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[MSE Lawrence]

This is the discussion to link on the back of Martin's blog. Please read the blog first, as this discussion follows it.

Read Martin's 'The Greater Fool Theory: Does it apply to house purchases in the last couple of years?' Blog.

Click reply to discuss below.

[JimmyTheWig]

A nice theory. I'd word it from a slightly different perspective...
I believe the current price is too high, but I'm buying it out of fear that a 'greater fool than me' will be willing to pay even more for it in the future.

In other words, if you don't buy "now", when you can afford it, you may be priced out of the market in a few years time.

While I think your theory works for stocks and shares (where the only point is to make money) this works better for house prices (where the real point is to own a home and making money on it is a bonus).


P.S. I believe in the first sentance of the "House Price Rises" section you mean "house price inflation" (or similar) rather than "house price decline".

[v3ronica]

I agree with you Martin, and I think overall, people seem to have wanted what they really cannot afford, before they were in a position to get stuff (not only with houses but with all credit). However, I think in particular with housing, a lack of affordable, decent rental and the presumption in the UK that everyone is 'entitled' to own a home has had a big impact upon people taking out unaffordable mortgages for over inflated houses.

[meester]

The house price crash fraternity have been calling the market down for a good number of years and those who bought in the early days are still heavily in profit.
You are implying that the HPC fraternity were wrong and if you bought when they first start talking about it you'd be heavily in profit.

This is absolutely wrong.

The boom happened at different times in different areas, for instance a bit of tinkering at Nationwide.co.uk/hpi

shows YoY rises as follows for Greater London, starting Q1 1996

20.64%
15.24%
13.47%
25.54%
5.59%
16.02%
23.41% (to Q1 2003)
6.26%
3.82%
5.13%
14.34%
5.61 (to Q1 2008)

Now when was House Price Crash registered? 26 October 2003.

So let's see area, by area, assuming you'd listened back in Q4 2003, what size fall you could stand, from the peak:

Greater London (peak Q4 2007) -27.7%
East Anglia (Q3 2007) - 24.3%
East Midlands (Q3 2007) - 21.3%
North (Q3 2007) -26.8%
North West (Q4 2007) - 29.2%
Northern Ireland (Q3 2007) - 58.8%
Outer Metropolitan (Q4 2007) - 22.4%
Outer South East (Q3 2007) - 22.8%
Scotland (Q3 2007) - 39.9%
South West (Q3 2007) - 24.7%
Wales (Q4 2007) - 29.1%
West Midlands (Q3 2007) - 20.8%
Yorkshire (Q3 2007) - 29.1%

House prices have fallen by 15% across the board already, by official figures, with some types of property down by 50%, Northern Ireland down by 30%+, so even assuming you did listen to the house price crashers on day 1, and given the lag in offical figures, and the difficulty of selling in the current market, the meltdown in newbuild prices, etc., the sideways swipe at the HPCers is clearly misguided, because people that bought in the last five years in most cases are NOT 'heavily in profit' at all, and in fact many are in negative equity, and not just those that bought last year.

[MSE Martin]

Meester, Im rather confused by your response.

My implication wasn't HPCers were wrong, but that no one can accurately call the timing of a crash, and whent the peek is. I've had much sympathy with the HPC view over the last few years - as you can see from my old blogs - though not as militantly.

I'm also confused by your post above. I can't see the relevance of the fall from the peek. My point was that many of those who bought years ago are still in profit if they (could) sell now.

Anyway if we could leave this on topic that'd be great.

Martin

[silvercar]

I believe the current price is too high, but I’m buying it in the hope a ‘greater fool than me’ will be willing to pay even more for it in the future.

I believe that the current price is too high, but I'm buying it because it suits me to move now rather than in 3, 5 or 10 years time.

Not much point saying to your kids, "you could have had a garden/ your own bedroom if house prices weren't too high" or having 3 kids in a 1 bedroom flat and pulling your hair out.

As long as you are in it for the long term, have a savings cushion, an affordable long term mortgage offer you can see the house price crash through.

[meester]

Originally Posted by MSE Martin

Meester, Im rather confused by your response.

My implication wasn't HPCers were wrong, but that no one can accurately call the timing of a crash, and whent the peek is. I've had much sympathy with the HPC view over the last few years - as you can see from my old blogs - though not as militantly.

I'm also confused by your post above. I can't see the relevance of the fall from the peek. My point was that many of those who bought years ago are still in profit if they (could) sell now.

It just depends what you mean by 'years ago'. The house price crash calls have really started getting loud only in the two or three years, and to be safe you need to have bought 6+ years ago.

[meester]

Originally Posted by silvercar

I believe that the current price is too high, but I'm buying it because it suits me to move now rather than in 3, 5 or 10 years time.

Not much point saying to your kids, "you could have had a garden/ your own bedroom if house prices weren't too high"

Rented houses have bedrooms and gardens too.

Anyone who can raise the hefty deposits required to buy a house now could rent a very nice house.

For £3,000/month (probably negotiable)
http://www.rightmove.co.uk/viewdetai...&mam_disp=true

you'd get 2 acres, heated swimming pool, sauna, gym, and 4000 sq ft in total.

On a 90% mortgage you're looking at about 6.59%.

That house would set you back about £900k, so you need to find £90k plus stamp duty = £126k, plus a mortgage of £4,500/month.

So you'd pay 50% more every month, be stuck with maintenance costs, and in a year's time the price would certainly have fallen by 10% - £90k, so the total cost over the year would come to £180,000, or £12,000/month. My son's only six, but even he would understand that that's not sensible.

[tenuissent]

Daughter bought south London house in 2004.For many good reasons she has to move, and while selling this house over the last few months has had to drop the price by almost £200,000

Yet she is still getting £100,000 more than she paid for it in 2004.

Not sure how relevant this information is, but at least she wasn't the last fool, has been paying mortgage rather than rent, and has enjoyed 4 years in the house with her family.

Fortunately the bigger house she is moving to nearby has dropped its price by a similar amount, so what she is actually paying extra for is more space and more garden.

If she had rented over the last few years while prices rocketed, I think there is no way she could have bought now, even with the crash.

[greenalien]

I think that the main driver of the housing market for the year or so before the crash was fear and desperation - the feeling that, 'If I don't buy now, I'll never be able to afford it'. The sums of money involved were so detached from reality for most of the people involved that they became unreal, beyond comprehension, so people paid unrealistically high prices that they could barely afford, not with the hope of later passing their property onto a 'greater fool' but just because they were afraid that if they held off any longer, prices would climb beyond their reach. I seriously doubt if many thought how far into debt they were plunging themselves, or how much of a trap they were falling into, they just wanted their own homes.

[JimmyTheWig]

Originally Posted by greenalien

I think that the main driver of the housing market for the year or so before the crash was fear and desperation - the feeling that, 'If I don't buy now, I'll never be able to afford it'.

I agree - that pretty much goes along with what I was saying in post #2.

[zarazara]

I agree, but what about the person who just needs to buy to have somewhere to live?

[macs1985]

hi all we baught a 3 bed house in oct 2007 on an intrest only mortage and are now in negitive equity any ideas?

[JimmyTheWig]

Originally Posted by macs1985

hi all we baught a 3 bed house in oct 2007 on an intrest only mortage and are now in negitive equity any ideas?

There's probably better places on the site to post this, and we'd need a lot more detail to give a decent answer, but in a nutshell I'd say do everything you can to reduce your mortgage.
Sell stuff you don't need.
Work longer hours / extra jobs.
Use the different areas of this site to get your bills down.
Take in a lodger.