House prices need to drop 40% to be affordable discussion

nearlynew

RenovationMan wrote: »

A person could have bought a 2 bed starter home for £40k with a £2k deposit and £38k IO mortgage. Sold it 7 years later for £140k, leaving £102k in equity.

They could then have bought a 4 bed detached house for £180k, with the £102k deposit and an £78k IO mortgage. Sold it for £250k after living in it for 8 years, leaving £172k in equity.

They could then have bought a 5 bed farm house for £450k, with a £172k deposit and a £278k IO mortgage. They could then sell that house after 20 years for (say) £600k and release £322k.

They could then buy a 2 bed starter home for (say) £250k and have £72k of tax free cash.

So, after 35 years, with the HPI you have suggested, a starter home only costs 250k?

To me, it still sounds risky.

RenovationMan

nearlynew wrote: »

So, after 35 years, with the HPI you have suggested, a starter home only costs 250k?

To me, it still sounds risky.

Even if the starter home costs £322k in 20 years time, the example person could still have bought it outright and without a single mortgage repayment in all that time.

Pimperne1

RenovationMan wrote: »

A person could have bought a 2 bed starter home for £40k with a £2k deposit and £38k IO mortgage. Sold it 7 years later for £140k, leaving £102k in equity.

They could then have bought a 4 bed detached house for £180k, with the £102k deposit and an £78k IO mortgage. Sold it for £250k after living in it for 8 years, leaving £172k in equity.

They could then have bought a 5 bed farm house for £450k, with a £172k deposit and a £278k IO mortgage. They could then sell that house after 20 years for (say) £600k and release £322k.

They could then buy a 2 bed starter home for (say) £250k and have £72k of tax free cash.

Only £322k equity - I am expecting you to be told you would have been better off renting (or buying with the same leverage whatever has done better than housing over the 35 years).

nearlynew

RenovationMan wrote: »

Even if the starter home costs £322k in 20 years time, the example person could still have bought it outright and without a single mortgage repayment in all that time.

But your figures are over 35 years, not 20.

RenovationMan

nearlynew wrote: »

But your figures are over 35 years, not 20.

Sorry, the figures upto the purchase of the 5 bed farmhouse were based on real-world values. The figures 20 years hence are guestimates.

nearlynew

It still sounds too risky to me.

But each their own and good luck to you.

RenovationMan

nearlynew wrote: »

It still sounds too risky to me.

But each their own and good luck to you.

Thanks.

Out of interest, where do you see the risk?

nearlynew

RenovationMan wrote: »

Out of interest, where do you see the risk?

I'm well aware of your strategy - it is quite common.

The risk I see is that it relies on high HPI in order to work in any worthwhile way.
You must also be able to resist "MEWing" away any gains.

And when I have discussed it with people before, they have tended to over-estimate what their "big" house is worth and/or under-estimate what a smaller house will cost.

And from an emotional point of view, there's also the major change of lifestyle that such a strategy would incur.

ukcarper

The average price of a detached house in 1995 was £91.5k if it had only keep up with RPI it would have been worth £131k in 2009. An average terraced house in 1995 was £49k if that had just kept up with RPI it would be worth £70k. So assuming you want to live in a detached home while you have kids and the overall cost of renting and buying are the same then you could sell downsize and have £61k less fees towards your retirement pot.

I choose 1995 to 2009 because that is the only period I could easily find the figures for. Over 14 years the cost of buying would probably be more than the cost of renting but over a longer period that could easily reverse.

You will also be living rent-free in your terraced house.

RenovationMan

nearlynew wrote: »

I'm well aware of your strategy - it is quite common.

The risk I see is that it relies on HPI in order to work in any worthwhile way.
You must also be able to resist "MEWing" away any gains.

And when I have discussed it with people before, they have tended to over-estimate what their "big" house is worth and under-estimate what a smaller house will cost.

And from an emotional point of view, there's also the major change of lifestyle that such a strategy would incur.

The model I'm following is to move up the housing ladder and allow HPI to create the gains*. Generally speaking, the larger your house the larger your gains but I do appreciate your point on overestimating worth but then it's very easy these days to keep an eye on the housing market and adjust your plan if necessary.

The risk of MEWing is there for both IO mortgage holders and repayment mortgage holders. In some respects someone who knows that they are relying on HPI gains to finance their retirement home are possibly less likely to MEW.

There are different models that someone could follow. I could have bought my starter home in London, lived in it for 30 years and then retired to the country, releasing a huge amount of equity in relation to areas outside London.

I also could have remained in my first home and kept the £38k mortgage for 30 years to retirement. In that time frame, due to inflation, £38k would have been quite easy to pay off. I'm not saying 'pocket change', but I bet it wouldn't be far off.

*Actually, my model effectively involves buying run-down or un-modernised properties (but in nice areas) and using what would be the Repayment portion of the mortgage to renovate the property, thus increasing its value and therefore the equity held in it more than it would have via repayments.