Tuesday 15 January 2013

When Should You Buy A House?

Both here in the UK and abroad, housing markets have been somewhat unstable over the last decade, and it appears to have inspired a lot of debate.

As someone from the UK, buying a property has always been seen previously as a no brainer. Over time, property prices always go up.
Traditionally, renting a property has been thought of as like flushing a lot of money down the drain every month, but is that still the case?

What are the options??

I read a couple of posts recently at Money Bulldog and Liquid Independence which both talk about house buying and it reminded me of the time I bought my house, and made me wonder what I would do if in the same situation today.

It was back in 2001 and property prices were starting to go up dramatically. Almost every night on the evening news there was a piece about the housing market, and every month prices seemed to go up a few per cent, so myself and my wife made the decision to get on the housing ladder.

There seemed to be a lot of sense in that decision, as the rent we were paying was about the same as a mortgage anyway, and on our relatively low wages at the time, we could see the price of home ownership might soon move beyond our limited reach. Oh how right we were!

When we both work full time, we are both capable of earning twice what we did back then, and funnily enough, the value of our house is now twice what it was too. If we had delayed our decision we would have been very much worse off. Plus with the banking crisis of 2008, mortgage companies often require much larger deposits of say 20% of the house's value. Back then, I put our 5% deposit on my credit card, (yes, I know, I wasn't as financially savvy then as now, and didn't even bother to save up for my deposit 0_o).

Since then, prices did go up significantly, and then there was a crash in the housing market.

Now in the UK, we have some very funny ideas about property, such as buying a house is a very safe investment. Previous figures bear this out though. Since 1920, property prices have risen, on average, 8% each and every year since, and that's still true even with the current depressed prices being taken into account. Also, when commentators talk about a housing "crash", prices haven't really dropped significantly.

They've certainly stopped rising, but prices never really fell more than about 10%, and these last couple of years they have remained pretty static. Again, I think this is partly to do with the UK's skewed belief in the value of housing. Nobody is prepared to sell at a loss, unless they really, absolutely, positively have to sell: i.e. the house will be repossessed by the bank if they don't.

This has left the market quite flat, and has locked out a lot of first time buyers because saving a 20% deposit for a small house on a modest income is a huge task. In our case, our deposit was £3,000, but at today's prices it would have been £24,000 for the same property (at 20% down), so essentially there are far fewer buyers out there. Ordinarily supply and demand would dictate lower prices, but like I said, with our attitudes, it's just not happening.

So all this begs the question, what's going to happen next?

Looking at that figure of 8% a year, I really can't see how that can possibly continue over a much longer term now. Prices simply cannot rise at that rate indefinitely when wages just don't increase in a similar manner, (average wage has increased by less than 40% over the last 10 years).

In one sense we're turning into a nation of landlords and tenants, being as it's only landlords who have the ready funds, or the existing property to borrow against, who can afford the deposit on a new property. The only other "alternative" is the bank of Mum and Dad if your parents are well enough off. Even with this situation though, it should still be cheaper to pay a mortgage rather than rent every month, because after all, rent is just the landlord's mortgage payment plus a margin for maintenance and/or profit.

Then there's the cost of mortgages.

The Bank of England base rate is at it's lowest rate ever at 0.5%, and as a result so are mortgage rates. When we bought, we thought a 6% mortgage rate was unbelievably cheap, but no one in their right mind would consider paying that now. (Luckily for us, our mortgage tracks the base rate - phew!)

Mortgages might seem to be cheap - and right now they are, but back in the '80's they were often in double figures. Should this kind of scenario re-emerge, a lot of people, especially first time buyers, are going to be in serious financial difficulties. We'd certainly see prices drop then, but for the meantime, despite lack of demand, I can't see prices doing anything other than remaining stagnant.

Eventually property will get cheaper, but that will probably be more to do with inflation catching up to house prices rather than anything else, besides, it's doubtful any government now would let interest rates go up too fast because of the impact on their vote.

So should someone buy a house now?

It's a good question. With the current market being as it is, and the future being unpredictable, investing in property seems much more risky than it used to be, with little in the way of return. Perhaps the best and only good reason for buying a house nowadays is simply because you want somewhere to live.

11 comments:

  1. Blimey 8% a year is a better return than the stock market once you consider how most real estate investments are leveraged. Interest rates can't go up too fast because the UK central bank won't risk a real estate collapse. If someone is worried they won't be able to finance their mortgage anymore 10 years from now if we see double digit rates again, all they have to do is hedge against that interest risk. Inflation decreases the value of money which makes the mortgage easier to pay back anyway, because the balance of any debt owed (in real terms) is worth less. Besides, a mortgage is just a temporary liability because eventually it would be paid off, whereas renting is a PERPETUAL expense that tend to increase over a person's entire lifetime, and the only way to stop it is to buy a home lol, or kick the bucket. I think if someone doesn't have a house, and they plan to live in that country for the next 10 years or so, then they should buy in a well populated area. It's hard to time the housing market but the earlier one gets in the better one will be generally speaking. Thanks for the mention.

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    1. I'd agree with just about all of that apart from the "well populated" area, but then again, compared with Canada, everywhere is populated in the UK - they say you're never more than 10 miles from the nearest pub, and in my experience that's pretty much true.

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  2. 8% a year?? That's crazy! I think it still really comes down to your personal situation and what's best for you from a financial and long term perspective.

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    1. I know it sounds completely mad, but it's true - http://www.guardian.co.uk/uk/2011/jan/11/1910-london-property-prices-put-online "Ancestry.co.uk estimates that property values have risen by 3,000% in a century." and there's plenty more articles you can easily find with a quick google search, hence my confusion over how it can possibly continue like this, but still does! It's no wonder so many of our pensioners sell up and emigrate to europe. Property's cheaper, you still get your state pension, which probably goes a very long way with the euro in crisis and the british pound still firm, and of course there's much better weather.

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  3. Thanks for the mention Matt! I'd be staying well out of it for the moment. In my eyes there are too many uncertainties and economic headwinds to be able to make a decision as big as home ownership. If someone does still want to buy I'd fix in for at least 5 years, who knows where mortgage rates (Not BofE rates) will be in two years time.

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    1. On balance, I think I'd agree with you. It's much easier to make a good decision and avoid a bad one, when you can tell which way the wind's blowing.

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  4. I bought in the UK in 2007 and the house has a positive rental cash flow, which prevents me from worrying about whether I bought it cheap or expensive. If you can live in a house where your mortgage would be less than your rent then you should buy. At first I was hoping for foreclosure prices like you would see in the US but in such a small and quite populated country you can't fall that low.

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    1. And with owners being so stubborn about selling prices, you'll almost certainly recoup your initial investment if/when you do sell.

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  5. I am 32 years old and I rent and I love it. I have thought about buying a house and in the last three years I have made two offers but I couldn't just never go through with it. I love the freedom and no responsibility lifestyle of renting.

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    1. There's pluses and minuses to both I suppose.
      When renting you can move whenever you want to as there's no real ties, but then on the other hand, you can't do what you like to the house. It's not like you could knock a wall through, or take down the conservatory if you didn;t like it!

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    2. In my opinion buying is always the best option. The market will come round sooner or later. Maybe later rather than sooner, but people will always need a place to live. And if you own a home and can rent it out, to said people who always need a place to live, then you will be able to generate cash flow.

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