How far will house prices fall [volume 4]

[V6Alfisti]

Targarama said:

So you plan to rent for a year, no harm in that. But doing it because prices might fall is not that logical IMO. £1,600 a month x 12 = £19,200 into someone else's pocket each year. if you're planning to stay in the area and can purchase the property you want surely it is better to buy? Prices may be stabilising, but will they really drop £50K+ in the next 3 years? Supply/demand. (and remember your mortgage will be £50k smaller after 3 years too).

Don't think I haven't considered that.

However people often forget about the interest paid on a mortgage during that time too. In fact people tend to ignore a number of facts, many of which I personally know will go into payment default when the rates rise even 1%.

"Edit: A bit of man maths ...

For this first year, I have basically retained about £3.2k in interest that would otherwise have been given as a deposit/stamp duty/legal, and saved about £500 mortgage interest a month. Add that up and thats £9.2k in interest payments and lost interest from savings, making the difference of £19k in rent, actually only £9.8k. Add in the associated risks with the property market, not quite the same story."

It is not just that prices may fall, its also because the quality of the property stock at the moment is attrocious. Literally the dregs, and actually prices have already flat lined around here and some £50k+ drops on admittedly high prices.

I am looking to buy in Westminster (Warwick Avenue/Maida Vale) the quality is low and the prices high and very little is selling as a result. I have seen one property go under offer 3 times within a year and never completing, I was looking at one property near West Hampstead, it eventually sold/completed, then a month later the seller put it back on the market for the same money they paid. Odd behaviour.Most of the property I liked simply didn't sell, I would say about 10% did, the rest have lingered, been withdrawn after multiple reductions.

Talking about demand, my thoughts about sources and current situation:-
1) FTB - Most are priced out now in the north/west but still some options in east/south (guess where the biggest growth is.
2) BTL'ers - Yield is typically about 2%, taxation changes and london price growth drops month on month - not hugely appealing.
3) Foreign Investment - China/Russia and most countries are suffering because of a) their own economy b)the strength of the pound. I have read a number of reports that state that Russian demand has pretty much dropped to zero, China will be a mixed bag as some of the demand will return, as people want a 'safe' home for their cash.
4) Existing owners - Their own property may have gone up, but so has the 'step up'.

Personally I am not looking to rent for 3 years, I have signed up to a 12 month contract with a view to look at the market more closely after 9 months.

If there is nothing that appeals, I will either look further out or move to Manchester/Bristol, or simply a different country. I absolutely refuse to spend the next 25 years of my life working myself to the bone to benefit banks and support government policy.

Edited by V6Alfisti on Saturday 12th September 11:48

[Sheepshanks]

rufusgti said:

Right. That's interesting, I have since last fixing my mortgage deals had another child and the wife has left work. This could really effect me. I have plenty of equity (75%) on both so I'm thinking that would always work in my favour? Not really much I can do I guess?

One of my daughters and her husband just (couple of months ago) came to the end of their fixed rate 5yr deal and took a new deal with the same lender (Britannia) and didn't have to go through any of the affordability stuff.

Daughter was off on maternity leave at the time. As they don't live in the South-East, they still have a high LTV as prices here (West Cheshire) are only now getting back to past levels.

[walm]

Targarama said:

So you plan to rent for a year, no harm in that. But doing it because prices might fall is not that logical IMO. £1,600 a month x 12 = £19,200 into someone else's pocket each year. if you're planning to stay in the area and can purchase the property you want surely it is better to buy? Prices may be stabilising, but will they really drop £50K+ in the next 3 years? Supply/demand. (and remember your mortgage will be £50k smaller after 3 years too).

So much financial fail.
The "someone else's pocket argument" is just asinine, no offence.

£900k. Say 75% LTV at 2.5% = £17k into the bank's pocket.

For the avoidance of doubt at a very rough first approximation rent = interest. You are paying rent except it's to a bank not a landlord.
For the equity, let's say an incredibly conservative 2.5% opportunity cost = another £5.6k.
So you are worse off.
Much worse off.

As for the "mortgage will be £50k smaller after 3 years"... again you simply don't understand the mechanics of what happens when you pay your mortgage.
You are paying interest (as above) and capital. The capital is simply SAVINGS.

So far you have cost the guy £3.3k. (£22.5k true cost of the mortgage less the £19.2k he was paying in rent.)

Now you conjure up a whole bunch of extra savings... So the monthly on a £675k mortgage at 2.5% for 25 years is roughly £3k.
So he needs to find an extra £1.4k a month.
3 * 12 = 36 which times £1.4k is £50k - which is exactly what he would have saved in his bank account if he was spending the magic £3k a month spare he has split £1.6 on rent and £1.4 on savings.

Oh - not to mention he should be compounding those savings at way over 2.5%, so it should be materially more than £50k.

Look, there are loads of benefits to buying (rental inflation hedge and speculative bet on real estate) but not paying rent/interest and magic savings are not two of them.

[Burwood]

walm said:

Targarama said:

So you plan to rent for a year, no harm in that. But doing it because prices might fall is not that logical IMO. £1,600 a month x 12 = £19,200 into someone else's pocket each year. if you're planning to stay in the area and can purchase the property you want surely it is better to buy? Prices may be stabilising, but will they really drop £50K+ in the next 3 years? Supply/demand. (and remember your mortgage will be £50k smaller after 3 years too).

So much financial fail.
The "someone else's pocket argument" is just asinine, no offence.

£900k. Say 75% LTV at 2.5% = £17k into the bank's pocket.

For the avoidance of doubt at a very rough first approximation rent = interest. You are paying rent except it's to a bank not a landlord.
For the equity, let's say an incredibly conservative 2.5% opportunity cost = another £5.6k.
So you are worse off.
Much worse off.

As for the "mortgage will be £50k smaller after 3 years"... again you simply don't understand the mechanics of what happens when you pay your mortgage.
You are paying interest (as above) and capital. The capital is simply SAVINGS.

So far you have cost the guy £3.3k. (£22.5k true cost of the mortgage less the £19.2k he was paying in rent.)

Now you conjure up a whole bunch of extra savings... So the monthly on a £675k mortgage at 2.5% for 25 years is roughly £3k.
So he needs to find an extra £1.4k a month.
3 * 12 = 36 which times £1.4k is £50k - which is exactly what he would have saved in his bank account if he was spending the magic £3k a month spare he has split £1.6 on rent and £1.4 on savings.

Oh - not to mention he should be compounding those savings at way over 2.5%, so it should be materially more than £50k.

Look, there are loads of benefits to buying (rental inflation hedge and speculative bet on real estate) but not paying rent/interest and magic savings are not two of them.

ditto. The biggest benefit to 'owning' is it's yours. You can do stuff to it and not worry what the landlord may think. I worked with a guy in the city years ago. It must have been 2000/2001, an Aussie who wanted to buy but waited two years because HE KNEW prices would fall. The flat he did buy eventually cost him at least 40% more over those two years.

No offence to anyone but if you are about to take on a mortgage ffs read up on how the interest/principle calc works.

[Burwood]

I wanted to add, if you can afford the mortgage it doesn't really matter if you get into negative equity or have some theoretical paper loss when it is your family home. The number of friends who think they are so well off because their house has gone up 300k. Really a fools paradise. Some even take out equity and buy crap like cars and holidays. Unless you have more than one property, the ups/downs mean very little other than a warm fuzzy feeling or not so fuzzy lol. You aren't going to live in a tent or down size to cash in your gain, not until you're older anyway.

[gibbon]

Burwood said:

Banks will not lend on earnings multiples on 4M properties. Plus, what sort of idiot would be mortgage free then take on 2M of debt at 45.

Banks will lend on earnings multiples on £4m properties, these incomes are often fairly heavy on a bonus structure, so banks usually average the last three years income, and will lend usually four times this amount.

As to who would want to? Well, possibly someone whos already made several million by stretching themselves at the higher end of the property market for the last decade or two. Not for me, but I know people who do and thus far have done exceedingly well out of it. Risky though.

[Targarama]

walm said:

Targarama said:

So you plan to rent for a year, no harm in that. But doing it because prices might fall is not that logical IMO. £1,600 a month x 12 = £19,200 into someone else's pocket each year. if you're planning to stay in the area and can purchase the property you want surely it is better to buy? Prices may be stabilising, but will they really drop £50K+ in the next 3 years? Supply/demand. (and remember your mortgage will be £50k smaller after 3 years too).

So much financial fail.
The "someone else's pocket argument" is just asinine, no offence.

£900k. Say 75% LTV at 2.5% = £17k into the bank's pocket.

For the avoidance of doubt at a very rough first approximation rent = interest. You are paying rent except it's to a bank not a landlord.
For the equity, let's say an incredibly conservative 2.5% opportunity cost = another £5.6k.
So you are worse off.
Much worse off.

As for the "mortgage will be £50k smaller after 3 years"... again you simply don't understand the mechanics of what happens when you pay your mortgage.
You are paying interest (as above) and capital. The capital is simply SAVINGS.

So far you have cost the guy £3.3k. (£22.5k true cost of the mortgage less the £19.2k he was paying in rent.)

Now you conjure up a whole bunch of extra savings... So the monthly on a £675k mortgage at 2.5% for 25 years is roughly £3k.
So he needs to find an extra £1.4k a month.
3 * 12 = 36 which times £1.4k is £50k - which is exactly what he would have saved in his bank account if he was spending the magic £3k a month spare he has split £1.6 on rent and £1.4 on savings.

Oh - not to mention he should be compounding those savings at way over 2.5%, so it should be materially more than £50k.

Look, there are loads of benefits to buying (rental inflation hedge and speculative bet on real estate) but not paying rent/interest and magic savings are not two of them.

Fair enough, but I'm simply looking at what the bank will want back from you when you sell after 3/5/10 years, however the mortgage interest is paid. Lets look at my situation as an example.

In 2012 In was renting a place for £1350 a month. I had a lot of capital in savings but it wasn't appropriate to buy at the time due to personal circumstances. So I paid £15k for a home that year. It was the best I could find on the market and was OK, but not perfect for us by a long shot.
In 2013 I bought a much bigger house we both love to bits with my capital + 200k mortgage. I overpaid the mortage, paying the same as I paid for rent.
In 2015 I came out of my 2 year fix and re-mortgaged into another (good LTV, no issues). I owed £178k at the time.
I now owe around £170k.

Whether my house went up in value or not I agree I paid 'rent' to someone. However, if I sell I now have £30k more in my pocket after 2.5 years. If I hadn't overpaid to the equivalent I was paying in rent the figure would be smaller for sure. But its still smaller.

The only question is if and how much/fast prices would fall.

[gibbon]

Targarama said:

Fair enough, but I'm simply looking at what the bank will want back from you when you sell after 3/5/10 years, however the mortgage interest is paid. Lets look at my situation as an example.

In 2012 In was renting a place for £1350 a month. I had a lot of capital in savings but it wasn't appropriate to buy at the time due to personal circumstances. So I paid £15k for a home that year. It was the best I could find on the market and was OK, but not perfect for us by a long shot.
In 2013 I bought a much bigger house we both love to bits with my capital + 200k mortgage. I overpaid the mortage, paying the same as I paid for rent.
In 2015 I came out of my 2 year fix and re-mortgaged into another (good LTV, no issues). I owed £178k at the time.
I now owe around £170k.

Whether my house went up in value or not I agree I paid 'rent' to someone. However, if I sell I now have £30k more in my pocket after 2.5 years. If I hadn't overpaid to the equivalent I was paying in rent the figure would be smaller for sure. But its still smaller.

The only question is if and how much/fast prices would fall.

The thing that you are overlooking, mainly at the higher end of the market, is the associated transaction costs. 12% stamp duty? That is killing the upper end market. Many people with a lets say, 3 year work plan, are better off with a high end rental rather than buying if they are unsure they will be staying in a certain area due to the stamp duty costs.

[Targarama]

gibbon said:

The thing that you are overlooking, mainly at the higher end of the market, is the associated transaction costs. 12% stamp duty? That is killing the upper end market. Many people with a lets say, 3 year work plan, are better off with a high end rental rather than buying if they are unsure they will be staying in a certain area due to the stamp duty costs.

Yes, that makes sense, I guess the transaction costs become less of an issue if you stay for 5 years or more. I'm generally thinking of average Joe.

[turbobloke]

Targarama said:

gibbon said:

The thing that you are overlooking, mainly at the higher end of the market, is the associated transaction costs. 12% stamp duty? That is killing the upper end market. Many people with a lets say, 3 year work plan, are better off with a high end rental rather than buying if they are unsure they will be staying in a certain area due to the stamp duty costs.

Yes, that makes sense, I guess the transaction costs become less of an issue if you stay for 5 years or more. I'm generally thinking of average Joe.

Survey said: 60% of adults have lived in the same house for more than 15 years, 10% have not moved for 30 years or more.

[anonymous-user]

[redacted]

[gibbon]

turbobloke said:

Survey said: 60% of adults have lived in the same house for more than 15 years, 10% have not moved for 30 years or more.

Sure, but we are talking about the affordability of central london property. The stuff being bought by high earning professionals, who often relocate globally for jobs.

Im not entirely sure of the relevance of a statistic relating to people who dont move house to a debate about people who ARE buying property.

[turbobloke]

gibbon said:

turbobloke said:

Survey said: 60% of adults have lived in the same house for more than 15 years, 10% have not moved for 30 years or more.

Sure, but we are talking about the affordability of central london property. The stuff being bought by high earning professionals, who often relocate globally for jobs.

Im not entirely sure of the relevance of a statistic relating to people who dont move house to a debate about people who ARE buying property.

Targarama said:

...stay for five years or more...

It was merely additional information pertinent to the post I replied to. But since you asked...both are subsets of the property market albeit operating at different participation rates. The overall picture is people buying houses to live in then living in them, as opposed to viewing it as a punt.

[thismonkeyhere]

Burwood said:

The number of friends who think they are so well off because their house has gone up 300k. Really a fools paradise.

I have a friend - intelligent high earner, believe it or not - who actually said to me the other day 'once we've made a bit of money on the value of this place, we'll be able to upgrade to that big place we saw with the stables etc'.

Further questioning on how that works revealed that he seemed to think that the price of the bigger place (just down the road) would remain static whilst his house would rise in value. Possible, I suppose....

He also seemed to think that he could borrow £800k to get it. Confused the hell out of me - he claims to be making about £110k pa.

I only argued briefly as I had better things to do. Opening another couple of beers being foremost.

[walm]

Targarama said:

However, if I sell I now have £30k more in my pocket after 2.5 years. If I hadn't overpaid to the equivalent I was paying in rent the figure would be smaller for sure. But its still smaller.

No - you have completely ignored the opportunity cost of your own capital.
The only reason you could overpay the mortgage using the same rent is because you put a boat load of equity into the house.
If you had instead put that into savings it would have generated a return.

[Mr Whippy]

Eeek, just been looking at rents and prices to buy again near here.

Stuff seems to have jumped another 10%+ in asking prices in the last 12 months again I'd say.

The bubble poppeth commeth!




What really needs to be answered is who will pay for it when it does correct?

Privatised profit and publicised debt again?


Or can we rest safe knowing that idiots will be punished and sensible people rewarded for once?

[Targarama]

walm said:

Targarama said:

However, if I sell I now have £30k more in my pocket after 2.5 years. If I hadn't overpaid to the equivalent I was paying in rent the figure would be smaller for sure. But its still smaller.

No - you have completely ignored the opportunity cost of your own capital.
The only reason you could overpay the mortgage using the same rent is because you put a boat load of equity into the house.
If you had instead put that into savings it would have generated a return.

Not ignoring, I agree there are other ways to save/make money. Or lose it. Interest rates on cash savings are pants. The stock market offers what level of return, and at what risk? Especially talking today instead of a few weeks ago pre the 'Chinese mini-crash'? My ISAs and pensions seemed to lose 8-10% over the past month or so.

[walm]

Targarama said:

Not ignoring, I agree there are other ways to save/make money. Or lose it. Interest rates on cash savings are pants. The stock market offers what level of return, and at what risk? Especially talking today instead of a few weeks ago pre the 'Chinese mini-crash'? My ISAs and pensions seemed to lose 8-10% over the past month or so.

You said you were £30k better off.
That is only true if you ignore opportunity costs (or consider your own cost of capital as zero).
Short term stock market volatility is almost entirely unrelated to a true cost of capital.

All I am saying is that people who think rent is wasted typically ignore the interest they pay the bank and they ignore their savings tied up in the house.
And from a financial analysis perspective, that is wrong.

[anonymous-user]

Mr Whippy said:

Eeek, just been looking at rents and prices to buy again near here.

Stuff seems to have jumped another 10%+ in asking prices in the last 12 months again I'd say.

The bubble poppeth commeth!




What really needs to be answered is who will pay for it when it does correct?

Privatised profit and publicised debt again?


Or can we rest safe knowing that idiots will be punished and sensible people rewarded for once?

I think you need to build a time machine and go back to the HPC forum 10+ years ago. We've heard it all before mate.

[Ari]

[redacted]