I am still trying to work out why the media in general think that ridiculously high house prices are a good thing.
The only problem with low prices is when the build cost is less than the market value: then it wouldn't pay to build any new houses.
The last government was keen on affordable homes for hard working families, while at the same time fuelling the credit boom. Of course if someone has paid a "bubble" price then they'll experience a value dip, however the next step up will be a lot less.
Can someone please explain why it is so difficult to transfer negative equity from one property to another. i.e. little ability to move house with negative equity. The end result for the bank/building society is the same, if there is a default and a forced sale then the bank/ building society makes a loss.
I was in neg equity for 10 years. It became such a problem that when the credit boom started, lenders started 100% + mortgages so that people could mortgage their neg equity and take it with them. Then greedy people wanted 125% mortages so they could buy a house *and* buy some goodies. Now 100+, and even 100% mortages are finished - back to the old days of staying put for years and years while people scream in your ear to get on your bike to get some work while not getting it that the lender generally won't let you sell or rent the property out while there is more owing on the mortgage than the property is worth.
Because a mortgage is a secured loan and the security is only real if the securing asset (equity) is valued higher than the outstanding balance of the loan.
If an asset loses value to the point that the borrower moves into negative equity then that will not force a sale provided payments are maintained though transfer of the mortgage to another provider would be impossible unless the negative balance was cleared.
part one i think you are reacting too quickly.... the government is forcing the banks to increase equity....thus at present they're short of funds to lend...
meanwhile there are still downward pressure on prices...
the banks may lend to you on transfers if they think you can pay...eg you've just landed an apparently secure well paid job...
if the prices are headed lower the banks (and you) may well be facing further increase of negative equity...
if you try to trade down...there will be less equity in the new house...clearly a bank will want to take the cream from your trade down...eg get some of their at-risk money back....
if you were to wish to trade up, you'd be likely to increase your negative equity...
the banks are not your friends...they're in it to maximise profits... their profits... ... part two... the value of 'your' house is already falling much more that you realise....because the currency is process of being heavily debauched... this means your debt on the house is being eroded...
but the numbers(the price) is running in the other direction... ie, there are upward pressures on the *price*
in due course the price will rise to the present level of the outstanding debt...or above... at which time the banks will set about trying to wind in the next tranche of marks/idiots... if you wait long enough you will have positive equity...and thus even profit from the game... ... part three....summary...
the price of your house is going up, but in ever less valuable money...
*and* the price is going down(at present)
thus the real value of your house is dropping via *two* (related) mechanisms....
last time around the drop in housing prices air was about 50%...half in inflation and half in dropped prices... the process took 5 or 10 years...
then the circus restarts...
governments love inflation...if you care enough to do some work...
formatting link
the sharpies will wait and wait and wait until they judge the house prices won't go any lower... the reasonably sane working people will tough it out and treat the house as a home... those in strong positive equity may even sell and start a business which will probably fail....
Erm, moving house is more expensive if prices are high (extra stamp duty, estate agents fees etc). The only advantage of rising prices is if they move downmarket and so cash in the increased equity. Do they move downmarket every time?
Because journalists are generally thick? Especially property journalists.
Some proper financial journalists have argued that lower house prices would be a good thing.
Yes, their ridiculous policies fuelled the bubble. If "key workers" can't afford housing in certain areas then that problem will soon fix itself, when local schools, hospitals etc can't get staff.
Yup.
Not sure, but in general people want to move upmarket, and if the new house is more expensive (inc running costs), then the borrower will have less money to service the loan so the negative equity is at greater risk.
What, so they start off in a big house and move to smaller and smaller ones with every move?
Until you find that that ideal small retirement bungalow you've set your heart on costs the same or more than your 4 bed family house (as people I know have found out).
Which they'll probably have to spend on buying a house, or financing their kids to buy houses, as most first time buyers have to be assisted these days as prices are so high.
Rising prices obviously transfers money from sellers to buyers, the main net sellers being the deceased, and the main net buyers being the younger generation buying their first house and families needing a bigger house. So the younger generation inheriting housing which they then have to spend on housing is a zero net gain on average.
Borrowing too much money against houses is what caused the current crisis.
Erm, nope. Unless ... (it all depends on what you mean by "less" -- less than what?)
If (as I thought when reading the above) it means "less than if he had not paid a bubble price", the answer is indeed "Nope".
Suppose house price inflation affects cheap and expensive houses the same way, i.e. upmarket and downmarket houses experience the same percentage rises and falls in price. This doesn't always hold in practice, but for comparative purposes let's pretend it does. Hence we can suppose that "the next step up" always means moving to a house which is 50% more expensive than the one you're selling, regardless of past price movements. We'll also disregard the overheads of selling/moving/buying.
So, let's look at a cheap 100k house, which goes up 30% in the bubble, and our guinea pig buys it then for 130k. Then there's a 20% drop, so its value goes down to 104k. He then moves to a 50% more expensive house. This'll cost him 52k plus his sale proceeds.
If he had not paid a bubble price because he bought pre-bubble, he'll have bought the house for 100k. Then the bubble comes and goes. Value goes up
30% and down 20% before he moves. He still sells for 104k, and the new house will still cost him 52k plus his sale proceeds. Exactly the same!
If he had not paid a bubble price because there was no bubble, he'll have bought for 100k, and if there's then a 20% drop, to 80k, his move will cost him 40k plus the sale proceeds. That is indeed less than 52k, but is not, I think, the situation Dave had in mind (because there has in fact been a bubble).
Perhaps he meant "less than if there had been no dip". Well, in that case it's true. A house 50% more expensive than 80% less will cost you less than a house which is 50% more expensive than 0% less. Duh. But that's true irrespective of whether one has previously paid a bubble price or not, so I don't understand why that qualification was included.
Well of course. Paying a "bubble price" is obviously never a good idea. But *having paid* the bubble price, a value dip can be good news if the next move is upmarket as the price differential will be less. Obviously negative equity could cause problems.
That's what I understood.
I think he was trying to say that the fact it was a bubble, rather than a sustained increased in price, is not all bad.
that looks muddled to me.... why not look at the house in terms of affordability (there are always several ways to assess a deal)
was the price to the older generation 3 times their wages (at outset) as it is now to the next generation? or otherwise... are the mortgage payments higher or lower in purchase time wages terms?
at present, 'interest rates' are unusually low....
imv most purchasers are so economically uninformed that they look at mortgage payments and not a present price
The simplist way is for a forced sale by auction to arise when a property enters negative equity. That way no one is trapped. Also help drive property prices down. A main reason jobs go abroad is that the cost of living in UK is so high, and a significiant element of that is housing costs.
But the vested interests of the "landed" classes will do everything to prevent this, including getting into bed with the bankers
Rubbish! That's not the *only* advantage at all...
Let's say they always get a 75% mortgage (interest-only to keep it simple), and when they move they spend their existing equity on:- deposit (25% of new house) SDLT (say 3% of new house) estate agents (say 3% of old house).
Suppose they bought their first house for 100K with 75K mortgage.
Now, if house prices rise by only 5%, then the house will be worth 105K. They'll have 30K equity to spend on deposit/SDLT/agents. Estate agents cost 3.15K, so they have 26.85K to spend on 25% deposit & 3% SDLT.
That means new house price 95,893. They'll get a worse house than before!
But now let's suppose house prices had risen by 25% instead of 5%, so their first house would then be worth 125K. They'll have 50K equity to spend on deposit/SDLT/agents. Estate agents cost 3.75K, so they have 46.25K to spend on 25% deposit & 3% SDLT.
That means new house price 165,179. They'll get a better house than before!
In the first case (house prices rising by 5%), they move to a new house worth only 91% of their previous one. But in the second case (house prices rising by 25%), they can move to a nice new house worth 132% of their previous one!
Therefore, another advantage of rising prices is that it makes it easier to move *up*market.
Except you ignore the fact that they're paying much more in mortgage in the second case. If they can afford that amount extra, then they could easily afford to get this second house anyway - as it'd be cheaper if HPI had been 5% instead of 25%. They'd need a bigger LTV, which might mean a higher rate, but the mortgage would be smaller so overall it'll almost certainly be cheaper.
Also if you assume they can suddenly afford a 65% jump in their mortgage payments, why could they not afford to save prior to moving, to increase the deposit they put down on the new house?
Only for those who are too poor to be have been able to save anything to put towards their next house, yet at the same time rich enough to be able to afford a big jump in their mortgage.
BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here.
All logos and trade names are the property of their respective owners.