The Terrible Truth About House Prices

[Guest muttley]

The Terrible Truth About House Prices

In summary, only someone who uses their skull to store rocks could believe that house prices can keep on rising faster than wages indefinitely. Eventually, the housing bandwagon will grind to a halt and will go into reverse.

Short and sweet.

[Rachel]

succinct and to the point, it's so obvious but people seem to believe the hype

[binkybonka]

But soon enough back into first gear and whhhhoooosssshhhhh, off again.

Cycles and all that.

[Guest Bart of Darkness]

But soon enough back into first gear and whhhhoooosssshhhhh, off again.

Cycles and all that.

You must be a relatively young EA to think we've even started on the "down" part of the cycle yet.

[HPCheese]

It's easy to see from the historic rates why people have been able to borrow such vast sums of money to buy houses:

http://www.bankofengland.co.uk/statistics/rates/baserate.pdf

But what happens if (when?) UK borrowing rates rise significantly?

This is what I think could happen and the timescale in which I can imagine it happening. Obviously this is all speculation on what *might* happen.

1. RATES GO UP - They will need to rise enough to have a significant impact on borrowers' monthly repayments.

[ +0yr 0m ]

2. BUYERS CAN'T BORROW AS MUCH - This will largely affect first time buyers, but will also affect, to a lesser extent, those looking to trade up.

[ +0yr 0m ]

3. SELLERS HOLD-OUT FOR THEIR ORIGINAL 'LOW RATE' ASKING PRICES - I can see sellers being extremely stubborn about accepting the new high rate paradigm and insisting on low rate prices for some time.

[ +0yr 0m ]

4. SELLERS EVENTUALLY REDUCE PRICE BY ENOUGH TO SELL

[ +1yr 0m ]

5. STATISTICS SHOW FALLING ASKING PRICES, SELLING PRICES

[ +1yr 3m ]

6. MEDIA AND AGENTS INFORM WOULD-BE SELLERS WHO EVENTUALLY REDUCE THEIR INITIAL EXPECTATIONS

[ +1yr 6m ]

7. PRICES ARE EVENTUALLY SHOWN TO DROP TO A LEVEL APPROPRIATE FOR THE NEW HIGHER RATES

[ At least 3yr ]

UNKNOWNS

1. Will there be a large number of forced sellers? If so this will accelerate dropping prices.

2. Will higher rates see-off the speculators? If so, will the exodus of new and existing speculators from the market create massive oversupply and a cascade in sentiment that pushes the market into a nosedive?

3. Can the market operate without many first time buyers? If so can landlords and existing owners absorb the higher rates?

4. How far will rates have to rise to have a dramatic effect on speculators and homeowners looking to move up, who generally need to borrow smaller sums of money?

------------------------------------------

Basically I suspect affordability (i.e. borrowing a sensible wage multiple at a historically 'average' borrowing rate) is still years away.

[warwickbloke]

The Terrible Truth About House Prices

Short and sweet.

There is a post ongoing wanting to arrange demonstrations on sunny sunday afternoons in the park to force people to ask less for their properties.

If they were just to read this common sense link it might save them a lot of effort.

Aaah, remember the 'ban the bomb' demonstrations, they worked well didn't they.

[warwickbloke]

Basically I suspect affordability (i.e. borrowing a sensible wage multiple at a historically 'average' borrowing rate) is still years away.

Higher interest rates will not affect too much on mortgages due to fixed rate deals, but credit card borrowing will hugely affect many, but again this is offset by the softer bankruptcy rulings, introduction of IVAs & other means currently being placed to allow debtors with cotton wool for brains to weasel out of most of their debts, again at expense of responsible spenders.

Get a few major strikes going over wage rises, force a good chunk of inflation & debts will be valueless in a couple of years, it worked in the 70s.

But historically I guess that housing affordability is about 12-15 years away as happened in early 70s, mid 80s, late 90s.

In the interim much profit will be made from the misery of many.

IMHO.

[Immigrant]

PRICES ARE EVENTUALLY SHOWN TO DROP TO A LEVEL APPROPRIATE FOR THE NEW HIGHER RATES

...

Basically I suspect affordability (i.e. borrowing a sensible wage multiple at a historically 'average' borrowing rate) is still years away.

I certainly wouldn't disagree with your 7 step scenario of what would happen if interest rates continue to rise. But what is that "appropriate level" to which they would drop? Depends on a number of things, all those you mentioned as well as inflation and wage inflation, and supply and demand which varies according to location. There wouldn't necessarily be a big nominal drop.

It's pretty plain to me that the present the ratio of average house price to average earnings has just about reached the limit but that doesn't mean prices will go back to anywhere close to the 3.5 historical average. Like it or not, the market has changed with all the BTL investors.

The MF report would certainly put off FTBs, but here's little in there to panic investors who as they love to point out are in it for the long term.

[Guest muttley]

It's easy to see from the historic rates why people have been able to borrow such vast sums of money to buy houses:

http://www.bankofengland.co.uk/statistics/rates/baserate.pdf

But what happens if (when?) UK borrowing rates rise significantly?

This is what I think could happen and the timescale in which I can imagine it happening. Obviously this is all speculation on what *might* happen.

1. RATES GO UP - They will need to rise enough to have a significant impact on borrowers' monthly repayments.

[ +0yr 0m ]

2. BUYERS CAN'T BORROW AS MUCH - This will largely affect first time buyers, but will also affect, to a lesser extent, those looking to trade up.

[ +0yr 0m ]

3. SELLERS HOLD-OUT FOR THEIR ORIGINAL 'LOW RATE' ASKING PRICES - I can see sellers being extremely stubborn about accepting the new high rate paradigm and insisting on low rate prices for some time.

[ +0yr 0m ]

4. SELLERS EVENTUALLY REDUCE PRICE BY ENOUGH TO SELL

[ +1yr 0m ]

5. STATISTICS SHOW FALLING ASKING PRICES, SELLING PRICES

[ +1yr 3m ]

6. MEDIA AND AGENTS INFORM WOULD-BE SELLERS WHO EVENTUALLY REDUCE THEIR INITIAL EXPECTATIONS

[ +1yr 6m ]

7. PRICES ARE EVENTUALLY SHOWN TO DROP TO A LEVEL APPROPRIATE FOR THE NEW HIGHER RATES

[ At least 3yr ]

UNKNOWNS

1. Will there be a large number of forced sellers? If so this will accelerate dropping prices.

2. Will higher rates see-off the speculators? If so, will the exodus of new and existing speculators from the market create massive oversupply and a cascade in sentiment that pushes the market into a nosedive?

3. Can the market operate without many first time buyers? If so can landlords and existing owners absorb the higher rates?

4. How far will rates have to rise to have a dramatic effect on speculators and homeowners looking to move up, who generally need to borrow smaller sums of money?

------------------------------------------

Basically I suspect affordability (i.e. borrowing a sensible wage multiple at a historically 'average' borrowing rate) is still years away.

Very well put, HPCheese. I think you've summed up the market very well.

I agree the bottom of the market may be 3 years away, but once the market turns you get BUYERS HOLD OUT FOR LOWER PRICES. All I need then is ONE forced seller and I can buy at BMV.

This is what I did in 1992, though I didn't engineer it.

[FollowTheBear]

Like it or not, the market has changed with all the BTL investors.

Why? Are there more people renting today than 20 years ago?

[Immigrant]

Why? Are there more people renting today than 20 years ago?

Renting from private landlords? I would think there most certainly are, but I have no figures to prove this.

Do you think BTL has not had an effect?