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Kyoto

Hpc Paradox

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On this site, people are baying for interest rate rises.

But lets work through an simple scenario:

You could buy today at something like:

£150k mortgage at 4% interest = ~ £6000 interest per year.

But say you don't buy and staunchly hold on for the impending crash. We eventually get our own way and achieve a 33% fall in values as a result of a high interest rate environment. You decide to buy, leaving you paying:

£100k mortgage at 8% interest = ~ £8000 interest per year.

i.e. higher payments and a net loss for you over any reasonable mortgage term.

The true picture can be even worse with a large mortgage and also with how they front load interest on a mortgage.

At least in this low interest rate environment you can be hammering capital, even if's a larger principle.

The same arguments can be applied to some of the other HPC desirables. People on here talk about job losses, inflation, cuts in benefits as being drivers for the HPC, but again, the money you eventually save on your house purchase might be paid back twice over when it costs hundreds of pounds extra per month to feed yourself and get yourself to work, and when you don't have a job and receive terrible benefits as a result.

Be careful what you wish for....

Edited by Kyoto

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On this site, people are baying for interest rate rises.

But lets work through an simple scenario:

You could buy today at something like:

£150k mortgage at 4% interest = ~ £6000 interest per year.

But say you don't buy and staunchly hold on for the impending crash. We eventually get our own way and achieve a 33% fall in values as a result of a high interest rate environment. You decide to buy, leaving you paying:

£100k mortgage at 8% interest = ~ £8000 interest per year.

i.e. higher payments and a net loss for you over any reasonable mortgage term.

...[sic]

Be careful what you wish for....

You're missing one key point.

If you buy when IRs are high, you can reasonably expect they'll only go lower from there. = No problem. :)

If you buy when IRs are at rock bottom, you can reasonably expect they'll only go higher. = Big problem! :angry:

HPCers are trying not to fall into the 'House Price Elephant Trap'.

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Be careful what you wish for....

Having been waiting the crash out overseas and only recently back in Blighty, I have a very sizeable deposit to hand. Prices down 25% from here over the next five years (real or nominal) combined with slightly higher IRs (2% say) and if I can carry on saving as I have been doing, I'll be able to buy with cash.

From my point of view, interest rate rises that bring prices down quicker while bringing a higher return on my savings move that scenario closer.

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On this site, people are baying for interest rate rises.

But lets work through an simple scenario:

You could buy today at something like:

£150k mortgage at 4% interest = ~ £6000 interest per year.

But say you don't buy and staunchly hold on for the impending crash. We eventually get our own way and achieve a 33% fall in values as a result of a high interest rate environment. You decide to buy, leaving you paying:

£100k mortgage at 8% interest = ~ £8000 interest per year.

i.e. higher payments and a net loss for you over any reasonable mortgage term.

Your figures assume nil deposit. For some people a 33% fall in house prices might bring a £150k mortgage down to zero.

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On this site, people are baying for interest rate rises.

But lets work through an simple scenario:

You could buy today at something like:

£150k mortgage at 4% interest = ~ £6000 interest per year.

But say you don't buy and staunchly hold on for the impending crash. We eventually get our own way and achieve a 33% fall in values as a result of a high interest rate environment. You decide to buy, leaving you paying:

£100k mortgage at 8% interest = ~ £8000 interest per year.

i.e. higher payments and a net loss for you over any reasonable mortgage term.

Sorry basic economic fail. Property prices are dependent on affordability so higher rates get priced in via price reductions. So at worst they are neutral for cash buyers. Of course increased rates also increase supply as existing owners are forced to sell so that will add to the price reductions. Finally there the fact that once prices fall a cash buyers deposit gets them a lower LTV and so their repayments might actually end up lower than if rates had not risen and prices had not fallen.

Theres no downside to rising rates so long as you wait for the rates to be priced in before you buy.

Edited by goldbug9999

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With a 33% fall my mortgage would be very small and be paid off over a short term saving a fortune in interest!

Also fixed terms don't last forever, what will the repayments be after a 5 or 10 year fix? If you use average historical rates for the remainder of the term in most cases you are better off waiting and saving.

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You're missing one key point.

If you buy when IRs are high, you can reasonably expect they'll only go lower from there. = No problem. :)

If you buy when IRs are at rock bottom, you can reasonably expect they'll only go higher. = Big problem! :angry:

HPCers are trying not to fall into the 'House Price Elephant Trap'.

when interest rates were at 4% then variable trackers were at 0.5% above base rate.

at 0.5% base rate trackers are now around 3-4% above base.

when rates go up the banks margins should come down.

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On this site, people are baying for interest rate rises.

But lets work through an simple scenario:

You could buy today at something like:

£150k mortgage at 4% interest = ~ £6000 interest per year.

But say you don't buy and staunchly hold on for the impending crash. We eventually get our own way and achieve a 33% fall in values as a result of a high interest rate environment. You decide to buy, leaving you paying:

£100k mortgage at 8% interest = ~ £8000 interest per year.

i.e. higher payments and a net loss for you over any reasonable mortgage term.

The true picture can be even worse with a large mortgage and also with how they front load interest on a mortgage.

At least in this low interest rate environment you can be hammering capital, even if's a larger principle.

The same arguments can be applied to some of the other HPC desirables. People on here talk about job losses, inflation, cuts in benefits as being drivers for the HPC, but again, the money you eventually save on your house purchase might be paid back twice over when it costs hundreds of pounds extra per month to feed yourself and get yourself to work, and when you don't have a job and receive terrible benefits as a result.

Be careful what you wish for....

It's all about affordability. If interest rates double, the price of houses will (aproximately) half, so you'll end up paying the same monthly amount.

You might therefore conclude that there is no benefit.

However:

- overpaying on a small mortgage, high interest mortgage will have a much, much larger effect than if you have a large mortgage, low interest scenario.

- As has been said above, interest rate moves are more likely to positively benefit you

- Any such moves will have less effect - interest rates changing from 0.5% - 2.5% = 500% increase in repayments; 8% - 10% increase = 25% increase in payments.

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Your figures assume nil deposit. For some people a 33% fall in house prices might bring a £150k mortgage down to zero.

I agree that some people on the site are cash rich and will have large deposits.

However, the figures I quoted were pretty modest.

I have a £100k+ deposit, but I'd still expect to pay £200k+ in todays market down here commutable to London.

We can argue about the outliers such as us, but the fact remains that in most scenarios a 1% rise interest rate rise takes money out of your pocket than a 1% fall in house prices puts in your pocket.

And again, add on higher petrol, food costs, taxes, suppressed wages. The circumstance which people think will save us is good for nobody.

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Sorry basic economic fail. Property prices are dependent on affordability so higher rates get priced in via price reductions. So at worst they are neutral for cash buyers. Of course increased rates also increase supply as existing owners are forced to sell so that will add to the price reductions. Finally there the fact that once prices fall a cash buyers deposit gets them a lower LTV and so their repayments might actually end up lower than if rates had not risen and prices had not fallen.

Theres no downside to rising rates so long as you wait for the rates to be priced in before you buy.

Don't get me wrong. I am NOT saying this is a reason to buy. It would be the worst of both worlds to be stuck with big debt and high interest rates.

However, for the vast majority of buyers a 1% rise interest rate rise takes money out of your pocket than a 1% fall in house prices puts in your pocket.

I also think you are giving our housing too much credit as being rational.

Do we really see IR rises priced in to prices in any meaningful sense? Prospect of a rate rise is growing by the day, but no movement in prices.

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It's all about affordability. If interest rates double, the price of houses will (aproximately) half, so you'll end up paying the same monthly amount.

If that was the case, that would be great. But it doesn't work like that right?

How come our house prices have not risen 100% since rates have fallen 100% since 2008, if they are that well correlated?

interest-rates-feb-08.gif

Edited by Kyoto

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I did consider this - from my POV though, although BOE rates are at 0.5%, the best mortgage i can get at a decent fix is still 5% odd - hasn't really changed much since before the crash.

The choice i see is that i can get a mortgage now on an overpriced flat and pay ~5% interest, or wait for a big crash, pay less for the flat but more interest.

What i'm hoping, is that the reduced flat cost will mean that i can borrow less money - so i can pay it off quicker. In that case, as a lot of the interest is compounded, even with a painful interest rate it should work out cheaper in the long run.

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The other point is that mortgage rates are not currently that low. The lowest for 7 years I think was what they last said in the reports. (cml I think) so in 2003/2004 mortgage rates were lower than they were today.

Edit to add: those with <40% deposit currently will also get the benefit of an improved LTV thereby allowing access to better deals which may be in future a very similar rate to what the can currently achieve with a high LTV.

Edited by Pent Up

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If that was the case, that would be great. But it doesn't work like that right?

How come our house prices have not risen 100% since rates have fallen 100% since 2008, if they are that well correlated?

interest-rates-feb-08.gif

1. You've posted BoE interest rates, not mortgage rates;

2. it's a bit like pushing on a cruise ship - long term it will go the way you think, but if you give up and start pulling instead after a little while, the action / reaction wil be totally lost and will only olook confused.

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Yeah as others have said this assumes your deposit is also wiped out in the crash. Technically this would have happened up to the compensation limit in the last credit crunch.

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1. You've posted BoE interest rates, not mortgage rates;

Indeed.. mortgages rates have barely changed.. upping the base-rate would squeeze the banks, but since they can all afford to pay such good bonuses again now.....

UK MORTGAGE RATES

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For those of us who are lucky enough to have six-figure deposits, whether as a result of STRing (as in my case) or not, the maths may work out quite differently.

I am aiming to pay about the same for a mortgage per month as I currently pay for my rent, but to adjust the duration of the mortgage accordingly. Bear in mind that when paying a mortgage over a shorter term, increased interest rates have a much smaller impact.

To buy a property for 300k, I would need to borrow around 110k – actually 115k, due to the 250k stamp duty kicking in.

115k at 5% over 22 years costs £719/month. Total repayment = 115k + 75k total interest = 190k

To buy the same property after a 20% crash for 240k, I would need to borrow around 50k.

50k at 8% over 8 years costs £707/month. Total repayment = 50k + 18k total interest = 68k.

Therefore waiting for a 20% crash, even if mortgage rates go up from 5% to 8%, would enable me to pay off the mortgage 14 years earlier and to save £122,000. Even if I have to wait another two years for this, while paying rent at £725/month, the mortage will only be paid off 12 years earlier rather than 14, and the saving is reduced by about 17k, but meanwhile my savings will (very slightly) grow. It is still a huge saving over the cost of buying the same property now.

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There is a tipping point in sentiment, whereby deferring a purchase now looks likely to be more advantageous than buying today. This is very different from recent years when people rushed in to avoid being priced out. Now that corner has been turned, it's no wonder transaction levels are plummeting.

Of course there are still idiots out there who don't follow the market and would be borrowing up to eight times their salary to get on the 'ladder' if only the banks would lend to them. Which leads me to wonder what the split between 'cant buy now' and' wont buy now' is?

Apologies in advance for a rambling post...

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On this site, people are baying for interest rate rises.

But lets work through an simple scenario:

You could buy today at something like:

£150k mortgage at 4% interest = ~ £6000 interest per year.

But say you don't buy and staunchly hold on for the impending crash. We eventually get our own way and achieve a 33% fall in values as a result of a high interest rate environment. You decide to buy, leaving you paying:

£100k mortgage at 8% interest = ~ £8000 interest per year.

i.e. higher payments and a net loss for you over any reasonable mortgage term.

The true picture can be even worse with a large mortgage and also with how they front load interest on a mortgage.

At least in this low interest rate environment you can be hammering capital, even if's a larger principle.

The same arguments can be applied to some of the other HPC desirables. People on here talk about job losses, inflation, cuts in benefits as being drivers for the HPC, but again, the money you eventually save on your house purchase might be paid back twice over when it costs hundreds of pounds extra per month to feed yourself and get yourself to work, and when you don't have a job and receive terrible benefits as a result.

Be careful what you wish for....

prices for assets are at their highest when the cost of finance is least.

Buying now is a surefire way to LOSE money. and once invested, you might have to get it out again.

cash is handy, pliable and liquid.

and when finance disappears or becomes expensive, you need a lot less of it to buy an asset.

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For those of us who are lucky enough to have six-figure deposits, whether as a result of STRing (as in my case) or not, the maths may work out quite differently.

I am aiming to pay about the same for a mortgage per month as I currently pay for my rent, but to adjust the duration of the mortgage accordingly. Bear in mind that when paying a mortgage over a shorter term, increased interest rates have a much smaller impact.

To buy a property for 300k, I would need to borrow around 110k – actually 115k, due to the 250k stamp duty kicking in.

115k at 5% over 22 years costs £719/month. Total repayment = 115k + 75k total interest = 190k

To buy the same property after a 20% crash for 240k, I would need to borrow around 50k.

50k at 8% over 8 years costs £707/month. Total repayment = 50k + 18k total interest = 68k.

Therefore waiting for a 20% crash, even if mortgage rates go up from 5% to 8%, would enable me to pay off the mortgage 14 years earlier and to save £122,000. Even if I have to wait another two years for this, while paying rent at £725/month, the mortage will only be paid off 12 years earlier rather than 14, and the saving is reduced by about 17k, but meanwhile my savings will (very slightly) grow. It is still a huge saving over the cost of buying the same property now.

Good example.

In the same way, this is pretty much why renting is more advantageous in my situation, regardless of house prices falling in the short to medium term. This is because the type of house we are looking to buy is vastly more expensive than the cost of us renting a similar house, and we are able to save a significant amount of money per month.

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For those of us who are lucky enough to have six-figure deposits, whether as a result of STRing (as in my case) or not, the maths may work out quite differently.

I am aiming to pay about the same for a mortgage per month as I currently pay for my rent, but to adjust the duration of the mortgage accordingly. Bear in mind that when paying a mortgage over a shorter term, increased interest rates have a much smaller impact.

To buy a property for 300k, I would need to borrow around 110k – actually 115k, due to the 250k stamp duty kicking in.

115k at 5% over 22 years costs £719/month. Total repayment = 115k + 75k total interest = 190k

To buy the same property after a 20% crash for 240k, I would need to borrow around 50k.

50k at 8% over 8 years costs £707/month. Total repayment = 50k + 18k total interest = 68k.

Therefore waiting for a 20% crash, even if mortgage rates go up from 5% to 8%, would enable me to pay off the mortgage 14 years earlier and to save £122,000. Even if I have to wait another two years for this, while paying rent at £725/month, the mortage will only be paid off 12 years earlier rather than 14, and the saving is reduced by about 17k, but meanwhile my savings will (very slightly) grow. It is still a huge saving over the cost of buying the same property now.

Can you do a leaflet and have the postmen drop that through everyone's letterbox?

Cheers.

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Good example.

In the same way, this is pretty much why renting is more advantageous in my situation, regardless of house prices falling in the short to medium term. This is because the type of house we are looking to buy is vastly more expensive than the cost of us renting a similar house, and we are able to save a significant amount of money per month.

How much rent have you paid so far ?

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I think it's that that low interest rates triggered the bubble and now we need to burst it with high interest rates. They wouldn't need to stay very high just notably higher than what triggered this whole bubble.

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  • 311 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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