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Bland Unsight

£750K At 0.38% Above Base

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A lad I grew up with.

After A levels, we all left school in 1992. He spent about a year working in the bakery at a supermarket then joined the Met. Bought his first property, a maisonette in North London, probably 1996.

Personally, I grew up at a dining table where my Mum's anecdotes about her junior's negative equity made an impression, and this must not have been a unique experience amongst my peers as we all thought it was very risky for him to take on a big mortgage against London property.

Time tells most of the rest. Property prices exploded. He traded up to a 2 bed terrace then when a marriage increased the household income, they BTL'ed the terrace and bought off plan a 'detached' house in Hertfordshire. They moved in and found it was too noisy, so they bought another off plan, further back in the development and BTL'ed the first one.

At some point, well pre 2008 I recall saying that it was all an asset price bubble that would end...

Last time I saw the fellah to talk about it, his only regret was selling the North London terrace pre-2008, given the asking prices he was seeing now. I knew that he'd moved out of the second of the new builds in order to rent closer to where his wife worked. I asked if he'd kept both properties. Yes, both BTL'ed. With a little cajoling he revealed that he'd remortgaed on a tracker at 0.38% above base rate just before they tanked the base rate. He had about three quarters of a million pounds of mortgage and the household had at that time a joint income of circa £60k pa to back the mortgages and pay they rent on where they lived. They had maybe 10%-20% equity in the mortgaged property.

IMO this is the greater fool. As we've discussed a million times on the boards, the government want to see credit financed spending fuelling GDP growth and the banks want people to borrow.

Of course, both BTL mortgages are IO.

My point of view on the whole thing is that somewhere in East Herts we have two households who are renting. In the absence of an uncontrolled flow of interest only lending, comedy interest rates and a failure to build enough new houses, their rents would be at one price. Here in the UK in 2014, their rents are at a higher level.

Who benefits? Landowners, bankers and people who have by the act of borrowing aligned their own interests with the landowners and the bankers.

A phrase that I have though of often is "the democratisation of debt", once heralded as the great positive transformation of our times.

IMO UK housing reveals how this works out in practice, the "democratisation of debt" is rocket-fuel for bubbles because it replaces the need for people to put their money where their mouth is with the weaker requirement that people borrow money and put the borrowed money where their mouth is.

There will be a monumental correction along. Beforehand we were trying to live with house prices based on IO and self-cert, with interest rates that could manage CPI with a straight face provided CPI exaggerated the importance a new TV compared to the importance of heating your home and feeding yourself. That ship sailed. Now they rob houses for the gold, not the consumer goods. Whilst it might look like we can live with these prices on a certified income repayment basis provided interest rates are comically low forever, I'm not sure that even that is true. As Merv said, house prices are a matter of opinion but debts are real. IMO the incomes available to service debts cannot support these prices, even at these interest rates. The correction is not priced in. The correction is coming.

When you democratise political power, you change how we pick leaders. When you democratise debt, you tie together the fate of the financial sector with the decisions of a million empty minds. The problem with debt is that it is a mechanism for transporting obligations through time. The problem with a system of money based on debt is that if the people offering those obligations at a money price are fully of sh!t, then their promises are writ on water.

Edited by ChairmanOfTheBored

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Tragic isn't it? Not even feeling the burden of the much diminished due to ZIRP obligation because that's what tenants are for.

And 20+ years in the Met? :lol: How much are we on the hook for the pension too?

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Tragic isn't it? Not even feeling the burden of the much diminished due to ZIRP obligation because that's what tenants are for.

And 20+ years in the Met? :lol: How much are we on the hook for the pension too?

He hasn't made it to 20 yet and isn't getting any closer at the moment. He's on a career break (has been for a couple of years) living off the circa £2k pcm difference between the mortgages and what the properties rent for. He reckoned that provided rents held, though rising rates would extinguish the £2k, the base rate would need to reach 7% before the rental income didn't cover the mortgage. Low rates and interest only are a heady mix.

I'm pretty sure this is Minsky's Ponzi capitalism writ large.

Edited by ChairmanOfTheBored

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He hasn't made it to 20 yet and isn't getting any closer at the moment. He's on a career break (has been for a couple of years) living off the circa £2k pcm difference between the mortgages and what the properties rent for. He reckoned that provided rents held, though rising rates would extinguish the £2k, the base rate would need to reach 7% before the rental income didn't cover the mortgage. Low rates and interest only are a heady mix.

I'm pretty sure this is Minsky's Ponzi capitalism writ large.

So not so different from a single parent working 16hrs a week and claiming child tax credits, housing benefit etc to male a living income (wage seems the wrong term)

Fine until the kids turn 18 or in his case rates rise.

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Exactly - and I think a big part of why this situation persists is because people believe so strongly that only by buying can they guarantee their financial future. Any society that has absorbed into its collective unconscious the idea that the only way to guarantee your financial future it to borrow a ridiculous amount of money to buy a deeply unsatisfactory house is frankly old-school mad.

Too true. When I suggested that to some people, I was told that it was because of my humble background, I didn't understand property and was not capable of making something of myself. It was part of this volley described below

Just been press-ganged by a bunch of people how renting is dead money, housing is not an investment but you'll make money on it and best of all I've some sort of irrational/emotional problem with buying a house when really what price can I put on making my wife happy?

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Too true. When I suggested that to some people, I was told that it was because of my humble background, I didn't understand property and was not capable of making something of myself. It was part of this volley described below

How many of the people troubling you with this argument would have realised that when property behaves like this it means that we've constructed a situation wherein people who are willing to throw their lot in with a predatory financial sector are the ones that get ahead only get ahead because their actions are redistributive? Actions like this create no new wealth.

Pretty sure that some of them will find out shortly that throwing in your lot with a conspicuous predator, when you are just a particular category of their prey, always ends badly...

Edited by ChairmanOfTheBored

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I was told that it was because of my humble background, I didn't understand property and was not capable of making something of myself.

Andrew Carnagie was so lucky not to be told this.

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As Merv said, house prices are a matter of opinion but debts are real.

I would say that, while we have long-term comedy base rates, and your friend is borrowing long-term at base rate +0.38%, it's actually the other way round: house prices (and rents) are real and the debt is a matter of opinion.

Because the interest rates are certainly not real, and he's under no pressure to clear the capital, and finally the chances are that because there are millions like him, the government will find a way to get the banks to quietly forget about the capital (effectively with QE they already have).

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I would say that, while we have long-term comedy base rates, and your friend is borrowing long-term at base rate +0.38%, it's actually the other way round: house prices (and rents) are real and the debt is a matter of opinion.

Because the interest rates are certainly not real, and he's under no pressure to clear the capital, and finally the chances are that because there are millions like him, the government will find a way to get the banks to quietly forget about the capital (effectively with QE they already have).

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Indeed.

I guess my point of view is that my erstwhile friend and his good luck are not important, except to the extent that people like him introduced the debt that inflated the bubble.

What interests me is the question as to whether or not the valuations are sustainable on a continuing basis. In order for this to be the case, someone would have to be able to come in today and buy the asset off him and make a suitable return on their capital.

Previously, capital appreciation means that debt costs were irrelevant. Latterly, reducing the costs of debt has put lipstick on the pig of late bubble transaction prices. My surmise is that we are approaching the point where capital appreciation is played out and debt costs can go no lower.

At that point, the fact that the asset value can turn on a dime whilst the debt nominal is, well, nominal in somebody else's ledger starts to bite - at any interest rate.

Finally, I'd argue that rolling rents in with prices as you do is misleading. Rents are anchored to local incomes. Prices follow credit. Hardly birds of a feather IMO.

Edited by ChairmanOfTheBored

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He had about three quarters of a million pounds of mortgage and the household had at that time a joint income of circa £60k pa to back the mortgages and pay they rent on where they lived. They had maybe 10%-20% equity in the mortgaged property.

That is clearly not sustainable - what happens at renewal?

We have a mortgage that is currently at about £450k, and a joint income of about £190k, and even then the £2470 mortgage repayment still feels like a lot. Yes, I am sure if it was just the mortgage it would be fine, but you then have all the other costs of running a family which to some extent are proportionate to your lifestyle. As I see it, you buy a big house, have a couple of kids and before you know it you hire a nanny and have school fees to pay. The mortgage is no longer the biggest bill.

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That is clearly not sustainable - what happens at renewal?

We have a mortgage that is currently at about £450k, and a joint income of about £190k, and even then the £2470 mortgage repayment still feels like a lot. Yes, I am sure if it was just the mortgage it would be fine, but you then have all the other costs of running a family which to some extent are proportionate to your lifestyle. As I see it, you buy a big house, have a couple of kids and before you know it you hire a nanny and have school fees to pay. The mortgage is no longer the biggest bill.

Yeah - but you're trying to live in a house and pay for it. He's just a canny speculator. It's just a massive leveraged bet and back in 2007 house prices could only go up and therefore lenders were super keen to lend as much as possible to anyone willing to borrow. HPI meant there was some equity - what could possibly go wrong?

My bad for leaving it out of the OP - these mortgages are lifetime trackers, so there will be no renewal until about 2032. He's all good until base rates reach 6.5%, or rather provided rents hold up and tenants can be found he's all good because it's the incomes of the two families living in the houses that are paying the mortgage and giving him and his other half £2k pcm to live off until such time as either the base rate rises appreciably or the lender claims that extraordinary market conditions mean that they need to renege on the 0.38% above base deal.

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I disagree that he is "all good until until base rates reach 6.5%". The unknown factor is whether he will still have tenants willing to pay that same rent if interest rates go up.

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