Friday, Oct 27, 2006

BoE worried about HPC rather than inflation

Bloomberg: U.K. Home Shortage Keeps Property Market Ablaze as Rates Rise

Rates at 5.5 percent might be enough to slow the rest of the economy, but not property,'' said Peter Spencer of the Ernst & Young ITEM Club in London. ``The housing market is going to keep on chugging.''

While Britain's house-price boom has helped fuel economic growth, it also creates headaches for the central bankers as consumers borrow against the rising value of their homes to spend more.

With consumers shouldering a record 1.25 trillion of debt, the housing market's importance to the economy may deter the Bank of England from clamping down too quickly. A speedy increase in rates might drive the investors and speculators who are helping fuel the boom out of the market.

Posted by little professor @ 10:16 AM (502 views)
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20 Comments

1. Surfgatinho said...

Blatant VI spin - all the comments are from EAs!
So the 300% rise in 10 years is due to demand?! Doh! Nothing to do with speculation, historically low cost of credit and property porn? Apparently not! This article is just intended to be picked up by the BBC to pass on to and scare people into buying!

Friday, October 27, 2006 11:08AM Report Comment
 

2. sold 2 rent 1 said...

Over the last month or so projections of where UK IR will peak have gone from 5 - 5.25% to 5.5 - 6%

Having just sold my house for 225K I was arguing back in the summer that it was 50% more expensive for a repayment mortgage than to rent.

It is amazing how with a few notches on IR and HPI still increasing this mortgage/rent ratio changes dramatically. Rental prices seem static as the BTL over supply is keeping rents down.

If say next November rates hit 6% (a 0.25 rise every quarter) and the house I have just sold has gone up by another 10%. A 100% 25 year repayment mortgage on a house worth 245K will cost 1600/month. The monthly rent on the same property is 850/month.

This puts the projected mortgage/rent ratio in Nov 2007 at nearly 100% (up from 50% back in the summer)

Friday, October 27, 2006 11:50AM Report Comment
 

3. Nohpc said...

Sold 2 rent you can't compare a repayment mortgage to renting. A repayment mortgage will be nothing after 25 years whereas rent could be double or triple what you were paying intially. You can only compare an interest only mortgage to rent and it is often cheaper if you have money to deposit intially. And as a new landlord rental prices are not static. My property is renting for 100 pounds a month more now than it would have gotten 6 months ago.

Just to highlight the main point again. At the end of your 25 year repayment mortgage you own the property. if you rent you have nothing. This seems to be the main point that you are always forgetting. And rents will be a lot more whereas you your mortgage will always be coming down so if you chose to go interest only later down the line it will be much less than renting.

Sorry to repeat myself but it seems to me that you keep forgetting this important point.

Friday, October 27, 2006 12:05PM Report Comment
 

4. kpjcomp said...

>> ``We've got an increase in housing demand without an increase in supply,'' said Gavin Redknap, an economist at Standard Chartered Bank in London.
>> ``That's what's underpinning the housing market in the U.K., as opposed to the U.S., where you can always easily build more houses.''

Ok, hands up anybody who thinks the No. of For Sale signs has increased over the years, not decreased. So what a load of rubbish about supply!.
Also down our street of about 25 houses, 3 of them have been empty for ages. So there certainly is not a short supply, the only problem here is that EA's are still been silly with there prices.

Friday, October 27, 2006 12:21PM Report Comment
 

5. tyrellcorporation said...

Reading this article just makes me think that actually the MPCs johb is now purely focussed on keeping the house-price plates spinning - sod inflation, the UK economy IS the housing market!

Friday, October 27, 2006 12:26PM Report Comment
 

6. sold 2 rent 1 said...

kpjcomp,

"So what a load of rubbish about supply"
I am not sure that your statement applies to London and the London commutable SE.

House prices are significantly higher in the SE. This pushes the prices into higher levels of stamp duty.

A loft conversion in the house I have sold is 20K.
Compare that to a typical stamp duty/buying /selling/moving costs of 15K when trading up the ladder.
You can see why people don't want to sell.

I have a few friends who are getting extensions now that trading up is no longer an option.

Friday, October 27, 2006 12:57PM Report Comment
 

7. Ticktock said...

REF - sod inflation, the UK economy IS the housing market!

Absolutely right, and they will do so until people begin to realise what this means for the long term sustainability of Stirling ( i.e. that estate agents are the only defenders of it) and sell it pronto. At this point I would expect that euro entry may be put back on the agenda.

In short, the BOE can destroy our currency because we have a default option for when it 'blows up'

Friday, October 27, 2006 02:04PM Report Comment
 

8. the bald man said...

It says everything that we depend on HPI to keep the economy going. What about productivity or increases in exports? Growth has been generated by borrowing from the future against our houses. Debt pay back time is not long away.

Friday, October 27, 2006 02:51PM Report Comment
 

9. bingo said...

Let me guess s2r1, they are mewing to pay for the loft conversion/extension. 20 grand on your mortgage at 5% will end up costing 35k. I agree with your previous post regarding the cost of a repayment loan against rent. In our neck of the woods (NE) there are plenty of rentals around and plenty of properties that have been on the market for a looong time. Interestingly, I happened to watch that show last night with Phil and Kirsties sister (whatever her name is), and I had my eyes opened to the fact that property had actually been losing value in certain (albeit crappy) areas of the UK. They still explained that the experts felt that purchasing a house in Middlesborough for 30k now would see its value increas to over 14 million quid in the next 4 years, the balls this guy has...

Friday, October 27, 2006 03:40PM Report Comment
 

10. denzil said...

kpjcomp said:>
>Ok, hands up anybody who thinks the No. of For Sale signs has increased over the years, not decreased. So what a load of rubbish about supply!.

I don't like to say it because I've said it on here a few times recently but there is a noticeable lack of supply in my area (Somerset). I have no idea whether what Somerset is representative of the majority of areas in the country so I can only report what I see and that is there are plenty of "Sale Agreed" or "Sold" signs but few "For Sale" signs in comparision to the last 2 years. Early summer I viewed a 16th Century place that looked as though it had no money spent on it since it was built. The Agent asked me for feedback and my words were, "It's truly minging". A month ago it finally sold for 10K less than the 500K price tag (granted it's not completed yet). I thought it was so overpriced that I didn't even entertain a ridiculous offer. I'm seeing similar madness on other properties too and my EA friends are all reporting lack of supply but also comment that at present property has to be priced sensibly to sell.

I believe that if the lack of supply persists through to Spring then there will be upward pressure on prices, at least in my area.

Many comments on here have pointed out that people who own cannot afford to move up the chain so that could suppress HPI.

Friday, October 27, 2006 05:16PM Report Comment
 

11. devil's advocate said...

"Many comments on here have pointed out that people who own cannot afford to move up the chain so that could suppress HPI."

I think that will put upward pressure on inflation, That's the reason for low supply of property. as you mentioned, this will put pressure on on prices.

The only thing to cause a downturn is a crash. that will allow people back into the market. Interest rates as they are will not cause a crash. And rates only look like going up another 0.5% so a crash will not happen. I fear the predictions of 30% rises in the coming years may be true.

Have been reading this site since 2003 and I must admit I fell for it hook line and sinker. Now i'm well out of pocket and weighing up whether to jump in.

Friday, October 27, 2006 05:34PM Report Comment
 

12. Rocket Robbie said...

devil.. you have come this far might as well hang in there

Friday, October 27, 2006 07:16PM Report Comment
 

13. sovietuk said...

What a pathetic state this nation must be in if the central financial decisions are determined by the cost of people's living quarters. What happened to the time when our economy was based on industry and manufacturing?

Friday, October 27, 2006 07:33PM Report Comment
 

14. Nohpc said...

Devil rocket robbie is probably right but then this site has already seen you tens of thousands out of pocket so how long are you going to listen to them for? If you can afford to buy and have a deposit and are looking for a long term place then if you see your dream property go for it. Does it really matter if it is worth half in a years time if it is worth 10 x as much in 40 years time? Obviously I don't think prices will drop anywhere near 50% but i'm talking worst case scenario.

The problem with this site is they all argue with logic and use economic theory whereas people are not logical and do not follow the rules. For example talk of the housing cycle. Just because there have been cycles in the past does not mean it will happen again. The housing market could potentially only ever go up. Very unlikely i know but it doesn't have to crash after a boom.

In conclusion: come to the dark side

Friday, October 27, 2006 09:15PM Report Comment
 

15. indiablue19 said...

sovietuk....

Hear hear!

Nohpc....

Maybe you can own a place in twenty five years, but who wants these dumps at the prices they're being peddled? I have no interest in owning an overpriced shack/dog house and would rather live in a lovely house and somebody else has got the headaches, including the fact that the furnace bites the dust because they tend to be twenty years old no matter the neighborhood.

If the property market ever realigns to offer value for money, then's the time to buy, not when it's peaked, or near, as it has now. Take a mortgage now -- no such thing as fixed for 25 years that I know of -- and as rates rise so do your payments on a MASSIVE debt. Salaries haven't improved, and likely won't in the interest of inflation control, in keeping with property hype, nor will they likely. People lulled into these deals are putting themselves at risk to the tune of 8, 9 or ten times their annual salary. You are unkindly advising others to commit financial suicide.

Friday, October 27, 2006 10:07PM Report Comment
 

16. Nohpc said...

I am renting a lovely flat in auckland just now. The walls are white and bear and we cannot put any pictures up. Things break they get fixed but it usually doesn't cost a fortune and insurance covers the rest.

I would argue that you are advising others to commit financial suicide by advising not to invest in property. And I am talking about the people that can afford to not the people that will be crippled by a 0.25% interest rate rise. For those that can afford it buy a place and use your savings as a deposit. If you want to carry on renting a nicer place then continue to do so and rent out your own property. If you buy in the right area you are pretty much guaranteed rent 100% of the time.

Friday, October 27, 2006 11:43PM Report Comment
 

17. C'mon Correction said...

Nohpc,
Rent for 100 more than a repayment mortgage, for real anywhere in the UK???? I'm paying 200 a month less than interest only, only a mug would buy here (south wales) at present. I've saved 11k in the 1.5 year over buying (this is a fact), and even if house prices gain at the same rate here over the next 3 years as the last 2 then I'll be 31k better off - paying back 52k over the 25 term !!!

Saturday, October 28, 2006 12:42AM Report Comment
 

18. kpjcomp said...

DA said>> Have been reading this site since 2003 and I must admit I fell for it hook line and sinker. Now i'm well out of pocket and weighing up whether to jump in.

Would it not be a shame, if you end up making yet another mistake. You jumped too early last time, what if you jump too early again?

Saturday, October 28, 2006 12:50AM Report Comment
 

19. Time To Raise Petrol Prices said...

"Nohpc said...
I am renting a lovely flat in auckland just now. The walls are white and bear and we cannot put any pictures up. Things break they get fixed but it usually doesn't cost a fortune and insurance covers the rest.

I would argue that you are advising others to commit financial suicide by advising not to invest in property. And I am talking about the people that can afford to not the people that will be crippled by a 0.25% interest rate rise. For those that can afford it buy a place and use your savings as a deposit. If you want to carry on renting a nicer place then continue to do so and rent out your own property. If you buy in the right area you are pretty much guaranteed rent 100% of the time."


May I add my tuppence ha'penny?

The argument that buying is better than renting because 'at the end of 25 years you own your own house' is spurious, and I'll explain why. Whether you rent from a landlord or pay interest to a bank, you have to pay the cost of 'renting the property' while you either grind down the capital (repayment mortgage), or save money somewhere else (renting). Your argument is that you will have nothing at the end of 25 years if you rent - this is nonsense. You will have the amount of money that you would otherwise have been paying to the bank to repay capital, plus your investment return. This fact has been exploited for decades by using investment-back interest only mortgages, on the basis that (with careful management) you can end up at the end with more cash than the cost of the property. Your argument only holds for the fool who rents and makes no savings elsewhere - which is no different to the man who takes out an interest only mortgage with no repayment vehicle.

If you buy now and rates go up, your argument looks even more hopeless. Investment returns will look better, whereas mortgage interest will be more expensive, thus further eroding the 'advantage' of buying. Buying a home to live in IS NOT and never has been 'investing in property'. It's the view that your house is something to make money out of (i.e. an investment in the conventional sense) that has caused the rampant speculation that has puched prices to their current astronomical levels.

One final point - the UK is so over-indebted, that I'm fairly certain that rates at 6% would be enough to bring the house down. It's an extra 85 a month on a 100,000 interest only mortgage , and recent FTB's have much bigger mortgages than this, and on a repayment basis too, so this figure could be higher. Stir in higher council tax, bills, skyrocketing energy prices, and there may be not much left to keep the wolf from the door.....

Saturday, October 28, 2006 12:30PM Report Comment
 

20. Nohpc said...

C;mon correction only a mug would take out a 100% deposit at their maximum loan. If you have a decent deposit then your interest only mortgage can easily be less than the rent. i think if you have 20% deposit you can shoulder any interest rate rises up to around 9% if it happened.

Sunday, October 29, 2006 02:17AM Report Comment
 

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