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Was Housing Undervalued In Past Decades ?


mercsl

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HOLA441

Over any say fourteen year period, housprices have been neither over valued or undervalued.

Its all about the mean and real affordibility.

At this point in time even the Bulls would now have to agree that they are vastly overvalued.

In two years time they may look pretty reasonable again :-)

And reasonable for some time too.

Prices will Plateau for sure, but not at the top of the market......they will languish and bumble along at the bottom until the next free credit boom.

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HOLA442

What you've enjoyed is your landlords ability to pass on lower rates to you. As prices increase (and therefore the desired rent forming the yield changes) & rates rise as well, those lower costs evaporate & guess what? You are targeted for rent rises to make sure the property returns its due.

If you think you're immune, think again. If your landlord feels they can't raise the rent on that particular property, the days until it is sold are numbered. You'll then get a kick in the teeth (financially) from your next landlord.

I have no objection to your desire to be a tenant forever though, how could I be a landlord forever without people like you?

Really? To be honest, in every property market I've seen (London/ Hong Kong/ Japan/ Jakarta) rents are not correlated with cost of financing property in the slightest. I.e. there is a rental market, prices are set by supply/ demand for rentals, not the financing cost of the landlords, or the price fluctuations of the property.

In your example, landlord 1 feels they can't raise the rent, and sells, what sort of numpty landlord 2 is going to buy at such a low yield a tenanted property, or think he wil have better luck raising the rent? Either the selling price will drop so landlord 2 can finance the deal, or he'll be stuck with the same problem.

I have every intention of renting until I retire. My life is too mobile to risk owning a PPR (note - that doesn't mean that I won't buy investment property if the numbers make sense)

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HOLA443

A question for the HPC bears.

In past decades have house prices been undervalued?

Things ARE different now and we will not be going back to the past. Come on bears prove they were not undervalued.

Perhaps they were previously undervalued in all of the countries around the world that have simultaneously experienced house price booms.

Can't be anything to do with regulations as these are different in most these countries.

Or perhaps it is the availability of cheap credit - low interest rates that did it.

Houses will only remain at their new "plateau"/ "correct new value"/whatever it's called for as long as people are willing or able to lend enough money at these historically low rates.

I personally think that there isn't going to be enough cheap credit. Has to run out sometime, doesn't it?

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HOLA444

The house is worth the current cost of materials, labour and the land. Anything on top of this is overvalued or a premium for no reason at all, normally because some idiot thinks it's worth more and starts of a craze.

Is a footballer really worth £19 million ?

How can someone look at a painting and say its worth £50 million. Some places on this planet would use it for firewood.

How can a carving cost 50p to make in Namibia but sell in a London shop for £45. Is it worth £45 or 50p ?

It's worth what it cost to make. Nothing more and nothing less.

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HOLA445

Mercsl,

This is certainly an interesting question and one that SHOULD be asked... even if it is a little too hopeful for me.

Can I PROVE to you that UK property didn't spend the last 30, 40, 50... years permanently "undervalued"?

No, I can't prove it but does it seem in the slightest bit likely? Given prices are determined by what others are willing to pay (rather than some set-in-stone "value") it's a bit of a long shot to argue along the lines of "people just didn't realise they were willing to pay more for their entire adult lives".

Your comments about the banking system, rental laws etc ask a different question it seems to me. Not so much was property permanently undervalued in the past but whether (although perhaps property was correctly priced in the past - roughly) changes to these issues have permanently driven prices much higher. This is of course the old "new paradigm" issue - beloved of TTRTR, even if he can square a couple of its circles (nice to see you back by the way - hopefully with some improvements to your argument :D).

Are you seriously arguing that today, when we hear FTBs are priced out of 95% of the country, is a shining example of what things SHOULD have been like in the past? You mean FTBs should never have been able to buy property?

Incidentally, I think the argument about there being a shortage of the houses people aspire to live in is a red herring - people's dreams/aspirations are limitless and have little to do with reality.

I'm not sure anyone is admitting intervention kept prices artificially low - although of course changes to rental laws etc will change the balance (between the attraction of renting v buying and for or against BTL).

Nodumsunreader,

You mean it WAS 3.5x wages when long term interest rates were double what they now are. Greater affordability linked to lower rates has pushed up the multiplier way above the old level - using 3.5 as a multiplier and justification for a crash continues to be an obsolete argument.

As ever, you disprove your name once more. You are fixated with nominal interest rates and insist on ignoring the effect a low inflation environment has on people's wage growth and therefore the long-term "affordability" of property.

TTRTR,

Don't bother.

I've been trying to convince the HPC bears of this reality for over a year now. It's like banging your head against a 500 ft tall brick wall.

Interesting that you would come back to tell people not to bother. WHY?

Just fill in the holes in your argument and you'll convert me. You prefer to pretend they are not there - your choice, but I find it a bit strange that you still insist on the superior tone.

King of The Castle,

I never quite grasp how people like you focus on only 6% of mortgagees. You're too investor focused in a non investor dominated market mate.

You clearly still haven't grasped the subtlety of how important BTLs have become in today's "troubled" market.

It may be true that they only represent 6% or so (I believe the percentage is higher, especially if you add in the hidden BTLs who don't tell their banks it is a BTL) but as you know most BTLs have multiple mortgages (so maybe 6% of the number of people with mortgages but I suggest a higher percentage of mortgages owed - and all interest-only and relatively new so an increasing slice of the mortgage debt). And obviously they buy typically at the bottom end of the chain - so one BTL purchase might kick off six house sales (no BTL purchase holds six house sales).

If only you BTLs would quit telling us about how good the opportunity is and get filling your boots then this market would soon take off again. I would venture it has stalled because there aren't enough investors willing or able to buy at the bottom of the chains anymore and sellers are not yet ready to return the market to the FTBs (who can only really buy in numbers at lower levels). I think you guys are essentially all talked out (and all spent out).

TTRTR,

What you've enjoyed is your landlords ability to pass on lower rates to you.

I see you still insist on sticking to that quaint view that rents are set by what landlords WANT rather than by tedious details like supply/demand for rental property, income levels etc. You tell us you get about a 6% yield, this is presumably because you do not WANT 7%, 8% or (tch, don't be stupid, who'd want it) 10%.

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HOLA446

You mean it WAS 3.5x wages when long term interest rates were double what they now are. Greater affordability linked to lower rates has pushed up the multiplier way above the old level - using 3.5 as a multiplier and justification for a crash continues to be an obsolete argument.

Affordability is an illusion. What would you rather borrow for the same asset:

1) 150k at 10% with 8% wage inflation

or

2) 300k at 5% with 3% wage inflation

?

frugalista

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HOLA447

Don't bother.

I've been trying to convince the HPC bears of this reality for over a year now. It's like banging your head against a 500 ft tall brick wall.

Why have you been trying to convince people?

Is it because you are decent lovely person who wants everyone to have a little bit more happiness in their lives at the expense of you having a reduced number of rent-punters for your smashing family homes?

What a guy!

How long until your Beatification?

Or is there a small chance that your assets will plummet if we don't fuel your dream.

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HOLA448
Guest rigsby II

Was Housing Undervalued In Past Decades ?

Is it a proper comparison to simply look at the price of the house in isolation to all the other things that contibute to running a home and your life ?

In the past houses were cheaper simply as a multiple of your earnings - no doubt, I'm talking 1960s/1970s - but other things were much more expensive, such as food, clothing, cars, electronic and whitegoods.

Today the exact opposite is true. Food and clothes are cheap, electronic goods laughably so, but as if to compensate, housing costs are mega - because people can afford it.

Maybe thats why our parents afforded houses at only 3.5x because of all the other high costs of living and its just not valid today.

:)

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HOLA449

Was Housing Undervalued In Past Decades ?

Is it a proper comparison to simply look at the price of the house in isolation to all the other things that contibute to running a home and your life ?

In the past houses were cheaper simply as a multiple of your earnings - no doubt, I'm talking 1960s/1970s - but other things were much more expensive, such as food, clothing, cars, electronic and whitegoods.

Today the exact opposite is true. Food and clothes are cheap, electronic goods laughably so, but as if to compensate, housing costs are mega - because people can afford it.

Maybe thats why our parents afforded houses at only 3.5x because of all the other high costs of living and its just not valid today.

:)

OK. So if you can prove to me that all these costs will remain the exactly same price relative to my earnings for the next half century, I'll get a fifty year morgage for a starter home. Deal?

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HOLA4410

Was Housing Undervalued In Past Decades ?

Today the exact opposite is true. Food and clothes are cheap, electronic goods laughably so, but as if to compensate, housing costs are mega - because people can afford it.

Good point. It is remarkable when I think what a fuss was made over "things" in the house when I was a kid. It was a really big deal to get a new piece of furniture or something. Also we used to eat the equivalent of Tesco economy frozen burgers, but lived in a house which is now "worth" 350-400k. Bought for 17k in 1974.

Can people afford it? People think they can afford it, but can they? They take on a mortgage which eats up 30-40% of their income, because they were told by others, "you must get on the ladder" etc. If you bought in the 70s and 80s your debt melted away due to wage inflation, which is where this pearl of wisdom originates.

Today wage inflation is very low; if this continues it means today's FTBs, unlike their parents will continue to be paying a large part of their income in repayments for years and years to come, with little chance of paying it off early or trading up. So I say again, this kind of affordability is an illusion.

frugalista

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HOLA4411

Indeed.

I was thinking about a work colleague of mine today, he owns half a house (bought recently with a friend).

If house prices are flat for seven-to-ten years (as stagnation theorists hope - he is one of them) with low income growth then in eight year's time he will "own" half a house (I don't know if he has a repayment mortgage or not but I'd hope so) with minimal equity and not notable a better salary than he is on today.

How does he climb the housing ladder?

Will property be "affordable" for him by then?

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HOLA4412

OK. So if you can prove to me that all these costs will remain the exactly same price relative to my earnings for the next half century, I'll get a fifty year morgage for a starter home. Deal?

Food I'm not so sure about. Food is stupidly expensive and too much goes to the middle men, the reatilers, the frieght companies.

My Parents last TV lasted nearly 15 years and was bought for £499 in 1989. The similar models now with a better spec would cost perhaps £299, however the durability of much modern tech is very poor - I'd guess it wouldn't last as long. A price fall? Debatable.

Likewise, if a decent farm chicken from a butchers 20 years ago, really the same as a 99p cruelly raised, chemical laced tesco value chicken? A cheap version you can't really call an alternative is not a price fall.

General crapness of quality hides inflation, and the government knows this. Fall-apart junk and sweatshop goods are claimed to show price decreases and offset the hyperinflation we see elsewhere.

A US-made Gibson or Fender guitar has risen in price each year of the last decade, but a far-east budget clone has probably fallen from £189 to £139. Yet the chinese fender squiers are quite shoddy and if you buy one blind it's quite likely to have little niggles and faults beyond merely cheap components.

Edited by CrashedOutAndBurned
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HOLA4413

I dont think its as easy as to say housing was over / under valued but I agree with your point about the banking sector. The last last 25 years have seen the banking industry de-regulated and an increase in competition. It is easier to borrow, with more leverage, and cheaper (i.e. the spread on mortgages over base rates has shrunk, regardless of absolute interest rate levels). This has all increased demand.

On the other side, supply has become even more tightly regulated. Housing construction has fallen 50% since 1975.

You have two choices. Either regulate the supply of credit (i.e. ration it, like in the 1950s) or increase supply. Am I the only person who finds it ironic that people who claim they cant afford to buy a house are prepared to argue that there isnt a housing shortage?

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HOLA4414

A US-made Gibson or Fender guitar has risen in price each year of the last decade, but a far-east budget clone has probably fallen from £189 to £139. Yet the chinese fender squiers are quite shoddy and if you buy one blind it's quite likely to have little niggles and faults beyond merely cheap components.

While we are on the subject, I have a 1997 USA Fender Strat for sale (inca silver custom shop colour, mother of pearl pickguard). If anyone is interested let me know. Open to reasonable offers!

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HOLA4415

I dont think its as easy as to say housing was over / under valued but I agree with your point about the banking sector. The last last 25 years have seen the banking industry de-regulated and an increase in competition. It is easier to borrow, with more leverage, and cheaper (i.e. the spread on mortgages over base rates has shrunk, regardless of absolute interest rate levels). This has all increased demand.

On the other side, supply has become even more tightly regulated. Housing construction has fallen 50% since 1975.

You have two choices. Either regulate the supply of credit (i.e. ration it, like in the 1950s) or increase supply. Am I the only person who finds it ironic that people who claim they cant afford to buy a house are prepared to argue that there isnt a housing shortage?

There are enough homes to meet housing demand, but not enough to meet speculative demand in addition (which has been huge in recent years). This has been mentioned frequently on HPC. To meet speculative demand would require the building of huge numbers of homes which are unnecessary.

I think the reason this is resisted is the fallout when boom turns to bust. Some of the new areas will be white elephants in which no-one wants to live and which will fall into disrepair and social decay.

Meanwhile taxpayers have shelled out billions to provide the necessary services (water, roads, transport etc) to service them. If developers were given free rein to build where they please but forced to pay the cost of essential services (and that includes the less obvious things like schools, healthcare, shops etc) to support them, their enthusiasm would be tempered.

Why should the rest of society pay for their wild west antics?

The more workable solution is to discourage speculation. Housing is too important for cowboys to be let loose.

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HOLA4416

In past decades have house prices been undervalued?

My grand parents bought a two up, two down(well three up, there was no bathroom) with an outside tumble toilet. No central heating, no hot water, softwood sash windows. Coronation street style. In the north west in 1974 for £5000.

Don't know what that means. But the same house with modern amenities would probably fetch £70,000 now.

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HOLA4417

"My grand parents bought a two up, two down(well three up, there was no bathroom) with an outside tumble toilet. No central heating, no hot water, softwood sash windows. Coronation street style. In the north west in 1974 for £5000.

Don't know what that means. But the same house with modern amenities would probably fetch £70,000 now."

Hi Growl

We bought our first house also in 1974 but in the north east for £6500. We noticed it in rightmove this morning having been reduced to £470,000 - but from what we don't know.

This is not a contest, but for illustrative purposes only because we sold in 1976 due to the running costs verses expenditure and arrival of children. The house is externally just the same - hasn't even had a coat of paint (hard wood windows you know) but hopefully the inside has been improved.

KT

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HOLA4418

"My grand parents bought a two up, two down(well three up, there was no bathroom) with an outside tumble toilet. No central heating, no hot water, softwood sash windows. Coronation street style. In the north west in 1974 for £5000.

Don't know what that means. But the same house with modern amenities would probably fetch £70,000 now."

Hi Growl

We bought our first house also in 1974 but in the north east for £6500. We noticed it in rightmove this morning having been reduced to £470,000 - but from what we don't know.

This is not a contest, but for illustrative purposes only because we sold in 1976 due to the running costs verses expenditure and arrival of children. The house is externally just the same - hasn't even had a coat of paint (hard wood windows you know) but hopefully the inside has been improved.

KT

The first house we bought in 1975, for 10.5k recently sold for 130k. My salary then, as an electruical engineer, was about £2,500. I couldn't have bought it without my wife's salary (secretary in the City) of about 2k.

I don't think prices are that much out of line with then. The difference was that despite our mortgage interest being 11%, salaries were rising at about the same rate, thus reducing the initial loan value.

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