How Sentiment Affected The Market

[frugalista]

Here are four very short stories I have made up, exploring the idea of how property sentiment has affected the market. Read them carefully to make sure you get the concepts. Then think about the implications. Importantly, all the stories are supposed to take place around 2002-3 when house price inflation was at its height. The stories are completely fictitious but supposed to be as realistic as possible.

The theme of this topic is so important, I would like the moderators to pin it, something I have never asked for in all my 1000+ posts! Moderators: pretty please, with a cherry on top, pin this topic.

Now for the stories.

STORY 1 - The FTBs

Andy is 25 and working as a junior accountant. He is happy enough, but not massively fond of his job or the somewhat dull home town he lives in. Nikki, 24, a newly qualified maths teacher, has been Andy's girlfriend for just over a year. They start discussing moving in, and sharing a rented flat. Nikki's friends and Andy's parents find out about their plans. "Why don't you buy somewhere?" they all ask. "Rent is just dead money" say Nikki's friends. Andy and Nikki are unsure, Nikki because they haven't been together that long and Andy because he doesn't want to be tied to the job and the area. For various reasons, it seems to both of them like a bit too much commitment at this stage. "Maybe in a year or two" they both say.

But the pressure doesn't stop. "Look at what prices are doing!" say's Andy's dad "in a couple of years you will be priced out". Andy and Nikki do a bit of research online and find it's true that prices have shot up 18% in their area in the last year. Worried about being priced out, this convinces them to take the plunge.

STORY 2 - The young family

Hanna and Jeremy are in their mid 30s and both work. They have two small children aged 2 and 4. The two-bed terrace they bought as FTBs a few years back will soon seem cramped, especially if they have a third child. They feel they are ready to buy a bigger house and that they can afford it. This house will probably be the family home for a long time, so they want to buy the right place. They start looking every weekend, leaving the kids with Jeremy’s mum.

After about 3 months, and after viewing about 40 properties, they find a 3-bed semi that they both really like, in an area with a good school. It seems a little bit overpriced, but the estate agent reassures them that the seller may negotiate. They decide to put in an offer at 10% under asking price. It is flatly refused. (This is 2002/3 remember). Hanna and Jeremy think they can stretch to 5% under asking just about, so that’s their next offer. The seller is not budging one bit. Hanna suggests they give up and start looking again. Jeremy agrees and so calls the estate agent.

“Are you sure you want to go back into the marketplace?” says the estate agent, “By the time you find another place you actually like the prices will have gone up again”. Suspicious of the estate agent’s claim, Hanna suggests a bit of online research to see what prices are doing. Sure enough, over the last few months prices have risen 11% in their area. They are worried that the estate agent is right – they cannot afford to go back to the marketplace. In the end they pay full asking price.

STORY 3 - The relocated worker

Jim is 39 and has a good job as a software engineer. He lives alone in a 2-bed small newbuild house which he bought some years back. He’s been in his current job about 3 years. Ahmed, a friend of Jim’s, emails him with a job opportunity. It’s a new company which is starting up. Ahmed reckons Jim could get a management position. Jim applies for the job and gets an offer, including a substantial pay jump from his current salary. The catch is, the job is hundreds of miles away in another city. But the company is offering a bit of relocation money so Jim goes for it. He looks for a new place to buy in the new city and finds a converted warehouse apartment which suits his taste and which is right near the new office. Now he just needs to sell the old house…

Down the pub, Jim is talking to another friend, Phil.

“You don’t wanna sell up, mate” says Phil, “keep it on as an investment”.

Jim is skeptical. “What’s the point?” he reasons, “I don’t need a property here anymore.”

Phil is adamant “Listen, you rent it out, which covers the mortgage, and what with prices going up, you’ll sell in a couple of years for a tidy profit”.

Jim has a think about it. He phones the mortgage lender. No problems there, they will offer a Buy-To-Let deal on the old place which will be covered by the rent and still give him the same loan on the new apartment. What about “prices going up”, does it stack up? A quick scan online shows plenty of data backing up Phil’s claim. Average price in the area has risen 20% in the last 18 months.

Based on this, Jim decides to hang on to the old house and become a landlord.

STORY 4 - The retiree

Margaret is 63 and is a widow. She is a solicitor, a job she has had for 30 odd years (the last 10 years she has worked part-time). Although her children have all left home, she still lives in the 5-bedroom detached mock Tudor family house which she and her late husband bought in the late 80s. The mortgage is now paid off. Margaret is considering retirement. Unfortunately, Margaret’s pension situation is not very good. Following the stock market crash of 2001, her pension pot is worth about £160k. An annuity bought with this money will only pay out a very small income, especially compared to what Margaret is used to.

Margaret brings up the pension problem with her daughter Rebecca (30) “Why not downsize to a much smaller place and use the capital for a better retirement income.” suggests Rebecca “a two-bed bungalow with garden perhaps?”

It seems like a sensible move. The house and its large garden were great when the kids were growing up. Margaret manages fine but she is getting a little bit tired with the cleaning and maintenance, now that her husband is not around to help. But then Margaret thinks about how much the large house has increased in value over the last 15 years. It is an astonishing amount. “What’s the point of selling up now”, she thinks, “it is clearly a valuable asset which is bringing in more capital every year.”

On this basis, she decides to hang on to the large house for a few more years.

Discussion

- Did the stories seem realistic?

- Do you think stories like this were playing out across the UK in the last few years, say around 2002/3?

- Notice how in every case people are looking at price rises as one factor to help make their decision.

In every case demand was increased or supply was reduced based on observed price rises

In other words, seeing the prices rising around them, people decided to buy early or pay more (increasing demand, stories 1 and 2). Again, based on prices rising they held on to property they didn’t need (reducing supply, stories 3 and 4).

Think about this. Because prices were rising, demand was increased and supply was reduced. . What further effect did this have on prices during those years?

Skip forward to 2006. Prices are flat. What happens when people do not see price rises any more? Won’t some of the outcomes of similar stories be different? Won’t people be less inclined to buy early or pay more? Won’t they be less inclined to hold on to unneeded property? What will this do to supply and demand?

When people stop seeing price rises, what will happen to prices?

Exercise for the reader: what kinds of analogous stories will play out when people see prices falling?

frugalista

[non-FTBer]

Some very good points well made.

[winkie]

My thoughts exactly, Fruglista.

We all need a home to live in, but many use property for making money from, all well and good but when the figures don't add up the stories will turn out to be quite different.

[Zaranna]

My thoughts are that at the present time, the stories might well play out as follows:

1. Nikki and Andy: depends on how wealthy their parents are. Worried about being priced out, encouraged by endless repeats of Homes Under the Hammer, and being told by family and friends to buy, they still try to buy but find they cannot afford anything. Either a) they give it up and wait; or b ) they convince their parents to MEW or to guarantee an IO mortgage on something overpriced in the hope that it will go up. I think b ) is still quite likely.

2. Hannah and Jeremy - are priced out of moving. They just wait.

3. Jim - still keen to let out his property, still keen to be a landlord because the second house will "be his pension". Tried to let it out but there's a long void period. He's still wondering why he can't get tenants and why he can't get a rent at the same level that the agent told him he would. Possibly he accepts a lower rent, that doesn't cover the mortgage, because he's "in it for the long term - and whatever happens in the short term, it will go up over the next 10-15 years, right?" Either way, he's hanging on to the house for the meantime. He's quite savvy about the possibility of a drop in prices, but he's still keen to keep hold of the second property now that he's got used to the idea of being a landlord - because you can only win in the long term, can't you?

4. Margaret, retired and keeping an eye on the local property pages, is being told by her daughter Rebecca (now 33 and keen for her mother to sell so that Margaret can give her some cash from the house sale for a deposit) that prices are at their peak. Panicked that the value of the house might go down again, she puts her 5-bed detached house on the market. Margaret, keen to extract as much "value" from the house as possible, and having heard from friends in the area how much houses here can sell for, prices it "optimistically" - after all, she wants to get what it's "really worth", and someone told her a similar house down the road sold for 650k in 2004. Margaret doesn't use the internet, so she depends on hearsay and the agent to know what houses like hers are really worth. She reckons that she can surely get 750k for it - after all, prices rise by about 20 per cent each year, don't they? She's not keen to drop the price, as that would look like "giving it away". There have been few viewings, but, told by agents that a spring bounce will bring out willing buyers, she eventually agrees to drop the price by 25K. Margaret thinks the house is lovely - she spent a lot of time decorating the house in the eighties, and she's very proud of it, so she's unwilling to countenance any further price drops - she and her husband might have bought it for 150k, but she does need the money for her pension and she's got used to the idea that that's what houses are worth now. It would make such a lovely family house - she can't understand why it isn't selling. So few young families seem to want to view it....

Margaret hears reports of a shaky housing market, but the nice agent tells her it's all rubbish and "doom-mongering", and she hopes he is right. Only, she's has a nagging worry that all is not as optimistic as the agent suggests....

I think that's basically how all the stories would play out right now, and describes the market that we're seeing at the moment. Story 4 in particular is interesting - it exemplifies the kind of doublethink that characterises the top end of the housing market at the moment - ie. prices won't fall, but I'm panicking that I must sell now in case they do, but of course they won't fall....better put my 5-bed house on the market so I get "top dollar" for it in case of a slump, but I'm not willing to drop the price becuase that's what "it's really worth" - etc. etc.

But as to how they'd play out if prices started to fall.....not sure. Hanna and Jeremy might jump back in, for example. What do you think?

Edited March 15, 2006 by Zaranna

[taxmyrs]

STORY 2 - The young family

Hanna and Jeremy are in their mid 30s and both work. They have two small children aged 2 and 4. The two-bed terrace they bought as FTBs a few years back will soon seem cramped, especially if they have a third child. They feel they are ready to buy a bigger house and that they can afford it. This house will probably be the family home for a long time, so they want to buy the right place. They start looking every weekend, leaving the kids with Jeremy’s mum.

After about 3 months, and after viewing about 40 properties, they find a 3-bed semi that they both really like, in an area with a good school. It seems a little bit overpriced, but the estate agent reassures them that the seller may negotiate. They decide to put in an offer at 10% under asking price. It is flatly refused. (This is 2002/3 remember). Hanna and Jeremy think they can stretch to 5% under asking just about, so that’s their next offer. The seller is not budging one bit. Hanna suggests they give up and start looking again. Jeremy agrees and so calls the estate agent.

“Are you sure you want to go back into the marketplace?” says the estate agent, “By the time you find another place you actually like the prices will have gone up again”. Suspicious of the estate agent’s claim, Hanna suggests a bit of online research to see what prices are doing. Sure enough, over the last few months prices have risen 11% in their area. They are worried that the estate agent is right – they cannot afford to go back to the marketplace. In the end they pay full asking price.

Exceptional stories Frugalista - story two is remarkably true for me, but with a different much happier ending. In the New Year the housing market in our area (like most areas) staged a brief rally. I nearly left all my rules, principles and brains behind chasing a house up with a cheeky offer, low/fair offer, very fair offer. But the guy was holding out for the asking price; he’s still holding out 6 weeks later. Probably expecting another offer from us – he won’t get one, and if the EA come back to me at some stage saying he’s had a change of heart; I’ll tell them so have I. I’ll buy at the cheeky offer or no deal!

It is so damn easy to get sucked in, but it won’t happen again.

[Jason]

Very well put.

Quite simply: Housing Demand = Genuine need for Shelter + Speculative demand

What happens in a flat market? Speculative demand subsides. Although, currently I think a lot of people think house prices will rocket again (especially with the media spouting lower interest rates).

With regards to Zaranna point about No1, most young people will see a mortgage advisor as their first step (many visiting the EAs mortgage advisor). In many many cases people are encouraged to take out interest only and self cert (as I was). This helped affordability, although I think a lot of FTBs wouldn't take that risk if the pressure to 'get on the ladder' wasn't there.

[Guest Cletus VanDamme]

Margaret hears reports of a shaky housing market, but the nice agent tells her it's all rubbish and "doom-mongering", and she hopes he is right. Only, she's has a nagging worry that all is not as optimistic as the agent suggests....

I think that's basically how all the stories would play out right now, and describes the market that we're seeing at the moment. Story 4 in particular is interesting - it exemplifies the kind of doublethink that characterises the top end of the housing market at the moment - ie. prices won't fall, but I'm panicking that I must sell now in case they do, but of course they won't fall....better put my 5-bed house on the market so I get "top dollar" for it in case of a slump, but I'm not willing to drop the price becuase that's what "it's really worth" - etc. etc.

But as to how they'd play out if prices started to fall.....not sure. Hanna and Jeremy might jump back in, for example. What do you think?

Great thread, probably one of the best in recent times, as it sums up the situation over the last few years perfectly. I think you're spot on with Margaret's story brought forward to today, and I think this doublethink explains why prices are still generally holding up in the mid-market (4-5 bed detached) - confidence is starting to crack, but the price falls haven't really started happening yet.

It's going to take a lot to wrench the boomer generation particularly away from the idea that this huge amount of 'earnt' equity is not their birthright. And could explain why we might not see a crash for a long time.

[Fingers Crossed]

I like your thinking, although I have one question.

Story 5

Louise, single professional aged 30. Can't afford to buy a one bedroom hovel within commuting distance of work. She buys a property in Spain as a holiday home and with possible distant thought of living there when she retires. Whilst this is affordable, it ties up a large proportion of her income. She continues to live in a rental bedsit.

How much is demand reduced because people are buying abroad and are tied into those investments long term?

[Without_a_Paddle]

I'm afraid you won't see a huge crash caused by sentiment alone.

You have to destroy affordability. That's what happened when rates went from 8% to 15% at the peak of the last boom.

Negative sentiment (initiated by destroyed affordability) then pulled the crash lower and longer than it should have been. Property became a giveaway in the mid 1990s.

Affordability is MUCH better in 2006 compared to the last peak in 1990.

There is NOTHING on the horizon that will destroy affordability in the next few years. A few 0.25% rate rises might dent it over the next few years, but wage inflation will be offset against this.

[Guest Winners and Losers]

I'm Jim.

Bought house in Oz about 12mths before the absoulte peak of the market. Put on market 2 years later (by design not choice). Agents said XYZ, price dropped by 100k over next 12mths. Only looking now at marginally more than we paid. As had sold London property in 2002 to buy Oz property, did not want to make the same mistake again and decided to hang on to it and let it out. Rent only covers IO mortgage (even with 50% equity). Now no money to buy another property in UK. Had we kept house in London we would be quids in. My life is over. On the bright side, if property prices don't come down in UK I will save my money to pay off my Oz mortgage and go back.

The moral of the story is - be careful buying at or near the peak of the market if you are planning to sell again in the next few years. You can wave bye, bye to capital gain for a while.

[Foobar]

Affordability is MUCH better in 2006 compared to the last peak in 1990.

There is NOTHING on the horizon that will destroy affordability in the next few years. A few 0.25% rate rises might dent it over the next few years, but wage inflation will be offset against this.

"Affordability" - much like setting out on a 100, 000mile journey with about a fiver's worth of petrol. "We're still going there's no problem!" They'll be something on the horizon at some point you can bet on it.

[BillyShears]

This is a great thread. I don't usually read the pinned ones, but I missed out here.

Billy Shears

[frugalista]

Exceptional stories Frugalista - story two is remarkably true for me, but with a different much happier ending. In the New Year the housing market in our area (like most areas) staged a brief rally. I nearly left all my rules, principles and brains behind chasing a house up with a cheeky offer, low/fair offer, very fair offer. But the guy was holding out for the asking price; he’s still holding out 6 weeks later. Probably expecting another offer from us – he won’t get one, and if the EA come back to me at some stage saying he’s had a change of heart; I’ll tell them so have I. I’ll buy at the cheeky offer or no deal!

The big difference is that in 2006 you didn't feel the pressure of time marching on and prices shooting up. You are relaxed and (perhaps) thinking of going back to the marketplace. You weren't tempted to make that final asking-price offer to avoid having to look at properties again.

frugalista

[frugalista]

I'm Jim.

Aha! more evidence that the tales are quite realistic!

Bought house in Oz about 12mths before the absoulte peak of the market. Put on market 2 years later (by design not choice). Agents said XYZ, price dropped by 100k over next 12mths. Only looking now at marginally more than we paid. As had sold London property in 2002 to buy Oz property, did not want to make the same mistake again and decided to hang on to it and let it out. Rent only covers IO mortgage (even with 50% equity). Now no money to buy another property in UK. Had we kept house in London we would be quids in. My life is over. On the bright side, if property prices don't come down in UK I will save my money to pay off my Oz mortgage and go back.

Question: I would be very interested to hear in more detail the reasoning which prompted you to hang on to the Oz property.

Anecdotal: I have an ex-colleague who moved to the UK from NZ and rented out his old house. Turned out to be an absolute nightmare and he sold up at a loss. I also relocated (to the US), and had this exact dilemma -- in the end I sold my previous property.

The moral of the story is - be careful buying at or near the peak of the market if you are planning to sell again in the next few years. You can wave bye, bye to capital gain for a while.

Good point. Anyone buying now better realise they will be there for quite a few years.

frugalista

[frugalista]

[...]

I think that's basically how all the stories would play out right now, and describes the market that we're seeing at the moment.

[...]

But as to how they'd play out if prices started to fall.....not sure. Hanna and Jeremy might jump back in, for example. What do you think?

This is really the critical issue. What would happen if the same stories took place today? The buyers, Nikki & Andy and Hanna & Jeremy, may well be priced out of the property they'd have been looking at in 2002. But, they'd perhaps be able to afford *something* presumably. For Nikki and Andy they might be looking at 1-bed as opposed to 2-beds? But, this just makes the whole prospect of buying at all (which was already marginal) rather unattractive. Not only do they have to commit to something they're unsure about, they end up stony broke, in a really poky flat. Add to this the fact that Nikki is lurking on HPC.co.uk!

Hanna and Jeremy are "in it for the long term" so in theory will stretch quite a bit to afford the place they want. Suppose they do find somewhere they like before lining up a buyer. The seller cannot apply much pressure because Hanna and Jeremy can return to the market place at their own pace -- there is a lot of stuff on offer and the prices are static. The other point is that they also now have the problem of selling their 2-bed terraced house in a flat market. If they are getting only cheeky offers they are not going to be in much of a mood to pay asking price. Perhaps Hanna and Jeremy will start looking into building an extension?

If Jim is as savvy as you say, I think he would just get shot of the old place, thereby increasing supply. He was probably convinced to sell by a bearish article in the Telegraph or the Economist.

Margaret is a different matter and I tend to agree with you. I think she would cling on for a couple more years from now. All she can see is the huge rise since they bought for £150k -- she is less sensitive to the more recent market conditions. However, when the crunch comes, she will realise that none of her retirement plans can move forward without selling up. The precious autumn years are dwindling faster than she thought. When she finally does come to sell, she doesn't find it hard to cut the price. She's not greedy, and it's not as if she actually worked to earn the money, so it's easier to let it go. She sells at 15% off the peak price.

frugalista

[frugalista]

I'm afraid you won't see a huge crash caused by sentiment alone.

You have to destroy affordability. That's what happened when rates went from 8% to 15% at the peak of the last boom.

Negative sentiment (initiated by destroyed affordability) then pulled the crash lower and longer than it should have been. Property became a giveaway in the mid 1990s.

You could be right. But how much of the recent rises have been due to sentiment? No-one can really say. I think the stories ring so true that in fact most of the HPI since 2001/2 has been sentiment-based. Affordability has been getting worse over that period.

Affordability is MUCH better in 2006 compared to the last peak in 1990.

This is quite true, but at the same time, affordability now is worse than any other period over the last 25 years apart from the 1989-92 crash.

There is NOTHING on the horizon that will destroy affordability in the next few years. A few 0.25% rate rises might dent it over the next few years, but wage inflation will be offset against this.

There might be a bit of wage inflation, but it's effect on demand could be cancelled out by rising unemployment. Also note that affordability is damaged by non-property price inflation, e.g. increased utility bills.

Also remember, the BoE does not directly set mortgage rates and does not directly determine the lending climate. If lenders start tightening up their criteria, either by higher rates, lower multiples, fewer self-cert or exotic mortgages, affordability will be severly damaged for many people.

If the lenders become jittery as repossessions rise, this is exactly what could happen.

frugalista

[frugalista]

3. Jim - still keen to let out his property, still keen to be a landlord because the second house will "be his pension". Tried to let it out but there's a long void period. He's still wondering why he can't get tenants and why he can't get a rent at the same level that the agent told him he would. Possibly he accepts a lower rent, that doesn't cover the mortgage, because he's "in it for the long term - and whatever happens in the short term, it will go up over the next 10-15 years, right?"

Zaranna,

I forgot to mention that Story 5 was going to be the hapless BTLer, a card-carrying member of the "BTL is my pension" brigade. But in the end I thought that the BTL topic has been so completely done to death on this forum I left it out. I do think it is a part of the sentiment story though. More important I thought was to bring out the less well-known and harder to measure trends such as Hanna and Jeremy.

frugalista

[Guest Winners and Losers]

Question: I would be very interested to hear in more detail the reasoning which prompted you to hang on to the Oz property.

frugalista

In case we go back.

a) We realised that we had left ourselves priced out of the UK market and did not want the same thing to happen if we went back.

We would have only had the deposit that we left the UK with in the first place. Add another 50k to the place I sold and I could buy it again!

c) We needed to have made a bit more money from the sale (than we paid!) in order to buy something in UK.

d) Because we could. With 50% equity in the house it meant that the rent would at least cover the IO mortgage.

e) Where we our house in OZ is they are in the process of building a new 'town', i.e. one does not exist at the moment. 3 new schools have gone in (grammar, catholic and state), plus 2 new nursery schools, brand new medical centre. It is all going to be state of the art stuff - aquatic centre, cinema's etc. etc. Well planned and looks nice. Our house is going to be about a 5 minute walk from the town centre.

f) Our house is 5 minutes from any number of perfect beaches. 5 minutes to golf, lakes, shopping. 15 minutes to huge shopping mall and 15 minutes from Mum's.

g) We had planned to settle down out there and have kids, but had problems in that department.

h) No firm plans in UK. I think I want to go home again. We either buy here and have 2 houses (we could borrow £235k - but would not borrow that much), or we decide we don't want to stay here and work a couple of years to pay off the Oz mortgage.

i) Well, you said detail (never ask me for detail, I am the master) - if they put IR's up in Oz we will be flat out covering the cost of that house, let alone another here if IR's go up! I don't know how all these BTL'ers do it! Perhaps I am just overly cautious by nature.

OK, I think that's it! Sorry if its a jumble!

[frugalista]

I like your thinking, although I have one question.

Story 5

Louise, single professional aged 30. Can't afford to buy a one bedroom hovel within commuting distance of work. She buys a property in Spain as a holiday home and with possible distant thought of living there when she retires. Whilst this is affordable, it ties up a large proportion of her income. She continues to live in a rental bedsit.

How much is demand reduced because people are buying abroad and are tied into those investments long term?

OMG that is truly bonkers. Do you know people who have done this?

frugalista

h) No firm plans in UK. I think I want to go home again.

It sounds nice and most importantly of all, for you it's home. That's very important. So, perhaps you did the right thing. In Jim's case he was never planning to move back there.

frugalista

[Zaranna]

Zaranna,

I forgot to mention that Story 5 was going to be the hapless BTLer, a card-carrying member of the "BTL is my pension" brigade. But in the end I thought that the BTL topic has been so completely done to death on this forum I left it out. I do think it is a part of the sentiment story though. More important I thought was to bring out the less well-known and harder to measure trends such as Hanna and Jeremy.

frugalista

It's funny - I know real world examples of all of these four types! Jim is my landlord (30s software engineer!) He's savvy enough to know that prices may drop (I wouldn't make my money back if I sold now as prices have dropped, he said to me about the flat I'm renting) but he is dead set on keeping it for the long term, even though it's a clear losing proposition (and he's paying out cash month-on-month as my rent doesn't cover the mortgage). He will stick for longer than we think. It won't be until near the bottom of the market that he panics and sells. He fancies himself as a bit of a "property developer".

I think it will be Hanna and Jeremy - (and Margaret, but I'll deal with her in a minute) - that are the key market. I think you're right that they'll be looking at an extension rather than a move, but won't be able to decide....

2006-7: "Hanna is unhappy about having two small children in such a small house, but she and Jeremy are priced out of moving. Hanna's finding it harder and harder to keep working and have two small children in nursery, which costs over 15k a year in nursery fees alone. She is keen to give up work, but she and Jeremy will find it impossible to move if they don't have two incomes. She likes their area, though - there are some fantastic delicatessens and shops and a great mix of people, and she can walk the children to their Montessori nursery, even if there is the occasional problem with discarded needles left at the end of their road, and it's a bit noisy on Saturday nights. But Hanna grew up in a detached 5-bed house in the country and she is finding it tough fitting two children into one bedroom, and to add to that she doesn't even have room for friends or her parents to stay in their 2-bed terraced house. They've had someone round to quote a figure for a loft extension, but it would be very disruptive to have building work at a time when Bertie is starting school and Molly doesn't yet sleep very well. Jeremy wants to make a start on a loft extension, but Hanna is not sure yet whether she wants to extend, move or give up work to look after the children. If she gives up work they can't afford either. What to do.....? Hanna is undecided. She has heard something about a house price correction, so she's keen to wait and see what happens...."

Edited March 15, 2006 by Zaranna

[Zaranna]

I’m really getting into this now. ! More on The Thoughts of Margaret, 2006-7.

“Margaret is becoming more and more concerned that the house doesn’t seem to be selling, but she doesn’t want to drop the price. She wants to be able to fund her pension, and to be able to help Rebecca out as well. Rebecca is always complaining that she can’t afford a house; but Margaret privately thinks Rebecca’s generation is rather spoiled. Secretly, she is a bit resentful of Rebecca - she always seems to have new clothes and new music equipment, and she isn’t married, even now she’s thirty-three. Rebecca and her boyfriend even fly to Barcelona several times a year for a long weekend. Margaret can’t help thinking of how she and her late husband John never took foreign holidays – they used just to rent a cottage in the Lakes for a month when the children were small. Foreign holidays were an undreamt-of luxury!

She and John encouraged Rebecca to go to university to study English Literature, and to get a lovely job as an assistant editor in a publishing company. It seemed a perfect kind of career, very family friendly, with lots of nice girls working there. But Rebecca still earns only earns 26k a year, and Margaret can’t help thinking that this doesn’t seem a lot – some of her friends’ sons work in IT and seem to earn much more than that. (Her friend Carol’s son Jim, for example, earns 50k as a software engineer, even if he is thirty-nine - a few years older than Rebecca. He not only owns his own house, but Carol says he is letting one out as well – becoming a “property developer”!) Margaret and John had thought that by now there would be a man on the scene to provide for Rebecca, perhaps a lawyer or a doctor, and that she would be happily married with small children. Instead, Rebecca’s boyfriend Jamie gave up his job a few years ago to do a PhD, and he doesn’t seem to be able to find a university job. Margaret can’t quite understand why there seem to be so few lecturer jobs now that everyone’s children go to university, but Jamie has been trying for a few years and has given up, so he’s now retraining as a chemistry teacher.

Rebecca gets irritable every time Margaret broaches the subject of marriage and children, so Margaret’s given up, but she worries that Rebecca will end up not being able to have a baby. Margaret privately thinks it’s a very selfish attitude of young women these days, who are more interested in their careers and having fun than bringing up children. Rebecca says she can’t afford it, but Margaret is sure that Rebecca could save more money if she stopped eating those ready meals from Marks and Spencer’s, and cooked some home food. Rebecca says she doesn’t get home from work until eight or nine in the evenings, so she’s too tired to start cooking from scratch then, but Margaret thinks she surely should cook a big batch of lentil stew on Saturdays and freeze it for during the week. That would soon save enough money to buy a house, she is sure: Rebecca should just be a little more frugal. When she was Rebecca’s age, she was married with a child, and was careful to cook from fresh ingredients every evening. That was the kind of thrift that paid off her and John’s mortgage early! Rebecca says she doesn’t know what it’s like to work full time nowadays, but it was hard looking after the baby all day and doing the housework in such a big house – and during the lean times of 1990 Margaret even took a little part-time job helping out with the accounts at the local primary school to afford luxuries like Rebecca’s private school uniform. So she does know what it’s like to work, despite what Rebecca says!

Still, it’s true that houses do seem to cost a lot for young people these days. That’s why she’s extra keen not to drop the price of her house – she plans to give some money to Rebecca to help her and Jamie buy a flat. She initially planned on giving them twenty thousand pounds, but Rebecca says she needs at least a hundred to be able to buy a flat in London on her and Jamie’s salaries. That’s why Margaret has decided that she needs to keep the house on the market at a high price – otherwise she won’t be able to help Rebecca out. Rebecca says the average house price in London is over two hundred and fifty thousand pounds, but that doesn’t seem right to Margaret. Rebecca always did over-exaggerate – she is sure it can’t be that much…”

-- Notice that Margaret doesn’t make the connection between the price of her own house and how expensive it is for Rebecca to buy – it’s like she doesn’t even see the two things as part of the same market. This reflects a bizarre bias I’ve noticed amongst my parents’ generation – the fact that they expect their own house to sell for a ridiculously high price, but also expect there to be plenty of cheap housing available for their children (they’re genuinely surprised that there isn’t any, even if they’ve just been talking about how much money they’ve made on their own houses!)

Edited March 15, 2006 by Zaranna

[frugalista]

I like how you connected Jim and Margaret socially -- it is these word-of-mouth exchanges which cause sentiment to spread. This is becoming the HPC soap opera! Characters really do take on a life of their own once you've invented them.

I seem to be Jamie basically. I am in my early 30s with a PhD, and my girlfriend did English Literature at uni, and has never earned more than £26k. Also her parents had a 5-bed detached house. But, they did the smart thing and sold up last year, they are now renting a much smaller place and having a great retirement.

I am probably a bit luckier than Jamie in that I have had a high-paid corporate job for the last 5 years and have managed to save a load of money. Still, I would like to be a uni lecturer or teacher one day maybe.

frugalista

[Zaranna]

I like how you connected Jim and Margaret socially -- it is these word-of-mouth exchanges which cause sentiment to spread. This is becoming the HPC soap opera! Characters really do take on a life of their own once you've invented them.

I seem to be Jamie basically. I am in my early 30s with a PhD, and my girlfriend did English Literature at uni, and has never earned more than £26k. Also her parents had a 5-bed detached house. But, they did the smart thing and sold up last year, they are now renting a much smaller place and having a great retirement.

I am probably a bit luckier than Jamie in that I have had a high-paid corporate job for the last 5 years and have managed to save a load of money. Still, I would like to be a uni lecturer or teacher one day maybe.

frugalista

Yes - they have taken on a life of their own! Sorry, I forgot she was meant to be a solicitor - I see Margaret as a housewife

Can you tell though that I know whereof I speak...? Margaret bears more than a slight resemblance to my parents. Even to the conviction that just giving up a few M&S dinners would save enough to buy a house. My dad doesn't actually believe what I tell him about house prices - he thinks I'm exaggerating. ("The average house can't cost 200,000!" he rants. "You're making it up!")

Know what you mean about the PhD thing. I don't know why I didn't leave school at 16 and become a plumber - I'd have been far better off

Edited March 15, 2006 by Zaranna

[AteMoose]

A HPC cartoon ;p

[Guest boredwaiting]

Wow - it's nice to see good arguments. I had these thoughts in my head but didn't think to formulate them like this.

We should revisit this is 6-12 months and see how the market is working out.

Winnersandlosers - i was sorry to read about your situation. I remember reading you have tenants in your oz place and you hope they stay for 5 years. I hope it all works out for you.