The Housing bubble

  Switcher 17:27 23 Nov 2008

The bubble had to burst eventually. When I married in 1965 I had a good salary and my wife had a reasonable salary. The maximum loan we could get was 2 X my sal. + 1/2 of my wife's sal. and only because we had saved regularly with a building society.
By the time I retired recently anyone with a pulse could get a mortgage for practically any amount and did. Why? Because the banks came into the house lending market with a vengeance in the 70s. and eventually using various complicated financial bamboozling methods even they did not understand converted loans into highly leveraged securities or phantom assets.
Thus if you borrow £100,000 on your £15,000 salary this eventually ends up looking like a
£1,000,000 assett on some financial company's books.
When people started to default on payments the whole house of cards started to tumble down. There is a credit crunch now but only in comparison to recent years. If the average home costs six times the average wage how could anyone on the average wage buy a home if they were limited to a mortgage of twice their wage. (as used to be the case)The bubble had to burst. House prices must come down to realistic levels.

  Forum Editor 17:41 23 Nov 2008

of what has happened. The puzzling thing is that the lending institutions seemed unable to make the mental leap - it's as if they hoped that by adopting a liberal lending policy they could make it alright in the end - rather like a gambling addict who hopes that one more bet will provide the funds to wipe out all previous losses.

The trouble is, a lot of the money that was being loaned didn't really exist.

  Pineman100 18:32 23 Nov 2008

who can't make a mental leap. We've been trying to sell our house for many months (and have now withdrawn it until the Spring).

Our estate agents tell us that the biggest tussle they're having is persuading vendors to price their houses realistically. People (us included!) got a valuation into their heads last Spring, and are now having real trouble in accepting the tumble in values.

But (again according to our agents) houses that *are* valued realistically are still selling - albeit slowly.

  Switcher 18:42 23 Nov 2008

One of the problems was that a lot of the borrowers did not think too clearly either.

They believed that the spiral of increasing house prices would go on forever. The theory
was, I will push my outgoings to the limit to buy this house eventually with inflation my
wages will increase and I will be able to afford it. At the same time my house will

increase well above inflation. I will then sell it and buy a bigger/better/dearer house and
so an ad infinitun.
I used to get fed up with the perennial dinner party talk of how much people's houses
had increased in value. Did people not realise that their next house had also increased
by the same percentage and they could not win. What about their children how would
they manage to buy a house. We are even seduced into believing that the news that
house prices have dropped is bad news. I think it is good news the sooner we get the
idea that buying property is about buying somewhere to live not about making an
investment the better.

  oresome 20:34 23 Nov 2008

I recognise the situation that Switcher describes, but when all around you are making thousands out of property, it's gauling to stand on the sidelines and watch.

One of my regrets is not doing exactly as you describe and trading up continually. We are only in our second house from being married some 37 years ago.

The present house was purchased using an endowment mortgage which comes to fruition next year and guess what............the sum produced won't cover the original loan used to purchase the house. At the time it was claimed to not only cover the cost, but provide a useful excess cash sum.

Around the same time, I took out an additional voluntary contribution to an employment pension which in the early days used to provide me with a annual statement estimating £100,000 at retirement. The fund was eventually sold on by the insurer and the interests of the members became secondary.

It was actually valued at £19,000 when I retired last year and provides a monthly income of £57.20 non-indexed after taking the tax free lump sum. Doesn't quite fill the car with fuel each month.

Meanwhile, many have made handsomely from property and can hardly be criticised for their good fortune or acumen.

  newman35 20:49 23 Nov 2008

The 'bottom line' is surely the price it will actually cost to build a house - prices cannot fall below that level, otherwise why would anyone build at all?
Now prices of materials, and labour, will not increase greatly in recessionary times but nor will they greatly fall (unions accepting wage cuts?), so it looks like the only factor changing may be price of land. Or were builders just cashing in, previously?
I ask because a builder (large, well known) near us is offering £40k off their £250k new build houses.
Makes you wonder what the actual build cost was.

  GANDALF <|:-)> 21:13 23 Nov 2008

Last July a friend of mine built his own 4.5 bedroom house. He did a lot of the work himself and took a 9 month sabbatical but electrics, roofing and plumbing were done by tradesmen and the build was conventional (like Wimpey home actually). The land was £25000 and the cost of the house carpets, fittings, paint, kitchen, bathroom (all good quality kit) etc. was a shade over £90K. A major builder would have been able to do it for 30-40% less, especially as they would have bought the land yonks ago.


  GANDALF <|:-)> 21:15 23 Nov 2008

... I forget to mention that he is a plasterer, so all the dry lining and plastering was done by himself.


  lotvic 22:00 23 Nov 2008

I seem to be in the same position as Pineman100 as I have also taken my house off the market until prices etc settle down and new buyers can get mortgages. I am wanting to sell house and get bungalow.

Switcher has given a good summary and I agree with both Switcher & Pineman100 and have thought that for many a year.

I reckon it will take a couple of more years before it settles.

  Stuartli 22:51 23 Nov 2008

I used to know someone in the 1970s who bought a modest house when he got married and, at the same time, employed local tradesman to build a new property on land he had acquired; he oversaw the work himself as much as possible.

When the new property was finished, he moved into it and sold the original. Then he started another new house project.

This was done four or five times, with the last new property being built alongside his then residence. After moving to the adjoining house, he ceased the sequence, having made a considerable amount of money over the years through the properties' sales.

None of the new properties cost more than approximately £20k, yet would cost 10 to 20 times that amount today.

He was prepared to work full time and also keep a strict, expert eye on his developments, so thoroughly deserved his financial rewards.

Incidentally, I'm very much of the opinion that high house prices over the years have been very much influenced by estate agents' over valuation - anyone working on a commission basis will want the best possible return.

  Stuartli 22:54 23 Nov 2008

If you price your property in line with buyers' expectations, you will sell it - in turn you will almost certainly land the property you want at a price with which you will be happy.

Swings and roundabouts. The problem is that most people still value their homes at those ruling before the "credit crunch" arrived.

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