House Price Crash

RHemmings

Mrs_Optimist wrote:

yes, sorry

Our house is valued at £170k with a mortgage of £39k. FIL is putting up £100k (cash) as he will be living with us. So we should have £200k cash to put as a deposit for new home (the remainder to cover fees, stamp duty etc). We would be looking to spend between £250k-£300k (250k would be great since we want to become mortgage free in the short term) which means a mortgage of around £800 per month. Obviously less if we can but we want to have somewhere decent to live comfortably for the next 15-20 years. it should be clear to me about the effects of the proprty market crashing, I know that we have made money on our house if we sell now no matter what, but if we put that money as a deposit for a new bigger home and the market price somes crashing down, have we really lost that money? I suppose if we are going to be there for a long time then prices will eventually go up again anyway? Sorry if this is not making any sense, I am trying to think and type at the same time!!

You have £131,000 equity in your home, plus FIL's £100,000. You wish to buy a property costing (averaged) £275,000. That would require (ignoring moving costs and the like) a mortgage of only £43,000.

If house prices were to drop 20%, then you would have £97,000 equity in your home. Plus FIL's £100,000 that would be £197,000. But the house you would want to move to would be worth £220,000. So you'd need a mortgage of £23,000.

If you buy now and prices drop 20%, then you'd have a house worth £220,000 and a mortgage of £43,000, so you'd have equity of £177,000. If prices drop 20% and then you buy, you'd have equity of £197,000. In both cases plus the repayments you've made since you bought.

These sums are over-simplisitic as I haven't counted things such as lost opportunity cost of the £100,000. I.e. the interest on that money if invested.

In my opinion, from a financial point of view these are the kinds of calculations you need to do. Work out a whole lot of scenarios, and work out what it means for you if each of these scenarios come true. Many people seem to ask "should I buy or should I not buy" and get some "yes you should buy" or "no you should not buy" answers, often without any explanation as to why people think these things.

Also in my opinion, if you're making financial decisions of the magnitude you are, you need to look very carefully at all possible eventualities, and come to your own opinion as to what might or might not happen. But it's no good deciding that you think there will be a correction of 10%, or if prices will double in the next 10 years as some tabloids claim, without working out what these eventualities mean for you.

Edit: There are some trivial arithmetic errors here. Embarrassing, but not bad enough to be worth changing as the basic message doesn't change.

RHemmings

Hereward wrote:

Are you sure that they would be something theat meets their needs and not their wants?

Yes. Did you not read the stories about people queuing around the block to buy "affordable" housing that was basically a one room flat made the size of a garage and typical garage materials. People who have a family and are prepared to accept whatever 2 bed flat in a high rise are not even meeting their needs as far as I'm concerned.

I disagree, people seem to want both: they will buy some designer stuff (which they are willing to pay a lot for) and, in order to afford the design stuff, some very cheap stuff that look like it's designer stuff and compliments the stuff they have already bought.

People may want both, but it seems clear that a large amount of the very cheap stuff is being bought, so perhaps that's more typical of what people are purchasing. I certainly know a lot of people who have no expensive designer stuff at all. Including a lot of younger people who in a normal world would be thinking of buying their first property in the next few years.

RHemmings

jezebel wrote:

You're not alone Jim, I am sick and tired of the mentality of people spouting on about the "have it now" generation who wouldn't or couldn't live without.

Even if there was this "have it now" generation, it's not like a £140 Ipod really makes a difference as to whether you can or can't afford a £200,000 two bed flat. Personally I'd say that an Ipod is good value for money as you would expect to get thousands of hours use out of it. Counting the use you get out of it, probably much better value than a £5 book that takes you ten hours to read.

Mrs_Optimist

Thanks for your input RHemmings. To be perfectly honest in the long term we want to be mortgage free so if whenever we decide to move we would not overstretch ourselves and want make overpayments to pay the mortgage off in full asap. First and foremost we are looking for a home (not just a house)for the next 10-15 years, and then to sell up and downsize using whatever capital is left (if any) to help our two children buy their won homes (they are still very young (5 and 8) and invest for our own pensions. We are still in our thirties and so as young enough to make a long term commitment. The equity we may or may not have if we buy now does not, I now realise, make any difference to us because we want to be mortgage free anyway so would not be withdrawing the equity. Unless you are using the equity for something cuh as buying a home it is in effect monopoly money. SO I guess you have answered my question in a roundabout way for which I thank you! It is likely that we will sell up in the New Year, have a few more things to do to the house to achieve best possible price (and we are on a fixed rate until May 2007 so do not want to pay redemption fees) and live at my FIL house while we househunt, which he owns outright and that he will probably sell rather than let to release the capityal he has and he can enjoy his early retirement

RHemmings

Mrs_Optimist wrote:

Thanks for your input RHemmings. To be perfectly honest in the long term we want to be mortgage free so if whenever we decide to move we would not overstretch ourselves and want make overpayments to pay the mortgage off in full asap. First and foremost we are looking for a home (not just a house)for the next 10-15 years, and then to sell up and downsize using whatever capital is left (if any) to help our two children buy their won homes (they are still very young (5 and 8) and invest for our own pensions. We are still in our thirties and so as young enough to make a long term commitment. The equity we may or may not have if we buy now does not, I now realise, make any difference to us because we want to be mortgage free anyway so would not be withdrawing the equity. Unless you are using the equity for something cuh as buying a home it is in effect monopoly money. SO I guess you have answered my question in a roundabout way for which I thank you! It is likely that we will sell up in the New Year, have a few more things to do to the house to achieve best possible price (and we are on a fixed rate until May 2007 so do not want to pay redemption fees) and live at my FIL house while we househunt, which he owns outright and that he will probably sell rather than let to release the capityal he has and he can enjoy his early retirement

I suspect that if your aim was to be mortgage free and were to pay off £800 per month, then it would take a moderate drop in house prices fairly soon to pay off sooner by waiting. Oh wait a second, I forgot that you're paying off your current mortgage and gaining equity that way. So maybe that's not right. I'm at work and can't solve this problem now.

But I still think it's worth your while working on the figures properly. Do you have a maths whiz in your family?

MORPH3US

jezebel wrote:

You're not alone Jim, I am sick and tired of the mentality of people spouting on about the "have it now" generation who wouldn't or couldn't live without.

I'm a twenty-something now but have been saving regularly since I was 16. I have a credit-card which I only use for emergencies and large purchases for the sake of the added insurance (which I pay off at the end of every month). I don't go out more than about once a month which includes trips to pubs/cinema/hanging out with friends. I put away any "disposable" income I may have after the month of required spending into a savings account and am working on getting a deposit for a house. My "dream house" is a one-bed flat close enough to home that I can see my parents once in a while.

Like lynzpower I had some second hand stuff and gifts to go away to Uni and I've kept anything that I did have (crockery, pots and pans, hand me downs from other friends/students) so that when I move into my own house I have the basic essentials to live on and have somewhere to start from.

Okay, I have an I-pod and a television, but both were presents for birthdays and christmases from friends and family.

I resent any generalisations about people my age because even with this modest living I couldn't get a house even with a mortgage of 4 times my income (which I am far too sensible to ever take out!). I pray each month for stability in house prices, I'm not expecting a crash but wish that they would at least plateau so that I'm in with a fighting chance.

IMHO, you and JimB (and probably most of the people on here) are the exception rather than the rule. I am the same, I don't have an iPod, I actually won one last week and sold it because I have better use for the money I got for it.

However I am strongly of the opinion that we have grown into a "have it now generation".

Its not just iPods, its plasma tv's, new cars, exotic holidays 5 times a year, new sofas for your new house, new kitchens, new decking, new wooden floors, new x-box 306's and Playstation 3.5's....... I could go on!

I'm not whiter than white, I have brought bamboo floors and built decking for my new house (blame the girlfriend for that one!!) but I consider myself a right tight !!!!!

M

Mrs_Optimist

RHemmings, believe it or not I AM the maths whizz! We cant do anything until the New Year anyway becausde we are tied in to our mortgage until MAY, I suspect that interest rates will raise again before then and that will have a knock on effect for house prices, in which case although our price will drop, so will the price of the house we are going to moving up to, so you have in actual fact answered my question. I dont actually care one jot if prices do drop because we have made money on our home no matter what and all house prices will drop, it will just mean that we may become mortgage free sooner than we thought! Will let you get on with your work now. Thanks

Jim_B_3

As an aside, with regards to not going out much, the best going-out purchase I ever made was seeing The Matrix back in 1999 in a big shiny cinema in Leicester Square. It was an expensive ticket, but the screen and sound were so good, combined with the film itself, that I realised there was no point ever going to the cinema again because nothing would ever top that. Haven't been since; I can just sit at home babbling on about it.

westernpromise

Broadly speaking, Mrs Optimist, if you are trading up you want prices to crash, and if you are trading down, you want them to rise.

If you're in a £200k house and you want to buy a £350k house, you need to find another £150k. If the market crashes 40%, your current house is worth £120k, and the one you want is worth £210k. So now, you only need to find another £90k. This, not surprisingly, is the original £150k difference, less the same 40% drop.

If it were the other way about, i.e. you're in the £350k house and you wanted to downsize to the £200k one, then you want prices to rise as far as possible. If you sold now, you'd have £150k left over after buying the smaller house (assuming no mortgage). If prices went up 40%, then the £350k house would be worth £490k and the £200k one would be worth £280k, meaning you'd have £210k left over.

If you had a £200k mortgage, then at some %age increase, the profit on the bigger house would eventually be large enough for you to buy the smaller one outright and unmortgaged.

I am in a similar position, in that we will need a bigger house within 5 years or so, but the transaction costs of housebuying nowadays are so huge that I am inclined to hold off until we can afford the 'last' house we'll ever buy, and go straight to that one. If there is a correction, sometime within the next 5 years, that will be just fine by me.

mystic_trev

Jim_B wrote:

It's all getting a bit http://ayup.co.uk/avina/twoyork.jpg

Michael Palin: Ahh.. Very passable, this, very passable.

Graham Chapman: Nothing like a good glass of Chateau de Chassilier wine, ay Gessiah?

Terry Gilliam: You're right there Obediah.

Eric Idle: Who'd a thought thirty years ago we'd all be sittin' here drinking Chateau de Chassilier wine?

MP: Aye. In them days, we'd a' been glad to have the price of a cup o' tea.

GC: A cup ' COLD tea.

EI: Without milk or sugar.

TG: OR tea!

MP: In a filthy, cracked cup.

EI: We never used to have a cup. We used to have to drink out of a rolled up newspaper.

GC: The best WE could manage was to suck on a piece of damp cloth.

TG: But you know, we were happy in those days, though we were poor.

MP: Aye. BECAUSE we were poor. My old Dad used to say to me, "Money doesn't buy you happiness."

EI: 'E was right. I was happier then and I had NOTHIN'. We used to live in this tiiiny old house, with greaaaaat big holes in the roof.

GC: House? You were lucky to have a HOUSE! We used to live in one room, all hundred and twenty-six of us, no furniture. Half the floor was missing; we were all huddled together in one corner for fear of FALLING!

TG: You were lucky to have a ROOM! *We* used to have to live in a corridor!

MP: Ohhhh we used to DREAM of livin' in a corridor! Woulda' been a palace to us. We used to live in an old water tank on a rubbish tip. We got woken up every morning by having a load of rotting fish dumped all over us! House!? Hmph.

EI: Well when I say "house" it was only a hole in the ground covered by a piece of tarpolin, but it was a house to US.

GC: We were evicted from *our* hole in the ground; we had to go and live in a lake!

TG: You were lucky to have a LAKE! There were a hundred and sixty of us living in a small shoebox in the middle of the road.

MP: Cardboard box?

TG: Aye.

MP: You were lucky. We lived for three months in a brown paper bag in a septic tank. We used to have to get up at six o'clock in the morning, clean the bag, eat a crust of stale bread, go to work down mill for fourteen hours a day week in-week out. When we got home, out Dad would thrash us to sleep with his belt!

GC: Luxury. We used to have to get out of the lake at three o'clock in the morning, clean the lake, eat a handful of hot gravel, go to work at the mill every day for tuppence a month, come home, and Dad would beat us around the head and neck with a broken bottle, if we were LUCKY!

TG: Well we had it tough. We used to have to get up out of the shoebox at twelve o'clock at night, and LICK the road clean with our tongues. We had half a handful of freezing cold gravel, worked twenty-four hours a day at the mill for fourpence every six years, and when we got home, our Dad would slice us in two with a bread knife.

EI: Right. I had to get up in the morning at ten o'clock at night, half an hour before I went to bed, (pause for laughter), eat a lump of cold poison, work twenty-nine hours a day down mill, and pay mill owner for permission to come to work, and when we got home, our Dad would kill us, and dance about on our graves singing "Hallelujah."

MP: But you try and tell the young people today that... and they won't believe ya'.

ALL: Nope, nope..