Shared suffering in house prices

A few days ago, someone clearing out their house for sale passed me a copy of their mortgage deed. They had borrowed £35,000 on a repayment basis from the now-defunct Northern Rock in 1990, at an “initial” interest rate of 14.75%. I thought that might interest people. So I tweeted a picture of the document. All hell broke loose. Older readers clocked the rate and started to remember the hell of having to pay it.

They told of working two jobs; living on foraged foods (“blackberries, windfall apples and chips”, said one woman); never taking a holiday; and forsaking all luxuries just to keep a roof over their heads (“no going out for meals, drinks or treats”). One reader came out in a “cold sweat” just thinking about how his rate peaked at 17%. Others relived the nightmare of failed endowment funds and having to come up with vast amounts of extra capital to pay off mortgages at the end of terms. The young today, they said, have no idea how good they have it.

Younger readers barely noticed the interest rate. They just saw the principal. £35,000! Imagine, they said, being able to buy a house for that (the average house price at the start of 1990 was actually £58,000). Today £35,000 would barely be enough for a deposit anywhere in the south. What matter the rates if they come with low prices such that you can actually buy a house in the first place? The old, they said, have no idea how good they had it.

Who’s right? On the face of it, it is today’s buyers: back in 1990, the average house-price-to-income ratio was around 3.5 times (on Office for National Statistics numbers). Today it is more like 5.5 times. Houses are just more expensive than they were in absolute terms. However, that doesn’t mean that they are harder to pay for. Look at it in terms of affordability, and the buyers of 1990 begin to take the “suffering” prize.

Mortgage payments as a percentage of income in 1990 were more than 50%. Today they are only just over 30%. Anyone who has managed to get their hands on a deposit (the key problem today) is – in terms of the share of income left after housing costs – very significantly better off than a buyer in the 1990s. They get more drinks out than the oldies ever did.

The good news (sort of) is that the two generations might soon have an experience in common. UK rates aren’t rising fast at the moment (the recent weak GDP numbers mean that 14.75% is a long way off), but they will rise. When they do, what is now a gentle plateauing in prices (down 0.1% in February) could easily turn into a proper fall (the affordability of monthly payments really matters).

Then everyone will be able to share the misery of negative equity. If this idea puts you off buying, there are plenty of other places for your money in the UK (although deposit savings should be kept in cash!). See Max King’s views on Alliance Trust (all good) and Jonathan Compton’s on the UK stockmarket (mostly good).