Novocastrian

Good point. I'd actually forgotten that in 1984 when I "got on the ladder" my first mortgage was at 12.5% and a (smallish) second mortgage from a private lender was 15%.

On the other hand, the total loan to gross income ratio was 2.4.

MarkG

When interest rates are 15%:

1. House prices are low because people can't afford to pay 15% interest on a loan of 10x their income.
2. Inflation is high so your wage rises will rapidly erode the value of the debt.

The best time to 'get on the property ladder' is when interest rates are high, not when they're low and you're going to have to pay off that 10x income mortgage with 2% annual pay rises.

Buying or not buying a $500 iPhone won't make any difference if you're looking at borrowing $500,000 to buy a decent house.

My parents had ordinary, everyday working class jobs. The house they bought on that income in the 60s recently sold for nearly 300,000 pounds. A typical salary in that town in the job ads today is 15-20k a year; how many working class couples do you think there are in the town who could afford to buy that house today?

johnh009

Looking back, I was surprised to see that the BoE rate in the UK actually reached 17% in 1979 when I first entered the market. A far cry from today.

http://www.bankofengland.co.uk/boeapps/iadb/Repo.asp

FlyingDutchman6666

My thoughts exactly.

You know what's scaring me? Rents in our area (Mississauga, Toronto suburb) are currently half of the monthly payments on the very same house. Ok, people are willing to pay a premium to actually *own* the house. But pay double??

From what I hear, people in the area are still talking about buying houses in terms of "an investment". Because prices will obviously increase indefinitely. And why shouldn't they? Various people have told me prices in Canada have been increasing for the last 30 years. Property is a one-way bet! So expectations of future house price rises are dragging people into taking on ever higher mortgages, much higher than the possible rental income.

Classic bubble territory.

dbd33

Not in Mississauga, at least not consistently. The house we bought for $140,000 in the mid-80s was still worth the same in 1989 (it had gone up and down in the interim). It then rose steadily in value to about $400,000 before the next dip, late 90s iirc, when it went down in value by almost a quarter. It then rose steadily again until my ex sold it for $850,000 a year or so ago. Over 10 years I think houses are a pretty safe bet compared with rent but not over five, not when you allow for the cost of maintaining the property.

FlyingDutchman6666

Yes, I suspected there have been ups & downs. But that's not what people seem to remember. I guess that's how the human mind works, and how bubbles form.

FlyingDutchman6666

I guess this will take us into major economics nerd territory, but I believe that it depends on the underlying rate of inflation.

When wages go up steadily, the real weight of the debt erodes quickly over time, as the mortgage payments decrease compared to income.

When wages are stagnant (or squeezed) for a long time, people who buy now will be burdened with large mortgage payments for a *very* long time. Perhaps their whole lifetime.

The way it's looking now, wages will continue to be squeezed for a long, long time. Something related to the huge influx of new (cheaper) middle class workers from emerging nations into the global economy.

Souvy

House prices are a strange thing. Mine is of a fairly standard 1980s design and there are many comparables. I'd put it at about 250. Similar places in Ottawa would set you back another 50. There is a broadly similar place in Oakville that is just under 400, and it's not detached.

R I C H

That's irrelevant if you've already purchased and your repayments are just climbing month after month.

That escaped me - I never saw wage inflation match interest rate rises. In fact, in 20+ years of work my salary increases have invariably come via either promotion or moving to another job. 2.5% is the largest yearly rise I've ever seen.


The iphone example isn't the whole picture though - throw in the monthly contract cost, plus a car loan, a flat screen TV and the expectation of a foreign holiday and the reality of being able to own a home vs. income don't add up. My salary when I first took on a mortgage was barely over $10k and local prices (Cotswolds) were $75K for a fixer-upper, with interest rates in the teens. How's that any more affordable? Being frugal with other expenditure is the only way to make it possible.

Tony-the-Tigger

And we shouldn't forget that many people are buying property at their maximum mortgage amount on a 2.8% interest rate.

BTW, the UK double dipped into another recession today. It was fun and games at PMQ's.

FlyingDutchman6666

And still, there seems to be a broad general consensus that real interest rates were negative throughout the late 1970s and early 1980s. Although these are economists' opinions we are talking about

Most of the developed world has racked up a gargantuan amount of debt. The banks and politicians were relaxed about this, because they hoped it was going to be paid off by future higher wages/economic growth. Globalisation and the economic rise of the developing world is the fly in the ointment - competition from cheaper middle-class workers from the developing world will probably keep wages and growth subdued for a very long time.

Governments will need to find a way out. I think the only way is to artificially stoke inflation, for example by printing money using QE. Great for borrowers, their debts will melt away. But so will savings...

Not a problem for places like the UK or Canada, where debts so easily outnumber savings.

Fine you think, I'll just move my money somewhere else, where inflation can't reach me? Look up a little term called "financial repression", which was widely used throughout the world to get rid of the WW1 and WW2 debts. Capital controls is just one tool in the arsenal.

Far-fetched? The UK had capital controls until the early 1970s. Hardly pre-history.

FlyingDutchman6666

I agree, up to a point. Cars, TVs, iPhones (had they existed) were all WAY more expensive 30 years ago, as a fraction of wages. Cheap labour in the Far East made things so much more affordable. No wonder today's young people all buy this stuff.

To give just one example: having your old car fixed vs. buying a new one. Thirty years ago, you'd have kept that old banger alive for a lot longer, as car mechanic wages were low compared to the cost price of a new car. Today, cars are dirt-cheap compared to car mechanic wages. Same for TVs - any TV repair shops left??

R I C H

Yes, I agree. I ran around in old cars for years, welded them when needed, bolted on new parts as necessary. What I didn't have in addition to running costs were a loan on top though.

I purchased a Sony TV 18 months ago for my games room, it expired last week, out of warranty. It's not economic to repair, so I have to just write off $500.

CanadaJimmy

And Sony wonder why they're making multi-billion dollar losses year after year, when they release such poor quality products now.

MarkG

Which emphasises my point. If you buy a house for as much as you can afford at 2% interest rates and they rise to 15%, you made a bad choice. Not only will you be struggling to afford the payments, but the value of your house will drop because everyone else will be.

The only thing you can hope for in that case is that your wages rise faster than the interest payments... if you can survive the first few years then the increase in wages will mean that the mortgage becomes easier to pay off.

My salary went up nearly a factor of four from 1989 to 2000; that's more than 10% a year on average. A few years of such rises and the increase in wages will completely cover a sensible mortgage payment.

But there aren't many people getting 10% rises today.

That might come to $10k a year. That wouldn't even cover the interest on a $500k mortgage, let alone the extra $20k a year you'll have to pay if you actually want to own the house after twenty-five years.

And remember, if interest rates remain low that means wage rises will remain low, which means that if you're currently having to cut out on all non-essential items to pay the mortgage you'll be doing that for the next twenty five years.