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Grauniad/observer: This Can't Go On: House Prices Must Drop Or Wages Must Rise. Which Seems More Likely?

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Another article preaching sense in the mainstream press.

Guardian/Observer article

Jeremy Grantham is the veteran fund manager who founded the US investment firm GMO. He is also a specialist in defining and identifying bubbles, which he rightly regards a crucial task in the investment game. He claims to have identified 34 of them over the years and says only two have failed to burst or deflate. One is today's UK housing market.

Grantham's findings are worth exploring in light of last week's news from the housing market. The Halifax reported that average house prices fell by more than £6,000 in September to £162,096, a drop of 3.6% from August and the biggest monthly fall on record.

..

In the end, though, you have to think that the cold mathematics of affordability will prevail. We are probably looking at several years when house prices go sideways or steadily downwards. Some areas will inevitably defy that trend. But for most homeowners, especially those who have come to view their home as a form of pension, the outlook is cheerless.

Well, the government is going flat out to make sure that the pound drops in value so much that the ridiculous prices for houses are actually justified but it will be quite some time before enough inflation can be produced to support those crazy values.

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...interesting ramble...

Of course, even if Grantham's analysis is correct, house prices are not about to crash by 25% overnight. It is far more likely that the realignment with earnings will be achieved gradually over many years. Lenders are hardly likely to get tough on repossessions – banks want to protect the assets on their balance sheets.

...not quite overnight but there are claims some have crashed by up to 75% in Ireland ...and therefore we have more to come as Gordo the Balloonist's sand based support structure for the Boom are slowly dismantled..... :rolleyes:

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Well, the government is going flat out to make sure that the pound drops in value so much that the ridiculous prices for houses are actually justified but it will be quite some time before enough inflation can be produced to support those crazy values.

No inflation without wage inflation. There can be no wage inflation until UK wages are low than those in China.

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No inflation without wage inflation. There can be no wage inflation until UK wages are low than those in China.

We would have to throw over the land owning elites for wages to go down that much, as it would need to be coupled with large derestrictions in planning permission that essentially made property 5x cheaper. Even though it's expensive to buy in China due to all the rich money flowing around from the businessmen, it's still dirt cheap to rent hence we need a big oversupply in the rental market to compete.

As unemployment rises in the UK over the next decade I predict a resurgance in entrepreneurism among the young, it will become cool and respected to try and do your own business rather than the current attitudes people have which is "no one is good enough, is arrogant to try it" etc. Especially the internet, ultimately that's the last free market out there.

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Why is everyone still focusing on Income Multiples! I have been looking for a mortgage recently (just curious, I am not mad!) and all the banks talk about is affordability. They are working it out on a 5% repayment mortgage basis (despite fact that offer is much lower) and have stated that they want to see how I can afford to pay it back. They want 3 months bank statements to show I can do this over time. This feels a lot more appropriate in so many ways. If you can afford the repayments, you can get a mortgage. Of coursse the key variable is the level of deposit to make the mortgage affordable.

You could still tweak the affordability. 3/4 months before you apply for a mortgage you cancel all non-important Direct debits. Sky TV, Mobile Phone etc and that will create a little extra headroom. It basically teaches you to budget again and cut down on all the rubbish that we pay for!

The key though is deposit! House prices can remain forever out of sync by just increasing the deposit percentage. What that will mean is that there is a short term reduction in demand as people have to save longer. However in the longer term all that happens is prices stay the same and people wait longer to buy houses like in the rest of Europe. It should also reduce the effects of Properdy Investors as without cash (30% BTL) they can not enter the market and create bubbles.

I agree the average house price is too much, I agree they are not affordable for the majority but I also recognise that the House Price Crash may actually be about 5 years of stagnation with prices not moving whilst inflation creaates the crash effect. I also understand there will be forced sellers....but given the larger deposits needed surely the only ones to benefit will be those with cash in the bank.....most of which are well off people (HPC's excluded!)

Multiples and liar loans should now be dying and consigned to history. Affordability, higher deposits and reasonable long term house prices will be the net effect.

Edited by Nautorius

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We are probably looking at several years when house prices go sideways or steadily downwards. Some areas will inevitably defy that trend.

Aah, she was doing so well until this line. Appeasing those in 'immune' areas. Bless. <_<

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Aah, she was doing so well until this line. Appeasing those in 'immune' areas. Bless. <_<

That was exactly the line that stood out for me. I believe these "immune" areas will be hardest hit as they are a tad frothy.

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Why is everyone still focusing on Income Multiples! I have been looking for a mortgage recently (just curious, I am not mad!) and all the banks talk about is affordability. They are working it out on a 5% repayment mortgage basis (despite fact that offer is much lower) and have stated that they want to see how I can afford to pay it back. They want 3 months bank statements to show I can do this over time. This feels a lot more appropriate in so many ways. If you can afford the repayments, you can get a mortgage. Of coursse the key variable is the level of deposit to make the mortgage affordable.

You could still tweak the affordability. 3/4 months before you apply for a mortgage you cancel all non-important Direct debits. Sky TV, Mobile Phone etc and that will create a little extra headroom. It basically teaches you to budget again and cut down on all the rubbish that we pay for!

...

Multiples and liar loans should now be dying and consigned to history. Affordability, higher deposits and reasonable long term house prices will be the net effect.

So called "affordability" is a short term measure. It is appropriatre today, but perhaps not tomorrow when your job changes or your wife gets pregnant or you are out of work for 6 months, i.e. it is a completely inappropriate measure as a mortgage is for 25 years. That house prices have historically oscillated around these standard multiples is not an accident. It is an indication of average interest rates, taxation and expenses and human life history. What your tweaking is indicating is that you are attempting to live an unsustainably frugal lifestyle which one can do for 3 or 4 months, but which would be miserable over a long period (and bad for the economy too.)

edited: oscillate -> oscillated

Edited by Tiger Woods?

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So called "affordability" is a short term measure. It is appropriatre today, but perhaps not tomorrow when your job changes or your wife gets pregnant or you are out of work for 6 months, i.e. it is a completely inappropriate measure as a mortgage is for 25 years. That house prices have historically oscillate around these standard multiples is not an accident. It is an indication of average interest rates, taxation and expenses and human life history. What your tweaking is indicating is that you are attempting to live an unsustainably frugal lifestyle which one can do for 3 or 4 months, but which would be miserable over a long period (and bad for the economy too.)

Yes and no - no because the examples he picked (Sky, mobile phone) are two that I don't have and have no desire to have. More seriously "no" because of your "bad for the economy" point. It continuous to worry me that the whole system relies on non-essentials like that to even keep functioning, instead of being nice-to-have luxuries that are great when we can afford them but ultimately we could do without.

The big "Yes" though is about your general point about "affordability". "Affordibility" is the nonsense that encouraged people to take out stupidly large mortgages because interest rates were low.

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So called "affordability" is a short term measure. It is appropriatre today, but perhaps not tomorrow when your job changes or your wife gets pregnant or you are out of work for 6 months, i.e. it is a completely inappropriate measure as a mortgage is for 25 years. That house prices have historically oscillate around these standard multiples is not an accident. It is an indication of average interest rates, taxation and expenses and human life history. What your tweaking is indicating is that you are attempting to live an unsustainably frugal lifestyle which one can do for 3 or 4 months, but which would be miserable over a long period (and bad for the economy too.)

+1

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Yes and no - no because the examples he picked (Sky, mobile phone) are two that I don't have and have no desire to have. More seriously "no" because of your "bad for the economy" point. It continuous to worry me that the whole system relies on non-essentials like that to even keep functioning, instead of being nice-to-have luxuries that are great when we can afford them but ultimately we could do without.

The big "Yes" though is about your general point about "affordability". "Affordibility" is the nonsense that encouraged people to take out stupidly large mortgages because interest rates were low.

Why can't people like you who reject 'non-essentials' like a mobile phone or Sky television fail to comprehend that some people do view such things as essential? We all spend our money on different things, this is what creates and sustains a diverse economy. We all ascribe value to different things. Personally I drive a car that does 25mpg and can go > twice the legal UK speed limit, waste of money? to some yes, to me it's worth every penny. Some people spend money on art, designer clothes, wine, whisky, video games etc etc. Can't you comprehend such? Yes, we could do without such 'non-essentials' just like we could do without comfortable homes and go back to living in damp caves.

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Until disposable incomes go up, house prices aren't going anywhere except down.

True.

No inflation without wage inflation. There can be no wage inflation until UK wages are low than those in China.

Well, you would have thought that.......

http://www.constructionenquirer.com/2010/10/11/rail-maintenance-workers-secure-7-pay-deal/

7% between now and December 2011 AND a £2,000 bonus. :huh:

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So called "affordability" is a short term measure. It is appropriatre today, but perhaps not tomorrow when your job changes or your wife gets pregnant or you are out of work for 6 months, i.e. it is a completely inappropriate measure as a mortgage is for 25 years. That house prices have historically oscillate around these standard multiples is not an accident. It is an indication of average interest rates, taxation and expenses and human life history. What your tweaking is indicating is that you are attempting to live an unsustainably frugal lifestyle which one can do for 3 or 4 months, but which would be miserable over a long period (and bad for the economy too.)

I do not think affordability is anymore short term than multiples of salary. they are both worked out on the basis of your current situation ie. today and for the last 3 months. We all have things that change our lives and that 'Risk factor' is applied within the repayment percentage. I just think affordability is a better challenge because you have to see for yourself that you need £1000 a month to pay for your mortgage! They were also checking (if in rental) you included Council Tax, Water, Elec, Insurance in your Statements. Where they were missing they added them in manually to the affordability spreadsheet.

It was only non-essentials that were not included, so you had to have a TV license but no Sky TV, You had included a Landline but no Mobile Phone. It was all very sensible. What it imeadiately showed me was that at the 'Mortgage Offer rate I would be 33% better off than renting, but at the 5% rate i would be 7% worse off. made me think twice about short term gain against long term risk!

Edited by Nautorius

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House prices can remain forever out of sync by just increasing the deposit percentage. What that will mean is that there is a short term reduction in demand as people have to save longer. However in the longer term all that happens is prices stay the same and people wait longer to buy houses like in the rest of Europe.

Nothing can remain forever "out of sync"

How on Earth do you manage to spin the fundamental laws of economics such that if there is insufficient demand for something at its current price, people will save up until they can pay the current price?!

If there is insufficient demand for something at its current price, THE PRICE WILL FALL until such point as demand and supply are equal once more.

A cursory glance at house prices in the US, Ireland and Spain should tell you that. The UK is no different, and is already beginning to follow suit.

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I do not think affordability is anymore short term than multiples of salary. they are both worked out on the basis of your current situation ie. today and for the last 3 months. We all have things that change our lives and that 'Risk factor' is applied within the repayment percentage. I just think affordability is a better challenge because you have to see for yourself that you need £1000 a month to pay for your mortgage! They were also checking (if in rental) you included Council Tax, Water, Elec, Insurance in your Statements. Where they were missing they added them in manually to the affordability spreadsheet.

It was only non-essentials that were not included, so you had to have a TV license but no Sky TV, You had included a Landline but no Mobile Phone. It was all very sensible. What it imeadiately showed me was that at the 'Mortgage Offer rate I would be 33% better off than renting, but at the 5% rate i would be 7% worse off. made me think twice about short term gain against long term risk!

How is this "affordability" actually calcuated? Do they just look at your income minus essential bills and allow the whole of the remaining balance for mortgage payments? Or, is there a maximum percentage of income that is allowed to be allocated to mortgage payments?

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How is this "affordability" actually calcuated? Do they just look at your income minus essential bills and allow the whole of the remaining balance for mortgage payments? Or, is there a maximum percentage of income that is allowed to be allocated to mortgage payments?

They actually look at if you have enough disposable income left in your bank account each month to pay a repayment mortgage of 5%. If you rent they minus this off. Then they like to see 10% headroom left. Obviously they also like to make sure you do not need to go overdrawn every month. Quite simple, the calculation took less than 5 mins, and the man said yess!

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If there is insufficient demand for something at its current price, THE PRICE WILL FALL until such point as demand and supply are equal once more.

While i agree prices will fall, they will fall because the high price will destroy the productive economy that pays for the real estate. The price mechanism you describe above doesn't work particularly well with real estate. Real estate price behaves differently from other markets because uniquely in real estate buyers have no way to open an alternate supply of land to circumvent the present incumbents.

Edited by Stars

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That was exactly the line that stood out for me. I believe these "immune" areas will be hardest hit as they are a tad frothy.

I too have a feeling that some so-called 'immune' areas will be hardest hit.

I live in an area where during the 1990s property crash prices sat still rather than fall as owners just didn't sell. Then however, there were far fewer second homes in this area.

The 'affluent' Brown years saw a huge increase in 2nd homes in my region and I see an eventual fire sale of these as the 'money' within them - if there is any after devaluation - needs to be retrieved to pay for life's needs or service debt. There truly may be a rush to the bottom in the prices of these houses as owners bail out.

Edited by LiveinHope

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I too have a feeling that some so-called 'immune' areas will be hardest hit.

I live in an area where during the 1990s property crash prices sat still rather than fall as owners just didn't sell. Then however, there were far fewer second homes in this area.

The 'affluent' Brown years saw a huge increase in 2nd homes in my region and I see an eventual fire sale of these as the 'money' within them - if there is any after devaluation - needs to be retrieved to pay for life's needs or service debt. There truly may be a rush to the bottom in the prices of these houses as owners bail out.

im pretty confident the immune areas and London will take the brunt of the next leg down, im reasonably confidentg that the banks will again collapse in it and not be bailed out, the banking/leverage bull market of the last 30 years will go up in smoke thus diminishing the wage disparity spiral its created in its wake and the finance sector will return to a utility function based upon some sort of narrow banking destroying the wages in the sector. To me these places have 70% real and probably nominal* further off written all over them at the same time whilst all taxes rise, i think capital taxes will go through the roof

One way or another the economy is in the process of resetting an 80 year credit bull market, we seem to be in an economic reset/actuarial event, good for our kids, not so good for those who will have to live and if they are lucky work through it

*Except for Maidstone

Could be wrong though

Edited by Tamara De Lempicka

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im pretty confident the immune areas and London will take the brunt of the next leg down, im reasonably confidentg that the banks will again collapse in it and not be bailed out, the banking/leverage bull market of the last 30 years will go up in smoke thus diminishing the wage disparity spiral its created in its wake and the finance sector will return to a utility function based upon some sort of narrow banking destroying the wages in the sector. To me these places have 70% real and probably nominal* further off written all over them at the same time whilst all taxes rise, i think capital taxes will go through the roof

One way or another the economy is in the process of resetting an 80 year credit bull market, we seem to be in an economic reset/actuarial event, good for our kids, not so good for those who will have to live and if they are lucky work through it

*Except for Maidstone

Could be wrong though

I can't disagree with any of the above. I also think that those with cash rather than assets are better served hanging onto cash at the moment, although I might be trying to reassure myself here !

Everything I see the current government doing indicates that they know the system has to reset so that the imaginary credit is removed, which will mean more failures.

Of course, I could be wrong though, especially as I am as knowledgeable about economics as the Shadow Chancellor.

good to see you use the 70% figure too. I have been 50-70 % for some time. Among colleagues who rent their homes from the bank I detect an obvious hint of fear now since coffee time comments have turned from ridicule of my arguments to an angry realisation that I may be right.

Edited by LiveinHope

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  • 149 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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