House prices correlated to inflation?

heathcote123

geneer wrote: »

"house prices only go up long term" was a familiar phrase in 2008 when they were tanking of course.

Theres a school of though (or self justification) that thinks provided your able to service a debt everything is just fine.

This does neglect the simple reality that had you say picked up an asses for 20% less, the mortgage sum would be less, the deposit requirements would be less, and the total interest payments would be less.

The first and last items are quite important combined.

for a 150000 mortgage at 7.5% interest rates you will pay a total of £332546 over 25 years.

For a 120000 mortgage you will pay 266037. Combine that with saving in capital sum, and youve saved £86509. Nice!

Don't forget landlords generally make a profit, so if you've been renting all that time you'll have paid your landlords mortgage, maintenance costs & profit, leavin you considerably out of pocket.

geneer

heathcote123 wrote: »

Don't forget landlords generally make a profit, so if you've been renting all that time you'll have paid your landlords mortgage, maintenance costs & profit, leavin you considerably out of pocket.

Hey Fubra/Heathcote.

How many years rent will £86509 buy you then?
Sorry, I thought that would be obvious mate.
But I've spelled it out for the hard of thinking.

Rinoa

geneer wrote: »

This does neglect the simple reality that had you say picked up an asses for 20% less, the mortgage sum would be less, the deposit requirements would be less, and the total interest payments would be less.

Good advice if you are thinking of buying just as prices are beginning to fall. Hopefully the OP won't make the mistake of missing out on HPI whilst waiting, and will take advantage of buying in the trough.

HAMISH_MCTAVISH

Michelle-Matched-Bettor wrote: »

@ Hamish - thanks. That's basically the information I was looking for. So it's a fact that (long term anyway) house prices have outperformed inflation? i.e. they have risen over and above the average cost of consumer goods services.

Yes.

Over any given 25 year period (the term of a mortgage), since the dawn of mass homeownership, house prices have outperformed inflation by a considerable margin.

In the short term, things like recessions, rising unemployment, mortgage rationing, government cut backs, etc, can cause prices to fluctuate.

Over the long term however, the primary influence on house prices is supply of housing versus population growth. And here in the UK we have a significant shortage of housing, of the types people want, in the places people want to live, and where the employment exists to support them.

To illustrate it simply, is it correct to say if I didn't spend all my money in Tesco 50 years ago, an decided instead to buy a house, and I sold that house today and went into Tesco, I would have more money to spend?

Yes.

Although the Tesco analogy is interesting, as it also raises a couple of other points.

In the last 50 years, wages have also increased faster than inflation.

And the cost of food has decreased relative to both wages and the costs of other basics included in the inflation calculation basket (although they constantly adjust the basket).

I don't remember the exact numbers, but to illustrate, food as a percentage of a families income 50 years ago may have been 20%, and it's more like 9% today.

@ Rinoa - Am I correct in assuming you are referring to the fact that inflation errodes debt?

Wage inflation erodes debt.

So if you have an interest only mortgage of 100,000 and wage inflation is 3%, next year the value of that debt is 97,000.

In a decade the value of that debt is approx 67,000.

In two decades approx 34,000. etc.

So a person buying a house in 1970 for £3000, even on a 50 year 100% interest only mortgage, would be significantly better off than a person who chose to rent the equivalent house at market rents since then, as rents tend to keep pace with or exceed inflation.

nollag2006

HAMISH_MCTAVISH wrote: »

So a person buying a house in 1970 for £3000, even on a 50 year 100% interest only mortgage, would be significantly better off than a person who chose to rent the equivalent house at market rents since then, as rents tend to keep pace with or exceed inflation.

Good point Hamish.

Interestingly, rents round my way are up 20% over the past year though.

HAMISH_MCTAVISH

geneer wrote: »

for a 150000 mortgage at 7.5% interest rates you will pay a total of £332546 over 25 years.

For a 120000 mortgage you will pay 266037. Combine that with saving in capital sum, and youve saved £86509. Nice!

Assuming say £600PCM for rent, £86509 gets you about, oh 12 years.

.

Just...... Wow.

Let's start from the top, but this time with some numbers a bit more grounded in reality....

A £150,000 repayment mortgage over 25 years at 5% would cost £113,067 interest, plus the capital of £150,000.

A £120,000 repayment mortgage over 25 years at 5% would cost £90,453 plus the capital of £120,000.

The difference between the two is £52,614, including capital.

Based on the current national average rent of £700 a month, that gets you slightly over 6 years of rent, with a 20% crash.

But of course, if like geneer you failed to take advantage of those 20% falls, and instead waited for prices to return to the current average of just 10% below peak, that's only 3 years rent. So you're into losing territory already, now that we're 4 years in. And if you'd been waiting for a crash since, say, 2005..... You'd be absolutely stuffed.

And that's before we get into the fact buyers have been able to take advantage of the last few years of record low rates, better mortgage deals pre-2008, etc etc etc.

So it does very much appear as if waiting a few years for cheaper house prices, whilst saving up a nice deposit, is a no brainer in terms of how much it will save you.

Only if you're either....

1. Using made up numbers that don't reflect reality for most people.

Or....

2. Financially illiterate.

geneer

HAMISH_MCTAVISH wrote: »

Just...... Wow.

Let's start from the top, but this time with some numbers a bit more grounded in reality....

A £150,000 repayment mortgage over 25 years at 5% would cost £113,067 interest, plus the capital of £150,000.

A £120,000 repayment mortgage over 25 years at 5% would cost £90,453 plus the capital of £120,000.

The difference between the two is £52,614, including capital.

Based on the current national average rent of £700 a month, that gets you slightly over 6 years of rent, with a 20% crash.

But of course, if like geneer you failed to take advantage of those 20% falls, and instead waited for prices to return to the current average of just 10% below peak, that's only 3 years rent. So you're into losing territory already, now that we're 4 years in. And if you'd been waiting for a crash since, say, 2005..... You'd be absolutely stuffed.

And that's before we get into the fact buyers have been able to take advantage of the last few years of record low rates, better mortgage deals pre-2008, etc etc etc.




Only if you're either....

1. Using made up numbers that don't reflect reality for most people.

Or....

2. Financially illiterate.

Wow....Just wow. Speaking of grounded in reality, Hamish seems to be making the classic bull mistake of assuming that emergency base rates existed before the crash, and will exist forever more. Somewhat silly of him.

He also seems to think that a cherrypicked current spike in rental prices (due to nosediving FTB numbers) can retrospectively be pushed back through all of time.

And even then theres still savings in the tens of thousands of points.

Come on Hamish. You should have learned by now.
Bulls....its harder to rewrite history than you think.

HAMISH_MCTAVISH

geneer wrote: »

the classic bull mistake of assuming that emergency base rates existed before the crash, and will exist forever more. Somewhat silly of him.

Mortgage rates of 5% are hardly at "emergency" levels.

In fact, given the likely trajectory for growth in the UK, and the yields on long term gilts, you'd have to be pretty idiotic to assume that the average mortgage rate for the next 25 years would be more than 5%.

a cherrypicked current spike in rental prices (due to nosediving FTB numbers) can retrospectively be pushed back through all of time.

What, rents that as you pointed out the other day are just 3% higher than they were in 2007......:rotfl:

And even then theres still savings in the tens of thousands of points.

For the buyer, sure..... But not for someone that delayed purchase and gambled on a crash. They're already in the hole to the tune of tens of thousands, and it's getting worse every month that passes.

its harder to rewrite history than you think.

Indeed it is.

"geneer's folly" can't be excused away through using made up numbers......

As we can clearly see from the real world example, using real world numbers, it's a pretty spectacular error in judgement.

Generali

Michelle-Matched-Bettor wrote: »

Yes - I realise my example is simplistic - but I was getting down to bare bones. I do realise of course, that if you are going to invest in a property, it needs to be a "good buy" (perhaps a bargain, good area.... etc etc)

I hope I didn't come across as dictating my views to you MMB.

My point was that there are many ways to decide what you are paying for a home over 50 years.

Thrugelmir

Michelle-Matched-Bettor wrote: »

To illustrate it simply, is it correct to say if I didn't spend all my money in Tesco 50 years ago, an decided instead to buy a house, and I sold that house today and went into Tesco, I would have more money to spend?

A lot has changed in 50 years.

Often forgotten that one reason house prices have risen. Is that a lot of money has been invested in improving them. Let alone maintaining them.

There's a high possibility that your house wouldn't of even had a bathroom. Certainly not double glazing, central heating (twice), fitted kitchens and minimal carpets.

So your expenditure in the intervening period would have been quite high.