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Posts posted by vzzzbx

  1. I'm wondering if this is going to be the straw that broke the camel's back. Once investors start demanding a normal, healthy above-inflation return on their investment in US government debt, which is supposed to be the safest possible investment class, everything else has to go up too. Why would you loan anyone else cash if it's more risky than loaning it to the US government and is also paying a lower rate?

    It causes a cascade of other things to happen. Rates go up across the board. Taking it further, this puts stress on other areas of the system which could be enough to make them go pop.

    It also calls into question those other highly indebted countries like the UK, so could force up the government's cost of borrowing. This could cause a loss of confidence in the UK's ability to repay its debts without having to fire up the printing press to inflate it all away. But that simply means investors will demand a higher yield to make sure that doesn't happen.

    You then have to look at the UK banks. Why bother lending out cash on mortgages to get a measly 2-3% return (below inflation), when they could simply lend it to the US government for 10 years and get 4%?

    So the UK government could struggle to raise the funds they need to keep going. This might force them to look very carefully at what they're spending their cash on. Anything that isn't essential could face the chop, including such things as stupidly extravagent mortgage guarantee schemes that put them right in the firing line if/when house prices go pop.

    I think it will be interesting, to say the least. Once the herd is spooked, even governments can't control the markets.

  2. Not sure I agree that everything on the high street is doomed. Sure it's easier and cheaper to get a lot of things online - try getting bits for your desktop computer from the high street and you'll see what I mean.

    However some products simply don't translate well into the online world. Take shoes for instance - they might look good but you really do need to try them on before buying. Even if they have your size in stock, they still might be uncomfortable when you're wearing them. You also still need a post office to be able to post back stuff you bought online that you don't want or isn't right.

    Then there's the endless coffee shops and cafes. You've been able to make yourself a cup of coffee or a sandwich at home for years yet they show no sign of disappearing any time soon.

    Plus there's the hassle of the useless, useless delivery companies used by the likes of Amazon etc. who don't seem to realise that Mon-Fri between 9am and 5pm isn't a good time to try delivering stuff to your house. Deliver it to work you say? Sure - I'm sure your employer would really like a washing machine delivered to their reception area. If Domino's pizza can deliver in the evenings why can't the likes of Parcel Force? And without a dammed surcharge, darn it!


    The immediate question that springs to my mind is: why wasn't this done a lot sooner?

    Also the story doesn't seem to mention any hard definitions of "applicants must satisfy lenders that they can repay a mortgage", so maybe Reckless Lending Bank Plc could still set up really crappy risk policies and lend to anyone able to fog up a mirror.

    But at least it does say something about Eric's favourite LIAR LOANS. About time they were thoroughly banned and actually should be made illegal with both the borrower and lender facing jail time, in my opinion.

  4. I've been making something similar too, except mine is designed for predicting your future costs based on assumptions you enter.

    One thing I'd say that's hard to compensate for is inflation. If you take a figure of 5% for inflation, then £500 in rent today costs more than £500 in 6 months time. At least in theory. Actually it depends on when/if you get a pay rise. If that's in 3 months time, then the last 3 months rent of £500 are easier to handle than before the pay rise. I notice your spreadsheet doesn't factor inflation into the costs of renting, but does take it into account on the buying side.

    Another factor pointed out to me on another thread is the ability to overpay a mortgage, which can mean sometimes it's better to buy now and overpay the mortgage than wait then buy.

    Also it's interesting to note that if you assume 5% inflation and 4% mortgage interest, the mortgage company is actually losing money giving you a mortgage. Sure they're losing it slower than if they didn't give the mortgage, but they're still losing cash.

  5. But TPTB/BOE/Govt want to prolong things - they prefer the current situation to a housing collapse and big problems for the banks.

    Keeping the housing bubble going is all part of propping up the banks so that the banks can become all dominant in our society once again. They must have that power is, I think, the thinking of the bankers in the BOE.

    Ahh but what happens when the banks have rebuilt their balance sheets enough so that they can afford to pull the plug on people in arrears in much greater numbers?

    I don't for a moment assume the current amounts of forbearance is the banks being helpful to borrowers out of the goodness of their hearts. I much prefer the explaination that there's a solid financial reason they're choosing this course of action.

    Maybe the banks are just biding their time. After all, I assume it must cost quite a bit in up-front fees for a bank to be able to repossess a house, market it, find a buyer and get all the paperwork sorted out. Long-term it's better for the bank to do that, but short term it hits their costs. If the bank's already teetering on the edge of bankruptcy it's probably best to do what they're doing - string things along for a while to build up their reserves until they can afford to pull the plug at a later date.

    One thing's for sure, if the slow drops accelerate and become a stampede of folks trying to cash out before they lose everything, it's going to be highly entertaining viewing for all here on HousePriceCrash. I predict many smug posts from the people here along the lines of "told you so!". Music to my ears, I would say.

    The real icing on the cake would be for some of those TV property "experts" being wiped out. If that happened, I'd laugh long and hard. Schadenfreude anyone?

  6. Then I would say that this shows that even if one tries to stack the deck in favour of their preferrred answer (that the "new paradigm" of higher house prices is sustainable), reality still comes in to mess things up and show you up for an idiot.

    As to further house price rises, it looks like there's not much else left to move over from the "interest" side of the total mortgage cost to the "original loan" side. So short of some more crazy lending, higher incomes for everyone or more people with incomes per household buying together, those numbers don't look like they've got much ability to go any higher.

    Sometimes it pays to argue against what you think to be true. Here I tried to find some way to justify the estate agent / deluded seller view and failed. I'm glad I did. It would be worrying if there was some way to make the numbers stack up. This whole site wouldn't be worth much if it really was a one-off "paradigm shift".

  7. It's true there's some fairly obvious flaws in the assumptions - that the interest rate would remain the same for the entire 25 year term being the biggest. It's an oversimplification I used to help pose the original question.

    The point of the post was intended to show some sort of crazy logic to the idea of higher house prices being sustainable. (Not that I think they are, I should add). I suppose if you assumed that interest rates can't go up significantly for the next 10-25 years and shut your eyes, run quickly over the shaky assumptions with your fingers in your ears going "LA LA LA", you might come to the conclusion that it's kinda sustainable.

    Why was I trying to justify current prices? Mostly so that I can have a rock-solid comeback pointing out why they're not sustainable when I hear stuff like this spouting from the mouths of those who are hoping that prices don't drop any more.

    The other one you often hear is that apparently women have suddenly started working in the last 10 years (!) so therefore now that there's two incomes available to pay the mortgage instead of one, it justifies a doubling in house prices. I leave that one as an exercise to those so inclined to point out how ridiculous a statement this is.

  8. Here's an interesting conundrum to pose:

    Late 1990's style scenario:

    Income: 20k/year

    House price: 65k

    Price/income ratio: 3.25

    Deposit: 6.5k

    Mortgage interest rate: 10%

    Monthly mortgage payment: £531

    Total paid over entire 25-year mortgage term inc. deposit: £165,976

    Theoretical current day(ish) scenario (i.e. not entirely the same as today's reality, more of a thought experiment):

    Income: 25k/year

    House price: 120k

    Price/income ratio: 4.8

    Deposit: 12k

    Mortgage interest rate: 3.2%

    Monthly mortgage payment: £523

    Total paid over entire 25-year mortgage term inc. depost: £169,035

    Did you notice that the total paid over the whole mortgage term is about the same in both scenarios?

    Also note the monthly payments. Nearly the same. However look at the headline price of the house: 120k vs. 65k. Surely the 120k price must be too high! Look at the price-to-income ratio - even though the monthly payments and overall mortgage cost over 25 years are nearly the same, one is clearly much higher than the other.

    So the question to ask ourselves is: does the house-price-to-income ratio really give us a reliable way to measure whether a house is too expensive or not?

    Or more generally: If the overall cost of owning a house over a 25 year mortgage term is X, part of X is the initial loan amount and part of it is interest. Today's lower interest rates mean that the share of X taken up by interest has reduced. Does this then mean that the headline price of a house can increase and have no effect on overall affordability?

    I'm wondering if some of the clever folks the frequent this forum can point out any obvious flaws to this argument...

  9. These calc's are flawed!! Using your figures if you can save £2,500 whilst renting @ £900PCM, then surely you can 'save' £2,100PCM when paying mortgage of £1,304. Also from my experience of South West London properties worth £280k seem to go for around £1400PCM (6% gross). Finally if you can really save £2,100 on top of your £1,300a month mortgage, surely you'd be overpaying on your mortgage by a significant amount each month thus reducing the amount it costs you in interest!

    Overall I don't disagree with you with renting not always being the wrong choice, but those calcs are all wrong!

    Indeed you could save or overpay while paying a mortgage, but that wasn't the point I was trying to make. It was simply to show the fallacy of the statement that "renting is always dead money", when clearly it isn't. However, in the illustration probably I should have put the following disclaimer:

    "The following situation assumes that you're working your ar$e off giving up all sorts of things to get the deposit you need for the house. It further assumes that this is unsustainable in the long term and that once you get the mortgage, you'll not be overpaying on it."

    However, for the doubters, allow me to present option 5: "the whole in the house way with 1 year renting"

    You wait one year renting at £900 per month

    After 1 year, you have a £56k deposit (as per option 2)

    You get a 20% loan-to-value mortgage of £224k at 3.84%

    This gives a monthly mortgage payment of £1191 over 24 years

    But you overpay by 2500+900-1191=£2209 each month (again ignoring early repayment charges)

    The total payment for the whole mortgage term is £251,965 paid in 6.18 years

    Added to your £56k deposit and 1 year's rent of 900x12=£10,800 you've paid £318,765 for your house

    Compared to the "whole in the house way" method that Mayalabeille described earlier which costs £316,110. So a difference of £2,655 in favour of Mayalabeille's option.

    However, I've not counted the fact you get a lower mortgage interest rate on an 80% loan-to-value mortgage than on a 90% one, neither have I counted the 1 year's interest you'd earn on the deposit fund, nor the fact that house prices are slowly drifting lower at the moment. Even a 1% drop in prices over a year would be worth £2800 on it's own, which would still mean that waiting a year and renting actually saves you money.

    All of which goes back to my (badly explained) main point that GIVEN THE RIGHT CIRCUMSTANCES, renting is not "dead money".

  10. I know there is a lot of factor not taken into account but I am starting to be fed up of people manipulating figure to get them say what they want. I can do this to and just proved it.

    Yes renting is better in some case, buying in some other. Yes house price are too high and so are rent but giving illustration as this one does not make any sense when it is just to illustrate your own point of view.

    Anyway, I hope some people will find all these options illustration useful.


    Not sure I'd go so far as to say it's manipulating the figures. It's more like saying "given this set of parameters, this is the result". Sure - it's certainly possible to overpay and it does save cash. My original illustration assumed a (hopefully more realistic) situation where people save like crazy for a few years for a deposit, then ease back afterwards because the cash is needed for other things such as insurance, repairs, holidays, kids, pension savings, replacing rust bucket cars and the like.

    But yes, if you're hell-bent on paying off the mortgage as fast as possible then the calculations show it's cheaper to get a place now and overpay on it. Even then it might not be so clear-cut because of early repayment charges.

    My main motivation for the post was to show those folks who continually trot out the "renting is dead money" mantra that it's not so clear-cut and will depend on the circumstances. So maybe the title should more accurately have been "Renting is sometimes dead money, sometimes not".

  11. (Please take this as constructive criticism)

    In scenario 1, can't you move to a better monthly rate once you've paid off some of the capital? (Assuming prices are flat of course!)

    No problem, all constructive criticism welcomed!

    Yes, you probably could move to a better monthly rate after a while. But then so could scenario 2. What I was trying to do was to give a relatively straightforward argument that lots of people can understand. Perhaps that's not possible with mortgages, but it's worth a try.

  12. Who can save £2500 a month???

    Admittedly not many people. Maybe I should make a spreadsheet so people can put their own numbers in to see how much they'd save.

    In any case, I think this is a strong case for compulsary teaching of financial literacy in schools. There's far too many people don't do calculations like this before taking the plunge.

  13. We always hear people telling you that "renting is dead money". All that is, except people on this site. So for your edification (and a convenient page to point the doubters to), I present a fully worked example of when renting can save you money against a mortgage.


    The situation:

    You want to buy a house costing £280k and prices aren't rising

    You have a deposit saved up of £37k

    You're currently renting a place for £900/month

    You can save £2500/month while renting

    Option 1: buy now

    You put down a deposit of £28k (10%), holding back £9k for fees, repairs, emergencies etc.

    You get a 90% loan-to-value HSBC fee-free mortgage of £252k @ 3.84%

    This gives a monthly mortgage payment of £1,308 over 25 years

    The total payment for the whole mortgage term is £392,396

    Added to your £28k deposit you've paid £420,396 in total for your house

    Option 2: rent one year then buy

    After 1 year, your deposit fund is now 2500x12+37000=£67k

    You put down a deposit of £56k (20%), holding back £11k for fees, repairs, emergencies etc.

    You get a 80% loan-to-value HSBC fee-free morgage of £224k @ 3.29%

    This gives a monthly mortgage payment of £1126 over 24 years

    The total payment for the whole mortgage term is £324,246

    Added to your £56k deposit and 1 year's rent at £900/month you've paid £391,046 in total for your house


    Option 1 total cost = £420,396

    Option 2 total cost = £391,046

    Meaning option 2 saves you £29,350 total and means your mortgage payments are £182/month cheaper.

    For one year's "dead money" renting, that's quite a lot of cash you've saved!

    Conclusion: Renting isn't always "dead money". And I've not even counted the extra interest you'd earn investing your deposit fund for one year (3% of £37k = £1,110) and the fact that in this case you'd have an extra £2k in your emergency fund.

  14. It's probably a good thing. Normal London's pretty much at breaking point regarding transport links anyway - just look what happens when an underground line has a train delayed for more than about 5 minutes - it's mayhem!

    If you had that plus Olympics numbers, you'd get gridlock. Probably a lot of people realised this along with the warnings and decided to stay away. Can't say I blame them really. I work in London and was seriously contemplating just taking a holiday while the games were on to avoid the inevitable travel hell they were predicting.

  15. In my area of the West Midlands, I'm not seeing much new stuff coming onto the market and the stuff that does is the usual 2007 +10% asking price insanity. This is usually followed by lots of viewings with no offers, followed by a long period of nothing, followed by a slow series of price drops. However, stuff that's halfway decent with a realistic asking price seems to sell quite quickly.

    Higher priced stuff seems to sit there doing nothing. I haven't been watching the bottom end, so can't comment on that.

    Overall I'd say that not much is coming up for sale and not much is selling. Basically stalemate. Quite a number of bungalows for sale, though.

  16. The idea of automated checkouts isn't a bad idea per se, but the current machines suck. I've been in supermarkets waiting to use the self-service checkouts and they have to have one member of staff permanently by them to sort out issues every time the customer does the most innocuous thing like putting the slightest bit of weight on the bagging area at the wrong time. If memory serves, there was a BBC show a few months ago that claimed it actually took longer on average to serve yourself with those machines than it did with a person.

    Now RFID isn't a bad idea because you can simply dump your whole basket into a scanning area and it will count everything in the basket at once. You'd then pay for it and move the basket to a bagging area to pack your stuff away, thereby freeing up the scanner for the next customer. Now that, I'd go for.

  17. But how about all the other companies they're driving out of business? Game? Waterstones? HMV? Currys?

    How many times do you hear "I could get it on the Internet for less" - usually when people say that, they tend to mean Amazon more often than not.

    Their revenues are consistently up and they're investing in lots of infrastructure to be able to keep the revenues growing. The theory being once they've grown enough, they can simply stop investing so much in new infrastructure and generate large profits.

    I also wonder if they'll become the iTunes of e-books. Surely that's got to be worth something...

  18. Who's touting him? ISTR thinking before the election Philip Hammond might make a chancellor, but I'm not so sure now.

    Yes, Vince (probably uniquely among members of government, either this one or nulab) warned publicly of the crisis well ahead of time. He was good at that. But his record in government marks him as one of those people who's much better at diagnosing a problem than fixing it.

    Although it should be mentioned that (according to Wikipedia anyway) Vince Cable has degree in Economics from Cambridge, a PhD in Economics from Glasgow University and was chief economist to Shell for a couple of years, whereas Osborne got a 2:1 in Modern History from Oxford and his commercial experience was a brief data entry job and a short job folding towels at Selfridges before switching to politics full time.

    Of the two, I know which one I'd rather have as chancellor.

  19. It also ignores the old wisdom that "trees don't grow to the sky". A company can only get so big before it can't realistically grow any more. So at some point it will need to keep investors happy by starting to pay them dividends instead of relying on their share price continuing to rise.

    I would assume investors don't really care so much whether the returns come from profits or growth, so long as it's a good percentage return on the cost of the shares when they bought them.

  20. Just to play devil's advocate for a moment, but isn't a free market based on the premise of the supplier who fulfils the customer's needs the best being the one who wins the sale?

    If they gave the contract to Bombardier (which would surely be a good thing for the UK economy) based on the fact it's British and not foreign, then we're effectively not working a free market system. This discourages the UK company from needing to improve their offerings because they know unless they're utterly rubbish, they'll win the contract based on their nationality.

    It also works both ways. We like it when a British company wins a big contract from a foreign government, but this only works if that government chooses the company that can best supply their needs.

    There's also the economic concept of the division of labour. Put simply, it says that if you have two countries A and B and they make two different products X and Y, then the most profitable way for everyone is to have each country produce the products it can make the most efficiently. Hopefully this means that country A produces product X 100% of the time and country B makes product Y 100% of the time. Or more casually, it's more profitable to put Steve Jobs to work running a consumer electronics company full-time than have him spend half his time doing something that he's not quite so good at.

  21. If I buy the house from the bank for £150,000 my bank balance (the bank's liability) drops by £150,000.

    The asset side of the bank's balance sheet also drops by £150,000, the book value of the house.

    Hence the contraction of both the bank's balance sheet and the broad money supply, each by £150,000.

    Still not sure I follow you. Bank A sells the house for £150k to someone who presumably takes out a mortgage with Bank B so they can pay the £150k. So as far as I can tell, the only contraction is from £180k of mortgage debt loaned to Billy the Punter to £150k minus deposit for Ben the Buyer.

    Overall the original situation was:

    Mortgage owed to bank A: £180k

    Equity: -£30k (180k mortgage vs 150k value)

    Whereas afterwards (assuming Ben's deposit was 15k):

    Mortgage owed to bank B: £135k

    Equity: £15k (135k morgage vs 150k value)

    Billy's negative equity owned to Bank A: £30k

    I make that 135+30=£165k owed to the banks (Bank A and Bank B). Plus Ben's £135k mortgage is backed up by £15k in equity, thereby protecting the bank against future house price falls.

    If repossession is happening all over the place, you'd find that Bank A and Bank B are swapping mortgages between themselves, so I'd guess that their balance sheets would drop a bit, but they'd be more protected against further price falls.

    Or am I missing something vital?

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