Housing Costs

[OpiateOfTheMasses]

This might be a bit left field, but I thought I'd raise it and see what you think...

Both here in the UK (especially in the south-east) and in parts of the US there have been and continues to be a huge inflation on house prices. Some parts of the London increase by an average of 8 or 9% a year regardless of the wider economic situation for example.

Now if you're already on the housing ladder this is fantastic.

But if you're trying to buy your first house it's bit of a nightmare.

There are various things the government could do to stop the prices going up as quickly, or even potentially make them reduce, which would help first time buyers. Yay for first time buyers!

But this would be unpopular with existing owners, potentially leaving a reasonable number of them as mortgage prisoners if the prices even declined. Bad for existing owners.

So what's the right thing to do? Help the first time buyers be able to buy an house where they want to live? Or ensure that those people who've already got on the property ladder continue to make money? I see this as an issue that will become more and more acute as time goes on...

[Blade Azaezel]

When my parents bought their new build 4 bedroom, double garage, detached house 17 years ago, it cost 3x my dad's annual salary (not taking into account what my mum was earning, which was fairly similar).

When I look at 2 bedroom, terraced, new build homes with tiny garden and one parking space...they are 4x my dad's old annual salary. It is ridiculous. The government needs to be building more affordable homes or at least introducing more council houses.

I am considering taking a massive gamble on a 3 bed new build, using the government 'help to buy' loan. The house is £165,000 so it'll be somewhere I'll likely live for the next 15-20 years, unless I get a pay rise/promotion and can upscale. Course, the likely outcome is I go broke and downscale

[OpiateOfTheMasses]

Ultimately it's your choice...

Personally, we came to the conclusion that once you've bought the house your mortgage payment will essentially stay the same (give or take the vagaries of the Bank of England Base Rate) whilst rent will continue to go up and up. And as an additional perk after 25 years or so you actually own the house so you get to stop paying altogether. So it was worth going through a few years of tight belts to get on the property ladder because once we'd survived the pain, five or ten years down the line we'd start to see the benefit.

And it is kind of working out that way. So if you're prepared to live like a bit of a monk for few years if - when! - the base rates go up, then I'd probably say go for it.



As to the wider question, building more affordable homes sounds great as a sound bite, but it's more complicated than that. The government doesn't build them - private companies build them. And private companies don't like building them because they're not as profitable as bigger houses. So they do things like 'Help to Buy' to incentivise the builders to build them and to make it easier for first time buyers to afford them.

On a big picture though, the biggest housing demand is in primarily within commuting distance of London and it gets very expensive. Even where I am (and it takes me just over an hour to commute to the office to London) a one bedroom flat will set you back about £200k - and that's considered affordable housing for first time buyers round here. But would you or I consider that "affordable first time buyer" property? I wouldn't. Even if they took a 95% mortgage they've got to scrape together £10k for the deposit and a further £3k or so for the conveyancing and other fees. That's a lot of money - particularly for a first time buyer.

[aels]

Apparently the disparity between house prices and wages in Cornwall is terribly bad so I'm just going to live at home forever and be buried in the back yard with my childhood cats, wheeeeeee.

In Cornwall, houses are about 10 times the cost of the average wage, which, according to the Office for National Statistics, was just under £21,000 last year.

Note 'average wage' - I live in one of the poor and shitty parts of Cornwall and no one I know is making close to £21k.

[Blade Azaezel]

I am making roughly 21K a year but only because I have done a fucking load of overtime this year. It's exceeded 200+ hours now. Now, obviously there are lots of people who do far more overtime, but considering I do a dogsbody job that pretty much any trained monkey can pull off, this kind of overtime just shouldn't be available. course, half of my team are pulling sickies 6 months of the year, and the other half are fecking incompetent and don't give a shit about falling behind, so it falls on me to actually keep us afloat. I've asked for a raise this year. if I don't get it, yammo burn that motherfucking place to the ground

[aels]

DO EET. I'll help you, I need a holiday. We'll burn some shit, have a barbeque, it'll be nice.

[Blade Azaezel]

Sounds like a plan! I'd like to see them try and get any real work done without me there, bunch of bastards.

[OpiateOfTheMasses]

Well here in the affluent South East of England, £21k isn't going to get you very far.

But that's kinda part of the problem. If you can somehow claw your way onto the housing ladder here then your house will go up and up in value every year just because of where it is and in 10 years time I can afford to sell up, repay the outstanding mortgage and with the money that's left buy half of Cornwall. (An exaggeration - but you know what I mean). Which inflates the prices and the locals then can't afford to buy any houses there.

I think the crux of the housing problem is the grossly distorting effect of places like London (and to a lesser extent Cambridge, Manchester and so on).

[thesalmonofdoubt]

This might be a bit left field, but I thought I'd raise it and see what you think...

Both here in the UK (especially in the south-east) and in parts of the US there have been and continues to be a huge inflation on house prices. Some parts of the London increase by an average of 8 or 9% a year regardless of the wider economic situation for example.

Now if you're already on the housing ladder this is fantastic.

But if you're trying to buy your first house it's bit of a nightmare.

There are various things the government could do to stop the prices going up as quickly, or even potentially make them reduce, which would help first time buyers. Yay for first time buyers!

But this would be unpopular with existing owners, potentially leaving a reasonable number of them as mortgage prisoners if the prices even declined. Bad for existing owners.

So what's the right thing to do? Help the first time buyers be able to buy an house where they want to live? Or ensure that those people who've already got on the property ladder continue to make money? I see this as an issue that will become more and more acute as time goes on...

It's an enormous problem for the same reason here as well, the biggest part of the problem is that no one seems to really understand the drivers behind the housing inflation to know what to do about them. Here, the median price of housing has been rising steadily and rapidly for the past 15 or so years (even longer is affluent area's) to the point where now, the median house price in Sydney (the entire city, not just the CBD) has just topped 1 million, while the prices here in Melbourne are in the high 800's .. median household income is around 70k AUD so a house would cost over 10X your average income - which is ridiculous and up from the 5X it would have cost in the 80's and early 90's.

The problem runs deeper than that tho. Lending vehicles have changed enormously over the past 30 years from locked down "get a mortgage, pay it back over a fixed period of time) models to equity vehicles that make liquid all that "Equity" in your home. People are now more inclined to take LOC's (think an overdraft) and consume their equity creating debt that could easily become unsustainable and puts them in risk of negative equity should the house prices fall even if (in fact, particularly if) they have owned their home for a period of time given they are actually consuming a market force for their spending rather than their own ability to earn and repay.

On top of this, more parents are finding themselves using their unearned equity as security for their kids houses - all bought at the high end of their affordability and usually around 100% financed. Kids are staying at home longer which reduces the saving power of the parents and so, their ability to store "equity fat" to pad out any potential declines in the house price in future..

What all this means is that houses are generally unaffordable for people trying to get into the market, and the people who are enjoying these price rises are mismanaging this increase in their personal equity by creating more debt (ostensibly secured but secured against a moving target) . and even people who are already in the housing market who attempt to climb the market a bit further and upgrade their house are taking on bigger mortgages than they can reasonably afford .. and even the ones who do nothing at all are housing their kids for longer and consuming their funds rather than saving for later.. a crash in the housing prices would see a domino effect of people liquidating properties they can no longer afford to keep (especially if unemployment rises like it always does when property prices crash) - a great many of those liquidated assets would leave people with more debt than assets - which means banks will increase lending rates to recoup their losses - which would have an overall impact on the economy - more job losses and more asset fire sales etc - In shorts, the 80's all over again.

The only reasonable course of action would be to slow down the growth to almost stagnate levels "deflating the bubble" rather than bursting it .. and wait till median wages balance more reasonably against median house prices rather than some enormous heavy handed corrective measures which would just crash everything for everyone.

[Blade Azaezel]

Surely the problem here is that there is a growing population and not enough housing is being built / renovated to suit the requirements of such an expanding population? Apparently, according to this article http://www.bbc.co.uk/news/magazine-30776306 the UK govt needs to be building around 240,000 houses per year to avoid spiralling prices, and it's nowhere near achieving that goal. There appear to be a number of reasons. 1) the planning process is far too bureaucratic and expensive 2) there is a lack of available land and it's very expensive 3) Housebuilders who own large areas of land only build a handful of homes at a time, because selling gradually keeps the price and demand high, whereas building and selling a few thousand all at once would lower the cost D) the government no longer builds council houses...

there are many more listed in the article. Kinda depressing really.

[OpiateOfTheMasses]

The only reasonable course of action would be to slow down the growth to almost stagnate levels "deflating the bubble" rather than bursting it .. and wait till median wages balance more reasonably against median house prices rather than some enormous heavy handed corrective measures which would just crash everything for everyone.

I don't disagree with anything you wrote and in theory you're suggested course of action should work...

...however, I can't see how a government would engineer that situation!

To exacerbate things further, here in the UK we have three further issues that will add fuel to the fire shortly (and at least the first one of these will be applicable elsewhere too):

1. Base Rate - The Bank of England Base Rate has been a 0.5% for a very long time now and will inevitably go up at some point in the next year or so. People have gotten used to paying their mortgages based on this very low Base Rate and when their mortgage payments start to go up you'll start to see a lot of people start to struggle to pay their mortgages. By the time Base Rate gets to 2.5 or 3.0% (which it should do within a couple of years of starting to go up) expect to see a lot of repossessions or people quickly wanting to downsize to reduce their monthly payments.

2. Pension Deregulation - With the changes to the pension laws where you don't have to buy an annuity and can take all your money out in one go, you'll see a lot of pensioners thinking it's a good idea to buy a second property and rent it out for an income.

3. Interest Only Mortgages - During the 90s and 00s it became very popular with banks to sell Interest Only mortgages to people rather than Repayment Mortgages because they're cheaper. These are now coming to the end of term and a lot of people that took them out made no attempt to come up with a repayment vehicle to pay off the capital at the end of the term. Mainly because they didn't understand what they were buying. So they've been paying the interest each month and will be surprised when they get a letter from the bank asking for X hundred thousand pounds or their house. A lot of people will be forced to sell their houses and downsize very quickly.

All of these factors will increase the demand for properties at the lower end of the market, making it even harder for first time buyers to get onto the property ladder.