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Goat

Affordability

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I originally posted this as a reply to another topic; I think that it is worth a thread of its own.

Yesterday I said that the apparent affordability is a result of repaying the mortgage over a much longer period. I think I should expand upon this.

The last time that mortgage payments were above 40% of THP was the period from mid 1987 to mid 1990. At that time inflation ranged from approx 5% to approximately 9%. Given that inflation today is approximately 2% this means that an additional 3% to 7% of the mortgage was paid off annually compared to today.

Lets take a look at what paying off this extra would mean using today's figures.

Using the quarter 4 2004 figures - loan 115,000; income £26,900 %THP 44%

An additional repayment of 3% = £3,450 or 13% of THP

An additonal repayment of 7% = £8,050 or 30% of THP

So to repay today's mortgages at the same rate we would have to pay between 57% and a whopping 74% of THP. This is well above the peak in the data series - and remember that was at a time of unusually high real interest rates.

So the situation today is that the low inflation environment has allowed people to pay off thier mortgages at a much slower rate.

The key difference is that whereas people were getting on the first rung of the ladder but then building up equity quickly so that they can trade up today's FTB is getting on the first rung of the ladder and then basically staying there.

There is a real prospect that today's FTB of a 160,000 flat will end up stuck there for life.

Lets put some real numbers into the equation, I am assuming zero inflation, zero income growth and a 4% rate of interest. I also assume that the buyer is unable to mortgage beyond 4x income (generous).

In my neighbourhood the average FTB pad, a 2 bed flat costs upwards of £160,000. The second rung on the ladder, a 3 bed ex council semi or a slightly better 2 bed terraced costs £220,000 upwards.

Lets say that a 30 year old FTB on £35,000 per annum takes on a 140,000 mortgage with a £20,000 deposit, this gives him repayments of £739 per month.

In 10 years time he will have paid off £40,000 of the mortgage giving him equity of £60,000. To move up the ladder he needs to borrow £160,000, he can't afford this. He is now 40 years old.

Moving forward another 5 years he now has £90,000 equity in his £160,000 flat. To move up the ladder he needs to borrow £130,000 but there is a problem, because he is now 45 years old he needs to repay the mortgage over 20 years, repayments of £790 per month, again he can't afford this.

So the problem is now that although he is building up equity in his flat every time he wants to move he needs to repay the mortgage off over a ever shorter period and he can't afford the repayments.

Fast forward another 10 years. He now owns the flat outright and can afford to pay off a £60,000 mortgage over the remaining 10 years of his working life, he can now move onto the second step of the ladder.

So here we have it. The average FTB today won't be able to afford even the most basic family home today until he is too old to start a family.

It doesn't work.

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its worse than above.

id say real inflation (not doctored) is closer to 6-7%

So wage increases are constrained by official cpi measures but we actually face higher costs then cpi states (and thus static or falling real wages...).

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Good post - which highlights that it is completely irrational for any FTB to buy in today's market. Down to 7% and peoples' lives on hold, no kids, no grandkids.

What a colossal f*ck up.

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its worse than above.

id say real inflation (not doctored) is closer to 6-7%

Is wage inflation running at equal levels or is price of goods/services inflation just detracting from mortgage affordability?

Good post goat!

I've said it before, but I've changed my view on owning my own property. I just don't want to anymore. I've stopped thinking of a house as a major part of my pension, and started to think of different ways to build a secure future. I plan to start my own IT business in the insurance sector this year. It may be risky, but I think it carries less risk than buying a house in the next two decades. Plus there is a possible upside to it.

After all, if I fail, will I be any worse off? I won't be able to afford a house. I'm not well educated on share dealing, but I have great IT skills which are currently being used to generate vast wealth for my employer. No more.

Britain's view of property will change permanently in my view.

If golden goose of HPI gets bird flu, how will the sheeple save for their future? Pile into pensions? I can't see the sooped up nova driving, gold and burberry wearing chavs becoming stock market kings - can you?

Ask yourself how much you are depending on your future purchase of a house as a major part of your pension. Then paint that on a backdrop of ever decreasing/poorly performing property and step back and take a look. Are you guilty of the same thinking as the sheeple who got us into this situation? Or do you genuinely just want to buy a house to live in, and do not count on it rising in value to support your future?

I think recession and HPDeflation will generate a lot of new thinkers/entrepreneurs out of necessity. A friend tells me this is exactly what happened in South Africa (born there, came here at 30), although her view may be clouded as she is a business woman, and mixes with those types.

Houses should be houses - NEVER investments. They should only increase in value through genuine improvements, and those increases should represent only the time and materials invested.

After all, as I read in a newspaper somewhere - "When you build an extension on your house its value increases. But when your house's value increases, it does not sprout an extension on the side".

I think its going to take another 15/20 years to get to this view - and plenty of burnt fingers, some of them currently typing on this forum.

Just my view.

Edited by Adam

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Or do you genuinely just want to buy a house to live in, and do not count on it rising in value to support your future?

I won't be buying until prices come down.

But I think I'm relying on buying to support my future. Not because the property might rise in value, but because after the mortgage is paid off (hopefully with real payments reducing over time thanks to inflation?) I won't have any housing costs to worry about.

You can't say this about renting, which is the only alternative I'd be happy with, which I can think of.

Edited by spleeper

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Lets put some real numbers into the equation, I am assuming zero inflation, zero income growth and a 4% rate of interest. I also assume that the buyer is unable to mortgage beyond 4x income (generous).

Those aren't real numbers. Try 2% inflation, 4% income growth and 5% interest rates.

Houses should be houses - NEVER investments.

If a house is a house and not an investment, then you can't live in it -- if you're deriving some benefit from your ownership of a house, such as being able to live in it, then it's an investment.

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If a house is a house and not an investment, then you can't live in it -- if you're deriving some benefit from your ownership of a house, such as being able to live in it, then it's an investment.

Pretty pedantic IMO. OK, I'll rephrase - A house should be bought as somewhere to live, NEVER as an investment which rises above inflation. OK?

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Those aren't real numbers. Try 2% inflation, 4% income growth and 5% interest rates.

They are of course a simplification however I stand behind the example. I don't think that factoring in inflation would have an effect, 4% income growth would be matched by increases in prices (assuming that today's prices are "reasonable"). Nationwide quotes 5.79% for FTB's at the moment.

The key point to note is that at today's prices it is not possible to increase your equity quickly enough to move up the ladder. To build up your equity quickly enough the repayments would have to be such a high % of take home pay as to blow the affordability argument out of the water.

FTB's buying today should expect to spent the rest of their lives there.

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So the natives cannot any offspring ? They should stop binge drinking then !

Does that mean we will have to rely on immigration for ever ?

The stupid natives of the UK should realise that a house is a shelter not

an ATM, pension fund or investment.

:o:o:o

Edited by E Powell

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the most amusing thing about all this is that in years to come they will ask... "why did no-one realise this would happen? Why did no-one try to stop it?"

but now, put this to people and you'll get the old "pshaw! what rot"

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the most amusing thing about all this is that in years to come they will ask... "why did no-one realise this would happen? Why did no-one try to stop it?"

but now, put this to people and you'll get the old "pshaw! what rot"

Afraid so. People have followed their parents advice to get on the ladder but have not realised that the ladder has changed shape. :(

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its worse than above.

id say real inflation (not doctored) is closer to 6-7%

Inflation is different to different people - it obviously depends what you buy/pay for.

But if you look at what constitutes CPI it is surprisingly comprehensive, IMO.

And the other measure, RPI is still only about 2.7%

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I won't be buying until prices come down.

But I think I'm relying on buying to support my future. Not because the property might rise in value, but because after the mortgage is paid off (hopefully with real payments reducing over time thanks to inflation?) I won't have any housing costs to worry about.

You can't say this about renting, which is the only alternative I'd be happy with, which I can think of.

Quite agree, all factors taken into consideration, the main benefit of buying as opposed to renting is the thought that one day it will be paid for... rent and mortgage free forever. Thats why IMO Interest only mortgage with no repayment vehicle is not a wise option for an owner occupier, as good as, if not worse than renting.

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The key point to note is that at today's prices it is not possible to increase your equity quickly enough to move up the ladder. To build up your equity quickly enough the repayments would have to be such a high % of take home pay as to blow the affordability argument out of the water.

No, the key point to note, which is not reflected in your figures, is that average salaries rise by about 2% above the rate of inflation, more or less in line with GDP growth.

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Pretty pedantic IMO. OK, I'll rephrase - A house should be bought as somewhere to live, NEVER as an investment which rises above inflation. OK?

It's not pedantry, exactly. I just get very tired of all this nonsense about it being good to buy a house to live in but bad to buy a house hoping to make some money on it. It's all investment, just with different benefits arising from the investment. But someone buying a house to live in is not a morally superior position to someone buying a house to rent out and make money from the rent and the capital appreciation. Either way, you're doing it for your own selfish purposes and depriving someone else with slightly less money of the house.

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It's not pedantry, exactly. I just get very tired of all this nonsense about it being good to buy a house to live in but bad to buy a house hoping to make some money on it. It's all investment, just with different benefits arising from the investment. But someone buying a house to live in is not a morally superior position to someone buying a house to rent out and make money from the rent and the capital appreciation. Either way, you're doing it for your own selfish purposes and depriving someone else with slightly less money of the house.

Yes, but instead of depriving only one person/family with slightly less money than you have, you will be depriving at least two persons/familys of owning the house.

Are there any other investments which deprive other people? I cant think of any which do so in such a direct way.

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Yes, but instead of depriving only one person/family with slightly less money than you have, you will be depriving at least two persons/familys of owning the house.

Are there any other investments which deprive other people? I cant think of any which do so in such a direct way.

How can you be depriving two people of owning the same house at the same time?

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How can you be depriving two people of owning the same house at the same time?

It's all investment, just with different benefits arising from the investment. But someone buying a house to live in is not a morally superior position to someone buying a house to rent out

I am not talking about the same house at the same time. I am talking about different houses at the same time.

If someone is buying a house to rent out then it would be safe to assume that they also own a house which they live in. They therefore own two houses.

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No, the key point to note, which is not reflected in your figures, is that average salaries rise by about 2% above the rate of inflation, more or less in line with GDP growth.

This is correct however if your argument is that prices are in equilibrium then the average price in future should increase in line with this, so this is no help whatsoever.

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  • 301 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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