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Marina

Question For The Bulls.

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Lots of people have made the comment 'I asked them if they could afford to buy the house they live in today'. I must confess to being a bit thick on this one, because I have never really realised the significance of this comment.

My instinctive reaction has always been 'well they have worked their way up over the years so it's not really relevant.' But, of course, it is very relevant.

Let's say you aspire to one day have a family (say wife and two kids) and you would like to own a very averge 4 bed detached estate house. Where I live you can buy a pretty ugly 60s box that would fit the bill for say 300k.

But, you're just starting off. You're 25 say. You save 20k and somehow (by taking on a truly horrendous mortgage) you buy your first grubby flat for £150k. You have a 130k mortgage.

Let's pretend, just for a laugh, there is no house price inflation - or deflation.

5 years on it's time for a 2 bed terraced house. So you sell up for £150k and buy a 2 bed terrace at 200k. You now have a £183k mortgage (cost of move say 3k - stuck on the mortgage).

5 years on it's time for a 3 bed semi. So you sell up for 200k and buy a 3 bed semi at 250k. You now have a mortgage of 237k (cost of move 4k - stuck on the mortgage).

5 years on and, at last, it's 4 bed detached time. So you sell up for £250k and buy at £300k. You now have a mortgage of £292k (cost of move 5k - stuck on the mortgage).

A golden rule seems to emerge here.

Whatever the price of a house is now - that is roughly the mortgage you will one day need to buy it - if there is no house price inflation.

If there is house price inflation then you will need to multiply the price of the house today by whatever that house price inflation might be.

I am sorry if this is painfully obvious to everyone else but the penny has only just dropped with me. I have always thought that my progression from flat to 4 bed detached house was miraculously achieved by clever trading up - by working on properties and improving their value etc. This is a complete illusion. In fact the mortgage I ended up having when I got to a 4 bed house was almost exactly what that 4 bed house would have cost me when I first entered the market - plus house price inflation.

So, the conclusion is, if a typical 4 bed detached estate house is 300k - you need to realise that, one day, you'll have a mortgage at least that size or larger - if you are ever going to buy that house. By my reckoning, looking at average wages and even allowing for half a partner's wage - that house should be no more than £150k.

I would say the vast majority of the population have this nutty idea that rising house prices are a good idea. Fascinating really. Something that is very bad for the majority of the population is regarded as very good by the majority of the population.

So, my question to the bulls is - you guys say property doubles every 7 years. For a first time buyer starting off now, if prices double twice in the next 14 years then, when he is ready to buy his 4 bed detached, that house will be £1.2 million and he wil need a £1.2 million mortgage to buy it. How does that work? :unsure:

Edited by Marina

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Don't feel too bad, I only did the maths about 4 weeks ago. Its a bit of a shocker really, particularly for those FTBs that have stretched themselves on a long rack to buy at the top of the market.

EDIT:

I realised recently its even worse than this because there has been a close in the differential gap between flats and houses. So if you buy a flat now in a house divided by 4, your likely to pay about 2/3rds of what you would pay for the whole house, and when it crashes these are the ones that are going to go all the way to the bottom.

Edited by Elizabeth

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I would say the vast majority of the population have this nutty idea that rising house prices are a good idea. Fascinating really. Something that is very bad for the majority of the population is regarded as very good by the majority of the population.

Indeed, the only ones' that actually gain are those cashing out of the market or trading down. For the rest it's a matter of simple differentials, for example say you bought a £100k house in 1999 and at the time your ideal house was £200k and one day you hope to trade up to that level, so there is a gap of £100k. Say prices have doubled then people think "great, I've made £100k on my house!" not realising that their ideal house is now £400k and that they'll have to find £200k to plug that gap, it's probably worse than that, the higher end of the market no doubt would have inflated even more.

Hyperbolic growth is not kind to those hoping to trade up... which is probably the majority of home owners who are just trading paper... effectively monopoly money, these people are now angry that young people can't or don't want to waste real money or take on real debt just to provide liquidity to their monopoly money.

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young people can't or don't want to waste real money or take on real debt just to provide liquidity to their monopoly money.

Bingo!

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Marina

Good post.

To make matters even worse, incomes are going to halve over the next 10 years. That is the price of the global economy.

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Yep, the whole idea of the property ladder is flawed.

Buy a place for £100k, prices move up 20%, buyer has made £20k.

Decides to trade up, but the house that was £200k has now risen to £240k (same 20% rise)

So even though our buyer has made a 20k profit, they're still 20k poorer than if there had been no inflation.

Now if they hadn't bought, they'd be even worse off, but something really needs to be done to kill housing inflation.

But then in 5 year politics, does anyone in power really care?

Looking at GB, I really don't think so.

Edited by BandWagon

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We've only ever had mortgages based on 1 salary.

I knew it was all totally stupid some 3 years ago.

Finished the mortgage on current house.

Mortgage of £40k.

House perhaps £250k.

What!

Wouldn't want to buy at that price on multiple of the 1 salary.

Utterly insane situation, which cannot go on.

That's just logic.

Marina, just imagine you were starting out again.

I wouldn't want to be there.

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We've only ever had mortgages based on 1 salary.

I knew it was all totally stupid some 3 years ago.

Finished the mortgage on current house.

Mortgage of £40k.

House perhaps £250k.

What!

Wouldn't want to buy at that price on multiple of the 1 salary.

Utterly insane situation, which cannot go on.

That's just logic.

Marina, just imagine you were starting out again.

I wouldn't want to be there.

Neither would I. Looking back the only way I made the jump from flat to detached house was primarily through inflation. The simple fact now is, if you are young and live where I live, and you one day want to live in a 4 bed detached box - you will be borrowing 300k by the time you make the big house - plus whatever HPI throws into the equation.

As someone else said, for most people (particularly not in the public services) real wage deflation is the order of the day which is why, without any doubt whatsoever, there will be a house price crash and a recession and house prices will not recover for twenty years - if at all.

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Neither would I. Looking back the only way I made the jump from flat to detached house was primarily through inflation. The simple fact now is, if you are young and live where I live, and you one day want to live in a 4 bed detached box - you will be borrowing 300k by the time you make the big house - plus whatever HPI throws into the equation.

As someone else said, for most people (particularly not in the public services) real wage deflation is the order of the day which is why, without any doubt whatsoever, there will be a house price crash and a recession and house prices will not recover for twenty years - if at all.

What you, I, and others say, is the logic.

What I, I suspect you and, of course, others fear is that so much is now dependent on all this that those pulling the strings are desparate to keep it going.

Thus all the "schemes" to try to keep the balls in the air.

History will judge but, and of course I may be proved wrong, I believe we are witnessing the start of the "endgame" for the West as economic power and thus influence in the World shifts inexorably to the East.

All imho.

Your recession scenario would confirm this.

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As someone else said, for most people (particularly not in the public services) real wage deflation is the order of the day which is why, without any doubt whatsoever, there will be a house price crash and a recession and house prices will not recover for twenty years - if at all.

Prices are set on the margins, the majority of home owners out there haven't bought (or sold) in the current market hence they just don't stop to think about affordability for new people, there is a vague "you always struggle to start with, we did" attitude, but most people simply don't appreciate the magnitude of how detached the average house price has become from average wages.

Even in the boom times only about 7% of the housing stock changed hands each year, most people haven't had to find real money for their own house, or service real debt for that matter, hence its value is notional, of those who have moved a lot they have benefited from previous inflation on their former home. The true measure of the market is bourne out by the low FTB figures, which are dubious in their measurement anyway, and rents which of course are a fundermental indicator of demand yet have become very detached from notional house prices. Those who have moved up and taken on bigger debts due to the price differentials have been allowed to chase a mirage due to the artificially low interest rates.

The fact of the matter is apart from a number of FTB'ers who have bought in at the top most home owners don't have to grapple with the current prices, in their view it's only a good thing, a great big MEW cash machine :P They don't stop to think about their children or the fact their dream home how has a price differential not of £75k but probably pushing £200k despite their 'hard earned' HPI on their own property.

In reality the only people who gain are those cashing out and the people who operate on commissions based on the prices (who would they be?) and the banks, of course, who can generate money supply and pass off risk onto the markets. All those who have benefited from HPI still require the input of workers, workers who have or will eventually have to service big mortgage debts if the current state of affairs is propped up and allowed to continue, all this despite the current low interest rates. In the 1970's by this stage there would already be hyper-inflation seeping into the real economy, not just assets, but outsourcing, the lack of bargaining power and cheap imported consumer goods have kept things in check, for a while at least, in the service sector there is already roaring inflation (health care, or school fees for example, the middle classes will need to MEW en masse soon).

From an economic standpoint housing is an unproductive asset that does not significantly contribute to the economy aside from generating debt, which acts as a drag on consumption and a countervailing force when dealing with inflation. It also misallocates resources and investment away from productive sectors of the economy, that's why the market always corrects the imbalance eventually.

The real issue isn't houses, a collection of bricks with eventually deterioriate much like a car, the fundamental issue is land, land price inflation is the real driving force and can run in excess of HPI. Contrarary to popular belief only 7% of the UK land is classified as 'urban', the planning system creates an artificial scarcity out of an otherwise abundant resource, much like De Beer's does with diamonds.

Edited by BuyingBear

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What you, I, and others say, is the logic.

What I, I suspect you and, of course, others fear is that so much is now dependent on all this that those pulling the strings are desparate to keep it going.

Thus all the "schemes" to try to keep the balls in the air.

History will judge but, and of course I may be proved wrong, I believe we are witnessing the start of the "endgame" for the West as economic power and thus influence in the World shifts inexorably to the East.

All imho.

Your recession scenario would confirm this.

Absolutely this is it - end game scenario for the western economies. Once upon a time I had a touching faith that 'the government would not let such and such a thing happen'. But, now I know that nothing, no government or power on earth, bucks the market.

If goods are produced more cheaply in other markets, we lose the ability to make goods. If services can be provided more cheaply by other markets, we lose the ability to provide services. What else is there? The number of people in non-productive, ******** jobs like PR, Advertising, Media, Graphic Design, Marketing, Market Research and, of course, the public services is mind boggling. The productive, money generating part of the economy has to support its own weight in non productive service providers.

The gravy train is over.

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Absolutely this is it - end game scenario for the western economies. Once upon a time I had a touching faith that 'the government would not let such and such a thing happen'. But, now I know that nothing, no government or power on earth, bucks the market.

If goods are produced more cheaply in other markets, we lose the ability to make goods. If services can be provided more cheaply by other markets, we lose the ability to provide services. What else is there? The number of people in non-productive, ******** jobs like PR, Advertising, Media, Graphic Design, Marketing, Market Research and, of course, the public services is mind boggling. The productive, money generating part of the economy has to support its own weight in non productive service providers.

The gravy train is over.

Thing is, no politician, of any current party here, dare speak such things.

So the slow wind down will continue.

Not much most of us can do to alter it.

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The fact of the matter is apart from a number of FTB'ers who have bought in at the top most home owners don't have to grapple with the current prices

Indeed, which is why we only have stagnation and marginal falls at the moment. But any FTB in the South that has bought in say the last 3 years - how on earth are they ever going to be able to buy up? The natural progression 'up the ladder' just won't be available to them - as they already stretched themselves to breaking point to get started.

In the old days a FTB would buy a flat and then, a few years later (having bought in his early 20s), when he was earning more money (maybe a promotion and some nice 10% a year inflation), he'd move up to a house.

Now the only FTBs that can enter the market are, on average, 34 years old and are probably not only high earners but also near the peak of their earning capacity. Even these top earners are not going to be able to trade up.

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In reality the only people who gain are those cashing out and the people who operate on commissions based on the prices (who would they be?) and the banks, of course, who can generate money supply and pass off risk onto the markets. All those who have benefited from HPI still require the input of workers, workers who have or will eventually have to service big mortgage debts if the current state of affairs is propped up and allowed to continue, all this despite the current low interest rates. In the 1970's by this stage there would already be hyper-inflation seeping into the real economy, not just assets, but outsourcing, the lack of bargaining power and cheap imported consumer goods have kept things in check, for a while at least, in the service sector there is already roaring inflation (health care, or school fees for example, the middle classes will need to MEW en masse soon).

From an economic standpoint housing is an unproductive asset that does not significantly contribute to the economy aside from generating debt, which acts as a drag on consumption and a countervailing force when dealing with inflation. It also misallocates resources and investment away from productive sectors of the economy, that's why the market always corrects the imbalance eventually.

The real issue isn't houses, a collection of bricks with eventually deterioriate much like a car, the fundamental issue is land, land price inflation is the real driving force and can run in excess of HPI. Contrarary to popular belief only 7% of the UK land is classified as 'urban', the planning system creates an artificial scarcity out of an otherwise abundant resource, much like De Beer's does with diamonds.

Excellent comments. This hosue of cards is going to collapse pretty soon and it will be very severe for all of us when it does so.

As someone who works in the private sector I increasingly wonder whether buying a house at all, whether it is now or when HPs crash in the coming years, is even sensible at all. The only people I know who are secure in their jobs are public sector workers and I increasingly wonder whether it is, when considering buying a house, necessary for me to get a public sector job in order to have that illusion of security to go forward with a purchase.

I can see private sector jobs becoming increasingly moveable in the decades ahead and it seems illogical to 'invest' in my biggest purchase, with all the costs of making that purchase, only to have an 'unknown' mean that the day after I purchase I could find my job has moved, my company taken over or I simply been shipped overseas.

Having said that, Bath Council outsourced its IT services a few years ago and Swansea City Council is in the process of outsourcing its IT services which, many believe, will become a model for other Council across the country. If IT services are outsourced today in Council what will they outsource tomorrow? Housing more or less went back in the 1980s did it not with a move to Housing Associations?

Ultimately, the bottom line is that the UK is now a very insecure place to work in, incredibly highly taxed and ridiculously expensive. I don't know how people can afford to rent many places these days let alone buy and then howo n earth do you have money left for pensions, other bills.

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I agree with you Marina, the ladder is mythical.

However, you have ignored any repayments made over the periods of living in each property, this is where the ladder supposedly works, i.e. the monthly payments are not 'dead money'.

But people seem to ignore some issues when they talk about the ladder and dead money.

Taking your example. Assuming they stay in each property for about five years then the capital repaid will be so low as to make little difference, especially including those moving costs.

Also, each time that person moves they will probably be taking on a fresh 25-year mortgage, otherwise the repayments would become too high. This occured to me in a conversation with my mum recently, so I know anecdotally this happens. It also explains why plenty of people in there 40s/50s have loads of time left on their mortgage despite first buying in their early twenties.

This pushes their mortgage-free age backwards each time and it adds to the overall interest paid to achieve that 4 bed house since most of the repayments in the first five years or so are on interest, and we now have four times first five year periods!

I said to my my mum in our conversation that it would be worth my while (though perhaps not affordable) stretching monthly payments in order to buy a place that I could live and raise a family in over a whole 25 year period without needing to move (e.g. 3 bed instead of a flat or a 2 bed, and after prices crash of course).

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However, you have ignored any repayments made over the periods of living in each property

Both this and also general inflation.

In the 1970s there was lots of inflation so our parents who bought their first houses in the 1960s, had their mortgages look made to look like peanuts.

In today's low inflation world it isn't going to happen. FTBs buying a 1-bed hovel at 6x had better be prepared to live in it for the rest of their natural lives.

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I was saying something similar to a 50-something colleague. I was explaining we were renting and that the new house we have is better than the squat like hole we used to rent, although the rent is quite high and the place is very small and close to sources of noise.

'Wouldn't you prefer to invest in your own house?' he says 'Isn't rent just money to the landlord?'

I explain that the larger mortgage payment, the loss of all our savings in the deposit, and the extra costs of ownership (building insurance, maintenance) would roughly speaking mean the cost buying the inadequate house we rent would be around 500 more a month. That's calculating the loss of returns on the savings, the larger mortgage payment Vs rent, and the costs of ownership. I didn't bother factoring in lawyers fees and moving costs you don't get when renting.

'The tuppence h'penny you pay off the capital amount is thoroughly exceeded by extra money we can save. There's no 'investment'. So we're better off giving our money to 'some bloke' than giving more of our to some faceless shareholders. And prices aren't going up - looks like you can make serious offers just now. We'd rather save up until we can avoid a massive mortgage'.

'I'd never thought of that', he said.

I don't think very many of the old school really did the maths on their march up the ladder, considered the role inflation acting as an aid to the indebted, the role of credit regulation (inflation of the money supply) in their housing wealth.

Edited by CrashedOutAndBurned

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I`ve often heard from friends the expression "I couldn`t afford to buy my own house now". One who bought 10 years ago, has seen value of house increase from 90-300K. Has 75K mortgage, wants bigger house in nicer area-500K+, does not want to treble mortgage. Stuck, particularly in light of the fact that values are falling, may as well just stay put. I know of someone else that has just put all their equity (400K) into a property that cost 890K, they have a half a million mortgage. If that property falls in value by 200K, they have half the equity wiped out, not withstanding that if rates go up by just a half a percent...well "do the math", as they say in the States.

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I`ve often heard from friends the expression "I couldn`t afford to buy my own house now". One who bought 10 years ago, has seen value of house increase from 90-300K. Has 75K mortgage, wants bigger house in nicer area-500K+, does not want to treble mortgage. Stuck, particularly in light of the fact that values are falling, may as well just stay put. I know of someone else that has just put all their equity (400K) into a property that cost 890K, they have a half a million mortgage. If that property falls in value by 200K, they have half the equity wiped out, not withstanding that if rates go up by just a half a percent...well "do the math", as they say in the States.

The contents of this thread contain the essence of why FTBs should not buy now. Those people on here who have said they are going to because they cannot wait any longer etc - I hope they are aware of what they are doing.

Nothing, absolutely nothing - no government action, no action by lenders and housebuilders, nothing on earth can stop the forthcoming major correction to house prices.

I know it might be a drag renting but you should let others take the hit, and buy into the market when prices are a lot lower. They quite simply CANNOT stay where they are. Very few people buying today will be able to trade up. The market must correct. But it might take a few years yet. However, the way the economy is going at the moment, it might not take very long at all. Look at what is happening in New Zealand now.

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In my opionion the housing ladder worked in the past because of high wage inflation, you buy a small house for 3k, but as wage inflation was 10->20% per year in a couple of years the morgage has been eaten away because your wages are so much higher, your wages are higher your house is worth more as this also tracked inflation and you can trade up.... Unfortunatly in recent years inflation has dropped through the floor, but House inflation has rocketted. People still believed in the the housing ladder, but the proccess that allowed a 'housing ladder' has disappeared.....

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I find it interesting that not one bull has made any attempt to put an argument.

That's because this is the ultimate argument - it demonstrates that the market is a pyramid scheme. Everyone knows the final outcome of a pyramid scheme! :lol:

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its quite simple (even for the bulls)..........

for the majority of recorded history:

wage inflation > rpi > hpi

in the last 5 years:

hpi > rpi > wage inflation

in the future:

rpi > wage inflation > hpi

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Personally, I bought my second property , a BTL for this reason. I don't plan to kep buying more and more properties to let out because as you know it can be hard work. I have a BTL on my Road. Easy to look after should I need to and every chance of prices infalting because of the close proximity to the town centre, train station, M4, M40 and M25.

The combined value of both my properties is slightly more than a 3 bed detached in the nicest part of my town, so as they inflate, so do my 2 properties. I would prefer a 4 bed but there is more value in extending a 3 bed.

Given the opportunity to buy another property that requires a lot of work, I will sell my residential home and move into my current BTL. Until I can comfortably afford my dream home I will always own 2 properties.

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  • 336 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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