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apom

Remember It Is A Market.

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Okay This was orriginally an answer to another thread.

Higher prices do not fix the problem, they make it worse, they are the problem

first thing that you have to take into acount is that house prices are goverened solely by the economy.

Can the economy afford people managing higher debt levels?

No.

The economy is a ballenced and almost organic entity.

If people are paying much more a month into mortgages then the economy suffers as that money is not going where it used to:

E.G That money was spent into business and tehn taxed.

See The state of the high street and threats of huge tax hikes.

Can people cope with their debt burden?

Nope. Much as last time this is showing to be impacting the borrowers as IR rates rise

Why will IR's rise...? Well the economy is struggling, businesses are struggling and tax revenue is not being recovered, weak economy = weak pound, save the pound.. you need to raise IR's. SEE recent MPC warnings.

Also the USA economy is linked to ours, ours is too small and too large a difference in IR's causes an investment run on the pound, devaluing it from outside. where the americans go we shall follow.

With low inflation what happens to the housing market?

It stagnates, contrary to popular belief people do not move up the housing ladder as their salaries increase, they move up as inflation lowers the cost of their loan against their salary and carries up the value of their home. People earn on average their peak salary by early 30's most inceases are inflation driven past that point. With low inflation house prices should gear below long term averages.

House prices are higher, but salaries are dropping against inflation.

essentially the housing market can be swayed in the short term. and aberation.

but it does not fit within the greater economic constraints and as it represents such a vast amount of peoples capital expenditure the economy can not change quickly enough to sustain such a vast assett value shift.

Looking at the picture that some can borrow 4 times their salary and buy with a large deposit does not refelct that most havent.. Most are massivly overstretched.

also many areas have inceased in cost up to 3 to 4 times. this represent 9 times average salary in Devon for example..

essentially what you have here is another speculative market that has tried to change economical laws.

Some win in these markets, some don't

but the facts remain the same.

If you create a model of poorly performing stock market and failing industry and low interest rates it will show that people will move toward borrowing to invest, for example property.

What will then happened is a debt based economy will be created based on rapidly rising house prices.

The debt burden sucks the rest of the economy dry, IR's rise people fail against debt.

market collapses.

Question.

If I can buy a new build now for £130,000 that was £170,000 last year.

Has the price dropped or become more realistic?

If I buy it now I would have £40,000 less debt.

does that make me better of, or worse of.?

Last point..

Where does the housing stock come from?

Each boom... Each time there is a boom a massive amount of housing stock is created.

which now stands empty until it is priced to a level that the people and the economy can afford.

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The debt servicing burden is critical to the health of the economy, as you say, but what's rarely seen is how quickly this cost is affected by increases in the interest rates and house prices.

With low inflation and stable interest rates, if house price double overnight, debt servicing costs are unchanged. Even if people move from their now expensive houses to similar priced property the debt servicing cost is unchanged, because they haven’t taken on more debt.

It’s only when significant amounts of this property is purchased by new entrants, or people up-sizing that the debt servicing cost increases. This may take 10 or 15 years to work through, but should show up in the total debt outstanding for UK mortgages.

My point is, even if prices stay at their current highs, and more and more entrants are forced to take on more debt, so the UK debt pile is on course to grow for many years to come. And debt servicing cost along with it. This will eat into the household balance sheets in the future, putting a ever larger drag on the economy, which can only mean one thing...

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There was a new comedy programme on last night (BBC3? about 9pm) in which one line went something like:

"Today, people in Britain spend more money borrowing money than they do spending it"

;)

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"Today, people in Britain spend more money borrowing money than they do spending it"

The individuals used to save and lend to enterprise, now the enterpise lends to individuals and makes money out of them. Who's getting screwed in all this now??

Further to the above, and well documented on HPC, is interesting to look at the profile of repayments as a proportion of income. Let’s take the typical example of 2 worlds –

1) Interest rates = 10%, inflation = 8%, wage inflation =8%, house price = £100k

2) Interest rates = 5%, inflation = 3%, wage inflation =3%, house price = £200k

So you can see both worlds have real interest rate of 2%, and in the second world house price have increased, encouraged by low interest rates.

Now take you stereotypical aspiring housebuyer, who is compelled to spend 25% of their income on housing.

So in year 1 of the loan, the two worlds will have the similar outgoings, but in subsequent years the high inflation in world (1) will reduce the payments, increasing their disposable income.

As I say, this has been talked about a lot on here, but the timing of the effect has not. It could well take 10 years for homeowners to realise that have actually taken twice the debt as their parents (they have in real terms - house prices have doubled, real interest rates are the same).

We could be starting to see this effect feed through right now, but there could be much more to come.

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Higher prices do not fix the problem, they make it worse, they are the problem

first thing that you have to take into acount is that house prices are goverened solely by the economy.

Can the economy afford people managing higher debt levels?

No.

The economy is a ballenced and almost organic entity.

If people are paying much more a month into mortgages then the economy suffers as that money is not going where it used to:

E.G That money was spent into business and tehn taxed.

See The state of the high street and threats of huge tax hikes.

Apom - keep up the good work! Your arguments cut through any amount of spin.

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Thank you..

although my spelling does let me down..

To that end I have posted these arguments and no bull has ever countered them..

At all..

Ever..

Wish one would.. I can't be right...? not fully...?

:)

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  • 302 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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