Climbing the Property Ladder

ss70

princeofpounds wrote: »

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 you are saying:

100k house but wanna buy 200k house, cost to change=200-100=100k
**********10% increase***************
Now 110k house but wanna buy 220k house, cost to change=220-110=110k

Which is bigger 110k or 100k

princeofpounds

Which is bigger 110k or 100k

You are looking at totally the wrong metric. The amount of wealth people have in a property is not the value of the asset, but the value of the equity.

Go look at the numbers again. At the beginning, the person only had 10k. This is only 5.0% of the initial value of the big house. At the end, this person had 20k. This is 9.1% of the value of the final value of the big house. That is an 4.1pp (82%) increase in the proportion of the value of the big house, simply from owning the smaller house in a geared manner in an inflationary period.

princeofpounds

Plus I should add that 110k at the end of the period is worth exactly the same *in real terms* as 100k at the start of the period. So when you ask which is bigger, the answer is neither.

Inflation was 10% - although housing inflation and general/wage inflation do not move identically over the long term they necessarily move together.

ss70

princeofpounds wrote: »

You are looking at totally the wrong metric. The amount of wealth people have in a property is not the value of the asset, but the value of the equity.

Go look at the numbers again. At the beginning, the person only had 10k. This is only 5.0% of the initial value of the big house. At the end, this person had 20k. This is 9.1% of the value of the final value of the big house. That is an 4.1pp (82%) increase in the proportion of the value of the big house, simply from owning the smaller house in a geared manner in an inflationary period.

:rotfl:

Right YOUR EXAMPLE i buy house for 100k put 10k down. House i really want is 200k.

10% increase i sell my house to a nice couple for 110k less mortgage of 90k leaves me with 20k.

I go to the 220k house and buy it, give them 20k from my last house and borrow 200k.
If i had brought the 200k house first with my 10k deposit i'd be borrowing 190k!.

pinkshoes

poppy10 wrote: »

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

It will always be a ladder though; buying your first is a step on, then paying off the equity and using that as a deposit for a bigger property will be the next rung etc...

No matter what happens to prices, it will always be seen as a ladder.

I would LOVE to get my foot on a higher rung, and can afford it, but unfortunately I can't find a single property that interests me as so few people seem willing to sell in this market.

pie81

ss70 wrote: »

:rotfl:

Right YOUR EXAMPLE i buy house for 100k put 10k down. House i really want is 200k.

10% increase i sell my house to a nice couple for 110k less mortgage of 90k leaves me with 20k.

I go to the 220k house and buy it, give them 20k from my last house and borrow 200k.
If i had brought the 200k house first with my 10k deposit i'd be borrowing 190k!.

Yeah, but no-one will give you a 200k mortgage with a 10k deposit these days.

And even if they did - what would have happened if prices dropped 10%?
You would have been in £10k of negative equity if you'd bought the 200k house - whereas with the 100k house you would at least have zero equity.

So buying the smaller property first is a lower risk move - you don't have as much upside if price rise, but you don't have as much downside if prices fall.

ss70

property ladder, maths shows it don't exist.

kriss_boy

Im a really frugal person, I dont earn much so I try to make it go far.

After tax by girlfriend and I have a combined income of around £2500 per month however we are both on scales and my girlfriend in particular will be on almost 30K in 4 or 5 years time. (If our jobs are safe of course).

So I guess I am trying ascertain what size of property we could afford to own in a few years time.

Do we follow in the footsteps of friends and buy another property or two before landing our ideal 'family home', or would it be possible to save for a couple of years and skip those rungs.

Im in my 20s, heck arguably my lates 20s and Im finding myself looking forward to different things.

Ok, I admit it, I want a big house purely to fit a snooker table in!!!!

ss70

pie81 wrote: »

Yeah, but no-one will give you a 200k mortgage with a 10k deposit these days. It's hypothetical to show the numbers, i'm not filling in a mortgage application for this scenario.

And even if they did - what would have happened if prices dropped 10%?
You would have been in £10k of negative equity if you'd bought the 200k house - whereas with the 100k house you would at least have zero equity.

So buying the smaller property first is a lower risk move - you don't have as much upside if price rise, but you don't have as much downside if prices fall. As always only buy what you can afford, whether that be small or big

Your point?

Fire_Fox

kriss_boy wrote: »

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.

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.

These two sentences make absolutely no sense when taken together!