Second Steppers Anecdotal

[FedupTeddiBear]

Yesterday I met up with a large group of friends/ friends of friends I have not seen in a while.

The get-together was at the house of a couple who have recently had their second baby.

Many of the people there were couples who bought their first property (mostly 1 or 2-bed flats) during the past 8 years or so.

The house was nicely done up - something I commented on, to which the wife shyly admitted that the house was actually rented and that the landlord had carried out the improvements.

Several people joined the discussion to admit that they had done the same - their flats are now too small for their growing families but they are unable to afford to buy family houses - the expected huge equity growth never materialised. Most are renting out the flats and using the incoming rent to help pay off existing mortgages / subsidise the rent on the bigger place. Some of these are people who turned their noses up at the idea of renting a couple of years ago.

Although it took the first lady to "admit" to renting, others soon joined in. Thankfully nobody seemed particularly bitter about the lack of HPI, or too negative about the idea of renting. Most of these couples are in the SE or outer London where house prices are not much different from 2007.

IMO After renting reasonably-sized houses in good areas for the past 8 years (OK, we've been lucky with the size of the rent) while saving for a deposit, we are no worse off financially than those who were eager to "take the first step" and buy a flat. The quality of life has been good for us in comparison, though.

Anyone else noticed similar trends?

Edit to add: Of the 17 or so couples there, about 4-5 couples said that they are now renting bigger places after buying flats and a few others considering doing the same.

Edited September 16, 2012 by FedupTeddiBear

[Nomadd]

Yesterday I met up with a large group of friends/ friends of friends I have not seen in a while.

The get-together was at the house of a couple who have recently had their second baby.

Many of the people there were couples who bought their first property (mostly 1 or 2-bed flats) during the past 8 years or so.

The house was nicely done up - something I commented on, to which the wife shyly admitted that the house was actually rented and that the landlord had carried out the improvements.

Several people joined the discussion to admit that they had done the same - their flats are now too small for their growing families but they are unable to afford to buy family houses - the expected huge equity growth never materialised. Most are renting out the flats and using the incoming rent to help pay off existing mortgages / subsidise the rent on the bigger place. Some of these are people who turned their noses up at the idea of renting a couple of years ago.

Although it took the first lady to "admit" to renting, others soon joined in. Thankfully nobody seemed particularly bitter about the lack of HPI, or too negative about the idea of renting. Most of these couples are in the SE or outer London where house prices are not much different from 2007.

IMO After renting reasonably-sized houses in good areas for the past 8 years (OK, we've been lucky with the size of the rent) while saving for a deposit, we are no worse off financially than those who were eager to "take the first step" and buy a flat. The quality of life has been good for us in comparison, though.

Anyone else noticed similar trends?

Spoke to a couple in the North West over the weekend who bought a "starter home" in 2007. They've had a baby and now want a bigger place.

They've been trying to sell their current place for 18 months. Only offer they had - over a year ago - was 25% less than purchase price.

As the offer would have left them in negative equity (they got a 95% mortgage when they purchased) they turned it down.

And now?

Well, I've just noticed an end-of-terrace (theirs is mid-terrace) on the opposite side of the road from them; garden is twice the size of theirs, and the house is also bigger due to it being on the end of the block. The asking price is 25% less than theirs, so in reality, they will have to drop at least 35% from their purchase price in order to secure a sale.

They still live with mantra "We can't afford to sell for that kind of price...so I guess we'll be stuck here for a long time now..."

They hate the house and hate the location. Filled with regret. On their wages, this "set back" will cost them 5-10 years of post tax earnings, I reckon.

I'm glad I stuck to my cheap rental.

[EmmaRoid #FBPE#JC4PM#GTTO]

Been there, sold up.

No negative equity though. Did it a couple years ago, that boat has sailed now

[Frank Hovis]

Glad to see that people are beginning to think beyond that "renting is dead money" mantra and have realised that sometimes renting is the clever thing and sometimes buying is.

[Democorruptcy]

Several people joined the discussion to admit that they had done the same - their flats are now too small for their growing families but they are unable to afford to buy family houses - the expected huge equity growth never materialised. Most are renting out the flats and using the incoming rent to help pay off existing mortgages / subsidise the rent on the bigger place. Some of these are people who turned their noses up at the idea of renting a couple of years ago.

It must be one hell of a flat to earn enough rental income after tax and maintenance to pay the mortgage on it and rent on a larger place.

Did you ask how many of these people were declaring the rental income?

[FedupTeddiBear]

It must be one hell of a flat to earn enough rental income after tax and maintenance to pay the mortgage on it and rent on a larger place.

Did you ask how many of these people were declaring the rental income?

Most were saying that the rent went into paying off the existing mortgage on the flat. I know of at least two of these couples who bought with IO mortgages. One lady mentioned, that with low interest rates, the rental income exceeds that needed to pay off the IO mortgage and as the rent on the new place is high, she is using some of the incoming rent to subsidise the new rent, which seemed a bit desperate to me. Nobody spoke about tax and I did not ask.

All who had rented their flats out said they had found a tenant immediately who was willing to pay the asking rent. I also did not delve into what rent they were asking.

Edited September 16, 2012 by FedupTeddiBear

[Democorruptcy]

Most were saying that the rent went into paying off the existing mortgage on the flat. I know of at least two of these couples who bought with IO mortgages. One lady mentioned, that with low interest rates, the rental income exceeds that needed to pay off the IO mortgage and as the rent on the new place is high, she is using some of the incoming rent to subsidise the new rent, which seemed a bit desperate to me. Nobody spoke about tax and I did not ask.

All who had rented their flats out said they had found a tenant immediately who was willing to pay the asking rent. I also did not delve into what rent they were asking.

Interest only? You said they didn't seem bitter about the lack of HPI. What are they going to do as it gets nearer to the mortgage term expiring if they don't have HPI? What are they going to do if interest rates rise, just whack the rent up on the flat but think their own rent won't increase? Or is it assumed that rates cannot possibly rise without HPI increasing the value of their flats because we are a safe haven? If they had a pre-bust low rate tracker mortgage and have a profit between mortgage and rental income then they make something each month to go towards their own rent. If they don't and have to pay tax on the rental income is it really viable or just a major punt on HPI?

This week I've seen a house for sale at £500k that is also for rent at £900 a month. So I can see why it might work. Particularly if you let one in London but rented somewhere different yourself.

[FedupTeddiBear]

Interest only? You said they didn't seem bitter about the lack of HPI. What are they going to do as it gets nearer to the mortgage term expiring if they don't have HPI? What are they going to do if interest rates rise, just whack the rent up on the flat but think their own rent won't increase? Or is it assumed that rates cannot possibly rise without HPI increasing the value of their flats because we are a safe haven? If they had a pre-bust low rate tracker mortgage and have a profit between mortgage and rental income then they make something each month to go towards their own rent. If they don't and have to pay tax on the rental income is it really viable or just a major punt on HPI?

This week I've seen a house for sale at £500k that is also for rent at £900 a month. So I can see why it might work. Particularly if you let one in London but rented somewhere different yourself.

Yes, if interest rates go up they will indeed be in trouble.

This is an anecdotal, remember - just reporting the discussion (mostly women) I found myself in. Maybe they are bitter about the lack of HPI, but at the time did not express this or complain about it. I also was interested to see where the conversation led to so did not want to wind anyone up by asking difficult questions. Often you find out more by simply listening...

The lady I mentioned who is paying IO is effectively now renting two places, just subletting one at a (short term) "profit".

I imagine that perhaps (just a random guess) that if her mortgage on the flat is £600pm and she can rent the place out for £800pm she has £200 (minus tax, if she is paying tax) to go towards her new rent of £1000pm so "giving herself a discount", as she sees it.

I think most of these people are in the mindset that HPI will kick off again at some stage soon. Also, in the short term, as it appears that there is no shortage of tenants for their flats, perhaps they see this as the best option. Panic selling may start when IRs rise or they are unable to get the rent they want for their flats.

I would certainly not want to be in the situation some of these people are in - very dangerous IMO, especially if interest rates and rents go up. However it appears that this seems to be an increasingly popular "solution" for those finding themselves sitting with a flat they are unable to sell at the price they want while at the same time needing to move to a bigger place.

As mentioned, perhaps it is my turn to be smug for a change. At various points we started to waiver about buying somewhere but after seeing what's going on, I am very pleased that we stuck to renting.

Edited September 16, 2012 by FedupTeddiBear

[mrtickle]

Indeed. One thing though, you keep saying "if" interest rates go up. As we all know here, it's WHEN, not if!

[Liquid Goldfish]

Yesterday I met up with a large group of friends/ friends of friends I have not seen in a while.

The get-together was at the house of a couple who have recently had their second baby.

Many of the people there were couples who bought their first property (mostly 1 or 2-bed flats) during the past 8 years or so.

The house was nicely done up - something I commented on, to which the wife shyly admitted that the house was actually rented and that the landlord had carried out the improvements.

Several people joined the discussion to admit that they had done the same - their flats are now too small for their growing families but they are unable to afford to buy family houses - the expected huge equity growth never materialised. Most are renting out the flats and using the incoming rent to help pay off existing mortgages / subsidise the rent on the bigger place. Some of these are people who turned their noses up at the idea of renting a couple of years ago.

Although it took the first lady to "admit" to renting, others soon joined in. Thankfully nobody seemed particularly bitter about the lack of HPI, or too negative about the idea of renting. Most of these couples are in the SE or outer London where house prices are not much different from 2007.

IMO After renting reasonably-sized houses in good areas for the past 8 years (OK, we've been lucky with the size of the rent) while saving for a deposit, we are no worse off financially than those who were eager to "take the first step" and buy a flat. The quality of life has been good for us in comparison, though.

Anyone else noticed similar trends?

Edit to add: Of the 17 or so couples there, about 4-5 couples said that they are now renting bigger places after buying flats and a few others considering doing the same.

When they say can't afford to move do they mean can't get a mortgage or couldn't afford the mortgage payments

I wonder why they've not gone the BTL mortgage route on the flats and bought the bigger houses that way. Maybe it's a problem getting the deposit(s) - I can't work out the maths!!

[waitingandsaving]

When they say can't afford to move do they mean can't get a mortgage or couldn't afford the mortgage payments

I wonder why they've not gone the BTL mortgage route on the flats and bought the bigger houses that way. Maybe it's a problem getting the deposit(s) - I can't work out the maths!!

I've had similar ish conversations recently - friends who bought 2005-2007 with a small deposit are now pretty stuck in their houses...

Oldsport - I think it's the not being able to get a mortgage - if you bought a 200k place with a 5% deposit, chances are the amount still owed on the property means you'd be in -ive equity if you sold it. Unless you've got the spare cash to make up the difference needed to cover the -ive equity, and also the extra deposit proprtion that the bank will now want, you're pretty stymied, and stuck in your smaller than you'd like house.

[Spork of Damocles]

I've had similar ish conversations recently - friends who bought 2005-2007 with a small deposit are now pretty stuck in their houses...

Oldsport - I think it's the not being able to get a mortgage - if you bought a 200k place with a 5% deposit, chances are the amount still owed on the property means you'd be in -ive equity if you sold it. Unless you've got the spare cash to make up the difference needed to cover the -ive equity, and also the extra deposit proprtion that the bank will now want, you're pretty stymied, and stuck in your smaller than you'd like house.

Even if you have positive equity you probably still can't get that mortgage. Effective multiples have come down (which is, in general, a good thing) but prices have gone up and wages have not increased – pushing what was slightly out of reach in the mid-noughties well out of range now (or for the moment, at least). The thing about Tooting now having the highest average PAYE earners suggests a correction is on its way if not imminent. Who else is going to take properties from those in Clapham, Balham etc who want to move out of London or downsize?

[Liquid Goldfish]

I've had similar ish conversations recently - friends who bought 2005-2007 with a small deposit are now pretty stuck in their houses...

Oldsport - I think it's the not being able to get a mortgage - if you bought a 200k place with a 5% deposit, chances are the amount still owed on the property means you'd be in -ive equity if you sold it. Unless you've got the spare cash to make up the difference needed to cover the -ive equity, and also the extra deposit proprtion that the bank will now want, you're pretty stymied, and stuck in your smaller than you'd like house.

Even if you have positive equity you probably still can't get that mortgage. Effective multiples have come down (which is, in general, a good thing) but prices have gone up and wages have not increased – pushing what was slightly out of reach in the mid-noughties well out of range now (or for the moment, at least). The thing about Tooting now having the highest average PAYE earners suggests a correction is on its way if not imminent. Who else is going to take properties from those in Clapham, Balham etc who want to move out of London or downsize?

Thanks guys, that's helped me think it through. It's now clear that in order to do the whole accidental landlord/BTL lark you need either substantial savings or substantial equity - because you would need at least 20% deposit for the BTL mortgage and 10% for the new residential mortgage - and that's not going to be the case with the the vast majority of 2004-2007 FTBs. And even then, as you say Spork, multiples have declined! - it really is totally hopeless if you're stuck in that too small place. I didn't get the Tooting/Clapham/Balham thing though as I live up North!

[FedupTeddiBear]

When they say can't afford to move do they mean can't get a mortgage or couldn't afford the mortgage payments

I wonder why they've not gone the BTL mortgage route on the flats and bought the bigger houses that way. Maybe it's a problem getting the deposit(s) - I can't work out the maths!!

One of the couples I mentioned bought in a popular commuter belt location just outside London in 2005. They used a personal loan of £20000 to fund the deposit and got themselves a self-certified interest only mortgage. I can still remember the wife excitedly telling me that they had bought a place, then going into detail about how they had managed it. I also remember thinking at the time that they were heading for trouble...

[Liquid Goldfish]

One of the couples I mentioned bought in a popular commuter belt location just outside London in 2005. They used a personal loan of £20000 to fund the deposit and got themselves a self-certified interest only mortgage. I can still remember the wife excitedly telling me that they had bought a place, then going into detail about how they had managed it. I also remember thinking at the time that they were heading for trouble...

Thanks for that extremely interesting insight!! Oh dear.......

The world just went totally mad for a few years.

Edited October 2, 2012 by oldsport

[Superted187]

Great thread.

I'm always thinking about buying (got a deposit but will wait until the time is right) and I've recently been thinking that I will be buying a place that we can "grow" into. I.e. I wont be buying somewhere that I couldn't stay in for 20 years, should everything happen as expected.

[mk1mini]

One of the couples I mentioned bought in a popular commuter belt location just outside London in 2005. They used a personal loan of £20000 to fund the deposit and got themselves a self-certified interest only mortgage. I can still remember the wife excitedly telling me that they had bought a place, then going into detail about how they had managed it. I also remember thinking at the time that they were heading for trouble...

Wow - it makes me think that I was extremely fortunate when I bought in 2007 and sold this year that I made a v.small profit, but that was mostly due to the amount of renovation that I put into the flat.

Rates will go and prices will drop, it's just a waiting game. Tick tock, tick tock...

[eric pebble]

Thanks for that extremely interesting insight!! Oh dear.......

The world just went totally mad for a few years.

YUP!!!! & it was all "financed" [FRAUD] by

PREDATORY LIAR LOANS...

[Gerinako]

Second stepper?

I can barely grab the first rung

[Goat]

Many of the people there were couples who bought their first property (mostly 1 or 2-bed flats) during the past 8 years or so.

The house was nicely done up - something I commented on, to which the wife shyly admitted that the house was actually rented and that the landlord had carried out the improvements.

Several people joined the discussion to admit that they had done the same - their flats are now too small for their growing families but they are unable to afford to buy family houses - the expected huge equity growth never materialised.

I'm sorry to say that I think your post represents a huge group of people who are going to be wiped out by this; those that bought in the last 8 or so years and also those that did manage to "second step".

Either prices return to reality, in which case their equity will be wiped out, or price remain at approximately the same level in which case they're never able to bridge the gap onto the next rung of the ladder.