The Property Ladder

[paradox]

Lets just think about the property ladder, and getting ones foot on the bottom rung of it.

This assumes that once you are on the ladder, even at the bottom, you are safe. As the ladder is raised you rise with it because you are holding onto the bottom rung. You can wave goodbye to those left at ground level.

They may try to reach out, to jump, but they can't quite make it. You on the other hand are safe, because you are on the bottom of the ladder.

Then, as time goes on, you can climb up the ladder bit by bit. But of course if you are never on the bottom rung in the first place this would not be possible.

This logic is what inspired me to buy my first property in 1991. The more I think about it the more I realise that the ladder works if and only if the real value of the mortgage is falling fast. This worked for me at first, by 1997, for example, my increased wages and inflation had conspired to reduce the real cost of the mortgage to me. The capital value of the flat had hardly gone up at all, but the small increase in equity, when put together with the existing equity from my initial deposit, was enough for a deposit for a larger property. The property ladder was working as it should.

But, I did not trade up then, I was not even in the UK, snorkelling in the Indian Ocean and sweating away working in foreign lands I was not aware of the impending explosion in the capital value of my flat.

Fast forward a few years, I come home full of hope, thinking of the property ladder and the next rung. Imagine my (genuine) surprise when I find out that the value of my flat has increased beyond my wildest dreams - giving me a capital gain the likes of which I never thought I would see in my life.

In hindsight - I wish I had cashed in there and then and returned to live in a palace in my tropical paradise. But no, I wanted to return to blighty (God knows why). Now armed with a family I needed a larger place. Never mind, I have a massive capital gain.

But wait - everywhere else has gone up as well. The two and a half bed flat we want is now on sale for a value that to me seems incredible and scarcely possibe

(I am fresh from 10 years in exile - John Major was PM when I left the UK, I find it hard to come to terms with Tony Blair's revolution).

Its normal, everyone tells me - I look around, Yes North London is the same, a few more wine bars maybe, a few more gastropubs, but these were beginning even when I left London in the early 90s. Upper St used to be full of kebab shops in the early 80s and I witnessed its transformation in the late 80s.

Its normal, everyone tells me. Low interest rates are here to stay, everyone is making so much money, Nobody is unemployed anymore, We don't even have British plumbers anymore and all the Irish builders have gone back to Ireland, Brixton is safe and trendy, Britain has changed, We even do well at sport, cool Brittannia, lets go clubbing, this is London, wow.

"Ok" I say, I look around me, North London is the same - same old streets and smells, but something has changed, a parallel universe maybe, because these scrappy streets are now full of flats with prices that make me feel uneasy. But never mind, I am on the property ladder, aren't I? So we go for it.

Our massive capital gain is ploughed into a deposit for an even more overpriced flat. A mortgage broker gives me some horrendous advice that I fall for hook, line and sinker. Our miniscule mortgage is exchanged for a massive one - after all, I need to stay on the property ladder, don't I? Even more savings are spent on a posh floor for our new posh flat - after all, it can only increase the value, can't it?

Fast forward two years. I feel sick, I realise that to repay the full term of the mortgage (with interest) will mean a total payment of stupendous amounts. Overpaying the mortgage will require more than I can manage. The capital value is falling, my taxes and expenses are rising, the next rung of the ladder would require a repeat of the above exercise in debt increase. But why should I worry - I am on the ladder, indeed on the second rung of it. From all sides people are telling me how lucky I am to live in central North London, how lucky I am to be on the ladder. I just feel sick. My home has an impermanent, spongy feel to it. The floorboards, the walls dont seem real, and certainly dont seem mine.

Then one happy day the truth dawns on me. Walk away! Get out what is left of my capital and invest it, just walk away.

Nobody can believe it when we put the place on the market. We notice that it will be a struggle to acheive what we paid for it two years earlier. We notice the fear and nervousness of the 'young professionals' that the Estate Agent brings round. We notice that the BTL brigade are offering us a price 20% below our asking price. We notice that the only buyer who can approach our asking price come with a crazy deposit which he is fortunate to have. We manage to get out having made no capital gain on the posh flat but having just about held on to the original gain from the first flat (now diminished in real terms by a couple of year's inflation. The whole experience has cost us a lot.

It hurts, but we know in our bones we are in over our heads and that we are doing the right thing to get out.

We also note that this is fate, and fate alone. Had circumstances been different and had we come home just 2 years earlier - just 24 months - we would have encountered a UK that could happily house us in our nice flat. But not this UK, not now.

We notice as well, the scorn, laughter and general disbelief that is poured on our heads as we retreat to our 3 bed rental house with garden. We notice how it feels so big and empty compared to our lovely little cozy expensive flat. We feel such a sense of relief (and even disbelief) when we find out that we can just call up our landlord to come and fix anything and.... there is no bill to pay.

We notice how quickly the word goes out.... "it didnt work out for them", "I really feel for them", "They have fallen off the property ladder" and, spoken with a hush, in the corner of the room, as if it is was a secret - "They're renting, you know"

We notice how our landlord finds it hard to believe that we prefer renting his house to owning our flat. He wanders what's up, he suspects something suspicious, we pursuade him to let us put pictures up - he agrees. We fit new curtains and invoice him in lieu of rent. We notice how keen he is that we extend our tenancy.

This is UK 2005. The property ladder doesn't work anymore. Inflation and wage increases no longer erode the real value of the mortgage. The capital increases work AGAINST the principle of the property ladder not in favour of it. Yet we are bloated and drunk on property and, more than ever before, where we live and what tenure arrangements we have is important to the social pecking order.

UK 2005 can be divided into three groups, all represented on this forum.

The winners

- 1 those who sell up and get out with a massive capital sum that they never thought they would ever see

- 2 those who bought before it all went crazy

- 3 those successful under geared landlords

The losers

- 4 those who sell up and get out with a massive capital sum that they never thought they would ever see only to go and blow it on a dream in France, Spain, Oz and find out that things just arent that simple, for one reason or another

- 5 those who bought recently and will have a long period of negative equity and / or debt that does not depreciate like it used to in the days when the property ladder was working

- 6 those who over commit to BTL and get crushed by voids and debt

The survivors

- 7 those who get out with just about enough capital to do something useful with or to save for better times

- 8 those who rented all the way through

- 9 those who bought recently on sensible mortgages or with no mortgage

- 10 Wannabee First Time Buyers who are biding their time

Which are you?? - we are number 7

I suspect the fate of the current government partly depends on how many fall into the loser category

[Hopeful FTB]

I am both 8 & 10 but a survivor at the moment.

I am saving for a deposit & its going up quite nicely and I will carry on like this probably for the next year.

I too travelled and my partner was in the army so didnt need to buy- the only problem that we have now is my biological clock ticking (I am 32) and not having enough room in our flat and not being able to afford to trade up in sunny but hideously overpriced brighton - we are caught in a trap in that respect!

This website has helped me not to make any silly decisions when all around me were jumping in and getting MASSIVE mortgages this year!

[Ignorant Steve]

Currently 7, probably be 9 by mid next year.

[rockdoctor]

No 11.

I bought a house with the proceeds of my insanely overinflated flat, with a mortgage that, although a large amount, is only 25% of my income.

The ladder worked for me, but I got on at the bottom (1996) having very carefully selected the flat (jumping to the second rung). I then saved every penny into the mortgage, clearing it just before I sold the flat in 2002.

I then had to move to a cheaper area in order to get a house, as prices had gone beyond what I could afford where my flat was. The house I bought should do for the time we'll be raising a family.

I expect 40% HP falls, but I'll still have lots of equity at that point.

[theChuz]

Decent post paradox.

[JBFTB]

Was an 8, now a 10.

I was an 8 up until about 2 years ago. Quite simply due to my job(s) and moving from one area to another - my situation just wasn't stable enough to buy until about 3 years ago. At that point I didn't have a big enough deposit (in my opinion, anyway). By the time I did have the deposit and started looking around, the market had started to go insane. No I'm at 10, able to buy something really shitty but refusing to be drawn into the trap.

[Alberta Tatlock]

Number 1.

Used the "profit" on a draughty terraced house from the to buy a custom built house and new life here.

Had the house a year and it's supposedly gone up 30%. Who knows? but we're not selling it anyway, it's a home not a money machine.

[HenryWeston]

Good post, im at 10

[Ignorant Steve]

No 11.

I bought a house with the proceeds of my insanely overinflated flat, with a mortgage that, although a large amount, is only 25% of my income.

The ladder worked for me, but I got on at the bottom (1996) having very carefully selected the flat (jumping to the second rung). I then saved every penny into the mortgage, clearing it just before I sold the flat in 2002.

I then had to move to a cheaper area in order to get a house, as prices had gone beyond what I could afford where my flat was. The house I bought should do for the time we'll be raising a family.

I expect 40% HP falls, but I'll still have lots of equity at that point.

Surely this is a 9 ie bought for sensible mortgage.

BTW why didn't you buy in a slightly better (more expensive?) area with a slightly larger mortgage? Were you convinced prices would drop from 2002 onwards? I too sold in late 2002 in London and remember well how pessimistic the EAs were about achieving a full asking price sale.

[Angus D Bitters]

Very happy as a 2 and 3.

Own house paid off mortgage years ago.

Couple of properties let out.

Nephews and Neices buying their own places

[Annansi]

I am currently 10 in the UK, was 1 in the US as i bought a property in 1980 for just $30,000 and sold it in 1990 for $150,000 i am biding my time as i am not as familuar with ths UK property market, i know times have changed and the market is not as rich as it use to be but with proper research and a bit of luck (which has to be calculated into everything) Property can still be a good investment.

------------------------------------------------------

Check out www.Hometrack.co.uk I have been using it as one of my research tools trust me it's worth looking at and suggestion of any other research tool would be greatly appreciated.

Thanks

Annansi

[BearLite]

I'm a 2 because I bought in 2001. However, it's a flat and I won't pay a crazy price for a house. I want a happy life with a disposable income not a debt nightmare. Having a grinding debt is no good for anyone.

[frugalista]

Good post. I am in category 7. STRd with a very modest bit of profit (having only bought in 2002). So really I am somewhere in between FTB and STR now. Lucky to get out I think and won't be back in for a couple of years.

The property ladder is all about inflation. However, what people don't realise is that there has to be a combination of asset price and wage inflation for the property ladder to be a reality.

In the years 1970-89 the property ladder very real. Inflation transferred huge amounts of wealth from cash savers to those with assets. If you had geared holdings in assets then your gains were multiplied further.

Most people would not generally dream of borrowing to speculate on assets. But in the inflation years this strategy paid off massively, for a wide range of assets, not just houses. The one area where people are comfortable with geared asset holdings is mortgages.

So, those who had mortgages through 1970-89 believe there is something "magic" about property, that it is a free money generator. It isn't. It was merely a highly geared bet on inflation.

The property ladder is long gone, as paradox has clearly explained. And it will stay absent until massive wage inflation returns.

frugalista

[libitina]

Was an 8, now a 10.

I was an 8 up until about 2 years ago. Quite simply due to my job(s) and moving from one area to another - my situation just wasn't stable enough to buy until about 3 years ago. At that point I didn't have a big enough deposit (in my opinion, anyway). By the time I did have the deposit and started looking around, the market had started to go insane. No I'm at 10, able to buy something really shitty but refusing to be drawn into the trap.

Same here.

[Neil D Possitt]

Number 2 here, but sometimes wish I'd done a number 1 (ahem, as it were....) last year.

[brainclamp]

As the labour pool expands, there is not massive eage inflation in the furture, but property inflation will continue.

Good post. I am in category 7. STRd with a very modest bit of profit (having only bought in 2002). So really I am somewhere in between FTB and STR now. Lucky to get out I think and won't be back in for a couple of years.

The property ladder is all about inflation. However, what people don't realise is that there has to be a combination of asset price and wage inflation for the property ladder to be a reality.

In the years 1970-89 the property ladder very real. Inflation transferred huge amounts of wealth from cash savers to those with assets. If you had geared holdings in assets then your gains were multiplied further.

Most people would not generally dream of borrowing to speculate on assets. But in the inflation years this strategy paid off massively, for a wide range of assets, not just houses. The one area where people are comfortable with geared asset holdings is mortgages.

So, those who had mortgages through 1970-89 believe there is something "magic" about property, that it is a free money generator. It isn't. It was merely a highly geared bet on inflation.

The property ladder is long gone, as paradox has clearly explained. And it will stay absent until massive wage inflation returns.

frugalista

[Surrey cash buyer]

Was a number 2 but did do a number 1 this year. Not that I was trying to do something financially clever, just wanted to move. Now I have a vast amount of money in the bank and can't quite work out where it came from.

It's time we came up with a replacement phrase for "Property Ladder" - How about "Property Lottery" or "Mortgage Ladder". I am sure somebody here can think of better.

[rockdoctor]

No 11.

I bought a house with the proceeds of my insanely overinflated flat, with a mortgage that, although a large amount, is only 25% of my income.

The ladder worked for me, but I got on at the bottom (1996) having very carefully selected the flat (jumping to the second rung). I then saved every penny into the mortgage, clearing it just before I sold the flat in 2002.

I then had to move to a cheaper area in order to get a house, as prices had gone beyond what I could afford where my flat was. The house I bought should do for the time we'll be raising a family.

I expect 40% HP falls, but I'll still have lots of equity at that point.

Surely this is a 9 ie bought for sensible mortgage.

BTW why didn't you buy in a slightly better (more expensive?) area with a slightly larger mortgage? Were you convinced prices would drop from 2002 onwards? I too sold in late 2002 in London and remember well how pessimistic the EAs were about achieving a full asking price sale.

Yep, stupid me. I am a 9.

I decided to limit my new mortgage to what was then 3.5 times income, to give a bit of headroom against interest rate rises. This put a cap on my borrowing.

Since moving to the new area I have decided I prefer it. The downside was the distance from the town centre where our flat was, but since then another closer shopping centre has been renovated. I am also now further from the Heathrow landing path - something I am more grateful for every day that passes.

I conclude that the move was beneficial as well as saving me money, so no regrets; ie if prices fell so that I could get the same house back where my flat was I now wouldn't take it.

[r thritis]

What an excellent post. I too returned from a long period abroad a couple of years ago and I have had very similar experiences. It all sounds very familiar - peoples total disblief that we would choose to go into rented accommodation rather than buy ('must have some dark credit history secret', or 'got burnt in the 89 crash and been left phycologically scarred, poor thing').

It was like the whole country had gone collectively mad - people diving into massive debts without a single thought - ('everyone's doing it, so it must be ok' - 'its not real money is it?'). It was as if the whole country had become collectively brainwashed and I was the only one who hadn't yet been 'assimilated by the borg'.

At any moment I might be discovered in my comfy rental and have my brain sucked out, processed and replaced, before I would lurch zombie-like into the local branch of the Nationwide and say to the nice man there, "Now I understand, its all clear to me now - can I borrow half a million pounds? Property only goes up. Renting is dead money...".

[CrashConnoisseur]

It's time we came up with a replacement phrase for "Property Ladder" - How about "Property Lottery" or "Mortgage Ladder". I am sure somebody here can think of better.

Debt snake?

[Fancypants]

good shiznit Paradox.

I'm a perfect 10 - I'm a survivor

as Destiny's Child might put it.

From the FTB coalface, there does seem to be rather less snottiness about my choosing to rent and far fewer hushed conversations behind my back about my perversion in that respect. Although this may be due to me being regarding as something of an outright lunatic so my recently-bought friends choose not to engage me on this issue.

There's certainly no smugness coming from them though. More like nervousness.

and other would-be FTBs are very receptive to my HPC dogma.

the edges are starting to crumble out there in mortgage land

[happily renting]

Nice post.

My wife and I are '8'. We never bought because we never found a place we liked enough, at the right price. (Well, we did once, but we were gazumped; looking back, we're incredibly relieved to have been.) And we've never much liked the idea of a property ladder to begin with. Don't feel the need to live in a bank, i.e., our house as an investment vehicle for our future. Would much prefer to spend the best years of our lives in lovely affordable rentals while we invest elsewhere, rather than serve time in a series of overpriced hovels, living in hope that eventually the escalator carries us to the promised land.

[Catch22]

Excellent post Paradox,

and glad you took the time to write it .........FOR THE BENIFIT OF OTHERS....... as you obviously already know the score.

You highlight the fact that HPI* is a curse even if you ARE ON the Property Ladder because the price point rungs grow wider apart. Indeed HPI* only benifits those downsizing as the rungs growing wider apart equates to bigger gains for those downsizing.

And yes the social snobbery attached to renting, even worse Owner Occupiers selling up and renting implies your are an even bigger failure than those who have never owned a house. You had it and you blew it, obviously because your a failure, or a knife and fork short of a full set.

Nice to see you are a person who has the confidence and strength of character to go against the social stigma that pervades this land of ours.

HPI* only benifits those downsizing, or those who own one or more properties other than the one they use as their home.

We were 2's who became 1's

Edited December 19, 2005 by Catch22

[Stressed-Out]

Thanks for such an honest and interesting post, Paradox.

We are a number 1 couple.

Acquaintances still look at me now and think I am crazy for 'forcing' my family to live in a large house in a lovely area of Tunbridge Wells because it's, heaven forbid, RENTED! Clearly, we're just throwing our money away, aren't we?

Well, actually, having sold up in September 2004, we're sitting on a large wad of cash, a tiny proportion of which we are spending on rent, while watching prices fall all around us.

Yes, that's right, we're mad...

[?...!]

I'm an 8/10. Graduated last summer, got a job, went to the estate agents after my third wage slip.

At the time the market was rampant, but after looking around I decided to rent, it was much cheaper and easier to arrange.

My Mum and Dad were horrified.

"But why?... Renting!?"

I didn't even try and explain.

As a student, I basically had been living in poverty for four years and had every intention of getting used to spending money before I made the biggest single purchase of my life. You’re only young once, and I can worry about getting rich later. I've spent a lot of money this year I perhaps should have saved, on nights out, but I can afford it and it's been a great year. No regrets.

I know quite a few young people who have taken the plunge this year, mortgages approaching 70% and more of their wages, and they don't really know what they're doing. Many have poor job security.

Unsurprisingly these are the same people who get on my back about renting. They feel they have made it, and take great pleasure in telling others "how I am throwing away money by renting" as they drive around in their hp cars.

I have stopped talking about money & investments all together, I can't keep a straight face when listening to my friends lecture me about financial acumen. It makes them nervous when they see the big grin on my face every time they state "it can't go down". I then get "what do you know that nobody else does? F*ck all that’s what" I can only reply with a nod and a huge grin. I warned them before they bought, it’s too late now.

I may sound bitter, but I’m not, it’s more frustration, and it’s directed at many of my friends who choose to ignore what I said believing instead older and wiser people.

I do get things wrong, but not when I’m certain, and I’m fairly certain they have been stitched up.

The way I value a house is simple.

Fifteen years rent = asking price

All you need to do is think who would live in the house and how much rent could they afford to pay per month.

On this assessment the current HP is ridiculous.