Will there be a correction?

fwog

Percy1983 wrote: »

Even if prices drop I am on a winner, after another 24.5 I will be payment free, rent would never stop (as well as go up over time).

This is a good point. Could I take 5 years of negative equity? If things do take a turn for the worst and there's a knock on effect in the economy, I may have to sell at a loss and foot the difference with the bank in a 'inclement' climate.

Loughton_Monkey

Graham_Devon wrote: »

What can you do with that money you have made though?

Ignoring the living rent / mortgage free argument for a minute, which is obvious the biggest benefit....you are just sitting on the wealth. You can't use it.

Not true.

I plan (at the right time) to downsize to (a) significantly cheaper area than Loughton, and (b) smaller property. This will release approx 40%/45% of the current value net.

Secondly (if required/desired) I would be of an age where a "Lifetime Mortgage" would release another 40% or so of the smaller house.

Hence I can release a total of roughly 60%/65% to spend, spend, spend. We simply do not need the space we have. In 5/10 years, Mrs LM will 'give in' on managing the large garden, and we will both lose interest in the swimming pool. Losing the tube to the City, and that catchment area for good schools [which between them artificially account for a huge proportion of the current value] is no loss whatsoever, since we hardly use them.

All of this means that I can (and do) already spend more of my wealth while I am 'young' (!!). Only two things can possibly happen: 1. We could die before our late 70's, in which case we haven't used the value of our house - but would be in no position to care. 2. We live to mid 70's and are still healthy in which case we simply release the cash to keep up our living standards.

Of course anyone not in a house they would wish to 'downsize' still has the option of equity release. OK, this method is potentially 'expensive' and eats rapidly into the remaining equity.. but this is completely irrelevant to the owner.

It is of course heavily relevant to the value of the estate (i.e. kids). For us, with no kids, who cares? For others, with kids, and who would be bothered by this, then I would strongly argue that choosing not to use equity release, thereby enhancing their estate value, is, in fact using the value of their house.

fwog

Sensible ideas LM.

A guy I know has 're-married' late in life. He and his new partner own their homes (well 90%).So they both rent them out and livein a nice ,spanking new home on an interest free.

Quids in as the rate is 0.5%

spenceeyftb

The only reason I'm concerned about a correction is that as a FTB I want to purchase as much house as I can and plan on staying there for a few years.

If prices come down I will therefore be able to afford more than at the moment. Although if we move back to renting the cost of renting may just be cheaper than a big drip in house prices.

This is all well over my head hence why I'm finding this house buying marlarkey hard work!

Loughton_Monkey

spenceeyftb wrote: »

The only reason I'm concerned about a correction is that as a FTB I want to purchase as much house as I can and plan on staying there for a few years.

If prices come down I will therefore be able to afford more than at the moment. Although if we move back to renting the cost of renting may just be cheaper than a big drip in house prices.

This is all well over my head hence why I'm finding this house buying marlarkey hard work!

Well absolutely no-one can say for sure. The opinions on these boards should be taken simply as 'noise' which may, or not help, your own decision. You must decide in the end.

Every year you rent, when you could buy, means that every penny of your rent money goes to keeping a roof over your head. Nothing more. Buying now, however, means that every penny you pay the bank goes either to paying for the use of that money for a year, and slightly paying more equity into your house.

House prices have already 'corrected' [fallen by up to 20% in some areas] but have now recovered [back to within around 5% of 2007 price in some areas].

If you choose to delay purchase, you need to quantify (a) the chance that prices might go up in that 12 months - or whatever, and (b) the chance that they will go down again in the same period. In fact you need to allow for them going down enough to compensate for the extra rent.

If prices broadly mark time, you have probably not gained by the delay, but not lost a huge amount either.

There are people who trade on shares and indices. Some trade 'throughout the day'. Others trade 'over a matter of days'. In both cases, these people are trying to do exactly the same thing: They are watching the ups and downs of the graph and trying to buy at the bottom of the dip so that they can enjoy the rise. This is extremely hard to call. And 99 out of 100 don't time it exactly right.

What you are doing (it seems) along with many others, is "trading" house prices. Trying to call the exact moment to buy. Successful investors (in both shares and property) deal very much longer term. Any 'trading' happens rarely, and even then shows up only as tending to buy when the investment is considered 'underpriced' and tending to sell when 'overpriced'.

Personally, I am totally convinced that houses are not overpriced. I consider them to be truly at a standstill, subject to the normal 'noise' of seasonal and other monthly variations, with the exception of the South East/London where I detect a small upward trend.

But it's 100% your own call.

martinsurrey

I have a spreadsheet calculator that works out by how much a mortgaged house would have to fall in cash terms to make renting a similar property better (its not a complete calculation, but pretty good)

over a 4 year timescale, a £250k house would have to fall by 14% cash so £35k to make renting it better, this is on a 3.45% mortgage and a 25% deposit (this is in surrey where that £250k house would cost £1200 to rent).

I personally think that house prices will fall by a fair bit in real terms, but a large proportion of that will be due to inflation, in nominal terms I cant see massive falls, simply because if they do, the bank fail and we're all !!!!!!ed, so the BoE will keep rates low enough for long enough to stop it happening.

Percy1983

martinsurrey wrote: »

I have a spreadsheet calculator that works out by how much a mortgaged house would have to fall in cash terms to make renting a similar property better (its not a complete calculation, but pretty good)

over a 4 year timescale, a £250k house would have to fall by 14% cash so £35k to make renting it better, this is on a 3.45% mortgage and a 25% deposit (this is in surrey where that £250k house would cost £1200 to rent).

I personally think that house prices will fall by a fair bit in real terms, but a large proportion of that will be due to inflation, in nominal terms I cant see massive falls, simply because if they do, the bank fail and we're all !!!!!!ed, so the BoE will keep rates low enough for long enough to stop it happening.

I have to agree, I do think houses will go down in real terms, for the actual value figures there maybe small decreases still to come but not enough to make a huge difference.

The interesting thing is if prices dropped 10% right now you could say I have lost my deposit, but every month renting is losing money.

danothy

Loughton_Monkey wrote: »

I set you, and anyone else for that matter a challenge.

Fire up a spreadsheet...etc.

I'm no expert, but I thought I'd give this a go ... I've input a standard mortgage payment calculation that spits out amount paid, capital outstanding, equity etc. and had the mortgage rate vary each year from a start of 5% with +(rand()-0.5)%. This is a poor man's Monte Carlo of a £125,000 mortgage over 25 years for want of a better description. So if the value of the property is adjusted each year by (rand()-0.5)% it can also tell us the net equity at each end of year (the amount paid to that point for the mortgage minus the equity held). Next I associated a rent with the property and said it would adjust by (rand()-0.5)% each year. The total cumulative expenditure on rent at any point can be compared to the net if you sold up at that point.

Both net expenditure lines tend downwards with the mortgage option sometimes trending up towards the end depending on the HPI rates over the life of the mortgage, and both usually end up as having an overall outlay.

Things to consider with this model is that the interest rates associated with the rent, mortgage and house value are probably somewhat interconnected, and that is not represented here. Neither is the mortgage rate coupled to the LTV ratio or mortgage/rent fees included. Maintenance costs are also not accounted for in the model.

That said, there are some notable outcomes (at least to my eye) from this model. While both typically have a net expenditure over the 25 years the mortgage leaves you a lot better off in most cases. The only times the lines come close to each other is when there is a sustained decline in house value coupled with a steady decline in the rent (although the balances are less sensitive to rents). This is also preconditioned by a high LTV ratio (about 95%) and a low rent scenario. If the initial LTV is set at 80% and the rent not discounted by £100pcm then there's usually £10s of thousands of benefit in taking the mortgage option (in terms of liquidating an estate at the end of it at least). If things go the other way (high rents and house price inflation) then the division is even more pronounced in favour of mortgages.

This effect of course also compounds at the end of the mortgage term, which I have not modelled, but it is clear that the only fluctuation for the mortgage option would be the value due to zero outlay and the rent would continue to be an expense.

It seems to me that even if you lose money on the house the loss is almost always less than the loss due to the expense of rent over the same period even in the scenario that economic conditions trash your 'investment'. This own vs. rent philosophy is probably true to some extent of any utility asset.

Thrugelmir

fwog wrote: »

I know the Eurozone is still up in the air, the can has been firmly kicked down the road by Barroso and they're looking at a 'lost decade'

The hurricane blowing in, keeps bouncing the can back.

With the global financial markets covered in sticking plaster. May well be some further carnage yet.

Loughton_Monkey

Thrugelmir wrote: »

The hurricane blowing in, keeps bouncing the can back.

With the global financial markets covered in sticking plaster. May well be some further carnage yet.

What if we get the Greek anarchists to set fire to the can?