Monday, March 12, 2007

Interesting and reasoned bull view

This is the Housing Market the UK Built

A moderately bullish article backed by logic rather than rhetoric. The thesis starts with the premise that a house price to earnings ratio needs to be balanced with interest rates. Note that the chart has started to break out and they cite inflation as the potential trigger for rising interest rates.Well worth a look, whether you are bull or bear as, whether or not you agree with the arguments, it reads ass remarkably balanced. Good starting point for the kind of reasoned discussion most of us are looking for. Let the thinking begin.

Posted by dohousescrashinthewoods @ 01:08 PM (563 views)
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16 thoughts on “Interesting and reasoned bull view

  • I think we’ve had this before.

    I’m not sure telling the thousands that are priced out of the housing market or that have taken out 50 year interest only mortgages that houseprices are in reality affordable, changes the reality of the situation. He also conveniently ignores the demand side of the supply demand equation.

    Incidentally, considering the large numbers of BTL mortgages out there, I’d have thought that this bloke should have considered the house price to rents ratio as equally important.

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  • You only have to look at the graph to see how quickly it all went wrong in the late 1980’s. I wouldn’t say this was any comfort to those people who are about to saddle themselves with outrageous mortgages.

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  • This article is not all ‘bull’. After all, it states quite clearly that ‘affordable’ HPI is supported by the availability of low interest rate credit. But the key word here is AVAILABILITY, low interest rates are no use to you at all if you don’t qualify for a loan, which is exactly what has happened very quickly in the sub-prime mortgage market stateside. What is so different about our own, highly overgeared, lie-to-buy, IO ‘sub-prime’ mortgage market? What happens to demand when this chunk of the market is no longer able to borrow?

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  • This graph has been around for some time. It relates only to IO mortgages. It does not consider the cost of the repayment vehicle required to meet that mortgage over the term. Basically the cost of the repayment vehicle is some 400% higher than in 1990. If this factor is built in to the graph it would show that the average house today is totally unaffordable for FTB whereby the average house was still affordable (just) to FTB in 1990. You can fool some of the people some of the time……

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  • This graph has been around for some time. It relates only to IO mortgages. It does not consider the cost of the repayment vehicle required to meet that mortgage over the term. Basically the cost of the repayment vehicle is some 400% higher than in 1990. If this factor is built in to the graph it would show that the average house today is totally unaffordable for FTB whereby the average house was still affordable (just) to FTB in 1990. You can fool some of the people some of the time……

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  • bidin'matime says:

    “However, the most recent rise in interest rates to 5.25%, has taken the index out of its comfort range, which suggests a period of consolidation. So it can be said whilst interest rates remain at 5.25% the expectation is for annual house price growth in the region of 5%. ”

    Eh? Why does it not suggest a fall, back to the ‘comfort zone’? If IRs stay level and wages rise say 4%, on what basis does he predict HPI at 5%?? And if rates rise to 5.5%, as widely anticipated, a rise in costs of around 5%, this must surely mean a fall in prices, just to keep the graph where it is!

    I stopped reading then…

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  • dohousescrashinthewoods says:

    Interesting statement on the IO / repayment vehicle. Where do you get the 400%?
    What would it look like on a repayment basis?
    And why does he think that we won’t go the way of the US (as sonic points out)

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  • hold one a minute. while it’s easy to suggest that interest rates play just as important part. what about the lax lending rules we’ve seen in the last few years? also I think his graph should include leverage of debt if it includes interest rates. but that wouldn’t look so flat.

    I think if you go back to the 80s you’ll find that building societies (the organisations who provided most the mortgages back then) didn’t offer anything for longer than 25 years and bearly budged from the 3x salary marker. — problably due to lower expected life excpectancy.

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  • If the graph is to carry any credibility houses must be more affordable now than they were in 1985.
    We bought our first house in 1985 for £22000 as a young couple our combined income was a modest £11000 pa, interest rates were around 9% and our monthly payments were approx £189.00 (£2268 pa). With a net income of £8250 housing costs were less than one third of income so the first step on the property ladder was relatively easy.

    Jump forward to 2007 same young couple would be earning £38000 the same house can be bought for £185000, Monthly payments £1322 (£15864 pa). With a net income of £28500 meaning housing costs would eat up over half of your income.

    My conclusion is that this graph is worthless twaddle 😉

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  • £50k borrowed 1990 less 10% deposit = £45k to be repayed. £200k borrowed 2007 less 10% deposit = £180 to be repayed.

    £45K X 4 = £180K. Ok its only 300% but it makes the point on affordability. This amount still has to be paid at end of term in addition to the IO mortgage.

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  • We should be looking at the Australian market more closely than the US. Aussies behave in a similar manner when it comes to property ie they love it and invest in it. Currently the average family spends 35% of their income on mortgage repayments and the market there is still rising albeit a little more slowly. I believe the percentage here spent on mortgages is nearer the 20%. Australia’s economy is underpinned by commodities at the moment much like ours is by financial services

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  • £50k borrowed 1990 less 10% deposit = £45k to be repayed. £200k borrowed 2007 less 10% deposit = £180 to be repayed.

    £45K X 4 = £180K. Ok its only 300% but it makes the point on affordability. This amount still has to be paid at end of term in addition to the IO mortgage and is not included in the graph.

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  • @Griptool

    “We bought our first house in 1985 for £22000 as a young couple our combined income was a modest £11000 pa, interest rates were around 9% and our monthly payments were approx £189.00 (£2268 pa). With a net income of £8250 housing costs were less than one third of income so the first step on the property ladder was relatively easy.”

    In 2005, £22,000.00 from 1985 was worth:

    £44,646.52 using the retail price index
    £45,114.20 using the GDP deflator
    £63,290.62 using average earnings
    £71,236.48 using per capita GDP
    £75,840.36 using the GDP

    In 2005, £189.00 from 1985 was worth:

    £383.55 using the retail price index
    £387.57 using the GDP deflator
    £543.72 using average earnings
    £611.99 using per capita GDP
    £651.54 using the GDP

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  • sold 2 rent 1 says:

    The graph is still too simplified.

    The Lombard Street Research’s “housing affordability” index also takes into account disposable income and the increase in 2 income families.

    Here is October’s graph
    http://www.telegraph.co.uk/money/graphics/2006/10/02/cnhouse02big.gif

    I like the “houses valued in ounces of gold” remarks. This is another plus sign for buying gold.

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