[Finance] Housing Market

[Weststander]

I would like more leisure time, but don't expect to get it. In order to do so, we'd need to develop a movement calling for it and, beyond a few isolated cases, that's just not happening at present.
Yes, technology has and continues to save many (though by no means all) forms of labour, and I agree with you about services -- and it's worth flagging up that many of the changes you and I refer to are happening already.

Ironically, I think many of us very regular posting ‘working’ nsc’ers, get more leisure than we think

Working in a professions office in circa 2010, I first noticed the young staff’s obsession with social media. People rearranged desks so monitors never faced the room’s door and one chap hastily put his iPhone down literally every time someone entered. I wasn’t the boss, I didn’t care.

 

[Half Time Pies]

It's a lot more complex than that.

Low interest rates have facilitated demand, but they don't create it ! People have still got to be willing and able to buy a house and service the mortgage debt.

As for landlords, they're just another scapegoat that people often blame high prices on, along with bankers, investors, estate agents, greedy sellers, second home owners, AirBnB owners, you name it. It's all a waste of time. All the time you blame someone else, you're waiting for a resolution based on the kindness of strangers. You're not spending time on solving the problem yourself. You could spend your whole life doing that.

You complain about south Devon and Cornwall, and I sympathise with the plight of the locals. I don't have an answer to it, and I'm sure the flight to space during the pandemic has made it worse.

Perhaps your very last sentence is the most telling. Perhaps migrants don't really have a material effect on house prices after all?
If you still feel a need to blame some section of society, perhaps you could do worse than blame first time buyers. There's an awful lot of them.

You have ht the nail on the head in your first sentence 'people have got to be willing and able to buy a house and importantly 'service the mortgage debt'. Interest rates affect affordability of mortgage payments, when they are low people can afford to borrow more and are prepared to pay more for a house, when they are high they can't and prices are lower.

There are plenty of historical examples of this at work, in the UK at the end of the 1980's/ beginning of the 90's interest rates went up 4% in 6 months which prompted a crash in house prices, people couldn't afford to service the debt, houses were repossessed leading to an excess of supply. Around this time interest rates were between 8% and 15%, ask yourself what house prices would look like now if interest rates were at those levels? Most peoples monthly mortgage payments would double, possibly even triple!

Since then we have seen a steady fall in the bank of England base rate, around 6%-8% range in the 90s, 4%-6% in the early 2000's and then down to zero following the financial crisis of 2008. At the same time house price growth has significantly outpaced wage growth and the only reason that they have continued to rise is because of ultra low-interest rates, whilst the gap between house prices and income has widened significantly, the cost of mortgage payments as a percentage of income as been relatively affordable.

 

[Eric the meek]

You have ht the nail on the head in your first sentence 'people have got to be willing and able to buy a house and importantly 'service the mortgage debt'. Interest rates affect affordability of mortgage payments, when they are low people can afford to borrow more and are prepared to pay more for a house, when they are high they can't and prices are lower.

There are plenty of historical examples of this at work, in the UK at the end of the 1980's/ beginning of the 90's interest rates went up 4% in 6 months which prompted a crash in house prices, people couldn't afford to service the debt, houses were repossessed leading to an excess of supply. Around this time interest rates were between 8% and 15%, ask yourself what house prices would look like now if interest rates were at those levels? Most peoples monthly mortgage payments would double, possibly even triple!

Since then we have seen a steady fall in the bank of England base rate, around 6%-8% range in the 90s, 4%-6% in the early 2000's and then down to zero following the financial crisis of 2008. At the same time house price growth has significantly outpaced wage growth and the only reason that they have continued to rise is because of ultra low-interest rates, whilst the gap between house prices and income has widened significantly, the cost of mortgage payments as a percentage of income as been relatively affordable.

First and foremost, I would agree that there is a negative correlation between house prices and interest rates.

When interest rates rise, there is downward pressure on house prices.
When interest rates fall, there is upward pressure on house prices.

But that doesn't mean to say, that house prices will fall when interest rates rise.
Neither does it mean that house prices will rise when interest rates fall.

That depends on many, many other factors!

In your final paragraph, you write 'the only reason they have continued to rise is because of ultra low-interest rates'. This is a wild statement.
To illustrate it, consider the following questions:

If interest rates were zero (nothing), but there were no houses for sale, would house prices rise? No, because there is no supply, and thus no sales. There is only a movement in price on a sale.
If interest rates were high e.g. 10%, but there were no buyers, would house prices fall? No, because there is no demand, and thus no sales. There is only a movement in price on a sale.

To recap, for ANY movement in price, you need both demand and supply - a buyer and a seller. Note that the sale may be in cash, in which case interest rates are irrelevant.

So rising (or falling) prices are due to the presence of demand and supply. Many factors affect demand and supply; interest rates are just one of them.

Take a look at this graph of interest rates vs. house prices over a 32 year period.

https://www.propertyinvestmentproje...nationwide-average-house-prices-vs-base-rate/

Over the entire period, interest rates have fallen, and house prices have risen. But does it prove you are right? Think carefully. The correct answer is 'No', but it may be a pointer.

Now look at the time period Oct 89 to Feb 94, when interest rates fell off a cliff. What happened to house prices? Very little. Does that mean that tanking interest rates has no effect on house prices? Same answer as above. It means that there might be other factors at work.

One final point. Forget using average wages as a measure of house prices. House prices and average wages decoupled 20 years ago.

Look on the UK finance website to get a feel for who is buying houses. To save you time, the scarcity of housing means that the people who are buying houses are the ones who are deemed least likely to default on the mortgage. It follows that today's buyers of average houses are not average, but are upper quartile earners, on salaries and dividends, not wages, who are deemed more creditworthy than those on average wages.

That's the result of an acute housing shortage. As property becomes ever more scarce, it gravitates to only the very best candidates. It's the same with the rental market.

 

[Half Time Pies]

First and foremost, I would agree that there is a negative correlation between house prices and interest rates.

When interest rates rise, there is downward pressure on house prices.
When interest rates fall, there is upward pressure on house prices.

But that doesn't mean to say, that house prices will fall when interest rates rise.
Neither does it mean that house prices will rise when interest rates fall.

That depends on many, many other factors!

In your final paragraph, you write 'the only reason they have continued to rise is because of ultra low-interest rates'. This is a wild statement.
To illustrate it, consider the following questions:

If interest rates were zero (nothing), but there were no houses for sale, would house prices rise? No, because there is no supply, and thus no sales. There is only a movement in price on a sale.
If interest rates were high e.g. 10%, but there were no buyers, would house prices fall? No, because there is no demand, and thus no sales. There is only a movement in price on a sale.

To recap, for ANY movement in price, you need both demand and supply - a buyer and a seller. Note that the sale may be in cash, in which case interest rates are irrelevant.

So rising (or falling) prices are due to the presence of demand and supply. Many factors affect demand and supply; interest rates are just one of them.

Take a look at this graph of interest rates vs. house prices over a 32 year period.

https://www.propertyinvestmentproje...nationwide-average-house-prices-vs-base-rate/

Over the entire period, interest rates have fallen, and house prices have risen. But does it prove you are right? Think carefully. The correct answer is 'No', but it may be a pointer.

Now look at the time period Oct 89 to Feb 94, when interest rates fell off a cliff. What happened to house prices? Very little. Does that mean that tanking interest rates has no effect on house prices? Same answer as above. It means that there might be other factors at work.

One final point. Forget using average wages as a measure of house prices. House prices and average wages decoupled 20 years ago.

Look on the UK finance website to get a feel for who is buying houses. To save you time, the scarcity of housing means that the people who are buying houses are the ones who are deemed least likely to default on the mortgage. It follows that today's buyers of average houses are not average, but are upper quartile earners, on salaries and dividends, not wages, who are deemed more creditworthy than those on average wages.

That's the result of an acute housing shortage. As property becomes ever more scarce, it gravitates to only the very best candidates. It's the same with the rental market.

Of course there are other factors at work! However in an earlier post you stated 'If you take the view, as I do, that house prices are purely a result of supply and demand, then the problem can be narrowed down to 'too many households' and/or 'too few houses'. Scapegoating banks, investors or anyone else is a waste of time'. Equally as wild a statement!

Interest rates don't track perfectly because of what might be going on with the wider economy, the rise in interest rates at the end of the 80s started the crash, and rates dropped too late to help home owners that could no longer afford to service the debt, prices fell substantially and the economy took some time to recover from the subsequent recession. Following a recession lenders often tighten criteria so, although interest rates may be low, mortgages may not be readily available, also the mortgage rate that is available may be significantly higher than the base rate as lenders price in added risk until confidence returns.

What i am talking about is the long term trend in excessively high prices rises, if theoretically rates were to stay approximately the same, or within a range, and prices continued to rise, there would be a point at which prices would stop rising as houses would no longer be affordable until incomes caught up or prices fell. There are only so many of your upper quartile earners and the housing market replies on first time buyers entering the market keep it moving along (unless they are investors in order for people to buy they need someone to sell to).

In your example where interest rates are zero (nothing), but there are no houses for sale, this is more or less what happened for periods post 2008, there was no pressure on people to sell because of low monthly mortgage payments but people were unable to move up the property ladder because of tightened mortgage criteria and high prices. The government ended up stepping in with initiatives like help to buy for first time buyers who couldn't get a mortgage.

In your other example where interest rates were 10%, there would be stressed sellers who couldn't afford mortgage payments, prices would then drop until there were more buyers.

I would argue that interest rates also have a huge bearing on confidence in the Housing Market in general, and particularly interest rates available on fixed rate mortgages, one of of the factors that has contributed to recent price increases have been the availability of 5 year fixed rate mortgages at historically low interest rates. When these are available people can have confidence that it doesn't matter what happens in the wider economy in the short to medium term they have stability in their outgoings and particularly during a period of higher inflation.

 

[Eric the meek]

Of course there are other factors at work! However in an earlier post you stated 'If you take the view, as I do, that house prices are purely a result of supply and demand, then the problem can be narrowed down to 'too many households' and/or 'too few houses'. Scapegoating banks, investors or anyone else is a waste of time'. Equally as wild a statement!

Interest rates don't track perfectly because of what might be going on with the wider economy, the rise in interest rates at the end of the 80s started the crash, and rates dropped too late to help home owners that could no longer afford to service the debt, prices fell substantially and the economy took some time to recover from the subsequent recession. Following a recession lenders often tighten criteria so, although interest rates may be low, mortgages may not be readily available, also the mortgage rate that is available may be significantly higher than the base rate as lenders price in added risk until confidence returns.

What i am talking about is the long term trend in excessively high prices rises, if theoretically rates were to stay approximately the same, or within a range, and prices continued to rise, there would be a point at which prices would stop rising as houses would no longer be affordable until incomes caught up or prices fell. There are only so many of your upper quartile earners and the housing market replies on first time buyers entering the market keep it moving along (unless they are investors in order for people to buy they need someone to sell to).

In your example where interest rates are zero (nothing), but there are no houses for sale, this is more or less what happened for periods post 2008, there was no pressure on people to sell because of low monthly mortgage payments but people were unable to move up the property ladder because of tightened mortgage criteria and high prices. The government ended up stepping in with initiatives like help to buy for first time buyers who couldn't get a mortgage.

In your other example where interest rates were 10%, there would be stressed sellers who couldn't afford mortgage payments, prices would then drop until there were more buyers.

I would argue that interest rates also have a huge bearing on confidence in the Housing Market in general, and particularly interest rates available on fixed rate mortgages, one of of the factors that has contributed to recent price increases have been the availability of 5 year fixed rate mortgages at historically low interest rates. When these are available people can have confidence that it doesn't matter what happens in the wider economy in the short to medium term they have stability in their outgoings and particularly during a period of higher inflation.

How do you reconcile 'of course there are other factors at work' with this in your previous comment 'At the same time house price growth has significantly outpaced wage growth and the only reason that they have continued to rise is because of ultra low-interest rates'?

In what way does 'the only reason' equate to 'of course there are other factors at work'?

 

[Half Time Pies]

How do you reconcile 'of course there are other factors at work' with this in your previous comment 'At the same time house price growth has significantly outpaced wage growth and the only reason that they have continued to rise is because of ultra low-interest rates'?

In what way does 'the only reason' equate to 'of course there are other factors at work'?

Because in your reply you were talking about prices being affected by a range of factors on a moment by moment basis which of course is true, but I am talking about the long term upwards trend of house prices in the UK defying gravity, which is only made possible by the availability of cheap credit.

 

[Eric the meek]

Because in your reply you were talking about prices being affected by a range of factors on a moment by moment basis which of course is true, but I am talking about the long term upwards trend of house prices in the UK defying gravity, which is only made possible by the availability of cheap credit.

To confirm, you say that prices are affected by a range of factors on a moment by moment basis, but widen the time horizon, and all those factors mysteriously vanish, and long term price rises are dependent only on cheap credit.

Not very likely is it? Aren't you massaging the data to fit your theory? If you want to be truly objective, you need to change the theory to fit the data.

You didn't look at the graph did you? The period from July 03 to July 07 shows both house prices and interest rates rising. The period July 07 to Feb 09 shows they both fell. So for an aggregate period from July 03 to Feb 09, the data doesn't agree with you, for both rising and falling house prices. There are other anomalies.

We're going to have to agree to disagree. It's Friday night !

 

[StonehamPark]

Significant 'age quake' issue in China and not enough being born? There's bloody millions of them. How many more do they need? Perhaps if they stopped moving in to other countries etc where they aren't welcome and just stayed in China, working out how to make laboratories secure, there might not be such an issue.

Yikes.

 

[Half Time Pies]

To confirm, you say that prices are affected by a range of factors on a moment by moment basis, but widen the time horizon, and all those factors mysteriously vanish, and long term price rises are dependent only on cheap credit.

Not very likely is it? Aren't you massaging the data to fit your theory? If you want to be truly objective, you need to change the theory to fit the data.

You didn't look at the graph did you? The period from July 03 to July 07 shows both house prices and interest rates rising. The period July 07 to Feb 09 shows they both fell. So for an aggregate period from July 03 to Feb 09, the data doesn't agree with you, for both rising and falling house prices. There are other anomalies.

We're going to have to agree to disagree. It's Friday night !

Yes agree to disagree but just coming back on your point, the period you selected is very easy to explain 03 - 07 was a house price bubble, the reality was that people couldn't afford the mortgage repayments on the properties they were buying yet still could get the credit because of loose (and frankly reckless) lending practices. 07 - 09 was when the bubble burst and we all know what happened then, the BofE lowered interest rates to save the economy but we hit a global recession so prices fell. At that time the only thing that saved the housing market from catastrophic collapse was those zero interest rates!

 

[Eric the meek]

Yes agree to disagree but just coming back on your point, the period you selected is very easy to explain 03 - 07 was a house price bubble, the reality was that people couldn't afford the mortgage repayments on the properties they were buying yet still could get the credit because of loose (and frankly reckless) lending practices. 07 - 09 was when the bubble burst and we all know what happened then, the BofE lowered interest rates to save the economy but we hit a global recession so prices fell. At that time the only thing that saved the housing market from catastrophic collapse was those zero interest rates!

I appreciate the history lesson, but the point remains that all the real world data I quoted, is the opposite of what your theory suggests!

To paraphrase your comment above, 'I would have been right, were it not for a house price bubble, reckless lending, the bubble bursting, a lowering of interest rates and a global recession'.

That doesn't mean your theory is right. It means you are good at explaining away the bits which don't match the real world data!

 

[LamieRobertson]

Get ya own thread

 

[Half Time Pies]

I appreciate the history lesson, but the point remains that all the real world data I quoted, is the opposite of what your theory suggests!

To paraphrase your comment above, 'I would have been right, were it not for a house price bubble, reckless lending, the bubble bursting, a lowering of interest rates and a global recession'.

That doesn't mean your theory is right. It means you are good at explaining away the bits which don't match the real world data!

It depends over what period you look at the data, if you drew a trend line from 1989 to 2017 there would be a very high correlation. The overall trend is house prices up and interest rates down, that data certainly doesn't disprove the theory at all.

To draw a proper conclusion you would have to do a deep dive in to the data, like these economists at the Bank of England have done:
https://bankunderground.co.uk/2019/...s-not-goods-taking-the-theory-to-the-uk-data/
https://bankunderground.co.uk/2020/01/13/whats-been-driving-long-run-house-price-growth-in-the-uk/

 

[Eric the meek]

It depends over what period you look at the data, if you drew a trend line from 1989 to 2017 there would be a very high correlation. The overall trend is house prices up and interest rates down, that data certainly doesn't disprove the theory at all.

To draw a proper conclusion you would have to do a deep dive in to the data, like these economists at the Bank of England have done:
https://bankunderground.co.uk/2019/...s-not-goods-taking-the-theory-to-the-uk-data/
https://bankunderground.co.uk/2020/01/13/whats-been-driving-long-run-house-price-growth-in-the-uk/

But it doesn't prove it either! It hasn't gone unnoticed that you haven't actually claimed that it does.....

Now it's time to park this. We've both given it a good go. I have a busy day before the game tomorrow and any more replies from you will be met with groans!

By all means have the last word.

 

[heathgate]

I just made 48k in 5 months on my property here in Wedmore, Somerset... I am selling again simply to grab that increase and try to get another tranche of cash on the next place, a 200 year old cottage 4 miles away,.... quite a buoyant market here.

Sent from my SM-G950F using Tapatalk

 

[Uncle Spielberg]

The under 1%, 5 year fixed rates lasted about 2 weeks, now over 1.50%. As commented on by others the low prices of mortgages is a factor for the over heated market