Devildog

Dave, that doesn't quite work.

If they had put the money away in a "savings account", they would have the £45k PLUS the interest. And the smart would have invested that wisely, in a tax efficient scheme which may well have resulted in substantial growth over 25 years.

The gamble is whether or not that 45k plus investment growth after tax will be more or less than the equivalent net growth of the property value in the same period.

Lets say the £150 per month becomes £60,000 in a tax efficient savings scheme.

Property value will have had to increase by at least that plus tax on the gain, ongoing maintenance, insurance, the cost of vacant periods, etc, etc.

Having said that, up until now, property investment has outperformed anything else, by a significant margin - but will it always be the case?

Going back to the original post, we've just sold our house last month with a gain of 60% in 4 years. An investment property/holiday home we own is currently worth 13.5% more than we paid for it (based on sales of identical properties) approximately 8 months ago and massively more than the mortgage costs paid in that period.

Not exactly signs of a slipping market, and aside from buying a few hundered kilo's of columbias finest, and flogging it on, there's not much to touch that level of return.

Interestingly, developers in Scotland are slowly being forced to incorporate affordable housing (which actually is affordable) in new build developments which can only be bought by local residents who have been in, or are on, local authority housing lists for some time, or who are first time buyers and have been residents for 5 years or more.

JamieMacdonald

Erm, but surely if you have a repayment mortgage over 25 years, you have invested £45k* and fully repaid the mortgage on a property which will then be worth £ xxx,xxx - possibly add another x in 25 years!

*(assuming you can always rent it out at a £150 deficit)

David Lock

Historically houses prices have risen on average by 8.1% per annum over the last 50 years. A downturn now and again which can last a decade. But as a long term investment which includes the pleasure of living in your own place it cannot be beaten IMHO. Plus it's completely tax free if you live in it when you sell and with a bit of planning can be tax free for your kids when you snuff it.

I would say be wary of odd markets like London and who knows what climate change will do to some areas in 30 years time? dl

Devildog

Fair point, but that assumes a repayment mortgage which, in many cases, would give rise to a much higher monthly payment and a bigger defecit over rent recieved than £150.

For example,

buy to let flat = £150k

75% mortgage = £112,500

Thats going to cost you £650 a month say interest only.

Unfurnished rent on that around me will be £450 pcm.

Thats a £200 a month shortfall on an interest only mortgage.

Many private investors/speculators may be paying higher deposits form prior profits, but many will be paying interest only mortgages, relying on the market upturn to generate (currently substantial) profit.

Repayment mortages really only make sense if you are in it for the long term, not if you are buying and selling with regularity.

Petem95

This is what estate agents and mortgage lenders certainly want you to think!

On the other hand where is the money going to come from if price rises are to massively exceed wage increases, and cheap borrowed money is looking like drying up big time?... prices are already unsustainably high.

There seems to be an increasing consensis that the era of cheap credit is well and try coming to an end.

Rising rates: What*they mean for markets and the economy - Jun. 14, 2007

Factor in inflation looking like its proving very hard to tame, and things really dont look good for supidly inflated assets (not just house prices..)

john banks

I don't want to wait say 14 or so years (historical example) for the house price after inflation to recover to where it is now if I buy now at what I believe is at or near its peak. I could buy eight decent rental properties around here on 75% loan to value and fund them even with no tenants and if interest rates doubled (both these events at the same time). More than a little evidence convinces me that this is not the no-brainer some would claim, and IMHO quite stupid at the point where I think we are in the cycle. Instead I don't own any property at all at present and am renting. This is highly contrary to the majority view.

Flatcapdriver

John, it may be contrary to the majority view but renting in the current climate isn't a bad option. We dipped out four years ago when I judged the market to have peaked. Bought and renovated this property a couple of years ago and am looking to sell.

What renting does provide you with is a strong entry/exit strategy. Because there was no chain, I played hard ball to get this house at a decent discount. If we manage to sell, then equally being in the end of a chain gives me leverage - we'd simply rent again.

The other factor people forget with home ownership is the value/cost relationship. They forget to factor in mortgage repayments. Roughly speaking, if you bought a property for £100k and paid off the mortgage it would cost your at least £200k. Say the property was sold for £200k - the home owner then claims to have made a profit of £100k when in actual fact they've made nothing.

Boost II

iTrader: (1)

Everything depends where you are. It is always possible to make money if you know what you are doing. In London you could buy a 1 bed flat in mayfair right now and the motgage would be about £1200 an month but you could rent it for £2400. Nice rental return and since it is cheaper to buy than rent, then that's a good indicator prices will continue to climb on top. Alternatively if you've less money try somewhere which is currently a total crap hole but is likely to undergo much regeneration and development over the next 5-10 years - maybe Woolwich?

Tidgy

couple of thingsd could happen.

first the market will crash because people just wont be able to afford the prices so no one will be buying.

second, people have borrowed so much that they can't afford it and the market will crash when all the houses suddenly apear ont he market.

third price could stay where they are

fourth well it could be all up from here, but wages will have to go up to suit

hades

I don't know that wages still do need to go up. I think that development of wealth (as opposed to income) is a part of the issue.

My dad was the first home owner on his side of the family, my mother's dad on her side. 150 years ago, only the very rich owned houses. Nowadays, more people own than don't. The effect of this is that a lot of families are now inheriting houses (minus some tax) for the first time, and this gives them the disposable wealth to keep house prices up. This is the only way I can see that average affordability can be continuing to increase.

I don't think that sort of thing is powerful enough to be driving up prices at a massive rate, so I can't see anyone expecting a big climb in values, but people were saying this years ago.

Also, from my recollection of the last house price crash -prices had recovered in absolute terms after say 3-4 years (obviously would have been longer in "real terms" - i.e. index linked). No reason to expect that any possibly impending crash is going to be much different.

Bigger crashes in certain market segments - e.g. "investment properties" - do seem more likely to me. To quote an example, look at the Spanish market. From my limited knowledge, the prices of the holiday home coastal resort type developments appear to be crashing quite majorly after a few years major growth. However, the "dull, inland, unfashionable" places (i.e. haven't been booming as stupidly in the last few years) where many Spaniards actually live don't seem to be crashing much.

sti-04!!

Just been reading through some property websites of my local area (Central Scotland) & it looks to be stabilising here. I personally would like a downturn but a stabilisation is good all round.

IMHO of course

thesyn

Dunno how old you guys are but I remember the heady days of 1987 buying a 3 bed terrace in SW london for 89k. Then double tax relief for cohabitees was cut and interest rates rose over 18 months into double figures. Property prices fell off a cliff. I was close to repossession and it took me 2 years to sell for 17k less than I bought it for.
Don't be complacent sh8t like this did happen and could happen again.

hades

I was only 13/14 in 87 but I do remember that house prices crashed. London and some of the South East, having benefitted from the biggest boom in the mid early 80s, suffered the biggest crash after that boom.

A lot of the rest of the country suffered more like 20% drop. My parents bought in Norfolk in '85 at just under 70k, their place peaked at maybe 160k value before dropping to a little under 130k. Whilst that wouldn't have been good news for those who bought at the peak and stretched themselves, and hence a lot of people got caught in negative equity etc, I wouldn't have called it prices falling off a cliff, and about 4 years after the crash, their place was worth over £160k again. Also worth noting the prices only fell to the level they were perhaps 18-24 months before the crash happenned.

For people who've bought houses as a short term investment which is in effect a gamble on house priced rising, a crash like the previous one will hurt a lot and could cost them lots of money. For someone who's gambled on renting short term and gets back into the market at the right time if prices do drop 20%, the gamble will pay off. The point is it is always going to be a gamble, and you shouldn't gamble if you can't afford to lose.

For people who've really stretched themselves to get on the housing ladder at the wrong time, it could cause a lot of short term pain. However for many of the country - people who have just owned houses for years and consider them somewhere to live - house prices make little difference as you aren't selling it, and higher interest rates might just mean belt tightening, less fancy holidays etc.

I should add that for people who've "cashed in the equity" of their houses by borrowing against rising values to subsidise a life (or a BMW X5!) they can't afford will also suffer. But that was a bit predictable, really, and I find it hard to feel the sympathy for them that I would for first time buyers who get stung a bit!

john banks

40% drop in last crash when you include inflation. Real house prices including inflation are the only ones that matter to me.

pslewis

I was trying to sell a house in 1989 - it dropped from £105,000 in 1989 to £66,000 in 1994 when it finally sold.

The house I bought then was built in 1990 and sold new for £147,500 - I paid £99,000 in 1994.

I have lived it and experienced it at the sharp end - the young of today have no idea whatsoever what can creep up and bite them.

This boom worries me in that it seems to be so everlasting that a fall - when it comes - will be total devastation, the likes of which we have never seen.

It only takes one Interest Rate rise too far and it will tumble like a house of cards