To Ftb Or Not To Ftb?

[MrP]

I've been thinking of buying for a while and have been trying to decide but I think that I will take the plunge. I know the majority of you will think I am mad but I have listened to your arguements and agree with many but I think the following has won me over:

1. There has been a average increase (forgeting the spikes) in prices of about 4 or 5% a year over 25 years.

2. That increase is on geared money ie if i bought at 100K with a 5K deposit then 5% would give me £5K gain. The same deposit stuck in a savings account would gain about 5% but has no gearing so i would gain only £0.5K. To compete any alternative investment would have to double in value inside a year.

3. Yes buying at exactly the right time will maximise my returns but nobody has a guaranteed way of predicting it. Also the historic data is not so reliable for means of comparison because interest rates are not under political control but controlled via the MPC and BTL mortgages are a relatively new innovation that must have brought more buyers to the market.

4. I am concerned that if I wait for a drop in prices (which isn't guaranteed) then as soon as the mortgage costs for BTL drop to the rental value there will be another load of BTLs to compete with. And this happens quite quickly because they pay larger deposits.

5. If the house prices fall this will be due to a lack of buyers presumably because of interest rates. These people will all need to live somewhere so won't the increased demand for rents push the prices up? If so wouldn't it be best to pay a bit extra for a similar place but own it at a later date?

6. BTLs will probably get into the market quicker if it falls for another reason as well - they can carry forward their losses for 6 years I believe.

7. If I were to invest in something else I expect I would have to spend much more time managing it than my own home.

8. I feel more comfotable with owning - no argueing over deposits, waiting for landlords to fix stuff, no more wanting to improve my home but not doing as I will just be improving someone elses investment and only benefit from it for a short time.

9. I am relatively young now and expect my salary to increase as I gain experience and hope that this will cover any difficult period.

10. A friend had a problem a few years ago (lost his job) and couldn't meet the mortgage payments. He spoke to the mortgage company and they arranged for him to not pay for 9 months, i think they added to extra to the mortgage. He managed to find another job in this time and is back on track. I doubt most landlords are this accomodating.

11. Bricks and mortar seem to be a safer bet and require less monitoring than shares. Don't get me wrong shares are a great investment for those that know what they are doing, but for me there are too many risks companies go bust, houses rarely do. If I go away on holiday I'm pretty sure that it will still be there when I come back (and I can insure it cheaply) alot can happen to shares in a month.

I'm not refuting everything that has been said on this board or people arguements but I feel that there is too much emphasis on the magnitude and not the probablility of some of the worst things that could happen to the market. In some cases people seem to be predicting economic collapse for the country in which case I would be stuffed whether I owned a place or not. This has been a BIG decision for me but I feel the above points are valid and outweigh the risks that are likely to effect me. If anyone can offer any advice or point out any fundamental errors with these points then I would appreciate your comments.

Edited September 11, 2005 by MrP

[FrozenOut]

I've been thinking of buying for a while and have been trying to decide but I think that I will take the plunge. I know the majority of you will think I am mad but I have listened to your arguements and agree with many but I think the following has won me over:

1. There has been a average increase (forgeting the spikes) in prices of about 4 or 5% a year  over 25 years.

2. That increase is on geared money ie if i bought at 100K with a 5K deposit then 5% would give me £5K gain. The same deposit stuck in a savings account would gain about 5% but has no gearing so i would gain only £0.5K. To compete any alternative investment would have to double in value inside a year.

3. Yes buying at exactly the right time will maximise my returns but nobody has a guaranteed way of predicting it. Also the historic data is not so reliable for means of comparison because interest rates are not under political control but controlled via the MPC and BTL mortgages are a relatively new innovation that must have brought more buyers to the market.

4. I am concerned that if I wait for a drop in prices (which isn't guaranteed) then as soon as the mortgage costs for BTL drop to the rental value there will be another load of BTLs to compete with. And this happens quite quickly because they pay larger deposits.

5. If the house prices fall this will be due to a lack of buyers presumably because of interest rates. These people will all need to live somewhere so won't the increased demand for rents push the prices up? If so wouldn't it be best to pay a bit extra for a similar place but own it at a later date?

6. BTLs will probably get into the market quicker if it falls for another reason as well - they can carry forward their losses for 6 years I believe.

7. If I were to invest in something else I expect I would have to spend much more time managing it than my own home.

8. I feel more comfotable with owning - no argueing over deposits, waiting for landlords to fix stuff, no more wanting to improve my home but not doing as I will just be improving someone elses investment and only benefit from it for a short time.

9. I am relatively young now and expect my salary to increase as I gain experience and hope that this will cover any difficult period.

10. A friend had a problem a few years ago (lost his job) and couldn't meet the mortgage payments. He spoke to the mortgage company and they arranged for him to not pay for 9 months, i think they added to extra to the mortgage. He managed to find another job in this time and is back on track. I doubt most landlords are this accomodating.

11. Bricks and mortar seem to be a safer bet and require less monitoring than shares. Don't get me wrong shares are a great investment for those that know what they are doing, but for me there are too many risks companies go bust, house don't (or less often).  If I go away on holiday I'm pretty sure that it will still be there when I come back (and I can insure it cheaply) alot can happen to shares in a month.

I'm not refuting everything that has been said on this board or people arguements but I feel that there is too much emphasis on the magnitude and not the probablility of some of the worst things that could happen to the market. In some cases people seem to be predicting economic collapse for the country whether I owned a place or not. This has been a BIG decision for me but I feel the above points are valid and outweigh the risks that are likely to effect me. If anyone can offer any advice or point out any fundamental errors with these points then I would appreciate your comments.

<{POST_SNAPBACK}>

So you are prepared to pay over the odds by 40-50% in the short term, as we approach a recession? This is the WORST time to buy, and I don't even need to list 11 points to know that sitting on my cash for another 18months is the best thing to do.

You are buying in to a falling market, in a country on the edge of recession.

Best of luck, you are going to need it.

[Zzzzzzzzzzzzzzzzzzzzzzzzzz]

A bad decision in my opinion, but good luck to you anyhow. If I was you, I'd wait a year, but hey, if you've made up your mind.......

[Guest Bart of Darkness]

Each of us has to do what we feel is right for us as individuals. I may not agree with your decision but I wish you luck with your new home.

[IPOD]

There has been a average increase (forgeting the spikes)

Of course it is very easy to come up with the interpretation you desire if you ignore large swathes of economic history. Ignoring the spikes and troughs in the UK property market would mean ignoring virtually all the post-WWII period.

2. That increase is on geared money ie if i bought at 100K with a 5K deposit then 5% would give me £5K gain. The same deposit stuck in a savings account would gain about 5% but has no gearing so i would gain only £0.5K. To compete any alternative investment would have to double in value inside a year.

Gearing is easily available to retail investors via spreadbets and CFD's.

BTL mortgages are a relatively new innovation that must have brought more buyers to the market.

Actually, BTL has stimulated relatively little brand-new demand. Experienced landlords have simply refinanced their portfolios using BTL loans instead of commerical loans, which they used before BTL came along.

this happens quite quickly because they pay larger deposits.

BTL's typically put down 10-15% deposits. Any FTB who is not completely stupid would also be looking to put down this amount (at least).

If the house prices fall this will be due to a lack of buyers presumably because of interest rates. These people will all need to live somewhere so won't the increased demand for rents push the prices up?

Err, what increased demand? Those people are already living somewhere, so net rental demand is unchanged.

[MrP]

So you are prepared to pay over the odds by 40-50% in the short term, as we approach a recession?  This is the WORST time to buy, and I don't even need to list 11 points to know that sitting on my cash for another 18months is the best thing to do.

You are buying in to a falling market, in a country on the edge of recession.

Best of luck, you are going to need it. 

<{POST_SNAPBACK}>

I would not benefit from a recession, doubt you would either.

As for paying out each month - I will have to anyway. I'd rather a little extra meant I'd get something back for struggling. Do you think that rents will stay low forever? Do you think that when the rents go up the BTLs won't notice and reappear as a force in the market? How long do you think that would take? Do you enjoy being a tenant?

Looks like people on here have been advising against buying for years I feel for those who listened as even with the massive drop you hope for they would still have been better off having bought.

[Bluelady]

10. A friend had a problem a few years ago (lost his job) and couldn't meet the mortgage payments. He spoke to the mortgage company and they arranged for him to not pay for 9 months, i think they added to extra to the mortgage. He managed to find another job in this time and is back on track. I doubt most landlords are this accomodating.

Landlords don't need to be this accommodating - tenants who lose their jobs are entitled to housing benefit.

[Jason]

It surprises me how many people are willing to take on huge debts and do no research whats so ever. It appears you have done this research, and it appears you have made a decision based on this.

So go ahead with your decision.

All I can say is make sure you barter hard, and get a good discount as your not in a chain. Good Luck!

[Chris....]

Answer me one question...

Could you afford to pay your mortgage if interest rates returned to their average level for the last 25 years?

This is 8.41%

source BOE

http://213.225.136.206/mfsd/iadb/index.asp...x=52&G0Xtop.y=6

[Charlie Don't Surf]

I earnt £50K last year, yet all I can afford is a 2 bedroom house in a street I don't even like walking down. Half my neighbours would be on DSS and I'd probably be kept awake by them watching satellite TV until 3 am.

Even if I did go for one of these houses I'd be tied into a mortgage that would mean I'd need to be earning a good wage for the next 25 years.

Anyway, how bitter would I feel in a years time when after signing my life away, house prices are in freefall and the I over hear a shelf stacker at Tescos saying how they should be able to clear their mortgage on the house they just bought in 15 years if Tracey gets her certificate in child-minding!

Think about it?!

[IPOD]

Even if I did go for one of these houses I'd be tied into a mortgage that would mean I'd need to be earning a good wage for the next 25 years.

Taking on a committment like this is tantamount to admitting "Yes, I would like to be a wage slave for the rest of my life".

[MrP]

Of course it is very easy to come up with the interpretation you desire if you ignore large swathes of economic history. Ignoring the spikes and troughs in the UK property market would mean ignoring virtually all the post-WWII period.

Meant gnore the current spike or it is much higher than 4 or 5%. I'm not ignoring the history just the latest spike all the troughs are in there.

Gearing is easily available to retail investors via spreadbets and CFD's.

True, but the thing that puts me off is that they no residual value. they either win or lose and i see them as much riskier.

BTL's typically put down 10-15% deposits. Any FTB who s not completely stupid would also be looking to put down this amount (at least).

didn't realise they could get as good as that I thought they needed 20% for a BTL mortgage. Not in the market for a BTL so don't know, will take your word for it.

Err, what increased demand? Those people are already living somewhere, so net rental demand is unchanged.

Population growth, and more people leading single lives.

<{POST_SNAPBACK}>

Edited September 11, 2005 by MrP

[boom_and_bust]

I've been thinking of buying for a while and have been trying to decide but I think that I will take the plunge. I know the majority of you will think I am mad but I have listened to your arguements and agree with many but I think the following has won me over:

1. There has been a average increase (forgeting the spikes) in prices of about 4 or 5% a year  over 25 years.

2. That increase is on geared money ie if i bought at 100K with a 5K deposit then 5% would give me £5K gain. The same deposit stuck in a savings account would gain about 5% but has no gearing so i would gain only £0.5K. To compete any alternative investment would have to double in value inside a year.

3. Yes buying at exactly the right time will maximise my returns but nobody has a guaranteed way of predicting it. Also the historic data is not so reliable for means of comparison because interest rates are not under political control but controlled via the MPC and BTL mortgages are a relatively new innovation that must have brought more buyers to the market.

4. I am concerned that if I wait for a drop in prices (which isn't guaranteed) then as soon as the mortgage costs for BTL drop to the rental value there will be another load of BTLs to compete with. And this happens quite quickly because they pay larger deposits.

5. If the house prices fall this will be due to a lack of buyers presumably because of interest rates. These people will all need to live somewhere so won't the increased demand for rents push the prices up? If so wouldn't it be best to pay a bit extra for a similar place but own it at a later date?

6. BTLs will probably get into the market quicker if it falls for another reason as well - they can carry forward their losses for 6 years I believe.

7. If I were to invest in something else I expect I would have to spend much more time managing it than my own home.

8. I feel more comfotable with owning - no argueing over deposits, waiting for landlords to fix stuff, no more wanting to improve my home but not doing as I will just be improving someone elses investment and only benefit from it for a short time.

9. I am relatively young now and expect my salary to increase as I gain experience and hope that this will cover any difficult period.

10. A friend had a problem a few years ago (lost his job) and couldn't meet the mortgage payments. He spoke to the mortgage company and they arranged for him to not pay for 9 months, i think they added to extra to the mortgage. He managed to find another job in this time and is back on track. I doubt most landlords are this accomodating.

11. Bricks and mortar seem to be a safer bet and require less monitoring than shares. Don't get me wrong shares are a great investment for those that know what they are doing, but for me there are too many risks companies go bust, houses rarely do. If I go away on holiday I'm pretty sure that it will still be there when I come back (and I can insure it cheaply) alot can happen to shares in a month.

I'm not refuting everything that has been said on this board or people arguements but I feel that there is too much emphasis on the magnitude and not the probablility of some of the worst things that could happen to the market. In some cases people seem to be predicting economic collapse for the country in which case I would be stuffed whether I owned a place or not. This has been a BIG decision for me but I feel the above points are valid and outweigh the risks that are likely to effect me. If anyone can offer any advice or point out any fundamental errors with these points then I would appreciate your comments.

<{POST_SNAPBACK}>

Hi,

I think this is a very good article that articulates the ancedotal stories and gut feelings some people have had about the current cycle stage we are in ;

http://www.moneyweek.com/article/1251/inve...rty-market.html

[MrP]

Answer me one question...

Could you afford to pay your mortgage if interest rates returned to their average level for the last 25 years?

This is 8.41%

source BOE

http://213.225.136.206/mfsd/iadb/index.asp...x=52&G0Xtop.y=6

<{POST_SNAPBACK}>

Good point. Would be ******* difficult at the moment!!! And yes that is the risk that has been putting me off a bit. However I my reasoning is that if I take a fixed interest rate for the next few years I am hoping that growth in my salary and inflation will have helped me out.

What is your opinion about the MPC taking over the decision do you feel that this will make a difference or not? There seems to be a lot of mixed feelings on this one?

Edited September 11, 2005 by The_Oldie

[Red Baron]

By all means buy if that is your decision, but please bear in mind you will be paying 40-50% over the top.

Make sure you bargain really hard; my own experience, having just sold my last remaining property, is that achieved prices are 12-15% off 2004 levels and continuing to slip. Your starting level should therefore be bids at least 15% under asking price because most vendors are still pricing at 2004 levels which are now unachievable. Do your homework too; find out what similar houses sold for in 2004 and beware of vendors who add a percentage to last years prices so you think you have a bargain when you negotiate a big discount.

If the vendor refuses your offer walk away. There is a glut of properties on the market currently and as the buyer it is you in the driving seat, not the vendor.

Finally remember that nobody has to be a buyer, but there are plenty who have to be sellers!

Edited September 11, 2005 by Red Baron

[Chris....]

I consider the MPC if really independent has the following problems:

Energy cost increases will take up to a year to fully feed through the economy,

(for example a haulage company with a contract to deliver goods may have to take a short term hit but when it comes up to renewal time it will need to pass on higher cost or go bust)

The target is 2% inflation it is currently 2.3% and set to hit 3% by next month.

The counter balance to the inflation was low cost food and drink (the tesco effect) and cheap clothes and electricals from China.

Tesco's cannot indefinately drill down costs as they will have no competition left and no solvent suppliers.

The EU has stopped the flow of cheap goods to the EU. (Mandelson ect)

Therefore with more factors driving inflation up and less driving down the MPC will have to put IR's back up.

[MrP]

By all means buy if that is your decision, but please bear in mind you will be paying 40-50% over the top.

Make sure you bargain really hard; my own experience, having just sold my last remaining property, is that achieved prices are 12-15% off 2004 levels and continuing to slip. Your starting level should therefore be bids at least 15% under asking price because most vendors are still pricing at 2004 levels which are now unachievable. Do your homework too; find out what similar houses sold for in 2004 and beware of vendors who add a percentage to last years prices so you think you have a bargain when you negotiate a big discount.

If the vendor refuses your offer walk away. There is a glut of properties on the market currently and as the buyer it is you in the driving seat, not the vendor.

Finally remember that nobody has to be a buyer, but there are plenty who have to be sellers!

<{POST_SNAPBACK}>

Cheers, thinking of selecting a few peoperties and making some very low offers and see who offers the lowest counter offer. Knowing my luck they'll probably just tell me to P1ss off though...

[Catch22]

I've been thinking of buying for a while and have been trying to decide but I think that I will take the plunge.

Life's one big learning curve, and there is nothing can compare to youthful exuberance accelerating that learning curve.

So hold on tight and be prepared to learn one of the most important lessons of your lifetime. The price of the lesson will be expensive but I'm sure its importance will not be lost on you.

The desire to own your own house is akin to the desire to lose your virginity. In that you cannot wait for it to happen, so you jump in at the first opportunity, irrespective of risk.

Good luck

[MrP]

Remember gearing works just as effectively on the way down.  A 5k deposit can not only evaporate, but lead to a 45k loss if prices drop 50%.

You also mentioned that people have been advocating STRing way too soon on this board.  I disagree.  Whenever it is cheaper to rent than buy, it is valid to STR.  You might miss out on the bubble-mania gains - you also miss out on the bubble-bursting devastating losses.

<{POST_SNAPBACK}>

Heard this before in many threads but the thing that swings it for me is that is that I have a friend who bought a place in 2002 and similar places are selling, not just asking for but selling for, almost three times as much. IF prices halved he would still be in positive equity. Had he STRed he would have lost out.

I've heard the arguements for a 40-50% price fall but think that they are simply unrealistic. They are usually based upon extrapolations that say the house market should have increased over that period by it's traditional average 4-5% and then calculating the difference or looking at the oil bubble and assuming that oil prices will only continue to rise at their current rate etc. Then only looking at the knock on effects that would be favourable to a HPC. The fact that house prices have this long term investment value of 4-5%is a large part of their attraction.

I understand the point about renting when it is cheaper to do so because of less outgoings, but in my opinion it would be far better to pay a bit extra and actually have an asset at the end of it. My thinking is that it is better to look at the difference in what you would pay on a mortgage against rent and comparing that to the probable value in 25 years time. If you look at any 25 year period from history you win by buying, however if you rely upon constantly switching you have to get your timing right everytime and economis can be effected by so many factors that I fear this could be a bit tricky.

One thing that has been bugging me though is I haven't been able to find any figures for average rents I am curious to see what they do during a crash and have a look at the differences between rents and mortgage payments during a crash. My guess is that they will increase but I am keen to see any data to see what it has done in the past.

[wannabe FTB]

When people claim prices will drop 40% do you mean taking into account inflation? i looked at the figures for the early nineties the other day, and the average house price feel from a peak of £69k to a low of around £60k, which is just over 10%. (can't remember which figures I looked at I think Halifax or Nationwdie) So when people say in last crash places fell 30% it must be taking into account inflation.

So how does inflation help a renter? Won't it make my deposit worth less money?

[MrP]

Just to mirror back two of your comments:

Prices have risen 3 times since 2002.

Prices cannot go down by 1/2.

I can understand buying and accepting the risk.  But IMHO you are not being realistic.  If it is a bubble (the Economist says it is) then prices will go below the bubble start point (seen in each of 13 manias recorded in history).

<{POST_SNAPBACK}>

You were predicting a 50% decrease but if they have already increase by 200% they will end up 50% higher than at the start. Or have i missed something?

Have been a bit disappointed with the reliability of the financial press, did the Economist accurately predict the gains of 2001, 2, 3 or 4?

Even if they fall in the short term they will only do so if interest rates rise. If I take a fixed interest rate for 3 years I won't suffer the effects of increased rates for a while during which time I'd expect rents to have increased anyway.

[MrP]

The 89-95 drop was a bull market correction, before another ramp up in HPI.  Not a crash.  It's spun as a crash by VIs to make you think that's the worst that can happen.

The 90% nominal drop in house prices in Manhattan after the Wall Street Crash (a smaller bubble than this one, and not as global, according to the Economist) - well that's a crash.  Prices didn't recover in NOMINAL terms for 40 years.

That was a depression, if that happens I'm fcuked either way. No jobs, companies failing left right and centre and probably a war or two. Are you seriously predicting a depression?

EDIT:  As for your deposit - well inflation helps no one except the government - it's a tax.  I've bought gold, but a good high-earning savings account should suffice.

I wasn't talking about the deposit but the monthly mortgage payment which hopefully will be reduced relative to my earnings by an increase in earnings as I am at an early stage of my career and by inflation.

Might I recommend "Conquer the Crash" by Robert Prechter for anyone wanting the full bearish case laid out in detail.

I'll have a look, thanks.

<{POST_SNAPBACK}>

edited to remove an extra quote tag

Edited September 11, 2005 by MrP

[FaTB]

From apom's earlier thread

http://www.rousselle.com/allan/archives/000415.html

Could this be the "Last Guy" we've been waiting for ?

The Greatest Fool !!

[Michael]

When people claim prices will drop 40% do you mean taking into account inflation?  i looked at the figures for the early nineties the other day, and the average house price feel from a peak of £69k to a low of around £60k, which is just over 10%.  (can't remember which figures I looked at I think Halifax or Nationwdie) So when people say in last crash places fell 30% it must be taking into account inflation. 

So how does inflation help a renter?  Won't it make my deposit worth less money?

<{POST_SNAPBACK}>

prices fell 30% in nominal terms in the South East but only 10% up North and in Wals and Scotland.....

[theChuz]

You've read the arguments and yet your 80% sure, personally i say buy.. we need suckers to chase the market down.