Climbing the Property Ladder

kriss_boy

How will my generation work their way up the property ladder? (bought in march 08)

If the property market remains stagnant and takes 3 or 4 years to get back to where it was then people like myself will have accrued very little equity in our properties other than what we have repaid.

Our LTV with thus be lower meaning less competitive mortgage deals right?

So what can we do? Naturally we are overpaying our mortgage during these tough times to ensure we have a decent amount of equity when we do come to sell.

On paper we could afford our dream home but our LTV would be so low wouldnt we be throwing money away?

chodges84

If you are looking to climb the property ladder, then a property market where prices are stagnant is far better than when they are rising. If property prices continue to fall then you will be in an even better position as your dream home will cost you less.

As well as overpaying you will no doubt be accruing some savings, which you can put towards your new house, so you will have a larger deposit. The equity in your home is effectively a deposit towards a new one and you can add to this with your savings.

We are looking to buy a house in the very near future, but I hope house prices continue to fall, in fact I hope they plummet. The idea that high house prices are a good thing is something that needs to be beaten out of the people of this Country.

If they fall far enough that it pushes you into negative equity then you may have problems, but if that happens enough that it affects a huge amount of the population then mortgage lenders will allow you to move your mortgage anyway, it happened the last time so i see no reason why not this time.

G_M

The difficulty is getting onto the ladder not climbing it. Once you're on, the property you own and the property you want will rise and fall in price in sinc.

kriss_boy

I think it depends on what you buy.

My brother raced up the property ladder from a small flat to a detached property within 5 years (2003-2008) thanks to his first flat practically doubled in value over the first couple of years. Then his two subsequent places despite being progressively bigger were in complete states so he got them cheap then the whole family pitched in to do them up.

Hes thus got a mortgage of only 120K on a property worth at least 180K if not more once its finished.

Amidst todays market you see a bargain of a beat up 3 bed semi and think wow I could turn that around... only to see a newly refurbished one a few doors up for a mere 20K more.

Some sellers are so desperate to sell its pricing other properties out the market.

Makes me think why not just save till we have 30K of equity then take the plunge and go for that dream home at a youngish age rather than trying to work our way up the ladder.

poppy10_2

Can't believe people are still using the phrase property ladder - thought all that nonsense had been shaken out by recent events

ss70

kriss_boy wrote: »

How will my generation work their way up the property ladder? (bought in march 08)

If the property market remains stagnant and takes 3 or 4 years to get back to where it was then people like myself will have accrued very little equity in our properties other than what we have repaid.

Please explain property ladder. if houses increase by say 20%, then the overall cost to move to bigger house increases significantly. If they drop by another 20% overall cost to move to bigger house decreases significantly. Simple math ratios. Perhaps i am missing something in your calculations?

Archlever

Hi,

We've moved recently. We bought our first house in 2004 (3 bed semi) , sold it in May 2009 for less than what we bought it for. In the 5 years we overpaid the mortgage and built up a large deposit. So in the downturn we saw an oppurtunity and bought a 5 bed detached which (we think) was going at a good price. I agree with ss70, we could not have afforded this house had prices still been rising. Although we sold at a "loss" we got a good price on this house. In my experience, overpaying, saving like mad and upgrading in a falling market reallly helped us.

maninthestreet

My parents are still living in the house they bought back in 1963, only their second property. There is only a need to move if your current property no longer meets your needs and can't be modified/altered to meet those needs.

princeofpounds

The property ladder was simply nothing more than the accumulation of equity as a result of leverage (borrowing to acquire an asset) and inflation.

Assume I buy a house for 100 and I put down a deposit of 10. I want to step up eventually to a house worth 200.

House prices rise 10%. My equity in the first property is now 20, which is up *100%*, not 10%. I can then sell my property, recover the 20, and use it to provide 91% of the deposit of the house twice the size.

Now that is a simplistic version, but that is the essence of it. Because you borrow money (which has a fixed claim in nominal £ terms), you are amplifying the risk on your equity massively. If you think about it, if prices had fallen 10% you would not have lost 10% of your equity, but again *100%*! All your net worth is wiped out.

Therefore the ladder is a great concept when prices always go up, but it genuinely does turn into a snake if prices go down.

So if you have a multi-decade bull market in housing (as we have had from the 1950s) it's a great idea if you can manage the bumps with your own cashflows. But don't think the property ladder is anything more intelligent than gambling with borrowed money.

As for the questions the OP asked, there are masses of issues all wound up in this question, not all of them to do with the property ladder. I would like to examine one of them (simplistically) - the issue of inflation and interest rate environment on the 'stress' period of high repayments.

In the good old bad old days, there were high inflation (and therefore interest) rates. This meant that houses were cheap assets because crudely speaking you divide the rental potential by the yield, which is based on interest rates, to get a valuation. Higher interest rates mean a lower valuation.

However, they weren't any cheaper to buy on a mortgage because the higher interest rates meant payments were higher as a proportion of the house. So it was just as difficult to get a mortgage and service it (barring the special circumstances of recent months).

But interestingly, the 'stress' period was much shorter. In a high inflation environment, the real value of the fixed payments is eroded much faster. Three years of 10% inflation means that the payments feel 33% 'easier'. Three years of 1% inflation means the payments feel only 3.3% easier. In the old days, it was a challenge to get on the ladder but once on it, things got easier quickly. For now, it's a challenge just to stay there.

kriss_boy

I'm really just trying to gauge where I will be in 2 or 3 years time.

Its been an expensive year, new car and now a trip to Austrailia but after that my girlfriend and I could realisitcally start kicking our mortgage into touch.

If the rate stays low or even if it rises to 6% again in the next year or so i reckon we could still get our mortgage down to about 70K owed on a 90K house.

So perhaps in a couple of years time we may have 20/25K equity for our dream home. In scotland and outwith Edinburgh you can get a nice stone built detached beauty for 300K!

Im a very frugal person because its always been an ambition of mine to have a nice house, pool table, friends over at the weekend sort of thing.

princeofpounds

So perhaps in a couple of years time we may have 20/25K equity for our dream home. In scotland and outwith Edinburgh you can get a nice stone built detached beauty for 300K!

Can't even get a 2 bed flat for that money where I live

Kriss, I re-read your first post and it looks like you are realising the conclusion that low inflation environments don't lead to much of a relief from the stress payments as I mentioned above.

To be honest, living where you are and saving will probably put you in the best position financially speaking to make the move when you do. You delay your consumption of the utility of the bigger house but it will probably be a better decision in terms of net present value (which basically means the in terms of maximising your eventual wealth).

Have a think about what you want to be moving to, and figure out what sort of deposit you will need to get a competitive mortgage deal (probably at least 20% these days, but that may change over time). The benefit of having 20% over 10% at the moment is significant, but having 30% over 20% is a diminishing return, so at a certain point it will be practically acceptable.

Also decide what sort of salary you will need to make it affordable. Review it as time goes on. When the numbers stack up, you can feel comfortable going for it.