So its a good time to buy a house…

Prices falling here. Non-university unfashionable northern town. Rental prices steady or rising as folk who would previously have been the first time buyers are buying iphones instead of saving for a 20% deposit.

crispo – Member
Kryton – we are also looking at first time buying at the moment. When I started a thread about this the other week I got a lot of warnings about the risks of getting into negative equity if house prices fall.

I’m not concerned with that as I intend to be bring our kid (maybe 2) up – before we move anywhere palatial, so its a long term view for us.

It is a gamble, it sounds like your current position puts you in a good place either way in my opinion.

I bought recently (14 months ago), with a lesser deposit so I have a higher interest rate, my patients with renting ran out – it was time to move on.

I have to say I’d buy with an aim to keeping the house for longer than 5 years, furnishing, updating and renovating are all things you don’t have to worry about as much when renting and are all additional costs that kick in when you own. In addition to that all the costs associated with moving (Stamp duty, solicitors, movers which you might find you need if you have 2 young kids and all the crap that goes along with that) There is also the hassle of chains and getting a sale to completion.

A house in my road went on sale Monday and had a sold sign on it last night, slightly more expensive than the one I bought, but not by much, so 20 months with no real price change here.

I am looking at it with very crude numbers but if we say buy and live there for 5 years it has to devalue by 5 years worth of rent to make it worth while not buying but renting? Or am I completely wrong with that?

you do realise how much of the 5 years payments go towards paying interest and how much goes towards capital repayment don’t you?

toby1 – so get the get the kids to junior school/nursery fees out of the way and then buy eh, saving additional deposit monies on the way…. Up to the age of 6/7 they could share our big bedroom, that may work…..

Could be a plan…

am i completely off the mark in thinking that banks increase the interest rate on fixed interests because they’re expecting them to go up?

Yes (and no).

Yes – their rate will broadly reflect the base rate.

No – their rate includes a profit margin and enough to cover their losses.

i.e. if 10% default, and are 10% in -ve equity all the mortgages in that category have to be higher to cover that shortfall. On top of that the banks need to turn a profit.

Thats over simplistic, but broadly how it works.

My most recent professional market advice for a northern university town is of flat or falling prices to readjust market to wage levels etc. With the exception of the cream of the property market where prime properties continue to sell to the people with money.

So long as your job security and long term affordabilty for repayments is good and if you need somewhere to live and its cheaper to buy than rent that is a good enough motivation.

so if they’re expecting losses then its still a reflection that they’re not predicting house prices and the market to go in an upwards direction ovr all?

(cheers for the simple explanation… i do brains not banks!)

I am looking at it with very crude numbers but if we say buy and live there for 5 years it has to devalue by 5 years worth of rent to make it worth while not buying but renting? Or am I completely wrong with that?

Also subtract cost of solicitors to buy house, solicitors cost for selling house, estate agent fees, stamp duty (if applicable), mortgage arrangement fees, maintenance on house that would have been covered by landlord…

In my opinion it’s a great time to buy if you are buying in cash. Later this year will be even better when the recession really starts to bite. I would stay put if I was borrowing the money to do it though, the economy is in the shitter and will be for some time.

Edit: Don’t max yourself out, don’t take any risks right now

you do realise how much of the 5 years payments go towards paying interest and how much goes towards capital repayment don’t you?

Yes but at some point sooner or later I will have to do this anyway! No?

5 years of rent is about £40K so either we stay put renting and give that to my landlord or I make the payments off a mortgage?

My very crude calculations were

Over 5 years rent would cost us £36,000
Our mortage would cost £27,000 and of that payment £9,000 ish would be repayment rather than interest (more in reality due to decreasing value of loan). So 18 grand is the amount the house would need to drop for us to lose money which in our case is 18%. In reality we don’t intend to move so house value not too important, but these sorts of calculations helped with taking the plunge.

Upfront costs for buying in our case were less than the upfront costs for renting, i.e. solicitors fees were less than rental deposit, no stamp duty, mortgage arrangement fee included in mortgage so calculated in above.

So 18 grand is the amount the house would need to drop for us to lose money which in our case is 18%. In reality we don’t intend to move

shouldn’t be a problem then, it only becomes one if you want to sell/move or you are on some crazy 100% interest only deal and need to remortgage but for more than the property is worth (after further price falls)

ohnohesback – Member

Prices have stagnated, they can only go up

The return of the property speculatordreamer…

In which case yes, I think its a good time to buy, and I am.

so if they’re expecting losses then its still a reflection that they’re not predicting house prices and the market to go in an upwards direction ovr all?

Pretty much, higher interest on a longer term loan would be an indication of either the rates going up, or of defaults in -ve equity going up in the longer term (i.e. 3-5years) (a defualt with equity wouldn’t bother the bank really).

You could get an indication by looking at whats happening with rates on better lona to value mortgages, obviously these will mostly have equity if the ‘owner’ defaults so the rate is more based on what they expect the base rate and their profit margin to be. If the’se are steady then its a safe bet they’re expecting a lot of defaults of the people with worse loan to value mortgages.

Ditto trackers, if they’re a long way above the base rate then the difference is either going into their profits (unlikely, they have to be compettative, banks deal with billions of ££££’s, so making millions of £££ profit sounds gready, but could be pants as a %age) or into mitigating their expected losses.

cheers spoony 😀

i’ll keep saving (mrsconsequence contracts with the probation service are all short term so not gunna apply for mortgage until she’s on a permanent contract instead of 12-18months at a time)

Edit: Don’t max yourself out, don’t take any risks right now

This maxing out business, I couldn’t believe when I heard that an upwards movement of .5% was putting some people in trouble, presumably because they’re ‘maxed out’ I mean didn’t they think about this!!

When we moved from London (1996) our interest rate on the new mortgage was 7.9% which felt low 😕 however, in deciding where we could afford to live we basically took a mortgage whereby if the monthly repayment amount doubled (yes doubled) then we could still afford it, obviously things would be tight but we wouldn’t go under for a .5% shift.

MrSmith

people talk about london prices going up but the figures are skewed by prime properties you see in the back of glossies left in the doctors waiting room. these are bought for cash by overseas investors looking for a safe haven not by your average working u.k. resident.

this is a bit sensationalist Gary. I’ve been ‘monitoring’ the North London market in N1, N4, N16, N5, N7, N8 for about 6 years, and one/ two bed flats and stuff has gone up consistently and shows no sign of stagnation or dropping, and it is normal folk who are buying these places.
it’s not just prime properties that are going up.
one thing I’ve noticed recently in these areas is that there aren’t many properties but there are a LOT of buyers. low mortgage rates and high demand are driving prices up, and stuff is going for asking prices.

I moved from London W12 to quite a nice part of Surrey in early 2007 – prices were rising fast then. According to Zoopla my new house is worth roughly what I paid for it whilst the old one has gone up by 12%. Curious mouseprice thinks both are worth quite a bit more than Zoopla says – double for the London one.

I say buy when you think you can afford something you’ll be happy to stay in for the medium term, don’t gamble on what the future might hold – but best to feel your employment is stable of course. I borrowed very highly when I bought my 1st and 2nd houses but I was confident in my employment and had lodgers anyway. I also bought in 1996 which worked out quite well really.

Just about to exchange on one (well, I hope so), so I hope that, for the immediate few years they are reasonably stable. Mind you, got a five year fixed rate which should tide us over if there is any stormy interest rate weather ahead.

I also intend to overpay like a b’stard during that time, so if the interest rates do go up, it won’t hurt too much.

+ve

Funding costs low
Likely to stay low for some time
Regionally – some positive S&D dynamics, plus some attractive yields (c.10%) apparently.

-ve

Housing still expensive vs income
Econ outlook – job security etc still v uncertain – Euro crisis still a real possibility in 1H12
Banks funding limited in supply
LT massive liquidity will at some stage lead to significantly higher IR – funding costs will go up (a lot) at some stage

Ergo – on balance still too early to max out.

this is a bit sensationalist Gary. I’ve been ‘monitoring’ the North London market in N1, N4, N16, N5, N7, N8 for about 6 years, and one/ two bed flats and stuff has gone up consistently and shows no sign of stagnation or dropping, and it is normal folk who are buying these places.

it’s not sensationalist when you take into account my words “your average working u.k. resident.”
find out the ‘average’ income and then look at a traditional x2.5-3 income multiple. then look at an ‘average’ 1-2 bed property.

what income multiple do you end up at? 4? 5? 6?

some info here:http://en.wikipedia.org/wiki/Real_estate_bubble

there is a graph/chart on melbourne property in that link that i have plucked some numbers for you. i picked these particular ones because they are close to nice round numbers.

1983 wage/property ratio 2.3 median property 52,500 wage 20,500
2010 wage/property ratio 7.8 median property 524,500 wage 67,000

so wages triple and property????

think those increases are sustainable?

An interesting problem, personally if I had the money (and I definitely don’t) I wouldn’t go near property with a bargepole. While prices haven’t significantly declined since 2008, volume has dropped massively (maybe 10x?). As a result the ‘price discovery’ aspect of the market is malfunctioning: people would rather hold on to their property and avoid realising a loss, or advertise at an unreasonable rate and simply not sell.

The clear indicator is the price to earnings ratio: if you reckon on a mean reversion to say 3x salary, then prices would have to drop by ~30% or salaries rise by 30%. In all likelihood, some combination of the two would achieve this.

However, as previously pointed out, we have a zero interest rate policy (ZIRP) in operation: the only thing which really can only go up are rates. As soon as wage inflation kicks in (i.e. your 30% salary increase for mean reversion) rates will go up. Historically, interest rates break upwards and very sharply:

While you might think a big house would be affordable now, how about if we get to 20% interest rates? My attitude is that debt is a liability (literally and figuratively) in the current highly unstable climate, and it is better to save and invest across a variety of asset classes (equity, cash, metals etc.) which will leave you much less vulnerable if we encounter significant economic problems.

Such as (in no particular order):
Chinese property crash/recession
Eurozone defaults
Euro breakup
Global recession
Global liquidity crunch (mk. 2)
Competitive currency devaluation/ trade wars

Also sugdenr, you sound like a canny investor.

Would you like to buy some magic beans? Subprime CDOs?

Such as (in no particular order):
Chinese property crash/recession
Eurozone defaults
Euro breakup
Global recession
Global liquidity crunch (mk. 2)
Competitive currency devaluation/ trade wars

so which is likely to happen? a combination of any 2 of the above events or your wages and house value going up next year?

this country must be full of deaf people, either that they are going round with their fingers in their ears going “la-la can’t hear you”

We are looking for houses in Cardiff at the moment and most people are asking 2007 prices or above, people cant afford tens of thousands of negative equity so everybody is playing house price chicken.

choron – Member
An interesting problem, personally if I had the money (and I definitely don’t) I wouldn’t go near property with a bargepole. While prices haven’t significantly declined since 2008, volume has dropped massively (maybe 10x?). As a result the ‘price discovery’ aspect of the market is malfunctioning: people would rather hold on to their property and avoid realising a loss, or advertise at an unreasonable rate and simply not sell.

The clear indicator is the price to earnings ratio: if you reckon on a mean reversion to say 3x salary, then prices would have to drop by ~30% or salaries rise by 30%. In all likelihood, some combination of the two would achieve this.

However, as previously pointed out, we have a zero interest rate policy (ZIRP) in operation: the only thing which really can only go up are rates. As soon as wage inflation kicks in (i.e. your 30% salary increase for mean reversion) rates will go up. Historically, interest rates break upwards and very sharply:

While you might think a big house would be affordable now, how about if we get to 20% interest rates? My attitude is that debt is a liability (literally and figuratively) in the current highly unstable climate, and it is better to save and invest across a variety of asset classes (equity, cash, metals etc.) which will leave you much less vulnerable if we encounter significant economic problems.

Such as (in no particular order):
Chinese property crash/recession
Eurozone defaults
Euro breakup
Global recession
Global liquidity crunch (mk. 2)
Competitive currency devaluation/ trade wars

Actually, I’d just quite like somewhere to live.

A house to live in, to do what you want with, to get long term security and a place to really call home, is worth paying a bit over rental costs for. Don’t forget to budget for maintenance though.

Really interesting read – sounds like some chaps know their onions.

Personally I would never max out. When buying our first place 5 years ago we budgeted based on 7% based on my fathers advice, still think this is a good idea now…

There was a mention about the property ladder earlier on. This is just a term pushed out by the media and vested interests, to try and scare people about ‘missing the boat’

As an example. I want to buy a house for £200,000. But I can’t afford it, so I settle for a £100,000 house to get me on the ladder and then allow me to trade up. In a rising market, 2 years later, prices may have gone up 10%. So my house is now worth £110,000 and the house I really wanted all along is now £220,000. So the difference between the 2 houses has increased from £100,000 to £110,000. This doesn’t feel like I’m climbing a ladder to me.

And in a falling market – you are better off just renting as you don’t expose any of your deposit to being eroded by falling prices, and you don’t have the other associated costs that come with buying – solicitors, surveys, maintenance, etc. The longer you wait in a falling market, you end up with a bigger deposit, so you end up with a smaller mortgage at the end of it.

the right time to buy is when you find a house you want to buy and make a home that you can afford.

served me well.

And in a falling market – you are better off just renting as you don’t expose any of your deposit to being eroded by falling prices,

except inflation and low interest rates are effectively eroding your stash. 🙁

except inflation and low interest rates are effectively eroding your stash

Exactly. I have a decent-sized deposit now, and it’s basically just getting smaller and smaller.

Midlife crashes has it for me

Im looking at a gaff that will do me well for a long time – by my nature im not a changer i just dont change things for the sake of it. The whole housing ladder thing i dont buy into

Im trying to buy a dated but livable property reasonably cheaply to invest my time and money into making it a 3 bed house i can bring my kids up in – i expect to either rent it out if i go to work abroad or to sell it when i retire/make my millions to move back home to my home town

I have friends that bought flats at 10% down and are stuck with them now due to negative equity and a swamped flat market !

Seems like a wiser move to me than buying a 2 bed Flat that i need to sell and incur fees and probably hit on ??

If it looses that much value i cant sell it itll be sold cheap and pay for my care in a care home im sure !

Interestingly the financial markets are quite positive about the economy at the moment, well up from their lows of a few months ago. So have they missed something? Those that think this is not the right time to buy, would you sell if you had a place and rent instead? Buying is generally less risky than not buying – just as long as you get something because you like it and not because you think you have to. Trying to time the market is a fools game unless you have special knowledge.

Exactly. I have a decent-sized deposit now, and it’s basically just getting smaller and smaller

Only if you’re using your deposit to pay your grocery bills, utilities & car insurance (all going up)

If your deposit is SPECIFICALLY earmarked for a house deposit, and house prices are falling, your deposit is actually getting bigger.

Money only has value when its exchanged for goods or services. If the asset you intend to buy is deflating, your money has more value (and vice versa for inflating prices)

Choron with that nonsense you are definitely and academic of some kind.

If you cant do, teach eh?

In last year we did a BTL that is returning over 12% ROCE, and the loan was just fixed at 3.5% for 5yrs.

You can have the smoke and mirrors beans, commodities, equities – may as well go to paddypower. I’ll take the property. I have been waiting a year and a half for the reposession time bomb to happen, but it blinking well hasnt. Of course we never had this same discussion in the late 80′ and 90’s did we.

What the kingisdead said.

Inflation is a funny one too, it is a common misconception that inflation erodes away debt. It is only wage inflation that erodes debt, which is something that we arent seeing much of as a nation.

Price inflation without wage inflation just means that people end up with less money to spend on mortgages, putting another downward pressure on house prices.

Dear oh dear. Seen the house now, and its and absolute dream.

Some financial workings out determine we are OK, and have a car loan that would finish in a year and half (in the fixed period) which would help us out if the rates shot up.

I’ve worked out a 1% rate rise is about £140 a month – any estimates as to how high they could go over the next 5-10 years?

the right time to buy is when you find a house you want to buy and make a home that you can afford.

This is really good advice. I would’t consider my home to be an investment vehicle (other than in the simplest of terms).