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Well average price of a 2 bed is 490k and rental prices are >2k a month so same maths hold. But if they can't afford to rent it then they can't afford to buy it. If they are priced out then they'll have to move to the sticks - Hertfordshire is nice.....

Well if all this sounds 'normal' and London property is 'cheap', why don't you just go and buy one.

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You've also forgotten lease depreciation. A large proportion of flats in London are on leases where the length is potentially relevant (i.e. double figure number of years, or low 3 figures).

You would need to add approximately 1% per annum depreciation due to the eventual cost of lease renewal.

Once you've taken into maintenance and buildings insurance (often quite high in London due to high risk of subsidence), depreciation, the hidden cost of lease renewal, etc. renting is good value compared to buying (unless you expect rampant HPI to continue). Having helped a London landlord with their accounts, it's also terrifying to see how high letting agent fees are; most of a LL's "profit" will typically end-up hoovered up by the agent, unless the LL manages the property themselves.

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So who is buying? International investors? Will the entire UK population be priced out of London? I wonder what will happen to the macro economy of London town if noone can afford to buy or rent, apart from a few international jetseters who spend a couple of months a year in UK to enjoy the summer?

Not jet-setters - the world's middle class seems to be sinking its money into London.

Can anyone explain how this is different from locals being priced out of Cornwall etc by London's middle class?

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I see what you are saying, but we have got to a stage where both renting and buying is going to be too expensive for most people meaning that the only sensible alternatives are to leave London or to live with parents or in a houseshare.

Buying is definitely being made more attractive than renting with the current schemes, but £1,500 per month is £18,000 per year which means you realistically need to be earning £50,000 a year to afford to pay for this, the bills and have a little left over for food, travel etc.

My definition of reasonable (not cheap) would be when a single person on the average London wage (£35k?) can comfortably afford an average 1 bed flat and a couple both on the same wage each can comfoatably afford an average 2 bed flat.

£1,500 a month is still a pretty expensive part of London - comparatively speaking. I'd suggest that most people paying that much are sharing (or taking in a lodger) and/ or couple where its likely both earn more than £50k.

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So Tooting will be full of...?

I guess not bankers seeing as the City is reducing headcount now.

Probably not a random sample, but people I've met recently who live in Tooting include commercial lawyers, senior accountants, publishers and managers in FTSE 100 type companies. Oh, and others with lower middle class incomes and serious gifts from parents.

This is the new law of London sadly....

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Not jet-setters - the world's middle class seems to be sinking its money into London.

Can anyone explain how this is different from locals being priced out of Cornwall etc by London's middle class?

Yes I completely agree with you.

The notion that it is only Russian Oligarchs and Arab Sheiks is another massive misnomer from little Englanders who don't understand the global appeal of our great capital. Clearly for some postcodes it is entirely Russian Oligarchs and Arab Sheiks but this is more the exception than the rule.

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Probably not a random sample, but people I've met recently who live in Tooting include commercial lawyers, senior accountants, publishers and managers in FTSE 100 type companies. Oh, and others with lower middle class incomes and serious gifts from parents.

This is the new law of London sadly....

I think that is a fairly reasonably cross-section for people that have moved there in the past 10 years or so. There are still a lot of older Tooting residents who are either benefit claimants or poor working class homeowners who bought a house there years ago when it was a cheap area to live. It still feels quite poor to me even though it is gentrifying quickly.

There are so many houses in this type of area that are worth £700k but have fallen into disrepair because the owners can't afford to renovate them. If I was in that type of situation, I'd move out of London and live the life of Riley on the proceeds!

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£1,500 a month is still a pretty expensive part of London - comparatively speaking. I'd suggest that most people paying that much are sharing (or taking in a lodger) and/ or couple where its likely both earn more than £50k.

Not in the example given by the OP, unless they are sharing a 1 bed flat.

When you bring two incomes into it, it becomes much easier. I live right out in zone 6 and I know quite a few people paying around £1,500 per month (for a 2 bed not a 1 bed flat) who earn under £100k joint income and are not letting out a room. In the more expensive areas there must be even more people like this.

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What loose lending? The last round finished in 2008; the loose lending resumes Jan 1st 2014!

London has the highest house price to wage ratio of any region in the country and the highest proportion of interest-only mortgages. How many more indicators of loose lending do you need?

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London has the highest house price to wage ratio of any region in the country and the highest proportion of interest-only mortgages. How many more indicators of loose lending do you need?

You've taken two different data points and super-imposed them....the implication from your statement is that everyone is 7x geared on an interest only mortgage. If this is the basis for a presumably negative thesis on London property then good luck to you.

The reality is that you have heaps of people on interest only mortgages with massive equity because the capital increase in their property has been so great. Now they might be living in a house that they may not be able to afford at current prices, but they don't have to. Now they can sit there until they feel compelled to upsize and move to a cheaper (not necessarily less desirable) area. Not to mention if they are on a legacy mortgage than the interest payments are a pittance so if they haven’t blown their disposable income then they have saved some serious capital. Also why would you pay down debt costing <2% when inflation in the UK is running at least 3%?

The average LTV on incremental mortgage issuance is at 60% today vs 90% in 2009; this average is no different in London. The few banks that actually have capital to lend are doing insanely profitable business effectively writing riskless loans with net interest margins of around 150-200bps. If you don't understand what is currently happening in the lending market and don’t understand the implications of Help to Buy phase 2 and what this does to risk-weightings on high LTV mortgages, then unfortunately you have little hope in understanding what is driving house prices at present.

So London property prices are currently well supported with average equity contributions of 40%, banks doing extremely prudent lending and that is completely ignoring the cash-only market.

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You've taken two different data points and super-imposed them....the implication from your statement is that everyone is 7x geared on an interest only mortgage. If this is the basis for a presumably negative thesis on London property then good luck to you.

The reality is that you have heaps of people on interest only mortgages with massive equity because the capital increase in their property has been so great. Now they might be living in a house that they may not be able to afford at current prices, but they don't have to. Now they can sit there until they feel compelled to upsize and move to a cheaper (not necessarily less desirable) area. Not to mention if they are on a legacy mortgage than the interest payments are a pittance so if they haven’t blown their disposable income then they have saved some serious capital. Also why would you pay down debt costing <2% when inflation in the UK is running at least 3%?

The average LTV on incremental mortgage issuance is at 60% today vs 90% in 2009; this average is no different in London. The few banks that actually have capital to lend are doing insanely profitable business effectively writing riskless loans with net interest margins of around 150-200bps. If you don't understand what is currently happening in the lending market and don’t understand the implications of Help to Buy phase 2 and what this does to risk-weightings on high LTV mortgages, then unfortunately you have little hope in understanding what is driving house prices at present.

So London property prices are currently well supported with average equity contributions of 40%, banks doing extremely prudent lending and that is completely ignoring the cash-only market.

The heart of your argument seems to be that London house prices are fine because the LTVs look pretty good. This is obviously self-referencing: it's like saying that as long as London house prices stay high, high London house prices are sustainable.

I'm sure you can see that this logic would work in exactly the opposite direction on the way down. If prices fall, the LTVs will start to look uglier and uglier and lenders will be forced to cut back to protect their capital, sucking prices even further down.

The current situation is fragile because London house prices are almost entirely self-referencing now rather than being based on fundamentals like wages or use-value.

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The heart of your argument seems to be that London house prices are fine because the LTVs look pretty good. This is obviously self-referencing: it's like saying that as long as London house prices stay high, high London house prices are not a problem.

I'm sure you can see that this logic would work in exactly the opposite direction on the way down. If prices fall, the LTVs will start to look uglier and uglier and lenders will be forced to cut back to protect their capital, sucking prices even further down.

The current situation is fragile because London house prices are almost entirely self-referencing now rather than being based on fundamentals like wages or use-value.

No the heart of my argument was that the economics of buying vs. renting in light of help to buy 2 is extremely good.

The rental market is directly driven by the number of people that have the income to pay (possibly extortionate) prices for the (limited) supply of housing stock available.

You made a flippant comment about loose lending which was factually incorrect and I was trying to help your understanding.

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You made a flippant comment about loose lending which was factually incorrect and I was trying to help your understanding.

I think we have different definitions of loose lending. Mine is whether or not the borrower has a realistic chance of paying back the loan over the lifetime of the mortgage (including selling the property at the end of the term to clear an interest only mortgage), taking into account the possibility of interest rate hikes and drops in income over that period. Yours appears to be that so long as the LTV looks good today, the lending is prudent.

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I think we have different definitions of loose lending. Mine is whether or not the borrower has a realistic chance of paying back the loan over the lifetime of the mortgage (including selling the property at the end of the term to clear an interest only mortgage), taking into account the possibility of interest rate hikes and drops in income over that period. Yours appears to be that so long as the LTV looks good today, the lending is prudent.

Walk me through the thesis where the bank doesn't get paid writing these typical 60% LTV mortgages?

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Walk me through the thesis where the bank doesn't get paid writing these typical 60% LTV mortgages?

There are many examples of drops in nominal house prices greater than 40%. I fully expect London to be added to that list given the size of its departure from fundamentals (especially wages) over the last 18 years.

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There are many examples of drops in nominal house prices greater than 40%. I fully expect London to be added to that list given the size of its departure from fundamentals (especially wages) over the last 18 years.

London should be added to that list, but the government are just digging themselves in deeper and deeper with all of the market support. As the problem grows bigger it gets increasingly difficult for them to stop the support, or even stop increasing the support.

The way it is going, we will start to see a majority of people who will take on a huge mortgage with no hope or intention of ever paying it off and just using HPI to bridge the gap.

The market will correct quickly and catastrophically if left to it's own devices because an average (London) salary of £30k will not support prices like £400k for a flat in the suburbs for very long. It used to be a joke on this forum that 'the government won't let it happen', but now it appears they really won't until their hand is forced.

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London should be added to that list, but the government are just digging themselves in deeper and deeper with all of the market support. As the problem grows bigger it gets increasingly difficult for them to stop the support, or even stop increasing the support.

The way it is going, we will start to see a majority of people who will take on a huge mortgage with no hope or intention of ever paying it off and just using HPI to bridge the gap.

The market will correct quickly and catastrophically if left to it's own devices because an average (London) salary of £30k will not support prices like £400k for a flat in the suburbs for very long. It used to be a joke on this forum that 'the government won't let it happen', but now it appears they really won't until their hand is forced.

Why should people take out a mortgage with the intention of paying it back? We live in a new paradigm of a capitalist system without default, supported and actively encouraged by policy makers.The UK is only geared 9x GDP (when we add in all the off balance sheet stuff), still running a primary deficit so we aren't paying that back and never will! Japan is nearer the 15x mark; we can still do another default-avoiding bail-out of the banking system before we have to change tack.

Just like the EMU; monetary policy in the south east (read Germany) is too accomodative but interst rates in provincial UK (read periphery) are not loose enough but since policy makers are running everything on an aggregate basis they will juice the south east until the rest of the country works. Difficult since there are massive strucutral reforms that should be put in place but instead we are opting to paper over the cracks.

There's a lot of talk about price/income ratio on here but not much about supply and demand. London population has grown by more than 1 million people in 10 years but added only 250k dwellings net. With incremental supply and demand so tight then you won't see the correction. And of course, price/income is not mutually exclusive from affordabilty; as of January 1st 2014 affordibility will be the best it;s been for a long time.

Lastly, I don't disagree about a nominal 40% decline in London property at some point in time, jusyt not from here. I think that there is so much momentum from the lending/affordability side of the equation and so much pent up demand from folk tired of seeing rents spiral out of control that it is about to kick off again.

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*****STOP PRESS*****

I hadn't even seen that securitisation markets were finally open again - have a look here

So whilst I jested in my previous post about why would people pay back mortgages. Seriously why would they? The lenders won't care either because they'll sell that debt to someone else "seeking yield"!

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Why should people take out a mortgage with the intention of paying it back? We live in a new paradigm of a capitalist system without default, supported and actively encouraged by policy makers.The UK is only geared 9x GDP (when we add in all the off balance sheet stuff), still running a primary deficit so we aren't paying that back and never will! Japan is nearer the 15x mark; we can still do another default-avoiding bail-out of the banking system before we have to change tack.

Just like the EMU; monetary policy in the south east (read Germany) is too accomodative but interst rates in provincial UK (read periphery) are not loose enough but since policy makers are running everything on an aggregate basis they will juice the south east until the rest of the country works. Difficult since there are massive strucutral reforms that should be put in place but instead we are opting to paper over the cracks.

There's a lot of talk about price/income ratio on here but not much about supply and demand. London population has grown by more than 1 million people in 10 years but added only 250k dwellings net. With incremental supply and demand so tight then you won't see the correction. And of course, price/income is not mutually exclusive from affordabilty; as of January 1st 2014 affordibility will be the best it;s been for a long time.

Lastly, I don't disagree about a nominal 40% decline in London property at some point in time, jusyt not from here. I think that there is so much momentum from the lending/affordability side of the equation and so much pent up demand from folk tired of seeing rents spiral out of control that it is about to kick off again.

Good post.

I definitely think that more and more people are going into mortgages with no intention of ever paying them back, and some people have been doing that for years.

I guess it is not necesarily a bad thing, but surely a disaster is still in the offing when the government support ends? When interest rates do increase and the £80k earning couple with their £400k IO mortgage find their monthly interest payment goes up from £700 (2%) to £2,000 (6%), what happens then?

I am not saying I think we ever will see rates that high again, just a 'what if'?

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Good post.

I definitely think that more and more people are going into mortgages with no intention of ever paying them back, and some people have been doing that for years.

I guess it is not necesarily a bad thing, but surely a disaster is still in the offing when the government support ends? When interest rates do increase and the £80k earning couple with their £400k IO mortgage find their monthly interest payment goes up from £700 (2%) to £2,000 (6%), what happens then?

I am not saying I think we ever will see rates that high again, just a 'what if'?

If they are earning £5k a month take home (assuming 40k each gross salary) and paying £700 of interest then they are pretty cash rich and still would be if their interest bill went to £2k!

The other option (which is the origin of the thread) is to go into a house share paying £700 rent for a double room without their own kitchen and bathroom. When such rents seem to be ticking up hansomly with inflation.

What would you do in their shoes?!

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If they are earning £5k a month take home (assuming 40k each gross salary) and paying £700 of interest then they are pretty cash rich and still would be if their interest bill went to £2k!

The other option (which is the origin of the thread) is to go into a house share paying £700 rent for a double room without their own kitchen and bathroom. When such rents seem to be ticking up hansomly with inflation.

What would you do in their shoes?!

Provided I had reasonable certainty of keeping both jobs, I'd carry on paying the £2k. What would worry me, though, is the amount of people in the similar positions who can't afford to keep up the payments due to unemployment/having kids etc and then have to move into a houseshare. If there are enough people in this position, surely this is pushing my house price down and reducing the return on my £2k per month investment?

Ok, there is no problem unless interest rates and unemployment go up at the same time, but it is not beyond the realm of possibility.

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Provided I had reasonable certainty of keeping both jobs, I'd carry on paying the £2k. What would worry me, though, is the amount of people in the similar positions who can't afford to keep up the payments due to unemployment/having kids etc and then have to move into a houseshare. If there are enough people in this position, surely this is pushing my house price down and reducing the return on my £2k per month investment?

Ok, there is no problem unless interest rates and unemployment go up at the same time, but it is not beyond the realm of possibility.

Newsflash; some corrupt central bankster just tied interest rates down, linked them to an unemployment imporvement and gave himself an extra 50bps of headroom in the inflation target.

Probability is very low for a while!

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