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DonnieDarker

Back To Basics - The Importance Of Your First Purchase

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I'm having a blonde moment but I've been playing devils advocate with myself and was posing the question:

Do house-prices actually matter if you are an owner-occupier with only 1 property?

My point being:

So long as you keep up with the repayments surely any increase/decrease in the value of your home is irrelevent because when you move to the next step on the ladder (assuming you are buying in a similar area) then if the property you live in has gone up or down 10% surely the property you are buying will have done likewise?

eg.

I buy Property A for £100k.

It increases 10% in value.

I sell Property A for £110k.

I buy Property B, but that has also increase 10% in value.

Am I being really stoopid?

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If property B costs more than property A, then 10% is a bigger value, thus moving the rungs apart, surely?

I would also consider it to matter more in terms of risk.

"So long as you keep up with the repayments" - what if you don't? Illness, redundancy, etc.

Edited by JBFTB

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You need to consider that the property you buy will likely be more valuable than the one you sell.

Your £100k goes up 10%, you've pocketed £10k capital appreciation.

Your new £150k house went up 10% to £165k, a £15k increase. That leaves you £5k worse off.

HOUSE PRICE INCREASE IS BAD NEWS if you own one house and plan one day to sell it and buy a better house - the rungs on the ladder move further apart.

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I'm having a blonde moment but I've been playing devils advocate with myself and was posing the question:

Do house-prices actually matter if you are an owner-occupier with only 1 property?

My point being:

So long as you keep up with the repayments surely any increase/decrease in the value of your home is irrelevent because when you move to the next step on the ladder (assuming you are buying in a similar area) then if the property you live in has gone up or down 10% surely the property you are buying will have done likewise?

eg.

I buy Property A for £100k.

It increases 10% in value.

I sell Property A for £110k.

I buy Property B, but that has also increase 10% in value.

Am I being really stoopid?

Well, the way I look at it is that they do matter.

Take your example in which you have property A bought for 100K, which rises in value to 110K because of 10% rises. So you sell for 110K. You say near the top of your example that property B is the next step on the ladder (in the similar area). But presumably by "next step on the ladder" you mean something comparitively more valuable, (e.g. bigger). So let us say for argument that property B cost 200K when you bought property A. So it will have gone up 10% too (assuming the rises are the same precentage at all levels of the ladder). So now property B costs 220K. The difference in property values is therefore 110K. Before the rises the difference was 100K. So the rise has left you worse off and less able to move "up the ladder". You have been protected against some of the rise by owning property A, because if you hadn't bought that the extra you would have to find since the start of the example time period would be an extra 20K, rather than an extra 10K. But you're still less able than before to move up.

For me, that is one of THE key reasons why HPI is bad. It is one of the reasons why I think people who talk about "getting on the ladder" are missing the point. Unless one gets a promotion or inherits money, if HPI exceeds background inflationary wage rise rates, then everyone who wants to buy a bigger house is less able to do so. At least that's the way I see it.

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Unless one gets a promotion or inherits money, if HPI exceeds background inflationary wage rise rates, then everyone who wants to buy a bigger house is less able to do so.

You're right, of course: the 'ladder' only exists when you have significant wage inflation to wipe out the debts, so the actual cost of your next house over the lifetime of the mortgage goes to nothing. Which has been true for much of the last fifty years, and is unlikely to be true for the next fifty.

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You know what. I'd never thought of that!

Makes it even more important to get the best you possible can as a FTB.

This logic is interesting for me.

Take this scenario.

I buy a 300K 2 bed flat.

In 10 years time I want to buy what is now a £450k house.

Let's suppose that in this time a HPC happens and both have 10% knocked off the value.

I sell my flat for £240k (am £30k worse off)

I buy the house for £405k (am 45k better off)

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Take this scenario.

I buy a 300K 2 bed flat.

In 10 years time I want to buy what is now a £450k house.

Let's suppose that in this time a HPC happens and both have 10% knocked off the value.

I sell my flat for £240k (am £30k worse off)

I buy the house for £405k (am 45k better off)

Exactly, so since most people are home owners with aspirations of owning a better home why on earth does the generally public regard house price increases as good news and house price decreases as bad news? It should be the other way around.

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why on earth does the generally public regard house price increases as good news and house price decreases as bad news?

Because they're 'financially special'.

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You know what. I'd never thought of that!

Makes it even more important to get the best you possible can as a FTB.

This logic is interesting for me.

Take this scenario.

I buy a 300K 2 bed flat.

In 10 years time I want to buy what is now a £450k house.

Let's suppose that in this time a HPC happens and both have 10% knocked off the value.

I sell my flat for £240k (am £30k worse off)

I buy the house for £405k (am 45k better off)

I hate to point out the obvious, but to be 30k worse off on your flat sale you need to sell it for 270k not 240!

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Exactly, so since most people are home owners with aspirations of owning a better home why on earth does the generally public regard house price increases as good news and house price decreases as bad news? It should be the other way around.

It's all part of the misconception of wealth. If your house has increased in value you have zero increase in purchasing power unless you sell the house. Not everyone can sell, there aren't enough buyers to buy all the houses. So the only people who can make money from property are those who get out quitely while the prices are high. Everyone else is screwed it is a pyramid scheme.

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Your first step onto the ladder is the most important one you ever take, because it defines your position in the house pecking order for decades. Buyers who waited until 1996 to buy could easily have an extra £50K of equity today over those who bought in 1989. That extra equity might make all the difference to those people today if they want to buy somewhere larger.

There's the rub.

This is the detail that sits outside my advocate's argument. The opportunity cost of buying vs. not buying.

Ideally, we should try and buy low not because we will make huge capital gains if property values rise (as we have already discussed there is a sound argument that the reverse is true if we are moving into a larger property) BUT because if we time it better:

we may be able to save more money for a deposit

our mortgage repayments may be smaller

which will leave more dosh left at the end of each month for saving towards the next property.

This is a bit of a eureka moment for me. It underlines why it is so important not to be be mortgaged up to the hilt and trat bricks and mortar as your only savings vehicle.

If you do that, you get screwed by the market if prices increase and you wish to upgrade to a larger property.

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I see it differently.

The higher the price I pay today the larger the debt burden I carry through my working life, and the less disposable income I have for my entire life.

Also bearing in mind that using a mortgage to purchase a property of higher value means added interest so it is actually far higher.

If I take a couple of examples and put them into the Nationwide mortgage calculator for the same mortgage product (assuming IRs never change):

These are the totals paid over the lifetime of the mortgage period.

House with £120K mortgage: £217568.75

Same house with £200K mortgage: £368801.27

The difference between having a mortgage of £120K vs £200K is £151232.53

That is how much of your disposable income is being 'wasted' due to speculative HPI if you buy now in the scenarios above. If you lived another 50 years that would be equivalent to £3024.65 a year (ignoring inflation and IRs) for the rest of your life.

Thinking of it that way - I think I'll pass thanks.

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I hate to point out the obvious, but to be 30k worse off on your flat sale you need to sell it for 270k not 240!

Also we are using cash values here, Im not sure many FTBs will buy their first property in cash. Most FTBs will have a smaller deposit or less equity than someone moving a rung and so will have a mortgage with more interest added to it. If you pay 300k for a flat, its real cost is likely to be far higher once interest is added on.

I think comparing nominal values "oooo i bought my house for 150k its now worth 200k Ive made 50k pure profit" is one of the reasons people see property as a smart move. I suppose banks hiding the total value of paying backing a mortgage might have something to do with this.

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Also we are using cash values here, Im not sure many FTBs will buy their first property in cash. Most FTBs will have a smaller deposit or less equity than someone moving a rung and so will have a mortgage with more interest added to it. If you pay 300k for a flat, its real cost is likely to be far higher once interest is added on.

I think comparing nominal values "oooo i bought my house for 150k its now worth 200k Ive made 50k pure profit" is one of the reasons people see property as a smart move. I suppose banks hiding the total value of paying backing a mortgage might have something to do with this.

Exactly what I was getting at.

Buy house for £200K.

MEW £50K profit out of house to buy car/holiday etc

Feel smug

You have paid £368801.27 over lifetime of mortgage before the additional cost of your MEW.

Effectively these people are just borrowing more. HPI just stokes the availability of secured credit to these muppets.

That is also a major gripe around this forum - credit largesse of the banks/BSs.

This has been over-extended as it has been secured to notionally (and speculatively) high house prices.

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You have paid £368801.27 over lifetime of mortgage before the additional cost of your MEW.

Of course if your wages are increasing by 20% a year you _should_ be smug, because you just got a 200k house and a car for a fraction of their cost in real terms. With high wage inflation, borrowing to buy is the smart thing to do.

It's when your wages are static or dropping that you get screwed.

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By this logic surely the best time to upgrade to a larger property is at the trough of a massive crash...which ironically is when everyone wants to dig their heels in and wait for prices to rise?

You might take a 20% hit on your 100K flat when you sell...but you could realise a 20% discount on the 200K flat you are moving to.

Question:

What happens if when you sell you are in negative equity with the bank? Do you simply have to find the cash or can you move it to the new mortgage?

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By this logic surely the best time to upgrade to a larger property is at the trough of a massive crash...which ironically is when everyone wants to dig their heels in and wait for prices to rise?

You might take a 20% hit on your 100K flat when you sell...but you could realise a 20% discount on the 200K flat you are moving to.

Question:

What happens if when you sell you are in negative equity with the bank? Do you simply have to find the cash or can you move it to the new mortgage?

Aye, you take the debt with you!

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The problem with treating the purchase / sale of your prime residence with this kind of analytical rigour is that real life tends to get in the way. Not withstanding the fact that selling your 1st property at the bottom of the cycle might be very very difficult. Hence why chains hang around for months and months before completion sometimes.

You'll probably find that the decision to upgrade will be less one of "it's now the bottom of the trough" rather "we need a bigger place for family" or "one of us has been relocated".

So given those vaguaries how do most people cover the risk? They buy the best quality they can afford irrespective of the exact point in the cycle, excepting those times when prices are obviously crashing. Life can be put on hold for 12 - 18 months but very often no longer.

Last year there was sufficient doubt in enough potential buyers to almost crash the market - not so sure now. I think in some areas the doubt has been assuaged and it's "back to normal" in many peoples eyes.

As anyone who STRd in 2002 or 2003 would testify timing the property cycle is very very hard.

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eg.

I buy Property A for £100k.

It increases 10% in value.

I sell Property A for £110k.

I buy Property B, but that has also increase 10% in value.

Am I being really stoopid?

Ok, say you bought property A for £100k as stated and your dream property B is £200k at the time, you make £10k on property A yet B is now £20k more expensive, so you're actually an additional £10k further behind than when you started despite making £10k. It's simply a matter of differentials, the higher the price of B and the greater the house price inflation the more proportionally worse things become. In short this is why the ladder is broken.

Say you buy property A for £100k and prices fall 20% over a set period of time, so your property is now only worth £80k yet your dream home B is now only £160k (assuming a universal fall), so in effect you've lost £20k on your first property but despite that loss your dream home is £20k further in reach. The problem is that you're still carrying £100k of mortgage debt that will need to be carried over, however a fall has still benefited you because B is cheaper.

People like big numbers and always assume the higher the better, unfortunately most people don't live in their dream home and are looking to upgrade so run away inflation means nothing if their dream home is growing proportionally more expensive (the rungs moving further apart).

Edited by BuyingBear

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Take this scenario.

I buy a 300K 2 bed flat.

In 10 years time I want to buy what is now a £450k house.

Let's suppose that in this time a HPC happens and both have 10% knocked off the value.

I sell my flat for £240k (am £30k worse off)

I buy the house for £405k (am 45k better off)

so by your calculation you are 15k better off. (45-30)

but if you had rented cheaply for those 10 years (ie paying rent the same or less as the interest would be on a loan to buy the home you rent) you would be 45k better off.

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depends on what your wage inflation is running at.... with low wage inflation you dont have a ladder so your first house may be your last....

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with low wage inflation you dont have a ladder so your first house may be your last....

Personally I don't see why anyone considers that unusual: my parents have only ever bought one house, they brought up the family in it and will probably be there until they die... they rented until they could afford to buy a house they could live in for the rest of their life.

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Exactly, so since most people are home owners with aspirations of owning a better home why on earth does the generally public regard house price increases as good news and house price decreases as bad news? It should be the other way around.

Indeed, however we all know this message is confused by the fact people like increases because they can 'extract' ever more 'equity' as if it's some big piggy bank that automatically fills up with money grown on trees.

Of course they're not extracting anything, it's just borrowing money on the back of notional price rises, it used to be called a "second mortgage" and it was looked down upon, all that has changed through a little bit of rebranding and the word 'second' is now technically incorrect, it's more like 'third', 'forth'. The only 'extraction' will be their ar$e from their own property when the banks want their money back, real money back, not magic money.

Edited by BuyingBear

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Unfortunately the general houseowning public is probably at an average age of about 50, not considering another move, and just looking at all the 'supposed' equity they will have in the future to retire on / give to their children. They are also thinking " I bought my house for £50k and it's now worth £250K so I'm only paying £200 a month for a £250k house - this is great!" Muppets. :angry:

Edited by spuggy

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  • 335 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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