The dissapearing property ladder

IveSeenTheLight

westernpromise wrote: »

Now buy another identical asset, such as main home that is nearer your childrens' school / your elderly parents / your new job.

Cost of identical asset: £60,000.
Borrow: £50,000
Inflationary gain: £9,000
Nett result: you're £1,000 short.

How is it possible to make a profit buying and selling an asset and then not have enough to buy an identical asset?

You Sir are confirmed as a Troll or a WUM.
Good day to you and all the best in your endeavors to get future bites.

Meanwhile, those that can, will.
Those that won't, can't.

Maybe if you change your perception to a can do approach you'll be more successful

P.S. Doffs cap to Loughton-Monkey for the last couple of brilliant retorts to this WUM

westernpromise

MFW_ASAP wrote: »

If your child was at a school that wasn't local to your house, there must be a reason why you chose it. Ususally it's because the school is superior to the ones nearby your current home. It's therefore likely that instead of paying the same amount for an identical asset, you'd pay more because it is in the catchment area of a popular school and so you're paying a premium (or Inflation as you like to call it) for living there.

This also follows if you move to an area with better employment prospects. London and the SE has far higher 'home inflation' than Hull because it has better employment prospects (amongst other things) and you'd therefore pay more to live there.

If you bought in an unpopular part of london in 2001 because you speculated that it was an 'up and coming' area and you were correct and had much higher 'inflation' than the surrounding areas, you've made more of a profit with your speculation than if you had bought in an established area.

Now you're speculating and second-guessing as to why I might need to move. With all due respect, it is none of your business why I might or might not need to move. The point is that if you treat inflation as profit, almost nobody ever will move. For example:

• I buy a house in 2005 at £200k;
• I sell up in 2010 at £300k, so that I can
• buy another house for £300k;
• but I can't afford to, because the inflation to £300k has been treated as profit, taxed away, and I've now only got £250k
• so I can't afford to move.
• so I don't.

Here's another example.

• I buy a house at £200k;
• It inflates to £300k;
• I'm getting old, so I decide to downsize to a £250k house;
• After paying the CGT on £100k of inflation, £250k is all I have left;
• So I have a choice - I can either stay in my £300k house or I can give away £50k in tax and own a £250k house. Tough call, huh?
• So of course I don't move.

If this were not inflation, my £200k house would appreciate to £300k, but nobody else's would. I could then sell for £300k, replace the house for £200k and the difference is profit. But I can't - I need £300k to replace the house because the new house also costs £300k.

I suspect the reason people don't want to understand this is that they buy a house, it inflates, and they can then congratulate themselves on their shrewdness. They may even mistake themselves for financial geniuses because they've "made money" out of property.

In fact all they've done is collected inflation, mistaking it for gain. The instant the gain is realised by a sale, they have to plough it back into buying a replacement.

I know one person who has made an indisputable non-inflationary gain from property, and that is a mate of mine who bought a Notting Hill flat for £1 million and has been offered £2 million for it less than a year later by the Russian who now owns all the other flats in the house (he wants to convert it back to a single house). So my mate can sell for two million and buy a basically identical flat nearby for probably 1.2 all in. That's a profit of 800 thousand.

MFW_ASAP

westernpromise wrote: »

Now you're speculating and second-guessing as to why I might need to move. With all due respect, it is none of your business why I might or might not need to move.

I was talking about a theoretical example, I had no idea that you're moving and I have no interest in why.

I'm inclined to agree with ISTL and his WUM comment. This is way too much like the sort of muddling Graham Devon does (to great effect) where he 'refuses' to understand the most basic financial concepts and the board wastes time trying to explain them to him, in increasingly creative ways.

Good luck with your house purchase, for whatever secret reason you're purchasing it.

Cornucopia

westernpromise wrote: »

I suspect the reason people don't want to understand this is that they buy a house, it inflates, and they can then congratulate themselves on their shrewdness. They may even mistake themselves for financial geniuses because they've "made money" out of property.

You are misunderstanding the activity and the mechanism. (And in fact, I heard an identical argument from someone in a pub in 1997).

The flaw, of course, is that the properties are not identical. The whole point is that the market, and the inflation are not uniform (don't be fooled by official statistics about "average HPI"). The aim, therefore, is to use the inconsistency of the market to make a real gain.

I suspect that even if inflation was uniform, there would still be potential real gains, IF you were able to use larger and larger mortgages to buy larger and larger houses, each of which would make a larger gain than the one before (but still the same in percentage terms).

It's also swings & roundabouts. My best property made 60% over three years, and my worst 3%. You take the good and the bad.

You also need to decide how aggressive overall you want to be. Having made 60%, can you now afford to live in that area? Do you want to find the extra cash/borrowing to do so?

Finally, fashion is a big influence, especially in London. If you're one of the pioneers in Islington (70s), Hoxton (80s & 90s), Bermondsey (90s & 00s), you are going to benefit from taking a risk. Is the risk something of a no-brainer, given all the merits of the area concerned? Maybe, maybe not. Either way, the reward comes directly from that risk, and from spotting the opportunity in the first place.

But this model is limited by time & location. Is Peckham going to be the next Bermondsey? Is Hackney going to flow on from Hoxton? Probably no to the first, and yes to the second.

BTW your maths is a bit screwy, too. The maximum CGT charge on a £100k gain is £28k, assuming no exemptions or reduced rates are in play. Would you move to realise a £72k gain? I think some people probably would.

MFW_ASAP

Cornucopia wrote: »

BTW your maths is a bit screwy, too. The maximum CGT charge on a £100k gain is £28k, assuming no exemptions or reduced rates are in play. Would you move to realise a £72k gain? I think some people probably would.

Minus any costs:

You can deduct costs of buying, selling or improving your property which reduce your gain. These include:

• estate agents’ and solicitors’ fees
• costs of improvement works, eg for an extension (normal maintenance costs don’t count, eg for decorating)

Minus the annual CGT allowance of £11k (if not already used).

If the seller organised his tax affairs correctly, but not worked on the house to create that £100k gain, the most s/he would pay is £17k CGT.

I was interested to notice when checking that threshold figure to learn that the sale of overseas homes are also subject to CGT.

westernpromise

Cornucopia wrote: »

The flaw, of course, is that the properties are not identical.

No, it's not a flaw. It's wholly irrelevant. You're making the mistake of introducing arbitrary detail and then getting bogged down in it, as though the detail makes a difference to the validity of the underlying point. They don't.

It's a very simple thought experiment that anyone can do. Imagine a conjectural market of 10* houses that all start out as worth £200k**. They all inflate to being worth £300k*** due to whatever cause - rising earnings, lower interest rates, whatever.

They're now all worth £300k.

You sell yours for £300k.

You now need to buy another. It's going to cost you £300k.

Where's your 'profit'? Show it to me. Show me the net free money you have over and above your £300k house.

The fact that the house you sold had 4 bedrooms and the one you're buying has 3 bedrooms and a garage is neither here nor there. What matters is that both are £300k. You'll be needing every penny of the sale price to buy it.

You can tie yourself in knots arguing that houses inflate at slightly different rates, or that they're worth different to different people, or that CGT is this rate rather than that. It's all beside the point. The point is that your house has inflated as have all others and you need to keep that inflationary gain just to stand still. If it is taken away, then you can only buy less house.

So you won't sell.

* or 100, or 1,000 - any number you like

** or £220k or any number you like

*** or £350k or any number you like

Cornucopia

The problem is that you've simplified it down to the level where the profit is removed from the equation.

Bear in mind that I, and many others, have actually done this in the real world - in and around London, between 1996 and 2007.

I can give you figures, it you want. It's possible that there was an element of luck involved, but I'm okay with that. I don't claim to be a property genius, merely that it's possible to make a real terms gain in appropriate market conditions, and with personal flexibility on where, and in what, you're happy to live.

You are only right to the extent that at some point, you need to be downsizing in some way to crystalise the profit (if, of course that is your aim). You could be simply trying to get more house for your money, or be racing towards being mortgage-free (as I was).

Once you split your equity across multiple properties, it gets very flexible, and you can take part of your equity in cash, without disturbing your mortgage status on your other properties.

westernpromise

IveSeenTheLight wrote: »

You Sir are confirmed as a Troll or a WUM.
Good day to you and all the best in your endeavors to get future bites.

Meanwhile, those that can, will.
Those that won't, can't.

Maybe if you change your perception to a can do approach you'll be more successful

P.S. Doffs cap to Loughton-Monkey for the last couple of brilliant retorts to this WUM

I've been here a lot longer than you have. If you're having trouble distinguishing between profit and inflation I suggest you may enjoy the Guardian more...

[Deleted User]

westernpromise wrote: »

No, it's not a flaw. It's wholly irrelevant. You're making the mistake of introducing arbitrary detail and then getting bogged down in it, as though the detail makes a difference to the validity of the underlying point. They don't.

It's a very simple thought experiment that anyone can do. Imagine a conjectural market of 10* houses that all start out as worth £200k**. They all inflate to being worth £300k*** due to whatever cause - rising earnings, lower interest rates, whatever.

They're now all worth £300k.

You sell yours for £300k.

You now need to buy another. It's going to cost you £300k.

Where's your 'profit'? Show it to me. Show me the net free money you have over and above your £300k house.

The fact that the house you sold had 4 bedrooms and the one you're buying has 3 bedrooms and a garage is neither here nor there. What matters is that both are £300k. You'll be needing every penny of the sale price to buy it.

You can tie yourself in knots arguing that houses inflate at slightly different rates, or that they're worth different to different people, or that CGT is this rate rather than that. It's all beside the point. The point is that your house has inflated as have all others and you need to keep that inflationary gain just to stand still. If it is taken away, then you can only buy less house.

So you won't sell.

* or 100, or 1,000 - any number you like

** or £220k or any number you like

*** or £350k or any number you like

Irrespective to 'who makes the profit' - who pays for the above inflationary costs of house prices? The FTBers - or it's the people renting from the boomers who bought the house as 'an investment'

Cornucopia

ringo_24601 wrote: »

Irrespective to 'who makes the profit' - who pays for the above inflationary costs of house prices? The FTBers - or it's the people renting from the boomers who bought the house as 'an investment'

Yes, but who is to say what a house is "worth" in financial terms?