If House Prices Crash, Does Anyone Gain?

watkins39

I bought in 2007 for 130k. Prices in my area remain unchanged, so I assume that is still the value of my house. I now have a family and need a bigger place. I plan to move in two years' time to a house that would cost around 250k in today's money.

Let's say that prices halve over the next two years. I would only get 65k for my house if I sold it, so given that there would be about 90k of mortgage left on it, I would owe the bank 25k. However, the price of the new house that I want would also have come down. The mortgage that I would need for it would be 125k + the 25k I owe the bank, i.e. 150k in total. Yet if house prices remain unchanged, I would need a 190k mortgage for that new house.

Am I missing something obvious, or do people like me benefit from a drop in house prices? It seems to me I save 40k if prices halve over the next two years.

Rov

In theory you are right you would massively benefit from a house price crash if you want a bigger house. Practically though, it depends on being able to port you existing mortgage to the new house. If you cant, you'd need to find the 25k shortfall to settle the old mortgage before getting the new one and the new lender wouldn't give you a mortgage for more than the value of the property, plus you'd need a deposit.
So portable mortgage + house price crash = winner

Daniel_gecko

As long as you don't fall into neg equity, falling prices are a good thing.

If i live in a house but in 5 years time i will move to a 200k family house and sell my house for 100k then the extra funds i need to acquire or borrow is 100k. If prices double I sell for 200k and buy for 400k, so i need to find or borrow 200k more. If prices halve then i sell for 50k and buy for 100k.. so i need to find or borrow 50k more.

I would rather owe 50k and 'own' 100k house than owe 200k and 'own' 400k. Because i will only ever see that materialise if i sell.. but it's where i live, so i won't.

it only benefits those with multiple homes (mps, rich, btl, daily express newspaper lol) or those who benefit from high prices via % fees (estate agents) or those who make their money as interest on a larger amt of debt (mortgages, banks)

getmore4less

£130k house, £90k mortgage. 1/2 price = £65k so -£25k

£250k house 1/2 price £125k need a deposit of at least £10% £12.5k

so you need to find £37.5k in cash and will have a £112.5k mortgage


if you port you £90k mortgage you will need to find £60k

latecomer

if you are buying a more expensive house then you benefit from falling house prices - you lose if you are buying cheaper.

Of course if the market crashes you'll probably find its because nobody is buying homes and hence you might not be able to sell to enable you to buy - or you may not be able to get finance etc.

watkins39

So, if the crash happened, my existing lender would be unlikely to allow me to borrow 100% of the value of the new house PLUS carry over a 25k debt on my previous mortgage? Sorry if that's a daft question - I know that first time buyers need deposits and so on, but I don't know how it works when you go to see your lender about moving to a more expensive house.

latecomer

Generally the amount you borrow would be restricted by affordability and maximum lending restrictions on the mortgage you apply for.

It used to be simpler - i.e the mulitplied your earnings by a number and that gave the maximum they would lend - now they would normally take into account other outgoings/debt etc.

Going by your figures :

Current house value - £130,000
mortgage £90,000
Equity = £40,000

No crash -
New house £250,000
deposit - £40,000 (presuming you pay all costs from other money)
new mortgage amount £190,000 (approx 80% loan to value - LTV)

Crash
Current house £65,000
mortgage £90,000
negative equity - £25,000

To sell the house you'd need to find £25,000 to pay off the mortgage and then something to put down as a deposit for the new house. You could sell now and then hope that prices drop - if they dont then you are further away from the house you want than when you started.

kk20

(minor necro) you also assume balanced reductions. Even in a crash larger houses may maintain a premium likewise smaller ones might. Certainly in our area there are a glut of lower middle houses (low semi, good terraced) whereas the upper middle (good detached) havent really changed in price - therefore upscaling is not realistically possible. In this scenario your negative equity will hurt you even more - hence the massive amount of extension building and "hipped end" conversions happening near us.

In this market the gains can be made from people with big equity who can remortgage/advance mortgage with the lower rates and buy a cheap investment property. Since it is cash sale you have better bargaining power and no restrictions on a mortgage for the investment property. Whilst renting it out you can monitor the market and sell it for a profit whenever you like (in reality). Like always, those with money usually win either way.

Thrugelmir

watkins39 wrote: »

my existing lender would be unlikely to allow me to borrow 100%

100% mortgages are in the past.

Build up as much equity in your existing property as you can. If you intend moving (upsizing) at a later date. Making regular overpayments is a good way of ensuring that money is used for this purpose.

firsttimetom

There has been a bizarre scenario in the UK over the past 15 years that rising house prices are a good thing.

TV's go up in price = Bad news
Bread goes up in Price by 3p - Terrible news
Petrol goes up in price - Riots are imminent
House's (The single most expensive purchase of your life and largest monthly outgoing) goes up in price - Party Time!!

What an absolutely odd thing to happen.

On top of that, the economic pain we are suffering is largely down to the House Price Boom, the economy can't grow because high cost of housing means wages must be high, making us uncompetitive.

How many people complain about 'Having to Call India' when their broadband breaks? Yet the next week, they are celebrating their house price growing up. The reason why companies move abroad is that UK housing demands high wages, which companies won't pay, so they outsource.

I fail to see how so many people were unable to put 2 and 2 together for so long.

Thrugelmir

firsttimetom wrote: »

House's (The single most expensive purchase of your life and largest monthly outgoing) goes up in price - Party Time!!

Was a Party Time with a sizable amount of equity withdrawn on rapidly rising house prices. All that capital now has to be repaid. No HPI and for many no high wage inflation to inflate away the debt.