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Should I buy or carry on ranting?

Neil Faulkner
by Lovemoney Staff Neil Faulkner on 06 May 2010  |  Comments 30 comments

A furious variation of a popular property question. But what's the answer?

Should I buy or carry on ranting?

There was a similar headline in the Guardian recently, but with my cursor hovering over the 'e' in 'renting', I misread it. Nevertheless, I thought my mis-read appropriate. First-time buyers (plus parents) are angry that house prices are so high, even after falls knocking thousands from most properties in 2008.

Those people with the money to buy don't know whether to do so or to keep on waiting – and complaining.

What everyone wants desperately to avoid is negative equity. I'm going to give you two good reasons why on the balance of probability you shouldn't wait. Better than that, what I tell you should give you more confidence, as you realise the risks are smaller than you think right now.

House prices revert to trend

Investment management company GMO conducted a study that found 34 bubbles over recent decades. Just two of them haven't burst – so far – and one of them is UK property (the other Australian property). The rest have collapsed and returned to average growth trends.

Buying your first property? Check out these top tips....

The vast majority of forecasters use house prices to salary ratios to measure whether we're in a bubble, yet it's normal for assets (houses and shares, for example) to rise faster than inflation or wages. Data from the stock market goes back more than a century and shows sustained growth over and above inflation. Yes, there are some bad periods, and that is a warning that should be heeded in all asset classes, but generally it has done very well.

Turning to property, from 1952 to 1999 – just before house prices started booming – house-price inflation was a little over 7%. For the first three decades of that, from 1952 to 1982, house price inflation was a bit higher: at a little more than 8%. This means that from 1983 to 1999 we've experienced below average inflation at slightly over 6%.

The first thing that follows from that is we've had, therefore, a little room for house prices to grow faster in the noughties. And they certainly did. Too fast. But for the past two-and-a-half years we've had a small correction and some stagnation. This has helped to bring prices closer to the long-term trend than you may realise.

At a little over 7%, average property prices should be around £145,000, not the £168,000 they're at now. Yet if the growth trend from 1952 to continues to the end of 2012, house prices should then be at £179,000, or £11,000 more than they're priced at today. It shows that time – and not necessarily a great deal of time – is strongly on the homebuyers' side.

You're buying an asset

So we have this safety net that the asset-price growth trend is likely to give us, but what if it doesn't work out that way? What if after the bubble we get under-valued properties?

Related how-to guide

Sell your home

If you want to obtain the best possible price when selling your home, then these ideas should help.

Once again, the fact that you're buying an asset comes to your rescue. Someone buying an average property today (with a 10% deposit, a 25-year mortgage and a 5.5% interest rate, and assuming a £1,000 fee is added to the mortgage) will have a mortgage £24,000 below their buying price after just 32 months to the end of 2012.

This means that house prices will have to be £35,000 below the long-term house-price growth trend at the end of 2012 for you to be in negative equity. That's quite a comfort zone that you can build very quickly.

Yes, prices fell tens of thousands just recently, but on the one hand that makes property now less risky, not more so, and on the other prices were well above the long-term trend when they did fall. My recommendation if they were to fall £35,000 below the trend in 2012 is that you should consider buying a second property!

Some bonus reassurance

Today, it's only people who bought in between September 2005 and October 2008 who, on average, will get a lower price for their property now than when they bought, by an average of £17,000:

Is a property worth more than when it was last bought?

When the property was bought

Is the property now worth more?

August 2005 or earlier

The average property is now worth more

Between September 2005 and October 2008

The average property is now worth £17,000 less than the buying price

November 2008 or later

The average property is now worth more

However, on average, people who bought during that bad period from September 2005 to October 2008 have reduced their mortgages to £19,000 below the buy price already. (This time assuming a 5% deposit, which was much more common back then.) Hence, the majority of people buying even then will be out of negative equity.

Related blog post

We can't know what's going to happen to house prices in the short term, but the trend is likely to help us. Plus, we do know that the sooner you buy, the sooner you'll stop giving all your money to a landlord, and the sooner you'll be owning, each month, a little bit more of your own home. I think my examples today make it clearer what precisely that means in terms of your own financial security.

Historically it's rarely a bad time to invest in property and those bad times aren't likely to last long anyway, not with the dual hit of trend growth and monthly repayments. You might not like having to pay today's prices, but it may be that your best choice is to both buy now and carry on ranting.

I must conclude with a few of my usual warnings:

  • This is article isn't a forecast that another crash won't happen. I don't do forecasts.
  • You must be able to afford repayments before you take a mortgage, even if interest rates were to rise dramatically.
  • You must be prepared for unfortunate events (e.g. redundancy).
  • You must be prepared to sit in the property you're buying for a while, in case of negative equity. (Even if it's short-lived.)

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Comments (30)

  • fnm500
    Love rating 4
    fnm500 said

    If all of us tied up our hard earned savings into an unproductive asset such as a home which just sits there and decays over time, how would the British economy grow? Where would the capital for investment in industry and entrepreneurship that provides for the jobs everyone needs to pay their mortgages come from? What about job mobility in the face of recession? What about interest rate risk? Redundancy risk? Are these only side thoughts? These should be the core input.

    I really urge everyone to invest your savings in your human capital- learn new skills to keep up in this competitive world, so that you minimise your risk of redundancy or so that you can start your own business, accumulate enough wealth to last a life time and only then buy a home. Britain needs its citizens to invest in productive capital or a safe, secure and growing future

    Report on 26 May 2010  |  Love thisLove  0 loves
  • old_contrary
    Love rating 0
    old_contrary said

    There's something going on here that we should all be concerned about.

    If you look at average salaries over the years and compare them to house prices there is a huge gap and there's a reason for it.

    Inflation tends to take it's toll on prices and wages but they typically keep pace with one another.

    House prices have not kept place with inflation and there is an ever growing gap.

    House price or asset price inflation has little to do with supply and demand and everything to do with the way money is created as debt out of thin air.

    Most of the banks lending is linked to houses which are provided as mortgages.

    Because of the way that money is created as debt out of thin air against property, we have ended up with asset price inflation.

    The technical term is called Fractional Reserve Lending and is something all Banks engage in.

    This may or may not help you to decide whether it's a good time to rent or buy. All I do know and I used to be involved with the mortgage market is this - First time buyers are finding it increasingly hard to get on this property merry-go-round. Parents are now having to gift the deposit (now averaging around £23,000) to help them.

    All the innovation around property is how to make it affordable for people to own or partially own their property. The system wants to keep things turning over ie buying and selling but it's running out of ideas.

    Do I see a big crash coming? To be honest I'm not sure and no one can predict the timing of these things with any accuracy.

    One thing I can predict is this. The pressure building up in the system will blow again. The UK and other countries are sitting on huge amounts of debt which will demand ever greater taxes.

    We take so many things for granted and never question them. I really think it's time we asked that extra question and dug that bit deeper because we are all being hoodwinked by our dear Governments and Banks.

    Regards

    Old Contrary

    Report on 14 January 2011  |  Love thisLove  0 loves

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