Is house price inflation advantageous or a massive con?

GreatApe

Koldweather1 wrote: »

So just did some research, the average inheritance seems to be very varied and ranges from 60,000 through to 120,000 depending on the people who did the research. Its certainly not enough to expect to buy a house outright with, even more so if your from an above average family size (3+) then your chances are going to be slim that this will be the case.

Most will inherit something it seems at some point, but few will inherit enough to fund a purchase as large as a house! It'll probably be enough to help access a mortgage though

This is incorrect, you have probably looked at average inheritances received which will look small because people gift to many people small sums along side one/two people the significant part of the pot (often their kids)

Here is data for 2014-15
If you take each generation to be 30 years then multiply the number of estates by 30 to get an idea of what one generation transfers to another



As you can see from the data the most common estate size left is between £100k-200k the second most common is £200k-£300k and the third most common is £300k-£500k

Overall that year about £75 billion was inherited, but bear in mind a lot of people sort their affairs out before they die so gifting is on a similar scale perhaps larger. Overall gifts + inheritances are about £200 billion annual transfer from old to younger. £200 billion is roughly equal to 1 million homes worth of wealth given from old to young each and every year. IT is truly massive

Of course within the figures there will be some extremes, some people will get absolutely nothing, some lucky others will have mansion money. I suspect certain areas (say Surrey) where there will be a higher percent of those in the latter, and I suspect certain areas of the country you'll find a higher percentage of those in the former. Total luck of the draw that is for sure!

Well yes you dont choose who you are born to but it is the majority who receive not the minority. If you look at the data above and look at just estates worth £50k or more you have aprox 230,000 such estates. If they gift to 2 people the bulk of the estate (say to their two children) that is 460,000 kids who receive at least £25k each in just that one tax year. x by 35 to get an idea of a generation and you have over 16 million kids getting inheritances every generation.

Now even 16 million sounds small, after all we are a nation of 65 million! However bear in mind the population is split roughly into 3 groups. Children, middle, and old and each group has about 22 million in it. The old give to the middle. So of the middle who inherit, 16 million out of 22 million get a very significant inheritence.

We can check to see if this is a reasonable calculation. 16/22 = about 73%

This correlates well with the number of pensioners who own their own home. Roughly 75% of the old own their home, mostly outright. So my estimates/calculation correlate well

Simply put, about 75% of the uk population will inherit. The figure for the natives are even higher, but for migrants they are lower.

PS Great Ape, the average is 1.7 family size...last time I looked 0.7 rounded UP not DOWN, so your examples needs everything split in half to reflect that!! (two children, NOT one for the average.

As a rule of thumb,

if you are an only child you will benefit from higher house prices
If you are one of two children, you will benefit from higher house prices
If you are one of three children, you will be mildly disadvantaged by higher house prices (two thirds of the higher house prices will be covered by your inheritances)
If you are one of four children, you will be disadvantaged by higher house prices, however half of the higher house prices will be covered by inheritences

The real losers are migrants who come here with nothing, and also the real winner of a hpc are migrants who come here with nothing

GreatApe

Carl31 wrote: »

Its just part of the stupid culture we have here on house prices

By the time you factor in interest cost and maintenance, your £250k house has probably actually cost you £450k over the lifetime of the mortgage, and like in the article, if you make money, so does everyone else in the local market, so unless you move from london, its unlikely your gain is going to add to your purchase power

The only really gainers from HPI are offspring who inherit

Fortunately for us, some 75% do inherit and most the other 25% inherit partially (via their partners side)

GreatApe

Another very important point the house price crash wishers miss is that if house prices crash 50% the nation is no better housed. Even if house prices crash 99% the nation is no better housed. The uk housing stock doesn't become better or larger in a house price crash

It is an interesting example, lets say house prices crash 99% so the average house goes from £200,000 to just £2,000

Does that mean people can afford bigger houses? maybe you would think so, as £2000 is a hell of a lot cheaper than £200,000 so people can buy much bigger homes right? Well how can that be possible how can people all buy bigger homes when the housing stock itself has no changed?

The only way house prices would crash 99% is if affordability also crashed 99%. Lets try a silly example imagine a global food crisis so food goes up in price massively so people can barely afford to eat. Well maybe in that situation house prices could crash 99% as no one has any money left after eating. Average house prices are £2000 but you cant afford the average house any more than you could afford it before the house price crash

So if prices go down, it means the public ability to afford to buy homes also went down. Or another way to say it, if you are unable to buy the average house today, you will likely be unable to buy the average house if it fell in price 50% or even if it fell in price 99%

Koldweather1

The one curveball I suppose Greatape are the numbers who have to sell their homes to fund for social care, et, though I suppose the numbers aren't going to be too great.

I suppose it all boils down to whether people are prepared to wait till their 40/50/60s to inherit the life changing sums of money to buy a house, or whether they more realistically want to be in a position to buy in the 'prime' of their adult lifes (say mid 20s through to 40). HPI means little chance of the latter happening, regardless of how much money may end up coming downstream through inheritence.

I'm not counting Grandparents, as that can be split sometimes 5-10 different ways through children/grandchildren and therefore I'm doubtful it directly is a large enough amount of money often enough to be a game changer when it comes to housing in 2017 (of course, some people will get lucky that way as well, I know a few people for example who stand to get mega money when a old grandparent finally passes. )

Koldweather1

GreatApe wrote: »

Another very important point the house price crash wishers miss is that if house prices crash 50% the nation is no better housed. Even if house prices crash 99% the nation is no better housed. The uk housing stock doesn't become better or larger in a house price crash

I suppose the logic is in a HPC other aspects of the economy would also suffer, thus less people able to get big mortgages, and as I assume alot of HPC are fairly cash rich, meaning a drop in prices FACILITATED by a large uptick in IR (that is usually the method they are hoping for!) won't matter to them as they can buy cash.

It would also mean that many of those landlords would sell their property as its not profitable anymore in an attempt to service their own mortgage debt, thus increasing the amount of houses on the market for 'actual' familes to own, not just landlords owning 10-20 properties.

I get the idea behind it, but its a flawed idea IMO.

GreatApe

Koldweather1 wrote: »

The one curveball I suppose Greatape are the numbers who have to sell their homes to fund for social care, et, though I suppose the numbers aren't going to be too great.

It is not a significant number who go into care, even those that do dont last long so while its expensive if you are only there 6 months it isn't going to eat much into your say £200k house you plan to give to the kids

Also part of care home fees will be paid by your pension both private and state. One of my grandfathers is in an expensive care home but his pensions (state+private) more or less covers it. So even if he is in care for 10 more years its not going to eat much into his estate.

I suppose it all boils down to whether people are prepared to wait till their 40/50/60s to inherit the life changing sums of money to buy a house, or whether they more realistically want to be in a position to buy in the 'prime' of their adult lifes (say mid 20s through to 40).

I know plenty of people who inherited significant sums in their late 20s early 30s often it was gifted to them on marriage. One guy I know gifted his boy a £500k house. I doubt very much he would have done so if his boy hadn't got married. Likewise I know a number who were gifted significant early inheritances on marriage which was enough for say a 30% deposit. Add their own savings + mortgage borrowing and what looked expensive an impossible maybe 1 year before they got married was possible and done 1 year after they got married.

Of course it also depends on how old you parents were when they had you. I think for women the average now must be first kid age 30 and second kid age 35. UK life expectancy is 82 so the first born is likely to get around age 52 and the second born around age 47. But as I noted before, lots of people gift away excess wealth well before they die. I plan to gift most my wealth away in my early 60s and almost all of it by the time I am 70. That would mean the kids get it around age 30-35 assuming they are MSE obviously if they become drunks or gambling addicts they wont get nowt

HPI means little chance of the latter happening, regardless of how much money may end up coming downstream through inheritence.

But as noted house prices move in relation to general affordability. If house prices crash that means affordability has also crashed. This is why people seldom benefit from a house price crash. There is a website full of crash wishers thousands of them who missed the 2008 crash and they will miss the next one too.

I'm not counting Grandparents, as that can be split sometimes 5-10 different ways through children/grandchildren and therefore I'm doubtful it directly is a large enough amount of money often enough to be a game changer when it comes to housing in 2017 (of course, some people will get lucky that way as well, I know a few people for example who stand to get mega money when a old grandparent finally passes. )

Well for every £1 house prices go up, inheritances go up £1, assuming your parents own a house which most brits parents do

Look at the estate data I posted. people get very significant sums. Something in the region of £200,000,000,000 is gifted by the old to the younger annually. That is equal to about 1 million homes annually gifted from old to young (about half of it is actual homes the other half is other wealth like pensions/securities/farm-land/commercial&retail buildings/savings etc)

GreatApe

Koldweather1 wrote: »

I suppose the logic is in a HPC other aspects of the economy would also suffer, thus less people able to get big mortgages, and as I assume alot of HPC are fairly cash rich, meaning a drop in prices FACILITATED by a large uptick in IR (that is usually the method they are hoping for!) won't matter to them as they can buy cash.

It would also mean that many of those landlords would sell their property as its not profitable anymore in an attempt to service their own mortgage debt, thus increasing the amount of houses on the market for 'actual' familes to own, not just landlords owning 10-20 properties.

I get the idea behind it, but its a flawed idea IMO.

Yes you are correct, some groups in a crash will fair better than others.
But bear in mind during a normal year only 3-4% of homes ever transact and the majority (perhaps 80-90%) of those buyers would have bought roughly at that time irrespective of a crash. That means very few people can both time a crash and take advantage of it

Also for every 1 person that benefits from a crash and is able to buy a bigger/better house there is 1 person who loses out and has to buy a smaller/crapper house. The reason is the same as before, crash or boom the housing stock is more or less the same.

As for landlords, you have it the wrong way around!
Landlords wont sell in a crash, why the hell would you think that?
If a landlord has a property giving him 5% return, if house prices crash 50% why the hell would he sell he is now getting 10% on his property. What is he going to do, sell his 10% return property and put it in a 1% savings account?

If you look at the 2008-2009-2010 period which was the last crash,landlords were BIG NET BUYERS of properties they bought a NET 800,000 properties during those 3 years!! so there is no evidence to suggest that in a crash landlords would sell up.

In fact its in booms that landlords sell, if prices went up 50% I would sell my property and buy more shares. That was what I planned to do, my guess was I was going to sell around 2020-2022 when prices would have been (my guess) 30% higher than today if brexit and the additional property taxes had not happened. Instead I might have to hold on another 20 years or so

Koldweather1

GreatApe wrote: »

Yes you are correct, some groups in a crash will fair better than others.
But bear in mind during a normal year only 3-4% of homes ever transact and the majority (perhaps 80-90%) of those buyers would have bought roughly at that time irrespective of a crash. That means very few people can both time a crash and take advantage of it

Also for every 1 person that benefits from a crash and is able to buy a bigger/better house there is 1 person who loses out and has to buy a smaller/crapper house. The reason is the same as before, crash or boom the housing stock is more or less the same.

As for landlords, you have it the wrong way around!
Landlords wont sell in a crash, why the hell would you think that?
If a landlord has a property giving him 5% return, if house prices crash 50% why the hell would he sell he is now getting 10% on his property. What is he going to do, sell his 10% return property and put it in a 1% savings account?
or so

Because if IR rates shoot up, they aren't going to be able to service their levels of debt and thus will have almost a forced sale. It won't be through choice. Given the recent changes in S24 etc, I'd suspect alot of landlords are probably not making huge yields, and if IR shoots up to say 7-9% like the HPC people want, then the landlord is going to be shafted and any profit will be long gone.

Thus, they will have to sell to make their money back, or at least as much as they can before HPC erodes away the paper profit.

The logic of HPC is any collapse in the prices will be down to a high shift upwards in Interest rates beyond say 7-8%. In the 2008-2010 the interest rates plummeted so no wonder landlords brought more, especially at lower prices. In the HPC forum scenario, the landlords are probably the ones who suffer the most due to their large levels of mortgaged debts (either IO or Repayment) and thus put into a position where they would have to at the very least sell some of their property to just be able to pay the bills as the rent won't be able to shoot up fast enough to cover the deficit.

economic

Koldweather1 wrote: »

Because if IR rates shoot up, they aren't going to be able to service their levels of debt and thus will have almost a forced sale. It won't be through choice. Given the recent changes in S24 etc, I'd suspect alot of landlords are probably not making huge yields, and if IR shoots up to say 7-9% like the HPC people want, then the landlord is going to be shafted and any profit will be long gone.

Thus, they will have to sell to make their money back, or at least as much as they can before HPC erodes away the paper profit.

The logic of HPC is any collapse in the prices will be down to a high shift upwards in Interest rates beyond say 7-8%. In the 2008-2010 the interest rates plummeted so no wonder landlords brought more, especially at lower prices. In the HPC forum scenario, the landlords are probably the ones who suffer the most due to their large levels of mortgaged debts (either IO or Repayment) and thus put into a position where they would have to at the very least sell some of their property to just be able to pay the bills as the rent won't be able to shoot up fast enough to cover the deficit.

you assume rent levels wont rise. in an unlikely world of 7% rates, how much do you think rents would have risen due to inflation?

Koldweather1

economic wrote: »

you assume rent levels wont rise. in an unlikely world of 7% rates, how much do you think rents would have risen due to inflation?

Not enough to counter what would probably be an uprise of +£500 a month in such a situation, especially with wage growth stubbornly staying behind inflation. Especially given people now JUST about afford to keep going when they are renting. Put simply something like a rent cap would probably become justifiable in such a situation, indeed even now its certainly being mussed by some.

However, I'm by no way a HPC advocate. My personal ideal would be slow and steady growth, bubbles only help the already rich established.