What Would Homes Cost If Lax Lending Stopped?

[Timm]

The question "How much would houses be worth if it were not for the effects of credit" is a thorny one with many variables. However what if we look at the cost of houses that would not be acceptable security to a residential mortgage lender? Such as holiday homes? Like this:

http://www.rightmove.co.uk/viewdetails-934...=5&tr_t=buy

Of course, bearing in mind the purchase of a holiday home is often financed by MEW on the main residence, and this is an asking price, we can assume from this that a two bedroom chalet in Cornwall would cost, what? Say £50k? The rest is created by the effects of credit.

Hey, shoot me down.

Edited October 1, 2007 by Timm

[House Or Home]

The question "How much would houses be worth if it were not for the effects of credit" is a thorny one with many variables. However what if we look at the cost of houses that would not be acceptable security to a residential mortgage lender? Such as holiday homes? Like this:

http://www.rightmove.co.uk/viewdetails-934...=5&tr_t=buy

Of course, bearing in mind the purchase of a holiday home is often financed by MEW on the main residence, and this is an asking price, we can assume from this that a two bedroom chalet in Cornwall would cost, what? Say £50k? The rest is created by the effects of credit.

Hey, shoot me down.

If credit was banned, the whole financial system would collapse. It will never happen.

Do you mean credit limited, and to what degree?

[Timm]

If credit was banned, the whole financial system would collapse. It will never happen.

Do you mean credit limited, and to what degree?

A rhetorical question it was, as all credit will benefit the system to some degree, while also driving up prices. As mentioned in my post, the holiday home above will still be affected by credit, but as it would be unacceptable to the majority of residential mortgage provider, goes some way to indicating what homes would sell for if mortgages were at levels that did little to encourage speculative bubbles. It's a flawed idea, perhaps, but helps to underline the assett inflating effect of cheap and easy debt.

[Jonnybegood]

The simple answer is whatever someone was willing to pay out of their hard earned cash and depending on the area i.e Levels of pay.

Even though it sounds a good idea it would never happen because for homes to be built in the first place the developers need credit its gone on for years and I see no problem with it.

Its only when the lenders step outside their normal day to day lending which leads to bubble markets like we are currently seeing, the value of money decreases and with it prices rocket.

[Injin]

The only possible reason to lend someone your own money is either because you have personal ties to them (family etc) or you want more money back then when you started.

Given that homes appreciate slowly in real terms compared to almost anything else and it's a big bet for a lot of nothing compared to almost anything else you could stick your cash into, creditless house prices would be damn close to cost of materials. Think pre 1960's prices, adjusted for monetary inlfation alone.

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I am assuming you mean a system where you having £50,000 to buy a house means that the person who gives it loses the use of that £50k, rather than our insane and dangerous credit ponzi scheme where £50k pops into existence and then gets "repaid" over time.

[huw]

Prices would be unlikely to fall much below build costs in my opinion, meaning that most would-be-buyers would be excluded (build costs being materials + labour + basic agricultural or amenity value of the land + cost to provide infrastructure). A small number of wealthy people would end up owning multiple properties, and everybody else would end up renting.

Plus ca change...

[Dr Doom]

Given that 98% of the money circulating is credit,

houses would probably be worth about 98% less if credit was taken away.

[Nationalist]

Back before "credit" only the very rich owned property and they mainly inherited it (free of tax of course.) Plebs rented for their entire lives and generally lived hand-to-mouth. Victorian prosperity was based on grinding the working classes into the ground.

[234SALE]

As an example

Dubai 4 years ago a 2 bed town house villa could be purchased at 50,000 pounds their was no finance available...

Now with 90% financing from many lenders the same property sells at 250,000 pounds

This is an example of finance of 90% in the market with strict 3.5x salary lending rules

So we could consider homes would, with no finnance be worth 80% less as how can you raise funds to purchase

Edited October 1, 2007 by 234SALE

[margesimpson]

Credit is so widespread now real world examples are difficult to find, but I do remember an example from the 80s - when England played Albania in the 1980s, it was reported that you could buy a flat in Tirana for the equivalent of £80.

[crown]

The question "How much would houses be worth if it were not for the effects of credit" is a thorny one with many variables. However what if we look at the cost of houses that would not be acceptable security to a residential mortgage lender? Such as holiday homes? Like this:

http://www.rightmove.co.uk/viewdetails-934...=5&tr_t=buy

Of course, bearing in mind the purchase of a holiday home is often financed by MEW on the main residence, and this is an asking price, we can assume from this that a two bedroom chalet in Cornwall would cost, what? Say £50k? The rest is created by the effects of credit.

Hey, shoot me down.

If residential lending was still limited to 2.5 joint income, if self cert was still proved by lenders checking bank statements and if BTL was still only available for home owners with a salary of over £25k and on a rental oncome of 125% at 75%LTV then house prices would have risen each year by around 5%/6% since 1997 and would be around the level of 2001 house prices.

It was the binning of all these criteria that has led to the credit fuled boom of the last 6 years.

[adibrown]

How much would Homes be Worth?

Well it is pretty straightforward. They would be worth what it costs in labour to build, materials + land and then add a 10-20% profit margin on top.

Without credit you would be simply restricting the number of high end properties and making more homes that fall within the £40k - £100k category. In terms of affordability you would simply encourage people from the age of 16 to start saving. If you earn £15k a year you could possibly save £175 a month (especially as rental costs would be a lot lower) you would have enough for a house in 15 years. So by the age of 31 you could buy a £40k house or flat (perhaps a small 2 bedder). If you saved double that you could afford a £80k house which would be pretty high end. From the initial purchase which is the biggest barrier to entry it is all easy from then on. Without mortgage costs and interest to pay you could probably save £1000+ a month, in which case 5 years down the line you could be in a very nice house. So by 36 you could be in a great 4 bed detached house worth about £140k with no debt hanging over you.

What would be interesting is if we look at houses as normal commodities like cars would the cost decrease as time goes on rather than keep on rising astronomically like at present.

[Bri2]

If residential lending was still limited to 2.5 joint income, if self cert was still proved by lenders checking bank statements and if BTL was still only available for home owners with a salary of over £25k and on a rental oncome of 125% at 75%LTV then house prices would have risen each year by around 5%/6% since 1997 and would be around the level of 2001 house prices.

It was the binning of all these criteria that has led to the credit fuled boom of the last 6 years.

Spot on the silly lending has just added the needed froth so people can contribute to Crash's Economic Miracle

[Injin]

If residential lending was still limited to 2.5 joint income, if self cert was still proved by lenders checking bank statements and if BTL was still only available for home owners with a salary of over £25k and on a rental oncome of 125% at 75%LTV then house prices would have risen each year by around 5%/6% since 1997 and would be around the level of 2001 house prices.

It was the binning of all these criteria that has led to the credit fuled boom of the last 6 years.

The criteria had to be binned or the original loans couldn't have been repaid. That's the problem with a system that borrows all money into existence.

If we say that for the whole economy £100,000 was lent and £300,000 had to be returned, in the next cycle either someone somewhere would have to borrow the extra £200,000 or the mortgage couldn't be repaid. Once they do, then we have a higher multiple that someone has to borrow in the next cycle. It's completely insane but here we are.

Edited October 1, 2007 by Injin

[Bloo Loo]

Ive just thought up a great way to mop up all the job loses in city that are about to occur because no-one checked lending criteria-

lets employ them all to check the loan applications criteria properly- they,d need to employ thousands just to do this! Ok its 25K compared to 250K+ bonuses, but, what goes around comes around

[AteMoose]

silly question, credit==money... 'what would happen if money was banned'? You would have to barter goods for housing...

[Injin]

silly question, credit==money... 'what would happen if money was banned'? You would have to barter goods for housing...

Nope. Money is anything you can use as a medium of exchange.

Free market money is the most commnly traded good.

In the past it's been gold, sea shells, nicotine, wheat, beef....in the long run, it always winds up being gold and silver.

Legal tender isn't the only form of money, in fact it's not really money at all.

[R K]

As we know, the main problem is not that mortgages exist but that lending criteria has become so relaxed as to act against the interests of borrowers.

The lending constaints which existed prior to the building societies deregulation and conversion to banks worked and worked well from what I remember. House prices were reasonable in relation to earnings, modest wage earners could afford to buy their own home over a reasonable time frame and disposable income was higher. With some savings over a few years, a couple on average wages could afford to buy their own average-priced home and repay the mortgage.

As we have seen with NR, the conversion from building societies who existed to serve their customers have been replaced by pseudo banks which exist to serve their shareholders and directors, followed by mostly US lenders whose only aim is to make money for their investment bank owners.

What is needed is a government, and regulations, which serve the electorate rather than an electorate which serves the government and their buddies. Banks have demonstrated they cannot control their own greed. Government must therefore act via legislation and credit controls. Cheap housing benefits everybody in the long run.

Btw, when we talk about house prices, we mostly mean land prices since when you strip out building costs it is largely land prices which are rising. Consider for a moment that agricultural land sells for around only £3,500 an acre and you can see how over-priced building land has become.

[Timm]

As we know, the main problem is not that mortgages exist but that lending criteria has become so relaxed as to act against the interests of borrowers.

The lending constaints which existed prior to the building societies deregulation and conversion to banks worked and worked well from what I remember. House prices were reasonable in relation to earnings, modest wage earners could afford to buy their own home over a reasonable time frame and disposable income was higher. With some savings over a few years, a couple on average wages could afford to buy their own average-priced home and repay the mortgage.

As we have seen with NR, the conversion from building societies who existed to serve their customers have been replaced by pseudo banks which exist to serve their shareholders and directors, followed by mostly US lenders whose only aim is to make money for their investment bank owners.

What is needed is a government, and regulations, which serve the electorate rather than an electorate which serves the government and their buddies. Banks have demonstrated they cannot control their own greed. Government must therefore act via legislation and credit controls. Cheap housing benefits everybody in the long run.

Btw, when we talk about house prices, we mostly mean land prices since when you strip out building costs it is largely land prices which are rising. Consider for a moment that agricultural land sells for around only £3,500 an acre and you can see how over-priced building land has become.

Thats pretty much what I was getting at. The thread was not a suggestion that borrowing be banned, but was intended to look at the effects if it stopped.

Please note I've amended the thread title to "What would homes cost if lax lending stopped?"

[Injin]

Thats pretty much what I was getting at. The thread was not a suggestion that borrowing be banned, but was intended to look at the effects if it stopped.

Please note I've amended the thread title to "What would homes cost if lax lending stopped?"

Either we would wind up back at this point again, or the banking system would foreclose on all property with a mortgage before the terms of those mortgages were up and wipe the debt off.

[Timm]

Either we would wind up back at this point again, or the banking system would foreclose on all property with a mortgage before the terms of those mortgages were up and wipe the debt off.

How and why would it do that?

[Qetesuesi]

Please note I've amended the thread title to "What would homes cost if lax lending stopped?"

How do you do this please?

[eric pebble]

If residential lending was still limited to 2.5 joint income, if self cert was still proved by lenders checking bank statements and if BTL was still only available for home owners with a salary of over £25k and on a rental oncome of 125% at 75%LTV then house prices would have risen each year by around 5%/6% since 1997 and would be around the level of 2001 house prices.

It was the binning of all these criteria that has led to the credit fuled boom of the last 6 years.

Spot on. And, as we all know, the crafty moneylenders KNOW this -- and so they have skewed everything and ramped up house "prices" quite deliberately - doubtless cashing in on the side, knowing it's a one way bet......... until....... When? /Now? Who knows.... But the whole Lie-to-Buy Scam is a fraud of such huge proportions that it defies belief...

[Injin]

How and why would it do that?

Because the banks only "create" the amount of money that they give you, they do not "create" the interest.

You "borrow" £100,000 - bank wants back £100,000 + interest. The interest doesn't exist at his point in time.

Unless someone borrows the interest AND you manage to get it off them to give to the bank, you will not pay back the loan.

So the alternatives are - mortgage mulitples go up, or foreclosure. Ofc in the real world it's more complicated than that, there could be a massive credit boom and subsequent collapse in some other good or service to find this money. Nevertheless, in order for current debt to be repaid, higher debt must be taken on in the next cycle. Most folks only have their house to borrow against so it's almost certainly going to be in mortgages eventually.

[Timm]

Because the banks only "create" the amount of money that they give you, they do not "create" the interest.

You "borrow" £100,000 - bank wants back £100,000 + interest. The interest doesn't exist at his point in time.

Unless someone borrows the interest AND you manage to get it off them to give to the bank, you will not pay back the loan.

So the alternatives are - mortgage mulitples go up, or foreclosure. Ofc in the real world it's more complicated than that, there could be a massive credit boom and subsequent collapse in some other good or service to find this money. Nevertheless, in order for current debt to be repaid, higher debt must be taken on in the next cycle. Most folks only have their house to borrow against so it's almost certainly going to be in mortgages eventually.

Perhaps I'm missing something. In the old days, you would be expected to work, get paid, and use this money to pay the interest, and even the capital!

Are you suggesting the interest payments should be met from a further loan?