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I'm not an economist but read with interest what they say -- and with some confusion, for after a more or less reasoned argument there is often a sudden jump, a leap of faith, to a conclusion that makes me dizzy! So maybe someone here can help ...

I understand that people when taking on debt consider mostly the monthly repayments and whether they can afford them. Are mortgages affordable on this criterion, and if they are how much more can prices rise with them still being afordable? I was looking at the interest rate data Jason kindly posted. Ok, in Jan '78 rates were 6.5%. In Feb '79 they we 14%. In Oct '79 prices peaked and a 'crash' followed. In March '87 rates dipped below 10% but by July 88 they were rising again till in Oct '89 they peaked at nearly 15%. Slump followed. In Jan '93 rates fell below 6% and have stayed low ever since. So I think that big increases in interest rates fuel crashes - especially because the increases come in response to econmic problems. Until then prices can keep creeping up with earnings. The recent explosove rise is simply an adjustment to low interest rates.

There is one new issue I can see. With prices so high it is very difficult to get the capital together for a deposit. My niece pays over £700pm in rent for her small flat in Reading - she can't buy because of the deposit. So who will keep the market alive? Well I guess volume will decrease and there will be a continuing flow of wealthy people going into the buy-to-let market providing homes for those who would have been first time buyers. Many of the buy-to-let people are those who have acquired their wealth from London prices, sold up, and bought two properties, one for a pension. My wife watches these people on the property porn shows on TV. Socially it looks disatrous, but politically it is presently not a high profile issue at all.

So I think that there will be no crash until there is a steep rise in interest rates and I don't see this happening. I would actually like to see a crash so the young ones can buy a home. But I doubt it. Can anyone give me reason to hope :rolleyes: ??

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  • 1 month later...
I'm not an economist but read with interest what they say -- and with some confusion, for after a more or less reasoned argument there is often a sudden jump, a leap of faith, to a conclusion that makes me dizzy! So maybe someone here can help ...

I understand that people when taking on debt consider mostly the monthly repayments and whether they can afford them. Are mortgages affordable on this criterion, and if they are how much more can prices rise with them still being afordable? I was looking at the interest rate data Jason kindly posted. Ok, in Jan '78 rates were 6.5%. In Feb '79 they we 14%. In Oct '79 prices peaked and a 'crash' followed. In March '87 rates dipped below 10% but by July 88 they were rising again till in Oct '89 they peaked at nearly 15%. Slump followed. In Jan '93 rates fell below 6% and have stayed low ever since. So I think that big increases in interest rates fuel crashes - especially because the increases come in response to econmic problems. Until then prices can keep creeping up with earnings. The recent explosove rise is simply an adjustment to low interest rates.

There is one new issue I can see. With prices so high it is very difficult to get the capital together for a deposit. My niece pays over £700pm in rent for her small flat in Reading - she can't buy because of the deposit. So who will keep the market alive? Well I guess volume will decrease and there will be a continuing flow of wealthy people going into the buy-to-let market providing homes for those who would have been first time buyers. Many of the buy-to-let people are those who have acquired their wealth from London prices, sold up, and bought two properties, one for a pension. My wife watches these people on the property porn shows on TV. Socially it looks disatrous, but politically it is presently not a high profile issue at all.

So I think that there will be no crash until there is a steep rise in interest rates and I don't see this happening. I would actually like to see a crash so the young ones can buy a home. But I doubt it. Can anyone give me reason to hope :rolleyes: ??

Dear rolleyes

The future of the UK housing market, based on Technical Analysis of the UK Short Sterling Futures Contract

Please view this graph GRAPH OF INTEREST RATES

http://www.tfc-charts.w2d.com/chart/SS/M

GRAPH OF INTEREST RATES

You may be interested in my theory about the future of UK house prices, based on Technical Analysis of this long term chart of interest rates. It is the UK Short Sterling Contract, monthly, over many years.

Technical Analysis is completely different from the more commonly encountered Fundamental Analysis. One of the advantages of charts is that they cut out all market opinion, which varies from week to week, and reveals actual price action.

For example, the tabloid press regularly sell their newspapers on the future of UK house prices, but have different opinions every week, even in the same newspapers!

Technical Analysis is by no means perfect, but does reveal probable outcomes based on Trends, although it is often difficult to be sure of the time scale.

Amongst other things, believers in Technical Analysis look for Market Trends, and areas of Support and Resistance.

General Interpretation of the above chart

Most Technical Analysts looking at the above chart would agree on two main points:

1. There is a currently a general long term downtrend, consistent with general increasing worldwide interest rates. ( Bonds go down as Interest Rates rise).

2. There is, on this particular chart, an area of obvious Resistance is approximately 93.50, the level in January 2000.

Detailed Interpretation of the above chart

1. As you can see the current figure in the above chart is approximately 94.1.

2. This means that the City expects UK interest rates to be 5.9% (100 - 94.1 = 5.9%) in a few months time. (There is a built in "carry cost" for a futures contract, so there are some minor inaccuracies here, but so small that they can be discounted for this purpose).

3. There is an area of Major Technical Resistance on this chart at approximately 93.50, the level in January 2000. If you look on the chart, interest rates were rising at this point, but Technical Resistance at this point prevented them rising any further.

4. What actually happened, of course, was the Stock Market Crash of the Dot.coms stocks, which spread to all of the other world stock markets! After this Stock Market Crash, world Central Banks rapidly lowered interest rates to prevent a recession.

5. This led in the UK, the US, and other countries, to a rise in consumer borrowing on housing, and a massive rise in residential housing values. Many people believe that this is a speculative bubble.

6. The current downtrend in the above chart can reasonably be expected to continue until the next Major Resistance Level, which is 93.50 .

7. This implies interest rates around 6.5%, up from our present 5.5%, within 18 months.

Results of interest rates of 6.5% by 2008

1. Should interest rates actually rise to 6.5% this would, I believe, cause considerable cash flow problems amongst amateur "buy to let" speculators, on smaller houses and flats up to £250,000.

2. Most of these amateur speculators have bought small houses and flats on a typical 85 -90% buy to let mortgage, which is very frequently discounted in the first 2 years.

3. These speculators are relying on rental income to repay their large mortgages!

4. The problem is that the rents received (the yield) are now in many cases already lower than the cost of the mortgage.

5. Speculators who borrowed before early 2005 would have been in a low interest rate environment, with interest rates then 1.00% lower than they are now. Interest rates were then 4.5%, with buy to let mortgages at 6.5%, discounted for the first two years.

6. If my theory is correct, interest rates in 2008 will be 6.5%, and typical buy to let speculators will, be paying 8.5%, dramatically increased from their earlier 6.5%, discounted to 5.5% .

For smaller houses and flats in the UK, up to £250,000, the buy to let buyers now constitute 80% of the buyers, since traditional first time buyers have been priced out of the market

1. For smaller houses and flats in the UK, buy to let speculators are actually 80% of the market participants, since normal first time buyers are completely priced out of the market, even with large mortgage multiples of income.

2. My personal feeling is that by 2008, these amateur speculators will be forced sellers, since their sums will simply not work. This is already happening in isolated areas of the UK.

3. In other words, their rental yields of 5% (and falling) will not match their mortgage interest rates of 8.5% (and rising).

4. Buy to let speculators will effectively be paying a monthly premium to speculate on increasing capital value of residential housing in the UK.

5. This is effectively the same as buying monthly call options on the UK housing market.

6. Since markets are always driven at the margins, a forced selling pressure of small houses and flats by the main buyers of these properties may lead to a rapid decline in general capital values in the UK.

The implications of forced selling of smaller houses and flats up to £250,00 in the UK

The implications of this are massive!

1. The UK housing market is currently valued at £3.8 Trillion, with mortgage debt at £1.3 Trillion.

2. As in all markets, market sentiment could change very rapidly, with perceived house values dramatically falling within weeks.

3. This could lead to a general panic in the whole UK housing market, as in any other financial market, particularly where that market is geared, in that 90% of the cost of the house is borrowed as a mortgage.

4. The situation is potentially very similar to the 1929 Stock Market Crash in Wall Street, where amateurs were speculating in Stocks on margin, using borrowed money.

5. In the 1929 Crash, market sentiment changed within a few days, a many amateurs were wiped out, as capital values plummeted.

6. The potential devastation in the UK from a housing crash in much greater than the 1929 Crash, because many more people are involved (75% of the UK population) and the level of borrowing is £1.3 Trillion, higher than the UK GDP.

7. I am of the Deflationary view, although there are good reasons to support both the Inflationary and the Deflationary scenarios.

8. The reason for this is that in the Japanese Housing Crash from 1990 until 2006, flooding the market with liquidity by lowering interest rates made no difference! Japan was awash with money to borrow, and still is, but this did not prevented residential housing values from falling by 60%.

9. The devastation in the UK could be much greater, and faster, than the Japanese experience, because UK house owners, unlike the Japanese general population, have very little savings.

10. Apparently half the population (52%) could survive financially for just 17 days, should they suffer an unexpected loss of income, according to research by Combined Insurance.

I would be interested to hear other people’s comments about this theory.

Housing Bear

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I agree that high house prices are here to stay.

It's based on simple economic fundamentals that demand has been rising greater than supply. Why House Prices will not fall

I can only see a change if demographic factors started to change, but at the moment that is not happening.

What is happening is that people are finding ways to borrow larger amounts.

I got a self certification mortgage 7 times salary plus huge deposit from parents. People may think I was crazy to borrow so much, but monthly payments are cheaper than renting. - Forget pensions, savings e.t.c just buy a house. You won't be able to afford £1,000 a month rent when you retire.

In addition to self certification mortgages, people are getting interest only mortgages, and 50 year mortgages.

50 year mortgages are an excellent idea; they are becoming popular in Japan now.

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I got a self certification mortgage 7 times salary plus huge deposit from parents. People may think I was crazy to borrow so much, but monthly payments are cheaper than renting. - Forget pensions, savings e.t.c just buy a house. You won't be able to afford £1,000 a month rent when you retire.

In addition to self certification mortgages, people are getting interest only mortgages, and 50 year mortgages.

50 year mortgages are an excellent idea; they are becoming popular in Japan now.

Now that is interesting. If it is still cheaper than renting then the Landlord can still make a profit and there is no bubble. The 50 year mortgage is interesting because it is unlikely ever to be paid off so you have to pay "rent" in retirement. But not so much! There is no bubble, and if there is a crash it will be for other reasons.

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I'm not an economist but

<snip>

So I think that there will be no crash until there is a steep rise in interest rates and I don't see this happening. I would actually like to see a crash so the young ones can buy a home. But I doubt it. Can anyone give me reason to hope :rolleyes: ??

10th July 2003 Rates were 3.5%

10th May 2007 Rates increased to 5.5%

That's a 57% INCREASE that looks pretty steep to me!!!!!

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10th July 2003 Rates were 3.5%

10th May 2007 Rates increased to 5.5%

That's a 57% INCREASE that looks pretty steep to me!!!!!

January 1978 rates 6.5% May 1988 rates 7.4%

February 1979 rates 14.0% October 1989 rates 14.9%

57% in 4 years is still small compared to 100% in 1 year. And the BoE is certainly not aiming to crash

the market, just squeeze it a little which it is probably managing to do.

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IMHO, by my calculations 7->8% interest rate will be where problems will start, houses are affordable, when IRs rise past 8% the mortgage on an average house is more than the average salary. This is when couples wont be able to afford to pay the mortgage and live in an average house. However its all based on expectations, if the average couple expects to live in an average house 8% is the limit, if an average couple expect to live in an average flat 12->15% is the limit of affordability

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  • 2 weeks later...
I agree that high house prices are here to stay.

It's based on simple economic fundamentals that demand has been rising greater than supply. Why House Prices will not fall

I can only see a change if demographic factors started to change, but at the moment that is not happening.

What is happening is that people are finding ways to borrow larger amounts.

I got a self certification mortgage 7 times salary plus huge deposit from parents. People may think I was crazy to borrow so much, but monthly payments are cheaper than renting. - Forget pensions, savings e.t.c just buy a house. You won't be able to afford £1,000 a month rent when you retire.

In addition to self certification mortgages, people are getting interest only mortgages, and 50 year mortgages.

50 year mortgages are an excellent idea; they are becoming popular in Japan now.

Buddy, devon has seen huge falls in some new build flats.

A mates sister just bought a £160,000 executive flat in Cardif, from a guy who spent £250,000 on it about three years ago...

France, spain, america...

the long term housing trends are also showing affordability back to 2.5 times salary within 15 years.

(from the USA federal reserve report)

the birth rate will mean that there are far less FTB's in 20 years then there are now...

Oh, and the bloke who created the boom did so to create a consumer boom based on debt borrowed against housing.

You have been played like a cheap fiddle I am afraid, and I would feel sorry for you but for one thing.

You commited fraud, you went into a bank and lied

(I presume that is what you meant about "Self Cert" I am self employed, I would have to take that sort of mortgage)

(If you did not lie then please dis-regard)

Fraud is a crime, lying about your ability to pay for a loan that you take out is fraud.

and if you don't think that police are interested consider this.

You should be in prison. :)

and mortgage fraud is by far the largest financial crime to have ever happened, to the extent that if you added together all of the other frauds from throughout history it would not even come close.

"Officer, would you please investigate self certified mortgage fraud?"

"Nope"

"Are you aware of it?"

"Yes"

"Do you own a house"

"Yes"

"Then I am placing you under citizens arrest for being complicit to a fraud that you have profited from"

You are one bored and angry person getting organised away from having your world turned upside down

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January 1978 rates 6.5% May 1988 rates 7.4%

February 1979 rates 14.0% October 1989 rates 14.9%

57% in 4 years is still small compared to 100% in 1 year. And the BoE is certainly not aiming to crash

the market, just squeeze it a little which it is probably managing to do.

they are not aiming to protect the market either.

In 2001 Mervyn King said that house prices would plunge when people realised that inflation would not pay of their mortgages like they did before.

Never in history have we entered a time when inflation did not pay of mortages faster then the repayment schemes.

never in history have we been in so much debt, and bare in mind we owe twice as much as in any previous peak.

massive debt, fast rising IR's low wage inflation =VERY BAD

Moderate debt, high IR's and massive wage inflation = ONLY BAD

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