[Crantag]

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.

Good points.

And I also think it is an issue.

I think it's a major risk, despite what my previous posts might have seemed to suggest.

However, the forseeability alone still tempers the risk in some respects, with respect to the concerns of the City of London.

I think that this is a big peril for the working class, which is principally what I'm concerned with. I haven't been convinced that this sort of situation will form a spreading contagion. I say so because of the nature of the management of financial risk, on the part of financial institutions. It's the whole 'heads I win, tails you lose' thing.

I haven't painted any scenarios which are favorable for the workers. What I am still unsure about is whether it constitutes a severe systemic financial risk, at least at its surface. The indicators you raise do have adverse implications for systemic risk, I would tend to think. There are likewise systemic risk factors on the surface, but predicting an actual collapse seems to me a complicated matter.

[B0ycey]

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.

I was hoping for evidence on your probable assertion that people took these loans out as an investment rather than the methods they could take to invest if they did. They could also make money by putting it on the horses too.

Endowments mortgages turn out to be a turkey, which millennial mortgage loanees would know about when taking them out and yes people put money into ISA's and PEPs but most rational people don't take up investments with money that isn't savings - unless you can provide evidence on the contrary.

These mortgages were taken out without the need to provide evidence on how the final instalment was going to be paid. Government estimates predict that just under half do not have the stategy to meet a full payment and about 10% have no strategy at all. These are the best figures I can obtain on the matter. But they are estimates, and like most government estimates are likely to be optimistic and massively so. I tend to look at human behaviour, common sense and logic when I make an assumption. So perhaps 1.5mn unpaid full installments mortages is being pessimistic but I certainly don't believe people took these loans out as an investment. I believe they took them out as it was the only means to buy a home they normally couldn't afford. And that is likely going to end badly. The fact people are ignoring warning letters is in itself a red flag.

[Prosthetic Conscience]

I was hoping for evidence on your probable assertion that people took these loans out as an investment rather than the methods they could take to invest if they did. They could also make money by putting it on the horses too.

Endowments mortgages turn out to be a turkey, which millennial mortgage loanees would know about when taking them out and yes people put money into ISA's and PEPs but most rational people don't take up investments with money that isn't savings - unless you can provide evidence on the contrary.

These mortgages were taken out without the need to provide evidence on how the final instalment was going to be paid.

While I haven't gone through the process of taking out such a mortgage myself, the typical description is that they did need to show how they'd pay back the capital - see eg:

You must be able to show the lender how you’ll repay the mortgage at the end of the term.

You - not the lender - are responsible for putting in place and maintaining a credible repayment plan to repay the original loan.

You can’t rely on the promise of a future windfall such as an inheritance or bonus.

You also can’t speculate that property prices will rise enough to allow you to buy a smaller home and still pay off the mortgage.

The lender will check at least once during your mortgage term that your repayment plan is on track to cover your mortgage.

https://www.moneyadviceservice.org.uk/e ... y-mortgage

And while they might win money on the horses, the odds are literally against that; while long term stock market investment does generally beat interest rates. Yes, endowments, once they lost their tax advantages, turned out to be turkeys, due to the high charges hidden inside them. But with a form of investment that had a track record of doing better than mortgage interest rates available, it wouldn't not have been 'irrational' to decide to use it. While the rules may say "you can't rely on being able to downsize at the end of it", if that was your backup plan in case investments didn't turn out so well, that's still rational - you get 25 years living in a bigger, or better-placed, house in the mean time.

[B0ycey]

While I haven't gone through the process of taking out such a mortgage myself, the typical description is that they did need to show how they'd pay back the capital - see eg:

You have just quoted the current rules. It changed after 2008 because surprise surprise, it was a liability. After all, letters have been sent out asking people how they intend on paying so they can change to a different mortgage plan if required. But when people don't reply it does say it all about this issue...