The Property Snake!

[room305]

But inflation begets inflation i.e. wages will also have to rise. Without taking this into consideration you're only looking at half the picture.

Usually it works the other way round - inflation in wages feeds inflation in house prices. However, the wage inflation issue relates only to the affordability of the mortgage and that is subject to other factors like interest rates. It doesn't change the size of the loan needed for trading up. If interest rates are at 1% it might be easier to obtain and repay a loan for €500k but it is still a €500k loan.

You made a blanket statement that when houses prices are not rising across the board, trading up from a starter home to a family home becomes more difficult, whereas in fact it is the opposite. If house prices are rising across the board, trading up is actually more difficult. Now you appear to be introducing this absurdity about wages always rising to match house price inflation to cover up your mistake.

 

[Afuera]

Usually it works the other way round - inflation in wages feeds inflation in house prices. However, the wage inflation issue relates only to the affordability of the mortgage and that is subject to other factors like interest rates. It doesn't change the size of the loan needed for trading up. If interest rates are at 1% it might be easier to obtain and repay a loan for €500k but it is still a €500k loan.

Plain and simple, inflation is caused by an increase in money supply. Whether it feeds first into wages or assets is irrelevant. You can't just view inflation (or lack of) in one and disregard it in the other. The interest rates affect all buyers in roughly the same way so I don't know why you're bringing that up.

You made a blanket statement that when houses prices are not rising across the board, trading up from a starter home to a family home becomes more difficult, whereas in fact it is the opposite. If house prices are rising across the board, trading up is actually more difficult.

The example that you used to try and prove that it's easier to trade up in a flat market was useless as you're not comparing like with like. 480k may be less than 540k in nominal terms, but in real terms when you consider inflation it's not. A trader upper in a flat market will ultimately have to put more of their wage towards purchasing their target home than someone who has gained from inflation. I find it hard to see how it's easier for them to get into the house they want in this scenario. (Also remember that this is even before we take the stamp duty issue, brought up by Persius, into consideration.)

Now you appear to be introducing this absurdity about wages always rising to match house price inflation to cover up your mistake.

If you can find anything to prove that wages and house prices do not have any correlation over the long term then by all means, show me.

 

[TTV]

So afuera do you see wages rising consistently over the next few years to match the rise in house prices? Thats an ideal scenario, why worry about inflation at all because wage inflation will match it. Sure why are the ECB worried about inflation at all..

 

[Afuera]

To revert to the mean, wages will either have to rise or property prices will have to fall. The ECB are worried about inflation because they've just seen the increase in money supply at its highest level since the Euro came into being. They are dedicated to ensuring price stability so hyperinflation would be a problem in trying to attain that goal.

 

[room305]

The example that you used to try and prove that it's easier to trade up in a flat market was useless as you're not comparing like with like. 480k may be less than 540k in nominal terms, but in real terms when you consider inflation it's not. A trader upper in a flat market will ultimately have to put more of their wage towards purchasing their target home than someone who has gained from inflation. I find it hard to see how it's easier for them to get into the house they want in this scenario.

Thanks for the economics 101. I know what inflation is. No amount of hedonics will pervert basic math so you either don't really understand what you are talking about or are deliberately trying to distort your original claim.

It really is simple, if you take a number and a larger number, then increase both by an equal percentage the difference between the two will increase.

Issues such as how much your wages have increased (nominal or real), how much the bank is willing to lend, the global macro-economic climate and the fortunes of the Irish soccer team may all be relevant to your situation when you are trading up but they do not change the basic facts. A trader-upper is in a better position if neither home has increased in value than if they both have.

If you can find anything to prove that wages and house prices do not have any correlation over the long term then by all means, show me.

I never made any such claim. They are intricately linked. You may be mixing up cause and effect though. Wage increases may result in (but are not the only reason for) HPI but the reverse rarely holds true.

Think about it for a second. If my boss gives me a huge raise I might buy a bigger house. However, I doubt I'd have much joy lobbying for a raise on the basis that I just purchased a bigger house.

 

[Afuera]

Sorry room305 if I'm not explaining this clearly. The important thing to take from the concept of inflation is that it means you can't compare two nominal figures with each other if they've been reached under different circumstances. You suggested that since one number is less than another, then it must be easier to trade up if that number is less. I disagree completely with this presumption.

Maybe if I put it into figures, it will be easier to see why I think it's easier to trade up when there are rises in house prices than in a flat market:

<Flat market scenario>
A couple buy a starter home for 200k, but the one they would eventually like to own is 500k. After 5 years, with no increase in prices, they've earned about 20k equity. This means that they have saved enough to purchase 4% of the house they really want (which still costs 500k).

<Moderate house prices increases>
Same couple, same houses, again at prices of 200k and 500k. After 5 years there has been a 20% increase across the board. Now the house they finally want to end up in costs 600k, their own one is worth 240k, and it means that they have equity of 60k. They have now saved up 10% of the price of the house they really want.

<High house price increases>
Same scenario starting off, but this time after 5 years all prices double. At this point the house they want to buy costs 1 million, their own is worth 400k, and they have build up 220k of equity. 220k equates to 22% of the price of the house costing 1 million.

The way I look at it, the greater the increase in house prices, the easier it gets for them to own their perfect house outright. Under the flat market scenario, it would make more sense for the couple to try and save 20k in 5 years or less and try and purchase their perfect house first time around, rather than attempting to trade up. This of course would only be possible to see in hindsight though.

Does this make sense or do you see any problems with this way of looking at it?

A trader-upper is in a better position if neither home has increased in value than if they both have.

Do you still think that the nominal figure is more important than the percentage of equity being built up?

 

[shanegl]

Surely the percentage figure only becomes relevant if wages have increased by a similar amount, otherwise the nominal figure is more important? In the long run you expect house prices to be linked to wage inflation, however a housing boom could outpace wage inflation in the short term and the nominal figure would be more important if you were looking to trade up at that time?

 

[polaris]

In your 3 examples, the new mortgages the couple will be applying for are: 480k, 540k and 780k respectively.

Surely these figures are more relevant than the percentages of equity being built up?

 

[room305]

The way I look at it, the greater the increase in house prices, the easier it gets for them to own their perfect house outright. Under the flat market scenario, it would make more sense for the couple to try and save 20k in 5 years or less and try and purchase their perfect house first time around, rather than attempting to trade up. This of course would only be possible to see in hindsight though.

Well even in a flat market the couple have to buy/rent somewhere if they want to live together. Presumably this is part of the theory (I'm not 100% sure how the whole "housing ladder" thing is supposed to work). Buy a small place, with the consequent small mortgage and then when they have sufficient money through savings and salary increases, sell their current place and buy a bigger one. HPI only works against this because no matter how much prices inflate, the nominal gap between their current home and their desired home just gets larger.

Does this make sense or do you see any problems with this way of looking at it?

I see now where you're coming from although I still disagee with your reasoning. The way I see it HPI is great for investors, good or irrelevant to those who already own their "final home" and bad for anyone who plans on trading up or buying.

What percentage I have as a deposit is not relevant if I cannot afford the loan amount. Look at the number of people posting on this board who cannot understand that even though they have a huge amount of equity in their home, the bank will not allow them to remortgage because they cannot afford it. In effect, they are trying to get a mortgage for a home with a large deposit but the bank won't lend them the money. I couldn't buy a €2M house even if someone was generous enough to lodge €1M into my bank account. Not even GE money would believe I could service the debt when I show them my salary slips.

Do you still think that the nominal figure is more important than the percentage of equity being built up?

Absolutely. The banks loan nominal sums not percentages. If HPI runs ahead of wage inflation then the couple in the starter home may be in a better position to trade up than if they hadn't bought but they would be even better off again if prices stayed flat.

 

[Remix]

The OP's scenario of possible negative equity and facing higher interest and penalties from the bank reminded me of an exchange I came across on a US website.

A poster with negative equity and mortgage problems was allowing a homeless person with a car to park and sleep in the car overnight
on his property for a small fee.

When the homeowner made a negative remark about the homeless guy's situation ,someone reminded him that the homeless person with the old car probably had higher net worth then the "homeowner" !!

 

[Afuera]

The banks loan nominal sums not percentages.

Point taken, and this is why I think wage inflation must be taken into consideration...Unfortunately, it's not too easy to estimate this though.

The only really long term study I've seen on housing, the Herengracht Index, shows tight coupling between rents and wages, and looser coupling between the price of rents and the price of houses. This does suggest that house prices and wages align eventually but clearly there can be frothy times where they go out of sync.

If HPI runs ahead of wage inflation then the couple in the starter home may be in a better position to trade up than if they hadn't bought but they would be even better off again if prices stayed flat.

I think that this again depends on wage inflation compared to HPI. Even if HPI ran ahead of wage inflation, they could be better off in the rising market than in the flat one. I'll use two of the same scenarios as my last post, to try and explain what I mean:

<Flat market>
5 years have gone by, they want to trade up to the nicer house which costs 500k. Because of their equity of 20k, they will need to take out a mortgage of 480k. To service this over 30 years @ 5% will cost them 2,575 p/m. This would be around 40% of a combined annual wage of 77,250.

<Moderate increases in market>
Same story; after 5 years they want to trade up. This time houses across the board have risen by 20%, so they now need to pay 600k for the nice house. Due to the equity they've built up of 60k, they'll need to get a mortgage of 540k. A 30 year term @ 5% will cost 2,899. 40% of an annual wage of 86,970 would cover those payments.

While HPI has risen by 20%, the amount of wage increases they would need to buy the same house has not risen by such a high percentage. In fact 86,970 represents a 12.5% increase on the wage they would have needed to get the house in the flat market.

After looking at all this, do you still think that the blanket statement that it's easier to trade up in a flat market holds true? As far I as I can see in a flat market you're better off to rent and save up for the house you really want to buy. In a rising market then "property ladder" rules come into play and you get left behind if you're not on it.

BTW, I think that this excercise is mostly academic anyway. How often does a market just flatline for a long period of time in reality?

 

[Afuera]

When the homeowner made a negative remark about the homeless guy's situation ,someone reminded him that the homeless person with the old car probably had higher net worth then the "homeowner" !!

Funny, but true

 

[room305]

Point taken, and this is why I think wage inflation must be taken into consideration...Unfortunately, it's not too easy to estimate this though.

When you say "wage inflation" do you also include the general increase in wages that occurs as workers gain experience (and hence increased productivity) or just that - an inflation in wages to compensate for the reduced purchasing power of fiat money over time? One will be general across the whole economy, the other specific to the individual.

The only really long term study I've seen on housing, the Herengracht Index, shows tight coupling between rents and wages, and looser coupling between the price of rents and the price of houses. This does suggest that house prices and wages align eventually but clearly there can be frothy times where they go out of sync.

Longterm this makes the most sense to me, house prices should track earnings.

I think that this again depends on wage inflation compared to HPI. Even if HPI ran ahead of wage inflation, they could be better off in the rising market than in the flat one. I'll use two of the same scenarios as my last post, to try and explain what I mean:

It is quite probably that a young worker would experience a 12.5% wage increase over five years without it being "inflation". In which case he still benefits more in a flat market. One thing to remember is that central banks specifically track and set interest rate policies based on "wage inflation" (an increase in wages without consequent increase in production) so interest rates may well increase in this environment. They don't do the same for asset inflation. So if the worker's wages have inflated he may find interest rates are higher as a result, negating your point. Globalisation means a 1970's style wage/price spiral is unlikely in the near future.

After looking at all this, do you still think that the blanket statement that it's easier to trade up in a flat market holds true? As far I as I can see in a flat market you're better off to rent and save up for the house you really want to buy. In a rising market then "property ladder" rules come into play and you get left behind if you're not on it.

Absolutely. In a flat market it is quite possible that the couple can increase their earning power and the gap between their current home and their target home is not increasing. In a rising market it is a definite that the gap between their current home and their target home is increasing but there is no guarantee their wages will rise to commensurate this gap (and if they do interest rates may rise to counteract this).

I'm not necessarily saying that buying a starter home and then trading up is the way to go. Renting won't always be cheaper than buying (I can remember time when it wasn't and I'm still in my twenties) and given that it might be quite a number of years before buying the desired home is feasible (regardless of market conditions) the couple may prefer to buy in the meantime. This will provide security of tenure but as yourself and Persius have pointed out - may not be preferable from a taxation perspective.

BTW, I think that this excercise is mostly academic anyway. How often does a market just flatline for a long period of time in reality?

Most of the time I would say the market is flat (in real terms at least) tracking earnings as a whole, up or down. When credit standards are lowered things may get out of kilter - like the strange times we live in today for example. However, what cannot continue by definition will not continue.