Guardian: The Roof Is Being Fixed But Beware The House Crashing Beneath It

[zugzwang]

Because we haven't hit the Household Debt Trap plateau yet. There are still lots of houses that were bought using one income that the BoE want sold to people using two. There are still lots of people on lower income multiple mortgages who the BoE want to live the dream and take on more debt at 4.5x household income. This is why they allow 15% to be greater than 4.5x to help edge the overall average up. This is still pushing prices up and so tempts in the BTLers for capital appreciation. Plus the afore mentioned governbankment schemes are deferring debt and making non-affordable houses look affordable.

House prices can continue to rise as long as the housing stock can be subdivided. An increasing share of one income is first dedicated to repaying the mortgage, then two. When two incomes is insufficient to buy an entire house, the house itself must be physically halved, then quartered. The endpoint of this process is an HMO daddy rent-farming 8-10 Elbonians in a nineteenth century terrace around a single bathroom and kitchen. Or, as Osborne likes to call it, Plan A.

[Democorruptcy]

House prices can continue to rise as long as the housing stock can be subdivided. An increasing share of one income is first dedicated to repaying the mortgage, then two. When two incomes is insufficient to buy an entire house, the house itself must be physically halved, then quartered. The endpoint of this process is an HMO daddy rent-farming 8-10 Elbonians in a nineteenth century terrace around a single bathroom and kitchen. Or, as Osborne likes to call it, Plan A.

I agree, which is why earlier on when talking about income multiples I mentioned "whole house".

If enough people are happy enough to borrow increasing amounts at higher income multiples, for a smaller and smaller share of a house, that's all they will ever get.

I've said for years on here that eventually there will be pods supplied by employers. Like Japanese capsule hotels, for the slaves to spend the little time they have between shifts.

[Neverwhere]

Because we haven't hit the Household Debt Trap plateau yet. There are still lots of houses that were bought using one income that the BoE want sold to people using two. There are still lots of people on lower income multiple mortgages who the BoE want to live the dream and take on more debt at 4.5x household income. This is why they allow 15% to be greater than 4.5x to help edge the overall average up. This is still pushing prices up and so tempts in the BTLers for capital appreciation. Plus the afore mentioned governbankment schemes are deferring debt and making non-affordable houses look affordable.

That doesn't actually answer my question. If LTIs to owner occupiers are solely driving prices then how have current average house prices exceeded current average household incomes at current average income multiples? If 85% of OO mortgages were made at the limit of 4.5x household income and this was what was driving prices then the average house prices should be somewhere around 4.5x average household income. They're much higher than this.

I would argue that one of the key reasons that they're higher than this is because supply to market is constrained, and supply to market is constrained because nobody has to sell any more: they can just switch onto a BTL mortgage and then use the proceeds to fund their own move to a different OO residence. IMO it's a mistake to assume that BTLers and late entrant OOs are totally seperate groups.

[Democorruptcy]

That doesn't actually answer my question. If LTIs to owner occupiers are solely driving prices then how have current average house prices exceeded current average household incomes at current average income multiples? If 85% of OO mortgages were made at the limit of 4.5x household income and this was what was driving prices then the average house prices should be somewhere around 4.5x average household income. They're much higher than this.

I would argue that one of the key reasons that they're higher than this is because supply to market is constrained, and supply to market is constrained because nobody has to sell any more: they can just switch onto a BTL mortgage and then use the proceeds to fund their own move to a different OO residence. IMO it's a mistake to assume that BTLers and late entrant OOs are totally seperate groups.

Re your (not mine) "owner occupiers solely driving prices" maybe you need my last post again? Sorry but I really cannot be bothered re-typing the same things again. It feels like you just want to argue for the sake of it, so I'll bid you good day.

[Neverwhere]

Re your (not mine) "owner occupiers solely driving prices" maybe you need my last post again? Sorry but I really cannot be bothered re-typing the same things again. It feels like you just want to argue for the sake of it, so I'll bid you good day.

Maybe I should have said "mainly"? Sorry, was posting in a rush. Perhaps I misunderstood even to think "mainly"?

That would make sense as I can't see how they credit conditions for OO could be the main driver of current prices (obviously it's a plausible mechanism for driving prices generally and has previously been the main driver and no doubt will be again) given they currently exceed average income mutliples as applied to average household incomes, even with government-gifted deposits added into the mix. OOs can use prevailing credit conditions for OOs to price other prospective OOs out of buying at reasonable income multiples, but they can't really use them to price them out of buying with the help of prevailing credit conditions for OOs and disregard for reasonable income multiples, because those by definition only allow them to acquire the portion of the housing stock that they actually live in.

Looser credit conditions for OO causing initial price rises and tempting in speculators makes sense and I totally buy that, but at this point the speculators - who are often also utilising OO lending - seem to have very much taken over the show.

For instance average working household incomes of £28.1k at 4.5x LTIs with 5% deposit and 20% HTB would - assuming everyone took advantage of HTB at maximum LTIs, and BTLers trail OO behaviour rather than lead it - put average prices around the £168.6k mark. That's about £27k off Nationwide, £34k off Halifax, £17.75k off Land Reg and £117k off ONS average house prices. Given we know that not all buyers borrow at maximum LTIs or with the help of government schemes those numbers seem significant, even ignoring the outlier ONS figure, as does the fact that average household incomes for those who do buy are significantly higher than average houshold incomes for the working population as a whole.

It seem to me that speculators are setting a floor under the market and that is pricing out households on average wages, and many of those speculators are using their speculative behaviour as a way of boosting their own household incomes and pushing up prices higher up the market as owner occupiers.

I really have no interesting in arguing other than in the sense of debating. I was, in the first place, only looking to point out that £45k is an above average household income and to agree with you about lending practices, as well as add in my own thought that if it was just about lending to owner occupiers then the current bubble should at least be smaller than it is now (which was intended as addition rather than opposition, all I am saying is that I think credit conditions for speculators have to be in the mix).

[winkie]

How on earth are we supposed to be able to pump more money into the economy if we can't persuade people to take on debt.......tell them/show them how their house will make money for them whether they have money or not.....they will by continuing to borrow, continue to pump borrowed money into the economy....as soon as they figure out free money in the end costs, and what goes up must come down......everything will come to a grinding halt.

[Democorruptcy]

Maybe I should have said "mainly"? Sorry, was posting in a rush. Perhaps I misunderstood even to think "mainly"?

That would make sense as I can't see how they credit conditions for OO could be the main driver of current prices (obviously it's a plausible mechanism for driving prices generally and has previously been the main driver and no doubt will be again) given they currently exceed average income mutliples as applied to average household incomes, even with government-gifted deposits added into the mix. OOs can use prevailing credit conditions for OOs to price other prospective OOs out of buying at reasonable income multiples, but they can't really use them to price them out of buying with the help of prevailing credit conditions for OOs and disregard for reasonable income multiples, because those by definition only allow them to acquire the portion of the housing stock that they actually live in.

Looser credit conditions for OO causing initial price rises and tempting in speculators makes sense and I totally buy that, but at this point the speculators - who are often also utilising OO lending - seem to have very much taken over the show.

For instance average working household incomes of £28.1k at 4.5x LTIs with 5% deposit and 20% HTB would - assuming everyone took advantage of HTB at maximum LTIs, and BTLers trail OO behaviour rather than lead it - put average prices around the £168.6k mark. That's about £27k off Nationwide, £34k off Halifax, £17.75k off Land Reg and £117k off ONS average house prices. Given we know that not all buyers borrow at maximum LTIs or with the help of government schemes those numbers seem significant, even ignoring the outlier ONS figure, as does the fact that average household incomes for those who do buy are significantly higher than average houshold incomes for the working population as a whole.

It seem to me that speculators are setting a floor under the market and that is pricing out households on average wages, and many of those speculators are using their speculative behaviour as a way of boosting their own household incomes and pushing up prices higher up the market as owner occupiers.

I really have no interesting in arguing other than in the sense of debating. I was, in the first place, only looking to point out that £45k is an above average household income and to agree with you about lending practices, as well as add in my own thought that if it was just about lending to owner occupiers then the current bubble should at least be smaller than it is now (which was intended as addition rather than opposition, all I am saying is that I think credit conditions for speculators have to be in the mix).

In 1998 I was offered a maximum mortgage of 3x main income plus 1x second income. If that still stood, houses would be cheaper and there would not have been as much speculation via BTL and flipping.

Re incomes, maybe the people buying average houses have to be nearer the top of your median income scale. The more they are prepared to borrow, the less chance others have of buying a whole house.

[Si1]

In 1998 I was offered a maximum mortgage of 3x main income plus 1x second income. If that still stood, houses would be cheaper and there would not have been as much speculation via BTL and flipping.

Re incomes, maybe the people buying average houses have to be nearer the top of your median income scale. The more they are prepared to borrow, the less chance others have of buying a whole house.

Will the new Basel legislation lead to the old mortgage multipliers coming back do we know?

[Neverwhere]

In 1998 I was offered a maximum mortgage of 3x main income plus 1x second income. If that still stood, houses would be cheaper and there would not have been as much speculation via BTL and flipping.

Re incomes, maybe the people buying average houses have to be nearer the top of your median income scale. The more they are prepared to borrow, the less chance others have of buying a whole house.

I totally agree with that. I just think that, once set in motion by price rises caused by loosening credit conditions to OOs, the speculation then takes over and starts driving the market and that this is mainly what we're seeing right now. Especially as speculation can be used to allow OOs to max out their own finances in excess of what is available to them under current prevailing credit conditions for OOs (which are still bubbilicious in their own right).

Those that borrow to the max in order to buy an OO property and then, after a few years, refinance onto a speculative BTL loan without any price discovery (essentially just agreeing on an imaginary amount of HPI with the bank) and then borrow again as OOs and use the combination of both sets of funds to make their next OO purchase are levelling both OO credit conditions and speculator credit conditions at their own OO house purchase, as well as taking up two properties and reducing supply to market, so they push up prices above what would be implied by even the (ridiculous) 4.5x income multiple constraint on OO lending because they're using that and then adding in BTL finance on top.

According to Countrywide in 2014 just 6% of landlords own more than one property. How many of the rest have used the rental income or released equity from their rental property primarily to raise funds against their primary home purchase? I would guess quite a lot, and even those who haven't have still been preventing the market from clearing and proper price discovery from occurring by constraining supply to market.

Basically I think you're right in many ways (especially about the beginning). I just think that speculative finance, once in motion, adds this whole other layer of price inflation on top of everything else.

Seriously constraining speculative finance would at the very least bring things back in line with credit conditions for owner occupiers, which would still be a bubble but just a slightly smaller one, and perhaps even beyond that as prices would have to fall in order to bring us down to average houses being around 4.5x average household incomes (which is absolutely far too high) and such price falls in-and-of-themselves could cause either credit conditions or debt appetite from prospective owner occupiers to fall further still.

Edited December 10, 2015 by Neverwhere

[Democorruptcy]

I totally agree with that. I just think that, once set in motion by price rises caused by loosening credit conditions to OOs, the speculation then takes over and starts driving the market and that this is mainly what we're seeing right now. Especially as speculation can be used to allow OOs to max out their own finances in excess of what is available to them under current prevailing credit conditions for OOs (which are still bubbilicious in their own right).

Those that borrow to the max in order to buy an OO property and then, after a few years, refinance onto a speculative BTL loan without any price discovery (essentially just agreeing on an imaginary amount of HPI with the bank) and then borrow again as OOs and use the combination of both sets of funds to make their next OO purchase are levelling both OO credit conditions and speculator credit conditions at their own OO house purchase, as well as taking up two properties and reducing supply to market, so they push up prices above what would be implied by even the (ridiculous) 4.5x income multiple constraint on OO lending because they're using that and then adding in BTL finance on top.

According to Countrywide in 2014 just 6% of landlords own more than one property. How many of the rest have used the rental income or released equity from their rental property primarily to raise funds against their primary home purchase? I would guess quite a lot, and even those who haven't have still been preventing the market from clearing and proper price discovery from occurring by constraining supply to market.

Basically I think you're right in many ways (especially about the beginning). I just think that speculative finance, once in motion, adds this whole other layer of price inflation on top of everything else.

Seriously constraining speculative finance would at the very least bring things back in line with credit conditions for owner occupiers, which would still be a bubble but just a slightly smaller one, and perhaps even beyond that as prices would have to fall in order to bring us down to average houses being around 4.5x average household incomes (which is absolutely far too high) and such price falls in-and-of-themselves could cause either credit conditions or debt appetite from prospective owner occupiers to fall further still.

I agree that speculation is driving the market latterly because the governbankment has made houses the only game in town. Through tax breaks and "help" that only makes houses more expensive and so encourages speculation for capital appreciation. However if lending multiples were gradually reduced the speculation would be less attractive. Unfortunately the BoE are going the other way.

[Neverwhere]

I agree that speculation is driving the market latterly because the governbankment has made houses the only game in town. Through tax breaks and "help" that only makes houses more expensive and so encourages speculation for capital appreciation. However if lending multiples were gradually reduced the speculation would be less attractive. Unfortunately the BoE are going the other way.

Given everything they've been putting out on the matter in recent years it looks like they're going to tackle the speculation directly via BTL regulation. We'll see what that amounts to soon enough but given speculation is currently driving the market adding to the disincentives aimed at should at least improve on the current situation. If prices then fall, which they would need to in order to be in line with (excessive) OO LTI limits, rather than OO LTI limits + speculative finance, then will the appetite for these higher LTIs still be there? It's one thing to max out on leverage in a rising or even static market, it's quite another to do so in a falling one.

Edited December 10, 2015 by Neverwhere