Should I buy or carry on ranting?

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

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.

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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?

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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.

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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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