House prices need to drop 40% to be affordable discussion

nearlynew

ukcarper wrote: »

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.

But we are talking about doing it with an IO mortgage.

Your example above suggests repayment.

ukcarper

nearlynew wrote: »

But we are talking about doing it with an IO mortgage.

Your example above suggests repayment.

It does and I’m not convinced about interest only mortgages as I believe you are right to be really effective it relies on HPI being higher than RPI. But never the less if he sell his house he will have the £61k it’s just that he will have to pay rent on the terrace. Also with interest only the cost of buying (if you can call it that) is more likely to be less than renting.

Thrugelmir

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.

In 28 years the net gain is £34k (£72k - £38k). Factoring in inflation that's a poor investment return.

In your example you've also omitted the £50k or so of stamp duty, legal fees, estate agents fees incurred. Let alone the additional expenditure of interest incurred on the mortgages and cost of owning larger properties.

So in effect this scenario would cost money.

IveSeenTheLight

Gents,
this is all interesting discussion on IO, rents, repayment vehicles etc, but it is a tad off topic in relation to why house prices need to drop 40% to be affordable, the factors that might make this achievable and what the outcome would be for the economy / government etc should this prediction occur.

It might be worth starting a new thread to discuss the merits of interest only over repayment.
I have some good info I could contribute.

wotsthat

Thrugelmir wrote: »

In 28 years the net gain is £34k (£72k - £38k). Factoring in inflation that's a poor investment return.

Shouldn't that £38k be the £2k initial deposit?

RenovationMan

Thrugelmir wrote: »

In 28 years the net gain is £34k (£72k - £38k). Factoring in inflation that's a poor investment return.

In your example you've also omitted the £50k or so of stamp duty, legal fees, estate agents fees incurred. Let alone the additional expenditure of interest incurred on the mortgages and cost of owning larger properties.

So in effect this scenario would cost money.

I'm not sure where you got the £34k net gain TBH.

The stamp duty (just like the temptation to MEW mentioned by NN) is there whether you buy a house using IO or Repayment. The expenditure of owning large properties is there whether you buy via IO or repayment, except higher interest payments, but then it depends on what you do with the repayment portion of the mortgage.

JonnyBravo

wotsthat wrote: »

Shouldn't that £38k be the £2k initial deposit?

Nah you see it's all to do with the rule of 51.

:rotfl:

nearlynew

The MAIN reason people take out IO mortgages is to reduce the monthly payment to enable them to afford to "buy" the house/flat that they otherwise couldn't afford.

This is 100% fact and I will not be replying to any suggestions to the contrary.

RenovationMan

nearlynew wrote: »

The MAIN reason people take out IO mortgages is to reduce the monthly payment to enable them to afford to "buy" the house/flat that they otherwise couldn't afford.

This is 100% fact and I will not be replying to any suggestions to the contrary.

LOL, fair enough.

IveSeenTheLight

RenovationMan wrote: »

LOL, fair enough.

Ignorance is not a virtue.

I recently remortgaged two of my properties to IO so that I can take the extra revenue for investments elsewhere rather than having it tied up in the property.

Back on topic, if properties were to reduce 40%, I'd be positioning myself to benefit from such reductions.
To be honest though, I'de likely be investing well before that level. indeed, we are already investing for a good return.