London housing bubble solution?

Agree 100% – and they are nice houses too, not like our rabbit hutches with shoebox rooms and tiny windows. Just a shame we’re so fixated on property prices here in the UK, at the great expense of investment in new business and exporting things that we could actually be making if the investment was there.

I know why don’t they package up all the mortgage debt into neat bundles and sell them to investors and get all that money working !! doh!

Germany is much richer than Britain, with ever rising wealth and immigration, and a cautious government. German house prices have actually fallen in real terms over half a century. There is a flourishing rental sector, regulated and with a degree of tenant security, while just 43% of Germans, mostly in middle age, own their homes. They invest their savings not in property but in productive industry, much to the benefit of the economy. Germany’s housing stock, says Monnery, “is a stable, functional and affordable asset”.

Who owns all of this quality german housing stock?

If it is being suggested that having a larger proportion of renters is a better way for the market to work presuably there has to be a financial incentive to rent vs buy, for individuals to invest in industry rather than property.

But in the UK rents are as high as a repayment mortgage. Its a no brainer to buy rather than pay someone else’s mortgage.

So who are these philanthropic German land owners accepting a lower ROI through renting out their property and where do they get the finance from to own the property?

Genuine question. It’s an interesting system.

Or is there a low availability of credit in Germany? Retricting the number of potential buyers? In which case I’m moving to Germany and starting a bank making a fast bucks offering easy credit.

So did they have £50k going spare or did they just borrow more? I wonder?

I don’t know.

I spoke to the agent after and he was a bit sheepish about it…he called it a ‘stupid offer’ and said it would be great if it actually went through.

I thought that the mortgage would fall through as the provider would say that it’s not worth the money they’ve offered, but that was 6 months ago now and similar houses are going for more.

FYI – it was ex council too

Annoyingly, when we started looking, if we had put in a stupid offer of as much as 75k over on the first house we looked at, it would now be worth more.

We’ve seen a house on Rightmove that is on for 145k over the value of a similar house that sold last September.

They invest their savings not in property but in productive industry, much to the benefit of the economy. Germany’s housing stock, says Monnery, “is a stable, functional and affordable asset”

So a) if it’s so affordable, how come so few people own and b) if people aren’t investing in property who owns all the houses that people are renting?

If prices are low then surely supply meets demand? If it didn’t, then it makes no difference if people rent or buy – prices would rise. After all, someone has to buy the house even if it’s not the person living in it.

I think the reason people are ‘obsessed’ with ownership, as you put it, is that it’s better than renting. You can do stuff to your own home and there’s no landlord. And even if prices don’t go up, your rent money goes to you not some third party. I’m sure this is true in other countries, so I doubt it’s any intrinsic difference between Germans and Brits that causes this. I suspect it’s basic market factors. Generally speaking if you put people in the same environment they end up doing the same things.

Or is there a low availability of credit in Germany? Retricting the number of potential buyers? In which case I’m moving to Germany and starting a bank making a fast bucks offering easy credit.

Germans are largely allergic to credit. Yes they’ll all have a credit card, but you’ll look like a freak if you actually use it. Low interest rates too (was certainly lower than UK by some margin before economies went titsup, UK did QE an reduced base rates to silly levels). I got 3.6% fixed for 10yrs, when UK would have been 6-7%. Don’t know what typical UK mortgage rate is these days for a straight repayment linked to bank a/c where I can pay what I like above a minimum interest only.

Start such a bank if you like, but it’ll be the Brits with their “I have a right to own” attitude and love of debt (or gearing/leverage, if you prefer), that will be your customers.

Property purchase costs can be high in other countries which can put off buyers until they’re sure where they want to be. Germany maybe 10% cost and also decent deposit of around 30%. Obviously UK purchase costs have been going up but I suspect the lower costs in the past helped create the ownership culture.

the Brits with their “I have a right to own” attitude and love of debt

Getting a bit annoyed with this painting mortgage owners as some kind of vain avaricous social climber. I bought a house because I wanted an asset I could live in and I was fed up of giving money away; and because I wanted to do stuff like decorate and put shelves up.

Help to Buy mortgages are upto £600,000

http://www.helptobuy.org.uk/mortgage-guarantee/eligibility

Not sure why the average mortgage they lend matters. Its still pouring more money into the market.

I agree with Molgrips that wanting buy a home isn’t a crime

I bought a house when I had kids. Its almost impossible to rent a house privately and have any security in the property longer than 6 months. Is that true in Germany?

agree it’s not a crime, but for many it seems to be the “status” that home ownership brings. for others it’s a home and an asset, for others again, it’s a pure financial asset.

rental security no problem in Germany. In fact it’s the other way around, and enough to probably scare the s**t out of the UK BTLers. You can rent for years no problem, not just apartments but houses too. Far more rights afaik. If the owner sells, he sells it with a paying tenant and it used to be that the new owner couldn’t evict or anything for at least 3 years (if at all).

NL I vaguely recall being similar, and rent is strictly determined by law too. If you remain in property the tenancy can only ever be extended, not renewed or a new one started, and rent for the extension is strictly limited by law to the lesser of 5% and RPI (or something like that).

but for many it seems to be the “status” that home ownership brings

Dunno, I’ve never met anyone like that.

Re Germany, the agency ripoff fees would’ve actually stopped me moving whilst renting, so you don’t even get the flexibility of being able to move around easily like you do here.

Seems to me that overcentralisation is the problem- London’s a big black hole, it doesn’t matter what you do to try and increase the labour or housing supply, it’ll just consume it and demand more. People go where the jobs are, so move the jobs. If London’s choking, let it, take all the money we’d throw at the south east putting the problem back by another month and invest it in the north.

dutch agency fees were stiff too. think I got them paid under relocation allowance.

deposit is good and bad too. 3 months deposit, up front (plus the agency fees), is normal. BUT that money gets held in an account in YOUR name, not held by the agency or landlord. but that account is blocked, the landlord keeps the book, and he can’t access it either. edit: and the rental contract is a standard one afaik dictated by law, and there’s not much scope for deviations.

so yeah moving needs a hefty chunk of cash, so people don’t, and as above, can’t be moved on either.

Seems to me that overcentralisation is the problem

I agree. However it’s also a strength. That’s why the city is so significant, and why it draws so much business.

BUT that money gets held in an account in YOUR name, not held by the agency or landlord

Same here, since some legislation relatively recently.

So the German “way” is fuelled by a cultural aversion to borrowing and some legislation that suppresses rents?

This means renting can be cheaper than buying but when you do buy there is a high bar to jump over so people delay the purchase.

This suppresses demand for housing as the ROI for a landlord is low and nobody wants to buy, therefore house prices stay low. Simple really.

So maybe an unpopular but effective approach in the UK would be to legislate to cap rent increases in line with RPI, offer cheap finance to landlords so owning property to rent is still viable and increase the amount of cash required to step onto the ladder.

It’s counter intuitive since it stops people being able to buy and seems to be offering money for money to the landlords; but the actual effect would be to reduce rents meaning renting was financially sound as it would cost less than the interest on a mortgage, house prices would be lower due to less demand, therefore property would be less of an investment and people would lose out less by not being on the ladder.

By Jove I’ve cracked it! (I’m sure it’s more complicated but carrying on the way we are going just perpetuates the issue)

jfletch – you WANT people to rent?

This would give a great source of income for those who have plenty of spare cash (ie can become landlords) but suppress other people from even buying their own. It would also divert capital from the poorer to the richer, by forcing the less well off to hand money over to those who already have enough cash.

What an awful idea… It’s bad enough as it is. What’s the point in prices being lower if affordability is no different?

If you want to allow cheap renting but don’t want to further line the pockets of the already rich then you need state owned housing. However this also has disadvantages in that those who never own their own house never get to leave anything to their kids.

jfletch – you WANT people to rent?

I did say it was counter intuitive! Didn’t expect such a tirade through 🙂

But no, I don’t want people to rent, but I do think it would be beneficial to remove the huge advantage to buying. This would create a market for housing, rather than investment in property. A consequence of this may be more renters but that is no problem since they aren’t losing out by not being on the ladder. Buying early would just mean paying more interest to the bank than rent to a landlord. House price inflation would be lower/zero so there is no penalty for buying later; low interest rates, high deposits and shorter terms mean less money paid to banks. Win win.

I’d also argue that leaving large sums of money via inheritance is also not a good thing (for society, it’s obviously good for the people who get it), it drives inequality and means having money becomes more lucrative than doing work. This is already true in London where your house already make more money every day than you do going to work. That is madness and fuels financial bubbles.

Obviously none of this will happen due to our national obsession with house prices but it doesn’t mean it’s a bad thing.

This would create a market for housing, rather than investment in property

That will always be the advantage of buying. No matter how flat the market or how cheap the house, you’ll always end up with a large asset at the end of it.

I’d also argue that leaving large sums of money via inheritance is also not a good thing (for society, it’s obviously good for the people who get it), it drives inequality

Yes, but your plan would mean even fewer people get to leave money, and they’ll leave much more because they will be rich propery tycoons.

That will always be the advantage of buying. No matter how flat the market or how cheap the house, you’ll always end up with a large asset at the end of it.

You can still invest, it’s just investing in property wouldn’t be as lucrative as say stocks and shares. Most of the money you “invest” in your house is actually interest paid to the bank.

Yes, but your plan would mean even fewer people get to leave money, and they’ll leave much more because they will be rich propery tycoons.

It’s not just individuals who invest in property (BTL + baby boomers + high house price inflation exacerbates this though). It can be owned by pension funds and other institutional investors, companies with shareholders etc.

You can still invest

Not so easily. The beauty of buying a house is that it’s both an essential outgoing AND an investment. This is not possible if you rent, because you have to give away a fat chunk of your income to someone else.

Germany also has quite a large self build segment of the market.
So where in UK one might be trying to jump on the home purchase ladder in 20’s, Germans may well be renting 20 years and then funding a dream home.

Don’t have any stats, and I know there will be many others in UK that do similar, but there’s at least 3 colleagues on my team that have done exactly that. Sure there’l be a mortgage, but I’d be surprised if it were a 90%+ LTV (or however the equivalent calculation works on a selfbuild), or more than 3x earnings multiple.

You need a large rental sector to have good labour migration. Owning houses works against free movement of labour and stifles an economy, you end up with skills in the wrong places or people wasting years of their lives sat in a car on the M25 pouring 10s of £k down the drain in commuting fees…..

The beauty of buying a house is that it’s both an essential outgoing AND an investment.

It’s not a beauty at all. If we had stable house prices rising with inflation then buying a house wouldn’t be an investment – which would solve over night the shortage as BTL would pretty much vanish.

The investment bit is the curse that causes ever rising prices….

Germany also has quite a large self build segment of the market.

I wonder if building land is easier to find in Germany? It seems to have a far more distributed economy. There are major industrial and economic centres speed all over the country which must be a big factor in even housing costs. Countries with one major centre (there are quite a few) must have much higher pressure on housing in that centre.

buying a house wouldn’t be an investment

Not as an appreciating asset, but even if your house tracks inflation you’re still getting half your money back. Imagine if you could rent a house for 25 years and your rent back as a lump sum. Pretty good deal no?

That will always be the advantage of buying. No matter how flat the market or how cheap the house, you’ll always end up with a large asset at the end of it.

Are you sure your house is an asset?

The beauty of buying a house is that it’s both an essential outgoing AND an investment.

This is not possible if you rent, because you have to give away a fat chunk of your income to someone else.

Molgrips I’d like to challenge you here, buying a house that you personally need to live in can never be an investment – if it’s a BLT then sure, that can be, but not if you need to live in it.

Perhaps do the sums yourself? Lets ask the question, what did you pay for your house?

There’s the initial sale price of property when you buy. Then there’s stamp duty, solicitors fees, survey fees, removal men etc. Then there’s a huge wadge of mortgage interest payments and mortgage arrangement fees over the course of the mortgage. Then there’s renovations, repairs, appliances and insurance. Possibly ground rent or service charges if it’s a new development?

What will you sell your house for?

If you sold it today would you cover all of the above costs in the price you sell it for? What about in 10 years time if you sell it then? Don’t forget to subtract your 2-3% agent sale fees!

Sure, renting has it’s down sides, and if you plan to stay in the same location long term then buying makes sense. But despite daytime TV trying to make you think otherwise, buying a house to live in can never be seen as an investment. Owning a house is a pretty inefficient way of building wealth, and the buying over renting argument is often not the surefire route to financial security you’ve been lead to believe.

If house prices had tracked inflation for the last 30 years then rents would be much lower and renting would be quite affordable, so you wouldn’t be so bothered about it. It’s only a big deal as rent is a ridiculous % of your take home, hence people can’t save, so they must mortgage themselves to the hilt to own a house. It all feeds itself. If house prices rose at inflation there’d be no foreign investment money chasing them, no one building for overseas investment buyers and more houses built for domestic buyers at modest prices. We’ve created a viscous self feeding system through which no one seems to benefit (other than on paper with silly house values).

Molgrips – your key assumption appears to be that rents will always be more than the interest on a mortgage + other home ownership costs. They don’t need to be.

I think the solution is to build council homes.

Councils should not flog off anymore land on the cheap, but use it to build on.

Councils can get cheap 100 year mortgages and could negotiate very low rates with their lenders.

They can build their own teams to construct property, buying in certain skill in the short term. That would them the chance to give young British people training and experience and a decent start in life. Private developers should have to contribute a certain amount towards these projects so no longer having to build affordable homes into their proposals.

The cost of development to the public purse would be slashed, therefore reducing the amount of borrowing required for these projects.

Councils could then stop giving private landlords the incentive to let property to them, so the council would save the tax payer from funding lucrative private buy to let projects.

Private developers would then be able to just build developments for people who can pay their way.

Molgrips – your key assumption appears to be that rents will always be more than the interest on a mortgage + other home ownership costs. They don’t need to be.

They are likely to be similar, because landlords will have to buy the houses in the first place and the tenants will have to pay their mortgages. Unless you want to limit that too, so that only the super rich (with lots of free capital) will be able to afford to be landlords, which is an even further regression towards mediaeval levels of wealth inequality!

I think the solution is to build council homes.

Good idea I think. What we are all complaining about here is market forces working on an essential commodity. I’m of the opinion that essential commodities should be (optionally, but not exclusively) provided by the state. So power, water, transport, housing, health, emergency services and education. Food is a funny one – market forces with a bit of protection seem to work better for that.

This thread is ace. Apparently molgrips is an idiot for buying a house…like so many other people. The people who think he’s an idiot are the ones who cant afford a house and are coming out with more and more convoluted arguments why. Its quite funny. Simple fact is I couldnt afford to rent the house I live in but can afford to pay the mortgage.

Simple fact is I couldnt afford to rent the house I live in but can afford to pay the mortgage.

Lucky you. I can’t afford to buy the house I rent. Nor can many people under 30…

I guess the mortgage isn’t for the full value – how much % is it?

Simple fact is I couldnt afford to rent the house I live in but can afford to pay the mortgage.

….. until interest rates rise 😉

Molgrips, you haven’t answered my question yet? Do you still think the house you live in is an asset and an investment?

I reckon many see there house as a hedge, though they may not realise this.

Do you still think the house you live in is an asset and an investment?

Both. And an essential item. So three things in one.

Both. And an essential item. So three things in one.

So you’ve completely ignored the evidence I’ve presented to the contrary then? Not trying to start an argument, just trying to understand your thinking and reasoning that’s all, and why the evidence I’ve presented could be wrong?

I missed your post earlier. It’s an interesting one though.

Chances are that in 30 years’ time my house will be worth a lot more than I paid for it even including interest. However, even assuming it doesn’t, it should still be worth something. A rented house would be worth nothing to me.

It’s still an asset as long as there’s capital in it, by the definition of asset. But the question is, will the value of that asset be more than the cost of upkeep. I have not done the maths.

However, because I need a house in which to live, I’d still have to pay rent. Which is likely to be pretty close to my mortgage, in reality. I wouldn’t have to pay home insurance and upkeep fees *directly* but my landlord will, and he’ll fund that through my rent, so eventually I’ll end up paying it anyway.

Also, I’ll still be alive in 30 years’ time hopefully, and I’ll own my own house.

As I say I haven’t done the maths and I’m at work so I won’t now, but if you can calculate how I’m worse off buying, then I’d be interested. I’m also not sitting and watching a video whilst at work.

The assets vs liability argument is a slightly simplistic one. If you own your house outright it’s still a liability (repairs/council tax etc…) unless you sell it at which point it becomes an asset. It’s a terrible deal in terms of cashflow in one item for 25yrs but it can be an asset. Actually over 25yrs (assuming rising house prices) it’s much more likely to be an asset than liability and without capital gains tax a better asset than a BTL or share investment.

Oh and it’s somewhere to live in!

Correction is already beginning

Nationwide building society has warned the London housing market may face a “natural correction”.

The mutual’s chief executive, Graham Beale said there was already a “slowing down in the market place”.

I suspect there’s a few people like me – would like to buy but with all the recent talk about a bubble are concerned they’ll be buying at the top of the market so are staying out until things calm down a little… open days, offers over asking and sealed bids are all a recipe for getting yourself into unmanageable levels of debt…

The worrying comment in this story is the expectation that London will stop rising and the rest of the country will catch up – which means rising prices outside London.

The problem with this is London is relatively wealthy but the rest of the country isn’t…and means interest rates will have to rise to give your average first time buyer a chance to afford to buy.

Clearly there’s a messaging campaign being waged here to calm sentiment down

As I say I haven’t done the maths and I’m at work so I won’t now, but if you can calculate how I’m worse off buying, then I’d be interested.

Cheers, Molgrips – the video is worth a watch just to give you an alternative view and debunk the myth that a house is an ‘asset’. Still, it’s probable that you’ll be better off buying over renting particularly if you intend to stay put for the next 30 years.

I’m just trying to redress the balance slightly though to make people realise that a house that they actually live in can never really be an investment, so long as they still need to live it.

Sure people feel rich if they think that that their house has increased in value. You can then sell at a higher price, but since you still need somewhere to live then you also need to buy at a higher price, wiping out any gains.

The only alternative is to downsize or move to a cheaper area, releasing some equity. Still when you factor in what it’s cost you to build that equity in the first place (mortgage interest, repairs, renovations, fees, insurance etc, etc) then it’s a pretty poor ‘investment’ really.

A house can normally only be a true investment when you no longer need to live in the said property – i.e. BTL or similar.

The danger with people mortgaging themselves at these current crazy multiples of income is that they may never pay off their mortgages, so may be effectively renting from the bank well into retirement – all the downsides of ownership and none of the benefits of renting. Don’t even get me started on those who’ve taken out interest only loans with no hope of paying off the capital at the end of the mortgage period.