House Prices to Plunge 40% (for Sam)

"Alex Butcher" wrote

You were talking about mortgages. The size of a mortgage loan is only one factor in the cost of the mortgage - the other main determinant being the interest rate. By implication, you therefore also need to consider the interest rate!

Right, I figured you might be coming at it from that angle, but I didn't want to put words in your mouth.

Yes, I've heard the argument that "we're now in an era of permanently low interest rates, so the only thing we need to concern ourselves with is the affordability of the monthly mortgage repayments, rather than the total amount repayable". That seems to be from the same school of thought that says "hey, with this Internet boom, our pension funds are many years ahead of where they should be, so us employers can stop paying into them for a few years!"

I've not, however, heard any arguments that convince *me* that we *are* in an era of permanently low interest rates. About the only ones that come close are those that point to a Japan-style deflationary period, which brings with it its own problems (i.e. that 133K mortgage for a 2 bed terrace looks even sillier when you find you can buy a 5 bed in a better area outright for 100K due to the effects of deflation).

What arguments convince you that we are in an era of permanently-low (or even "permanently low for the next 25 years or so") interest rates?

Best Regards, Alex (not a professional economist :-)

"Alex Butcher" wrote

I am not convinced at all. I was merely asking a question! ;-)

Anyway, you don't need to be convinced. If interest rates rise and you can't afford the repayments, simply trade-down! [You'd end up in the same situation as if you had bought a smaller house originally; but would be able to enjoy a larger house for a period as well...]

The flaw in that master plan is that in a market where most properties are already occupied, for everyone trading down someone else must trade up. If high interest rates make it hard for everyone to trade up, then trading down is not something that can be done "simply"!

...and that's without taking into account that it's reckoned that in a normal market, it takes about 6 years to recoup the costs incurred in purchasing, AND that if interest rates were to rise dramatically, then house prices might well fall also, bringing back the spectre of negative equity. Further, if interest rates rise, then a rise in unemployment wouldn't be unexpected (though which is the cause and which is the effect is open to debate!) meaning that if one wanted to stay employed, it might be required to move to another area for work.

Best Regards, Alex.

"For everyone trading down someone else must trade up"? That's simply not the case.

Matti

Yes it is. It doesn't necessarily mean that for every two trading down two must trade up, of course, but it could be a 3-member cyclic swap with 2 going down and one up, or vice-versa.

OK, I know I only said "most", and then proceeded as though I had said "all" [properties are occupied], and you may chide me for that if you wish. But if all are occupied, you can't have linear chains but only loops, and unless those loops are "horizontal" [involving no participants moving upmarket or downmarket] they can't all move up or all down; at least one must go in the opposite direction to at least one other.

One grand house converted to 10 flats might skew the one-to-one-ness. Also mortgage-equity release enabling exisitng home owners to buy a cheap holiday home (uptrading) from a villager who is also uptrading. And chain length is a factor. A 5-chain could be closed with one FTB (arguably 'up'), 3 uptraders and one down. (e.g.Jack Gold's TV play 'The Chain' - the dying millionaire at the top buys and returns to the house at the bottom where he was born). No, it doesn't happen every day but the man at the top might retire to Spain. Skewed also because we're becoming 'wealthier'

"Ronald Raygun" wrote

Aren't you assuming that households always move as "units"?

Consider this:

Someone (A) dies, leaving a house [A] which is then sold. Household (B) sell & trade-down to house [A]. Young whizz-kid (C), previously living with parents, has just made a lot of money and 'first-time-buys' house [B].

We have (A) NOT trading up (they died). We have (B) trading-down. We have (C) neither trading-up NOR trading-down.

Please tell me who has traded-up in this case??!

"Alex Butcher" wrote

No -- you're misusing the standard phrase "for every A there is a B", which implies the same number going up as going down. Extending it as you are now doing is to destroy the interest-rate point you built on it.

Matti

also meant to say, the quality of our housing stock has undergone significant improvement (apparently) via make- overs and extensions. This has to result in a bias towards uptrading however the underlying argument is presented.

I swear I read that figure in my Which? guide (published September 2000), but I can't seem to find the exact reference right now.

The major costs they were presumably referring to probably included:

- stamp duty

- land registry fee

- local authority searches

- lender's legal fee

- valuation fee

- mortgage arrangement fee

- structural survey

- house-hunting expenses

- buildings insurance

- removal expenses

- utility (re)connection charges

- new locks

- solicitor's/conveyancer's fee

- breakages during moving/replacement furnishings

Add 'em all up, and it's not something you want to be doing every five minutes. And that's without including the hassle factor. ;-)

Best Regards, Alex.

"Alex Butcher" wrote

Even that lot is very unlikely to exceed (say) 5% of purchase price. So you are expecting, in a *normal* market, house prices to rise at less than 1% each year??!! :-((

True, the phrase is often used in a way which does imply that, but it doesn't always have to be like that. Consider "for every child there is a parent".

Not really. My point was that high rates makes it harder to trade up, and therefore harder to trade down. In a cyclic chain with only one up-trader but three down-traders this may seem to make it three times as easy to trade down, but this isn't really the case because each down-trader only benefits from part of the value.

Perhaps what I ought to have said in the first place is that for every pound released in a down-trade, a pound has to be spent in someone else'e up-trade (more, in fact, as money leaks out of the system in professional fees and stamp duty).

Yes, I was oversimplifying to make a point.

Well, one could get into a fruitless argument over whether (C)'s move does or doesn't constitute trading up, but that's not really the issue. The point is that to facilitate (B)'s trade down to [A], someone (in this case (C)) has to spend the money to buy [B].

In general (excluding cash buyers) higher interest rates mean this kind of spending will become rarer, and so opportunities to trade down will too.

Equity doesn't grow on trees. If you want to extract it, someone has to pay.

Lucky you. They're over 8x my income here and I'm on above average income.

Agreed.