Moving On Up The Ladder....

[BillyShears]

I keep on reading in the press and seeing on television FTBs "getting on the housing ladder".

One thing I note being omitted are details about how these FTBs will actually move up the ladder in the future. I mean something like these FTBs buying shared ownership in a £250K flat in London paying the mortgage for the next X years, and then managing to save enough to go for their own house to raise children and all that. But still we hear "property ladder" this "property ladder" that. Then we read about people in Australia who will, basically, never pay off their FTB homes, presumably at the bottom of the ladder. So how do they move up if they can never really afford their starter home. OK, so salaries tend to rise as people get older, and many may manage to pay off their first home. But even with today sized gaps between the rungs, with the smaller number of working years these people will have by then how do they move on up?

Is it just me being unobservant, or is something being swept under the carpet here?

Billy Shears

[frugalista]

I keep on reading in the press and seeing on television FTBs "getting on the housing ladder".

One thing I note being omitted are details about how these FTBs will actually move up the ladder in the future. I mean something like these FTBs buying shared ownership in a £250K flat in London paying the mortgage for the next X years, and then managing to save enough to go for their own house to raise children and all that. But still we hear "property ladder" this "property ladder" that. Then we read about people in Australia who will, basically, never pay off their FTB homes, presumably at the bottom of the ladder. So how do they move up if they can never really afford their starter home. OK, so salaries tend to rise as people get older, and many may manage to pay off their first home. But even with today sized gaps between the rungs, with the smaller number of working years these people will have by then how do they move on up?

Is it just me being unobservant, or is something being swept under the carpet here?

Billy Shears

The property ladder only works when you have wage inflation which is as rampant as HPI. No wage inflation, no property ladder. In the 70s and 80s inflation of all kinds was high the property ladder was alive and well, so older generations think it must be the same today. But since there is low wage inflation today, it is a myth that the property ladder still exists.

frugalista

[apom]

One of my biggest arguments about the housing ladder is precisely that..

and granted I only came up with it after a bit of research..

Mervin King has said the same.. I m sure that on the day in 2003 when Mervin King said that the lack of this inflation paying of mortgages as it did in the 70's/80's that the market would crash.. I am sure that the BBC had someone from some VI blowing smoke up the collective bottoms of its viewers in moments..

Then we all know what happened..

War, needed money, drop interest rates...

and watch as the population grabbed hold of debt, loved it.. and spent the country into boom time..

Shame its hurting a bit now though

The person can be a clever bugger.. but the herd is a moron

[teddyboy]

This is EXACTLY my predicament!

I could "afford" a shyte house in a "shyte" area but I know that that will be the only house that I live in! Im 38 this year and have not got time on my hands to make my way 'UP THE LADDER'. That is why I am trying to buy a so-called 'SECOND-RUNG' house.

When explaining to people that its the only way as I will never have the opportunity to do it the traditional way I am told "I am expecting too much". Bloody good job we dont have guns in the country coz I would have blown a few peoples heads of that say that to me - makes my blood boil!!!

This is why there will be correction. I do believe that the TOP END of the market is sufferring already.

EG.

http://www.rightmove.co.uk/viewdetails-4195507.rsp

started at £1million - reduced to 795,000 (-20.5%) and then further reduced a month later by £20,000 (-2.5%)*

I can start to see a lot of the higher end houses moving downwards and the lower end have just moved up. THERE IS NO LADDER ANYMORE!!!!This can only mean one thing - people just wont bother moving houses and the economy goes TITS UP! (well it already is)

THERE IS GONNA BE A MASSIVE RECESSION IN THE NEXT 5 YEARS - TAKE MY WORD FOR IT!

We blamed the Conservatives for the 80's - well the 'naughties' are credited to Gordon Brown. The biggest fraud since Sven-Borin Erikson!

It is hard to put into words how much social damage this '******wit' has caused. I can see Labour LOSING the next election. 1) Because COE has the financial nounce of NICK LEESON and 2) They can pass on all the 'shit' that THEY CAUSED to another party to be the 'patsy'.

I just wish I had an opportunity to speak to this guy on LIVE TV and I would make him squirm soo bad!

TB

*DATA COURTESY OF 'JON' and his excellent www.nwhouseprices.co.uk

[BillyShears]

Good to see the replies. I see we're all singing from the same hymn book. But I'm curious whether anyone has seen any property bulls claiming that it still exists and describing in detail how it can still work at current prices and wages.[\b]. I've never seen such, just frequent mentions of "the property ladder" with no analysis.

Billy Shears

[apom]

This is EXACTLY my predicament!

We blamed the Conservatives for the 80's - well the 'naughties' are credited to Gordon Brown. The biggest fraud since Sven-Borin Erikson!

It is hard to put into words how much social damage this '******wit' has caused. I can see Labour LOSING the next election. 1) Because COE has the financial nounce of NICK LEESON and 2) They can pass on all the 'shit' that THEY CAUSED to another party to be the 'patsy'.

I just wish I had an opportunity to speak to this guy on LIVE TV and I would make him squirm soo bad!

TB

*DATA COURTESY OF 'JON' and his excellent www.nwhouseprices.co.uk

Many have said that the conservatives lost the last election on purpose..

I don't know if I agree..

but I will say that beyond a shadow of a doubt I would have had I been them..

Everything was still looking great.. on the surface.. and then only if you paid almost no attention to detail...

Bull's suggest that £600,000,000,000 of extra debt in 6 years is no problem..

I could say that the moon was infact a giant aliens marble and that france was a giant squid.. not a country..

Both mad comments, but not dangerous..

We are screwed.. I do not even look at housing as the issue, all housing has ever been is a way to sell credit.. and that is what all of this has been about...

Find me anyone who thinks they have made money out of the housing boom and for 9 out of ten of them I will show you someone who is in more debt then they were pre-boom..

Even if their asset (house) is worth more then they paid for it.. They are not planning to sell the damn thing anyway..

and still they think they have become richer..

Paying for a car that depreciattes 60% in 4 years over a 25 year loan is not richer...

not by any definition that can be made in a sane way..

France is not a giant squid, and £600,000,000,000 of extra debt is a very serious matter indeed

[Columbo]

We are screwed.. I do not even look at housing as the issue, all housing has ever been is a way to sell credit.. and that is what all of this has been about...

I've been reading the views of this site for some time and mostly it's pretty much the same things put in a different order with a few different jokes etc. The news blog is handy and it's nice to read comments related directly.

Now, every once in a while someone says something that rings out with sparkling clarity and makes a genuine new contribution to the debate. The comment above is one of those IMO. Good post.

[FTB1]

I think the 'new property ladder' will just consist of people moving further out to get more space. The £250k flat in London will be sold for a £250k 2 bed house further out which will then be sold for a £250k 3/4 bed place even further out.

[rockdoctor]

In my case, getting a larger property involved removing a ladder.

The ladder involved was the one to the loft - I replaced it with a staircase when I converted the loft. Now I live in a four-bed house and have no plans to move again.

[BillyShears]

I think the 'new property ladder' will just consist of people moving further out to get more space. The £250k flat in London will be sold for a £250k 2 bed house further out which will then be sold for a £250k 3/4 bed place even further out.

Then what happens to larger and more expensive properties further in? What happens if commuting becomes considerably more expensive as the years go by due to rising fuel costs?

Billy Shears

[AteMoose]

the property ladder worked when wages rises were high, you get a morgage its painful for 2 years but when your wages are rising at 20% you can move up the ladder very quickly, without wage inflation/high interest rates the ladder isnt as quick, you need to wait 10->15 year to move up a rung. Unftortunatly people still think the 'housing ladder' exists....

Higher wage inflation means Higher interest rates which means people with properties wont be able to afford massive morgages many will be reposessed causing houseprices to fall (and over shoot), but it also means the housing ladder will become partially fixed.

The catch 22 situation that the bulls are banking on is, high interest rates and wage inflation dont normally happen in a recession....

Edited March 2, 2006 by moosetea

[George Mainwaring]

"The Property Ladder" is a creature of inflation as in: take out a mortgage, let inflation wipe it out in real terms while holding the "inflation proof" property; move, take out new mortage, etc.

In a low inflation economy it doesn't work. The wisdom of my parents generation who did most of their buying and selling in the 1970's was that you shouldn't worry about the size of loan because after a few years the repayments will seem like nothing.

Unfortunately all this has remained as the accepted wisdom even though the economic conditions to make it work don't (currently) exist.

[munimula]

I keep on reading in the press and seeing on television FTBs "getting on the housing ladder".

One thing I note being omitted are details about how these FTBs will actually move up the ladder in the future. I mean something like these FTBs buying shared ownership in a £250K flat in London paying the mortgage for the next X years, and then managing to save enough to go for their own house to raise children and all that. But still we hear "property ladder" this "property ladder" that. Then we read about people in Australia who will, basically, never pay off their FTB homes, presumably at the bottom of the ladder. So how do they move up if they can never really afford their starter home. OK, so salaries tend to rise as people get older, and many may manage to pay off their first home. But even with today sized gaps between the rungs, with the smaller number of working years these people will have by then how do they move on up?

Is it just me being unobservant, or is something being swept under the carpet here?

Billy Shears

I think that falling on the 'Property Snake' will become the new buzz word of the future.

My parents are looking to sell their property - valued at £450K.

To sell and buy another property at the same price will cost them around £20K

They are low earners and don't have this kind of money so in fact the maximum they can pay for the next property will be £430K

They will in fact be forced to move down the property ladder.

Therefore, really the 'property ladder' is dead in an environment without rampant HPI. Stamp duty taxes have been overlooked as they were sneaked in during a period of rampant HPI. Without this there is nothing to absorb these massive moving costs for most people.

[George Mainwaring]

Therefore, really the 'property ladder' is dead in an environment without rampant HPI

Don't confuse HPI as being anything to do with The Property Ladder. In fact HPI reduces the Property Ladder effect (or even as at present negates it entirely).

The Property Ladder works best when HPI in real terms is minimal and wage / monatary inflation is high. ie. when house prices increase at the sameish rate as wage inflation while the mortgage debt is evaporating nicely in real terms.

Edited March 2, 2006 by George Mainwaring

[Biriani]

On the subject of what a difference a low-inflation environment makes, the clearest explanation I have ever seen was in one of Andrew Farlow's papers - Pages 6-8.

The four rows represent mortgage repayments under different inflation and interest rate environments.

Row 1: High inflation, high wage inflation, high interest rates - If you buy a house that consumes 1/3 of your earnings in repayments in the first year, after 25 years it would only be consuming 4% of earnings.

Row 2: High inflation, high wage inflation, low interest rates - House prices increase, but the repayment burden and pattern remains the same.

Row 3: Low inflation, low wage inflation, low interest rates (Today) - House prices increase by the same amount as in scenario 2, and the burden in the first year is the same. But it doesn't tail off over time to the same extent, and over 25 years you end up spending 23% of your earnings on the mortgage instead of 15%.

Row 4: Same low-inflation environment as row 3, but buyers decide that over their lifetimes they still only want to spend 15% of earnings on housing repayments. Instead of bidding up house prices until repayments reach former levels, they just spend less as a % of income on repayments in the first years of the mortgage.

Row 4 is the fantasy scenario, because what happens in real life is that individual buyers can "cheat" by bidding up house prices, since they can afford higher initial repayments. Of course, what happens is that house prices rise until everyone gets the same house they would have otherwise, but at a higher price.

In other words, the housing market in a low-inflation environment is one huge prisoner's dilemma game, where we would all be better off if we could refrain from bidding up prices, but because we can't stop "cheaters", we all end up spending more of our lifetime income on housing.

Please read the original paper for a better explanation. I don't really do justice to what I consider to be the clearest, and in a way the most depressing, explanation of rising house prices I have seen.

[AteMoose]

On the subject of what a difference a low-inflation environment makes, the clearest explanation I have ever seen was in one of Andrew Farlow's papers - Pages 6-8.

The four rows represent mortgage repayments under different inflation and interest rate environments.

Row 1: High inflation, high wage inflation, high interest rates - If you buy a house that consumes 1/3 of your earnings in repayments in the first year, after 25 years it would only be consuming 4% of earnings.

Row 2: High inflation, high wage inflation, low interest rates - House prices increase, but the repayment burden and pattern remains the same.

Row 3: Low inflation, low wage inflation, low interest rates (Today) - House prices increase by the same amount as in scenario 2, and the burden in the first year is the same. But it doesn't tail off over time to the same extent, and over 25 years you end up spending 23% of your earnings on the mortgage instead of 15%.

Row 4: Same low-inflation environment as row 3, but buyers decide that over their lifetimes they still only want to spend 15% of earnings on housing repayments. Instead of bidding up house prices until repayments reach former levels, they just spend less as a % of income on repayments in the first years of the mortgage.

Row 4 is the fantasy scenario, because what happens in real life is that individual buyers can "cheat" by bidding up house prices, since they can afford higher initial repayments. Of course, what happens is that house prices rise until everyone gets the same house they would have otherwise, but at a higher price.

In other words, the housing market in a low-inflation environment is one huge prisoner's dilemma game, where we would all be better off if we could refrain from bidding up prices, but because we can't stop "cheaters", we all end up spending more of our lifetime income on housing.

Please read the original paper for a better explanation. I don't really do justice to what I consider to be the clearest, and in a way the most depressing, explanation of rising house prices I have seen.

we are currently at 3 you need to wait at least 10->15 years to move up the ladder, but if prices are too high and arent rising and debt is continuing to rise within the next 10 to 15 years your bound to have a crash/recession, however there are many people who bought 5 10 years ago who are at 4, and wont feel the pain (unless they MEW or move to a bigger house).

Edited March 2, 2006 by moosetea

[munimula]

we all end up spending more of our lifetime income on housing.

Which is just what we need when our economy is already going to struggle to compete with the majority of the rest of the world - that our earnings get swallowed up on debt servicing.

Our real earnings are going to have to go down to compete, they have already started to do this. Last year real term average earnings in UK went down. And at the same time we are spending huge sums on debt servicing.

Real term average earnings going down but service costs and debt servicing high = less money going into the economy = weak economy.

It's already happening but wage inflation isn't going to come along and rescue us, this just hasn't dawned on most people yet.

[George Mainwaring]

i.e it's unsustainable.

[BillyShears]

In my case, getting a larger property involved removing a ladder.

The ladder involved was the one to the loft - I replaced it with a staircase when I converted the loft. Now I live in a four-bed house and have no plans to move again.

When I lived in London, lastly in an area of small 3 bed terraced properties, there were large numbers of loft conversions going in. It made a lot of sense, as with house prices expanding the distance between the rungs on the ladder, but the price of the extensions wouldn't, I would presume, follow the market. Certainly where I was, I saw enough of these conversions happen to noticably alter the balance between the number of 3 bed and 4 bed properties if all of those were extra bedrooms.

Billy Shears

[CrashBear]

The property ladder only works when you have wage inflation which is as rampant as HPI. No wage inflation, no property ladder. In the 70s and 80s inflation of all kinds was high the property ladder was alive and well, so older generations think it must be the same today. But since there is low wage inflation today, it is a myth that the property ladder still exists.

frugalista

nicely put, I know what to say when my mother tells me how they started in a small pokey house and moved up the ladder etc etc

[BillyShears]

Therefore, really the 'property ladder' is dead in an environment without rampant HPI. Stamp duty taxes have been overlooked as they were sneaked in during a period of rampant HPI. Without this there is nothing to absorb these massive moving costs for most people.

Not enough in my view. I think people should pay capital gains tax if they sell a house for more than they paid for it, over and above inflation. That could restore the market to some semblence of sanity, and help prevent future booms.

Billy Shears

[apom]

"The Property Ladder" is a creature of inflation as in: take out a mortgage, let inflation wipe it out in real terms while holding the "inflation proof" property; move, take out new mortage, etc.

In a low inflation economy it doesn't work. The wisdom of my parents generation who did most of their buying and selling in the 1970's was that you shouldn't worry about the size of loan because after a few years the repayments will seem like nothing.

Unfortunately all this has remained as the accepted wisdom even though the economic conditions to make it work don't (currently) exist.

Mervin king said this in 2003, saying that as soon as people realised that inflation would not pay of mortgages as it had in the past that prices would crash.

There is a good argument to be made that house prices were overrprices in 1997, even though it had dipped below the long term average of 4 times average salary for the average property.

The argument would be that without wage push inflation people would not be able to more up the ladder, reducing the money that could be comited to the first purchase.

In 2003 the head of the Bank Of England and the chair of the Monitary Policy Commision stated that exactly what we are discussing here would cause the market to crash when people realised its effect.

They are now,

Its all madness, huge debt created that is throttling the country..

The banks will make far more from this debt as inflation will not erode the value of future repayments as it has in the past..

Low inflation suite the banks as much as high interest rates in long term loans..

When my Parents finally paid of their mortgage about 5 years ago it was about £50 a month for a four bed that would be worth £250,000 at peak.

That is the effect of inflation.

So, when a bank or mortgage lender is talking up the market they are selling as much credit as they can.. for as long as they can..

Imagine a bank..

9 years ago a loan for £100,000 would be paid of over 25 years..

now £250,000 over the same period, on IO..?? With no inflation, and with Interst rates not appearing to be the worldwide stable low anymore..

The banks have leant to companies, who have built houses to sell to people for money borrowed from the banks..

They must be running round in circles.. shouting for joy...

There is no housing shortage, I hope that no one has even thought that for a while.

There was easy credit, low interest rates a speculative market and the sort of press spin that money couldn't buy..

A generation embraced the equity of their homes, using it to borrow more against their homes to allow them to keep spending..

This allowed the economy to be protected from the lowered spending power of overstretched first time buyers, paid for a war and comitted more and more into the dream of continued house price inflation and huge easy debt..

People bought into this and the good times rolled on..

Property developers, also able to borrow as much as they liked stated to build and build, throwing up as many as they could.. and the good times couldn't last..

Someones footer on here was that they would refuse to be convinced that the economic cycle had been broken just because a VI told them.

Equity in your home has no value unless you sell, or unless you use it to borrow more money using your home as collateral..

Then all you are doing is increasing debt.

Debt is real, house prices are just a matter of opinion..

Debt cannot grow exponentially, at some point its effect stops building the economy and shows its true colours, like a cancer it eats the economy from within..

That and the fact that too many homes have been built to sell...

Oversupply..

Too much debt..

Oh dear..

[Come On Down]

Check out my signature, which sums it all up.

[Guest]

Check out my signature, which sums it all up.

The bottom of the ladder is too close to the floor though?

[quangolicious]

Check out my signature, which sums it all up.

It's almost right, the missing detail is that the first rung should be about 5' off the ground.