People Sucked Even Further Into The Trap

[RichM]

Mentioned this on another thread, but found out today that it was the worst case scenario for some friends.

TTRTR will love this. Basically some friends, abolsutely lovely people, bought a 1 bed in W London about 2 years ago. Paid c200K we think; sold for c235K. Not bad - but we don't know how much was spent on the kitchen, DIY, time spent, etc etc. The "profit" might cover other costs incurred, including a moderately lavish wedding last year.

Of course, now they are "moving up" the ladder, buying a big place near us for c300K.

The "property always goes up" mentality has been well and truly reinforced, so taking on nearly a third of a million pounds is no big deal. Yes, they have good salaries, but how they will have children on just one or even one and a half salaries I don't know. And if IRs go up or they lose their jobs...

Basically, I think this is an example of a very sad process. This boom has gone on for so long that some people, who would otherwise be very well off, have been suckered into taking on even greater debt than the average FTBer. A very, very sad of affairs.

[OnlyMe]

RichM,

Dilution of net assets, every move up takes time and costs - in terms of net salaries these alone are gettng punitive. The further up the chain you go with the same (or lower due to tax and costs) the more exposed the situation.

[Marina]

1994 replies including this one. Can barely see the screen! What a laugh!

[BuyingBear]

In a way these people are easier to catch than FTB'ers, there's more of them and they're existing "stake holders", they took the gamble and saw returns, be it modest, and they can see that the game works and they are part of it and want in, a classic trick of any good pyramid scheme.

Hence it makes it easier to jump up the ladder and take on a larger mortgage, it helps create the mental disconnect between 1/3 of a million quid and real money because they believe they will get that back and more so, the liability is not real, or it doesn't feel real.

They are acting exactly the same way as people have always done with property but this time there is one crucial difference, they haven't been bailed out by inflation, so the real cost of their mortgage is greater than ever and will remain so for some time to come. People don't understand inflation or its affects, they just like looking at big numbers and ignore the fact their next rung up the ladder is ever further away.

Maybe these swappers are the only things keeping the market alive, especially at the upper-end?

[RichM]

In a way these people are easier to catch than FTB'ers, there's more of them and they're existing "stake holders", they took the gamble and saw returns, be it modest, and they can see that the game works and they are part of it and want in, a classic trick of any good pyramid scheme.

Good point BB. The low inflation trap is so widely unrecognised it is terrifying. For me that alone is the abolsute deal breaker - that kind of debt just won't go away. These friendswent to very good universities by the way. I don't even think they wanted too much to make a profit - I guess they could afford to buy just about, their parents probably did OK out of property (and let's face it, for people in their 20 and 30s, their parent almost certainly did), so they thought "why not?"

I would love to know who bought their last flat, I say "buy", they've only accepted an offer as yet...

Marina - what was that all about? You been drinking?

[Mushroom]

1994 replies including this one. Can barely see the screen! What a laugh!

You're going to be doing quite a bit of editing tomorrow to get these posts back to your usual high quality!

[Elizabeth]

In a way these people are easier to catch than FTB'ers, there's more of them and they're existing "stake holders", they took the gamble and saw returns, be it modest, and they can see that the game works and they are part of it and want in, a classic trick of any good pyramid scheme.

Never truer words spoken. Having 'saved' someone from a pyramid (and it took 3/4 of an hour to explain simple exponential addition) I think compulsory real world maths should be included in the social science curriculum.

[88Crash]

RichM,

Dilution of net assets, every move up takes time and costs - in terms of net salaries these alone are gettng punitive. The further up the chain you go with the same (or lower due to tax and costs) the more exposed the situation.

One of my relatives has just moved up the chain

Sold their house in Surrey for a price I thought they would never get, but they did (Surrey still seems to be holding up quite well)

But their new place is 500K and they still work on the 'always goes up theory'

If prices drop even a moderate amount over the next couple of years, all their equity is gone

Then they would have spent the last 7 years moving up the ladder to be back to square one

What a waste of f**king time

[Guest muttley]

Someone had as a sig "Stealth Wealth.You owe more,but you feel richer"

I like that.

However,may I point out that it is quite normal for people to spend more as they get older.The spending cycle usually peaks in your mid 40s.Earnings tend to maximise around then and it has never been unusual for aspirational singles/couples to take on bigger mortgages as they get older.

However,my advice to anyone thinking of buying, wherever they might be on the ladder is "wait and see" in this market.

[Aud]

Friends of mine have also recently moved up from a pleasant 3 bed semi with a 70k repayment mortgage to a 240K IO mortgage(self-cert) to buy their dream home, an 'ideal modernisation project' which translated as a moneypit, they've spend at least 50K and its no where near finished but have now run out of money.

Why do people in their late 40's feel the need to take such risk. A term used in mental health and psychology is the 'Tyranny of Shoulds' society is constantly telling people what they should have or achieve to be considered successful. The rise is house prices has interupted what many considered the natural progress up the ladder, the cost of moving up the next rung now requires the willingness to take on huge debt but staying put which makes many feel that they have failed in some way.

When I asked my friend why they were taking such a risk I was told " Its what you have to do if you what to get on"

[Pent Vaer]

Good point BB. The low inflation trap is so widely unrecognised it is terrifying. For me that alone is the abolsute deal breaker - that kind of debt just won't go away.

Why won't the debt go away ? You don't expect devaluation of the currency via constantly increasing money supply to result in increased wages over a 30 year mortgage period ? Or even

a 15 or 20 year morgage period ?

As long as you don't have problems making payments or have

to sell in a house price dip period you should be fine

long term, cliche or not.

Pent

[Fanny Magnet]

As long as you don't have problems making payments or have

to sell in a house price dip period you should be fine

long term, cliche or not.

Pent

At last. A sensible voice from out of the wilderness.

Why should everything have a cost in simply pounds, shillings and pence. Some things you can't put a value on. Happiness and contentment is one of these. If people are happy to make the commitment and can afford it why shouldn't they.

RichM, £300K and having good salaries is not too bad IMHO, just because you think it's a bad idea does not mean they think it is. They are free thinking intelligent individuals are they not ? Simply signing on the mortgage dotted line does not instantly turn them into `sheeple` zombies - even though the cliche ridden pigeon-holers on this site would have us believe it is so. One shot at life RichM, just one.

[Harry Sacks]

Friends of mine have also recently moved up from a pleasant 3 bed semi with a 70k repayment mortgage to a 240K IO mortgage(self-cert) to buy their dream home, an 'ideal modernisation project' which translated as a moneypit, they've spend at least 50K and its no where near finished but have now run out of money.

Why do people in their late 40's feel the need to take such risk. A term used in mental health and psychology is the 'Tyranny of Shoulds' society is constantly telling people what they should have or achieve to be considered successful. The rise is house prices has interupted what many considered the natural progress up the ladder, the cost of moving up the next rung now requires the willingness to take on huge debt but staying put which makes many feel that they have failed in some way.

When I asked my friend why they were taking such a risk I was told " Its what you have to do if you what to get on"

'Tyranny of shoulds', not heard that one before, probably relevant to 99% of people though. Implemented in advertising and the root of debt culture no doubt.

[Pent Vaer]

At last. A sensible voice from out of the wilderness.

Why should everything have a cost in simply pounds, shillings and pence. Some things you can't put a value on. Happiness and contentment is one of these. If people are happy to make the commitment and can afford it why shouldn't they.

Woh woh woh, I didn't say I thought it was a good idea to buy

a house right now There's a good chance of losing your job

in the coming years IMO.

However, the debt strain almost certainly *will* reduce with time, whatever the current wage inflation environment may be due, to constant increases in the amount of money knocking around.

Pent

[MarkG]

You don't expect devaluation of the currency via constantly increasing money supply to result in increased wages over a 30 year mortgage period ?

Not by anywhere near enough to destroy the cost of a modern mortgage: and quite possibly disposable incomes won't increase at all over the next thirty years when taxes are going up, many jobs are being outsourced and many more given to cheap Eastern European immigrants.

What makes you think that more than a tiny fraction of British workers have any wage pricing power today? Even many of the 'fat cat' jobs in the City can be outsourced to India at a much lower cost.

One shot at life RichM, just one.

So why would any sane person waste it on slaving away to pay off a mortgage?

Edited February 4, 2006 by MarkG

[OnlyMe]

However, the debt strain almost certainly *will* reduce with time, whatever the current wage inflation environment may be due, to constant increases in the amount of money knocking around.

Not certainty about it at all I'm afraid in real terms the debt will reduce whilst the central bank are busily printing away but the negative consequences of this are many. Investments, savings, pensions will all fall in relative value; then imports join the party and those rise in price then real incomes fall I can easily see a situation where people simply run out of money to be able to afford an increasing cost of living (as well as paying back capital/interst on all the detb tey have taken up). Wages will only rise if foreigners are willing to pay the prices we charge for goods - get too out of step and they simply won't, we won't produce goods for our market either and the whole economy goes into a tailspin.

[Guest horace]

[Wages will only rise if foreigners are willing to pay the prices we charge for goods - get too out of step and they simply won't, we won't produce goods for our market either and the whole economy goes into a tailspin.

We produce the wings for Airbus and the London stock exchange brings in money but what else of any significance does U.K. plc produce?

It`s looking bleak in my opinion.

horace

Edit...

The UK is particularly good at producing Estate Agents and charity shops.

Edited February 4, 2006 by horace

[Pent Vaer]

Not by anywhere near enough to destroy the cost of a modern mortgage: and quite possibly disposable incomes won't increase at all over the next thirty years when taxes are going up, many jobs are being outsourced and many more given to cheap Eastern European immigrants.

What makes you think that more than a tiny fraction of British workers have any wage pricing power today? Even many of the 'fat cat' jobs in the City can be outsourced to India at a much lower cost.

I think you're focusing too much on today's conditions.

Look at the house-prices-since-god-knows-when graph. We've had

lots of different sets of economic conditions. Low taxes, high taxes. Low immigration, high immigration. Boom, bust. War, peace.

Inflation adjusted, or not inflation adjusted. But up they go, slower or faster, for better or worse.

I know a 'modern mortgage' seems enormous. But I sincerely

believe it will look like peanuts in 30 years time. There was a time houses cost 500 quid, do you think they could imagine

500 grand for a house ?

This is where I get to say 'or is it different this time ?', since it's

been used on me here before :-)

Edit: again, I'm not saying this is a good time to buy a house,

merely that in the long run the debt will likely become insignificant.

Pent

Edited February 4, 2006 by Pent Vaer

[MarkG]

But up they go, slower or faster, for better or worse.

Almost all the growth in house prices has occured since the 50s.

This is where I get to say 'or is it different this time ?',

The rise in house prices since the 50s came in a time of global peace with limited competition and a growing population. We're now heading into a time of global conflict with a declining population of productive workers, a growing population of parasites, and massively increased competition.

Any predictions based on the economic conditions of the last fifty years are likely to be totally wrong when those conditions no longer apply.

I know a 'modern mortgage' seems enormous. But I sincerely believe it will look like peanuts in 30 years time.

Where is the massive rise in wages going to come from when pretty much any job can either be outsourced to China or 'insourced' to cheap immigrants? Why is that question so hard to answer?

Edited February 4, 2006 by MarkG

[BuyingBear]

Why should everything have a cost in simply pounds, shillings and pence. Some things you can't put a value on. Happiness and contentment is one of these.

If you'd be happy and contented sitting on a £300k IO mortgage without any repayment vehicle, aside from the hope of future rises, then so be it. Personally it looks like a ticking bomb.

[Pent Vaer]

Almost all the growth in house prices has occured since the 50s.

The rise in house prices since the 50s came in a time of global peace with limited competition and a growing population. We're now heading into a time of global conflict with a declining population of productive workers, a growing population of parasites, and massively increased competition.

Any predictions based on the economic conditions of the last fifty years are likely to be totally wrong when those conditions no longer apply.

Right, your prediction that a 50 year stretch of conditions will end

is more likely than that it will continue. What was that Blackadder line 'the last thing they will expect is another year like the last 50, Darling!' You really think we havn't had warfare, energy shocks, major immigration, recessions, national uncompetetiveness etc etc in the last 50 years ?

Do you think if we'd been on a gold standard since the 50's

house prices would have risen so much, whatever the economic

conditions ?

Where is the massive rise in wages going to come from when pretty much any job can either be outsourced to China or 'insourced' to cheap immigrants? Why is that question so hard to answer?

It's fairly clear I hope from the last few years that a massive rise in

wages is not required for massive HPI. You will argue that it's

not sustainable and prices will crash, I'll argue that they won't

go down as much as they went up. Even 2% average HPI and

wage settlements over 30 years makes the original loan fairly insignificant.

If you insist on talking short-term, you may have noticed that government's official policy is to target CPI of 2% per year. The cost of borrowing will be reduced if that target is not met. Sod

the exchange rate. If imports get expensive people will have to

cut down, local production will be encouraged. There are a million possibilities as to what may develop in the economy; protectionism, immigration restrictions, oil at $260 etc etc that will affect your 'wages can't rise' argument. This isn't the first time there have been wage pressures.

I'm trying to say it's nigh impossible to predict what will happen with economic conditions in the short/medium term, it's just to complex, but the money supply will continue to rise IMO, and perhaps at an accelerating pace, no matter how damaging the eventual outcome.

HPI will keep pace on average. IMO. 30 years is a long time.

Pent

[MarkG]

Right, your prediction that a 50 year stretch of conditions will end is more likely than that it will continue.

Those conditions are ending right now. If you can't see that, you're not looking very hard.

You really think we havn't had warfare, energy shocks, major immigration, recessions, national uncompetetiveness etc etc in the last 50 years ?

LOL. Yeah, I guess I missed those world wars, and that couple of billion new workers entering the global economy in a few years over that time.

Do you think if we'd been on a gold standard since the 50's house prices would have risen so much, whatever the economic conditions ?

No, but I don't see how that's relevant. If we do go back to a gold standard then it's pretty clear that prices will fall dramatically: no-one would be able to borrow 10x their income for 25 years at 5% with hard currency.

It's fairly clear I hope from the last few years that a massive rise in wages is not required for massive HPI.

There's absolutely no other way to sustain high house prices. How long are people going to continue borrowing 10x their income to buy a two-bed flat if there's no prospect of wage rises destroying their debts?

If you insist on talking short-term

You're the one who's talking short term: the last fifty years are the short-term anomaly as far as British house prices are concerned. Now we're about to revert to the mean.

What exactly do you think that British people are going to be doing in the next fifty years to sustain wages more than ten times as high as those in China? If you can convince me that we can do that, then maybe I'll start to agree with you, but I sure don't see anything.

30 years is a long time.

Thirty years is nothing, from an economic standpoint. A trend that's only lasted fifty years is a short-term blip.

Edited February 5, 2006 by MarkG

[Pent Vaer]

LOL. Yeah, I guess I missed those world wars

The Cold War wasn't a world war ? Or do you expect a WWII style war ? Can't see it, but if so, all bets are off, of course.

What exactly do you think that British people are going to be doing in the next fifty years to sustain wages more than ten times as high as those in China?

I expect that real wages and standards of living will plummet

in the years to come. However, I expect nominal wages and house prices to rise significantly. That via devaluation of the currency. I don't think our viewpoints are so irreconcilable actually :-)

Pent

[The Masked Tulip]

How long are people going to continue borrowing 10x their income to buy a two-bed flat if there's no prospect of wage rises destroying their debts?

For a nation that cannot balance its own cheques books, I sugest that this, unfortunately, could go on for a very long time to come.

Oh well, the Iranians will probably turn off their oil taps sometime this Summer so...

[Levy process]

Mentioned this on another thread, but found out today that it was the worst case scenario for some friends.

TTRTR will love this. Basically some friends, abolsutely lovely people, bought a 1 bed in W London about 2 years ago. Paid c200K we think; sold for c235K. Not bad - but we don't know how much was spent on the kitchen, DIY, time spent, etc etc. The "profit" might cover other costs incurred, including a moderately lavish wedding last year.

Of course, now they are "moving up" the ladder, buying a big place near us for c300K.

The "property always goes up" mentality has been well and truly reinforced, so taking on nearly a third of a million pounds is no big deal. Yes, they have good salaries, but how they will have children on just one or even one and a half salaries I don't know. And if IRs go up or they lose their jobs...

Basically, I think this is an example of a very sad process. This boom has gone on for so long that some people, who would otherwise be very well off, have been suckered into taking on even greater debt than the average FTBer. A very, very sad of affairs.

So what has happened to their salaries in 2 years that means they can afford an extra 65K? If they've gone up that much to cover the difference then fair enough, although that's a big percentage for two years. If they haven't gone up that much, why didn't they buy a bigger place 2 years ago?