Jump to content
House Price Crash Forum
Milton

Mortgages And Housing. David Miles. Mpc

Recommended Posts

Mortgages and housing in the near and long term

Speech given by David Miles, External Member of the Monetary Policy Committee, Bank of England

At the Home Builders Federation Policy Conference, London

31 March 2011

Highlights:

The beginning of the long correction......expect 50% falls minimum?

The level of net mortgage lending has fallen to a small fraction of the average for the 5 years leading up to the start of the crisis in 2007. The number of

transactions in the housing market is running at about half the levels of 2002-2007.

Average UK house prices, in real terms, are about 20% below the levels of mid 2007.

I think we got away with it. Lets try our best to keep the Vested Interest bubble going:

I want to explore how persistent the fall in activity in the housing market might be. There are two views I want to consider.

The first is that what we are seeing is a painful transition from a position where the cost and availability of mortgage debt was unsustainable (and may have fuelled unsustainable expectations about house price rises) to a more sustainable position. On that transition activity – in terms of lending, housing transactions and

house-building – will be very sharply lower.

The second view is that we may be stuck in a bad equilibrium of low confidence, and impaired ability to buy; and that we cannot be confident that these things will self-correct.

Let me say at the outset that I believe the evidence is more consistent with the first – the less bad – of these interpretations.

Yes, Liar Loans were rampant.

The FSA estimates that in 2007/08, for about 50% of mortgages, income was not verified.....What is remarkable in the years leading up to 2007 is

how little variability there was. For example, in early 2007 rates charged on mortgages with very different loan to value ratios differed by very small amounts...............I believe it is very hard to avoid the conclusion that by 2007 – and for some years before that – the pricing of different mortgages did not bear much relation to risk.....

We knew exactly what was occuring years before the bailouts. [No explanation as to why action was not taken back then.]

The failure of pricing to reflect risk differences is something I focused on in the Mortgage Review I undertook in 2003 and 2004. I felt then that it was a problem and that it was undesirable that existing borrowers with low loan to value ratios and who had a track record of servicing loans often paid much higher rates than

those with large loans, relative to their incomes and to the value of their homes, and who often also had no track record of paying debt and sometimes limited proof of income.

Blatant Fraud created the Boom in housing. House Prices of the late 1990's should be the present day measure of affordability.

In the years leading up to the crisis the average spreads on new loans were falling as the quality of information on new borrowers' incomes was almost certainly declining.

And at the same time typical loan to income ratios of new borrowers were rising fast....................The spreads on new mortgage lending now have two features: the average spread over a measure of the cost of funds is substantially higher than in the years leading up to the crisis; it has moved back to a level that is closer to the level at the end of the 1990s.....

Revealing his assumption that, the average house price is likely to drop back to 4x salary of an individual ?

The Transition back to reality..

A simple back of the envelope calculation can be very helpful here – one using figures that are not wholly unrealistic. Imagine that initially people can buy a house with a 5% deposit. Assume that a house for a first-time buyer costs 4 times their annual income.

That is a substantial sum and one which with a saving rate of 5% takes about four years to accumulate from the point at which you start saving.

Suppose as a potential first time buyer you are in a position to start doing that at age 28, so typically you buy at age 32.

Now assume that – suddenly – the deposit needs to be 10%. That means a potential first-time buyer needs to have a deposit worth 40% of

annual income and this requires 8 years of saving at a rate of 5%.

Other things equal this means the typical age of a first time buyer rises to 36. The transition from one equilibrium to another – assuming the

requirement for a higher deposit is sudden and unexpected – is stark. In the stylised example, for about four years after the sudden shift in the required deposit no first-time buyers can enter the market. But after that the flow of new first-time buyers goes back to its normal level.

We MUST do everything possible to sucker First Time Buyers into Shared Ownership?

The UK owner occupation rate was near 70% in 2006; it has since moved down to 67%.

Over the same time, the number of loans granted to first-time buyers has about halved. The fact that this number has not fallen more, as the stylised model would predict, can probably in part be explained by additional assistance that has been given to first-time buyers, for example in the form of

shared equity schemes or help from parents. Indeed, the CML estimates that the share of first-time buyers

under 30 who received some form of assistance about doubled from about 40% to just over 80%

I believe this reflects the importance of first-time buyers in allowing chains of transactions to be feasible.

http://www.bankofeng...1/speech488.pdf

Edited by Milton

Share this post


Link to post
Share on other sites

"The number of transactions in the housing market is running at about half the levels of 2002-2007."

Thats rather a large range and includes the very peakiest of peaks....

Share this post


Link to post
Share on other sites

Mortgages and housing in the near and long term

Speech given by David Miles, External Member of the Monetary Policy Committee, Bank of England

At the Home Builders Federation Policy Conference, London

31 March 2011

...//....#

age house price is likely to drop back to 4x salary of an individual ?[/u][/b]

We MUST do everything possible to sucker First Time Buyers into Shared Ownership?

http://www.bankofeng...1/speech488.pdf

LIAR LOANS were [and still are] THE POISONOUS TOXIC FUEL THAT FRAUDULENTLY SUPER-TURBOED THAT "MARKET" - AND CAUSED MASSIVE, MASSIVE, MASSIVE DAMAGE - WHICH WE ARE NOW LIVING WITH TODAY. :angry:

Share this post


Link to post
Share on other sites

Great analysis M. Many thanks

Thankyou KB

Edited by Milton

Share this post


Link to post
Share on other sites

In the stylised example, for about four years after the sudden shift in the required deposit no first-time buyers can enter the market. But after that the flow of new first-time buyers goes back to its normal level.

Thought this bit was interesting. So in about 2 years we should have a sudden influx of first time buyers. Except this lot will be four years older and wiser, and will have spent an additional 4 years saving every penny they can. I can hardly see them being keen to overpay.

Share this post


Link to post
Share on other sites

Good find

I can't help but be pernickity about this:

[/b]Revealing his assumption that, the average house price is likely to drop back to 4x salary of an individual ?

You have mis-read your quote - he says "Assume that a house for a first-time buyer costs 4 times their annual income."

What the relationship between average price of all and the average first time buyer is I do not know but would be willing to bet my right arm the overall average, of all housing in the UK is higher that the first time buyer average.

regards

J

Share this post


Link to post
Share on other sites

Amazing how some of these mouthy people can fill the air with a whole truck load of words and make it sound so complicated.

So complicated in fact that you doubt that they really know what they are talking about.

It's simple. The Banks were reckless and lent out money to any Tom, Dick and Harry without any checks and no cares that they might not repay.

This caused house prices to bubble.

Now, not only have prices soared beyond the FTB, but much of the mortgage money that should be available to FTB's is locked up in BTL.

Share this post


Link to post
Share on other sites

Good find

I can't help but be pernickity about this:

You have mis-read your quote - he says "Assume that a house for a first-time buyer costs 4 times their annual income."

What the relationship between average price of all and the average first time buyer is I do not know but would be willing to bet my right arm the overall average, of all housing in the UK is higher that the first time buyer average.

Not Guilty Re-Joyce. Re-read it.....slowly....

Amazing how some of these mouthy people can fill the air with a whole truck load of words and make it sound so complicated.

So complicated in fact that you doubt that they really know what they are talking about.

It's simple. The Banks were reckless and lent out money to any Tom, Dick and Harry without any checks and no cares that they might not repay.

This caused house prices to bubble.

Now, not only have prices soared beyond the FTB, but much of the mortgage money that should be available to FTB's is locked up in BTL.

Yep. Not news to anyone on here. Just a reiteration of the simple facts.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 331 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%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.