Yes but in the 1970's people were used to high inflation, and they knew that they might be stretching themselves to the limit when first buying, but that in a few years their payments would go down significantly in real terms due to inflation.
Similarly in the 1990's, nobody expected interest rates to, say, go up by 1.5 times to 22.5%. With rates at 4.75%, the possibility of them going up 1.5 times is very real.
So these two factors need to be considered when assessing "affordability".
"Andy Pandy" wrote
As Tumbleweed admitted above, he **didn't know** that inflation was going to be high afterwards. But he still bought.
"Andy Pandy" wrote
Why do you think that is significantly more likely than 15% rates going up to 22.5% ?
Of course he didn't *know*, but high inflation was something people were used to and expected. My parents bought in the 1970's with exactly that in mind - they were stretched for a few years and then payments became easy.
Now people expect low inflation, so if they're stretched when they first buy, they'll be stretched for a long time.
Because such high interest rates would have caused economic damage and the government would almost certainly have done something to prevent such high rates. Do you really think a base rate of 22.5% was as likely in the 1990's as
7.25% base rate is in the next 10 years or so? Even if you do, I doubt many people would agree, and it is that perception that is important.
!!!95% confident of zero-growth for 10-20 years!!!
NEXT!!
...and a perception not entirely insensitive to the historically high house-price/wage ratio...
"Andy Pandy" wrote
They might be "stretched", but they can still *afford* it!
"Andy Pandy" wrote
Don't you think that 15% rates also caused economic damage? Why didn't the government do something to prevent 15% rates?
"Andy Pandy" wrote
For someone in 1990 looking back at previous bank rates, they'd see rates of
17% just over 10 years previously, and an average over the previous 20 years of around 11-12%, with current rates sitting at 15%. So they shouldn't have been surprised if rates had then gone to nudge over 20% ...Let me ask you a question -- when base rates were 10%, prior to going up to
15% -- how likely do you think it was that they'd "go up 1.5 times" to 15% ?
"curiosity" wrote
Even 10-20 years of zero real growth, *WILL* keep pace with inflation ... So certainly no crash!
In message , curiosity writes
YAWN!!
A talk given at work by Roger Bootle last month using data supplied, IIRC, by Datastream.
Quite, but subsidised housing that's wrongly allocated is worse than private housing that's wrongly allocated because the latter can be expected to self-correct whereas the former need not.
"Richard Faulkner" wrote
Except that 5 or more years ago, renting the house cost more than renting the money, which is why BTL emerged. Now that that is no longer true, and renting either the money or the house costs essentially the same, there is no particular advantage to buying over renting. Buying carries a unique disadvantage in the shape of exposure to price falls. This risk should, I would have thought, start to push rental yields back up quite soon; I have just increased the rent on my BTL by 2% which may reflect this.
Except they cannot realise it, and what are they are now sitting on is a long position in a market that's on the way down. The preferable position is be short of housing at present, but this is not to say that we should all sell. The cost of exit, re-entry, and bringing a new place back up to the standard of the old requires belief in a larger correction than many of us expect.
In message , John Redman writes
You are picking petty holes. I mention 5 years and you think I am being specific, so you provide an argument which counters the specific - I am making a general point, which is why I also mentioned 10/15 years ago.
I.e. if you bought a house more than say, 5 years ago, you are quids in.
I think you would be hard pressed to find someone who isnt quids in, one way or another.
Where is it? Are you getting the increase?
Of course they can realise it!! Say they bought for £40,000 in 1988, and are now worth say, £225,000. They can sell for say £200,000, buy smaller, or different location, for £125,000, and have £75,000 to play with.
Or they can sell for £200,000, and rent somewhere.
I am not saying they should realise the growth, merely that they can.
"Richard Faulkner" wrote
No, I'm making an equally general observation in reply, which is that once the cost of renting falls below that of buying, one should *expect* capital house values to fall. Instead, buyers display no such expectation on the whole, and instead exhibit grossly irrational behaviour. This is why one reads of renters who think renting houses at 5% is 'money down the drain' and 'paying off somebody else's mortgage', as though renting money at 5% is somehow different.
Buying somewhere and treating the subsequent inflation in price as capital growth overlooks three things. One is the cost of maintenance, which IME house owners almost *always* ignore when contemplating their 'gains'. If you have to spend even 2% per annum of the price of a house maintaining / cosmetically improving it, suddenly it's not such a great return after all. The second point is that, as you've pointed out below, actually accessing the 'growth' entails accepting a sacrifice in terms of space or location, so there's a cost to getting at the supposed gain which rather suggests there's no gain at all. And finally, it overlooks the fact that owning something at a cost of 5% while having to maintain it *and risk its value falling* is a crap, crap deal compared to renting it for 5% and letting someone else lose all the money.
West London; rent has just gone from 1690pcm to 1725. I reckon the place is worth 385,000, so a gross yield of 5.4%. About all one can expect at the mo' I feel.
"John Redman" wrote
No, what you said was "push rental yields back up". That could mean **rents increasing**, rather than housed prices falling.
"John Redman" wrote
Well also, you'll probably find that " *renters* display no such expectation on the whole, and instead exhibit grossly irrational behaviour...".
"John Redman" wrote
If you "rent 100K money at 5%pa" to buy a house costing 100K, and then sell it (say) 10 years later at a price 5%pa higher than you bought, then you get back all the "rent" money which you've spent over those years.
However, if you "rent a 100K house for 5Kpa", and then leave 10 years later, you do *not* receive back the rent you've paid during those 10 years!
So, from the above, of course "renting money" is *definitely* (not just "somehow") different to renting the house.
[Don't forget that it's been shown that average mortgage rates and average house price growth have been much the same in the past.]"John Redman" wrote
Maintenance is basically the only cost of owning -- as shown above, mortgage interest and house price growth cancel each other out. So, you need to compare paying 2% for maintenance (when owning) against 5% for rent (when renting). No contest!
"John Redman" wrote
What kind of contorted logic is that? - "If you have to give up the thing you are selling for a gain, then it isn't a gain at all..."
"John Redman" wrote
You are only considering the "downside". The "upside", over a reasonable period of time, (history has shown) is actually more likely.
"John Redman" wrote
Buying also carries a unique advantage in the shape of exposure to price rises.
Further, buying carries many more advantages, such as having greater control over decoration / maintenance / visitors etc etc.
In message , John Redman writes
??? Those that rent dont have the opportunity to accept the sacrifice in return for a lump sum, (perhaps a reduction in rent, but not a lump sum).
Having owned only 1 property in 1998, I've accessed my gains several times over the past 5 years, and invested in more property with them. I now live in a small flat rather than a 5 bedroomed house, and have retired to live off the rents.
No Growth??? No Gain??
Why have you got a BTL?? Or is it the BTL which has made you so cynical?? If the latter, dont forget that investing in property is a long term thing, and you will look back in 10/15 years and wish you had bought more.
Perhaps that's the best you can hope for.
One of Capital Economic's spokespeople on the radio last year suggested that once Joe Dokes realises there's no growth investment potential in the housing market that that in itself could rip the heart out of the market. The argument was basically that Joe panics unless his pile is growing and more recently with BTLers displacing FTBers in significant part Joe's sensitivity to this - and hence the market's sensitivity to Joe - shouldn't be underestimated.
If past performance is anything to go by then it's unlikely that the next 20 years will pass without at least one major bust and boom with possibly a recovery to today's prices. A look at the latest HP/wages graph would suggest a fall is just begging at the moment though I concede this might not happen just yet.
Note that Farlow talks in probabilities yet you take the liberty of converting this to certainty. Promises of such rash certainty are best left to unscrupulous estate agents..............(!)
Let's not lose sight of the OP's original message. Even he might concede that the long-term prospects for the housing market are reasonable but his message was about the possibility of an imminent crash and the folly of buying a property right now. A canny buyer will watch and wait.
Well your cat is finally out of its bag and your zealousness on this subject is fully explained!
A vested interest!!
....and over-extended BTLers!!!
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