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Commentary and reactions
When is any Government going to wake up and stop supporting house prices as a cornerstone of their policy. By continuing to do this they maintain house prices at 35-40% above their worth and perpetrate the problems
This concept seems to be the driving force behind artificially low interest rates supporting those with debt & in negative equity. Excessive LTV's (unaffordabe prices) were the issue in the past - the fact that people still cannot to put down 20% unless they are assisted by the Government still does not alter the fact that they cannot afford the purchase in the first place
Prop up house prices at all costs and ignore the fact that they were part of the problem in the first place. The realistic solution is raising interest rates to say 4-6% and taking the hosing market fallout - house prices would probably drop to a more sensible level and first time buyers would not have to be subsidised, because reduced house prices would make them more affordable - problem solved and probably encourages the possibility of a recovery (per the US)
In reality all these bad loans on the banks balances sheets should be crystallised so that we can all move on. Failure to do this results in falsely overstating assets when in reality everyone knows that by refusing to acknowledge the debts, results in banks being able to meet liquidity rules - but adopting a lie to do so
Governments must stop interfering in the market place and trying to give everyone a soft landing by mutualising the problem over entire nation - with savers underwriting those in debt
So as far as I am concerned as a taxpayer - NO I DO NOT WANT TO GUARANTEE someone else’s mortgage
Don't waste money trying to buck the market. If you give first time buyers a subsidy, all that will happen in time is that the market price will increase to reflect that subsidy. Then you are back to square one.
It might sound harsh, but if first time buyers can only afford a 5% deposit then they are probably not yet ready for the property market.
If first time buyers are priced out of the market then, over time, the market price will fall to reflect that there are few new entrants. Simple demand and supply economics.
The average UK house price for a 4-bed detached house is currently £324,602. If this price fell by 37.5% as proposed by JC, the new price would be £202,876.
What would it cost to build such a house for new? An average 4-bed house would be about 150m2, so at £1000 per m2 for an average specification, that's £150K in construction costs alone. The S106 local authority roof tax in my area for a 4-bed is now running at £22K per house. This leaves only £31K for the developer to cover her finance costs, the marketing and sales costs, the costs of design and planning, insurance and an NHBC guarantee, plus the company running costs and, of course, the cost of buying the land in the first place, and maybe even making a tiny profit.
However, the figures are even worse than this, because for every 3 houses built, the developer has to give away one house to a housing association as an "affordable home". He is only reimbursed the construction cost, so all the other costs have to be carried by the two remaining houses for private sale. On these figures I conclude a drop of 37.5% in house prices would simply kill the construction sector stone dead: the residual value left available for the land after paying all the construction costs, taxes and running cost actually works out negative, and the profits are zero.
It is futile to argue that house prices are overvalued because they "ought" to be 3-4 times average male earnings, because they were once in the past. This ignores radical changes in family makeup and earnings: we have dual-earner couples now, we have ultra-low interest rates, we have increasing wealth percolating down to the younger generations via gifts and inheritance. In fact, the number of houses owned outright now exceeds the number that are mortgaged, and the amount of mortgage debt as a percentage of total housing value and of total national wealth is the lowest ever recorded. Affordability as measured by how much housing takes from average monthly budgets is now well within average ranges, so what good is this simplistic notion that houses *must* be valued between a 3 and 4 multiple of wages?
There are reasons for having multiples for defining affordability and if you don’t believe me simply look at Cyprus, where they raised the lending limit on foreign deposits from 30% of capital to 90% and then lent massively to Greece (bad call). Different market same concept; although akin to 100% mortgages etc.
Nevertheless, it is all about figures and what I am talking about is that house prices are overvalued by 37% & not that they should fall by 37%
Anyway to move on – the real issue is that successive Governments have through market interference (interest rate manipulation etc.) managed to maintain a resilient housing market, in spite of the economic realities. By deferring repossessions they have kept people in houses they cannot afford and prevented new entrants in the form of first time buyers. This is hardly a good policy, getting savers etc. to underwrite the those who cannot afford their mortgages whilst effectively stopping new blood from entering the market because prices are too high
Furthermore, in the 10 years from 2001-2011, the average house price increased 94% compared to a 29% increase in the average salary; in other words, house prices rose three times faster than wages.
Don’t forget that pretty much all markets will ‘revert to mean’ in the longer term and housing is no different; all Government interference has done is suspend gravity for a period. This situation cannot last forever and in one sense should be regarded as a ticking time bomb – like the children’s party game – don’t be caught holding the parcel when the music stops
We also have those in the unenviable position of being interest only, with no exit plan for repayment & relying on property price increases to cover the debt. Once again these are ticking time bombs, especially where older (over 50) people are concerned
Eventually all this will trigger a wave of forced sellers and once this occurs then borderline buy-to-let (currently on the increase with low interest rates) will slip into negative equity and potentially have to sell … and so it goes on like a pack of cards. Maybe the ‘perfect storm’!
In conclusion, The Economist describes UK property prices as the “unfinished bust” and thinks they remain 20%-28% too high. Credit rating agency Fitch reckons 25%. Deutsche Bank’s calculates 34%. Morgan Stanley estimates 15%-25%. Even the IMF (International Monetary Fund) says UK house prices are 30% over valued.
They may all be wrong – but so far we have not seen a valid argument to the contrary
the 90's before the boom.....?
in the late 80's & early 90's together with a sensible deposit instead of 95-110% mortgages - and the market crash in the early 90's
or do you refer to the 17% interest rates in 1979
Rather than the artificially manipulated interest rates in force today
Just work out the cost of a mortgage today at these interest rate levels
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