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Smell the Fear

Inflation And Wage Increases

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OK, so I'm a lazy bugger and should have done it myself.

From my calcs, from National Statistics, I get the following:

Wages have increased by 37% since 1997

RPI has increased by 18.5%

Personal debt has increased by 83%.

At first glance, it looks out of whack. But let's look a little deeper. In 1997 base rates were around 7%, today they are 4.5%. I don't subscribe to the belief that lower rates mean that we should be comfortable with high debt levels.

However, I do believe that low rates mean that we should be comfortable with slightly higher debt levels.

Rates were 56% higher in 1997 than they are today (7% vs. 4.5%). How much extra debt can we justify with these lower rates? I agree, we cannot justify 83% more debt. Maybe we can justify 25% more debt?

That would mean that we can tolerate a rise in personal debt from 600bn to 750bn.

If we also take into account the wage increase of 37%, we can maybe justify another 37% increase in debt (37% x 600bn) = 222bn of debt.

This brings the total justifiable debt to 977bn.

The final factor is the fact that RPI has increased at only half the rate of wages (18.5% vs 37%).

Again, this allows us to justify the servicing of yet more debt. Even if we only allow another 10% of debt to be justified by this, it adds a further 60 bn to our total, bringing justifiable debt to 1,037bn.

So, if debt represents what we have borrowed to invest in housing, then perhaps housing is only overvalued by 1,100bn - 1,037bn = 63bn.

We could express this as a %: 63bn/1,100bn = 5.7% overvalued.

Hardly worth putting your life on hold for, is it?

I'm playing devil's advocate here, so I await a demolition of the above.

:ph34r:

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OK, so I'm a lazy bugger and should have done it myself.

From my calcs, from National Statistics, I get the following:

Wages have increased by 37% since 1997

RPI has increased by 18.5%

Personal debt has increased by 83%.

At first glance, it looks out of whack. But let's look a little deeper. In 1997 base rates were around 7%, today they are 4.5%. I don't subscribe to the belief that lower rates mean that we should be comfortable with high debt levels.

However, I do believe that low rates mean that we should be comfortable with slightly higher debt levels.

Rates were 56% higher in 1997 than they are today (7% vs. 4.5%). How much extra debt can we justify with these lower rates? I agree, we cannot justify 83% more debt. Maybe we can justify 25% more debt?

That would mean that we can tolerate a rise in personal debt from 600bn to 750bn.

If we also take into account the wage increase of 37%, we can maybe justify another 37% increase in debt (37% x 600bn) = 222bn of debt.

This brings the total justifiable debt to 977bn.

The final factor is the fact that RPI has increased at only half the rate of wages (18.5% vs 37%).

Again, this allows us to justify the servicing of yet more debt. Even if we only allow another 10% of debt to be justified by this, it adds a further 60 bn to our total, bringing justifiable debt to 1,037bn.

So, if debt represents what we have borrowed to invest in housing, then perhaps housing is only overvalued by 1,100bn - 1,037bn = 63bn.

We could express this as a %: 63bn/1,100bn = 5.7% overvalued.

Hardly worth putting your life on hold for, is it?

I'm playing devil's advocate here, so I await a demolition of the above.

:ph34r:

Devil. Perhaps I am being simplistic/naive but are you not double counting the wages and rpi increases?!!Surely you should net the 37% wage increase off against the 18.5% increased cost of living (which the wages would have to meet) to get the "net" increase in dispsable income which could count towards debt service?

ie 750Bn plus £139Bn (being (37-18.5)=18.5% x 750 = £139Bn) =£889Bn. A lot less than £1,100Bn (about £211bn or nearly 20% overvalued using your basis)

Btw the total £1.1Tn debt number you use also includes about £200Bn(?) of credit card debt which does not relate to housing market on either side of the equation.

In any event it is a grossly simplisitic and misleading indicator as the amount of a mortgage says nothing of the cost of a house. Many small mortgages exist which boost the figure but have nothing to do with house value etc. It is the houses at the more recent end of the buying and selling spectrum which dictate market movements up and then down. Many of those are at record prices and bought with mortgages on record multiples and record gearing/100% loans.

PS are you an IFA?

Edited by Tempest

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Btw the total £1.1Tn debt number you use also includes about £200Bn(?) of credit card debt so does not relate to housing market on either side of the equation.

I didn't want to mention that, but do you know how much credit card debt is accounted for by the "stoozers" who draw down debt and put it in a high interest savings account? I hear CC companies are thinking about introducing annual charges to discourage the practice, so it must be significant.

"Stoozing" debt can be ignored in my opinion, as it is offset by deposits.

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Its also worth noting the number of almost paid off mortgages that people choose to never pay off as it is cheaper to pay the interest so the bank/bs hold the title deeds, rather than pay a solicitor to store them.

Although, wasn't there some new thing from the banks/bs/legislation where people would now be holding their own deeds (to save the banks/bs money on storing deeds)... this would lead to fairly rapid changes in the average mortgage figures as many of the almost zero mortgages would dissapear from the books.

The other thing to note in the calculations is that you base this on IRs now being lower than they were in 1997. Yes they are lower. Will they stay that way???

If people always base their borrowings, which are spread over anything from 1 to 30 years, on the IRs of today on a variable IR product then they are asking to be caned.

If I borrow money, it is on a fixed rate for the term of the loan. Then I know I can afford it for the term of the load barring anything serious occurring.

If people load up on debt while IRs are low, and then IRs rise, then problems await (reposessions/bankrupcy increasing etc).

The only reason to take on a non-fixed IR product IMHO is greed/overstretching. Either you couldn't afford the repayments if you take into account the premium for a fixed product (over stretching) or you are trying to cream off what the premium for the fixed rate product would have cost as cash (Greed attached to more than a little risk).

Edited by non-FTBer

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I agree with the sentiment

I had this discussion at the wekend with my partner. I mentioned that some people were talking of 20-40% drops in house prices. he said, well what do you think would happen to interest rates then? (I said dunno)

Well, said he, they would drop to 1%

Ah - so on that basis we are going to go ahead and buy another property.December / January is a great time to buy (in past experience) This is not a recommendation - just a personal view.

The point being that in real terms it is not a huge risk, compared with say buying a car, or smoking! (money paid v capital growth)

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OK, so I'm a lazy bugger and should have done it myself.

From my calcs, from National Statistics, I get the following:

Wages have increased by 37% since 1997

RPI has increased by 18.5%

Personal debt has increased by 83%.

At first glance, it looks out of whack. But let's look a little deeper. In 1997 base rates were around 7%, today they are 4.5%. I don't subscribe to the belief that lower rates mean that we should be comfortable with high debt levels.

However, I do believe that low rates mean that we should be comfortable with slightly higher debt levels.

Rates were 56% higher in 1997 than they are today (7% vs. 4.5%). How much extra debt can we justify with these lower rates? I agree, we cannot justify 83% more debt. Maybe we can justify 25% more debt?

That would mean that we can tolerate a rise in personal debt from 600bn to 750bn.

If we also take into account the wage increase of 37%, we can maybe justify another 37% increase in debt (37% x 600bn) = 222bn of debt.

This brings the total justifiable debt to 977bn.

The final factor is the fact that RPI has increased at only half the rate of wages (18.5% vs 37%).

Again, this allows us to justify the servicing of yet more debt. Even if we only allow another 10% of debt to be justified by this, it adds a further 60 bn to our total, bringing justifiable debt to 1,037bn.

So, if debt represents what we have borrowed to invest in housing, then perhaps housing is only overvalued by 1,100bn - 1,037bn = 63bn.

We could express this as a %: 63bn/1,100bn = 5.7% overvalued.

Hardly worth putting your life on hold for, is it?

I'm playing devil's advocate here, so I await a demolition of the above.

:ph34r:

What on Earth is this? I only agree with your figures if it is possible to get a 25 year fixed rate mortgage at these low rates, or interest rates stay at or below 4.5% - hardly likely.

Otherwise your argument is only valid at the start of the mortgage. Interest rates might be 7% in two years time and then you'd wish that you hadn't taken on a mortgage at 7x your annual salary.

The idea that low interest rates necessitates high house prices is nonsense in my opinion - it is a short term view backed by the banks that will lead to catastrophe in the future. Always borrow within your means and TAKE A LONG TERM VIEW.

No....why do you ask? You can pay me for advice if you want! :P

No thanks if your calculations use interest rates at 4.5%!!!!

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What on Earth is this? I only agree with your figures if it is possible to get a 25 year fixed rate mortgage at these low rates, or interest rates stay at or below 4.5% - hardly likely.

Otherwise your argument is only valid at the start of the mortgage. Interest rates might be 7% in two years time and then you'd wish that you hadn't taken on a mortgage at 7x your annual salary.

The idea that low interest rates necessitates high house prices is nonsense in my opinion - it is a short term view backed by the banks that will lead to catastrophe in the future. Always borrow within your means and TAKE A LONG TERM VIEW.

No thanks if your calculations use interest rates at 4.5%!!!!

I remember my partner's uncle telling us in 1983 "Never get a mortgage"

Very glad we ignored him.

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I agree with the sentiment

I had this discussion at the wekend with my partner. I mentioned that some people were talking of 20-40% drops in house prices. he said, well what do you think would happen to interest rates then? (I said dunno)

Well, said he, they would drop to 1%

Ah - so on that basis we are going to go ahead and buy another property.December / January is a great time to buy (in past experience) This is not a recommendation - just a personal view.

The point being that in real terms it is not a huge risk, compared with say buying a car, or smoking! (money paid v capital growth)

I wouldn't take financial decisions based on your partner's knowledge of finance.

Our economy exists in a global economy. Our interest rates are effectively pegged to the US Dollar. The reasons why have been explained ad nauseam on here - have a look at other threads.

The fact is - only twice in the last 25 years have our base rates been below the US - and then only for a couple of months as the market immediately 'corrected' it. Generally we are always between 0.5% and 1.5% above the US. US rates are at 4% now and still in a rising cycle. Expected to peak at about 5% in this cycle.

There is no way on this earth we will have base rates of 1%. There would be a massive run on the pound and massive inflation as the cost of our imports rose in proportion to the amount our currency declined.

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I wouldn't take financial decisions based on your partner's knowledge of finance.

Our economy exists in a global economy. Our interest rates are effectively pegged to the US Dollar. The reasons why have been explained ad nauseam on here - have a look at other threads.

The fact is - only twice in the last 25 years have our base rates been below the US - and then only for a couple of months as the market immediately 'corrected' it. Generally we are always between 0.5% and 1.5% above the US. US rates are at 4% now and still in a rising cycle. Expected to peak at about 5% in this cycle.

There is no way on this earth we will have base rates of 1%. There would be a massive run on the pound and massive inflation as the cost of our imports rose in proportion to the amount our currency declined.

Thanks - I think he was making the point (to me) that there was no likelihood of a 20-40% drop in house prices, not a prediction that interest rates would drop to 1% !

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Two things are missing from this thread.

The first is the fact that our society is polarising. For many people wage rises are a dream. Bus drivers are earning the same now as they were 20 years ago.

Lawyers are earning 10 times more.

I know lots of people that are earning less in real terms than they were in 1997.

The second factor is taxation. There are a few nutcases on here who claim tax has not gone up under this government. Wonder how they afford an extra million public sector workers. Read some FACTS on this recently but can't remember the figure. The freezing of personal allowances, a huge percentage more people in the higher rate band, increases in stamp duty, massive rises in council tax and loads of stealth taxes - mean that many people are worse off than they were in 1997 and not in a position to take on more debt.

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What on Earth is this? I only agree with your figures if it is possible to get a 25 year fixed rate mortgage at these low rates, or interest rates stay at or below 4.5% - hardly likely.

Otherwise your argument is only valid at the start of the mortgage. Interest rates might be 7% in two years time and then you'd wish that you hadn't taken on a mortgage at 7x your annual salary.

The idea that low interest rates necessitates high house prices is nonsense in my opinion - it is a short term view backed by the banks that will lead to catastrophe in the future. Always borrow within your means and TAKE A LONG TERM VIEW.

No thanks if your calculations use interest rates at 4.5%!!!!

My argument was that a 25% increase in debt levels could possibly be justified by the fact that interest rates were 56% higher in 1997. I am not arguing for a directly proportional relationship between rates and debt.

Would anyone disagree with the statement that lower rates (even if it is only certain in the short term) justify increased levels of debt? I would argue that lower rates do justify higher debt levels - the question is HOW MUCH of an increase in debt can be justified.

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I remember my partner's uncle telling us in 1983 "Never get a mortgage"

Very glad we ignored him.

perhaps then, in 20 years time, we'll be glad that we ignored you :)

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Thanks - I think he was making the point (to me) that there was no likelihood of a 20-40% drop in house prices, not a prediction that interest rates would drop to 1% !

I'd be curious to know how he thinks current prices are sustainable. Young people who have stretched with big mortgage multiples at historically low interest rates to buy a small flat - how are they going to be able to move up the ladder?

The effect so far is a compression between the traditional bands. Where I live you can buy a 4 bed detached for not much more than a 3 bed semi - simply because at this end of the market you don't seem to be able to actually sell houses. You can put them on the market but to get a sale you have to drop 50k and wait a year.

The problem is stagnant chains. The house opposite me has been on the market for well over a year now - the Sold sign has gone up 5 times according to the owner. It's been 'Sold' now for the 3 months I have lived here - but there is no first time buyer at the bottom of the chain - so they are all just waiting and hoping.

The stuff in the plus 600k range where I live has already fallen 15% in many cases - and still isn't selling. At this point it gets a bit anecdotal - but I have seen houses lately that 2 years ago would be anywhere between 750k and a million - now on the market for £575k.

I believe the present market prices are unsustainable in the medium term - especially given that IRs will go up again and taxation will rise even more.

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I'd be curious to know how he thinks current prices are sustainable. Young people who have stretched with big mortgage multiples at historically low interest rates to buy a small flat - how are they going to be able to move up the ladder?

The effect so far is a compression between the traditional bands. Where I live you can buy a 4 bed detached for not much more than a 3 bed semi - simply because at this end of the market you don't seem to be able to actually sell houses. You can put them on the market but to get a sale you have to drop 50k and wait a year.

The problem is stagnant chains. The house opposite me has been on the market for well over a year now - the Sold sign has gone up 5 times according to the owner. It's been 'Sold' now for the 3 months I have lived here - but there is no first time buyer at the bottom of the chain - so they are all just waiting and hoping.

The stuff in the plus 600k range where I live has already fallen 15% in many cases - and still isn't selling. At this point it gets a bit anecdotal - but I have seen houses lately that 2 years ago would be anywhere between 750k and a million - now on the market for £575k.

I believe the present market prices are unsustainable in the medium term - especially given that IRs will go up again and taxation will rise even more.

I think you have correctly highlighted the issue around this whole website (are you in the SE?) - prices have already corrected and he feels that they are now at the bottomm ( or near) and due to rise - albeit slowly. A bit of a peak in 1st FY quarter 2005 (ie Apr-june)

I don't want to buy when prices are going up -as that is when people are competing - we nearly bought a place in 2003 and it got to sealed bids - which is when we dropped out.

I want to be - the only buyer in a good negotiating position,

I don't know the answer (& as I'm apparently a Troll you should ignore anything I say) however, i'm just giving my/my partner's opinion.

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To further add to Marina's post, I can't see how either HP and rents are sustainable.

Again a little anecdotal but I have noticed both Hp and rents dropping in areas of the south east. Many homes that don't sell get turned into buy to lets by the owners and most are still not getting let (the house I rent now was originally for sale for over a year, also the rent was dropped by 40% before I agreed to move in).

At the moment there is nothing (on a major scale) to force people to have to sell. However, the longer stagnation continues the more likely a crash will be as consumer spending will be channeled into servicing mortgages for houses they can't sell (unless they drop the price), meaning that the high street, manufacturing and service industries will be forced to make cut backs as their income slips away from them.

This doesn't even consider the rising cost of fuel, pensions or council taxes.

Edited by laughing_goat

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Two things are missing from this thread.

The first is the fact that our society is polarising. For many people wage rises are a dream. Bus drivers are earning the same now as they were 20 years ago.

Lawyers are earning 10 times more.

I know lots of people that are earning less in real terms than they were in 1997.

The second factor is taxation. There are a few nutcases on here who claim tax has not gone up under this government. Wonder how they afford an extra million public sector workers. Read some FACTS on this recently but can't remember the figure. The freezing of personal allowances, a huge percentage more people in the higher rate band, increases in stamp duty, massive rises in council tax and loads of stealth taxes - mean that many people are worse off than they were in 1997 and not in a position to take on more debt.

It seems to me that classic 'affordability' arguments by the VIs usually are based on salaries, not based on actual affordability i.e. income left once you've paid for all taxes and essential services. In another thread, I calculated recently that the cost of my 'essentials' per month is at least £170 - this is gas, water, electricity and council tax. It does not include food, or petrol (which in reality are also essentials - petrol alone is about £50 per week). Despite receiving reasonable (above inflation) salary increases over the past two years, my disposable income has gone DOWN.

Even if interest rates go down in the short term, I can only see that this is propping up the house of cards for a bit longer. I am sure that there are people out there who are already using credit to pay for essential services (such as the water bill / council tax bill). If the increase in costs such as gas, electricity, water and council tax continue to rise well above increases in salaries, then for most people the amount they can afford to spend on housing (mortgage or rent) will decrease.

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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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