The dissapearing property ladder

IveSeenTheLight

westernpromise wrote: »

Give me an example please.

We'll, the concept has appeared to move from Mars Bars, to BTL and now to owner occupier examples as different asset classes.

Anywho, happy fishing

jamesmorgan

Profit is an accounting term. It is surprising the number of people from a non-business background who confuse profit for cash. Many businesses may be highly profitable, but don't generate any cash. The reason is simple - all of the profits are ploughed back into the business buying additional assets. Typically the business only generates large amounts of cash when it is sold (or floated - which is essentially the same thing).

It is similar with housing. Assuming you always need the utility value of a house, profits only become cash in one of 2 scenarios:

a) You downsize
b) You die (the ultimate downsize)

For most people, downsizing is a sensible way to recognise profits from HPI. Take the example of someone who owns a house worth £50K, 25 years ago. He then moves to one worth £100K. 25 years later houses have increased in value by 10x, so he downsizes from his current house worth £1m to his old house worth £500K. Even with a IO mortgage he is now back to where he started plus £450K in his bank account.

Even if you choose not to call the £450K a profit, he is a lot happier than if he had simply stayed in the original house for the 25 years!

MFW_ASAP

westernpromise wrote: »

Quite, they're the same. In one case you have a watch worth £2,000 and in the second you have £2,000 and no watch. It's the same.

Exactly, so in your various examples, instead of selling the watch and then rebuying it with no profit you are selling a house then buying it back immediately, also for no profit.

It's a difficult concept, but I'm glad we got there in the end.

£100k house sold for £200k and rebought the next day for £200k = no profit

£100k house sold for £200k and rebought the next day for £100k = £100k profit

£100k house sold for £200k and rebought the next day for £300k = £100k loss.

Now it's written out like that, I can see what you're getting at. It was worth my time over the last few days to now be able to grasp theconcept of profit, loss and no profit. Thanks.

MFW_ASAP

jamesmorgan wrote: »

Take the example of someone who owns a house worth £50K, 25 years ago. He then moves to one worth £100K. 25 years later houses have increased in value by 10x, so he downsizes from his current house worth £1m to his old house worth £500K. Even with a IO mortgage he is now back to where he started plus £450K in his bank account.

Even if you choose not to call the £450K a profit, he is a lot happier than if he had simply stayed in the original house for the 25 years!

A concept I tried many times to explain to Dervprof and failed. He's happier in his 1 bed starter home than I am in my 5 bed farmhouse because it's mortgage free. :rotfl:

Cornucopia

jamesmorgan wrote: »

It is similar with housing. Assuming you always need the utility value of a house, profits only become cash in one of 2 scenarios:

a) You downsize
b) You die (the ultimate downsize)

Yes... strictly speaking.

But this being housing, it's a little more flexible.

The asset is typically mortgaged, so there is the question of what proportion of it belongs to you, and what to the bank.

There's also the question of how much they will lend you on different bases, on different properties, with different LTVs, for different purposes, at what cost.

All this info is a lot more accessible now than it was all those years ago... when I sat in the Halifax interview room and they told me that under their rules, I could spread my mortgage across more than one property - and that was the real start of all of this for me.

westernpromise

MFW_ASAP wrote: »

Exactly, so in your various examples, instead of selling the watch and then rebuying it with no profit you are selling a house then buying it back immediately, also for no profit.

It's a difficult concept, but I'm glad we got there in the end.

£100k house sold for £200k and rebought the next day for £200k = no profit

£100k house sold for £200k and rebought the next day for £100k = £100k profit

£100k house sold for £200k and rebought the next day for £300k = £100k loss.

Now it's written out like that, I can see what you're getting at. It was worth my time over the last few days to now be able to grasp theconcept of profit, loss and no profit. Thanks.

Exactly. As jamesmorgan has pointed out, it is possible to release cash in consequence of owning an asset that has experienced inflation. I don't think anyone disputes that. The bit that is harder to get - because it's less intuitive - is that you can usually do this only by doing without that asset, either in part or in whole.

So in the case of your gold watch, you have either a £2000 gold watch and no cash, or £2000 cash but no watch. If you want £2000 cash you'll have to sell the watch and do without. If you want a gold watch you'll have to cough up £2000. You can exchange from one position into the other and back again, but all you do thereby is express your £2000 of worth as either watch or cash.

The issue with CGT on homes is that all this is far too subtle for a tax. If you sell your £325k flat a year later for £400k, that's not £75k profit, that's inflation. If you sell it to a Russian millionaire a year later for £650k then buy another for £400k, that's £75k of inflation and £250k of profit. It is unlikely any tax would be subtle enough to distinguish these so as to apply only to the £250k.

It would also be unfair. Someone who buys 4 houses in succession for £250k and sells them for £350k would probably face far less tax than someone who had bought a house in 1971 and now it's worth £1.4 million, even though the aggregate value is the same and even though the 1971 buyer's income is probably less.

westernpromise

jamesmorgan wrote: »

Even if you choose not to call the £450K a profit, he is a lot happier than if he had simply stayed in the original house for the 25 years!

True, but only in a narrow sense - he's better off because he doubled his holding and has now halved it. So yes, if you can afford to finance owning an asset twice the size that will appreciate at the same rate, you can later convert your large house back into a small house and cash.

westernpromise

IveSeenTheLight wrote: »

We'll, the concept has appeared to move from Mars Bars, to BTL and now to owner occupier examples as different asset classes.

Anywho, happy fishing

Mars bars are just an analogy but the concept should be clear enough.

BTL and owner occupied houses are different asset classes.

Cornucopia

westernpromise wrote: »

... is that you can usually do this only by doing without that asset, either in part or in whole...

I'm pretty sure there isn't anyone here who doesn't understand what you mean when you say that. But it isn't the defining feature of the property market - far from it.

People are buying more property than they need all the time, whether that equates to size, location, luxury or number of properties. Once you do that, you have "unlocked" the notion of asset or cash, and can begin to have home + investment + cash.

The issue with CGT on homes is that all this is far too subtle for a tax.

Is this all about you trying to find out why we don't have CGT on main residences?

It's simple - the Government want us to own our homes. So they give us that exemption, as well as all the little exemptions around a property that is partly (in either space or time) used as a home.

If you think about it, it's a little unfair, say on people who own more than one home. If I have two homes worth £500k each, why should I pay CGT, when I wouldn't if I only had one £1m home? But that's the kind of compromise you get with taxation.

westernpromise

Cornucopia wrote: »

Is this all about you trying to find out why we don't have CGT on main residences?

No, we've had people arguing that there should be CGT on main residences. I am making the point that the G in CGT on inspection always turns out to be mostly inflation, and it is thus inherently unfair to tax it. As well as being penalised by paying an inflated price for the next place you buy, you're having part of your inflationary gain confiscated as though it's profit.