house prise rise or crash??

Pal

While your advice on purchasing new cars is sound, your example on housing is oversimplified because of the gearing that most people have on their house purchase.

Example:

House worth £100k, 80K mortgage.

Price falls 5% = £95k. Lose of equity = 25%.
Price falls 10% = £90k. Lose of equity = 50%.

Remember that the mortgaged part of the property is not owned by the individual. It is mearly "rented" to them by the mortgage company in return for the interest on the mortgage amount. However the loss of house price value all comes out of the purchaser's equity.

The comparison with cars is a bit weird. When people who already own properties discuss house prices they are treating them as a "financial asset": Something that adds to their wealth. This is despite the fact that the wealth is entirely notional and is almost never actually realised until they die, when their children inherit it. At best it is rolled over to a new house that has increased in value by at least the same amount. The owner's never benefit from the equity.

A car is simply a wasting asset: People do not treat cars as financial assets.

MattLG

Pal wrote:

People do not treat cars as financial assets.

Oh yes they do, but they shouldn't :-)

MattLG

dougk_2

Pal wrote:

The comparison with cars is a bit weird. When people who already own properties discuss house prices they are treating them as a "financial asset": Something that adds to their wealth. This is despite the fact that the wealth is entirely notional and is almost never actually realised until they die, when their children inherit it. At best it is rolled over to a new house that has increased in value by at least the same amount. The owner's never benefit from the equity.

Mine will be realised - Unless I have an unfortunate accident....:(
When I get to a time when I no longer the house for security or I know my end is nigh, I shall sell and blow the money away having the enjoyment out of it - why should I want to leave it for the government to take a big chunk?

Maybe my beliefs are different to others - simply that is you are not entitled to anything in this life you have to earn everything - therefore my siblings can do the same! (or maybe I am becoming a tighta**e!)

I believe most people consider whatever they own to be a financial asset, whether it be a house , car, tv or CD! Therefore in my view a house should be thought of in the same way as the other items.

Just to note a vast majority of people don't own their brand new car outright either - its either on HP, other loan or belongs to the company they work for so in effect is no different to the mortgage.

EdInvestor

Pal wrote:

When people who already own properties discuss house prices they are treating them as a "financial asset": Something that adds to their wealth. This is despite the fact that the wealth is entirely notional and is almost never actually realised until they die, when their children inherit it. At best it is rolled over to a new house that has increased in value by at least the same amount. The owner's never benefit from the equity.

Times have changed you, know.People downsize to smaller homes when they retire, releasing capital to help fund their retirement income. They release equity via reverse mortgages or home reversion plans to top up income. They let out a room to a lodger for some tax free extra cash. They move abroad to a cheaper country, again realising capital from their property.

Haven't you heard people talking about "my home is my pension?" That's what they mean. Arguably since the recent awful performance of pensions, the home has become the most important financial asset of them all.

Pal

Editor wrote:

Times have changed you, know.People downsize to smaller homes when they retire, releasing capital to help fund their retirement income. They release equity via reverse mortgages or home reversion plans to top up income. They let out a room to a lodger for some tax free extra cash. They move abroad to a cheaper country, again realising capital from their property.

I agree, but it is far less common than you might think. There is also a problem in that the examples you give only apply to elderly people, and yet many younger people are happy to talk about, and spend based on how their wealth has increased despite that fact that it doesn't mean anything. The vast majority of people get ill and die without releasing value in their home. Most people cannot predict their death in the way that doug wants to. In the end the value of the home goes to the children. The other exception is that the house has to be sold to pay for long term care facilities, which just removes any entitlement to state aid with care fees until the money is gone.

In the future the points you mention will no doubt become more common, but my guess is that they will remain the exception rather than the rule for a long time yet.

Haven't you heard people talking about "my home is my pension?" That's what they mean. Arguably since the recent awful performance of pensions, the home has become the most important financial asset of them all.

Firstly - pensions have not performed badly, investment markets have.

Secondly - The home has become the most important financial asset to most people because they have failed to save for their retirement, but have been handed a large chunk of equity on a plate, although they have to sell up or borrow in order to spend it. Personally I think that anyone who says "my home is my pension" is making excuses up for not saving for their retirement.

Thirdly - people who say that are very foolish indeed. If what you say is correct then an awful lot of retiring people are going to be looking to downsize over the next 20 years, and that is going to create a heck of a housing supply glut at the top end, pushing house prices down across the board. They are basing their financial future for the last 20 years of their life on the fluctuating price of a single asset. (Incidentally the same principle may well apply to both stock and bond markets).

A few nasty shocks being stored up for the future I think.

nik-nik_2

We're in the process of buying our first house, we had to buy now due to a few personal factors. The best deal I could get at the time, was an interest only fixed for 2 years mortgage. I'm quite new to this whole financial area, but I'm guessing if (for examples sake) properties dropped significantly in value, it be correct to assume interest rates would go up?

We are buying a 3 bed so we don't need to move in the foreseeable future even if we have an addition to the family, so negative equity shouldn't bother our sleep. But I'm slightly worried now if the above situation happens as we remortgage at the end of our fixed period we wont be able to get an affordable mortgage due to the high interest rates as we can only afford interest only at the moment (assuming our income remains the same).

Is there anything I can do to protect us? I considered increasing the fixed period, but I doubt this would make any difference as we can't guess if/when a this could all happen - so many variables! Have I understood everything right??

Walletwatch

I must admit, I speak more as an armchair expert here, considering I don't have any personal experience with the mortgage market. Will try and respond to your queries though.

nik-nik wrote:

We're in the process of buying our first house, we had to buy now due to a few personal factors. The best deal I could get at the time, was an interest only fixed for 2 years mortgage. I'm quite new to this whole financial area, but I'm guessing if (for examples sake) properties dropped significantly in value, it be correct to assume interest rates would go up?

If property prices drop moderately, we could rely on the Bank of England to actually reduce interest rates to alleviate the burden of mortgage repayments on house-owners. However, if there were to be a house crash, now that could throw the whole system out of sync, with negative equity becoming prevalent, and repossessions going up. In such a scenario, one could expect a downward spiral with house prices going down, and interest rates going up at the same time.

nik-nik wrote:

We are buying a 3 bed so we don't need to move in the foreseeable future even if we have an addition to the family, so negative equity shouldn't bother our sleep. But I'm slightly worried now if the above situation happens as we remortgage at the end of our fixed period we wont be able to get an affordable mortgage due to the high interest rates as we can only afford interest only at the moment (assuming our income remains the same).

I don't think not having to move in future would preclude the possibility of negative equity. I think one is in negative equity on his house if the value of his house drops lower than the outstanding amount on your mortgage.

deemy2004

The bank of england will do what has to be done to control inflation. Even if it means damning the housing market into a slump... !

For there are far more dangerous economic conditions than falling house prices such as stagflation....

I think in future years i..e. late 2006 onwards , the BOE will not be able to cut interest rates due to upward pressures on inflation largely as a result of a falling currency due to both a growing a trade and budget deficit.

Thus the BOE will have no choice but to actually keep raising interest rates.

frugal_dougal_3

Resurrection shuffle


Post on this thread to save going off topic on the others !

meanmachine_2

deemy2004 wrote:

The bank of england will do what has to be done to control inflation. Even if it means damning the housing market into a slump... !

For there are far more dangerous economic conditions than falling house prices such as stagflation....

I think in future years i..e. late 2006 onwards , the BOE will not be able to cut interest rates due to upward pressures on inflation largely as a result of a falling currency due to both a growing a trade and budget deficit.

Thus the BOE will have no choice but to actually keep raising interest rates.

Plus the economically ignorant keep arguing that, should the economy falter, inflation will fall and so interest rates can be cut. Uh uh. Doesn't work that way. There's always a lag with inflation.

Rampant consumerism 12 months ago is only now feeding into the economy, meaning that inflation will continue to rise no matter what happens to house prices. So they could plummet by 30% but inflation could still keeping going up and up, meaning that the BOE would *have* to keep putting up interest rates - thereby exacerbating the problem further. That's why recessions are unavoidable, despite everyone's best efforts.