Seeking your opinions on a genuine dilemma...

msquandary · 1 December 2008 at 3:40PM

First, hello. I'm a long time lurker - normally not a public person so have hesitated to post before, but the strength of my dilemma now outweighs my shyness. I read alot of your posts and opinions, and some seem really promising but then go off-thread - like the one on inflation, money and house prices. Sorry it's a bit long, you could skip the background and go straight to the questions....!

My situation is this:
For many years I worked too hard in a stressful job where the only aim was to earn money and needless to say I was unhappy and lost sight of a lot of what was important in life. During this time I bought a flat in London. When I moved to Brighton for work I kept that property and rented in Brighton. However eventually I got caught up in the 'greed bubble' and in 2005 bought a flat in Brighton too (theory - one to live in, one for a pension). Then in 2006 I burnt out, left work and went abroad to do volunteer work and other things.

Six months ago I returned from abroad. I was planning to fund myself through college for 3 years to retrain in an area I love where I hope to earn vastly less than I used to but to be vastly happier. I order to acheive this I planned to sell the Brighton flat for the following reasons:
- Interest rates had increased so much it looked as though I would be subsidising the mortgages by a large amount each month while studying
- I didn't have enough savings to see me through college so I thought if I could recoup the initial deposit (£60k - mostly from an inheritance) it would help see me through

Since then I've been through a couple of buyers but not yet managed to reach exchange (although there is never any shortage of interest... is on the seafront so desirable - I realise I'm very fortunate). The flat is still for sale but things have changed (complete financial meltdown goes without saying....) but also
- interest rates are down so I am now comfortable that I will not have to subsidise the mortgage during my study years - although any gain will probably barely cover maintenance, voids etc which until now have come from my own pocket
- I am now only going to be studying for 18 months so my savings plus a part-time job will see me through without selling the property.
- However given the state of the financial/economic world, the fact I still have the London property (tried but could not sell, accept that) and the fact that I am unlikely to have a regular reasonable income (economy allowing) for another 2-3 years I feel that perhaps I still ought to sell to protect myself as much as possible from whatever the next few years are likely to bring...

However despite all my efforts at educating myself in whatever way I just don't have a full enough understanding to make the decision - hence after many weeks of torturing myself over the decision and spending hours reading the internet and newspapers I have decided to put my dilemma out there....

SO MY QUESTIONS
I would be really interested to get the views of the people on this forum about what you would do in my situation. I realise alot of you may think I made my choices so must take the consequences, and I do know that. I accept the decisions I made - but it doesn't make the decisions now any easier - oh, also, I'm not a greedy, evil landlord...

Main questions I have are:
- IF YOU WERE ME WOULD YOU SELL OR HOLD?
- I know that continued falls in HP are taken for granted but what are your predictions for recovery? So many people I know (and at 38 me included) just can't shake off the conditioned instinctive belief that 'house prices always go up' and advice I get from family and friends is uniformly - 'hold on to it if you can, you will be glad in the long run' but I can't help feeling that by having 2 flats I'm very exposed... (looked into selling London too but not an option in this market)
- Inflation: I'm now reading about the risk of hyperinflation. If I sell I hope to recoup about two thirds of my initial deposit - does it really make sense to sell if hyperinflation is coming, should I be hanging on to the 'debt' rather than having money in the bank? If I do sell what's the best thing to do with the money (hope to be around £40k+)
- It seems to me that as soon as lending returns then there will be another boom (anecdotally, I don't think I know a single person who is not waiting to buy at the bottom...). Realistically could lending return to 'normal, sensible' levels any time soon i.e. will people start borrowing in foreign currency? will cash rich entrepreneurs start setting up lending businesses? I just wonder, the landscape in terms of bank lending has of course changed irrevocably but won't people work out a way to lend/borrow anyway?? How soon might the banks get back to 'business as usual'?
- If I sell now while I won't recoup my original deposit, I will have a nice deposit ready to buy a home in the future if I decide to. But in 18 months I will be starting out 'self-employed' so am a good way away from being a good bet to get another mortgage. It makes me wonder - is having a Mortgage a more valuable 'asset' than having a large deposit in the current climate?

I'm 38 and it might seem I've been greedy but I am of that generation encouraged to use property as pension, I worked hard, lived frugally, all my money has gone into property and mortgage repayment vehicles... I knew when I bought the 2nd flat that a HPC was due at some point and would have told you then I would ride it if I could - but recent events are of course unprecedented and mind boggling to one such as me and change everything..

I'd be grateful for any advice/opinions/pointers to information to help me make what feels a huge decision....

I'd be really interested to get your comments. I've also posted to another forum - or should that be THE other forum - as I'm interested in a range of perspectives. Also, I'm not one of these people who comes on here with my mind made up just looking for reassurance - I'm genuinely as confused as can be. In a right pickle in fact and scared of making a big mistake which ever course of action I choose.

Dithering_Dad · 1 December 2008 at 3:54PM

Where do you intend to live once you have completed your 18 month course? If it is in either London or Brighton then it's likely that you will live in one of your flats while you continue to rent out the other.

In the meantime, I would look at getting a long fixed deal in place (I rememebr a guy on here was offered a very competitive fixed mortgage) so that you won't have any surprises while you get on with your course and start building your new self-employed enterprise.

If the rental income covers the mortgages now, then they definitely will if you get a decent fixed mortgage rate. Just make sure than any surplus is held in account to cover any void periods.

If you have a large amount of cash on deposit you will not be entitled to any benefits when you complete your course and you're just starting out with your new venture.

PasturesNew · 1 December 2008 at 4:04PM

Difficult. But you used the word 'opinion' because nobody can give you advice unless they invented time travel and could go foward then come back.

msquandary wrote: »

Main questions I have are:
- IF YOU WERE ME WOULD YOU SELL OR HOLD? SELL
- ...continued falls in HP ... YES
... predictions for recovery? bottom in 3 years, then it'll sit there for another 2, then rise more slowly than it was doing at the peak

...in the long run' If you sell now and buy in lower, then you're even better off in this magical long run

... by having 2 flats I'm very exposed... Yes - which might cause you to stress/drop out of your studies if they both become untenanted, so by keeping them you risk your brave new future

...- ... risk of hyperinflation. I'm hoping for deflation, nobody can really guess right now which way it'll go. But hyperinflation killed Argentina from 1989 to today, so they have to avoid that.

... does it really make sense to sell if hyperinflation is coming, should I be hanging on to the 'debt' rather than having money in the bank? It depends if hyperinflation DOES come.
... - as soon as lending returns ... could be years

...there will be another boom ... see Japan

(anecdotally, I don't think I know a single person who is not waiting to buy at the bottom...). Are they also wanting to afford a Ferrari? Wanting doesn't mean we all ever will.

Realistically could lending return to 'normal, sensible' levels any time soon - sensible is how it was until the late 90s.

i.e. will people start borrowing in foreign currency? will cash rich entrepreneurs start setting up lending businesses? I just wonder, the landscape in terms of bank lending has of course changed irrevocably but won't people work out a way to lend/borrow anyway?? How soon might the banks get back to 'business as usual'? the recent past was not normal, it might be 20-50 years or never

...- If I sell now while I won't recoup my original deposit, I will have a nice deposit ready to buy a home in the future if I decide to. But in 18 months I will be starting out 'self-employed' so am a good way away from being a good bet to get another mortgage. It makes me wonder - is having a Mortgage a more valuable 'asset' than having a large deposit in the current climate? All of this is future speculation with too many variables. You've not even started to study yet.

What course will you be studying? What self-employment will you be looking for?

You have to weigh up the potential for loss in the next 2 years, the probability of your success in your studies, the probability of being able to pursue self-employment after your studies.

At least by not having property you can live worry-free during your studies and not feel any special need to be based from one area when you do set out in your new life. Having property clouds the mind as to where to base yourself that might not enable you to make the most of your new found qualification.

BlondeHeadOn · 1 December 2008 at 4:05PM

If you've already tried to sell and not managed to reach exchange on a desirable property in Brighton, then the decision may end up being a pragmatic one rather than an ideal solution.

I would say that it is not worth selling at a very low price unless you absolutely have to, why not keep and rent out the property to ride out the downturn instead?

That said, you might have to be prepared to wait for a long time for prices to recover - but you are only 38, so not very close to needing your pension just yet!

TDS_2 · 1 December 2008 at 4:56PM

I'm pretty bearish about house prices, but I don't think you're gonna make any appreciable money by selling now and buying back in 2 or 3 years time (once fees etc. are taken into consideration). Or to put it another way, I don't think there's a big enough of a chance that you will make a worthwhile amount that it's worth selling to then buy back later.

To my mind, it becomes a descision based on the If however, based on the current long term fixes that are available currently, you cannot afford to keep the property then it's all a little irrelevant. Having said this, I don't think you stand to lose a lot if you do sell it and buy back in a few years. The caveat being that you need to decide quick. No point sticking your head in the sand only to find out that the rent (+ voids) don't come close to covering the mortgage, by which time you're forced to sell at a lower price.

That's my two'pence worth, anyway...

kennyboy66_2 · 1 December 2008 at 5:14PM

I would sell one of the flats, mainly because it doesn't seem the most appropriate pension investment. I don't know the Brighton market, but I am fairly certain that flats & studios will be amongst those properties that fall furthest & take the longest time to recover.

Maybe look at it this way - if you just had the flat in London now, would you be looking to buy another flat as an investment. If the answer is no, then it really follows that you should sell. If you did sell, I don't see much point in buying again in 2/3 years.
My opinion might be slightly different if you had substantial non property pension provision.

I personally doubt if we will have hyper-inflation, but equally don't think we will have a deflationary spiral.

What seems likely is a fair few years of below trend growth, where both individuals & government (from say 20010/11) save (or pay down debt) rather than spend.
I also doubt if we will have the levels of east-european immigration that we have had in the last 10 years or so.

Mr_Matey · 1 December 2008 at 7:08PM

Hi msquandary and welcome to the board!

I agree with DD, where you plan on living is crucial to the decision.

Some pros for Selling/Holding that I'm reading into your post are:

Selling:
+ all this house price crash stuff is stressing you out and it wouldn't if you only owned 1 place.
+ maintaining 2 properties whilst studying and looking for new jobs is unnecessary stress.
+ more cash = more security.
+ prices may fall.

Holding:
+ prices may rise.

Either way you sound like you'll weather the storm and not have a reposession on your hands, but I think in your situation I would sell.

fc123 · 1 December 2008 at 10:13PM

Hi , I am based in Brighton and London. I have run a business in Brighton for over 1o years.
The Brighton bubble is popping a lot worse than the London one.
The local economy isn't based on much more than call centres, tourism and property.
2 years back there were hardly any 1 bedders under £150k...now there are pages of them on RM.

I would initially base decisions on the work you intend to do, how much it will pay and where it would be better to be based.

You don't mention the LTV on the 2 properties and I think that is key.

A 200k flat (at todays value of 25% off peak price say) but with a mortgage of 50k, is worth keeping to live in.

I would sell one and live in the other....less hassle, less mortgage (as you can reduce the loan on the one you keep) and property IS selling...it just has to priced at around end 2004 price.

This is based on people I know who have sold recently...not anything official.

monkeymaster · 1 December 2008 at 10:51PM

Ask yourself how you'll feel if prices have dropped another 40% in 2 years? Are you happy with that risk?

It's likely that prices will continue to fall for at least 2 years.

Things to consider:

Despite Gordon Brown et al saying how well placed we are, international experts (IMF, OECD etc) say we are in the worst position.

Unemployment is continuing to rise which will have further downward pressure on house prices.

We aren't even officially in recession yet.

Looks at what has happened to our currency in the last year.

Look at what happened to Japan in the 90's.

Mortgage lending which is a leading indicator of house prices by several months is continuining to fall.

Lending is likely to be much more strictly regulated down the line as the tax payer now has such a huge interest and the last thing politicians want is this crisis replayed in 10 years or so. I expect once the market finds its natural bottom rules will come in to try and restrict lending to prevent another boom.

No one can tell you what you should do, the best thing is to educate yourself so you are best placed to make the decision that is right for you.

msquandary · 1 December 2008 at 10:51PM

Hello again, and thank you to all of you for taking the trouble to give me your thoughts/advice/opinions.... all added food for thought to add to my already spinning brain. To respond to some of you:

DD - I'm not sure where I will live when I finish my course, Brighton more likely than London, but it could be anywhere! - I'm not a great 'settler' and starting to understand that about myself!
In terms of mortgage, without a regular income I'm at the mercy of current lenders best deals - this means that London recently went on a 7% 3 year fix (BTL) and Brighton will be on whatever best deal Halifax is offering come June 2009....

Pastures New - I'm training in Nutrition, so am likely to be self-employed in that field, salaried employment may also be an option by then but self-employed route is more likely and more the norm in what I'm studying. You are right about the freedom that not having property brings - on the other hand I've just spent 2 years overseas so I don't see property in itself as preventing me from moving about.

BlondeHeadon - very good point about time to go before retirement .....perhaps I've been worrying too much?

TDS - thanks, very level and sensible point, I think in the current climate it is so easy to panic. I'm not too worried about not being able to cover the mortgages with rent over the next 2 years as both flats are very lettable, although equally I can expect to break even at best. The biggest fear, if any, is of both properties coming off fixed rates in mid 2011 - if LTV is really down and interest rates are up again that could be where I come unstuck - and 2.5 years is a long time to spend worrying about the possibility!

Kennyboy - I agree about the pension - 'If only...'

Mr Matey - You have managed to sum up my dilemma completely and succinctly in just 5 bullet points - I should have hired you as a consultant before posting it and saved everyone the pain of reading it..... You hit the nail on the head, apart from point one - it's not actually the HPC stuff that's stressing me, it's the magnitude and unpredictability and scariness of the entire financial situation - if it the correction wasn't driven by the credit crisis, resulting in banks falling and governments bailing out whole economies, talk of deflation/inflation/country going bankrupt blah blah I would not be half so concerned.... But you are right, I am in a position to weather the storm unless something really unpredictable happens.... - and for that I realise I am far luckier than alot of other people.

FC123. LTV as follows: Brighton £225k, mortgage £140,000. London flat - £280, mortgage £165k. Have used peak 2007 values rather than trying to guestimate current values

Dithering_Dad · 2 December 2008 at 11:13AM

msquandary wrote: »

DD - I'm not sure where I will live when I finish my course, Brighton more likely than London, but it could be anywhere! - I'm not a great 'settler' and starting to understand that about myself!
In terms of mortgage, without a regular income I'm at the mercy of current lenders best deals - this means that London recently went on a 7% 3 year fix (BTL) and Brighton will be on whatever best deal Halifax is offering come June 2009....

I'm not a BTLer so I may be incorrect here (hopefully some of our landlord contributors will correct me if I'm wrong) but if you have a BTL mortgage on both your properties, as long as the income from the rent meets your providers criteria (I think it needs to cover the mortgage completely and have a certain amount of surplus), then you won't have any problem re-mortgaging to another BTL mortgage. I don't think they look at your personal income.

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Seeking your opinions on a genuine dilemma...

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