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Charles_Darke

Is This Why House Prices Have Stayed High?

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I plotted a graph of house prices * interest rates / earnings:

http://digitalconsumption.com/forum/20

Pink line is what happens if interest rate is 5% (each point increases by 1% until 11%). See my comments in the link for my initial comments/observations. I'm trying to do a localised graph for the area I'm thinking of buying in.

hpc1.gif

post-4845-1149023399.gif

Edited by Charles_Darke

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This seems to be a similar graph to the one posted by Spline earlier on this evening.

For one, it is using (I assume) the B of E base rate.

Mortgage rates have been rising well above the base rate and are continuing to do so.

Also:

People have much more credit card debt and other outgoings now, such as fuel costs, so mortgage rates would not have to rise as high as a percentage, as people have less margin for error, or spare cash to absorb these costs - hence the rising repos and bad debts we are seeing.

Interestingly, house prices fell until 1995 ish, when the rates were actually low and lowering - because of negative sentiment towards debt and therefore houses.

I am trying to put any reasons into the melting pot as this needs debating.

Edited by BubbleTurbo

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Well i'm not a great fan of any statistics that are quoted as "affordability", it's so open to mis-interpretation.

For a start does this graph take into account MIRAS which made a significant impact on peoples mortgage repayments back in the late 80's & early 90's?

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Well i'm not a great fan of any statistics that are quoted as "affordability", it's so open to mis-interpretation.

For a start does this graph take into account MIRAS which made a significant impact on peoples mortgage repayments back in the late 80's & early 90's?

Nope. It's a very simple graph. House price index * Base rates / Earnings index. It should broadly give you a guide to the propotion of earnings that a mortgage represents. While you could easily refine it and make tweaks, I think the trend would broadly be the same.

I think this is why HP have stayed high. I think they will continue to do so while people can continue to pay their mortgage. So I think there are 2 factors that could lead to a HPC: unemployment and interest rate hikes. Of course, both of these are well within the realms of possibility.

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It doesn't fully represent the effect of inflation either (I know this will be factored into the salary portion of the calculation). If wage inflation is low then it means that the hard part of the mortgage at the start where you pay the biggest proportion of interest before making headway into the capital lasts longer. That means that people who want to trade up from FTB homes can’t afford to do so until a lot longer (if at all). So the market reaches a stalemate. If the majority of FTBs are priced out (as they are now) then they won’t be able to sell anyway. You need FTBs coming into the market to sustain it. Interest rate hikes and unemployment will certainly do the trick, but a third option has to be the entire market collapsing under its own weight with nothing to sustain it at the bottom. Probably a combination of all three IMO.

Also, the effect of interest rate hikes will be considerably worse for those that have taken IO mortgages.

Good post by the way.

Edited by SCUMBAG

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Well I had to just join that forum and post my comments though it is moderated and they will take a while to appear.

My first comment about MIRAS is not a "tweak" is is a very significant factor i.e. upto 40% of the mortage payment on the full value of the house back in 1990 (i.e. 2 * £30K @ HIT)

My second comment is equally valid.

The second key factor your graph mis-represents is the impact of inflationary erosion.

A key comment in discussions when purchasing a house is "well it's always difficult to get on the ladder it was so in my day"

The difference between then and now:

Then: Although it was tight in the first couple of years and often extra credit or sacrificies had to be made, inflation (and wage increases) soon eroded that early burden and within 3 years the unaffordable mortage became affordable.

Now: There is very little inflation (and lower wage pressure), hence an unaffordable mortage now stays unaffordable for many years.

For example....

£100 debt at '90-'91 "rates" (10%) erodes to an equivilent of £50 within 7 years.

£100 debt at '03 rates (3.5%) takes approx 20 years to erode to an equivilent of £50.

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I plotted a graph of house prices * interest rates / earnings:

http://digitalconsumption.com/forum/20

Pink line is what happens if interest rate is 5% (each point increases by 1% until 11%). See my comments in the link for my initial comments/observations. I'm trying to do a localised graph for the area I'm thinking of buying in.

what have you used for the earnings ? If it is earnings of FTB's, as other graphs use, then it is skewed by the change in which potential FTBs can afford to buy a house.

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MIRAS RATES:

1990-1 At your highest rate

1991-2 At the basic rate

1992-3 At the basic rate

1993-4 At the basic rate

1994-5 20%

1995-6 15%

1996-7 15%

1997-8 15%

1998-9 10%

1999-2000 10%

2000-2001 None

Now double MIRAS (2 * £30K) was withdrawn on new purchases in August '88 but for those that had bought prior to it it was still applicable to their payments until sometime in the early 90's when double MIRAS on earlier purchases was revoked.

Also:

Currently inflation is low and interest rates are above inflation but are at their lowest for many years. This means that currently the cost of borrowing money is (appears) a great deal cheaper than it has been over the last 20 years. During the late 1970's and early 1980's there were periods where inflation was very high and interest rates were lower than inflation, effectively people were paid to borrow, the costs of mortgages decreased along with the value of their outstanding loans.

Simple graphs about something as complex and subjective as "affordability" can be very misleading

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MIRAS RATES:

1990-1 At your highest rate

1991-2 At the basic rate

1992-3 At the basic rate

1993-4 At the basic rate

1994-5 20%

1995-6 15%

1996-7 15%

1997-8 15%

1998-9 10%

1999-2000 10%

2000-2001 None

Now double MIRAS (2 * £30K) was withdrawn on new purchases in August '88 but for those that had bought prior to it it was still applicable to their payments until sometime in the early 90's when double MIRAS on earlier purchases was revoked.

Also:

Simple graphs about something as complex and subjective as "affordability" can be very misleading

Thanks for comments. I'll look into factoring MIRAS into it. Maybe that will drastically change the graph. BTW, your comments appeared on the other forum. You might want to change your username there.

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'Affordability' accross the whole of the housing market isn't that illuminating - as it will take the many who bought decades ago and have now paid off their mortgages, and thus drag the figures down.

The figure that is much more illuminating too look for 'affordability issues' would be the more stressed sections of the market - in particular FTBs. This is more useful because these are the people who will go to the wall (hence have a bigger impact on stressed selling) and they are also the new money flowing into the market - hence their affordability levels count.

This data shows that affordability levels for 'new borrowers' are significantly more streached than the aggregate affordability figure - in fact returning to 1990 levels.

http://www.nuff.ox.ac.uk/users/murphya/Hou...pt#524,11,Slide 11

Where would this new borrower data come from?

Charles D could you plot in a chart using new borrower data and then factoring interest rate rises? Think that would really start to show where increases in the cost of borrowing would start to bite

Thanks!

JJ

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'Affordability' accross the whole of the housing market isn't that illuminating - as it will take the many who bought decades ago and have now paid off their mortgages, and thus drag the figures down.

The figure that is much more illuminating too look for 'affordability issues' would be the more stressed sections of the market - in particular FTBs. This is more useful because these are the people who will go to the wall (hence have a bigger impact on stressed selling) and they are also the new money flowing into the market - hence their affordability levels count.

This data shows that affordability levels for 'new borrowers' are significantly more streached than the aggregate affordability figure - in fact returning to 1990 levels.

http://www.nuff.ox.ac.uk/users/murphya/Hou...pt#524,11,Slide 11

Where would this new borrower data come from?

Charles D could you plot in a chart using new borrower data and then factoring interest rate rises? Think that would really start to show where increases in the cost of borrowing would start to bite

Thanks!

JJ

Exposure to debt, high house prices in Anglo-Saxon economies is high, so global interest rate environment will remain kind.

Egh? How?

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Egh? How?

Yeah the rest of the power point is nonsense - done by John Muellbauer famous anti house price crash pundit - however look at slide number 11 'mortgage payments as % of income' for the really interesting numbers:

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Your graph is quite interesting but I do think the market is buyed by sentiment as much as anything else. Everybody believes property to be a winner, so even if you cant afford to cover your mortgage, you can sell, remortgage your way out etc. as prices 'always go up'.

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Thanks for comments. I'll look into factoring MIRAS into it. Maybe that will drastically change the graph. BTW, your comments appeared on the other forum. You might want to change your username there.

But of course the biggest flaw in your "affordability" calculation is that it is only relevent to I/O mortgage. Regardless of whether I/O or repayment the capital has to be paid off somehow (through endowment or other savings plan) and is therefore a factor in "affordability".

By completely missing out the attribute of capital repayment your graph is completely skewed against BOE rate in the favour of debt.

For example:

Person borrows: £100,000 @ 25 years @ 4% average earnings for example purposes (£25K)

I/O: £333.33 pcm

Re-payment: £527.84 pcm

Your "affordability" index = 100*4/25 = 16

Person borrows: £100,000 @ 25 years @ 8%

I/O: £666.66 pcm

Re-payment: £771.82 pcm

Your "affordability" index = 100*8/25 = 32

i.e. your index assums a doubling of (un)affordability (i.e. 100%) for a doubling in BOE rate. Yet a repayment mortgage only becomes 46% more (un)affordable (771.82-527.84/527.84*100%).

If your graph took capital repayment, MIRAS, real rate rather than BOE nominal rate and inflationary erosion of debt, I predict you would see a very different story un-folding.

The "wrongness" of the story presented by the graph beggers belief.

However your graph has been invaluable in one thing......Little wonder why Estate agents love using simple "affordability" indicies rather than straight earnings v price measures.

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'Affordability' accross the whole of the housing market isn't that illuminating - as it will take the many who bought decades ago and have now paid off their mortgages, and thus drag the figures down.

Charles D could you plot in a chart using new borrower data and then factoring interest rate rises? Think that would really start to show where increases in the cost of borrowing would start to bite

Well since it takes average HP and average earnings, then by default it measures new borrowers, because each point in time shows the hypothetical IO cost of a mortgage if you bought an average house and had an average wage.

Factoring in repayment instead of IO mortgage would simply be a vertical shift in the graph. Modelling MIRAS would be interesting since it should depress the left part of the graph.

I intend to do a graph for the local area where I'm buying. But affordability for the UK as a whole is interesting since any big crashes will probably need a movement in the broad trend.

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Better example:

Person borrows: £200,000 @ 25 years @ 4%, average earnings for example purposes (£25K)

I/O: £666.67 pcm

Re-payment: £1055.68 pcm

Your "affordability" index = 200*4/25 = 32

Person borrows: £100,000 @ 25 years @ 8%, average earnings for example purposes (£25K)

I/O: £666.67 pcm

Re-payment: £771.82 pcm

Your "affordability" index = 100*8/25 = 32

i.e. houses prices drop by half, interest rates double....your "affordability" remains same......but the repayments for a repayment mortgagee drops by 27%!!!

Factoring in repayment instead of IO mortgage would simply be a vertical shift in the graph.

No it wouldn't!!!!!

I think you need a new hobby from statistical modeling.....you aren't very good at it! B)

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i.e. your index assums a doubling of (un)affordability (i.e. 100%) for a doubling in BOE rate. Yet a repayment mortgage only becomes 46% more (un)affordable (771.82-527.84/527.84*100%).

If your graph took capital repayment, MIRAS, real rate rather than BOE nominal rate and inflationary erosion of debt, I predict you would see a very different story un-folding.

The "wrongness" of the story presented by the graph beggers belief.

However your graph has been invaluable in one thing......Little wonder why Estate agents love using simple "affordability" indicies rather than straight earnings v price measures.

Thanks for your comments. I did this simple graph for my own use so there is no hidden agenda here and I welcome your comments to understand what the graph does and doesn't say.

I'm trying to adjust for MIRAS now and I think this could have a significant effect.

i.e. houses prices drop by half, interest rates double....your "affordability" remains same......but the repayments for a repayment mortgagee drops by 27%!!!

No it wouldn't!!!!!

I think you need a new hobby from statistical modeling.....you aren't very good at it! B)

Oh. I see what you mean now.

Edited by Charles_Darke

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Here's some stats on comparing Now/last time. I posted these a while back

Read the figures and decide for yourself. Note the similarity between the mortgage/income/disposable income ratios in early 1988 and today. It took a hike in rates from 8% to 15% in 1989 and a big reduction in MIRAS relief for joint incomes to kick off the crash last time.

Year 2006

Salary 1 £25k

Salary 2 £17k

(big) Mortgage £160k (Nationwide average house Price)

Long term fixed (5yrs? 10yrs?) at 4.7%

Monthly repayment £900

Combined take home pay £2500pm

Car loan £5000 4yrs 6% = £115pm

Net disposable income before bills £1485pm

In 2006 this is affordable. This is why people are out there buying houses today NOW.

i.e. 115,000 mortgage approvals earlier this year.

If rates hit 8% in 5 years then their mortgage will go up by £300pm.

But you could argue that their wages would rise by more than 3.5% if there were higher rates/inflation/promotions.

(Don't forget, not ALL couples have to be able to buy, in order to sustain the market)

How far do interest rates have to go before you can stop couples like this from buying?

Compare this to the same couple trying to FTB in 1989 (when there really was a crash...)

Year 1989

Salary 1 £12.5k

Salary 2 £8.5k

Mortgage £62k (Nationwide average house Price)

IR at 15%

Monthly repayment £800 before MIRAS

MIRAS (reduced to single income post 1988) £90 therefore Mortgage £710pm

Combined take home pay £1250pm

Mortgage £710pm

Car loan £5000 4yrs 15% =£140pm (cars cost the SAME in £££ in 1989 as they do today. Computers cost MORE)

Net disposable income before bills £400pm

OUCH! Wonder why it crashed like this....?

Here's why. Go back a year.

Year 1988

Salary 1 £11.5k

Salary 2 £7.5k

Mortgage £62k (Nationwide average house Price)

IR at 8%

Monthly repayment £480 before MIRAS

MIRAS (joint mortgage) £180 therefore Mortgage £300pm

Combined take home pay £1150pm

Mortgage £300pm

Car loan £5000 4yrs 8% =£120pm

Net disposable income before bills £730pm

In 1988 this was affordable and explains why people were buying houses in the late 1980s.

Their disposable income is nearly DOUBLE what it would become a year later. Quite a shock to the system inside a year!

Where is a similar interest rate shock (don't forget the MIRAS shock too) for a HPC (one which causes large nominal falls in £££) coming from in 2006? I don't see it happening (at least not this side of the next election)

Edited by Without_a_Paddle

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I plotted a graph of house prices * interest rates / earnings:

http://digitalconsumption.com/forum/20

Pink line is what happens if interest rate is 5% (each point increases by 1% until 11%). See my comments in the link for my initial comments/observations. I'm trying to do a localised graph for the area I'm thinking of buying in.

At 15% interest rates the average mortgage was 35% of take home.

House price trebbling..

I can't even summon the energy...

its happening.. its going to be about 3 years before its half way down.. and.. well..

Just enjoy your lives in the meantime.

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Oh. I see what you mean now.

:D You started a very worthwhile debate....."affordablity" is one of the most mis-used terms by the VI's and this thread has helped identify why something that seems so intuative can be so mis-leading

Where is a similar interest rate shock (don't forget the MIRAS shock too) for a HPC (one which causes large nominal falls in £££) coming from in 2006? I don't see it happening (at least not this side of the next election)

I do agree that we aren't going to see such a interest rate shock and hence unlikely to be a sudden HPC......It really is different this time.......But houses are unaffordable in terms of debt repayment and without inflationary erosion there's little chance of settling it.

It's going to be 15 years down the line before the real repurcussions of this come through when people realise that they owe as much as they did back in '06 yet there house isn't worth a penny more (nominaly).

I firmly believe the market will correct (in real terms).....but it's going to be a la Japan 90's rather than UK '90's.

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:D You started a very worthwhile debate....."affordablity" is one of the most mis-used terms by the VI's and this thread has helped identify why something that seems so intuative can be so mis-leading

I added a model for MIRAS (note only single MIRAS and capped benefit to 20%) strictly for some years this could be more, but I think on a statistical average, these higher rate earners would be too small to have an effect.

http://i3.tinypic.com/1193143.gif

Miras does have an effect, but not big enough to affect the trend. Even double Miras doesn't have a big enough effect to alter the broad trend.

I also looked at repayment versus IO. Your example works only due to the doubling of interest together with the drop in HP. Looking at the data I have from 1990 to today, the repayment vs IO differences remains at 83.33% throughout so IO vs repayment doesn't have a real effect (for this purpose) on the model.

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:D You started a very worthwhile debate....."affordablity" is one of the most mis-used terms by the VI's and this thread has helped identify why something that seems so intuative can be so mis-leading

Please find the misleading bit in my figures a few posts further up. Anyone (and I don't mean you here, BTLOO) who thinks it is 'tougher' today to buy compared to 1989/1990 is misleading themselves.

A typical working couple today can still have loads of cash left over each month (as a % of income) after buying an average FTB house.

Not so in 1989/1990.

Today employment numbers are rising (highest total since 1971 apparently)

Wages are rising at nearly 4% yoy. (average of public/private sectors)

CPI is low.

You can get a 10 yr fixed rate loan at 4.7% to protect yourself from IR rises.

This is why house prices are staying high. (in £££)

In real terms they stopped going up over a year ago.

But what is going to make them crash?

Edited by Without_a_Paddle

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I think this is why HP have stayed high. I think they will continue to do so while people can continue to pay their mortgage. So I think there are 2 factors that could lead to a HPC: unemployment and interest rate hikes. Of course, both of these are well within the realms of possibility.

If your conclusions were true, a property with 20 year lease would be worth the same as a freehold property. Also, what about tax changes such as stamp duty, changes in disposable income (not linked to redundancy), population changes, rate of house building, relaxation of planning laws. The most important one of all for me is sentiment. Why should a person pay out 30%+ of his take home salary to keep a roof over his head?

(edit: comma added)

Edited by dog

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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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