| Topic: | Re:Re:Re:Warning from the Bank of England | |
| Posted by: | Teja P Howell | |
| Date/Time: | 18/07/15 22:53:00 |
| The picture is possibly more dynamic. For most of the 70’s inflation was higher than mortgage interest rates. So inflation paid off (or at least reduced) your mortgage faster than the cost of borrowing (i.e. interest). The more you borrowed, the more you benefitted from inflation. That generation got rich on inflation. And of course house prices increased even faster than general inflation. Now even with historically low mortgage rates of 2% or 3%, we have “real” interest costs, i.e. interest costs are higher than inflation. I think it’s down to good old fashioned supply and demand economics. Supply (available houses) has remained fairly static. People have more money now than a few decades ago, but the biggest increase on the demand side has been the increase in liquidity from the ease of credit. Even up to around 1985 maximum mortgages available were 2.5x or 3x first income and 1x or 1.5 x second income. Then the market was blown open with mortgages of 5x income or more or even “self-certified” mortgages with no proof of income (which the banks then bundled up and resold onto the secondary market, and released more cash to lend back into the mortgage market, and so the merry-go-round continued). More money from easy mortgages chasing the same number of houses created demand growing faster than supply, relentlessly driving up house prices. It suits the banks (bigger mortgages = we pay more of our income in interest). I think it suits the Government: - selling high value London property to overseas buyers is, in effect, an invisible export (even if the property itself remains in the UK). And people feel rich when they look in the local estate agent’s window. But sitting on (or living in) a massively valuable asset doesn’t help us for so long as we need somewhere to live unless we can downsize or move out of London, or borrow against the asset to create even more debt. It certainly doesn’t help the younger generation – who face enormous problems with housing in London. The FCA’s Mortgage Market Review has tightened up of mortgage lending – but otherwise the Government’s only solution seems to be to make subsidies available to purchasers but do nothing to increase supply, which will just push house prices up even higher. I think that the only answer is to increase supply: i.e. build a lot more houses; and reduce demand: i.e. tighten up on mortgage lending. |