How are savings for a house affected in a financial crash?

vitamin_joe

I'd like to ask this question using a hypothetical example. Say I have ten thousand pounds in savings in my bank, and I want to buy a house costing thirty thousand pounds. A friend is going to lend me the other twenty thousand pounds. As I am arranging this, a financial crash happens, of a similar magnitude to the 2008 crash. Is it likely that I will find it easier (ie less costly) to buy the house, or more difficult (more costly)?

I realise there is probably no definitive answer, but I am looking to understand how the dynamics of a financial crash affect savings and house prices, and how the relationship between capital and property is altered. Thankyou

padington

vitamin_joe wrote: »

I'd like to ask this question using a hypothetical example. Say I have ten thousand pounds in savings in my bank, and I want to buy a house costing thirty thousand pounds. A friend is going to lend me the other twenty thousand pounds. As I am arranging this, a financial crash happens, of a similar magnitude to the 2008 crash. Is it likely that I will find it easier (ie less costly) to buy the house, or more difficult (more costly)?

I realise there is probably no definitive answer, but I am looking to understand how the dynamics of a financial crash affect savings and house prices, and how the relationship between capital and property is altered. Thankyou

Houses will get cheaper ( or in in London they might stop going up). Also if this is because of forced sales through inability to pay mortgages, more houses will come on to the market so your options could become better.

If however something like 2008 happens and credit is limited but interest rates are kept low, the choice of houses available to buy will become really small because the owners don't have to sell at a loss and you might find most of the houses for sale all have something wrong with them. However again they will probably be cheaper still.

The problem will be is that you won't know where the bottom is so it will be quite a fraught time to buy. On top of this your friend who said he was up for lending you 20k might suddenly lose his job because of the economic system and decide it better to not lend you the 20k.

Hence why sometimes its easier buying in a boom.

westernpromise

vitamin_joe wrote: »

I'd like to ask this question using a hypothetical example. Say I have ten thousand pounds in savings in my bank, and I want to buy a house costing thirty thousand pounds. A friend is going to lend me the other twenty thousand pounds. As I am arranging this, a financial crash happens, of a similar magnitude to the 2008 crash. Is it likely that I will find it easier (ie less costly) to buy the house, or more difficult (more costly)?

I realise there is probably no definitive answer, but I am looking to understand how the dynamics of a financial crash affect savings and house prices, and how the relationship between capital and property is altered. Thankyou

Depends on the circumstances but broadly, it is harder to buy in a crash.

Because nobody knows where the bottom is, deposits required by lenders go up - they're not going to give you a 90% mortgage on a property that may still have 40% further to fall.

At the same time lending multiples fall (because either your income or mortgage rates or both have become uncertain). Typically rents go up too, because if nobody can or wants to buy, they want or have to rent instead. The demand from new renters flooding in forces up rental prices which means your rent gets you less house. This tends to burn up savings rather fast.

Taken together the above tend to prolong crashes.

It was the scenario that led to the rise of BTL; people who were averse to buying through fear of capital falls rented instead, from people who were able to put a deposit down and then borrow interest-only at monthly payments that were less than the rent they could charge. People able to put a deposit down were typically people who still had equity in their homes having bought years before at prices cheaper than the post-crash levels.

Crashes cause BTL, basically.

System

westernpromise wrote: »

Depends on the circumstances but broadly, it is harder to buy in a crash.

.

In a crash cash is king.

MARTYM8`

Clifford_Pope wrote: »

In a crash cash is king.

Exactly.

Love the logic though of some on here. Clearly it would be disastrous to have to pay only £250,000 to buy a house when you could pay £500,000 instead and be up to your eyeballs in debt for 25 years!

westernpromise

The problem Marty is that in a crash you wouldn't have £250k, but in a boom, you might have £500k.

mwpt

westernpromise wrote: »

The problem Marty is that in a crash you wouldn't have £250k, but in a boom, you might have £500k.

Oh yes, like this current HPI boom with everyone making money with all the high yields around.

vitamin_joe

Thankyou everyone, this is exactly what I needed to know :beer:

A supplementary question- what happens in this scenario if the economy goes into crisis, such as it did in Greece?

westernpromise

I'm not sure what yield you're referring to, Marty.

If you mean the rental yield on housing, in a housing rally I would expect that to stagnate or fall.

At any given time, people have the option of buying or renting. If house prices are trending up, buying is more attractive than renting, because it holds out the prospect of capital gains. So there tends to be more demand for that. If prices are falling, then renting looks better because it offers shelter from capital losses.

It follows that in a climate of rising house values, rental prices will either rise more slowly or actually fall. This is broadly what we have seen, with yields if not actual cash values notably lower now than 10 years ago. By way of example, when I moved out of my flat in 2004 it was worth about £400k, and it let for about £1,900 a month; it’s now worth (supposedly) £950k, and rents for about £2,400. Value up more than 100% but rent up by 25%.

When prices are falling renting becomes more attractive and therefore worth more. If you could buy somewhere for £100k and it’s losing £20k a year, then all other things being equal you’d pay £20k more to rent it than own it because it saves you from losing £20k a year.

This at least is what eventuated between 1989 and 1995. Being a landlord was a remarkably rewarding experience for those who got in early because for a while those folks got both rising rents and rising asset values.

MARTYM8`

westernpromise wrote: »

The problem Marty is that in a crash you wouldn't have £250k, but in a boom, you might have £500k.

Sorry – I would still rather pay £250k for a house than £500k for the same house. In a recession the vast majority of people keep their jobs and keep saving and keep paying their mortgages. Cash would of course be king and there would be less debt too.

Your argument is just the usual insane argument that high house prices and ever rising prices are good for us all. Maybe ever rising food, utility, transport and council tax costs are great too – you can borrow money from banks to fund those as well.

padington

MARTYM8` wrote: »

Sorry – I would still rather pay £250k for a house than £500k for the same house. In a recession the vast majority of people keep their jobs and keep saving and keep paying their mortgages. Cash would of course be king and there would be less debt too.

Your argument is just the usual insane argument that high house prices and ever rising prices are good for us all. Maybe ever rising food, utility, transport and council tax costs are great too – you can borrow money from banks to fund those as well.

You might not have 250k in a crash. Your bank might have gone bankrupt. The cashpoints might be closed. A new tax on savings might get introduced to pay for the national debt.

Anything could happen. Waiting for a crash is like waiting for a national accident, you have no idea what state the state will be in and how that will effect you.

Risky game. Sometimes it's better to make hay whilst he sun shines and put down what you can, when you can to pay for the roof over your head.