Why the european housing market is about to crash

[Hydrogen]

The existence of the 50-year mortgage shows lenders are desperate

The New Statesman is not usually in the business of giving financial advice, but following the announcement that a new lender, Perenna, has been awarded a licence to bring 50-year mortgages to the UK market, I will make an exception and tell you this: do not apply for a 50-year mortgage. These are ludicrously expensive products that the government should never have allowed, and the very fact that they exist suggests that the housing boom is at an end.

The idea might not sound too bad to begin with: 50 years of paying 4.5 per cent interest, and never having to worry about where interest rates will go. Just buy a house, and very slowly pay for it. A slight snag is that to achieve full ownership of your home by the current average retirement age of 65, you’ll need to have found that house, plus a good job to pay for it (and also probably a life partner) by the time you’re 15.

Let’s imagine you are a happily married 15-year-old with two children and a solid career: the 50-year mortgage is still a terrible idea. Borrowing any amount of money over such a long time is a bad idea because mortgages are amortising loans. This means each payment is made up of a payment towards the balance, plus an interest charge. These interest charges are highest towards the beginning of the term (because there’s more interest to pay on a bigger balance), but to keep your payments equal for the whole term, the lender just takes a bigger portion of the earlier payments. What this means in practice is that your first year of payments on a mortgage is almost all interest, which your bank keeps, and the last year is almost all balance, which you keep (as the bricks and mortar you’ve bought). The longer the period of any amortising loan, the longer it takes to start really paying it off.

An amortisation calculator is a useful tool to show why a 50-year mortgage is such a terrible product: a £250,000 mortgage at 4.5 per cent will have payments of around £1,000 a month. After 20 years of these payments, you’ll have spent more than £240,000 but cleared less than £45,000 from the debt. It will take 37 years to clear half the loan, and after 50 years, that £250,000 mortgage will have cost more than £629,000.

Clearly, almost no one is going to make it to the end of a 50-year mortgage. The average first-time buyer, now in their early 30s, would need to be able to guarantee their income (and probably their relationship with their partner) well into their 80s to do so. But the fact that there is a market for them – and that the government supports them – is a strong indicator that house prices are due to fall.

Danny Dorling, a professor of human geography at Oxford University and author of All That is Solid: The Great Housing Disaster (2014), told me the 50-year mortgage indicates that Britain’s housing market has reached “a point of desperation”, and that the product itself is the “last gasp” of an industry that is on the brink of running out of demand. The huge increase in energy costs coming in October, the current inflation in prices across the economy, the arrival of a new cohort of school and university leavers just as companies see their bills rising still further, and the arrival of a new prime minister will all bring a number of new challenges to Britain’s already struggling economy this autumn. A government that has spent tens of billions inflating house prices may find it can no longer afford to do so: “The choice,” said Dorling, “may be between propping up the housing market, or ensuring that people don’t freeze over the winter.”

Everyone considering buying a house will be thinking about this. “This is the most predicted recession ever,” Dorling said. “And as soon as you get hunkering down, and the feeling of ‘wait and don’t buy now’, that’s it. It’s all it takes.” The signs are already beginning to emerge: no-fault evictions have risen by 41 per cent over pre-pandemic levels, and there are signs that this may be a result of buy-to-let landlords deciding that the market has peaked. Dorling said landlords, who buy and sell more quickly, are a “key indicator” of where demand is headed.

But the most telling sign is the 50-year mortgage itself. In the 1970s, as mortgages were rationed, buyers scrabbled for new long-term deals before the market slumped. In 1989, many couples rushed to buy at inflated prices before tax relief was outlawed; within a few years the average London property had lost almost a third of its value. The fact that once more people are being encouraged to use a new and yet more desperate measure, when house price affordability had dropped to a level not seen since the late 19th century, is a very strong sign that the pattern is about to repeat.

https://www.newstatesman.com/quickfire/2022/08/will-housing-market-crash-50-year-mortgages

....


This claims the introduction of a 50 year mortgage indicates the UK real estate market is due to collapse. As occurred during its downtrend in the 1970s.

Many I have seen actually support a collapse in real estate prices. As it would result in real estate, land and homes becoming more affordable. It is mainly HODLers of real estate who fear market collapse. Which could  fuel a counter intuitive cycle where the rich in real estate becoming poorer. And the poor have an opportunity to buy real estate and gain wealth.

The UK having one of the stronger economies in europe. It may be deduced that if the UK real estate market is in poor shape. Other european nations who aren't as well off, could be even worse. How far a housing collapse could extend remains to be seen.

American real estate appears to remain in high demand. With many large swathes of land being bought out by foreign investors.

[davis196]

And the poor have an opportunity to buy real estate and gain wealth.

The poor won't be able to buy real estate at affordable prices unless the banks offer them mortgage at affordable interest rates.
The central banks are raising the interest rates, so mortgages might become less affordable in the future.
I don't agree that UK has one of the stronger economies in Europe. Brexit still has it's impact and the UK economy will be facing recession combined with inflation and labor shortage.
The idea of a 50-year mortgage is simply stupid. Nobody would want to put debt on his children, so that they will have to pay it off even after their parents die.
There is a real estate bubble in the capital of the country where I live. I don't even understand why. There's high inflation, the working class is becoming poor and house/apartment prices are going up. This doesn't make any sense.

[avikz]

50 years mortgage is indeed a sign of desperation. The global standard is 20 to 25 years and for some exceptions, it is 30 years. But it could have a positive impact on the poor class of people because now the installments will be cheaper and could come within their payment limit. But on the other hand, landlords may see less demand for rental homes because more and more people can now afford to buy homes.

So I don't see this step as a disaster for the real estate market. Rather it may fuel housing demand in UK which might drive up prices. Lets see how it works out!

[fillippone]

50 years mortgage is indeed a sign of desperation. The global standard is 20 to 25 years and for some exceptions, it is 30 years. But it could have a positive impact on the poor class of people because now the installments will be cheaper and could come within their payment limit. But on the other hand, landlords may see less demand for rental homes because more and more people can now afford to buy homes.

So I don't see this step as a disaster for the real estate market. Rather it may fuel housing demand in UK which might drive up prices. Lets see how it works out!

50 years long mortgage is a financial nonsense. This is longer than most work life. I cannot think about working literally from your first day to the last one, and more, to pay for your primary shelter.
This is a desire sperate move to lure peoples le into buying houses they cannot afford.

[lizarder]

50 years long mortgage is a financial nonsense. This is longer than most work life. I cannot think about working literally from your first day to the last one, and more, to pay for your primary shelter.
This is a desire sperate move to lure peoples le into buying houses they cannot afford.

In the area where I live, it's even worse for the sellers of tender houses (contractors), they suck the blood of small people and work very well with banks, which are labeled as Shari'ah.
Bank as a third party that provides guarantees for people who take the house, provided that the certificate of the house is held by them.
This shows how evil they are to suck the blood of the little people in a measured and systematic way.

The requirements given are also not kidding?

1. Time period
This relates to the time period agreed upon by both parties (the Buyer of the House and the Bank), the longer the agreed year, the greater the profit received by the third party.
Because the buyer will continue to deposit every month according to the current year's agreement.

2. Down payment
The amount of the down payment that must be deposited depends on the agreement between the home buyer and a third party (bank), taking into account the conditions they provide, the smaller the down payment, the greater the monthly deposit.

3. Monthly Installation
Installments determine the price of the house, because the smaller the agreed monthly installments, the longer the ratio of the specified repayment period, thus the more expensive the house price.

Examples I've seen
Term of 20 years
Downpayment $5.370,21
Monthly Installment Ratio $134,26

Let's count?

20 Years X 12 Months = 240 Months
1 Month Deposit $134,26 X 240 Months = $32.221,25
Down Payment $5.370,21 + 240 months Deposit $32.221,25 = $37,591.46

Total for one house $37,591.46

In fact, if we buy land and build our own house, without using their system, the money we need is around $16.781,90

Thus, if the term of the agreement is long (Current Year), then the third party will automatically benefit $20.809,56, because the monthly deposit will run according to the year and the agreed down payment.
Then try to calculate the mortgage for 50 years, That's roughly how they rob money from the little people.

Fuck them!!!!

[DrBeer]

Mortgage for 50 years??? Objectively, this scheme will never take off if there is no country where the state will GUARANTEE a high level of income for at least 2 consecutive generations of one family.
The logic is very simple. The age when people conditionally graduate from a higher educational institution, start a career, and reach a certain acceptable level of income, is about 25-30 years. Ok, let it be 25. A mortgage of 50 years means that a citizen will be obliged to pay it up to 25 + 50 years = 75 years! Those. already retired. It doesn't look like it's too bad, BUT!
1. Retirement savings will likely not allow for such payments or will be a significant financial burden
2. A subtle nuance - for example, the inability to pay off a mortgage in 5-10 years, "guarantees" that you will not be able to move to a new apartment, for example, when changing jobs, or in connection with moving to a new place to live in retirement.
Well, plus 50 years to realize that the house is not yours, and you are 50 years old to pay DEBTS, this puts a lot of pressure on the psyche!

I like the scheme that PRIVATE developers have implemented in Ukraine (no, I'm not saying 100%, but many). The scheme is simple - an initial payment of 25-30%, an installment plan for 3-5 years. Interest rate - installment service, approximately 1.2% per annum.

[edgycorner]

This is the most ridiculous thing I have ever read. Why would anyone in their right mind want to sign up for a 50-year mortgage?! The only people who would do something like that are those who are desperate to buy a house and will do anything to make it happen. This is just a terrible idea and the fact that the government is supporting it just shows how desperate they are to keep the housing market afloat.

Given the current state of economy, it is unlikely that people will be able to afford these mortgages in the long run.

Any sane person will wait for the market to normalize before dipping his toes in a market with no demand.

[Don Pedro Dinero]

Curious that the title talks about the European real estate market, when the article talks about the UK, which is physically in Europe but has never been characterized by a Europeanist sentiment.

The 50-year mortgage is crazy, we agree, 15 or 20 years at the most is the most financially sound, because as the article explains, you spend the first years paying interest and not amortizing at all. The longer the term of the mortgage, the longer it gets.

But I don't think this is widespread in Europe. I have no news. The maximum is 40 years depending on age and after the 2008 crisis the banks learned their lesson and no longer give you 100% mortgages. So if you sign a mortgage of 200.000€ you have to put down at least 20.000€, depending on the bank and your situation. Some will ask you for €30,000 or €40,000, so you are already starting with equity and even if you amortize little at the beginning, you are adding equity.

If I can believe that there will be a crash, I think it will be due to the general economic situation. If due to inflation people consume less, companies start to have problems and lay off workers, obviously people will have less money or access to credit to buy a house, and some of those who pay mortgages will not be able to meet their payments.

[bitgov]

Curious that the title talks about the European real estate market, when the article talks about the UK, which is physically in Europe but has never been characterized by a Europeanist sentiment.

The 50-year mortgage is crazy, we agree, 15 or 20 years at the most is the most financially sound, because as the article explains, you spend the first years paying interest and not amortizing at all. The longer the term of the mortgage, the longer it gets.

But I don't think this is widespread in Europe. I have no news. The maximum is 40 years depending on age and after the 2008 crisis the banks learned their lesson and no longer give you 100% mortgages. So if you sign a mortgage of 200.000€ you have to put down at least 20.000€, depending on the bank and your situation. Some will ask you for €30,000 or €40,000, so you are already starting with equity and even if you amortize little at the beginning, you are adding equity.

If I can believe that there will be a crash, I think it will be due to the general economic situation. If due to inflation people consume less, companies start to have problems and lay off workers, obviously people will have less money or access to credit to buy a house, and some of those who pay mortgages will not be able to meet their payments.

Europe has jumped in the crisis after jumping in Russia and Ukraine war.
In pursuit to destabilize Russia - all those countries are in deep trouble now - winter is already there - and now they will be in more trouble due to less oil and gas supply. To me they have made very bad decision