[B0ycey]

http://www.bbc.co.uk/news/business-42872432

So yeah, just read 1 in 5 mortgages in the UK are interest free. I knew the situation was bad, but not 20% bad. Talk about toxic. The houses in question are in affluent areas. Which means the total sum at the end of these mortgages will be unaffordable to even the middle class. If people can't afford to repay these loans or their homes lose value below the borrowed amount due to the bubble bursting (which will happen) people are not going to be pay them off. What fucking morons thought these type of loans were a good idea? Talk about cheap profits. It is crazy to think that the blackhole created by banks prior to 2008 is not even half filled. So yeah, I'm going to predict that the final nail in the financial sector and it's ultimate destruction will be in 2030.

Am I being pessimistic?

[Potemkin]

Am I being pessimistic?

Optimistic, I'd say. Lol.

A large percentage of people seem to think they can coast through life giving the appearance of success by cutting corner after corner, and there won't be any comeback. The banks sell these interest-only mortgages to prats who want to live in a big house but can't afford one. So they just pretend they can afford one, until it gets repossessed of course. Which wouldn't matter, but if enough of them do it they'll take the entire economy down with them.

[B0ycey]

Optimistic, I'd say. Lol.

See, you say this but the UK economy relies on its financial institution. Unlike Germany, they shipped their factories abroad. Banks could perhaps recoup their loses by selling off homes - if people can afford to buy them. I know that this will at least be the final dildo up the arse for the creditors and likely reduce the gap between rich and poor, but there will be a price to pay in terms of living standards - even for you comrade Potemkin.

[Potemkin]

See, you say this but the UK economy relies on its financial institution. Unlike Germany, they shipped their factories abroad. Banks could perhaps recoup their loses by selling off homes - if people can afford to buy them. I know that this will at least be the final dildo up the arse for the creditors and likely reduce the gap between rich and poor, but there will be a price to pay in terms of living standards - even for you comrade Potemkin.

We must all make sacrifices for the revolution, B0ycey.

Or, more accurately, we must all sit back and let the bankers force everyone else to make sacrifices for the revolution. Which amounts to the same thing, I suppose. At the moment, bankers are the most dangerous revolutionaries in Britain.

[Albert]

Yep instead of keeping housing market prices fair with sometimes need government intervention, a system is created of bleeding the people dry. Where it has come to a point now, that is is hard to start a family or just simply live a decent life. Instead people's impulsiveness is taken advantage of. And the government, the people in position who are supposed to take care of their own citizens, join in on the exploitation.

Then these fuckers have the nerve to preach about some "principles" of democracy and freedom. And all these "rights" mambo jumbo they like to give speeches about.

[Crantag]

See, you say this but the UK economy relies on its financial institution. Unlike Germany, they shipped their factories abroad. Banks could perhaps recoup their loses by selling off homes - if people can afford to buy them. I know that this will at least be the final dildo up the arse for the creditors and likely reduce the gap between rich and poor, but there will be a price to pay in terms of living standards - even for you comrade Potemkin.

I see a fundamental difference here when compared to the situation in the US in 2008.

In the latter case, future revenue receipts on loan repayments, which were a combination of interest and principal, were calculated into the equation on the part of banks. The sudden spikes in defaults were therefore a shock, and overwhelmed the system.

Here, the banks are receiving interest payments, while the underlying principal is left intact. By accounting trickery, the underlying principal probably even appears on bank's balance sheets as solvency. There is the ostensible apparent danger perhaps, but the paying off of the associated interest by the home occupant is a critical factor here.

In effect, a situation is created whereby a bank is a holder of a 'financial asset' (a piece of real property, so converted), and they receive a flow of interest payment on that asset, from the home occupant. So, the home might just as well be a piece of bond paper, as far as the bank is concerned, through such an arrangement.

If the person can't pay in the end, the home reverts back to the bank. I understand your point about the potential market impacts, but the thing is that the asset which then reverts to the bank is that said same 'would-be bond paper' if you will, and so during the life of that 30-year mortgage, the bank has been profiting already as a result of this ownership right.

So, the bank is left holding only the principal. And it is also not clear that the houses would be difficult to sell at that point; but even if they are, the amount of loss a bank could actually absorb would be greater, being that the interest has already been detached and paid in full. Moreover, the non-suddenness of the phenomenon may be enough to avert a shock.

Now, here is an alternative scenario. People get the bill in the end, can't pay, and the property reverts to the bank. The property is put up for sale, and sells at an exorbitant price. Meanwhile, workers in the UK find themselves less and less able to afford to buy homes. This, mind you, would also largely be consequence of the extant and well-developed practice, whereby homes are now accounted as financial assets.

[SolarCross]

2030 is 12 years away, honestly I don't see the bubble lasting that long. I say it'll burst in under 5 years from now.

It will be painful for some when it bursts but like lancing a boil we will all be the better off for when it happens.

Part of the problem is that fiat money loses value like sieves lose water which makes evaluating house, or any, prices difficult. They can appear to be climbing in value when really they are losing value.

If you compare houses to gold instead of GBP then the UK housing bubble is already burst!

[The Immortal Goon]

I suspect that it might couple internationally. The US equivalent is the Student Loan bubble, which as far as I can see, has pretty much the same effect.

An imminent economic crisis the likes of which this generation has never experienced is coming. However, the conditions under which the next bubble will burst will surprise even the most astute observers of economy, culture, and politics. The higher education bubble (one-sixth of the U.S. economy) will likely burst with the force of all previous catastrophes combined—a shock wave so sudden, so large, that it gathers the full force of the savings and loan, insurance, energy, tech, and mortgage crashes, creating a blockbuster-level perfect storm.

Disturbing patterns of unsustainable economic activity have emerged over the last decade. College and university budgets rely on inflated real estate investment, deny the short- and long-term effects of student loan defaults, accept the rise in tuition above the rate of inflation as normal, and expect a downsized part-time faculty to help subsidize inflated tenure track and endowed tenure budgetary lines. The insatiable upper administrative appetite for high salaries, job description absurdity, and low accountability adds endless layers of compulsive, prideful incompetence to an already unstable education business model that believes it simply cannot crash.

It seems to me that if the US or UK collapses economically, the other will probably follow right off the cliff as they're both precariously standing on the same basic issue here.

So I'd be looking at before 2030 if nothing were done as we basically have twice the chance of this happening.

[Crantag]

The student loan crisis has a good potential to ultimately lead to university bankruptcies.

I see in this, once again, principally a degradation of the conditions of the working class. It isn't necessarily the case that either this or the UK housing situation described in the thread/OP link will lead to financial catastrophe.

As for the narrowing of the wealth gap in the UK resulting from an eventual collapse, I don't see that. The situation I laid out in a previous post would result in an opposite effect: merely that of homeownership being out of reach to workers. There are non-financial means to make up these differences, namely resorting to squalid living conditions on the part of workers. The UK housing market need not necessarily falter in it.

[SolarCross]

Anyone "rich" in fiat money or real estate will be wiped out, that's a narrowing. A fiat money collapse, which is what we are talking about really as both the housing and student debt bubbles are leveraged asset bubbles essentially, will disproportionately affect the middle and upper classes actually. The lower income groups can expect to be largely unaffected as they are largely debt free having never bought a house or gone to university.

It will also have little effect on overall employment or real industry. It's just fake assets that will be brought down to reality.

[Crantag]

Anyone "rich" in fiat money or real estate will be wiped out, that's a narrowing. A fiat money collapse, which is what we are talking about really as both the housing and student debt bubbles are leveraged asset bubbles essentially, will disproportionately affect the middle and upper classes actually. The lower income groups can expect to be largely unaffected as they are largely debt free having never bought a house or gone to university.

It will also have little effect on overall employment or real industry. It's just fake assets that will be brought down to reality.

Once more, there is no necessity that emergent mechanisms will have the effect you describe.

A collapse of the currency itself could, and it's possible, but not really foreseeable at the moment.

It is not a safe assumption that the homes people are forced to vacate when their interest-only mortgage expires will not readily find sellers. Especially with international free capital flows. As I also pointed out previously, the interest burden relieved by the home occupant also automatically hedges the risk for the bank, but even this needn't necessarily be actualized (though banks typically still convert such 'assurances' into on-the-book value, through financial engineering).

This is because the utility-value of a house as a roof over a family is not necessarily connected to its exchangeable value, because such a linkage has been subverted through the 'financialization' of real property assets.

[SolarCross]

@Crantag
Why do you think the banks can resell repossessed properties at an "exorbitant price"? I am genuinely curious.

----

Also, if you will, what do you think about the fact that house prices in gold have already crashed back to normal?

[Crantag]

@Crantag
Why do you think the banks can resell repossessed properties at an "exorbitant price"? I am genuinely curious.

----

Also, if you will, what do you think about the fact that house prices in gold have already crashed back to normal?

That was mostly intended as an exception to illustrate the various pathways possible. But the reason I see it as of good potential is that houses are financial commodities, and there is a lot of demand for them, independent of their use as houses. It is a common phenomenon for housing demand to well exceed supply, and that creates conditions where houses do not remain on the market long. It was mentioned that these houses are in affluent areas. You will need to show me evidence of a glut in housing demand in the UK in these areas, to even have any case. I suspect the opposite condition likely exists.

As for the gold chart, I think it means nothing, because gold is not a monetary substance, but is rather affected by secondary financial and monetary flows. It's linkage to currency has been severed, most severely in the United States, who's currency was consequently made the principal means of international settlement (and therefore arguably the principal underlying value basis of the British pound, although this isn't really clear because the British Pound is pretty unique, and I suspect it is effected by multiple such underlying factors).

[SolarCross]

That was mostly intended as an exception to illustrate the various pathways possible. But the reason I see it as of good potential is that houses are financial commodities, and there is a lot of demand for them, independent of their use as houses. It is a common phenomenon for housing demand to well exceed supply, and that creates conditions where houses do not remain on the market long. It was mentioned that these houses are in affluent areas. You will need to show me evidence of a glut in housing demand in the UK in these areas, to even have any case. I suspect the opposite condition likely exists.

But the prices they command during this bubble are due to the leverage supplied by the banks. They can't keep those prices except through more leverage. The buyers of repossessed houses tend to be thrifty people with cash on hand rather than being drunk on leverage. Banks might be good at financial wizardry but they are shit at selling real assets, mostly they just boot out repossessed properties out on auction where they go to hard haggling unleveraged buyers at fractions of their leveraged value. If too many houses are booted out this way from a swarm of defaults then the market prices will dragged down hard too.

As for the gold chart, I think it means nothing, because gold is not a monetary substance, but is rather affected by secondary financial and monetary flows. It's linkage to currency has been severed, most severely in the United States, who's currency was consequently made the principal means of international settlement (and therefore arguably the principal underlying value basis of the British pound, although this isn't really clear because the British Pound is pretty unique, and I suspect it is effected by multiple such underlying factors).

[/quote]
Values are fluid but one thing is clear fiat monies leak value so you can't think of them as a even level, something which sells for $1 in a given year will sell for $10 next year but it didn't get more expensive the money just became more worthless. Whereas gold is a better measure of value because demand vs the supply is stable over time. The evidence for this is that gold tracks very closely with all the other commodities. Do you think gold, tea, oil, sugar are all getting more expensive even while production matches consumption? Or are USD, GPB, Euros losing value over time? That being the case that gold values are stable and fiat is depreciating then if house prices have already bottomed out in gold then maybe houses actually aren't over valued at this time?

[B0ycey]

I see a fundamental difference here when compared to the situation in the US in 2008.

In the latter case, future revenue receipts on loan repayments, which were a combination of interest and principal, were calculated into the equation on the part of banks. The sudden spikes in defaults were therefore a shock, and overwhelmed the system.

Here, the banks are receiving interest payments, while the underlying principal is left intact. By accounting trickery, the underlying principal probably even appears on bank's balance sheets as solvency. There is the ostensible apparent danger perhaps, but the paying off of the associated interest by the home occupant is a critical factor here.

In effect, a situation is created whereby a bank is a holder of a 'financial asset' (a piece of real property, so converted), and they receive a flow of interest payment on that asset, from the home occupant. So, the home might just as well be a piece of bond paper, as far as the bank is concerned, through such an arrangement.

If the person can't pay in the end, the home reverts back to the bank. I understand your point about the potential market impacts, but the thing is that the asset which then reverts to the bank is that said same 'would-be bond paper' if you will, and so during the life of that 30-year mortgage, the bank has been profiting already as a result of this ownership right.

So, the bank is left holding only the principal. And it is also not clear that the houses would be difficult to sell at that point; but even if they are, the amount of loss a bank could actually absorb would be greater, being that the interest has already been detached and paid in full. Moreover, the non-suddenness of the phenomenon may be enough to avert a shock.

Now, here is an alternative scenario. People get the bill in the end, can't pay, and the property reverts to the bank. The property is put up for sale, and sells at an exorbitant price. Meanwhile, workers in the UK find themselves less and less able to afford to buy homes. This, mind you, would also largely be consequence of the extant and well-developed practice, whereby homes are now accounted as financial assets.

This is largely true but there are a few things to consider here.

Firstly, the interest actually won't cover the initial loan. Second, there are 1.64mn of these mortgages all roughly up at the same time. Of them you can expect (this is an assumption) about 1.5mn not to be repaid - because if a loanee was going to be saving up as they paid the interest, why didn't they just do a normal home loan that would essentially do the same thing?

So are the banks and the government going to allow say 3m people to become homeless when we currently don't have enough homes to house the homeless we have now? No. I suspect these loans will have to be extended until the day the loanee dies before repossession takes place. But that will just delay the issue.

People have bought homes they cannot afford. Mortgages approval is also at an all time low. Which means demand for high house prices will be low. The banks, by creating these loans have artificially inflated house prices and this bubble will burst. Perhaps the bubble should have already burst but as people don't sell homes at a loss, this hasn't occurred yet. But in 2030, or maybe 2050, when 1.64mn homes are put up for sale with only rich buyers available, a crash will occur. I sense it.

[Prosthetic Conscience]

Second, there are 1.64mn of these mortgages all roughly up at the same time. Of them you can expect (this is an assumption) about 1.5mn not to be repaid - because if a loanee was going to be saving up as they paid the interest, why didn't they just do a normal home loan that would essentially do the same thing?

That's a huge assumption, and one you have made no attempt to justify. Unless you're an author of an industry study into the loans, we should assume it's meaningless and wrong. Why didn't they use a repayment mortgage? Probably because, historically, investing in shares has performed above the mortgage loan rate, so that you'd be likely to get richer with an interest-only mortgage, and putting money into an ISA. They also may have been able to use the more flexible nature of an interest-only mortgage - knowing they're going to get a substantial rise in income soon, when they can better afford larger payments to build up capital to pay off the loan, or their circumstances will change (eg children leaving home; that also might give them the option of moving to a cheaper house).

This is a problem only for the people who haven't made sufficient provision. Hence the letters trying to find out, or, if the lender knows the way they intended to repay (back in the 90s, for instance, "PEP" mortgages were sold, in which I think you had to show you'd started investing in a PEP), then they can estimate if it's on track. Bu the article is vague about how many are still unknown - "Hundreds of thousands of homeowners could be at risk" is the most definite it gets to.

[Rugoz]

In addition to what PC said, in most countries mortgage interest payments are tax deductible.

[B0ycey]

That's a huge assumption, and one you have made no attempt to justify. Unless you're an author of an industry study into the loans, we should assume it's meaningless and wrong.

To be fair, you are correct. I have no evidence or is able to obtain evidence whether 1.5mn people will be able to afford or even plan on buying their homes after their mortgages run out. Hence I said it is an assumption. You can also assume it is could be wrong but perhaps not say it is entirely meaningless. Only time will tell. However what I do know is people are ignoring the warnings about repayment, didn't have to specify how they were going to repay the final installment and also this was the only way some loanees could obtain a affordable mortgage in affluent areas prior to 2008 as they couldn't actually afford full mortages. I have also read accounts where people took these mortages knowing full well they were not going to repay them as it was cheaper than renting in desirable locations.

Why didn't they use a repayment mortgage? Probably because, historically, investing in shares has performed above the mortgage loan rate, so that you'd be likely to get richer with an interest-only mortgage, and putting money into an ISA. They also may have been able to use the more flexible nature of an interest-only mortgage - knowing they're going to get a substantial rise in income soon, when they can better afford larger payments to build up capital to pay off the loan, or their circumstances will change (eg children leaving home; that also might give them the option of moving to a cheaper house).

Can you provide evidence for this? Endowment morgages turned out to be worse than actual repayment morgages, and yes I will give you ISAs but shares and bonds are uncommon investment adventures for the middle class unless a banks does it for them. And the return is usually worse than the interest you pay for a mortgage. Plus you are risking your home in a business adventure and this isn't wise. Also you need to put into account that it is a fact that people are ignoring warning letters and the government are aware this is an real issue and you can perhaps make an educated assumption that there is going to be many people not paying off these loans. But by all means think this is meaningless.

This is a problem only for the people who haven't made sufficient provision. Hence the letters trying to find out, or, if the lender knows the way they intended to repay (back in the 90s, for instance, "PEP" mortgages were sold, in which I think you had to show you'd started investing in a PEP), then they can estimate if it's on track. Bu the article is vague about how many are still unknown - "Hundreds of thousands of homeowners could be at risk" is the most definite it gets to.

I largely agree with your logic here. However I do think if you believe the numbers are only hundreds of thousands you are being optimistic. But it is your opinion and I will admit I cannot provide evidence to challenge this. Perhaps I will be wrong. But it is a gut feeling that the actual figure is more likely going to be over a million. I hope I am wrong though.

[Prosthetic Conscience]

Can you provide evidence for this? Endowment morgages turned out to be worse than actual repayment morgages, and yes I will give you ISAs but shares and bonds are uncommon investment adventures for the middle class unless a banks does it for them

PEPs (which preceded share ISAs) and ISAs, along with pensions and endowment policies, are mentioned as the typical ways to repay interest-only mortgages here: https://www.hedgelands.com/mortgages/mo ... ossary.htm . In the 1990s, Rugoz's point about mortgage deduction also applied, and in the 80s, endoment politices had special tax treatment too - which was why they'd been so popular. Advisers probably should have dropped them after that, and the misselling was probably due to the large commissions they continued to receive on them.

An ISA invested in an index-tracking fund wouldn't need any attention from the borrower, and if it's invested regularly the volatility is evened out. If these figures are accurate for the FTSE 100 and FTSE 250's total return (ie including dividends), then the equivalent return since 2005 (when those figures start, and also when a 25 year mortgage maturing in 2030 would have started ) have been about 7.5% and 12% respectively. That would, I think, have been higher than mortgage interest rates have averaged over that time (certainly after 2008).

If people have been using a vehicle like this to cover an interest-only mortgage, I think some kind of staged withdrawal from the market over that last few years might be a good idea, to avoid having to do it all at a moment hen the market is down (as pension investors are often advised to do).

I think overall that interest-only mortgages can have worked out fine, if people got reasonable advice when starting them, and have continued to follow it. People who don't reply to letters trying to check such an important bit of finance may not be sensible, of course.

Speaking of pensions, that might become a source of making up any shortfall - people with private pensions having to take some of it out when they're allowed to, to pay off mortgages they haven't covered after all. It might end up with people having less comfortable retirements than they expected.

[Atlantis]

It was mentioned that these houses are in affluent areas. You will need to show me evidence of a glut in housing demand in the UK in these areas, to even have any case. I suspect the opposite condition likely exists.

Ghost towers: half of new-build luxury London flats fail to sell

If half of luxury flats fail to sell, then there is a glut. Moreover, newly planned towers are in the pipeline, which can't be cancelled without substantial losses, and numerous owners have taken their property off the market because they would be making a loss selling below what they invested.

A pile of bricks is just a pile of bricks. It's value increases if the economy grows, if it doesn't, the value will fall. A lot of people have invested in real estate in the expectation of continued growth. As this growth fails to materialize, they will make losses and thus further reduce economic growth.