Is the property ladder now a myth?

wilfred30

Are you saying that you've got one double and three single bedrooms?

If so, when you converted your loft, did you only add a single bedroom rather than a double?

princeofpounds

The 'property ladder' is a web of concepts that are often poorly understood.

Take your property as a simplified example. 

You bought it for 290k. Let's presume you funded 80% of that with a mortgage of 232k, and 58k with your equity deposit.

Your property is now worth 560k. It has increased in value by 93%. 

Your equity however, is now much bigger. Let's assume you were on an interest-only mortgage, and so your outstanding mortgage principal is still the same at 232k. Your equity is now worth 328k - i.e. your initial equity investment is now up fivefold, far in advance of house price inflation. 

Your next property will cost you 850k. Let's assume that it also increased in value by 93%, and was worth 440k at the start. At that initial point, you had 13% of the equity required to buy that bigger property. Currently, you have 39% of the equity required to buy that bigger property. 

That is the power of leverage (aka gearing) - using borrowed money as a fixed liability to amplify returns on asset investment. It can work the other way of course and amplify losses, but in the last few decades of falling/low interest rates and soaring house price it's a process that worked very nicely for property investors. 

That's one of the big picture concepts which is part of the 'property ladder'. Well, except for the times it becomes a 'property snake'.

Of course if your wages haven't also kept pace then yes, raising the next mortgage is a tougher job. Homeowners often love house price inflation for obvious reasons, but there is something of a fallacy to that because whilst you can make a lot of money on what you do own, the opportunity cost of the next property you would like to trade up to does get higher. But that's less tangible so people don't tend to notice it so much, unless they hit your kind of situation.

There are of course other concepts that feed into the idea of a property ladder. Paying down mortgage principal through a repayment mortgage is of course another, more pedestrian but more consistent way of building equity. But that's boring and no longer the British way 

RS2OOO

princeofpounds said:

The 'property ladder' is a web of concepts that are often poorly understood.

Take your property as a simplified example. 

You bought it for 290k. Let's presume you funded 80% of that with a mortgage of 232k, and 58k with your equity deposit.

Your property is now worth 560k. It has increased in value by 93%. 

Your equity however, is now much bigger. Let's assume you were on an interest-only mortgage, and so your outstanding mortgage principal is still the same at 232k. Your equity is now worth 328k - i.e. your initial equity investment is now up fivefold, far in advance of house price inflation. 

Your next property will cost you 850k. Let's assume that it also increased in value by 93%, and was worth 440k at the start. At that initial point, you had 13% of the equity required to buy that bigger property. Currently, you have 39% of the equity required to buy that bigger property. 

That is the power of leverage (aka gearing) - using borrowed money as a fixed liability to amplify returns on asset investment. It can work the other way of course and amplify losses, but in the last few decades of falling/low interest rates and soaring house price it's a process that worked very nicely for property investors. 

That's one of the big picture concepts which is part of the 'property ladder'. Well, except for the times it becomes a 'property snake'.

Of course if your wages haven't also kept pace then yes, raising the next mortgage is a tougher job. Homeowners often love house price inflation for obvious reasons, but there is something of a fallacy to that because whilst you can make a lot of money on what you do own, the opportunity cost of the next property you would like to trade up to does get higher. But that's less tangible so people don't tend to notice it so much, unless they hit your kind of situation.

There are of course other concepts that feed into the idea of a property ladder. Paying down mortgage principal through a repayment mortgage is of course another, more pedestrian but more consistent way of building equity. But that's boring and no longer the British way 

What a great post, enjoyed reading that.

By the same notion my first 2 bed flat was £69k. 
A 3 bed semi would have been £85k but that extra jump pushed risk tolerance out of my comfort zone.

But now with 3 bed semis circa £400k and 2 bed flats circa £250k I really regret not taking that extra £15k of risk as I no longer have enough working life left to afford a mortgage on the type of house I could have owned by this stage of my life.

The property ladder steps are never the same distance apart.

getmore4less

m0t said:

My wife won't move too far away from where we are now because she wants to be close to her parents.

I've been working on that for years but no luck so far.

I don't feel I really benefit from being in London. It's cramped, expensive, full of traffic and crime and I rarely visit the city itself.

If it wasn't for family I'd be happy in a moderately sized town anywhere.

Give the wife back to her parents and move.

theoretica

Looking at the property websites what are other houses valued around £560k like - do you think that valuation is fair and correct or the bank being cautious? What are properties you think similar to yours valued at?

What are properties you could afford like? £700k or whatever?  Are they just too small a step up the ladder to feel worth bothering with?  Or more expensive for reasons you don't care much about? 

Thrugelmir

RS2OOO said:

princeofpounds said:

The 'property ladder' is a web of concepts that are often poorly understood.

Take your property as a simplified example. 

You bought it for 290k. Let's presume you funded 80% of that with a mortgage of 232k, and 58k with your equity deposit.

Your property is now worth 560k. It has increased in value by 93%. 

Your equity however, is now much bigger. Let's assume you were on an interest-only mortgage, and so your outstanding mortgage principal is still the same at 232k. Your equity is now worth 328k - i.e. your initial equity investment is now up fivefold, far in advance of house price inflation. 

Your next property will cost you 850k. Let's assume that it also increased in value by 93%, and was worth 440k at the start. At that initial point, you had 13% of the equity required to buy that bigger property. Currently, you have 39% of the equity required to buy that bigger property. 

That is the power of leverage (aka gearing) - using borrowed money as a fixed liability to amplify returns on asset investment. It can work the other way of course and amplify losses, but in the last few decades of falling/low interest rates and soaring house price it's a process that worked very nicely for property investors. 

That's one of the big picture concepts which is part of the 'property ladder'. Well, except for the times it becomes a 'property snake'.

Of course if your wages haven't also kept pace then yes, raising the next mortgage is a tougher job. Homeowners often love house price inflation for obvious reasons, but there is something of a fallacy to that because whilst you can make a lot of money on what you do own, the opportunity cost of the next property you would like to trade up to does get higher. But that's less tangible so people don't tend to notice it so much, unless they hit your kind of situation.

There are of course other concepts that feed into the idea of a property ladder. Paying down mortgage principal through a repayment mortgage is of course another, more pedestrian but more consistent way of building equity. But that's boring and no longer the British way 

The property ladder steps are never the same distance apart.

Markets ultimately self correct and an equilibrium re-established. 

[Deleted User]

Yes, the housing market is a disaster and there is no sign of it getting better any time soon. You are lucky, you are least have a home of your own.

penners324

As alluded to in a previous post, part of being on the property ladder is also moving up the career ladder...

Newnoel

Have a look around Bromley or East Croydon areas. Plenty of 3 bed houses with gardens, and within your price range of up to £600k. Good transport links to London and easy access to local parks etc

redundantmortgage

There's currently a 3 bed detached house with drive, garage and front and back gardens near my parents that's for sale for slightly less than my 1 bed flat which I've nearly paid the mortgage off for. My mum thinks I should buy it and commute to work because it will give me the mortgage free existence I've desired all my life.

However the cost of the train fare, parking at the station and petrol to drive to the station would collectively cost me £13.5k a year. If that was to go up 3.8% each year like the train fare is going to do this year then that will cost around £550k over the next 25 years. My wife would have to do the same but we'd have to commute separately because we don't work the same hours. That's £1.1 million over the next 25 years.

OK this is an extreme example but the point is that moving further out and commuting won't always be more cost effective.

I am looking to upgrade to a house and it's looking like I'm going to end up borrowing more than I borrowed to get on the property ladder in the first place which is depressing.

What I'm finding to my cost is that trying to be sensible by saving a big deposit and buying somewhere I can comfortably afford isn't sensible at all. Had I taken the plunge earlier I'd probably be in my house by now but instead I'm wondering whether I'll be able to afford one at all.