How far will house prices fall [volume 4]

[crankedup]

Derek Chevalier said:

XJ40 said:

Generally as wages and prices inflate, the debt will be erroded over the term of the mortgage and repayments will become less and hence more affordable in real terms. Let's see what happens with interest rates...

Unfortunately the debt erosion due to wage inflation is unlikely to happen this time around unless the link between rates and earnings is removed. Unlikely.

Debt erosion through inflation was an upside 30/40 years ago, but it didn't stop house price inflation. The question I ask myself is : would I rather have almost zero rate interest on my mortgage but still in a rampant house price bubble or a high interest rate (15% anyone) in a housing bubble. Obvious answer which is why today's buyers are fortunate. Tin hat time.

[crankedup]

Sheepshanks said:

crankedup said:

First Housing bubble early 1970's we were about to buy our first home. Prices rising faster than a rocket to the moon, any home that came to market in our budget would sell almost instantly, certainly within 24 hours. Went to look at a bungalow in Southend on sea, we arrived on the Saturday morning to view and joined a Q of about 60 other people!! Mental times. We looked at anything within budget within a thirty miles radius of work in a dencely populated area and had a stroke of luck to achieve our dreams.

We first bought in 1979 and demand was bonkers but I don't recall the same applying to prices. We got a new build released off-plan a year before it was built and only got it as someone dropped out - my missus to be had to leave work and rush over there with the deposit.

I suppose the fact that money was hard to come by may have limited prices but yet demand was still very high. Seems hard to imagine now but lenders released money in tranches and it was very uncertain whether you'd get your loan or have to wait for the next round.

Yes back in the day looking back it seems almost quaint. 2.5 X mortgage on salary or 3x joint income, repayment only but later added endowment option. Cap in hand almost begging for a mortgage. Yup, seems almost silly but it worked, as soon as the drawbridge was lowered plenty of fools rushed in and became over debted and when interest rates rose we saw
Foreclosure on many homeowners. That is the big dread now, if rates move up how many people will go bust.

[crankedup]

anonymous said:

[redacted]

Based upon your examples I agree. But real World numbers were rate rises from 7% to 15% in around a one year or 18 month time frame. Let's call it double bubble. Rates currently 2% .? No way will they rise to 6%. may rise to 3% in very small increments. And employment is far from stable at the present time add to that wage suppression during the past eight years.
Today's, or at least buyers over the past seven years have enjoyed exceptionally low interest rates and ripping house price inflation, they must be in a better situation with this background. (I may have confused myself)

[Mr Whippy]

Plenty of places values haven't continued up for the last 7 or 8 years though. They went up in the mid 90s and to the mid 00s and then it all stopped in 2007/2008.

So really those values are probably reasonable now if you assume that the correction we'll enjoy (or not) is in the salaries we'll enjoy in the coming decade.

I don't have any historical data here but:

Will salaries rise first, then interest rates?

Or could we see inflation of assets and goods/services and interest rates rise, despite salaries still remaining somewhat static?

I assume goods/services won't go up too much if people aren't getting paid more... assets like houses however... hmmmm :scratchin:

Dave

[walm]

Mr Whippy said:

I assume goods/services won't go up too much if people aren't getting paid more...

Somewhat true but a significant chunk of recent deflation has been related to the underlying COGS.
- We have just had TWO excellent harvests, combined with an ongoing price war in the supermarkets owing to discounter (Aldi/Lidl) store roll-outs. That has driven food deflation. Nothing to do with wages or disposable income which has actually been on a tear UP!...
- Oil. Oil price drop is just a huge help for dropping the cost of all sorts of things - after all even if not a raw material, to distribute the damn thing usually involves burning the smelly stuff.

It is unlikely that we will see a third excellent harvest although the supermarket price war doesn't seem to be abating any time soon.
Oil will annualise eventually (Q3-Q4 2016 if spot holds, which it won't).

2017 could be interesting for inflation.
Oh and back on property, if the price of houses doesn't rise, landlords will refocus on rental yields to compensate and put the price up far more aggressively than recent years.

[turbobloke]

Mr Whippy said:

Will salaries rise first, then interest rates?

It depends what you mean by 'rise' given that the 2015 rate of increase was 2% which compared to inflation (cpi) at -0.1% around the same time isn't too bad, but then that's cpi fwiw and it's not hpi = house price inflation.

Can't see interest rates (base rate) going up any time soon.

[JagLover]

walm said:

Somewhat true but a significant chunk of recent deflation has been related to the underlying COGS.
- We have just had TWO excellent harvests, combined with an ongoing price war in the supermarkets owing to discounter (Aldi/Lidl) store roll-outs. That has driven food deflation. Nothing to do with wages or disposable income which has actually been on a tear UP!...
- Oil. Oil price drop is just a huge help for dropping the cost of all sorts of things - after all even if not a raw material, to distribute the damn thing usually involves burning the smelly stuff.

It is unlikely that we will see a third excellent harvest although the supermarket price war doesn't seem to be abating any time soon.
Oil will annualise eventually (Q3-Q4 2016 if spot holds, which it won't).

2017 could be interesting for inflation.
Oh and back on property, if the price of houses doesn't rise, landlords will refocus on rental yields to compensate and put the price up far more aggressively than recent years.

I agree with you on inflation.

In regard to Landlords any with any sense is already charging the maximum rent the market will allow. Unlike house purchases this is far more constrained by earnings.

[walm]

JagLover said:

In regard to Landlords any with any sense is already charging the maximum rent the market will allow. Unlike house purchases this is far more constrained by earnings.

Absolutely agreed. I guess I was swayed by a bunch of my well-to-do mates who have seen the value of their BTLs skyrocket and hence haven't bothered to raise rents in years!

[crankedup]

Looking back for guidance, interest or clues to the future, as I have often indulged in and still do, is a waste of time and effort. It will not provide us with anything other then a history lesson. Most of the so called experts and pundits seem to agree that we, as a Nation, have never been in a financial situation as we are now in. The old ways and men's of balancing our economy re 'out the window' and we are almost flying by the seat of our pants. The EU question adds to the drama.

[z4RRSchris]

PCL volume has dropped off a cliff. Almost to a standstill.

Am currently in Istanbul trying to sell some top notch prime, Middle East next weekend.

[dxg]

These graphs are interesting:

https://twitter.com/HenryPryor/status/730667980405...

[dxg]

This appears to be the source:

http://www.rics.org/Global/3._WEB_%20April_2016_RI...

[turbobloke]

dxg said:

These graphs are interesting:

https://twitter.com/HenryPryor/status/730667980405...

They are, but if London is down 70% on 1 million enquiries and East Anglia is up 50% on 2 enquiries...

Yes, I know, but the actual numbers would be interesting as well as %!

[turbobloke]

dxg said:

This appears to be the source:

http://www.rics.org/Global/3._WEB_%20April_2016_RI...

Thanks for the link.

[Derek Chevalier]

XJ40 said:

Derek Chevalier said:

XJ40 said:

Generally as wages and prices inflate, the debt will be erroded over the term of the mortgage and repayments will become less and hence more affordable in real terms. Let's see what happens with interest rates...

Unfortunately the debt erosion due to wage inflation is unlikely to happen this time around unless the link between rates and earnings is removed. Unlikely.

I'm not sure what you mean but a link between rates and earning, can you elaborate?

Debt erosion will always occur as it's pretty much fundermental to capitalism. The money supply has to rise exponentially, otherwise the system will run out of money to pay interest owed on debt... This increase will always be reflected in asset prices which will inflate accordingly.

And it'll find it's way into peoples pockets as wage inflation. The so called working/unskilled class have seen limited wage growth over the last decade or so due to various factors, currently wage growth is around the 2% mark, so higher than measures of inflation...

Historically (I looked at data around 5 years ago for the previous 60 years) earnings growth was around 7% pa. This meant that that after 10 years typical earnings had doubled relative to a given debt, enabling people to move up the housing ladder/pay down debt. With earnings of around 2%, this process now equates to around 35 years - we've painted ourselves into a corner

[Derek Chevalier]

crankedup said:

Derek Chevalier said:

XJ40 said:

Generally as wages and prices inflate, the debt will be erroded over the term of the mortgage and repayments will become less and hence more affordable in real terms. Let's see what happens with interest rates...

Unfortunately the debt erosion due to wage inflation is unlikely to happen this time around unless the link between rates and earnings is removed. Unlikely.

Debt erosion through inflation was an upside 30/40 years ago, but it didn't stop house price inflation. The question I ask myself is : would I rather have almost zero rate interest on my mortgage but still in a rampant house price bubble or a high interest rate (15% anyone) in a housing bubble. Obvious answer which is why today's buyers are fortunate. Tin hat time.

Not sure if this is a trick question - I'd be very surprised if anyone took the first option.

[XJ40]

Derek Chevalier said:

XJ40 said:

Derek Chevalier said:

XJ40 said:

Generally as wages and prices inflate, the debt will be erroded over the term of the mortgage and repayments will become less and hence more affordable in real terms. Let's see what happens with interest rates...

Unfortunately the debt erosion due to wage inflation is unlikely to happen this time around unless the link between rates and earnings is removed. Unlikely.

I'm not sure what you mean but a link between rates and earning, can you elaborate?

Debt erosion will always occur as it's pretty much fundermental to capitalism. The money supply has to rise exponentially, otherwise the system will run out of money to pay interest owed on debt... This increase will always be reflected in asset prices which will inflate accordingly.

And it'll find it's way into peoples pockets as wage inflation. The so called working/unskilled class have seen limited wage growth over the last decade or so due to various factors, currently wage growth is around the 2% mark, so higher than measures of inflation...

Historically (I looked at data around 5 years ago for the previous 60 years) earnings growth was around 7% pa. This meant that that after 10 years typical earnings had doubled relative to a given debt, enabling people to move up the housing ladder/pay down debt. With earnings of around 2%, this process now equates to around 35 years - we've painted ourselves into a corner

What I'd say to that is that the national average figure only tells you so much. In reality the situation for an individual house buyer would often see more wage growth I should think. If you have a career then you should expect to easily beat cost-of-living/average wage inflation rises over the term of a mortgage taken out, especially if you are a younger buyer.

Edited by XJ40 on Thursday 12th May 11:46

[JagLover]

Derek Chevalier said:

Historically (I looked at data around 5 years ago for the previous 60 years) earnings growth was around 7% pa. This meant that that after 10 years typical earnings had doubled relative to a given debt, enabling people to move up the housing ladder/pay down debt. With earnings of around 2%, this process now equates to around 35 years - we've painted ourselves into a corner

Yep

Increasing age of first purchase also means that the "housing ladder" is becoming very much a misnomer.

[turbobloke]

XJ40 said:

Derek Chevalier said:

XJ40 said:

Derek Chevalier said:

XJ40 said:

Generally as wages and prices inflate, the debt will be erroded over the term of the mortgage and repayments will become less and hence more affordable in real terms. Let's see what happens with interest rates...

Unfortunately the debt erosion due to wage inflation is unlikely to happen this time around unless the link between rates and earnings is removed. Unlikely.

I'm not sure what you mean but a link between rates and earning, can you elaborate?

Debt erosion will always occur as it's pretty much fundermental to capitalism. The money supply has to rise exponentially, otherwise the system will run out of money to pay interest owed on debt... This increase will always be reflected in asset prices which will inflate accordingly.

And it'll find it's way into peoples pockets as wage inflation. The so called working/unskilled class have seen limited wage growth over the last decade or so due to various factors, currently wage growth is around the 2% mark, so higher than measures of inflation...

Historically (I looked at data around 5 years ago for the previous 60 years) earnings growth was around 7% pa. This meant that that after 10 years typical earnings had doubled relative to a given debt, enabling people to move up the housing ladder/pay down debt. With earnings of around 2%, this process now equates to around 35 years - we've painted ourselves into a corner

What I'd say to that is that the national average figure only tells you so much. In reality the situation for an individual house buyer would often see more wage growth I should think. If you have a career then you should expect to easily beat cost-of-living/average wage inflation rises over the term of a mortgage taken out, especially if you are a younger buyer.

It looks as though this is related to a point or two I've made on several occasions in house price threads, to the effect that ASHE data used for average price/average income ratios is misleading as it includes people not in the housing market and therefore not influencing prices through demand in any way the same as a buyer would, or indeed 60 of them in a viewing queue outside a bungalow.

As house prices increase, the proportion of non-average earners in the market is naturally going to increase.

Also as you rightly indicate there's the general point that chicken soup averages are less than totally helpul in another way, given that those aspirational people who aren't p/t workers or NLW earners who are interested in buying a house may well be among those receiving above average pay rises, regular promotions, or taking increasing drawings / dividends from their successful business(es).

ASHE data excludes the self-employed anywway, another reason why long-run schmaverage is more useless than previously thought and no guide to future market behaviour (exactly as it hasn't been for years now).

[XJ40]

turbobloke said:

It looks as though this is related to a point or two I've made on several occasions in house price threads, to the effect that ASHE data used for average price/average income ratios is misleading as it includes people not in the housing market and therefore not influencing prices through demand in any way the same as a buyer would, or indeed 60 of them in a viewing queue outside a bungalow.

As house prices increase, the proportion of non-average earners in the market is naturally going to increase.

Also as you rightly indicate there's the general point that chicken soup averages are less than totally helpul in another way, given that those aspirational people who aren't p/t workers or NLW earners who are interested in buying a house may well be among those receiving above average pay rises, regular promotions, or taking increasing drawings / dividends from their successful business(es).

ASHE data excludes the self-employed anywway, another reason why long-run schmaverage is more useless than previously thought and no guide to future market behaviour (exactly as it hasn't been for years now).

Yes good points, I very much agree with all that.

Another factor outside of earnings is buyers, particularly FTB's, being essentially gifted funds from the bank of mum-and-dad, of receiving inheritance maybe...