How To Dismantle The Deck Of Cards

[Democorruptcy]

Where did the people at the top get the money?

Anyone in the financial or public sector seem to have bonuses coming out of their ears. If they were happy to pay over the odds for a house it must filter down the chain. Look at how local people are priced out in desirable second home locations, unless they try compete by borrowing too much - so it was a two-way squeeze.

Of course our fine upstanding politicians had their property portfolios partly funded by taxpayers.

[huw]

Anyone in the financial or public sector seem to have bonuses coming out of their ears

Precisely -- these people were just better at riding the bubble, i.e. it was derived from cheap credit too (in the case of the public sector, indirectly by taxing/borrowing against debt-fuelled growth).

The few who grew rich from true wealth creation deserve to live in nice homes IMO, no need to curtail their spending power (arguably they've been short-changed by having to compete with the cheap-credit brigade).

[Democorruptcy]

Precisely -- these people were just better at riding the bubble, i.e. it was derived from cheap credit too (in the case of the public sector, indirectly by taxing/borrowing against debt-fuelled growth).

The few who grew rich from true wealth creation deserve to live in nice homes IMO, no need to curtail their spending power (arguably they've been short-changed by having to compete with the cheap-credit brigade).

I think a lot of it depends where you live.

If you are in an industrial Northern town you are more likely to be competing with the over extending themselves cheap credit brigade. If you are in the South you are competing with financial sector bonuses.

Late 2008 the credit market froze and it seemed the financial bonuses might dry up. Now the financial bonuses taps are turned back on Southern prices are reportedly back up. This is no doubt what is behind the supposed house price indices increases.

The problem is, while we have moral hazard and banks too big to fail, are the credit taps being turned back on to generate more fictitious bonuses?

[nohpc]

OK, a simple plan, from a fairly simple fellow.

We know that the media are spinning faster than a very fast spinning thing to keep the property bubble inflated. We are also witnessing the government doing everything they can to keep property prices from falling. I think that for a fairly large majority of the property buying/owning UK population, a further 20-30% fall in property prices would have more a psychological effect, rather than a huge financial effect. However, I do understand that for some homebuyers, wiping a third of the value of their home could cause financial problems, especially when remortgaging. I also realise that the banks won`t like it. Well that`s tough, they`ve had their "fun", now it`s payback time. Here`s the plan.

1. Put interst rates up to where they should be (I can`t suggest what they should be, but I know they are being held down to the cost of our currency/savers).

2. Introduce strict rules/laws on lending multiples.

3. Ban property ramping.

4. Wait.

5. When people start moving into the "dreaded" negative equity, put pressure on the banks to allow these people to remortgage when they need to (without harsh penalties for being in negative equity).

6. Wait.

7. We should now have more reasonably priced houses, people with more REAL money in their pockets to spend, and an economy that can thrive without the aid of never ending HPI.

A simple plan. I commend it to the forum.

I agree with this plan.

House prices are too high for people not on the ladder or people wanting to move up the ladder.

Assuming that everybody deserves "nice" treatment

Current mortgagees should have favourable rates if they fall into negative equity as long as they maintain their payments.

New borrowers have to pay "new" higher rates - the purpose of this is not to penalise people into higher payments but to help bring house prices down.

This way you would have people buying houses for the first time for much cheaper prices but paying the same repayments as people who bought the house much more expensive who are paying cheaper rates.

Isn't this sort of happening already though?

[winkie]

Min 10% deposits.

No equity withdrawals except for home improvements of said property.

Only repayment mortgages to be repaid over lifetime to retirement.

That should sort it.

[huw]

The problem is, while we have moral hazard and banks too big to fail, are the credit taps being turned back on to generate more fictitious bonuses?

QE = credit so yes, IMO.

[Democorruptcy]

Announce that from midnight in 60 days time:

It is illegal for a person or company to own more than one property. Anyone owning a property must prove they live in it for at least 184 days a year. 20 years in prison for any offenders.

Private sector renting is illegal.

Ban the purchase of UK property by anyone non resident today for an indefinite period.

Estate agencies are illegal, property can only be sold at a once weekly auction held in your local town hall.

Ex-council houses are only allowed to be purchased by councils. Right to buy is cancelled immediately.

HPC sorted but the banks might need just a little temporary help.

[Bloo Loo]

"Payback time" implies they're solvent, that they have the means to pay. I suppose the taxpayer-owned ones probably do

Wiping a third off home values wipes a third off the corresponding bank assets -- assets that we largely now own and/or insure. By placing ourselves on the hook we've missed the best opportunity to let failing banks fail IMO. Now we either go through a slow grinding "lost decades" process or we inflate.

not quite....the homes are not banks assets...the loans are.

its the backup in case of default thats at issue.....and that means that all the very clever but stupid financial products they produced based on property, which they swapped for cash, are now all but unsaleable.

houses arent the real issue.....collateral, defaults and lost financial asset values are.Defaults mainly.

Edited January 14, 2010 by Bloo Loo

[torridon18]

I think that if the banks were limited to lending 3.5 times income or 2.5 times joint income (no interest only loans) and you needed a minimum 10% deposit then house prices would slowly ease back to affordable levels. Nobody would be able to buy houses they can't really afford and push up prices, easy!

Edited January 14, 2010 by torridon18

[jaycey]

Your plan won't work in most major cities, as there's not a huge differential between the price to rent and the price to buy - we keep being reminded of this with the average BTL rental yields, meaning that landlords are closing any gaps.

Hence if you stop people from buying, you'll increase the yields for landlords, so you'll have more landlords.

You can keep the landlords out by making it unattractive to be a landlord, but bascially this is communism.

Or you could address the underlying issue of rents being too high by building more houses (or deporting people).

[torridon18]

Good point, tax rental income and capital gains on BTL property at 40% (no offsetting mortgage). Does this make it viable?

[huw]

houses arent the real issue.....collateral, defaults and lost financial asset values are.Defaults mainly.

The bank only has a problem with a default if the value of the housing-collateral is insufficient. With high enough HPs the bank can just repossess, sell, and remain solvent. Or the borrower could liquidate the asset and repay the loan without defaulting at all.

[scepticus]

Announce that from midnight in 60 days time:

It is illegal for a person or company to own more than one property. Anyone owning a property must prove they live in it for at least 184 days a year. 20 years in prison for any offenders.

Private sector renting is illegal.

Ban the purchase of UK property by anyone non resident today for an indefinite period.

Estate agencies are illegal, property can only be sold at a once weekly auction held in your local town hall.

Ex-council houses are only allowed to be purchased by councils. Right to buy is cancelled immediately.

HPC sorted but the banks might need just a little temporary help.

how very communist.

is it the case that for some house prices have become such a sticking point any means justifies the ends (HPC)?

[winkie]

Your plan won't work in most major cities, as there's not a huge differential between the price to rent and the price to buy - we keep being reminded of this with the average BTL rental yields, meaning that landlords are closing any gaps.

Hence if you stop people from buying, you'll increase the yields for landlords, so you'll have more landlords.

You can keep the landlords out by making it unattractive to be a landlord, but bascially this is communism.

Or you could address the underlying issue of rents being too high by building more houses (or deporting people).

You can keep the BTL property speculators down by freezing the MEW available to put a down payment on a BTL.........Rents are only determined on income and ability to pay (and housing benefits ability to pay).

[Democorruptcy]

how very communist.

is it the case that for some house prices have become such a sticking point any means justifies the ends (HPC)?

Why "very communist"?

I didn't ban capitalism. Wouldn't a communist want to wipe out classes and the private ownership of capital? My suggestions would just lead to homes that were for living in and not an investment vehicle. They would leave lots of surplus cash to invest in other capitalistic things.

[damage]

I think that if the banks were limited to lending 3.5 times income or 2.5 times joint income (no interest only loans) and you needed a minimum 10% deposit then house prices would slowly ease back to affordable levels. Nobody would be able to buy houses they can't really afford and push up prices, easy!

Nice idea, but you're then restricting a free market which will never happen.

You'll knock the stamp duty revenues which the government loves, and as much as I hate saying this, the banks profits as well, which in turn will lead to less tax paid to the government.

moving forward,, do you think anyone will actually ever sell?

Using some random numbers and with out any deposit

Less say average wage in London is 25k, your model would state that a single person could buy something worth 87.5k and a couple 125k. That is a massive difference to over come.

Now what is to stop that London couple buying a place in NewCastle , where the average wage is say 18k (allownace - single 63 & couple 90)

Potentially you could price people out still

Also, if you then get the odd couple on a combined income of 125 (allowance 312k) , they could then effective buy three places in Newcastle, if they chose too and therefore effectively price the locals out due to the wage difference.

I might also add that if you're on 50k PA, you can afford 4x salary, where as if you're on 15k, even 2.5 times would be a struggle.

having set numbers will not work IMO

Edited January 15, 2010 by damage

[the end is a bit nigher]

3. What do you mean by banning property ramping?

The only thing that will work in my view is increasing the stamp duty for property over 300/400k to a level which makes it very difficult to justify the purchase,.

That would merely increase the competition for houses below that level.

Remove the tax break on BTL. There are over 1 million BTL mortgages more in existence since Labour came to power than before. Most are held by private individuals who get massive tax breaks on what most see as an investment.

Anyone who believe their BTL is a business should be made to file proper business accounts to claim the tax benefits.

[torridon18]

Nice idea, but you're then restricting a free market which will never happen.

You'll knock the stamp duty revenues which the government loves, and as much as I hate saying this, the banks profits as well, which in turn will lead to less tax paid to the government.

moving forward,, do you think anyone will actually ever sell?

Using some random numbers and with out any deposit

Less say average wage in London is 25k, your model would state that a single person could buy something worth 87.5k and a couple 125k. That is a massive difference to over come.

Now what is to stop that London couple buying a place in NewCastle , where the average wage is say 18k (allownace - single 63 & couple 90)

Potentially you could price people out still

Also, if you then get the odd couple on a combined income of 125 (allowance 312k) , they could then effective buy three places in Newcastle, if they chose too and therefore effectively price the locals out due to the wage difference.

I might also add that if you're on 50k PA, you can afford 4x salary, where as if you're on 15k, even 2.5 times would be a struggle.

having set numbers will not work IMO

I wouldn't think that many couples in London would want to buy 3 houses in Newcastle! I presume that most people would want to buy houses where they live and work. If people can't obtain big mortgages then sellers looking for high prices would have to accept that they either stay where they are or drop their price. London prices are so high that it's difficult to see a happy landing and can't really be compared to large areas of the country. Eventually due to inflation and peoples desire/need to move prices will plateau and become more affordable.

On £50k 4x is affordable and on £15k 2.5 times is a struggle correct, maybe the linit should be 4 x. If those on £15k can't afford to pay back 4x they should be refused a mortgage due to affordability. The basic point is that people shouldn't be given a mortgage if they can't afford the to pay it back (not interest only or with massaged earning figures).

I think that banks restricting lending is not a bad thing and is the easiest way to control HPI.

[Prof]

Nice idea, but you're then restricting a free market which will never happen.

If puttling sensible limits on lending multiples and introducing deposit requirements is restricting a free market (which some would say is a bad thing to do), then -

Is introducing and allowing self-cert/100%+/high salary multiple mortgages encouraging a "free market" ? Is this a good thing to do ?

There is no reason, IMO, that firm rules can`t be introduced to "control" the mortgage market to some degree. Look at what happened in the U.S for an example of a "free market" without sensible rules.

Gas/Electricity company raise prices by 7%, uproar. Mortgage lenders introduce 100%+ mortgages, hardly a whimper. Yes, quite different examples, but I think you might see where I`m coming from.

Edited January 15, 2010 by Prof

[Timm]

A good and thoughtful post, and one that actually comes across as optimistic IMO, mainly because it finds solvent parties who can take the losses (though I'm not persuaded savers jumping into property will absorb enough losses to re-balance the books).

By repossessions hidden by STR transactions do you mean OOs being kicked out of their (fraudulently) STR-mortgaged property, thus not appearing in the lost-home stats?

Thanks.

The STRs I'm referring to are those who were forced to sell to the bank or an investor, who then rents the place back to them. I should have made this clear.