Location, Location, Location - Thurs 5th Sept - East Dulwich

[LondonMix]

This conversation has finally really hit the nail on the head. When people talk about house prices and income ratios, they entirely forget to take into account interest rates. Due to persistent high inflation, interest rates used to need to be much higher than they have been over the last decade or two. The best measure regarding the affordability of housing is how much of a family?s disposable income goes towards housing themselves, not prices or income growth per se.

Generally needing to spend more than 35% of net income is considered unaffordable and, in the UK, this ratio is breached primarily in the South East (16% of households are paying unaffordable housing costs) due to a shortage of house building- the population is increasing faster than the housing stock.

Will this unaffordability figure increase dramatically? Who know but there are a few things to take into account:

1. High interest rates in the 70s and 80s were linked to very high rates if inflation (13% on average in the 70s hitting a peak of 25% one year!). Interest rates were high in part in an attempt to tackle this. Everything changed in 1990s when the central bank (both in the UK and many around the world) were explicitly give inflation targets and then later granted independence. This independence freed them from political manipulations of the interest rate and the money supply to try and influence the foreign exchange rate. Since that independence was granted and clear goal sets?managing price inflation and stimulating economic growth-- the interest rate landscape in this country has shifted dramatically. Suggesting we look to the 80s as a model of what interest rates might be in future misses the very fundamental changes that have occurred.

2. The Bank of England has clearly committed themselves to keeping interest rates low until economic growth is apace and unemployment is down. At times, the two goals of growth and price stability can be at odds on the BofE have clearly stated what their priority is regarding interest rate policy

3. Mortgage rates aren?t that low. While the Bank of England rate is very low, mortgage rates have not fallen proportionally (to the banks benefit unfortunately). Someone locking in a 5 year mortgage with a 15%-25% deposit could pay a minimum of 3.69%- 3.84%. The average standard variable rate has increased every year since the base rate was lowered to 50bps in 2009 and now stands at 4.35%. A return to pre-crisis interest rates wouldn?t be as dramatic an increase as you might expect just looking at the BoE rate.

[Blackcurrant]

You only have to look at the rise in Sterling to see that markets don't take the Bank of England's commitment to keep rates low seriously. If rates were to stay at 0.5 for another three years, sterling would have fallen. Also, the mortgage rates are already rising. Fixed term mortgage rates are linked to the yield on long-term gilts, which have doubled in a year. There isn't much the BoE can do to control that - ultimately markets set the cost of borrowing.

[LondonMix]

Yes, maybe. Most people took for granted that the BofE's priority was growth rather than inflation so when they made such a definite statement (with caveats concerning 2.5% inflation) the market assumed they meant the opposite of what they said. However, no one thinks that the BofE will raise rates unless there is significant inflation so this only becomes a concern if you believe we are headed toward staglfation (high inflation with no growth) that will force the central bank to make a decision regarding priorities. I don't see that on the horizon. Part of the increase in interest rate expectations is the faster than expected growth figures that have come out since the announcement was made.

[StraferJack]

A lot of reasonable (bordering on probable) financial forecasting from different people - and that's all well and good.

But as we know, such analysis and foresight amounts to no more than a piece of fry seaweed in the bath as an indicator of what will happen when various "unknowns" are added into the mix.

So from a planning perspective it makes far more sense to assume the worst (and by worst I'm with Mr Ben, rather than the more moderate fraction-of-a-percent-pa)

[MrBen]

The BofE might have given it's "forward guidance" as a way of establishing confidence to spend but if growth continues at the pace of the past quarter there is no way rates will be at this level in 2 years whether the BofE wants to or not - they wont have a choice. Blackcurrant is right, the markets will ultimately decide rates. They're already pricing that in despite Carney's last speech. They almost ignored him completely.

LondonMix - you're right on the SVR rising but most switch off if they can or when their deal expires and there are plenty taking out 2 year fixed rate deals at 2.5%. It's stupidly cheap. Cheap mortgages, sky high prices...a few familiar chimes in there no? Only back in 2004 a market leading fixed rate deal was 4.5%. Thats ?500 extra for a family to pay a month on my quoted example above versus where we are now. And rates were BELOW historic norms then.

I don't see a return to the 1980's double figure rates. But I do see a strong likelihood of a 5-7% range within the next 3-5 years.

[Jeremy]

Of course SJ, very wise to leave a sensible margin for rate rises.

I'm personally confident that the BoE know pretty much what they're doing and will steer us clear of MrBen's scenario, but it's just banter... only a fool would take any "predictions" they read here seriously...

[jrpfinch]

> 1. High interest rates in the 70s and 80s were

> linked to very high rates if inflation (13% on

> average in the 70s hitting a peak of 25% one

> year!). Interest rates were high in part in an

> attempt to tackle this. Everything changed in

> 1990s when the central bank (both in the UK and

> many around the world) were explicitly give

> inflation targets and then later granted

> independence. This independence freed them from

> political manipulations of the interest rate and

> the money supply to try and influence the foreign

> exchange rate. Since that independence was

> granted and clear goal sets?managing price

> inflation and stimulating economic growth-- the

> interest rate landscape in this country has

> shifted dramatically. Suggesting we look to the

> 80s as a model of what interest rates might be in

> future misses the very fundamental changes that

> have occurred.

This is the line peddled by politicians.

My interpretation:

The opening up of Eastern Europe and China post-1990 meant there was suddenly a seemingly-infinite pool of cheap labour. This meant central banks could keep interest rates low without stoking inflation.

The downside is that instead of wage inflation, we ended up a credit boom and asset price inflation (not just properties, but commodities and equities too).

Another less obvious downside to low inflation is that the real value of your debt erodes more slowly. Everyone moans about how high interest rates were in the 1970s-80s, but forgets that the value of mortgages in relation to wages fell very very quickly.

[jrpfinch]

I suppose the logical conclusion is that rates will rise when:

There is some instability which disrupts the global labour pool.

and/or

Foreigners decide UK debt is a bad investment (either because it can't meet repayments or because they worry about sterling devaluation)

[aileking]

The worst thing about London

> is not how high prices are but how volatile they

> are. They shouldn't shoot up and down at the rate

> they have done since 2007 - it isn't a normal

> market.

I agree. I could accept where I can or can't afford to buy, but the moving goal posts are difficult to deal with. Latest experience was getting an offer accepted for the vendor to ask for 10% more one week later (original offer was already 5% above asking price). I walked away but the price advertised increased again so the house increased in price by ?50,000 in two weeks. All very well if you can sell the place you're in at a higher price, but as a first time buyer who has spent years saving for a deposit this market is a complete nightmare because every time you think you can afford something you find out you can't......

[LondonMix]

That's horrible aileking. I agree that if you are prudent you should be looking at if you could afford your mortgage if the rate were closer to 6% vs circa 4% today. Banks actually tell you want it would be at 7% and ask if you could afford that level when making your offer so no one can actually ignore what that looks like.

However, if I were a first time buyer trying to decide to buy or wait to see if house prices in London collapse when interest rates increase, I would buy now as long as I could afford it. I have friends in that position and while there are no guarantees either way, as long as there remains a shortage of housing in London and assuming the UK doesn't enter into an extended episode of stagflation, I don't think anyone's plan for getting on the property ladder should involve waiting for prices to dramatically collapse.

Edited to add-- circa 40% of people are on SVR rates so you really can't ignore that rate when assessing how expensive mortgages are at the moment.

[ElmGrove]

This area and its environs seem to be in a bubble, which I presume is due to the new transport links. It might be time to look in other parts of London. East Barnet is 'reasonable', you can get a 1930s 3 bed house for under ?500k. Parts of it are near Totteridge and Whetstone and High Barnet on Northern Line. There are also overground stations in the area.

[Peckhamgatecrasher]

i went to school in Rochester. I can tell you the best places to bunk off and the finest pubs!

[Blackcurrant]

LondonMix Wrote:

-------------------------------------------------------

> Yes, maybe. Most people took for granted that the

> BofE's priority was growth rather than inflation

> so when they made such a definite statement (with

> caveats concerning 2.5% inflation) the market

> assumed they meant the opposite of what they said.

> However, no one thinks that the BofE will raise

> rates unless there is significant inflation so

> this only becomes a concern if you believe we are

> headed toward staglfation (high inflation with no

> growth) that will force the central bank to make a

> decision regarding priorities. I don't see that

> on the horizon.

Their job is to use bank rate to control the future path of inflation a year or more ahead, based on their predictions, rather than to bring down today's level of inflation. So any evidence suggesting inflation will rise in the future tends to increase the chance of a rate rise. One concern the BoE have is the effect of QE having raised the money supply - if we have an economic recovery without the QE money being withdrawn from the economy, there's a danger of inflation getting out of control.

I don't think Carney gives a damn about this. All he does is slash rates and stoke property bubbles, whether in Canada or the UK. But he can be outvoted. And he has his reputation to consider.

I agree London has a shortage of property and it's one of the reasons prices have recovered faster here than elsewhere in the UK. But that's not to say they can't get out of hand.

It's crap for first time buyers in London. It has been for a long time. Unless you have lots of equity, buying here is like running across the motorway wearing a blindfold.

[LondonMix]

Yes, the pace of growth (whatever that will be) will ultimately dictate how quickly interest rates need to rise and the withdrawl of QE. My point was that strong growth will mitigate the financial impact of rising rates partial feed through on mortgage rates and therefore housing affordability. I think affordability will only come under serious pressure if we have significant rate rises that in turn increase mortgage rates significantly with no growth (stagflation) which I don't think most people are anticipating. For this reason, plus the fact that there isn't a 1 to 1 direct correlation between mortgage rates and the BofE rate I wouldn't bet on a massive decrease in house prices in the medium term. Of course, a million and one things could happen that can change that and anyone taking out a mortgage should make sure they can afford it if and when rates do increase without relying on making having tons more income.

Simply, my base case isn't a London house price cash, that's all. I really feel for first time buyers. If we didn't buy years ago, there's no way we could afford a house in ED at our age. We got lucky (and luck is all it is) and are thankful. Overtime, London will become more like NY- the concentration of the very rich will continue to increase pushing out middle income workers to the home counties. 33% social housing means London won't ever be totally made up of the rich but it will be very polarised economically.

[Blackcurrant]

An increase in bank rate doesn't just affect mortgage affordability though. It makes cash more attractive, which means investors aren't forced into buy-to-let to chase yield, which leads to less demand from landlords. Having said that, rates could still rise and stay negative in real terms.

[MrBen]

I was out in Forest Hill last night. Pretty massive changes on past 2 years. The Hipster Express has made all the difference. The crowd at The Sylvan Post pretty much all looked like they'd walked out of Pizza East.

[Otta]

I made my first visit to Sylvan Post at the end of July for my birthday, and I rather liked it. Also a big fan of The Hob.

Dartmouth Arms just feels cold and bleak to me, and the bird in cage (or whatever it's called) just looks like it's full of old skool villans.

[PN33]

Forest Hill is looking ever-more likely as to where we'll end up (still keeping everything crossed for Nunhead but we'll see how it plays out). I do like Forest Hill, just the added mountain to my daily cycle to/from central that's putting me off now!!

[balanceforlife]

That mountain will keep you fit. See it as a free bonus if you end up in Forest Hill ;)

AJ

[LondonMix]

I actually prefer Forest Hill to Nunhead but then its horses for courses. If I were going to leave ED Honor Oak would definitely be top of the list

[midivydale]

Forest Hill seems like a good place to live,we were looking there before we bought our flat and only ended up in Nunhead as it was cheaper then:).

[Otta]

Personal taste I guess, but I'd pick Forest Hill over Nunhead in a heartbeat!

[NewWave]

I live in Forest Hill, having brought two years ago, Initially We were looking in ED but couldn't afford it, so Opted for FH because of the Ginger Line.

We LOVE it here...great independent coffee shops, an arty vibe, The SylVan Post and The Hob. Theres a really good Indian Resturant on London Road (india Gate. Swimming pool, Lovely Parks, great cafe at the Horniman Museum etc etc etc...

I was really worried having lived in West London my entire life but I don't regret moving here.

The other great thing is Lordship Lane's shops are within easy reach, or you can hop up to Crystal Palace for a change or scene.

Finally 20mins on the overground and youre in Shorditch.

[simonethebeaver]

Worth noting that the world hasn't gone entirely mad. The Honor Oak shed has been reduced from 350k to 325k to 300k in the space of two days.

[Jeremy]

I quite like the shed. Kinda small though...