housing crash 'could happen'

[kronas]

mortgage lenders are warning the bank of england that interest rates will have to double from its current rate (4.25%) to offset a crash in the housing market.

the increasing debt burden the economy is trying to handle maybe too much if a 'siginificant' rate rise is not seen.

source: bbc news

http://news.bbc.co.uk/1/hi/business/3739511.stm

[Paul K]

All bubbles burst eventually the key is what is going to be done to try to minimise the crash when it occurs. A significant rise in interest rates will help solve one problem but will inevitably cause a few more. We do not need another stock market slump or an economic free-fall, the bank of england and the government have a very difficult decission to make soon.

Unfortunately with house demand outstripping supply, of both new build and older properties, then a sellers market is inevatible. As happened back in the 80's I think the housing market's bubble is bound to burst sooner or later. And when it does, I'll be glad I'll not be stuck with a negative equity property.

[Scarlett]

What I'm concerned about here is the proposed 'cure'.

The repayment figures quoted for a 80k mortgage are to go from £200 odd quid / month to £700 Go knows what that's going to do to my 106k mortgage (although not for another 2.5 years due to taking out a fixed rate mortgage

I hate to be the cynical one here but what's being proposed is a hike in the money that you pay to the banks for the money that you borrowed. There is no increase in the level of serveice or ANY benefit to yourself but your paying an extra £500 each month (going on the values provided) to you mortgage provided, And who's giving this advice ?

[Richard M]

I hope it does crash.
I feel sorry for the buyers but the estate agents and mortgage companies have been laughing all the way to the bank for far too long.
All good things come to an end, sooner or later.

[etccarmageddon]

Originally Posted by Scarlett

What I'm concerned about here is the proposed 'cure'.

The repayment figures quoted for a 80k mortgage are to go from £200 odd quid / month to £700 Go knows what that's going to do to my 106k mortgage (although not for another 2.5 years due to taking out a fixed rate mortgage

I hate to be the cynical one here but what's being proposed is a hike in the money that you pay to the banks for the money that you borrowed. There is no increase in the level of serveice or ANY benefit to yourself but your paying an extra £500 each month (going on the values provided) to you mortgage provided, And who's giving this advice ?

very dodgy figures there in that article...

a repayment mortgage of 80k does not cost £200 a month!

more like £491 a month at 5.5 percent over 25 years. if this increased to 9.75% then you're talking £712 a month which means the repayments have gone up by around 50%.

[Pierre]

There is absolutely no way interest rates will rise to 8% in one or two jumps.

The result would bring the country's economy to a standstill. It's scaremongering. No economist with an ounce of common sense would ask or predict such a thing.

Expect rates to go up to 5% / 5.5%.

If rates went up to 8% it would be over years not months.

I don't think the housing market will crash - at least not in the same way it did in the late 80's / early 90's. The situation then was influenced by a change in tax legislation, which removed the 'loophole' where individuals could 'share' a mortgage, and each claim tax relief on their payments. Because there was a cut off date where this was to end, there was a huge demand for houses that sent prices soaring.

The subsequent rise in interest rates then exposed people who had over-extended themselves, coupled with a drop in prices, this left many people in the trap of 'negative equity'

A move to increase interest rates, now, to 'slow down' the market will disadvantage too many people to be practical. I believe we are very close to a natural 'barrier', where a 'normal' first time buyer cannot afford any kind of property. The scenario I see here is that prices will stabilise, or fall slightly, but not crash.

[andygrif]

The problem is though that most first time buyers, particularly in the South East simply cannot afford to buy any house. I think there was some data a few months back saying that to buy a house in Hemel Hempsted an averaged salaraied first time buyer would have to borrow something like 10 times their salary - which is crazy.

So we're creating a situation where there will be no 'new blood' in the housing market, which will mean that the lower end will stagnate - and that is the start of a crash.

The problem is compunded right now becuase people are panic buying - they see the prices getting bigger and bigger so will leap on the house buying train now, irrespective of whether they will be able to afford the payments should the rates climb to, say 8%.

At the end of the day, no-one knows what will happen, they can only speculate - there is a real danger that we will see a crash, although unlikely to be as severe as the one in the late 80s which was spurred by other market forces too.

To be frank, and knowing that it will cause a lot of heartbreak to many people, a price crash is really the only way that many people will be able to afford a house again.

[trebor]

Originally Posted by Richard M

I hope it does crash.
I feel sorry for the buyers but the estate agents and mortgage companies have been laughing all the way to the bank for far too long.
All good things come to an end, sooner or later.

Well I thank god you ain't running the country.
I can remember interest rates got up to 15%, I was ready to take my house keys back to the bank because there was no I could afford that.
it took 13 years for house prices to recover from that in our area.
theres some interesting history here
http://www.hbosplc.com/media/pressre...0-11-02-00.asp

[Scarlett]

Originally Posted by Richard M

I hope it does crash.
I feel sorry for the buyers but the estate agents and mortgage companies have been laughing all the way to the bank for far too long.
All good things come to an end, sooner or later.

And if it crashes those mortgage companies will just reposses the houses of those that can't pay and just sell them off (through those estate agents) and chase the buyers for any difference.

Besides, one of the main causes is that there are simply not enough houses at the moment so a large crash is less likely.

[Alanmelon]

Looking at these posts so far, I think its quite easy to guess which members own their properties and which ones rent! I'm personally one of the latter, and feel that for far too long prices have been rising at a ridiculous rate.

Over the past few years, I've gone from being a student to qualifying for my first job, to a couple of pay rises, and even after that fairly significant rise in income, a lot of houses are still creeping out of my reach.

I don't profess to know an awful lot about the subject, but is there nothing that can be done by the government to cap/slow the rise in these prices?

[Scarlett]

Originally Posted by andygrif

The problem is though that most first time buyers, particularly in the South East simply cannot afford to buy any house. I think there was some data a few months back saying that to buy a house in Hemel Hempsted an averaged salaraied first time buyer would have to borrow something like 10 times their salary - which is crazy.

So we're creating a situation where there will be no 'new blood' in the housing market, which will mean that the lower end will stagnate - and that is the start of a crash.

The problem is compunded right now becuase people are panic buying - they see the prices getting bigger and bigger so will leap on the house buying train now, irrespective of whether they will be able to afford the payments should the rates climb to, say 8%.

At the end of the day, no-one knows what will happen, they can only speculate - there is a real danger that we will see a crash, although unlikely to be as severe as the one in the late 80s which was spurred by other market forces too.

To be frank, and knowing that it will cause a lot of heartbreak to many people, a price crash is really the only way that many people will be able to afford a house again.

I have only one thing to say to people buying right now and that is fixed rate. I did that when we bought our house last year (okay I could only get 3 years fixed rate) which is why I get to take a slightly more relaxed view of the rate raises.

Also due to my new job, I can manage if the rates hit 8% (and possibly higher as well) but I'd rather not see a crash as I've only just started out so for the first few years, I'm pretty much paying the banks interest and not my capital. So if there is a crash I'm going to be stuck in negative equity for several years

[andygrif]

Originally Posted by Alanmelon

I don't profess to know an awful lot about the subject, but is there nothing that can be done by the government to cap/slow the rise in these prices?

Raising interest rates is the only realistic way to slow the market down - but if you raise them too high, then people will not be able to borrow, existing homeowners will not be able to afford their payments - and then you have a crash again.

Also, it is not in the remit of the Bank of England to raise interest rates on the grounds of housing - although it is clear that this is necessary and they are doing so.

I'm not sure if there are any more sensible options to improve the situation without hurting people. The only real option is to saturate any open space with 2/3 bed houses to meet demand, which should increase competition and lower cost - however they have been doing this for a while now, and the greed of the house builders means that the prices are actually going up.

Originally Posted by Scarlett

I have only one thing to say to people buying right now and that is fixed rate. I did that when we bought our house last year (okay I could only get 3 years fixed rate) which is why I get to take a slightly more relaxed view of the rate raises.

Also due to my new job, I can manage if the rates hit 8% (and possibly higher as well) but I'd rather not see a crash as I've only just started out so for the first few years, I'm pretty much paying the banks interest and not my capital. So if there is a crash I'm going to be stuck in negative equity for several years

Actually there is a far more sensible option that would mean far fewer cases of negative equity and tiny amounts of repossesions becuase people could not afford higher payments linked to big increases in the interest rates:

There's some discussion about it now - but we are one of the few countries in Europe that does not have fixed rate mortages for the whole term of the loan. If you buy a car for £20,000 you look at the interest rate and that rate is fixed for the whole term.

However most people cannot get mortgages in this country which are fixed for any longer that 3-5 years. There's a few that are 10 years - but you'll pay 7-8% on those - that's the same rate as my credit card!!!

By entering into a mortgage that is fixed for the whole 25 years - you always know how much your payments will be, and you can ensure that you can afford them. Sadly, with most lenders knowing that rates will rise, they are unwilling to enter into such an agreement.

[Neil]

Originally Posted by andygrif

By entering into a mortgage that is fixed for the whole 25 years - you always know how much your payments will be, and you can ensure that you can afford them.

The problem is Andy, that fixed rate mortgages are more expensive per month, & you are paying heavily for that security. I am moving currently, & have opted for a discounted mortgage over a fixed one, because for the monthly payment to match what it is on a fixed rate, my mortgate would have to go up several percent in a fairly short period of time, & I just can't see that happening.

Sadly, with most lenders knowing that rates will rise, they are unwilling to enter into such an agreement.

Not at all, all lenders are offering fixed rate, just at a premium. If I want a fixed rate mortgage, it will cost me approx £80.00 more per month than the equivalent discounted mortgage, which basically means an extra £960.00 per year, & thats a hell of a lot of interest rises in one year (that's why I don't think fixed rate mortgages are of any value)

I hope that makes sense.....