How far will house prices fall [volume 4]
Discussion
dom9 said:
AyBee said:
Your ex got her eye on it then? 
I believe she is sorted, so to speak 
I reckon our rent is about 2.3% of the believed value of our property...
MX6 said:
Another way at looking at things is, would we rather have:
1. A mortgage for let's say £270k at 1.5% interest rate, paying £1k a month in repayments.
2. Have a mortgage for £175k at 5% and pay..... £1k a month.
Personally I'd rather the larger debt and pay much less in interest to the bank, as ultimately in terms of a financial investment you are making more money (presuming price rises), but obviously you are more leveraged and exposed to rate rises...
I think that lower rates are here to stay now, I don't see us getting back to historical levels. A small rise would be all that was needed to put the brakes on lending and inflation if needs be...
I view it the other way around. With a small mortgage at high interest rates if you have capital anywhere else it will be at a similar if not higher interest rate and earning and eroding debt much faster than a millstone around your neck with very little chance of either capital appreciation or wage inflation. No thanks. 1. A mortgage for let's say £270k at 1.5% interest rate, paying £1k a month in repayments.
2. Have a mortgage for £175k at 5% and pay..... £1k a month.
Personally I'd rather the larger debt and pay much less in interest to the bank, as ultimately in terms of a financial investment you are making more money (presuming price rises), but obviously you are more leveraged and exposed to rate rises...
I think that lower rates are here to stay now, I don't see us getting back to historical levels. A small rise would be all that was needed to put the brakes on lending and inflation if needs be...
A big mortgage is nothing to be scared of if you can manage the payments and have enough to use spare cash elsewhere. For example, my ISAs are maxed rather than paying down the mortgage with that money every year, as over the life of the mortgage that tax free income in various long term funds should do a lot better than the 1.8% interest I pay on the mortgage debt.
Non ISA investments need to make double that over the time as I get taxed at 45% +NI on that income, but that is still very likely long term, so with my mortgage debt cheap, I invest rather than overpaying the mortgage. And the mortgage is obviously still getting paid down, just not overpaid.
If Interest rates on the debt change significantly, and the balance of income on £ invested vs interest on £ owed changes, I'll adjust.
In small emergency (job loss by both earners), can cash the investments and pay down mortgage debt or fund the mortgage until I find a new job - I should still be in a better position than having paid down the mortgage but having no reserves to access.
Or if financial Armageddon happens and I am in negative equity after a crash and we can't make our mortgage payments even if cashing savings to pay down debt (hopefully not likely as we are not hugely leveraged, although the mortgage is sizeable), I hand the keys to the bank and walk away. I then still have funds elsewhere. If everything were all in the house, I'd be in trouble in this situation.
Not risk free - stock and bond markets are volatile, and you have to take a long view. But while we are both earning enough to comfortably pay the mortgage, it's a risk worth taking.
it also depends on your view on risk/diversification. If I pay down the mortgage with all my spare cash and don't have any other assets, I am totally undiversified. My only asset is in London property - and if London tanks as many of you think it will, I am stuffed. I can't cash the house in if the market is screwed, and after repossession by the bank I am penniless. But if I have other assets in other asset classes (diversified stocks, bonds, gold - whatever) that the bank has no claim on, I live to fight another day.
Non ISA investments need to make double that over the time as I get taxed at 45% +NI on that income, but that is still very likely long term, so with my mortgage debt cheap, I invest rather than overpaying the mortgage. And the mortgage is obviously still getting paid down, just not overpaid.
If Interest rates on the debt change significantly, and the balance of income on £ invested vs interest on £ owed changes, I'll adjust.
In small emergency (job loss by both earners), can cash the investments and pay down mortgage debt or fund the mortgage until I find a new job - I should still be in a better position than having paid down the mortgage but having no reserves to access.
Or if financial Armageddon happens and I am in negative equity after a crash and we can't make our mortgage payments even if cashing savings to pay down debt (hopefully not likely as we are not hugely leveraged, although the mortgage is sizeable), I hand the keys to the bank and walk away. I then still have funds elsewhere. If everything were all in the house, I'd be in trouble in this situation.
Not risk free - stock and bond markets are volatile, and you have to take a long view. But while we are both earning enough to comfortably pay the mortgage, it's a risk worth taking.
it also depends on your view on risk/diversification. If I pay down the mortgage with all my spare cash and don't have any other assets, I am totally undiversified. My only asset is in London property - and if London tanks as many of you think it will, I am stuffed. I can't cash the house in if the market is screwed, and after repossession by the bank I am penniless. But if I have other assets in other asset classes (diversified stocks, bonds, gold - whatever) that the bank has no claim on, I live to fight another day.
Edited by Harry Flashman on Thursday 15th March 22:47
I just re-read that and wonder if it makes any sense. Précis: it is possible, mid to long term, to earn more on your money if invested than you pay on the money you owe (using leverage for investment, in effect). But it involves risk, and you should be able to comfortably manage your debt repayments in the meantime (cash flow). Changes like job situation or massive change in outgoings means you should have a Plan B (flexibility/planning) or be willing to walk away from your home if you have to.
anonymous said:
[redacted]
I’m also renting such a place, paying about 3% of the value per year in rent maybe less. If I was to buy it the stamp duty alone would equate to a year’s rent, I’d have to find about 3 years’ rent upfront to put down as the mortgage deposit, and the mortgage payment would be equivalent to my current rent payment anyway. I’ve never stayed anywhere longer than a handful of years, by my own choice, so if I picked my sale time poorly (or was forced) could very easily wipe out the savings made vs renting anyway. I’d be heavily invested into that one asset and banking hugely on values staying stable or increasing. I’m quite happy renting and putting money aside into investments for the future, enjoying the house in exactly the same way as I would if I owned it, whilst also awaiting my new Aston with the cash that would instead have been ploughed into mortgage deposit
Interest on a mortgage is dead money too when the mortgaged asset is not increasing in value and not giving you an income (a residential home in London today). So it is completely legitimate to minimise that dead expense by renting instead of paying mortgage interest - Tonka is paying a higher rate for his rent as he would be on a mortgage, but doesn't tie his deposit up in a house. If this were a long term plan, he could invest that equity and offset his rental costs. If he owned, that "deposit money" would be both useless except on paper, and illiquid. Currently it would not even be gaining on paper - it would be decreasing if house prices are stagnant but you still have inflation.
Use that deposit for investment, and you are better off than owning a house while the situation continues. Were we renting and our equity invested, we would be doing a lot better than we are now.
But a house is also an emotional issue. We want a family home near our friends, and so have taken this route.
But there is absolutely no point in pretending it is some sort of investment in this market though. It is a liability, if anything. I think people fail to understand this, in the main - House prices stagnating mean your equity is locked up in an asset that is depreciating, when you factor in real inflation. You just have to hope that long term it will beat inflation when in the short term it will. Inflation is of course good for people who have mortgage debt as it lowers the real size of that debt, so you need to factor this in too etc.
Renting gets you out of this calculation - the difficulty being that you cannot fix your rent in the same way you can fix your mortgage rate. When this changes by legislation and you can safely have a long term home at fixed cost, renting becomes a very financially sound plan.
This also has implications for BTL, of course, especially when you factor in the end of higher rate tax relief.
Use that deposit for investment, and you are better off than owning a house while the situation continues. Were we renting and our equity invested, we would be doing a lot better than we are now.
But a house is also an emotional issue. We want a family home near our friends, and so have taken this route.
But there is absolutely no point in pretending it is some sort of investment in this market though. It is a liability, if anything. I think people fail to understand this, in the main - House prices stagnating mean your equity is locked up in an asset that is depreciating, when you factor in real inflation. You just have to hope that long term it will beat inflation when in the short term it will. Inflation is of course good for people who have mortgage debt as it lowers the real size of that debt, so you need to factor this in too etc.
Renting gets you out of this calculation - the difficulty being that you cannot fix your rent in the same way you can fix your mortgage rate. When this changes by legislation and you can safely have a long term home at fixed cost, renting becomes a very financially sound plan.
This also has implications for BTL, of course, especially when you factor in the end of higher rate tax relief.
Edited by Harry Flashman on Friday 16th March 07:40
Edited by Harry Flashman on Friday 16th March 07:41
tannhauser said:
Agree with this completely - however we don't need any communism: simply restrict lending to sensible levels, and house values will find their own, sensible levels.
That would be great, for individuals.No one cares about individuals. They care about business and stats, continually being bigger and better than last year...,it’s an obsession. Ramping up prices makes everything look great, allows people to spend more on trinkets and enables banks to lend more and more (which, with low IRs is needed), with the added bonus of making people who own property feel better off.
So sod the individual, no one cares....keep playing the music and let the party continue, at all costs.
If people either can’t afford to buy (so rent) or have to mortgage up well into retirement, the government are delighted...you have to keep working and keep paying taxes. Don’t even think about enjoying life!
I don’t support that approach at all, but it’s the way it appears to be.
Harry Flashman said:
Interest on a mortgage is dead money too when the mortgaged asset is not increasing in value and not giving you an income (a residential home in London today). So it is completely legitimate to minimise that dead expense by renting instead of paying mortgage interest - Tonka is paying a higher rate for his rent as he would be on a mortgage, but doesn't tie his deposit up in a house. If this were a long term plan, he could invest that equity and offset his rental costs. If he owned, that "deposit money" would be both useless except on paper, and illiquid. Currently it would not even be gaining on paper - it would be decreasing if house prices are stagnant but you still have inflation.
Use that deposit for investment, and you are better off than owning a house while the situation continues. Were we renting and our equity invested, we would be doing a lot better than we are now.
But a house is also an emotional issue. We want a family home near our friends, and so have taken this route.
But there is absolutely no point in pretending it is some sort of investment in this market though. It is a liability, if anything. I think people fail to understand this, in the main - House prices stagnating mean your equity is locked up in an asset that is depreciating, when you factor in real inflation. You just have to hope that long term it will beat inflation when in the short term it will. Inflation is of course good for people who have mortgage debt as it lowers the real size of that debt, so you need to factor this in too etc.
Renting gets you out of this calculation - the difficulty being that you cannot fix your rent in the same way you can fix your mortgage rate. When this changes by legislation and you can safely have a long term home at fixed cost, renting becomes a very financially sound plan.
This also has implications for BTL, of course, especially when you factor in the end of higher rate tax relief.
Yes, I get it. It all makes sense, but perhaps your perspective is a little biased by your experience and financial literacy, as well as your income. People on higher income typically have more flexibility and capability in this context. Use that deposit for investment, and you are better off than owning a house while the situation continues. Were we renting and our equity invested, we would be doing a lot better than we are now.
But a house is also an emotional issue. We want a family home near our friends, and so have taken this route.
But there is absolutely no point in pretending it is some sort of investment in this market though. It is a liability, if anything. I think people fail to understand this, in the main - House prices stagnating mean your equity is locked up in an asset that is depreciating, when you factor in real inflation. You just have to hope that long term it will beat inflation when in the short term it will. Inflation is of course good for people who have mortgage debt as it lowers the real size of that debt, so you need to factor this in too etc.
Renting gets you out of this calculation - the difficulty being that you cannot fix your rent in the same way you can fix your mortgage rate. When this changes by legislation and you can safely have a long term home at fixed cost, renting becomes a very financially sound plan.
This also has implications for BTL, of course, especially when you factor in the end of higher rate tax relief.
Edited by Harry Flashman on Friday 16th March 07:40
Edited by Harry Flashman on Friday 16th March 07:41
The rest of the world have university debt, credit card debt, cars on finance and don't earn £100,000 per household. Though the majority of housing in the UK is either not mortgaged or bought when much more affordable, you will know well that markets move at the edges. That's why I would say that for most people a mahoosive mortgage today is closer to financial suicide than wisdom.
Harry Flashman said:
Renting gets you out of this calculation - the difficulty being that you cannot fix your rent in the same way you can fix your mortgage rate. When this changes by legislation and you can safely have a long term home at fixed cost, renting becomes a very financially sound plan.
This also has implications for BTL, of course, especially when you factor in the end of higher rate tax relief.
Various councils are just beginning to realise that they have a shortage of private rental stock available & that the legislative measures to penalise LLs are having the effect that investment in rental houses has declined massively.This also has implications for BTL, of course, especially when you factor in the end of higher rate tax relief.
I know that the government trying to get rid of landlords wasn't supposed to have unintended consequences like lack of rental properties but it wasn't exactly a great leap of the imagination to foresee it. The RLA have been trying to explain cause & effect to the authorities but it's an uphill struggle.
Any further legislation will make rentals scarcer as it won't be worth doing.
People seem to forget that owning one house (of the correct size) is not being "long" the property market. You have no position. You need somewhere to live. It doesn't matter if it goes up or goes down in value. You will still live there. If it goes up, you are no better off unless you can downsize (and worse off if you need to upsize). If you don't own a property, then you are short the market.You are betting that it will go down. Rises are bad for you.
Own a second property and then you're taking a view.
Own a second property and then you're taking a view.
I would not compare mortgage versus rent. Compares interest payment on mortgage versus rent, as the rest is essentially a savings mechanism.
The balance for rent v buy then looks somewhat different.
However, the freedom and lack of risk aspect to renting is appealing, particularly when you consider the transaction costs for purchasing / selling expensive property.
Harry, your points do make sense. I am in a not dissimilar position to you regarding mortgage size and house value I suspect, and though the numbers are a little scary, the reality of the situation is that i am not leveraged up too much at all, and the payments are very affordable. The key as you say, is to have some spare capacity to adjust your financial situation should the horizon change.
The balance for rent v buy then looks somewhat different.
However, the freedom and lack of risk aspect to renting is appealing, particularly when you consider the transaction costs for purchasing / selling expensive property.
Harry, your points do make sense. I am in a not dissimilar position to you regarding mortgage size and house value I suspect, and though the numbers are a little scary, the reality of the situation is that i am not leveraged up too much at all, and the payments are very affordable. The key as you say, is to have some spare capacity to adjust your financial situation should the horizon change.
AstonZagato said:
People seem to forget that owning one house (of the correct size) is not being "long" the property market. You have no position. You need somewhere to live. It doesn't matter if it goes up or goes down in value. You will still live there. If it goes up, you are no better off unless you can downsize (and worse off if you need to upsize). If you don't own a property, then you are short the market.You are betting that it will go down. Rises are bad for you.
Own a second property and then you're taking a view.
I agree with this, by virtue of everyone needing somewhere to live, if you dont own a property you are actually short the market.Own a second property and then you're taking a view.
NomduJour said:
Point is nobody has a (working) crystal ball - who knows if/how/when double-digit interest rates will reappear? Locking in for as long and low as possible has to be the sensible option now, given there’s some rate movement in the offing.
Well, 10y gbp interest rate swaps are at 1.5% pretty much bang on. 5y is at 1.33% ish. Interestingly 30y is at about 1.55%. So though the 'market' is often caught out and of course is constantly moving, there doesnt seem to be a huge danger.You would imho be mad paying a huge premium to fix for a long period, but of course everyones risk appetite is different.
stuckmojo said:
MX6 said:
Another way at looking at things is, would we rather have:
1. A mortgage for let's say £270k at 1.5% interest rate, paying £1k a month in repayments.
2. Have a mortgage for £175k at 5% and pay..... £1k a month.
Personally I'd rather the larger debt and pay much less in interest to the bank, as ultimately in terms of a financial investment you are making more money (presuming price rises), but obviously you are more leveraged and exposed to rate rises...
I think that lower rates are here to stay now, I don't see us getting back to historical levels. A small rise would be all that was needed to put the brakes on lending and inflation if needs be...
I view it the other way around. With a small mortgage at high interest rates if you have capital anywhere else it will be at a similar if not higher interest rate and earning and eroding debt much faster than a millstone around your neck with very little chance of either capital appreciation or wage inflation. No thanks. 1. A mortgage for let's say £270k at 1.5% interest rate, paying £1k a month in repayments.
2. Have a mortgage for £175k at 5% and pay..... £1k a month.
Personally I'd rather the larger debt and pay much less in interest to the bank, as ultimately in terms of a financial investment you are making more money (presuming price rises), but obviously you are more leveraged and exposed to rate rises...
I think that lower rates are here to stay now, I don't see us getting back to historical levels. A small rise would be all that was needed to put the brakes on lending and inflation if needs be...
What would worry me even more is taking out a big mortgage at tiny rates and then the rates going back to 'normal' whilst I am still carrying a huge debt. That won't actually happen of course, but just the slightest possibility is enough to put me off.
stuckmojo said:
Yes, I get it. It all makes sense, but perhaps your perspective is a little biased by your experience and financial literacy, as well as your income. People on higher income typically have more flexibility and capability in this context.
The rest of the world have university debt, credit card debt, cars on finance and don't earn £100,000 per household. Though the majority of housing in the UK is either not mortgaged or bought when much more affordable, you will know well that markets move at the edges. That's why I would say that for most people a mahoosive mortgage today is closer to financial suicide than wisdom.
That is completely fair - I wasn't trying to be smug, just to try to help, really. I've had to learn (and am still learning) this stuff. Non-mortgage debt is the very first thing you get rid of before even thinking about anything else.The rest of the world have university debt, credit card debt, cars on finance and don't earn £100,000 per household. Though the majority of housing in the UK is either not mortgaged or bought when much more affordable, you will know well that markets move at the edges. That's why I would say that for most people a mahoosive mortgage today is closer to financial suicide than wisdom.
And on-topic, house prices at the top end are often driven by leverage, as people use the methods I have talked about, and can get the leverage at high incomes.
Interest rates rise, and make this model unsustainable, they'll want/need to get out of speculative property, or exit investment positions to pay down their residential mortgage debt/. Both have economic effects: one on house prices (correction) one on stock market (correction).
Lot to think about.
AstonZagato said:
People seem to forget that owning one house (of the correct size) is not being "long" the property market. You have no position. You need somewhere to live. It doesn't matter if it goes up or goes down in value. You will still live there. If it goes up, you are no better off unless you can downsize (and worse off if you need to upsize). If you don't own a property, then you are short the market.You are betting that it will go down. Rises are bad for you.
Own a second property and then you're taking a view.
Absolutely spot on.Own a second property and then you're taking a view.
But it does also mean that your only asset (equity in your home) is illiquid, non-income producing and completely undiversified: as well as being at the mercies of a financial instutution if you default on your obligations. You can work on this by using mortgage debt to fund other investments, but as I (and others) have said, you need to have the income, risk appetite and flexibility to do this.
You should not think of the equity in your house as an investment - in that you are correct. However, you should think of your mortgage debt as a liability (that could affect your property equity - your main or a major asset, for most people) that needs hedging.
Apologies for the many posts - I find this whole thread interesting, but what is most interesting is that we are not taught any sort of financial management or even basic economics at school - and yet managing ones resources may be the greatest skill for anyone with debt. Everyone on this thread talks about foreign buyers artificially inflating property prices in London (driving the whole south east).
These people are savvy, or have advisors who are. Everyone else just reacts, or takes cheap money without realising a) the implications or b) what it could really do for them We need to be teaching this stuff to our children at school age. Only then can we all too use the system the way the truly wealthy do.
Wealth redistribution is a flawed solution fuelled by envy or frustration. We need to arm ourselves with knowledge. You don't need much money to put this stuff into action.
Edited by Harry Flashman on Friday 16th March 10:37
Gassing Station | News, Politics & Economics | Top of Page | What's New | My Stuff