What If.......?

[FaTB]

What if IR's rise, and is a trigger for a House price crash.

Could we find ourselves in a similar situation still in 2 or 3 years time, where we still cannot afford a house not because of asking prices but because of High IR's making the mortgage unaffordable.

Have not done any detailed calculations it was just a thought.

Any veiws ?

[2005]

If IR's were so high that we couldn't afford to buy then nobody else could and prices would be pushed further down.

BTL would find it harder to buy and hold onto property with high IR's so house prices would correct in line with average wages. IMHO

[apom]

What if IR's rise, and is a trigger for a House price crash.

Could we find ourselves in a similar situation still in 2 or 3 years time, where we still cannot afford a house not because of asking prices but because of High IR's making the mortgage unaffordable.

Have not done any detailed calculations it was just a thought.

Any veiws ?

One.. regadless of interest rates.. It is important..

Better

a small loan + high interest rates = large payments

Than

a large loan + low interst rates = Large payments

as only interst rates can change..

Small Loan + Low interest rates = small payments

Large Loan + high interest rates = The end of your world.

[BandWagon]

I would far rather have a £100k mortgage at 15% than a £300k mortgage at 5%.

Same monthly repayment, but I'd rather buy when rates are above long-term averages, as the capital values will be lower and the odds are the payments will go down. That means you're on the right side of the curve, as interest rates fall, monthly payments head down, capital values move up. Win-Win.

It's also far easier to repay 100k in a high inflation environment that 300k in a low one, as high inflation erodes debt.

If rates had to suddenly hit 8 or 10% from now, you can be guaranteed that house prices would plunge.

No matter what the VI's say, there will always be the forced sales.

People who are currently piling up mortgage debt at record low interest rates are condemning themselves to lots of beans-on-toast.

They're stuck on the wrong side of the curve. Lose-Lose.

Edited September 25, 2005 by BandWagon

[FaTB]

Thanks guys,

Very useful replies, and has put my mind at rest.

Its obvious when you lay it out like that, but sometimes have these little thoughts that I just can't get my head round.

[OnlyMe]

Don't forget there is a very nasty scenario where wages do not keep up with general inflation - they did last time more or less, which is why eventually affordability returned and so did housng transaction volume.

Stiff competition could mean even with siralling inflation there would be no way that companies could affrod to pay their staff more - under those circumstances they would be pushed to move even more productive capacity abroad or give up the ghost.

[English Rose]

If prices crash, it's all bound to be part of a scenario where a lot of people are losing jobs and can't afford a house because of that

That's what happened last time. Despite the high IRs houses were affordable because prices had gone through the floor... but only as long as your job was secure.

[2005]

I don't think we necessarily need high IR's or unemployment for house prices to fall.

People can afford high priced housing now because the IR are low. But all that means is the proportion of money (after basic living costs) they have to spend on a mortgage can sustain that.

If that proportion goes down because of increased tax, council tax, fuel prices etc then people will have less to spend on their mortgage and house prices will adjust accordingly.

[Once in a lifetime]

What if IR's rise, and is a trigger for a House price crash.

Could we find ourselves in a similar situation still in 2 or 3 years time, where we still cannot afford a house not because of asking prices but because of High IR's making the mortgage unaffordable.

Have not done any detailed calculations it was just a thought.

Any veiws ?

My memory’s a bit foggy but I do remember house hunting / looking in Basildon.

in 1993 (well into the crash) not a nice place to live, (IMO). that’s why I didn’t.

A three bedroom (fair sized) house with 40 ft garden £34,000.

I’m not making that up,

it really was that low. I wouldn’t want to guess what they went for last year?

When house prices crashed last time confidence crashed with them.

Stagnated for years, so long in fact you hardly noticed them rising slowly.

[right_freds_dead]

what i remember 89/94 was negative equity bleatings on news and a non interest in housing after 91. in 1989 i still saw lots of lending, but it was for high street goods. by 1994 housing was simply an affordable practicality. a good 3 bed was about 45k. average town wage was id say £12k. made sense. no panic like now. no hype and no property programs.

there wasnt a down beat mood. just less going out, more buying cans. kwik save not sainsburys. jamie olivers fancy poppy seen filled peppers will seem a waste of money. i saw people cut the waste back, but not the main stays. not like the 81-83 recession. that was cold. i hope we dont get one like that again.

by those dynamics id say we would be at the next low point 2008/9 dropping all the way until then. id guess 20% per year to a possible -50-60% total peak to low correction. and dont drop your jaws too far down. if areas can shoot up 200% in 4 years they can drop the same amount within the same time. 60% is not a lot.

peaople are house drunk right now.

Edited September 25, 2005 by right_freds_dead

[apom]

I don't think we necessarily need high IR's or unemployment for house prices to fall.

People can afford high priced housing now because the IR are low. But all that means is the proportion of money (after basic living costs) they have to spend on a mortgage can sustain that.

If that proportion goes down because of increased tax, council tax, fuel prices etc then people will have less to spend on their mortgage and house prices will adjust accordingly.

Okay.

In one month 200,000 people re-mortgages. This was not to increase debt, but to move to a new fixed rate loan.

This was last month.

The average mortgage was £96,000

now the mortgages would have been taken out at a time when 3.5 % was achievable

Now fixed rate of 4.9 % is normal

I did the sums..

These people on that average payment need to find over £1300 more a year or over £100 a month extra..

that hits hard. if you have overstretched yourself already.

Impact to the economy was £1300 X 200,000

or £260,000,000 in a year..

Next month the same amount will be the remortgaging..

£3,120,000,000 in a year at those amounts...

and that is the impact if debt does not grow..

Think about it..

sustainable old economy isnt it?

[2005]

Okay.

In one month 200,000 people re-mortgages. This was not to increase debt, but to move to a new fixed rate loan.

This was last month.

The average mortgage was £96,000

now the mortgages would have been taken out at a time when 3.5 % was achievable

Now fixed rate of 4.9 % is normal

I did the sums..

These people on that average payment need to find over £1300 more a year or over £100 a month extra..

that hits hard. if you have overstretched yourself already.

Impact to the economy was £1300 X 200,000

or £260,000,000 in a year..

Next month the same amount will be the remortgaging..

£3,120,000,000 in a year at those amounts...

and that is the impact if debt does not grow..

Think about it..

sustainable old economy isnt it?

Not sure if we are agreeing or disagreeing

I am not suggesting that house prices won't fall or that the economy is sustainable. I am merely suggesting that house prices can fall without a recession.

[ajh]

What if IR's rise, and is a trigger for a House price crash.

Could we find ourselves in a similar situation still in 2 or 3 years time, where we still cannot afford a house not because of asking prices but because of High IR's making the mortgage unaffordable.

Have not done any detailed calculations it was just a thought.

Any views ?

If you were very brave, you might be able to get the best of both worlds by organising a mortgage denominated in euro.

I know someone who was on overseas contracts, and bought 2 investment properties here in Australia in 2001 with $US mortgages. He's now absolutely coining it, despite our recent price falls, but people doing the same thing in the early 90's got slaughtered.

[Gavin]

If you were very brave, you might be able to get the best of both worlds by organising a mortgage denominated in euro.

I know someone who was on overseas contracts, and bought 2 investment properties here in Australia in 2001 with $US mortgages. He's now absolutely coining it, despite our recent price falls, but people doing the same thing in the early 90's got slaughtered.

It would be more than brave, don't consider this unless you know exactly what you are doing.

My old thread about Euro mortgages, its long but useful if you have the interest

[frugalista]

I would far rather have a £100k mortgage at 15% than a £300k mortgage at 5%.

Me too. Aside from the risk of further rate rises in the 300k scenario, it is very difficult to pay off the loan by overpayments. Even if you have a 100k mortgage at 15%, should you have spare cash you want to use to overpay, you could very well pay off the mortgage early. With a 300k loan this is well nigh impossible.

A third reason is that if interest rates are 15% the chances are that wage inflation is also high. This is a good thing if you are a net debtor. Better to have a 100k debt being quickly inflated away than a 300k debt which seems to linger long long after you took it on.

frugalista

[Fancypants]

Me too. Aside from the risk of further rate rises in the 300k scenario, it is very difficult to pay off the loan by overpayments. Even if you have a 100k mortgage at 15%, should you have spare cash you want to use to overpay, you could very well pay off the mortgage early. With a 300k loan this is well nigh impossible.

A third reason is that if interest rates are 15% the chances are that wage inflation is also high. This is a good thing if you are a net debtor. Better to have a 100k debt being quickly inflated away than a 300k debt which seems to linger long long after you took it on.

frugalista

yup. We've touched upon this before.

another sad indictment of short-termism/hand-to-mouthism. Most people's logic seems to be "I can afford the monthly repayments and house prices only ever go up" but they are oblivious to the risks inherent in both premises (no pun intended). It is indeed the worst of both worlds to borrow at anamolously low rates and high capital values.

[doogie]

Also, if you are currently fortunate enough to have a sizable deposit, you'll need a much smaller mortgage if house prices crash so you'll be less affected by high interest rates.