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Wealthier? Or deeper in debt?
RHemmings
Posts: 4,894 Forumite
I remember an example someone posted on here where they moved from one property to another. They made a lot on their first house, and then bought a more expensive one, and seemed quite pleased that they owned a house worth a quarter of a million pounds.
If I misremember the figures, then take this as a hypothetical example, rather than a real one.
Their original home was bought for £50,000 six years ago. They then sold for £150,000. That's a massive gain in the value of that house. They then bought a house for £250,000, on which they have a £90,000 mortgage. So, they had a deposit of £160,000 on the house, of which £100,000 came from the increase in price of the first house. £60,000 came from their original deposit on the house, and other monies.
To see what the actual result of HPI was, we'd need to know the original price of the £250,000 house. Assuming that the house price inflation was constant across different house types, then this house would have tripled in price too. So it's original price would have been £83,333.
If no house price inflation had taken place, then the original house would still have been worth £50,000, and the person's equity would have been only the £60,000. This means that they now could be living in their current house, but only have a mortgage of £23,000, not much more than a quarter of their current mortgage debt.
Let's assume that prices had only doubled in the six years. In this case, the original house would have been worth £100,000 on sale, and the person would have had £110,000 of equity to buy the second house. The price of the second house would have gone up from £83,333 to £166,667. Therefore they would live in the same house they do now, but only have a mortgage of £56,667. Once again, they would be in the same position as today, but have less much less debt.
As one last calculation, I'm going to assume that the HPI on the cheaper house was much more than the more expensive house. I'll say that the cheaper house tripled in value (as it did) but the more expensive house only doubled, from £125,000 to £250,000. This means that if there had been no price inflation at all, that the person would have sold their first house with a resulting equity of £60,000, and bought the second house with a mortgage of £65,000. So, even if the HPI for the cheaper house had been massively more than for the more expensive house, the end result is that the HPI only meant that the person lives in the same house they do now, but have a bigger debt. For the size of the debt to be the same in an inflation/no inflation comparison, the bigger house would have had to have been worth £150,000 at the start of the six years. The price of this house would have gone up only 67% during a time period when the cheaper house went up 200%.
Of course the upside of the HPI is that the house owner has additional equity in their new house compared to if there had been no HPI. But there are several points that need to be considered here.
First, because they have moved "up the ladder", the amount of price fall required to wipe out the previous gain is much smaller than if they had stayed put. If they had stayed put, then prices would have to fall by 66% to wipe out the previous 200% gains. But after moving up the ladder, it would only require falls of 40% to wipe out these gains.
Second, the amount that needs to be repaid to a lender to pay off a debt is more than the amount of the debt. For example, if we presume that the £90,000 is going to be paid off in 19 years (to make the full term from the purchase of the first house 25 years) at a fixed rate of 5%, then the actual amount paid off £141,492.24. They have paid back £51,4921.24 in interest. So the amount of actual equity they have in the house, minus future committments, is £108,507.76. £60,000 of that is money that they would have had anyhow if there had been no inflation. Returning to the no-inflation example, they would have had to pay back £23,333 of debt. I tried to calculate this given the same repayments of £620 per month as in the £90,000 case, but the BBC mortgage calculator won't let me shorten the mortgage period that much. If they pay back this £23,333 of debt over five years, they will pay £449.11 per month, and pay back a total of £26,946.60. Or, they will pay back £3,613.37 interest. So, there is £37,878.87 more interest to pay back in the £90,000 debt case than in the £23,333 debt case. So a fair proportion of the "extra" equity is swallowed up by interest charges. There are problems in this calculation, as a lot of the "interest" is committments in the future, rather than now. But there is at least some indication.
In conclusion, it is far from certain that the "person" involved has actually benefitted from HPI. That they are in a better position now than they would have been if there had been no HPI.
I apologise to the "person" whose example I have discussed without tracking down their actual username.
If I misremember the figures, then take this as a hypothetical example, rather than a real one.
Their original home was bought for £50,000 six years ago. They then sold for £150,000. That's a massive gain in the value of that house. They then bought a house for £250,000, on which they have a £90,000 mortgage. So, they had a deposit of £160,000 on the house, of which £100,000 came from the increase in price of the first house. £60,000 came from their original deposit on the house, and other monies.
To see what the actual result of HPI was, we'd need to know the original price of the £250,000 house. Assuming that the house price inflation was constant across different house types, then this house would have tripled in price too. So it's original price would have been £83,333.
If no house price inflation had taken place, then the original house would still have been worth £50,000, and the person's equity would have been only the £60,000. This means that they now could be living in their current house, but only have a mortgage of £23,000, not much more than a quarter of their current mortgage debt.
Let's assume that prices had only doubled in the six years. In this case, the original house would have been worth £100,000 on sale, and the person would have had £110,000 of equity to buy the second house. The price of the second house would have gone up from £83,333 to £166,667. Therefore they would live in the same house they do now, but only have a mortgage of £56,667. Once again, they would be in the same position as today, but have less much less debt.
As one last calculation, I'm going to assume that the HPI on the cheaper house was much more than the more expensive house. I'll say that the cheaper house tripled in value (as it did) but the more expensive house only doubled, from £125,000 to £250,000. This means that if there had been no price inflation at all, that the person would have sold their first house with a resulting equity of £60,000, and bought the second house with a mortgage of £65,000. So, even if the HPI for the cheaper house had been massively more than for the more expensive house, the end result is that the HPI only meant that the person lives in the same house they do now, but have a bigger debt. For the size of the debt to be the same in an inflation/no inflation comparison, the bigger house would have had to have been worth £150,000 at the start of the six years. The price of this house would have gone up only 67% during a time period when the cheaper house went up 200%.
Of course the upside of the HPI is that the house owner has additional equity in their new house compared to if there had been no HPI. But there are several points that need to be considered here.
First, because they have moved "up the ladder", the amount of price fall required to wipe out the previous gain is much smaller than if they had stayed put. If they had stayed put, then prices would have to fall by 66% to wipe out the previous 200% gains. But after moving up the ladder, it would only require falls of 40% to wipe out these gains.
Second, the amount that needs to be repaid to a lender to pay off a debt is more than the amount of the debt. For example, if we presume that the £90,000 is going to be paid off in 19 years (to make the full term from the purchase of the first house 25 years) at a fixed rate of 5%, then the actual amount paid off £141,492.24. They have paid back £51,4921.24 in interest. So the amount of actual equity they have in the house, minus future committments, is £108,507.76. £60,000 of that is money that they would have had anyhow if there had been no inflation. Returning to the no-inflation example, they would have had to pay back £23,333 of debt. I tried to calculate this given the same repayments of £620 per month as in the £90,000 case, but the BBC mortgage calculator won't let me shorten the mortgage period that much. If they pay back this £23,333 of debt over five years, they will pay £449.11 per month, and pay back a total of £26,946.60. Or, they will pay back £3,613.37 interest. So, there is £37,878.87 more interest to pay back in the £90,000 debt case than in the £23,333 debt case. So a fair proportion of the "extra" equity is swallowed up by interest charges. There are problems in this calculation, as a lot of the "interest" is committments in the future, rather than now. But there is at least some indication.
In conclusion, it is far from certain that the "person" involved has actually benefitted from HPI. That they are in a better position now than they would have been if there had been no HPI.
I apologise to the "person" whose example I have discussed without tracking down their actual username.
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Comments
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I agree. House price inflation doesn't benefit anyone. I'm looking to buy a 1/2m pound house, as a FTB. A few years ago (not that many at all sadly) it would have been 1/4m.
In a few years I guess I might want to trade up to a larger house, say one that's worth £1m now, and not so long ago would have been £1/2m.
If there is a massive house price crash (unlikely it's true) and prices go back to their old levels, I would have a £250k house that I had paid £500k for.
But to get my larger house, it would only cost £500k instead of £1000k.
So despite losing £250k on the house value, the larger house would have lost £500k, so I would be £250k beter off. And it would be a lot easier to do a £250k upgrade than a £500k upgrade.
The only time it would benefit me is when I'm 75 and trading down to a retirement flat.
But by that time I'd be close to the grave and I'm not going to give two figs about the value of my house. So yeah, the only people who are better off are people who are about to die or want to leave the country and live in a hut in Papua New Guinea.
Great investment....0 -
thelawnet wrote:So yeah, the only people who are better off are people who are about to die or want to leave the country and live in a hut in Papua New Guinea.
. . . or those who don't want the hassle of owning a house and don't care about keeping up with the Joneses, e.g. intentionally childless single people or couples who don't want to spend all their time looking after a property that's obviously too large for them. :cool:0 -
Sapphire wrote:. . . or those who don't want the hassle of owning a house and don't care about keeping up with the Joneses, e.g. intentionally childless single people or couples who don't want to spend all their time looking after a property that's obviously too large for them. :cool:
It would be nicer, in some ways, if only people who wanted a property that is too large for them, would get burnt in a downturn. But there are a lot of people around with growing families who really need a bigger property to give their family a decent standard of life.0 -
If people are free to buy a house, then they are free to buy whatever size of house they choose, regardless of their actual needs.
The people who complain that potential FTB's have a "right" to buy a house, and that BTL LL's/people parent's helping them onto the "ladder" are stopping them can't also say that when people buy said house, they (the compainers) have a right to judge whether it is actually the size neededAnnual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery0 -
I think "poordave" has missed the point of the thread.
Still, let's not pass up an opportunity to bash "greedy" FTBers, eh?
This blind ignorance of the sham that is the "boom" really does stagger me.
When the masses finally wake up to how it's all a con, that'll be a glorious day indeed.
Maybe, now that Krusty Allsloppy has dropped her sprog, she'll come to realise the madness of pricing out an entire generation and start campaigning against rampant HPI. Some hope.0 -
""Maybe, now that Krusty Allsloppy has dropped her sprog""
do you enjoy being offensive ?0 -
clutton wrote:""Maybe, now that Krusty Allsloppy has dropped her sprog""
do you enjoy being offensive ?
My contempt for that woman knows no bounds. If you're Kirsty, I wish I could say I'm sorry, but I can't.
If you're not her, clearly you've never seen the woman in action. She's awful. (as is Phil thingy, just in case people accuse me of being a mysognist).0 -
Like I said in another thread...
The greatest trick the [STRIKE]devil[/STRIKE] banks ever pulled was to convince the public debt is wealth.0 -
meanmachine wrote:I think "poordave" has missed the point of the thread.
Still, let's not pass up an opportunity to bash "greedy" FTBers, eh?
This blind ignorance of the sham that is the "boom" really does stagger me.
When the masses finally wake up to how it's all a con, that'll be a glorious day indeed.
Maybe, now that Krusty Allsloppy has dropped her sprog, she'll come to realise the madness of pricing out an entire generation and start campaigning against rampant HPI. Some hope.
You mean like the landlord bashers don't miss an opportunity to bash them at every opportunity?
I fully understand the point being made in the thread.
Also i never said FTB's were greedy. My point is in what other situation would people expect a right be able to buy something they couldn't afford? Or a right to be able to afford something? Just strikes me as odd.
Nobody's saying people don't have a right to a roof over their head, but if rent is £400 and mortgage payments would be £600 on that same house, and £600 is not affordable, then the person in question only has a right to rent.
A lot of property purchasing is to show status e.g. i have a big house, therefore i am a success, because to some people that is vitally important.
A whole generation hasn't been priced out, but it seems all in that generation will suffer sometime, as it is likely to be the same generation who suffer the most from a crash, since these are the owners likely (on average) to have the least equity in their properties, and thus are most exposed to negative equityAnnual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery0 -
House price increases benefit nobody?? I disagree. I think it is an incredible way to generate cash. My house cost £58000 in May 2001, sold for £135,000 in Aug 2006. Location Liversedge West Yorkshire. I have sold now because the market is stagnant and will remain so for about 3-5 years in my opinion. In the meantime I will invest the profit into a property that needs a renovating and is cheap to buy (Plenty about still) .........and then do it all over again...Simple. Wll it's not because it's actually been tough to pull off, but made it in the end.0
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