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"not As Bad As The Late Eighties"?

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I met someone this week who had bought a house recently, but when we were discussing house prices he said that even though they were a bit high, things "aren't as bad as they were in the late eighties".

What would you say to someone who said this?

:huh:

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I met someone this week who had bought a house recently, but when we were discussing house prices he said that even though they were a bit high, things "aren't as bad as they were in the late eighties".

What would you say to someone who said this?

:huh:

As far as i am aware houses are much more expensive now in relation to the late eighties and the earning multiples are the highest seen, ever?

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Houses were far more 'unaffordable' in 1989/1990.

Interest Rates shot up from 8% in 1988 to 15% in 1989/1990.

Today they are 4.5%.

Typical wage in 1990 £11k. 3 bed semi £85K.

25yr repayment loan @ 15% IR = £1000pm. More than wages BEFORE tax/deductions.

Today, salary £23k. Same house £150k. 4.5% IR. Repayments around £900pm. ie. several hundred pounds LESS than wages AFTER tax/deductions.

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Houses were far more 'unaffordable' in 1989/1990.

Interest Rates shot up from 8% in 1988 to 15% in 1989/1990.

Today they are 4.5%.

Typical wage in 1990 £11k. 3 bed semi £85K.

25yr repayment loan @ 15% IR = £1000pm. More than wages BEFORE tax/deductions.

Today, salary £23k. Same house £150k. 4.5% IR. Repayments around £900pm. ie. several hundred pounds LESS than wages AFTER tax/deductions.

its because ir's are low that make the situation worse.if people are maxed out on low ir's,what are they going to do when they rise.there will be no room for manoeuvre.

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Houses were far more 'unaffordable' in 1989/1990.

Interest Rates shot up from 8% in 1988 to 15% in 1989/1990.

Today they are 4.5%.

Typical wage in 1990 £11k. 3 bed semi £85K.

25yr repayment loan @ 15% IR = £1000pm. More than wages BEFORE tax/deductions.

Today, salary £23k. Same house £150k. 4.5% IR. Repayments around £900pm. ie. several hundred pounds LESS than wages AFTER tax/deductions.

If that's true, then why won't a bank today lend someone earning 23k 150K to buy a house?

150k in most areas of the country today is entry-level property. 85k in 1990 was mid-range property.

I lived in the north in 1990, and prices were not anywhere near as high as 85K. Top-end property, like my parents' house, cost at most 100k in 1990. My dad earned about 35-40k at the time. In 1998 there were still houses available in my parents' city for 16-20k. They were not higher than that in 1990.

Someone in a northern city in 1990 earning 11k would still have been able to afford to buy something, even if it wasn't that nice. Someone earning 23k in most of the country today can't buy anything.

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its because ir's are low that make the situation worse.if people are maxed out on low ir's,what are they going to do when they rise.there will be no room for manoeuvre.

I find the idea that houses are 'affordable' because someone else is willing to lend you a fortune that you will struggle to pay back madness. Why are people so relaxed about borrowing huge sums of money is a nonsense, it would make far more sense to base the value of the house on the actual value rather than what you can borrow. This is what seems to have led to this mess in the first place.

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Houses were far more 'unaffordable' in 1989/1990.

Interest Rates shot up from 8% in 1988 to 15% in 1989/1990.

Today they are 4.5%.

Typical wage in 1990 £11k. 3 bed semi £85K.

25yr repayment loan @ 15% IR = £1000pm. More than wages BEFORE tax/deductions.

Today, salary £23k. Same house £150k. 4.5% IR. Repayments around £900pm. ie. several hundred pounds LESS than wages AFTER tax/deductions.

Affordability is such a bogus concept. Spin at its worse.

Its an attempt to dissasociate what you can afford every week from what your paying back in the long run.

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thats what i was saying. 85k in 1990 was a huge house.

in 1999 i saw a 5 bed bard with a couple of acres of land sell for £100k and that was eye watering at the time, when here in the north a 3 bed semi in 1990 was not more than 35k-50k.

wages were around 10k-14k for clever little BAe workers.

they were living like kings on the good old 3.5x rule.

now the new BAe workers are on 24k+ and local 3 bed houses are nuts at 180ks.

it cant be done, thats why no ones doing it other than trade in/sales or blind btlrs.

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£85k ?? i think the maths is wrong.

more like 45k

No it's not.

The house cost 85k in 1990, falling to £50k in 1995 and is now worth around £150k.

North Glos.

If it was £45k in 1990 (different part of the country?) then it probably fell to £28k in the crash and is now worth £85k to £90k.

Edited by Without_a_Paddle

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wages have doubled since the 1988 peak of the last boom and HPs have tripled.....

However now you can lock into 5.5% aprs for the long term ..in the 80s you had a roller coaster ride with the IRs.........but you did have MIRAS which knocked about 25% off the interst component of the mortgage payment....so when they say IR's were 15% they were effectively 11.25%...and the very high rates only lasted a short time.......eg several months....

so even at the peak of the 1988 boom with 15% (11.25%) rates coming along just after it a 100% interest only mortgage ( on a 3 times multiple) would have taken up 33.7% of the borrower's pay.

Now the corresponding figure would be 24.7% allowing for the higher HPs and lower IRs........

It must be emphasised that on the occasions in the past 1975, 1981 and 1990 when IRs shot up to 15% it was only a temporary blip and they were soon back down 10%......and in the 1970s when the income tax rate was higher MIRAS was 33%

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wages have doubled since the 1988 peak of the last boom and HPs have tripled.....

However now you can lock into 5.5% aprs for the long term ..in the 80s you had a roller coaster ride with the IRs.........but you did have MIRAS which knocked about 25% off the interst component of the mortgage payment....so when they say IR's were 15% they were effectively 11.25%...and the very high rates only lasted a short time.......eg several months....

so even at the peak of the 1988 boom with 15% (11.25%) rates coming along just after it a 100% interest only mortgage ( on a 3 times multiple) would have taken up 33.7% of the borrower's pay.

Now the corresponding figure would be 24.7% allowing for the higher HPs and lower IRs........

It must be emphasised that on the occasions in the past 1975, 1981 and 1990 when IRs shot up to 15% it was only a temporary blip and they were soon back down 10%......and in the 1970s when the income tax rate was higher MIRAS was 33%

But thats an intrest only morgage! what about a replayment morgage? Things arent as bad today if you dont pay the debt off, if you paying things off, things are alot worse. Its impossible to pay off a house now, the only option is IO.....

Edited by moosetea

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No it's not.

The house cost 85k in 1990, falling to £50k in 1995 and is now worth around £150k.

North Glos.

do you have a link or some info on this ?

a friends cousin bought a 3 bed home in bath for 55k in 1997 ??

while on 14k.

im thinking somerset is probably more expensive that glos.

are you really sure this 85k house was an 'average' house ?

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its because ir's are low that make the situation worse.if people are maxed out on low ir's,what are they going to do when they rise.there will be no room for manoeuvre.

Double digit IR's were an anomaly and not historically representative. Throughout most of the 20th century, IR's were below 5% as they are today. What is wrong with basing affordability on todays IR's that are more representative of what is historically normal rather than on 3.5x multiples that were only useful in the context of historically abnormal high interest rates.

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it doesnt work like that.

earn 11k = 45k house IRs 15% 3.5x income ? pcm @ £220 out of take home pay of £750 = 1/3

earn 24k = 180k house IRs 5% 7x income ? pcm @ £750 out take home pay of £1500 = 1/2

also why is the 10% cash deposit now impossible for most people.

most people dont even have £3k in the bank - not even £18k.

this shows how incompatable the prices are to earnings and the true costs of living.

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a 100% interest only mortgage is the best comparison with the past and when comparing buying to renting.

I agree, but were not comparing buying to renting, were comparing buying to buying, the sensible option is to repay. People stop repaying when houseprices go up to much or economic conditions worsen, my parents moved to a IO morgage when things go tight....

Your supposed to additionally save at a repayment rate when you take out an IO morgage to pay off the debt, so the sensible thing would be to compare replayment against replayment, as thats the total cost...

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im thinking somerset is probably more expensive that glos.

are you really sure this 85k house was an 'average' house ?

You're thinking right. Bath is much more expensive than Gloucester - and always has been.

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a 100% interest only mortgage is the best comparison with the past and when comparing buying to renting.

Well, maybe it is, but it is far from perfect... a 100% mortgage on an expensive property with low interest rates will be harder to pay off than one with a 100% mortgage on a cheap property with high interest rates. Of course, nobody nowadays thinks about the actual amount you have to repay, because it's too scary :)

Even if the amount you pay may be the same, if you make overpayments on both properties they will make a much larger dent in the total repaid on the cheap property.

The factors that affect "affordability" are obviously pay, property price, interest rates and "external factors" (such as energy, insurance, "cost of living" etc). Perhaps we should devise a method of comparison that takes into account what the interest rates are likely to be in the future (some regression to mean type of thing?), the inflation, wages etc so that we can compare how "expensive" a property bought today will be over its lifetime, compared to how expensive a similar property would have been in 1990 :)

Of course, we can't use money for the "expensiveness value", but it would have to be something external which people would generally compare (big burger index? Number of pints of beer left after paying mortgage index?)

Maybe if we had a nice little curve that described expensiveness over time, we could integrate over 25 years :) (It's likely to become some form of differential equation as mortgage payments would go down etc (assuming non I/O mortgage, I guess)

Does the above make any sense? In essence, I'm trying to get some feel for how much a property would be likely to "cost" (but like I said, not in $) over it's lifetime.

Edit: Now I saw that I went off on a total tangent to the post I quoted, I thought you were comparing buying to buying. My ramblings above still hold some value though, I think

Edited by Henrik

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the saame house is now supposed to be 'worth' 300k and he is only now on around 30k.

there would be no way he could buy that house today from that very same job.

(he is still in the same job/employer too.)

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The house cost 85k in 1990, falling to £50k in 1995 and is now worth around £150k.

North Glos.

30% nominal drop from 1990 to nadir -pull the other one. Halifax 17%, N'Wide 13%.

Ave semi in SEast is now £250k

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Average Prices in 1990.....

Q1 1990 North 203.5 25.2 51,336

Q1 1990 Yorks&Humb 233.0 14.9 53,796

Q1 1990 N.West 221.3 23.4 56,610

Q1 1990 E.Mids 233.4 -1.2 61,013

Q1 1990 W.Mids 234.5 -2.0 66,175

Q1 1990 E.Ang 227.6 -20.0 68,460

Q1 1990 Wales 219.6 8.0 56,839

Q1 1990 S.West 223.3 -12.0 73,845

Q1 1990 S.East 224.5 -13.0 91,143

Q1 1990 Gr.Lon 239.7 -8.1 95,450

Q1 1990 N.Ire 128.5 -1.1 33,048

Q1 1990 Scot 174.2 16.7 50,401

Q1 1990 U.K. 220.7 1.3 68,188

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Guest Charlie The Tramp

In 1990 my house increased in price by 30% to its 1988 level and I still could afford to buy it, even when IRs hit 15%. Come 2003 I would foolishly have overstretched myself to buy it at 4.5%.

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im thinking somerset is probably more expensive that glos.

Not anymore!

Check out Halifax figures for Dec'04 - Dec'05

Somerset

Ave Price Dec'04: 197,896

Ave Price Dec'05: 178,852

Change: -10%

Gloucestershire

Ave Price Dec'04: 195,406

Ave Price Dec'05: 198,280

Change: 1%

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