High House Prices - Sucking Money Out Of The Economy

[munimula]

As I have described in the post below excessive HPI means that if I buy the same house today as I almost bought in 1998 the repayment mortgage will cost almost £600 per month more;

http://www.housepricecrash.co.uk/forum/ind...showtopic=18527

This got me thinking. If house prices were at 1998 prices (+ reasonable inflation, 2.5%) I'd only need a £30K mortgage.

If I had the extra £600 (£7200 yearly) spare to pay off the mortgage quicker how long would it take?

Answer:

Just over 4 years!!!

mortgage outstanding after paying off £7200

1 £30,000 22800

2 £22,800 15600

3 £15,600 8400

4 £8,400 1200

Lets assume that my earnings don't go up and I buy the house today, I can't afford to pay off the mortgage quicker now because it's sucking up so much of my income. How much money will I spend on the mortgage over 25 years (assuming 5% mortgage)?

Answer:

£230,000

So if I buy the house today I'll be spending £768 every month for 25 years, a total cost of £230,000.

So now the calculation, how much extra is this house going to cost me?

Answer:

£230,000 - £35,000 (£30K mortgage paid off in 4 years)

= £195,000

So due to excessive HPI personally if I buy today the economy, my savings, my pension etc etc will be seeing £195,000 (+ when including savings, pensions growth) over the next 25 years. And if I bought the house at 1998 prices (+ reasonable inflation) I would be mortgage free in 4 years!!!!

Now, consider that after paying off my mortgage in 4 years I can save the extra £600 every month.

Assuming 5% savings growth.

year saved (interest + £7200)

1 7200

2 14760

3 22698

4 31032.9

5 39784.545

6 48973.77225

7 58622.46086

8 68753.58391

9 79391.2631

10 90560.82626

11 102288.8676

12 114603.3109

13 127533.4765

14 141110.1503

15 155365.6578

16 170333.9407

17 186050.6378

18 202553.1697

19 219880.8281

20 238074.8695

21 257178.613

So at todays prices the house will cost £195,000 more in mortgage costs and I will miss out on potentially saving £257,178.

Over the 25 year period I am £452,000 worse off at todays prices!!!!!!

Pissed off, you bet.

Edited November 4, 2005 by munimula

[Ritters]

High House Prices - Sucking Money Out Of The Economy

Exactly! This is what the bulls cannot see. This affects you ability to spend elsewhere and maintain a stable economy.

Systems thinking is an good ability to have. It enables you to see the big picture, so if you introduce a change here, you can see where it will affect elsewhere.

Edited November 4, 2005 by Ritters

[apom]

I did a similar sum just htis morning..

Working out that the capital for the interest only mortgage I was just remomended to enter would take a over a decade of my take home salary to pay for..

Thats ten years.. out of 25 years.. just for the capital..

now interst makes up a fair chunk of that..

A quick sum showed that if I took out an interest only mortgage and spread the capital repayments over 25 years I would have £11 left a month after the mortgage was paid..

but I have been told that interest only means that I don't have to pay of capital..

Seriously.. I was told that as a way out of the high house prices..

and they are right... things would be okay... Providing I made no attempt what so ever to pay back the loan..

So...

Sorry..

got a case of the giggles....

I was giggling.. as I wrote that.. it is that stupid an idea... the dumbest thing I have ever heard... ever..

Then I stopped..

Giggling..

Because people are doing this...

My god...

They are doing this...

Stop... we know what they are up to... but stop and think... think about what these people are doing...

Step back.. look at it,...... its a sobering thought that made my blood run cold.

no matter how bad life could be.. imagine an interest only loan of £180,000...

Chilling

[AntiSpeculator]

Good post munimula!

It seemed obvious to me that higher house prices (even with low interest rates) continueing would mean that anyone buying now will be SUBSTANTIALLY worse off than those who bought a few years ago.

I was thinking about putting together some costings to show that the actual nominal house price increase between then and now is only the start of the financial damage, but your example is perfect.

This is the sort of thing that people in denial of the problem need to see: If you bought a small house now you will be almost half a million pounds worse off than someone who bought the same house 7 years ago at the end of the mortgage term.

That is a lot of money, even accounting for inflation!

[munimula]

Good post munimula!

It seemed obvious to me that higher house prices (even with low interest rates) continueing would mean that anyone buying now will be SUBSTANTIALLY worse off than those who bought a few years ago.

I was thinking about putting together some costings to show that the actual nominal house price increase between then and now is only the start of the financial damage, but your example is perfect.

This is the sort of thing that people in denial of the problem need to see: If you bought a small house now you will be almost half a million pounds worse off than someone who bought the same house 7 years ago at the end of the mortgage term.

That is a lot of money, even accounting for inflation!

Thanks AS - problem is you would struggle to explain this concept to 99.9% of the UK population.

What is very frustrating is how much resistance there is to prices coming down. The stupid buyers still buying, the sellers hanging on, the VI bullsh*t affecting sentiment. So much resistance to even small falls in prices, people perfectly accepting of prices going up 25% a year but totally unable to accept that they might come down even 5%.

[Pedro]

This is brilliant analysis, simply brilliant.

I am going to write to my MP with these figures - I haven't done so before because if you just complain about high house prices you get the basic response 'shared ownership' schemes 'low interest rates', blah blah, but faced with this kind of economic argument I think it's much more likely to get a decent response.

Thanks munimula!

[OzzMosiz]

Id start sending that to the papers if I were you.

Excellent analysis!!

A+ go to the top of the class

[Levy process]

Exactly! This is what the bulls cannot see. This affects you ability to spend elsewhere and maintain a stable economy.

Systems thinking is an good ability to have. It enables you to see the big picture, so if you introduce a change here, you can see where it will affect elsewhere.

Totally agree! It really annoys me that most people can't get this. Their eyes glaze over and you can see them thinking that anyone who goes on about this is crazy.

[StandupBcounted]

Not forgetting that also people in the same position as my self - 'renting just waiting out' are presently putting less and less towards the economy and concentrating on savings only.

There are plenty of things that I could and would like to go and buy but am deliberately putting off. It sounds silly but its true, I want to go over to broadband but won't, Sky TV the same, probably would also like a new decent TV. New furniture, kitchen ware, appliances, tools, garden stuff and all the general associated DIY materials to go along with it.

Normally I would of also exchanged my car by now for a brand new model, but as I don't currently have off road parking the old one will suffice. I've conditioned myself to a life style of minimalist living, until the time is right to buy.

Furthermore the longer this goes on the more entrenched I seem to become, the more frugal I am becoming with my money and the more I churn into savings. I will only start parting with this money once house prices come back down to 'realistic values', then I will buy, feel I have become settled again and ready to enjoy some of the home comforts.

In the mean time the only part of the high street that is seeing any of my disposable income is my high street savings account. If anybody from the retail sector or government is reading this the answer is a simple one. If you want me to paint a rosy picture and sell me the paints to achieve it, first you will have to provide a fair cost canvas to do it on. :angry:

[Tempest]

Good post and I agree in principle with the analysis - but watch the numbers before you publish - presumably you would not have had the same salary available in 1998 (ie disposable cash) so the £600 (and thus paying off the mortgage in 4 years) may be a little artificial (not a like for like comparison). Also you wouldn't have had nearly the £30k deposit then. And you would have an asset worth something at the end of the day so the £452k figure could be misleading in saying you are "worse off" - depends what heppened to the house prices vs your savings! also inflation could have eroded your cash savings potentially but probably not your house asset.

I think it is a great example of what is wrong with the whole game but we need to be accurate on any numbers to have credibility. Could you do two parallel examples one starting in 1998 and one now using the same (real - ie after inflation) wages/disposable income and (%) depositetc?

This is the way I have long calculated how much I will save over my life/term of the loan when the family house I am looking to buy drops in value. eg a saving of £200,000 could amount to a million pounds incl interest, principal and isa/investment returns over 25 yrs on the money not spent on paying the increased mortage)

[AntiSpeculator]

Furthermore the longer this goes on the more entrenched I seem to become, the more frugal I am becoming with my money and the more I churn into savings. I will only start parting with this money once house prices come back down to 'realistic values', then I will buy, feel I have become settled again and ready to enjoy some of the home comforts.

In the mean time the only part of the high street that is seeing any of my disposable income is my high street savings account.

I know exactly what you mean. Basically I've become really stingey.

Not good for the economy.

[29929BlackTuesday]

I did a similar sum just htis morning..

Working out that the capital for the interest only mortgage I was just remomended to enter would take a over a decade of my take home salary to pay for..

Thats ten years.. out of 25 years.. just for the capital..

now interst makes up a fair chunk of that..

A quick sum showed that if I took out an interest only mortgage and spread the capital repayments over 25 years I would have £11 left a month after the mortgage was paid..

but I have been told that interest only means that I don't have to pay of capital..

Seriously.. I was told that as a way out of the high house prices..

and they are right... things would be okay... Providing I made no attempt what so ever to pay back the loan..

So...

Sorry..

got a case of the giggles....

I was giggling.. as I wrote that.. it is that stupid an idea... the dumbest thing I have ever heard... ever..

Then I stopped..

Giggling..

Because people are doing this...

My god...

They are doing this...

Stop... we know what they are up to... but stop and think... think about what these people are doing...

Step back.. look at it,...... its a sobering thought that made my blood run cold.

no matter how bad life could be.. imagine an interest only loan of £180,000...

Chilling

My brother has (genuinely) just got himself an interest-only mortgage of £170000. Gulp. He said "It's so EASY! Just go into the bank and tell them which house you want and THEY'LL TELL YOU HOW MUCH TO SAY YOU EARN to get it. And 'cos it's interest only you don't have to pay for the house and then you can sell it at the end for a massive profit."

He said these very words. Really.

[munimula]

Good post and I agree in principle with the analysis - but watch the numbers before you publish - presumably you would not have had the same salary available in 1998 (ie disposable cash) so the £600 (and thus paying off the mortgage in 4 years) may be a little artificial (not a like for like comparison). Also you wouldn't have had nearly the £30k deposit then. And you would have an asset worth something at the end of the day so the £452k figure could be misleading in saying you are "worse off" - depends what heppened to the house prices vs your savings! also inflation could have eroded your cash savings potentially but probably not your house asset.

I think it is a great example of what is wrong with the whole game but we need to be accurate on any numbers to have credibility. Could you do two parallel examples one starting in 1998 and one now using the same (real - ie after inflation) wages/disposable income and (%) depositetc?

This is the way I have long calculated how much I will save over my life/term of the loan when the family house I am looking to buy drops in value. eg a saving of £200,000 could amount to a million pounds incl interest, principal and isa/investment returns over 25 yrs on the money not spent on paying the increased mortage)

£60K for the house would be the 2005 real term adjusted 1998 price for that house.

The house today actually costs around £160K.

I based everything on the house being valued today at £60K, it was £52K in 1998. £60K is what it would have cost today if HPI had been 2.5% (Actually higher than the CPI figures we have been peddled).

Therefore I think it is reasonable to compare costs overall using my salary today and the money I have saved today with the house at £60K and at todays price of £160K

Edited November 4, 2005 by munimula

[Tempest]

£60K for the house would be the 2005 real term adjusted 1998 price for that house.

The house today actually costs around £160K.

I based everything on the house being valued today at £60K, it was £52K in 1998. £60K is what it would have cost today if HPI had been 2.5% (Actually higher than the CPI figures we have been peddled).

Therefore I think it is reasonable to compare costs overall using my salary today and the money I have saved today with the house at £60K and at todays price of £160K

Ok - sorry I see what you are doing. As I said I think it a great example. I have had a post in draft for a long time that seeks to suggest that everyone has their own "financial model" - an excel spreadsheet with all of life's expected cashflows in and out (salary, mortgage, bills, pension etc) and within which one can assess on a lifetime basis the long (and short) term effects of financial decisions, prices, rates etc at any point in time. Effectively showing what you are displaying above but tailored to individual circs and with lots more variables. Average joe would never understand it or want to see it!

[munimula]

Ok - sorry I see what you are doing. As I said I think it a great example. I have had a post in draft for a long time that seeks to suggest that everyone has their own "financial model" - an excel spreadsheet with all of life's expected cashflows in and out (salary, mortgage, bills, pension etc) and within which one can assess on a lifetime basis the long (and short) term effects of financial decisions, prices, rates etc at any point in time. Effectively showing what you are displaying above but tailored to individual circs and with lots more variables. Average joe would never understand it or want to see it!

My workings were all back of a fag packet type but I don't think unreasonable. It's just a different way of looking at it.

Most people will look at the situation and see that house prices are roughly 3X higher today than they were 7-8 years ago and they just accept that is the case and that's what they cost now.

But when you really analyse what this means financially, as I did here, what it really means for those people buying at today's prices as I roughly showed, if I bought today, current high house prices mean that I would be £450,000 worse off over 25 years. And that's for a £130K mortgage. There are many many people taking on mortgages higher than this.

Whether I'd saved this money into my pension or saved to buy a car, whatever I'd done with this money at some point it would have been fed into the economy. But as this money would instead merely go into servicing the debt on my mortgage this money would not be available to spend.

And as pointed out earlier, the double whammy is that even those not buying but that are saving are also reducing the money going being spent and going into the economy.

[eek]

Good post and I agree in principle with the analysis - but watch the numbers before you publish - presumably you would not have had the same salary available in 1998 (ie disposable cash) so the £600 (and thus paying off the mortgage in 4 years) may be a little artificial (not a like for like comparison). Also you wouldn't have had nearly the £30k deposit then. And you would have an asset worth something at the end of the day so the £452k figure could be misleading in saying you are "worse off" - depends what heppened to the house prices vs your savings! also inflation could have eroded your cash savings potentially but probably not your house asset.

Outsourcing means that I'm now earning less than I did in 1995 let alone 1998. In fact my take home pay has dropped £2,000 in the past 7 years. The IT industry is not what it once was.

[pricedout]

"Furthermore the longer this goes on the more entrenched I seem to become, the more frugal I am becoming with my money and the more I churn into savings. I will only start parting with this money once house prices come back down to 'realistic values', then I will buy, feel I have become settled again and ready to enjoy some of the home comforts.

In the mean time the only part of the high street that is seeing any of my disposable income is my high street savings account. "

Me too, this is just how I feel, I have a pet word, THRIFT, we use it whenever tempted to buy anything too frivalousoe remotely expensive.

I'm getting a reputation for it, (I think I might be a natural !) my best friend takes the mick regarding it, but renting cheaply and living well below our means is resulting in a savings rate that I couldn't have imagined evan a short while ago. Looking at the deposit sitting there and growing gives us both a warm glow and is a great safegard for the future, whatever it throws at us.

THINK THRIFT

[FTBvish]

Stuff I bought/done this year that I would consider 'luxury'...

Going..

Skiing (+ clothes)

Thailand

Istanbul (LFC 5 times

Bought ..

PSP

LCD Monitor

Golf set

Laptop (for £320!)

I should probably be a little stingier..

[jellybean]

In the mean time the only part of the high street that is seeing any of my disposable income is my high street savings account. "

Me too, this is just how I feel, I have a pet word, THRIFT, we use it whenever tempted to buy anything too frivalousoe remotely expensive.

THINK THRIFT

I found it helped to set a goal other than fixating on getting a bigger house which, rationaly, I know would be stupid to do in the present climate. Mine is to pay of my mortgage becuase that is an achievable short term goal. It stops me wasting money on all the crap that I would normally buy if I did not have that goal. I have found that the less stuff I buy the more I appreciate what I do get and the happier I am. A lesson it has taken me quite a long time to learn.

[See]

Outsourcing means that I'm now earning less than I did in 1995 let alone 1998. In fact my take home pay has dropped £2,000 in the past 7 years. The IT industry is not what it once was.

I remember during the IT boom companies were in serious spend mode.

Nowadays to me it seems outsourcing and more so offshoring is a sign that the company being frugal with its money.

When companies, employees and citizens are all frugal then its curtains for the economy. And it will last until the mindset changes again.

[brainclamp]

Why we're heading for a crash

22.08.05

Evil Knievel

I am not always bearish. I prefer life when markets are tumbling, as it exposes the lies and frailties of mankind. Just as a receding sea reveals all sorts of rubbish lying on the beach, a bear market exposes mis-deeds and balance sheet weaknesses which might otherwise go undetected. And, of course, yours truly hoovers it up in an industrial-harvesting manner.

However, sometimes one must recognise that markets are just going to go up and I would expect that markets will rise on a short-term view. I admit that I am no economist. Warren Buffett once said that he spent an hour studying macroeconomics each year and it was an hour wasted. I would agree. It is a waste of time – which could be spent with my nose in the Racing Post or in my local vintners. However, I do have a pretty good record of calling the economy correctly. I like to think of it as a natural gift. Some of us have such a gift. I suspect that most of you reading don’t.

So why are equities rising? Quite simply, because there is nothing else worth buying. Property is for economic masochists only. Interest rates are clearly on their way down, so bonds look like a mug’s bet. Meanwhile, the twentieth highest yielder in the FTSE 100 yields 4.5%. If one adds in the effect of buybacks, that is almost 5%. Equities are the best of a bad bunch and that is why they will go up in value.

But hang on a second. Why are interest rates falling? Because the average British pleb is grotesquely overborrowed and, stupid though he is, is just about bright enough to realise that our beloved Chancellor will squeeze his disposable income going forward via a raft of tax increases. Hence, the pleb in the street is curtailing his spending, and that is bound to mean lower corporate profits for an awful lot of companies.

The bulls will tell you that this will be at least partially offset by companies becoming more efficient by outsourcing work to China and cutting costs elsewhere. Cripes these bulls are stupid. Have they not twigged that corporate efficiencies of this sort mean huge job losses in Britain as a result. I accept that the aforementioned Mr Brown will retrain some of the unemployed as “5-a-day co-ordinators” or “community outreach liaison officers”, but not all of the unemployed can be found non-jobs in our bloated state system. The inevitable result of this process is higher taxes (to pay for the non-jobs) and more unemployed plebs. This can only put a further squeeze on corporate earnings. Ultimately, if corporate earnings slide, so too will equity valuations. I have not even bothered to mention the effects of higher oil prices, bombers on benefits and other reasons to be cautious. I don’t need to. Equities will go up in the short term but the correction that will follow will be extremely unpleasant for those unwise enough not to follow my sage counsel.

[munimula]

Why we're heading for a crash

22.08.05

Evil Knievel

I am not always bearish. I prefer life when markets are tumbling, as it exposes the lies and frailties of mankind. Just as a receding sea reveals all sorts of rubbish lying on the beach, a bear market exposes mis-deeds and balance sheet weaknesses which might otherwise go undetected. And, of course, yours truly hoovers it up in an industrial-harvesting manner.

I've followed Evil Kneivel for several years and he is rarely wrong. Afterall he was an accountant.

The most memorable shorts he was tipping before they crashed were LastMinute and Jarvis.

Got this today;

Why Pursuit Dynamics is a screaming short for Christmas

By the diarist of infamous bear raider Evil Knievil of www.t1ps.com

My diarist writes: There are three matters weighing on my mind. I am putting the final touches to the investment book of the year: The Infamous Diary of Evil Knievil 2005. It costs just 8.99 pounds and can be ordered from the t1ps.com bookstore already. It is clearly essential reading for all investors. To be truly entertained and illuminated at Christmas and to help support 37 vintners and 12 bookmakers click here

Secondly there is the matter of my new horse which has only one testicle. What shall I name it? One short? Why knows? It is a great dilemma.

And finally, how shall I pay for a Christmas of gargantuan excess? This is the easy bit. Pursuit Dynamics (PDX) on AIM will pay because I am short and by Jove, at 197p, are its shares overvalued. On Monday of this week it served up a trading statement which was a piece of art for dissection by those blessed with a superb analytical mind (myself for instance). It was, perhaps, the funniest profits warning in history. One wonders whether it was written by our beloved leader Mr Blair himself it is such a hoot.

In terms of using one's superb analytical mind to dissect this paper one does not know where to start. Perhaps it is worth mentioning that trial delays in the US have been delayed because of hurricanes. Well there is a shock, if there is bad news blame it on God. But wait for it, Avian flu is n there, and guess what? Pursuit reckons that this could generate good new business. Well what a stroke of luck. I wonder how much that business will eventually be worth? Chicken sh*t? But the piece de resistance is the statement on actual sales. I really can do no better than quote the actual statement:

Revenue and contractual orders to date, including two PDX FireMist trials, total approximately 350,000 pounds. Of the total of ten licences and FireMist contracts achieved to date, revenue for only five Sonic licenses was recognised by 30 September. The success of our sales and marketing effort has meant that only the very first units have been priced at a discount to the normal 60,000 pounds unit price.

Turnover in the year to 30 September 2005 is expected to be approximately 90,000 pounds and losses after taxation, reflecting the increased level of activity surrounding the commercial launch of the first products, are expected to have increased to approximately 2.7 million pounds, after charging depreciation and amortisation of approximately 632,000 pounds.

If you enjoy Evil's style there is only one book to order now for Christmas delivery. The Notorious Diary of Evil Knievil, 2005 can be snapped up for just 8.99 pounds in the t1ps.com bookstore by clicking here.

Read those lines carefully once more. I think even your average East End street urchin might be able to see what I am getting at. Pursuit describes its sales and marketing as successful but in real terms that means that the last financial year its first five licences were knocked out at an average of 18,000 pounds each - that is to say at a 70% discount to the "normal" price. Do you remember all those RNS statements over the summer boasting of new orders but which failed to value the orders and which excited the demented BB loonies so much? Well now you know why there was no value placed on those orders. But of course one must view the sales and marketing campaign as a "success." It is unreal. I might point out that if the first five licenses netted 90,000 pounds then the next five must have netted 240,000 pounds (or 48,000 pounds a pop) which according to my basic maths shows that Pursuit has continued to discount. I would also point out that contractual orders are not the same as revenue in that they do not actually involve cash being handed over.

Aha, the subject of cash. As at March 31st the company had 2 million pounds in the kitty but judging by the woeful second half of the year that cash position must now be down to well under 1 million pounds. Well I might have failed the Cambridge entrance exam (I should have applied to Oxford as they will let anyone in, viz: my illiterate Diarist, my former apprentice young Lucian Miers, and our beloved leader Tony Blair) so I may not be the greatest mathematician on earth but at the current rate it cannot be long before Pursuit passes its hat around again.

Now let us turn to the valuation: I should point out that at the half year stage net assets were 5.8 million pounds but if one strips out intangibles and the second half cash drain I reckon you have net assets of 1.2-1.5 million pounds. Now, at 197p Pursuit is valued at around 90 million pounds. You do not have to be the smartest bear in the woods to work out that a loss-making company with sod all asset backing and frankly with pretty irrelevant sales which will soon have to raise fresh cash and which feels the desperate need to incorporate a mention of Avian flu in its statement is not worth 90 million pounds. I am staying short and my first target for these shares is sub 100p. I do not expect to wait long for the gravy to come rolling back to Evil Towers..

Evil Knievil is the UK's most infamous short-seller. His online diary, written by his long suffering diarist, appears three times a week on website t1ps.com which also publishes cracking share tips from Tom Winnifrith. The next diary entry appears on Friday morning and can be accessed by clicking here.

Evil's Good Book of Boasts, the definitive guide to short selling normally costs 20 pounds but can be snapped up for just 17 pounds by clicking here

Edited November 4, 2005 by munimula