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House Prices ... It's All Relative

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I explained this to a friend whom I have learned an awful lot from other the years about politics and economics, and hence I consider him to be very clever. I was amazed when he came out with arguments claiming that he didn't pay relitivly more moving from his 1 bed + box room to a 4-bed house. Never underestimate how far people will delude themselves into believing that this sort of issue isn't a problem.

Nice to see it written down but I think it could do with being clearer still. I know this argument verbatism but still had to think to confirm its accuracy.

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I explained this to a friend whom I have learned an awful lot from other the years about politics and economics, and hence I consider him to be very clever. I was amazed when he came out with arguments claiming that he didn't pay relitivly more moving from his 1 bed + box room to a 4-bed house. Never underestimate how far people will delude themselves into believing that this sort of issue isn't a problem.

Nice to see it written down but I think it could do with being clearer still. I know this argument verbatism but still had to think to confirm its accuracy.

Happy to re-write to enhance clarity .... by all means PM me with suggestions.

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I've seen this explained as the gaps between the rungs on each ladder getting shorter. Some very educated friends bought a place for £90k in 1999, sold it for £180k in 2011 and bought a slightly bigger place round the corner for £220k. This had, apparently all been made possible by HPI. "Some people don't like high house prices, but we do!" she declared. Back of the envelope calculation tells me that HPI has cost them an extra £20k in purchase price and up to another £20k in mortgage interest. Didn't want to risk the friendship by throwing a wobbly at them. I reckon the % of British people who understand the example shown here is in single digits.

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Happy to re-write to enhance clarity .... by all means PM me with suggestions.

I guess Brits are secret accountants and they are slaves to a subliminal balance sheet.

Detached house......£300,000

Mortgage.................£300,000

Net Assets.....................£0.......................................... :(

Detached house (same one) £400,000

Mortgage..................................£375,000

Net Assets.................................£25,000......................... :)

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[...] HPI has cost them an extra £20k in purchase price and up to another £20k in mortgage interest [...]

And how much have they had to earn before Tax and NI to pay for that extra £40k? :)

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I've seen this explained as the gaps between the rungs on each ladder getting shorter. Some very educated friends bought a place for £90k in 1999, sold it for £180k in 2011 and bought a slightly bigger place round the corner for £220k. This had, apparently all been made possible by HPI. "Some people don't like high house prices, but we do!" she declared. Back of the envelope calculation tells me that HPI has cost them an extra £20k in purchase price and up to another £20k in mortgage interest. Didn't want to risk the friendship by throwing a wobbly at them. I reckon the % of British people who understand the example shown here is in single digits.

Ooh try the precentage magic.

180K house goes up 50% = 270K

Then falls 50% = 135K

What! Magic! Where did the 55K go? The calculator must be broke!

Is the cash in your pocket? Where are you hiding it?

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Well yes, the above is how things actually work. Unfortunately this isn't how lots of people think it works, none of them care to look at anything other than what loan they can persuade the bank to lend them. I've tried explain the whole relative thing and just been told that I don't know what I'm talking about because I'm ignoring the increase in equity.

This is how they think:

Target home: 200000
Current property: 100000
Mortgage: 85000
Equity: 15000
Current LTV: 85%
LTV in target home 93%

The assumption is that 85% LTV is allowed by the banks, 93% isn't. Hence they buy the 100,000 hutch and hope prices increase, because... (prices double)

Target home: 400000
Current house: 200000
Mortgage: 85000
Equity: 115000
Current LTV: 58%
LTV in target home: 71%

Now the LTV on the home they'd like is only 71%, and stuck in a 2006 mindset the belief is that the bank will lend against that, allowing them to trade up in a way they couldn't before. We'll just ignore monthly repayments, income ratios and total amount repayable because they're just trivial details we don't have to worry about.

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I'm not sure people are actually convinced that house prices are relative. It's one of the first calculations I made when I was planning a figurative move to a larger house. Are people really that thick? I know that this is the age of buying without reading the fine print first, but surely a basic calculation would be done in most cases. Or do I overestimate people?

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Problem, as I see it, is that people aren't spending earned money and therefore don't see either the cost or the saving,

Just so long as they can make the monthly payment. Nothing else is calculated, neither the cost or the slavery. Owning a house is held to be so important it defies reason.

Personally, I see the both cost and the debt slavery, which is why I'll never buy, until that 50% correction.

The rest of the word isn't like me (thankfully, some would say)

Edited by LiveinHope

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For those who struggle to understand this a simple diagram might help, maybe bar-chart type of thing, or pictures of houses getting proportionately bigger or smaller.

The genuine problem (which you might want to gloss over) is that if prices fall people who already own may well not be able to trade up, either because their equity has shrunk to a level that won't even cover the loan-value-ratio on their current house, never mind a bigger one, or because the fall has been precipitated by a a more widespread economic malaise which has screwed their finances in other respects.

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Well yes, the above is how things actually work. Unfortunately this isn't how lots of people think it works, none of them care to look at anything other than what loan they can persuade the bank to lend them. I've tried explain the whole relative thing and just been told that I don't know what I'm talking about because I'm ignoring the increase in equity.

This is how they think:

Target home: 200000

Current property: 100000

Mortgage: 85000

Equity: 15000

Current LTV: 85%

LTV in target home 93%

The assumption is that 85% LTV is allowed by the banks, 93% isn't. Hence they buy the 100,000 hutch and hope prices increase, because... (prices double)

Target home: 400000

Current house: 200000

Mortgage: 85000

Equity: 115000

Current LTV: 58%

LTV in target home: 71%

Now the LTV on the home they'd like is only 71%, and stuck in a 2006 mindset the belief is that the bank will lend against that, allowing them to trade up in a way they couldn't before. We'll just ignore monthly repayments, income ratios and total amount repayable because they're just trivial details we don't have to worry about.

This is the crux of it. Given the low propensity to save in the UK the only way that many people can perceive of having enough equity to fund the purchase of the larger house is through HPI. As you say the absolute value of the mortgage debt is ignored - it's the monthly servicing cost in the two year "teaser" period that is the sole focus on the income side of the equation.

If there was no such thing as a mortgage and everyone had to buy their house for cash then the public view of HPI would be very different.

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That is why if things carry on as they have, no doubt about it people will be stuck living and paying for what they have got for many years to come....stagnant market.

Sure my house may be worth one million quid but there is no way I could buy one for one million two hundred thousand and pay for it before I die, not on what I earn. ;)

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I remember talking to some reasonably intelligent people about this when I upgraded from a flat to a money and they could not understand that HPI had cost me money, even when I showed my workings out.

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Problem, as I see it, is that people aren't spending earned money and therefore don't see either the cost or the saving,

Just so long as they can make the monthly payment. Nothing else is calculated, neither the cost or the slavery. Owning a house is held to be so important it defies reason.

Personally, I see the both cost and the debt slavery, which is why I'll never buy, until that 50% correction.

The rest of the word isn't like me (thankfully, some would say)

Agree, it's back to the old 'renting is dead money' (I've never seen money alive :P) theme. If the mortgage is the same as renting people dismiss it. We need rents to be a lot lower than the mortgages on the same places, before people stop to think 'Hmmmm.... maybe renting would be better value for money!'. We probably need house prices to fall or at least stay flat for 10 years too!

As to the opening post. Houses prices are relative but I tend to look at them relative to other stuff! And the houses I see still cost far too much relative to other stuff!

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Agree, it's back to the old 'renting is dead money' (I've never seen money alive :P) theme. If the mortgage is the same as renting people dismiss it. We need rents to be a lot lower than the mortgages on the same places, before people stop to think 'Hmmmm.... maybe renting would be better value for money!'. We probably need house prices to fall or at least stay flat for 10 years too!

As to the opening post. Houses prices are relative but I tend to look at them relative to other stuff! And the houses I see still cost far too much relative to other stuff!

That renting is "dead" money thing really bugs me. Interest is "dead" money too - all you get by buying with a mortgage (in a financial sense - ignoring improved security of tenure) is to take a leveraged gamble on property prices and the benefit of wage inflation (if there is any) eroding the debt in relative terms.

Both these financial forces have been at play to a greater, or lesser extent for most people's living memory (hence "you can't lose with property"). If things change though and we have both low inflation and HPC then the maths work very differently. It seems that many intelligent people don't see that.

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Problem, as I see it, is that people aren't spending earned money and therefore don't see either the cost or the saving,

Just so long as they can make the monthly payment. Nothing else is calculated, neither the cost or the slavery. Owning a house is held to be so important it defies reason.

Personally, I see the both cost and the debt slavery, which is why I'll never buy, until that 50% correction.

The rest of the word isn't like me (thankfully, some would say)

All they see is the monthly payment, I recall someone telling me that they'd extended the term of their mortgage and had managed to reduce their monthly payments so had more money to spend.

I couldn't be bothered explaining...

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For those who struggle to understand this a simple diagram might help, maybe bar-chart type of thing, or pictures of houses getting proportionately bigger or smaller.

The genuine problem (which you might want to gloss over) is that if prices fall people who already own may well not be able to trade up, either because their equity has shrunk to a level that won't even cover the loan-value-ratio on their current house, never mind a bigger one, or because the fall has been precipitated by a a more widespread economic malaise which has screwed their finances in other respects.

This is one of the main reason with other being MMR why transaction levels are so low for large parts of the country ,this combined with BTL propping up the bottom end has prevented price discovery throughout the whole market

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Any statisticians out there who can tell us how many moves that is buying and selling to buy again did someone do between the age of 20 to 50, thirty years....in the period between 1960 to 1990 thirty years....and/or 1980s to 2010

I would take a punt that an average person (family) used to upgrade every 8 to 10 years........I doubt people would move more than twice nowadays. ;)

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In the 70s and 80s I think the average was 7 years .... I may be wrong, but in this time your house doubled and if you were progressing up the company ladder then your salary could double as well. Happy days!!!

They claimed that. I call BS on my stats on family.

2 - 3 moves max.

Every 7 years EA wishful thinking.

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Nice work hiace_drifer. Much better than that blurry scan from 2008 that an EA was posting out to try and drum up some business.. bring sellers to market.

For those who struggle to understand this a simple diagram might help, maybe bar-chart type of thing, or pictures of houses getting proportionately bigger or smaller.

The genuine problem (which you might want to gloss over) is that if prices fall people who already own may well not be able to trade up, either because their equity has shrunk to a level that won't even cover the loan-value-ratio on their current house, never mind a bigger one, or because the fall has been precipitated by a a more widespread economic malaise which has screwed their finances in other respects.


Boring.

You can donate to them out of your own savings if you're so worried - or maybe donate cash to me towards all the rent I've paid out for years.

Their position is their position, and there's £Trillions in equity on the owner side. Your 'problem' owners can sort their own finances out. They got what they wanted anyway, arranging mortgages and buying.

Fair enough - like I say I'm more curious on the ABZ specifics and people's mindsets. Typically for most people to upsize they need some form of HPI to move on (especially if they struggled to pull a deposit together first time round). After all, the whole world is built on some form of (healthy) inflation or not as the case maybe. You have said it yourself "because it makes it even harder to upsize from a flat". Unless you/someone plan to use cash to upsize from a flat (which is where I started life) you'll be hoping your flat increases in value to release equity ? I have moved house 6 times in 15 years & worked hard to facilitate each move (which were all in relative increments - I count myself lucky for that reason). Each time I benefitted from HPI. I would never had been able to upsize if it had not been for HPI. However I realise that this is very unhealthy when left to spin out of control. Especially when it comes to my offspring's future. So I'll take the rough with the smooth. A correction in values is welcome - a full bore crash is not always in everyone's best interests. Just ask anyone young person in Ireland who owned a flat before the celtic tiger property crash and is now left with massive amounts of negative equity and cannot upsize from their flat / or even sell it. It all depends on your viewpoint and boils down to supply & demand. And when the prices become palatable again for HPC'ers.....what will happen ? People typically jump in again. The ultimate point I'm making is that property prices in ABZ grew for a reason. Are we wishing that reason away or will ABZ happily thrive on a default economy. Value for money means nothing other than what price you are prepared to pay/risk to live in an area that is desirable to you. If that area just so happens to be desirable to others who can also earn a living in close proximity to that area then .......hello HPI.


This is entirely your own world view.

What do you want individuals here to do? Apply for a £300,000 mortgage for a flat, after years of paying rent, in this market, to satisfy your world view, and protect your HPI and that of others who have HPI obsession.

When fewer than 2 in 5 homeowners have a mortgage. http://www.theguardian.com/news/datablog/2013/may/13/mortgages-property-debt-uk-trends

You chose rising HPI to help you upsize each time, and in most instances it requires a corrsponding bigger mortgages for the upsize home costs more.

We'll buy with a much smaller mortgage or for cash, and have the rest of our savings and incomes to give ourselves more comfortable lives and to spend on our families rather than jumbo mortgages to comply and feel hardship like the rest of the people you offer up as examples.

Markets are full of individuals. I don't exist to worry about those who have signed up to jumbo mortgages, and 'their best interests'. Or those who are at the top of the layer cake after a run of upsizing with extra big mortgage debt.

Grew (HPI) for a reason? The only reason.. the only thing which makes house price go up, is others in the market, on a daily, weekly, monthly timeline - our market competition - buyers and sellers, paid higher prices than the month before. They transacted at higher prices and that pushed up all wider values. That's how HPI comes about. At the margin. That's what sets values. It also works that way, setting lower market values, when buyers and sellers begin to sell for lower prices (HPC). We don't exist to look after everyone who bought on the 'grow' side, especially not those who upsized with ever more debt into 'the miracle'.

Maybe you should look to sell up before the main HPC hits, after years of HPI.... rather that project some sort of 'get into massive debt' to protect other owners.

[...] I am not sufficiently convinced that prices are stable at this level to start handing over every last penny of savings to a bank in order to buy a shit house. I am happy to pay a BTLer to take that balance sheet risk on my behalf. I'd rather we'd had a massive correction in prices and the extermination of the buy-to-let sector, but that hasn't happened yet, so I take the world as I find it and make a call. I sleep well at night. I feel no rancour towards the BTL tw@ts. The whole business is not a big deal emotionally for me. What I feel is, as I've said before, sadness and grief; I think that Byron cut to the chase when he mentioned his anger at the fact that these clowns meant that family formation is delayed and thus some people have gone to their grave having never met their grandchildren, just so that we could have a societally destructive housing bubble.

For me it's all about how do you respond to idiocy and iniquity. If you see a chance to make an easy buck and pile in, I think you are scum. I don't think that's manipulative. It's just my opinion.

[...]. I'm not saying, "Golly, if I can make everyone believe this rubbish, I'll get a cheap house", I'm saying, "This is societally destructive unsustainable idiocy and I refuse to be complicit by an act of commission". I can't stop some herbert like Mark ganging up with a shit bank and using my earnings to pay a BTL mortgage but I can chose not to hand over my savings and sign up for a whacking great repayment mortgage.



Full bore HPC. If that's what you fear is coming, then it no individual on HPC is going to stop things by buying in this market, as things only just begin to wobble from new peak prices.


All these HPI boomer easy lifers need a shock to their positions.

Daily Mail
September 2014
Average UK house price to hit £780,000 by 2040, says leading think tank

-Comments
Kilo Charlie, My World, 9 hours ago
We purchased a property in 1983 for £72,000.........today it's worth £650,000 plus. It's certainly possible and quite likely.

Sam, Bucks, 3 hours ago
Bought house in ,74 for 16k added extension about £8k now valued at £480k you do the maths?

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They claimed that. I call BS on my stats on family.

2 - 3 moves max.

Every 7 years EA wishful thinking.

Could be 2-3 times 7 years apart ? buy mid 20`s last move late 30`s mid 40`s kids left home buy then ?

I think "every" is very misleading

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