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).

  • Lebowski1975

    I would much prefer to have lower property prices, higher interest rates and rising wages. At least then you know that a large chunk of the debt will be inflated away, and interest rates will come down, eventually. We now have the complete opposite, property is massively overvalued, interest rates which are only going to rise (possibly quite sharply) and very little wage inflation. As a potential first time buyer the wrong side of 40 it’s an awful situation – and a dilemma- but I refuse to buy into the never ending hubris surrounding the UK property market. My prediction is that it will crash, quite spectacularly, eventually, and the longer that prices are propped up by low interest rates and ill-advised government intervention, help to buy being the prime example, the bigger and more spectacular the crash will be.

    • michael flynn

      You haven’t got a clue. You obviously live down South. In the North property is 25% less in real terms than it was 10 years ago. It is very easy for first time buyers to get on the property ladder.

      Move North and stop moaning.

      • Lebowski1975

        Not that simple. The industry I work in is centred around London and the South East. The few jobs that are in the north pay less than 50% of what I would earn in London. As such moving north – in terms of buying property – would be a zero sum game. Not to mention the poor climate and high unemployment rates etc. There are some lovely areas in the north, obviously, but there are good reasons why property in London and the south east is valued much more highly.

        • cornishtinmine

          I’d sooner have a Land Value Tax and greater controls on money creation and lending.

          • michael flynn

            And the rich will just get richer and the poor will just get poorer. At least poor people can borrow money and become rich if they’ve got the wherewithal to do it.

            May I suggest you move to Russia. You’ll be far happier there.

            • cornishtinmine

              You clearly do not understand how banking works nor LVT, Michael – reforming both would make housing more affordable for all and reduce wealth inequality. LVT has support across the political spectrum – it’s arguably the fairest form of taxation.

        • michael flynn

          I can’t get my breath! Living in the North is much better than living in the overcrowded, congested, expensive South. There is more to life than just working all the time. The commutes most of you do is ridiculous.

      • JaneMorris

        Depends where you are. Desirable areas in the North East (where people with good jobs want to live) are up 30% since 2010. Low income areas are down due to the curtailing of subprime lending.

  • James Gardner

    House prices will not drop back to 3.5 x joint £ earnings until a national home building programme is launched in the South East adding 80,000 new homes each year. Whether the housing demands of 340,000 net new arrivals pa reduces depends on Brexit outcomes. 80,000 new homes each year in SE would require Govt funding & there appears to be no political desire for this at the moment (until the ignored ‘generation rent’ perhaps vote in Corbyn & Co?). The large ‘quoted’ house builders have no interest in ramping up supply & bringing house prices down, as it directly reduces their profits. Within Greater London thousands of new homes can be built over railway lines, as successfully built in Holland. https://www.standard.co.uk/news/london/building-above-londons-open-railway-could-solve-capitals-housing-crisis-major-report-suggests-a3687991.html

    • Lebowski1975

      I absolutely agree that the country would benefit enormously from a well planned national house building programme. However I am always somewhat sceptical when ‘demand’ for housing is mentioned. Demand in my opinion is not a measure of how many people would like to own or rent a property who currently do not, but rather how many of them can actually afford to pay the going rate. If interest rates go up demand and thus prices will fall, substantially, but so long as interest rates remain at historically low levels demand will be sufficient to prop up the market even when housing currently offers very poor value fot money.

      • michael flynn

        Yet another Southener. You lot are clueless. House prices are very low in the North and the standard of living is much better. We are a lot friendlier.

        There is a very affordable life North of Watford you know.

        • Lebowski1975

          Well yes, having read your comments you do sound very friendly and not even a tiny bit partisan.

          • michael flynn

            I’m fed up of you Southerners thinking life only revolves around London and the South East. You need to take the blinkers off.

    • michael flynn

      Another Southener. Move North and stop moaning. You can get perfectly acceptable houses near town centres for much less than £100k.

      It’s not grim up North!

    • michael flynn

      What a load of baloney. Houses can be bought at less than 3.5 times single earnings in the North. You can get a great house for 3.5 times joint earnings.

      Take the blinkers off and stop being so London and South East centric.

  • norman mccammon

    While it was 3 times your earnings that dictated how much you could borrow in the 90s, interest rates were around 5%. When it shot up to 17% repayments were a lot more than 3 times your earnings.

    • michael flynn

      Let’s conveniently forget to mention that this level of interest didn’t last that long and that inflation massively eroded the debt on the mortgage.

  • Mark Antrobus

    The article is a bit one sided. Pay rises were much higher in the 1990s so the burden of the mortgage debt was being eroded faster. It is today’s young that are disadvantaged. Moreover the young of the 1990s did not have any graduate debt to pay off. Nor did they have to save so much for their retirement outside work pensions – which in those days were typically benefit defined final salary schemes with generous employer contributions.

    • michael flynn

      At last a voice of reason. Well said.

      • Lebowski1975

        You’re enthusiasticly agreeing with Mark Antrobus’ comment above yet in other comments you’re extolling the merits of investing in property. Isn’t that a somewhat dichotomous position to say the least? Count me as utterly confused by your comments.

        • michael flynn

          I don’t make the rules. Just because the housing system is unfair does not mean that I should avoid making money out of it. I’ve got news for you. Life is unfair.

          I am not about to get on my high horse and not invest in property because I am self righteous. Being self righteous is for losers. I’m a winner and make a fortune out of buy to let.

          You should try it. There are plenty of clued up Southeners making a fortune out of buy to let in the North. That’s just on the rent. When our boom occurs in the next 5 to 7 years there will be a lot of multi millionaires who made the wise decision to invest up North. I intend to be one of them.

  • michael flynn

    It annoys me greatly that MoneyWeek and you in particular are always slagging off property as an investment. It is by far the best investment that anyone can make, especially at this point in the property cycle that you seem completely oblivious to.

    What do the wealthy invest their money in? Property of course! That’s why they are wealthy and their wealth continues to increase.

    Think about it and stop being so biased. Go to a bank and tell them that you want to invest in shares and you would like them to give you treble the amount you’ve got to invest. They will tell you to do one. Tell them you want to invest in property and they won’t be able to give you the money fast enough.

    Think about it.

    • JamesTennant

      You mean exploiting the basic human need for shelter in order to extract the incomes of those that have to work for living?

      • michael flynn

        I exploit no one. I turn rundown houses that were lived in usually by one person into nice modern rooms that house 5 or more people. I am part of the solution not the problem. You live in a fantasy world that will never exist. Not everyone wants to own a house. Check your history. Renting was the norm just after the war. Homeownership is a relatively new phenomenon. I’m just helping to restore the natural order.

  • michael flynn

    Advising anyone to invest in the stock market at this moment in time is extremely bad advice. It is obvious that it is currently overvalued and heading for an imminent correction.

    Shame on you.

  • JamesTennant

    If we ban mortgage lending, house prices would be set by supply and demand. Intergenerational fairness would follow. No more boom and bust. No more systemic risks that wreck the economy. No more slaving to pay off bankers. http://housingracket.blogspot.co.uk/

    • michael flynn

      You need to check out ‘How the Economic Machine Works’ on Youtube by Ray Dalio. No more boom and bust! Don’t make me laugh. That’s how the economy works. It goes in predictable cycles.

      Knowing about it has made me a very rich man. You on the other hand will always be poor as you have got fanciful ideals that will never be realised. You need to get with the game. In this life there are winners and losers. You need to ask yourself which one you are.

      • JamesTennant

        You really do sound like a total idiot.

        • michael flynn

          No need to be rude. You obviously don’t know how the economic machine works and I was only trying to help you. Abolish boom and bust! Hahahahahahaha!!!

          • JamesTennant

            It’s your dumb view of what constitutes being a winner. And how you’re so sure of it. But never mind.

            • michael flynn

              You live in a dream world. No doubt you are a Corbyn supporter. You do realise that to abolish boom and bust you first need to abolish human nature? It’s not going to happen. The closest you can get to it is communism. Why don’t you move to China or Russia? You’d be so much happier there.
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              • JamesTennant

                I’m talking specifically about credit bubbles created by excessive lending into housing rather than investment into industry. You know nothing about me.

                • michael flynn

                  The biggest cause of credit bubbles or booms and busts is human nature. You obviously know nothing about economic cycles and how the real world works. You are way out of your depth on the subject as you think far too rationally and logically about something that is massively affected by human nature. Just accept that human nature is the greatest force in the economy and then work out how it affects it. Then plan accordingly.

                  Let me give the best advice you have ever received. Beg borrow or steal as much money as you can get your hands on and invest it all in property in the North. In 7 years time you will be extremely wealthy.

                  Of course you won’t do this as you don’t understand how economic cycles work and can’t be bothered to learn about them even though you’ve got an expert like me pointing you in the right direction. Get that plane ticket booked for Russia. They will welcome you with open arms.

                  • JamesTennant

                    I don’t believe you.

                  • Rico

                    The real cause of credit bubbles is money creation through the issue of new loans by banks, who create money from nothing according to rules laid down by the reserve bank of whatever country they function in. If this money creation goes unchecked then the money supply will increase according to exponential function leading to boom and eventual bust.
                    P.S, the clue is in the name “Credit” boom.

                    • michael flynn

                      I agree with everything you say. Who creates the credit? It is humans that decide how much credit is created. Humans make decisions based on human nature and not on logic. Until human nature is taken out of the equation then we will continue to have booms and busts. Therefore we will always have booms and busts because human nature cannot be taken out of the decision making process.

                      There are economic and property cycles. There is nothing that can be done to change this. Its best just to get used to this and take advantage. It is amazing how abysmally ignorant the vast majority of the population is is about economic cycles. Gordon Brown must go down as the most inept politician there has ever been for making the absurd claim that he had abolished boom and bust. It is very scary how unaware our politicians are of how the economy works.