House prices are up! House prices are down… Now they’re up again! And now there down again. And when they are only halfway up they’ll be neither up nor down….
And that’s where they need to be, neither up nor down but on a bit of a plateau.
While that’s going on, earnings need to go up which will bring down the – House Price : Earnings.
In order for earnings to go up, inflation needs to rise steadily.
In order for inflation to rise steadily people need to have enough money to keep buying stuff.
How do they find more money during a time of high Debt : Income?
Introducing the 40 year mortgage! (It doesn’t exist but what if it did…?)
A mortgage you take with you throughout your working life (and beyond if you can still afford it).
What’s the downside? People take out 25 year mortgages when they’re 25 and pay them off for 15 years then, so they can afford a bigger house, they take out a bigger mortgage for another 25 years. That’s 40 years of having a mortgage anyway.
If the mortgage was 40 years from the start it would cost a lot less on a repayment basis than a 25 year mortgage.
£150,000 over 25 years at 5% = £877 per month.
£150,000 over 40 years at 5% = £723 per month.
£154 per month less.
The idea of long term debt is something the FSA are scared of. They want people to have the opportunity to one day be totally debt free, no mortgage and happy in retirement.
For that to happen people need to think differently about money and I noticed a car insurance advert on the back of a bus today stating that ‘saving is cool’ so some effort is being made by the media to promote saving. But while pop stars sing about wanting to be billionaires (so freakin’ bad) and snappy aftershave commercials sell gold bullion people will want, want, want which, is good for the economy but brings about a catch 22 situation.
How do you get people to spend while working towards being debt free at the same time?
Stop them borrowing more than they can afford.
Impose a maximum debt to income ratio that encompasses all borrowing.
People that aren’t up to the maximum can keep borrowing if they want to. People who are over the maximum can’t borrow any more until they’ve paid some off.
And how do they pay it off? With the extra £154 per month they’re not spending on their mortgage.
This could lead to long term mortgages keeping people in debt for longer and although it would be lovely if we could all be mortgage free after just 25 years or less the truth is many of us will have a mortgage for 30, 40 or even 50 years anyway.
But if house prices come down while earnings rise the maximum debt to income ration could be increased and long term mortgages could be phased out.
So, who’s going to keep house prices level and how are they going to do it?
Incidentally, take the 40 year mortgage and over pay it by £100 per month and it could be repaid in 28 years and still cost £54 per month less (subject to interest rate changes).