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The Masked Tulip

Homeowners Can No Longer Rely On Rising House Prices To Trade Up,

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http://www.dailymail.co.uk/news/article-12...il-Spencer.html

The TV property expert who had his fingers burnt in the slump warned homeowners that they can no longer count on rising prices to help them trade up.

Phil Spencer, the co-host of Channel 4's Location, Location, Location, said buyers now need to look for homes that will accommodate them for years, and for properties where value can be added.

'You cannot rely on the market helping you to move in the future,' he said.

'It's not going to be enough to buy a property and think, I'll own it for two or three years, it'll go up in value, and I'll be able to trade up the ladder.

'That's not going to cut it any more. You've got to be more strategic. This is a long-term decision.

'Look for opportunities to add value; look for properties that can be adapted to meet your requirements as they change.'

The advice paints a gloomy but realistic picture for current buyers.

During the housing boom, many families were able to cash in on huge rises in their property's value in order to buy bigger, more luxurious homes.

Those who bought at the height of the market, and are now in negative equity, are in the worst position as they can see no prospect of trading up.

'I worry greatly about unemployment across the country and that brings forced selling and forced selling means repossession, so there will be some fairly serious heartache for people out there,' Mr Spencer added.

Read more: http://www.dailymail.co.uk/news/article-12...l#ixzz0Mn9kRGU4

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Doesn't make sense does it?

When prices rose people sold their house and used the proceeds to trade up? Er isn't the bigger house more expensive too, only even more so as its percentage increase means a bigger gap in actual ££££

Unless they mean that three years into your small home the money it has risen can be immediately pushed into a bigger mortgage so you maintain a measley 5% deposit but have a way bigger mortgage. Don't get it. Can someone please explain.

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Doesn't make sense does it?

When prices rose people sold their house and used the proceeds to trade up? Er isn't the bigger house more expensive too, only even more so as its percentage increase means a bigger gap in actual ££££

Unless they mean that three years into your small home the money it has risen can be immediately pushed into a bigger mortgage so you maintain a measley 5% deposit but have a way bigger mortgage. Don't get it. Can someone please explain.

I would say by trading a small, immaculate house for a larger, run-down one. Renovate and repeat until you've got the place you want (or until you begin to suspect you'll end up as the greater fool, if you continue). Ideally, buying each time in not-yet-fashionable area bordering a smart one, to benefit from a supply of priced-out adventurous buyers around the time you wish to sell.

I suppose it's also possible to ratchet up by improving and selling properties in a flat market, but the "improving area" syndrome was IMO very much a product of the boom.

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I would say by trading a small, immaculate house for a larger, run-down one. Renovate and repeat until you've got the place you want (or until you begin to suspect you'll end up as the greater fool, if you continue). Ideally, buying each time in not-yet-fashionable area bordering a smart one, to benefit from a supply of priced-out adventurous buyers around the time you wish to sell.

I suppose it's also possible to ratchet up by improving and selling properties in a flat market, but the "improving area" syndrome was IMO very much a product of the boom.

Who bought the smaller immaculate house each time? It sounds like a good explaination but the model fails for any significant number of people doesn't it. After all it works by buying a run down house not an immaculate one.

I suppose the immaculate ones could go to the renters/council tennants who then make it run down thereby sustaining the market ;)

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If you don't get it then it means you are thinking for yourself. Congratulations!

A rising market doesn't help you trade up.

Example

It's 2010 and somebody buys a one bed flat for 100k with a 100% mortgage on repayment terms. Lets assume they earn 25k. They'd like a 200k house but can't afford it, so plan to trade up in 5 years.

In 2015, after 5 years of 5% house price growth, their first flat is worth ~128k. They have also paid off 10% of their mortgage so have 90k debt outstanding and a total of just under 38k equity. They feel rich.

The house they wanted has risen from 200k to 255k. As a result they now require a loan of 217k. This is better than having done nothing (unless they could save 37k in 60 months), but for the same 4x mortgage their pay will need to have risen by just over 100% to ~54k. If their salary has instead risen by 5% then they will actually earn just ~32k, meaning either a ~7x mortgage or a fundamental reassesment of their dreams.

Or we could assume that HPI is higher - that's even better right?

If HPI was 10% rather than 5% the above calculation works out as equity of 71k (woohoo! Rich!) but to trade up they'd still need a loan of 251k. If their salary was still only 32k they'd need an 8x loan....!

If HPI was 15% (rock on!) the calculation works out as equity of 111k (F*ck Me I'm Bling!) but to trade up they'd still need a loan of 291k. If their salary was still only 32k they'd need an 9x loan....!

It's nonsense. The ladder doesn't work like this.

What no one tells you is that the ladder was a product of the 1970s. In the 70s inflation was high, and so was wage growth. If you maxed out in yr 1 of the mortgage it was inflation of your wages that enabled you to trade up, not equity or repayments. It was decreasing real debt. This doesn't happen any more. We have inherited some hand-me-down assumptions that don't work and applied a high inflation strategy to a low inflation world. Big Fail.

See Myth 2 in this document http://www.scribd.com/doc/17827322/View-From-the-Mountain, specifically pages 21-23.

The figure on page 26 illustrates that even previous owners (those trading up) in the actual stats have been required to take out larger mortgages relative to incomes. Everybody gets into debt. The only winners are the banks, final owners, and BastardTyrantLandlords.

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What no one tells you is that the ladder was a product of the 1970s. In the 70s inflation was high, and so was wage growth. If you maxed out in yr 1 of the mortgage it was inflation of your wages that enabled you to trade up, not equity or repayments. It was decreasing real debt. This doesn't happen any more. We have inherited some hand-me-down assumptions that don't work and applied a high inflation strategy to a low inflation world. Big Fail.

Completely right and something many never consider.

For those of us entering adulthood in the 70's and 80's double digit inflation was normal. It was the acceptance of inflation that allowed us to climb the housing 'ladder' as our mortgage debt and the monthly repayments shrank in real terms year after year.

The next generation has never experienced inflation on this scale, yet still expects the model of the 'housing ladder' to remain intact. In the 50's and 60's, before inflation kicked in, people were more likely to buy a house commensurate with their means and remain in it all their lives.

Inflation has many drawbacks, but it didn't half make house buying easier!

Edited by Mr Yogi

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What no one tells you is that the ladder was a product of the 1970s. In the 70s inflation was high, and so was wage growth. If you maxed out in yr 1 of the mortgage it was inflation of your wages that enabled you to trade up, not equity or repayments. It was decreasing real debt. This doesn't happen any more. We have inherited some hand-me-down assumptions that don't work and applied a high inflation strategy to a low inflation world. Big Fail.

It's a pity this isn't discussed more.

Parents buying a house in the seventies would have more front loading for the debt, struggling to pay the mortgage for the first few years until inflation eroded the debt, and their earnings rose sharply.

The strategy made sense then.

If they have children buying now, who take the same view of maxing their initial payments, then they're going to find the debt barely erodes. This could turn into a massive financial disaster years down the line.

Most people won't understand the difference between real and nominal interest rates, and that's a problem when you have a shift from a high inflation/nominal rates to a low inflation/nominal rates economy.

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What no one tells you is that the ladder was a product of the 1970s. In the 70s inflation was high, and so was wage growth. If you maxed out in yr 1 of the mortgage it was inflation of your wages that enabled you to trade up, not equity or repayments. It was decreasing real debt. This doesn't happen any more. We have inherited some hand-me-down assumptions that don't work and applied a high inflation strategy to a low inflation world. Big Fail.

See my sig

The ladder is a metaphorical construct designed to sucker FTBs on to the "first rung". That boomers have been able to trade up over their lives to bigger and better properties does not mean that there is a ladder there for subsequent generations to climb, nor that there should be one. HPI has made the rungs too far apart and in some instances the ladder has been pulled up away from the average FTB altogether as boomers recycle their equity to their offspring to give them a leg up (the levitating ladder).

If there ever was a ladder it was during a period when boomers were expanding the economy and marching onwards and upwards in a demographic bulge. The economy is no longer doing that and for most people their first property may be their last.

My late grandfather, a machine tool maker in the North East, bought his first and only house in the '30s. He never moved, his first house was adequate for family needs (he had 4 children and his wife did not work). He was not wealthy by any objective measure but by today's standards he seems to have been, which shows what a nonsense the UK property market has become.

JY

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Completely right and something many never consider.

For those of us entering adulthood in the 70's and 80's double digit inflation was normal. It was the acceptance of inflation that allowed us to climb the housing 'ladder' as our mortgage debt and the monthly repayments shrank in real terms year after year.

The next generation has never experienced inflation on this scale, yet still expects the model of the 'housing ladder' to remain intact. In the 50's and 60's, before inflation kicked in, people were more likely to buy a house commensurate with their means and remain in it all their lives.

Inflation has many drawbacks, but it didn't half make house buying easier!

+1 exactly right.

In the seventies and even the eighties the rise up the ladder was fuelled by increasing salaries and debt erosion via inflation, not by sheer speculation and absurdly low interest rates (and interest only mortgages). Not everyone aspired to a large detached house (i.e. top of the ladder) or was able to get there.

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Doesn't make sense does it?

When prices rose people sold their house and used the proceeds to trade up? Er isn't the bigger house more expensive too, only even more so as its percentage increase means a bigger gap in actual ££££

Unless they mean that three years into your small home the money it has risen can be immediately pushed into a bigger mortgage so you maintain a measley 5% deposit but have a way bigger mortgage. Don't get it. Can someone please explain.

You're absolutely right here, it doesn't make sense and in fact never did. I lived in North London in the eighties and was always looking to trade up but the gap between what I had and what it was worth moving for was well beyond me in terms of borrowing capacity. You can 't explain it because it's nonsense.

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Phil's having a laff :rolleyes:

The only way most people have been able to trade up in the last 10 years is by tapping the bank for even more cheap n easy credit (debt). Few buyers used their savings. Now that the credit taps are turned off, it's game over.

Phil is now going through his "mea culpa" phase to redeem himself in the eyes of all those poor sods who will be stuck in -ve equity for the next 10-20 years, because they bought into his "dream". Complete charlatan. :angry:

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Doesn't make sense does it?

When prices rose people sold their house and used the proceeds to trade up? Er isn't the bigger house more expensive too, only even more so as its percentage increase means a bigger gap in actual ££££

Unless they mean that three years into your small home the money it has risen can be immediately pushed into a bigger mortgage so you maintain a measley 5% deposit but have a way bigger mortgage. Don't get it. Can someone please explain.

agreed, the man's clearly a fool.

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nonsense guys.

according to ministers having all this debt is an indication of your wealth.

rising differentials and your ability to get 217K loans means you are wealthy, we are wealthy and the economy is great...just make sure you mew for a new car while you are trading up too. oh and that £7k cost to trade...mew that too.

Schroedinger would have been proud.

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If you don't get it then it means you are thinking for yourself. Congratulations!

A rising market doesn't help you trade up.

Example

It's 2010 and somebody buys a one bed flat for 100k with a 100% mortgage on repayment terms. Lets assume they earn 25k. They'd like a 200k house but can't afford it, so plan to trade up in 5 years.

In 2015, after 5 years of 5% house price growth, their first flat is worth ~128k. They have also paid off 10% of their mortgage so have 90k debt outstanding and a total of just under 38k equity. They feel rich.

The house they wanted has risen from 200k to 255k. As a result they now require a loan of 217k. This is better than having done nothing (unless they could save 37k in 60 months), but for the same 4x mortgage their pay will need to have risen by just over 100% to ~54k. If their salary has instead risen by 5% then they will actually earn just ~32k, meaning either a ~7x mortgage or a fundamental reassesment of their dreams.

Or we could assume that HPI is higher - that's even better right?

If HPI was 10% rather than 5% the above calculation works out as equity of 71k (woohoo! Rich!) but to trade up they'd still need a loan of 251k. If their salary was still only 32k they'd need an 8x loan....!

If HPI was 15% (rock on!) the calculation works out as equity of 111k (F*ck Me I'm Bling!) but to trade up they'd still need a loan of 291k. If their salary was still only 32k they'd need an 9x loan....!

It's nonsense. The ladder doesn't work like this.

What no one tells you is that the ladder was a product of the 1970s. In the 70s inflation was high, and so was wage growth. If you maxed out in yr 1 of the mortgage it was inflation of your wages that enabled you to trade up, not equity or repayments. It was decreasing real debt. This doesn't happen any more. We have inherited some hand-me-down assumptions that don't work and applied a high inflation strategy to a low inflation world. Big Fail.

See Myth 2 in this document http://www.scribd.com/doc/17827322/View-From-the-Mountain, specifically pages 21-23.

The figure on page 26 illustrates that even previous owners (those trading up) in the actual stats have been required to take out larger mortgages relative to incomes. Everybody gets into debt. The only winners are the banks, final owners, and BastardTyrantLandlords.

This is a great post. Every FTB should have it nailed to their forehead.

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The transition from a high inflation environment to a low inflation one has affected everything.

Even the endowment issue where the endowments no longer pay off the mortgage - the life companies couldn't achieve the returns in a low inflation environment that they thought they would get. And borrowers didn't make use of low rates to pay down their debts.

Pensioners on fixed incomes or limited rpi linking no longer find that their pension is virtually worthless after a few years of retirement. But on the other hand the private companies and the government with large liabilities that are not going away are looking increasingly bust.

Whilst the population is ageing the political will for low inflation grows. But it won't be easy.

Which is where HPI meets globalisation. It's the entrance of China into the world economy that has enabled a long period of low inflation. This is seen as a good thing. It may be, but it's certainly not 100% clear. Offshoring means that many previously safe jobs now have little or no wage bargaining power; cheap tat made in the far east keeps CPI low; we've even managed to outsource our pollution. I'm no anti capitalist, but when the pink (and the government) was extolling the brilliance of immigration because it kept wages low so interest rates could stay low and mortgages were "cheaper" I began to wonder if the current version was a bit too red in tooth and claw. These overly low rates, for too long, and a woeful lack of education means that the west has piled into massive debt. Of course, when the market bit them on the ass, which it dutifully did, everyone cacked themselves and quickly robbed the taxpayer to keep the party going... What we have now is the worst of both worlds - the greed of uber capitalism and the support of socialism for the rich. Genius.

Everyone thinks properdee will make them rich, but in reality it will just make some rich and create an elitist rentier society.

* China is still playing the communist game btw. They believe that we will be hoisted by our own petard. They're effectively accelerating this by creating these imbalances in our system, slowly creating an angry proletariat that will overthrow the investors etc., etc... . This is probably by accident, but.. they're also playing a long game buying up all the resources. We will find out that we're up to our eyeballs in debt and unable to get any cheap energy. Nice.*

That's probably a load of rubbish, even if it half makes sense today. But it doesn't matter. Nor do Phil's comments on the Property Ladder. It doesn't work any more, it's just the pathway to debt. But what choice do people have? Try explaining even the most basic element of housing and people's eyes glaze over. They love it. They want more debt. They think it'll work. Show them any proof of the ladder not working and they will think that it's a trick. By the time they wake up it'll be far too late.

It is this inability to understand what they're signing up for that makes me wonder if it is really a social turning point...

EDIT: to change my mind

Edited by bear_or_bull

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agreed, the man's clearly a fool.

Disagree - he is playing the TV and publishing industries and the public for fools, has done for years. They should be very angry with him. They just don't realise it yet.

The housing market is extremely resistant to anyone owning (in the literal, no mortgage sense) a property out of step with their wealth.

The people who went 'up the ladder' in the 70s and 80s didn't really, they just found the level determined by their true wealth over time.

I'm not sure that will ever change.

It's funny, you never see the trolls like Sibley reasoning out things like this. They just keep saying houses will go up and the bears are all stupid based on scant bull evidence that they don't ever question.

We have asked them again and again to back their claims with solid evidence but they never do.

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Surely upsizers benefit from falling house prices in two ways. Asssuming that prices fall uniformly, that will mean the extra money they have to find to trade up will reduce too.

If you sell a house worth 150K and buy one worth 200K, it cost you 50K

If prices halve (for argument's sake) and the house you sell is now worth 75K and the one you want to buy is worth 100K, you only need to find 25K - a saving of 25K.

Also, if prices are falling, if you sell first then buy, during the time interval, prices might fall a little.

When prices were rising the biggest benefit to me was that our equity went up - in the end we paid off our mortgage so now I don't really care what our house is worth except in relation to the wider property market.

Edited by blankster

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For those of us entering adulthood in the 70's and 80's double digit inflation was normal. It was the acceptance of inflation that allowed us to climb the housing 'ladder' as our mortgage debt and the monthly repayments shrank in real terms year after year.

The next generation has never experienced inflation on this scale, yet still expects the model of the 'housing ladder' to remain intact. In the 50's and 60's, before inflation kicked in, people were more likely to buy a house commensurate with their means and remain in it all their lives.

Inflation has many drawbacks, but it didn't half make house buying easier!

Spot on.

The VI's spun property as being "affordable" becuase interest rates were low and mortgage payments were in line with historical norms. What they forgot to tell you was historically the mortgages were (in effect) being paid off over 10 years wheras now you were paying them off over 20 years or longer.

So your £180,000 2 bed flat looked ok because the interest payments were only £8,000 per year, but if you actually wanted to own it in a reasonable time frame (10 years) it's £21,000 p/a.

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