How far will house prices fall [volume 4]
Discussion
gibbon said:
I read above, you talked about 3.5% averages, normals, and your believe we would return there, I would call that a fairly strong view.
I happen to see things differently, and for a bit fun would like to take the opposite view to you in the form of a small charitable donation.
A tool and his money are easily parted, so i thought you'd jump at the chance.
Based on the question of 'what do you consider the average base rate", over a 30 year period of actuals in this country averages out at 7%, the lowest it's ever been is 3.5% before the global recession in 2008. Sorry if you don't like these figures, but these are actuals and you should take it up with the Bank of England if you wish to have a bet.I happen to see things differently, and for a bit fun would like to take the opposite view to you in the form of a small charitable donation.
A tool and his money are easily parted, so i thought you'd jump at the chance.
So at a time where the economy is on sound footings (no time defined, who knows?) then it doesn't defy the whit of man to think it will get back to the lowest figure of a 30 year run before a global recession. If you disagree then that's fine.
The only person to put a time frame on the historical actual averages/figures and when those will be seen again old chap...is yourself.
Edited by V6Alfisti on Tuesday 31st July 09:45
V6Alfisti said:
Based on the question of 'what do you consider the average base rate", over a 30 year period of actuals in this country averages out at 7%, the lowest it's ever been is 3.5% before the global recession in 2008. Sorry if you don't like these figures, but these are actuals.
So at a time where the economy is on sound footings (no time defined, who knows?) then it doesn't defy the whit of man to think it will get back to the lowest figure of a 30 year run before a global recession. If you disagree then that's fine.
The only person to put a time frame on the historical actual averages/figures and when those will be seen again old chap...is yourself.
Im not debating the past with you, im debating the future, and the perception that many, including yourslef, seem to hold that rates will return to somewhere near the lower range of the 30 year average.So at a time where the economy is on sound footings (no time defined, who knows?) then it doesn't defy the whit of man to think it will get back to the lowest figure of a 30 year run before a global recession. If you disagree then that's fine.
The only person to put a time frame on the historical actual averages/figures and when those will be seen again old chap...is yourself.
By the nature of us debating interest rates in the context of mortgages, we are all looking at it within a time frame, most people fix in 2-5 years chunks, hence the most pressing view for home owners needing funding is 0 - 5 year time frame. It also almost pointless in my view to try to predict much futher than that.
Put simply I think there has been a paradigm shift and the new normal rate range is conservatively 0 / 2%, more likely 0.25 / 1.75% the concept of previous normals is, in my view, completely meaningless.
As for your comments regarding a soundly footed economy, again, well thats a whole other debate, I dare say we would differ in opinion on that too.
gibbon said:
Im not debating the past with you, im debating the future, and the perception that many, including yourslef, seem to hold that rates will return to somewhere near the lower range of the 30 year average.
By the nature of us debating interest rates in the context of mortgages, we are all looking at it within a time frame, most people fix in 2-5 years chunks, hence the most pressing view for home owners needing funding is 0 - 5 year time frame. It also almost pointless in my view to try to predict much futher than that.
Put simply I think there has been a paradigm shift and the new normal rate range is conservatively 0 / 2%, more likely 0.25 / 1.75% the concept of previous normals is, in my view, completely meaningless.
As for your comments regarding a soundly footed economy, again, well thats a whole other debate, I dare say we would differ in opinion on that too.
Ok good, we have moved to a higher shelf conversation By the nature of us debating interest rates in the context of mortgages, we are all looking at it within a time frame, most people fix in 2-5 years chunks, hence the most pressing view for home owners needing funding is 0 - 5 year time frame. It also almost pointless in my view to try to predict much futher than that.
Put simply I think there has been a paradigm shift and the new normal rate range is conservatively 0 / 2%, more likely 0.25 / 1.75% the concept of previous normals is, in my view, completely meaningless.
As for your comments regarding a soundly footed economy, again, well thats a whole other debate, I dare say we would differ in opinion on that too.
You are of course right to look forward, but imo you cannot ignore history.
There were some that recently said "how can house prices drop, when demand is so high and money so cheap" "house prices have only gone up in the last x years". Looking forward at the time (2015/6) ignoring history/economics would tell you that yes house prices would keep going up (and indeed they have in some areas like the west/northwest ), but history tells us there are a number of levers in a market and things that happen over a lifecycle.
Low base rates = low savings rate, that means people look to move their money into something (typically an asset) that has opportunity to grow. This if not controlled will run out of control and eventually out of steam (housing, classic cars, antique watches...)
Housing peak and troughs = Housing has had a stellar run and the typical peak/trough model has roughly worked out through the years, this time its had a rather extended upside due to HTB/BTL/FI/QE. Not all of those levers are particularly strong now....
Sentiment = This is where I am most interested in interest rates more than the rate itself in all honesty, IR even increasing 0.25% noticeably impacted sentiment. The everlasting 0.25% base rate was no more, so that's the free money forever dream gone, then see house prices going in reverse...that's another blow to sentiment and a major one.
Anyway I digress (but my history point remains), the interest rate debate is a point of interest for me but admittedly rather low at the moment, because the impact on the other levers is seemingly so severe, a number of areas of interest in London are already down to their 2014/2015 values. Maybe you are right, who knows...lets see.
Also with the mortgage point, I can see your logic, but I look at this more from a negative equity/affordability perspective for those who are stretching themselves (who lets not be in any doubt, a large number of new market entrants are...you don't go to a city with 13x average salary and find the majority of people easily affording property) rather than those that were lucky enough to be born a few years earlier and have bought at much lower multiples/core cost and paid off a % of their mortgage.
In terms of debating where interest rates will be in x years, like I said I don't have any really strong views on it currently as I wouldn't need to borrow much but more interested in the sentiment.
Interest rate remains essentially a political tool. Attempting to apply economic logic or to correlate it to market forces is for the birds.
What we can see is that increasingly lengthy mortgage rate fixes at rates based on the current position are readily available. As others have said, it is now possible to get 25 and even 50 percent through a mortgage term on a fixed rate. If, in 10 years time, the political and economic landscape has maintained downward pressure on house prices to the extent that purchasors have seen stagnant or negative capital appreciation then the value of their home is likely to be the least of those purchasers worries.
What we can see is that increasingly lengthy mortgage rate fixes at rates based on the current position are readily available. As others have said, it is now possible to get 25 and even 50 percent through a mortgage term on a fixed rate. If, in 10 years time, the political and economic landscape has maintained downward pressure on house prices to the extent that purchasors have seen stagnant or negative capital appreciation then the value of their home is likely to be the least of those purchasers worries.
ClaphamGT3 said:
Interest rate remains essentially a political tool. Attempting to apply economic logic or to correlate it to market forces is for the birds.
.
Eh? Interest rates are used In monetary policy to influence inflation, supply of money and soft (or hard) steer economies. Its entirely market force and logic driven- in the UK devolved to the BoE not chancellor. Fiscal policy on the other hand is entirely political and tax / spend. .
Implementation of monetary policy may well be politically ideologically motivated but it's fairly easy to predict rate movement based on market and economic factors. Given the size of UK household debt and economy driven by consumer spending / service sector there really is limited scope for hawkish rate rising. With a decade of low rates and significant rise in asset wealth (for those on the ladder), it has increased consumer activity. Raising rates may have too detrimental effect on the economy given other factors such as Brexit that throw us into significant recession. It's not a binary linkage between inflation and central bank rate, other factors come into play (FX can push inflation up).
Brexit probably removes a lot of housing and speculative demand from the market + confidence to dent house price growth without having to default to rate rises. And not just London. Cardiff, Glasgow, Bournemouth etc all have significant financial service hubs that could be massively affected by Brexit.
I'd bet that Brexit uncertainty has a bigger effect on house prices than rate setting right now.
Edited by stongle on Tuesday 31st July 12:20
stongle said:
Eh? Interest rates are used In monetary policy to influence inflation, supply of money and soft (or hard) steer economies. Its entirely market force and logic driven- in the UK devolved to the BoE not chancellor. Fiscal policy on the other hand is entirely political and tax / spend.
Implementation of monetary policy may well be politically ideologically motivated but it's fairly easy to predict rate movement based on market and economic factors. Given the size of UK household debt and economy driven by consumer spending / service sector there really is limited scope for hawkish rate rising. With a decade of low rates and significant rise in asset wealth (for those on the ladder), it has increased consumer activity. Raising rates may have too detrimental effect on the economy given other factors such as Brexit that throw us into significant recession. It's not a binary linkage between inflation and central bank rate, other factors come into play (FX can push inflation up).
Brexit probably removes a lot of housing and speculative demand from the market + confidence to dent house price growth without having to default to rate rises. And not just London. Cardiff, Glasgow, Bournemouth etc all have significant financial service hubs that could be massively affected by Brexit.
I'd bet that Brexit uncertainty has a bigger effect on house prices than rate setting right now.
I agree with your point about Brexit. Implementation of monetary policy may well be politically ideologically motivated but it's fairly easy to predict rate movement based on market and economic factors. Given the size of UK household debt and economy driven by consumer spending / service sector there really is limited scope for hawkish rate rising. With a decade of low rates and significant rise in asset wealth (for those on the ladder), it has increased consumer activity. Raising rates may have too detrimental effect on the economy given other factors such as Brexit that throw us into significant recession. It's not a binary linkage between inflation and central bank rate, other factors come into play (FX can push inflation up).
Brexit probably removes a lot of housing and speculative demand from the market + confidence to dent house price growth without having to default to rate rises. And not just London. Cardiff, Glasgow, Bournemouth etc all have significant financial service hubs that could be massively affected by Brexit.
I'd bet that Brexit uncertainty has a bigger effect on house prices than rate setting right now.
Edited by stongle on Tuesday 31st July 12:20
Whilst your analysis of the theory of interest rates works as a summary it doesn't really take in the reality. You don't need to know as much about the subject as you clearly do to recognise that, had you had a bunch of economists undertaking a desk-top exercise on the UK economy with no outside intervention or pressure, we probably wouldn't be in the position we're in today.
stongle said:
Brexit probably removes a lot of housing and speculative demand from the market + confidence to dent house price growth without having to default to rate rises. And not just London. Cardiff, Glasgow, Bournemouth etc all have significant financial service hubs that could be massively affected by Brexit.
I'd bet that Brexit uncertainty has a bigger effect on house prices than rate setting right now.
Whilst that might apply to the towns you mention I think it has less effect in Coventry, Stoke, Newcastle, Merthyr Tydfil, etc.I'd bet that Brexit uncertainty has a bigger effect on house prices than rate setting right now.
nikaiyo2 said:
I don't get why mortgages are not fixed rate for the life of the loan, is there a reason for this?
At least if they were you would not have to try and forecast affordability at an unknown interest rate at an unknown time in the future.
They are in most countries. France, Italy, etc. In the UK the mortgage products are awful in comparison. At least if they were you would not have to try and forecast affordability at an unknown interest rate at an unknown time in the future.
nikaiyo2 said:
I don't get why mortgages are not fixed rate for the life of the loan, is there a reason for this?
At least if they were you would not have to try and forecast affordability at an unknown interest rate at an unknown time in the future.
30 years is a hell of a long time to fix a loan for. And banks would cover the worst case scenario so it would be ludicrously expensive. A ten year fix is a lot more expensive than a 2 year fix, so imagine a 30 year fix.At least if they were you would not have to try and forecast affordability at an unknown interest rate at an unknown time in the future.
Banks lose out if they have to cover rises but also the consumer also loses out with a drop in interest rates during fixed deals. I lost thousands on my previous 5 year fix at something like 5% when the base rate tanked.
p1stonhead said:
30 years is a hell of a long time to fix a loan for. And banks would cover the worst case scenario so it would be ludicrously expensive. A ten year fix is a lot more expensive than a 2 year fix, so imagine a 30 year fix.
Banks lose out if they have to cover rises but also the consumer also loses out with a drop in interest rates during fixed deals. I lost thousands on my previous 5 year fix at something like 5% when the base rate tanked.
The banks will hedge out the risk after taking a haircut, they wont be winning or loosing on hikes / cuts.Banks lose out if they have to cover rises but also the consumer also loses out with a drop in interest rates during fixed deals. I lost thousands on my previous 5 year fix at something like 5% when the base rate tanked.
30y gbp irs is at about 3%. Interestingly thats lower than 15y gbp irs, which is at about 3.2%.
Edited by gibbon on Tuesday 31st July 13:19
Just out of interest anyone following what is happening to the really expensive stuff in London - One Hyde Park type developments or £20m+ Central London houses etc?
I assume that this kind of stock is bought by rich foreigners, footballers, celebrities etc. Are they seeing the same falls in value that “cheaper” London stock is seeing?
I assume that this kind of stock is bought by rich foreigners, footballers, celebrities etc. Are they seeing the same falls in value that “cheaper” London stock is seeing?
BlackLabel said:
Just out of interest anyone following what is happening to the really expensive stuff in London - One Hyde Park type developments or £20m+ Central London houses etc?
I assume that this kind of stock is bought by rich foreigners, footballers, celebrities etc. Are they seeing the same falls in value that “cheaper” London stock is seeing?
I'd presume they're sufficiently individual that it's difficult to assess a trend with them, ie very small dataset.I assume that this kind of stock is bought by rich foreigners, footballers, celebrities etc. Are they seeing the same falls in value that “cheaper” London stock is seeing?
ClaphamGT3 said:
I agree with your point about Brexit.
Whilst your analysis of the theory of interest rates works as a summary it doesn't really take in the reality. You don't need to know as much about the subject as you clearly do to recognise that, had you had a bunch of economists undertaking a desk-top exercise on the UK economy with no outside intervention or pressure, we probably wouldn't be in the position we're in today.
I think you are correct, the problem we have is low rates and QE etc are just can kicking exercises. When you want to reverse it, you'll in a whole world of hurt. Just ask Trump. Whilst your analysis of the theory of interest rates works as a summary it doesn't really take in the reality. You don't need to know as much about the subject as you clearly do to recognise that, had you had a bunch of economists undertaking a desk-top exercise on the UK economy with no outside intervention or pressure, we probably wouldn't be in the position we're in today.
I can't see ant room to raise rates currently, in fact post whatever Brexit becomes we're probably going to want to be borrowing money. Big time. Large infrastructure spend / sovereign wealth / fiscal policies will be required to ease Brexit uncertainty (short term damage). A low rate environment massively helps here.
're the point on 30yr bank mortgage cost, the bank cost to build a 30 year mortgage product would likely be in the 4-4.5% range. Rate hedge 3% plus, bank levy around .1%, leverage ratio .5% + securitization costs (credit spread higher due to duration risks I guess). I think you need to be off your rocker to go that far out on a mortgage unless you have a massively stable job with low wage inflation or are really sh*t managing money.
Anyhoo, in the area of London I'm in, it's micro regions. Some streets are still selling in a day or so - others stagnant. This is all 600-1m. Other streets hang around for ages. Houses are a store of wealth in the UK, the political and BoE agendas correlate on not screwing up a consumer / debt lead economy. If Labour gets in however, all bets are off.
stuckmojo said:
They are in most countries. France, Italy, etc. In the UK the mortgage products are awful in comparison.
Yeah I think in most of the US they are fixed for life.p1stonhead said:
30 years is a hell of a long time to fix a loan for. And banks would cover the worst case scenario so it would be ludicrously expensive. A ten year fix is a lot more expensive than a 2 year fix, so imagine a 30 year fix.
Banks lose out if they have to cover rises but also the consumer also loses out with a drop in interest rates during fixed deals. I lost thousands on my previous 5 year fix at something like 5% when the base rate tanked.
I think this is where my understanding falls down...Banks lose out if they have to cover rises but also the consumer also loses out with a drop in interest rates during fixed deals. I lost thousands on my previous 5 year fix at something like 5% when the base rate tanked.
Why would a bank need to cover "worst case," if they commit say £200k today to me to buy a flat, they have paid that £200k to a 3rd party today at todays interest rates, they do not have to "go back to market" in 12 months for more funds for this loan, so why do they need to "cover" potential rate rises? Is it just opportunity cost against what they could potentially lend it for at date X in the future?
Is the cost for a 10 year fix now not more about market pricing and differential pricing, the banks would rather have people on a shorter fix than a long term fix, so if the entire market was fixed for life as standard then this differential would be removed?
It just seems to make so much more sense to have mortgages that are a known constant unless altered by the borrower.
BlackLabel said:
Just out of interest anyone following what is happening to the really expensive stuff in London - One Hyde Park type developments or £20m+ Central London houses etc?
I assume that this kind of stock is bought by rich foreigners, footballers, celebrities etc. Are they seeing the same falls in value that “cheaper” London stock is seeing?
i do expensive. I assume that this kind of stock is bought by rich foreigners, footballers, celebrities etc. Are they seeing the same falls in value that “cheaper” London stock is seeing?
rich foreigners, - yes + locals.
footballers, - not rich enough
celebrities - not rich enough
nikaiyo2 said:
I think this is where my understanding falls down...
Why would a bank need to cover "worst case," if they commit say £200k today to me to buy a flat, they have paid that £200k to a 3rd party today at todays interest rates, they do not have to "go back to market" in 12 months for more funds for this loan, so why do they need to "cover" potential rate rises? Is it just opportunity cost against what they could potentially lend it for at date X in the future?
Is the cost for a 10 year fix now not more about market pricing and differential pricing, the banks would rather have people on a shorter fix than a long term fix, so if the entire market was fixed for life as standard then this differential would be removed?
It just seems to make so much more sense to have mortgages that are a known constant unless altered by the borrower.
In the UK, mortgage borrowers prefer the seemingly lower costs of fixing for shorter periods. Longer term fixed periods would be more available if there were a demand.Why would a bank need to cover "worst case," if they commit say £200k today to me to buy a flat, they have paid that £200k to a 3rd party today at todays interest rates, they do not have to "go back to market" in 12 months for more funds for this loan, so why do they need to "cover" potential rate rises? Is it just opportunity cost against what they could potentially lend it for at date X in the future?
Is the cost for a 10 year fix now not more about market pricing and differential pricing, the banks would rather have people on a shorter fix than a long term fix, so if the entire market was fixed for life as standard then this differential would be removed?
It just seems to make so much more sense to have mortgages that are a known constant unless altered by the borrower.
As for the banks, if not deposit funded, they match fund the loans...ie go out to the market a borrow the funds for the same period and profile they expect to be lending for.
The market that does have fixed long term mortgages is the USA, and there it is the government that sources the money (Fannie mae & Mac can issue 30 year bonds as they have govt guarantee)
In the U.K., without that guarantee, who would be willing to give money to a building society for 25 years without a decent risk premium? The longest I can find is a Lloyd’s 2040 bond and a Barclays 2049 - which is 4.1%. Not sure what overheads and margin you need to put on that for retail lending.
In the U.K., without that guarantee, who would be willing to give money to a building society for 25 years without a decent risk premium? The longest I can find is a Lloyd’s 2040 bond and a Barclays 2049 - which is 4.1%. Not sure what overheads and margin you need to put on that for retail lending.
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