It is Obvious

Chris Rick has got altogether too much to say

A hole in the ground

Posted by chrisrick13 on January 16, 2010

It is obvious: house prices are going to go up.

(Not sure about this one!)

I have been told I have been saying that house prices are going to go down for so long that I have become boring and have lost credibility.

We have certainly been through 3 house price ‘reductions’ while I have been forecasting it.  It reminds me of the logic when asked what is better a clock that has stopped or one that loses a second a day.  The answer is the stopped clock as it tells the right time twice a day.

I had a conversation with two of the children of a friend and told them not to buy houses.  They both did and are now in negative equity.  One of them told me that renting was lost money.  I didn’t mention that interest on a loan also is.  You don’t buy a house for investment reasons, you buy it to live in.

So what is the difference between renting and buying?  The market should balance at the point where renting or buying where you want to live is more or less the same.  If it does not then the landlord can get a better return by putting his money in the bank and sells helping to depress prices or the renter can buy for the same cost and come out of it with a house as well as somewhere to live for 25 years and buys rather than rents.

Of course the balance point is moved by other factors.  One is that house prices only ever go up so even if I don’t make money on the rent I will cash in a huge capital gain in a number of years.  My response is that you should do the maths and don’t forget to include all your costs including maintenance and all the taxes.  Another is simple greed and fear watching house prices rise and wanting to be in on the bubble.   There are plenty more.

For the person who wants to buy, the equation is simple.  Provided the bank will lend the money, if he/she can afford the repayments then they buy.  After all there is no downside and the property can always be sold to repay the loan and get the profit.  Changes in interest rates spoil that scenario.  You cannot pay the higher monthly repayments and your house has gone down in value.

So house prices will have huge pressure to follow average wages.  Interest rates determine the bangs per buck and further dictate the renters/buyers tipping point.

There are a lot of people out of work and many in work are working less hours or have taken a pay cut so this means that house prices must come down because average wages have come down.  Despite the huge premium banks are charging to base rate, interest rates are low.  So, even small increases in interest rates will bring huge increases in mortgage repayments.  If you have a £100,000 loan and are paying £400 a month in interest then a 1% increase in base rate will put the payments up to £483.  Go back to the long term average of interest rates and you are paying £800.

Apply this cost multiplier, which is coming, and the average wage drop over all people, not just those who are working (non-working people have mortgages), then house prices have a long way down to go.

It is obvious: house prices are going to go up in smoke.

2 Responses to “A hole in the ground”

  1. Bill said

    I think the arguments that you put forward are all valid but incomplete as you seem to be considering a house purchase as just an investment. There are a number of reasons for buying and investment is one – over the years it has been a very good investment. In most years my house ‘earned’ more than I did even though pundits (such as Bob Beckman) were warning that house prices would plummet. They have now but I have still come out on top.

    Both my ‘young ones’ are renting at the moment and are frustrated by the restrictions that this imposes. It isn’t wasted money, after all they are getting shelter from the elements with someone else bearing the risk for problems including a price crash. But they can’t upgrade the properties (even repaint vile colour schemes) and can’t become too comfortable as they may have a higher rent imposed or just asked to vacate. In fact they can’t ‘invest’ in making the place the way they want it…

    Moving house is a trauma and at least if you own a home you get a choice when to move(?) I have things (maybe more than I should have) arranged the way I want them and not subject to the whim of a landlord. This must be worth something. One has to take a balanced view (including non-financial arguments) and compare renting and buying from a lot of aspects although the protection or growth of the (very high) initial financial commitment has to be high on the list of considerations.

    • You are right. A house is somewhere to live. There is a a lot of value that it is impossible to quantify but it is big.

      I am concerned about the hopes and aspirations of people sucked into large mortgages to buy that dream then find that they owe a lot of money and can’t service the debt or repay it.

      I have painfully found out that staying in one place for 20 years you accumulate a lot of stuff and the roles are reversed as it now owns you. I think it should be compulsory to move house every couple of years!

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