Buy Something Cheap And Cheerfull (hedging The Market)...

[Guest DisposableHeroes]

If you have a reasonable deposit and can afford a low end 1-2 bed house, with a 5-10 fixed rate repayment mortgage. Is this the best way to go?

1. When eventually the market does re-adjust the loss won't be as great as a more expensive place.

2. Proportionally with percentage falls the next run up will be easier after a fall in the market.

3. Won't have to keep dwelling on the situation and move on with life.

4. If a long term fixed rate mortgage is taken out, work hard to pay off as much as possible. If rates do go crazy it won't matter.

[Magpie]

If you have a reasonable deposit and can afford a low end 1-2 bed house, with a 5-10 fixed rate repayment mortgage. Is this the best way to go?

1. When eventually the market does re-adjust the loss won't be as great as a more expensive place.

2. Proportionally with percentage falls the next run up will be easier after a fall in the market.

3. Won't have to keep dwelling on the situation and move on with life.

4. If a long term fixed rate mortgage is taken out, work hard to pay off as much as possible. If rates do go crazy it won't matter.

That's pretty much what I've done, so I may be biased...

I'm sure others here would point out the risks but here are my thoughts. I think the main danger with this strategy is getting stuck with something unsaleable - if prices fall and people start being able to skip the "first rung", the cheap stuff can be hard to shift. In London in the last crash, some of the cheap stuff fell a long, long way, especially in questionable areas. But if it is a reasonable property in a decent area and you think it would still sell in a downturn, it may be a reasonable gamble.

Personally I think not having to dwell on the situation is of some importance. Worrying and waiting indefinitely doesn't feel great - some can detach their emotions from this decision and see it as a pure investment decision, but I couldn't. Although having bought I do still dwell on it quite a lot, simply because, even though I am optimistic and happy to have a place, I am nervous of the potential downsides.

How I looked at the pros and cons was to run a lot of spreadsheets on what I thought would happen if prices went up 10%, stayed level, or fell 10-30% or more. I found that in quite a lot of the scenarios, buying now, as opposed in say 5 years time, was not a huge loss, especially if you take into account the fact that by waiting 5 years you either have to pay an extra five years mortgage in 25 years time or, in my case, take out a 20 year mortgage because of age. For instance in my case, 10% falls combined with a 1.25% rise in IRs over 5 years would leave me paying the same initial monthly amount and total repayment ( a big factor in this sum was how much you can save by waiting - if, unlike me, you can save up a big monthly amount towards a deposit by waiting, then that moves the decision towards waiting).

I reckon that if you are looking at the bottom end of the market, the difference is smaller than if say you are a STR looking at £500K+ houses. Of course big falls would still make the situation worse at the cheap end, but they have to be quite big to really hurt. So it depends on where you live and how far you think it will fall realistically. I'm expecting falls but I tend to expect up to 10-20% (+ more for new-builds) rather than more. Maybe I'm wrong - you need to take your own gamble there.

If you go for it, avoid new-build flats (you said house anyway - that would be good), get a decent amount of space and a garden, go for traditional virtues such as location and hope for the best. Also try to make it somewhere you could live for 10 years or so if the worst comes to worst.

It's a gamble whether you wait or buy at this stage. Best of luck either way.

Edited April 8, 2006 by Magpie

[winkie]

Would have to agree with both the above posts.

[Loanshark]

If you are going to buy, buy a HOME not a house.

It is you that has to live in it so whatever you buy you want to be able to say i am happy to live in this property for a number of years.

Do not buy just anything as a hedge so as to be on the ladder.

My advice as a Bear would be to rent and Enjoy the freedom that brings, change your attitude to renting, even rent some property thats much more expensive or unusual than you should for a year or two( i have seen luxury properties that are not that much more to rent than the average property) or give your self an extra 2 holidays a year for the next 2 years to compensate for renting, before you know it you will be glad you never bought a house.

[Gavin]

The half hedge? Before we STRd we wanted to do this.

At the time we realised that our house had gone up in 'value' by so much in a short time that we could move back down to a smaller place further out of town and practically have no mortgage. This was the first realisation that something was odd in the market.

We had been wondering how to stay in our current place, maintain our income for 25 years and God forbid have children in the very family house we had bought for the purpose.

Que putting our house on the market to see what happens and then 3 days off work to find a smaller property.

It was only when we looked round said places and were disgusted by the prices of those on offer that we just decided to sell and rent. A concept that we imagined at the time we had created ourselves, it was certainly unpopular amongst family and friends.

We were happy to let someone pay us a silly price, but we were not prepared to do the same onwards. The notion of silly price only started to form structure when we examined the price to earnings ratios. Then enlightenment!

In a sense selling at these prices felt immoral, maybe it was. The new owners were certainly delighted and have enjoyed the house since, and its all a game.

Actually the half hedge of downsizing would have been a good financial strategy because I think that the prices of smaller places have been the real growers since 2003 whilst the mid to large houses have stagnated.

The half hedge has merits, especially if you want some kind of stable home life. It would be considered a mildly bearish strategy, whereas STR is a extremely bearish strategy.

The benefits of STR are slightly different though to purely financial, as STRing:

-Allows you to view the market from the outside, like looking through the window into a drunken party, it gives you a different prespective.

-Allows you to appreciate what huge sums of money houses involve compared to other consumerables (e.g. with 100k cash you could travel the world for 10 years of more.)

-Allows you to be very mobile and try other areas to live. This is often glossed over by owners. I lived in the same place as my birth for 30 years and was staunchly patriotic to it. After moving 3 times I would never want to go back there. This shows me how blinkered I was.

I like the idea of a half hedge, but it ain't living and it aint gambling!

Besides, the previous post about finding a cheap place that won't lose value in crash by being in a good neighbourhood is actually the defination of what isn't cheap.

[right_freds_dead]

If you have a reasonable deposit and can afford a low end 1-2 bed house, with a 5-10 fixed rate repayment mortgage. Is this the best way to go?

yeah. its the best way to go to waste your hard earned money,.

why join a loss ?

[Magpie]

Besides, the previous post about finding a cheap place that won't lose value in crash by being in a good neighbourhood is actually the defination of what isn't cheap.

Yes, there is an element of truth in that - it's certainly hard to find anywhere you can describe as remotely cheap in reasonable areas - and if you get it wrong you could end up with something that loses a lot in any falls.

In my case it was a matter of buying something at the cheap end of a traditionally good London postcode for £10-20K more than the bottom end of worse areas down the road. In the last crash this area stayed about level while the "up-and-coming" areas lost 20-30%. But it's still a gamble and it's especially a gamble on the specific property not falling too much.

It's not really a hedge for me - I need somewhere to live, and it doesn't cost that much more for me to buy than to rent a similar property. I might well make a different decision if that gap were bigger, as it is for many. But waiting to buy isn't going to improve my situation much unless there is a very rapid fall in prices, and I tend to think it will be more of a slow grind downwards, in London at least.

Edited April 8, 2006 by Magpie

[Gavin]

It's not really a hedge for me - I need somewhere to live, and it doesn't cost that much more for me to buy than to rent a similar property. I might well make a different decision if that gap were bigger, as it is for many. But waiting to buy isn't going to improve my situation much unless there is a very rapid fall in prices, and I tend to think it will be more of a slow grind downwards, in London at least.

The key here is maybe what we have discussed before.

Outside London, to buy a 1 bed flat will cost maybe 800 pcm on a comparable i/o mortgage, and might be 600 pcm to rent.

For a four bed house it might cost 2000 pcm to buy but only 1200 pcm to rent, as there doesn't seem to be a 4 bed house renting market.

We are currently renting a wonderful house for much less than we could buy for. THIS IS THE ELEPHANT IN THE ROOM as far as we are concerned. It sweeps away all the arguments that immigration and household numbers have forced demand and prices up, if that were true, rents would be similarly high. They are not.

I have a friend who lives in Marylebone paying 1200 pcm for a 2 bed, 2 floor flat, to buy it? GBP 1.2m

Crazy crazy, its the ELEPHANT, in the damn room!

[Guest muttley]

We considered this strategy shortly after selling, but rejected it.

In order to buy something we liked we would have been paying stamp duty.Also we like the idea of being to move quickly if a decent property comes up, as we missed out in 2003 because we hadn't sold.

We now rent a lovely,spacious appartment and our deposit grows by the month.

[Magpie]

The key here is maybe what we have discussed before.

Outside London, to buy a 1 bed flat will cost maybe 800 pcm on a comparable i/o mortgage, and might be 600 pcm to rent.

For a four bed house it might cost 2000 pcm to buy but only 1200 pcm to rent, as there doesn't seem to be a 4 bed house renting market.

We are currently renting a wonderful house for much less than we could buy for. THIS IS THE ELEPHANT IN THE ROOM as far as we are concerned. It sweeps away all the arguments that immigration and household numbers have forced demand and prices up, if that were true, rents would be similarly high. They are not.

I have a friend who lives in Marylebone paying 1200 pcm for a 2 bed, 2 floor flat, to buy it? GBP 1.2m

Crazy crazy, its the ELEPHANT, in the damn room!

Yes I think this is always a huge factor in how you view things, and there are wide variations in different locations and price brackets. For me in North London I bought a 2-bed for under £190K. Not the perfect property, but perfectly good to live in and we'll be fine if we get stuck there for a long time. Rent around there for similar would be £900 a month, the repayment mortgage is £1050 - so a much narrower gap than the examples you've mentioned. OK there are plenty of extra costs for being an owner, but I'm quite motivated to buy and this kind of gap makes some sense to me.

I have said a few times I think it's reasonable to pay more to buy than rent, though obviously if the gap is huge that changes things. One way of looking at is if I live another 35-40 years, I'll have 10-15 years when the mortgage is paid off. The longer I rent, the fewer mortgage-free years there will be (or else I'll need to pay the mortgage over a problematically short period) - so any difference in rent now needs to make up for that big difference the other way in 25 years time.

[right_freds_dead]

if you have enough confidence to buy at the cheaper end, then instead just go buy your dream house.

all your hedging here is for a loss. if you have even a glimer of confidence it will rise.

its like watching icebergs melting into a hot sea, and then saying.

well i might as well buy a small ice cube before their all gone.

[winkie]

Nothing wrong with renting in todays market, but if you have a compulsion to buy, are prepared to stick with it, chose the right location and the property type with a unique selling point, have a resonable deposit, and are prepared to risk it over the shorter term. Go for it if it makes you feel happier, after all a house is your home.

Property £190,000

Mortgage £175,000

Deposit £15,000

Fees £5,000

£175,000 25 years repayment 4.8% fixed £1014 per month.

Interest only or renting without the benefits £700 per month.

A man can't go anywhere while he's straddling a fence.

[right_freds_dead]

no. just wait till the icebergs begin to rise again.

then hop on one.

otherwise you will be stuck on an expensive ice cube for the rest of your life.

[padders]

If you are buying now I think location, location, location matters more than ever. Buy the worst house in the best area. Crap areas is where prices will crash most.

[right_freds_dead]

If you are buying now I think location, location, location matters more than ever. Buy the worst house in the best area. Crap areas is where prices will crash most.

yeah so. anywhere outside the uk will do.

[Converted Lurker]

There are still cheaper properties out there. I posted a week or so back at my disappointment in attending local auctions that no FTBs were there. Houses selling for 70K in roads that the average prices (according to nethouseprices are 100K).

Whether the group on here like it or not there is an element of lazy and defeatist thinking on here, there are guys "`avin it off" buying and selling at the lower end of the market, I saw it with my own eyes a couple of weeks back. It`s a very personal thing buying your own propepty, win your own personal battle v the BTL brigade and the flippers...

[clv101]

I found that in quite a lot of the scenarios, buying now, as opposed in say 5 years time, was not a huge loss, especially if you take into account the fact that by waiting 5 years you either have to pay an extra five years mortgage in 25 years time or, in my case, take out a 20 year mortgage because of age.

By waiting 5 years (and saving what you would have been repaying on the mortgage) when you do come to take out the mortgage it will be more than 5 years shorter! Economically - waiting 5 years and saving is a good thing, meaning less need to borrow and less interest paid.

[BillyShears]

If you are going to buy, buy a HOME not a house.

It is you that has to live in it so whatever you buy you want to be able to say i am happy to live in this property for a number of years.

Do not buy just anything as a hedge so as to be on the ladder.

My advice as a Bear would be to rent and Enjoy the freedom that brings, change your attitude to renting, even rent some property thats much more expensive or unusual than you should for a year or two( i have seen luxury properties that are not that much more to rent than the average property) or give your self an extra 2 holidays a year for the next 2 years to compensate for renting, before you know it you will be glad you never bought a house.

One of the problems I have with buying a "cheap" house is that where I live a "cheap" house is generally in an area where the school results are poor. So, I save 40K or so by buying a house about a mile away rather than where I live now. But what then happens with my son's education? If I'm not losing massive amounts of money by renting, then I have enhanced mobility. If house prices stablise or enter a very slow real terms decline, then effectively I'm getting closer to owning all of a house (rather than part of a house) faster than if I had bought. But I also have high mobility, and if necessary could move slap bang into the centre of a top school catchment area. Much easier to do if you rent because if necessary you can move into the catchment area, get your child into the school, then move away again to a cheaper area not too far away.

If I end up paying for private education, that's going to hurt.

Billy Shears

[theChuz]

Oh i dont know, if i lose £50K - £70K i wont be too happy about it

WHere i am we've got 2 up 2downs for 125K, 5 years ago they were about 50K, i put a trend value of 75K maybe 80K on these places, if the market falls back to trend then there goes 50K, if it overshoots which is plausable then i basically could of bought 2 of what i would have for the money.

We shall see what happens but for the immediate future my/the banks money is going no where near bricks and mortar.

For people that 50K isn't a large amount then yea go for it but for me... i think ill pass.

[Johnny Cash]

If you're basically bearish about house prices but worried about being priced out by further rises why not hedge against it by betting that prices will rise further (www.igindex.co.uk). If prices rise at least you,ve made money there and if they fall then thats the HPC you've been waiting for.

[Magpie]

By waiting 5 years (and saving what you would have been repaying on the mortgage) when you do come to take out the mortgage it will be more than 5 years shorter! Economically - waiting 5 years and saving is a good thing, meaning less need to borrow and less interest paid.

Yes, but in my case the savings aren't enough to close that gap. Maybe they are for some - I think these sums will work out different for many and for many they will indicate waiting is better. But not me.

[theChuz]

If you're basically bearish about house prices but worried about being priced out by further rises why not hedge against it by betting that prices will rise further (www.igindex.co.uk). If prices rise at least you,ve made money there and if they fall then thats the HPC you've been waiting for.

If prices fall by 20K but then i go and lose 20K on a spredbet i would not be to amused, it just puts me back to square one. (not that i would even have enough to cover the spread on that amount :lol )

[BillyShears]

Yes, but in my case the savings aren't enough to close that gap. Maybe they are for some - I think these sums will work out different for many and for many they will indicate waiting is better. But not me.

For very large mortgages, it's a rough rule of thumb that for every £1 you're going to spend on the house you pay £2 to the bank. In any case, it will be more than £1. So in the absence of HPI and where interest only mortgages are comparable to rent, it's quite easy for the numbers to add up. Not for everybody, but for some people.

By the way, in a previous post in this thread, I said that if I moved to a cheaper area one mile from here I could get a house for 40K less than I can here. But that the schools weren't so good. I was talking about the New Parks area of Leicester.

(Ref: http://chavtowns.co.uk/modules.php?name=Ne...ticle&sid=1393)

However it appears that one of the schools over there at least is an excellent school.

http://www.ofsted.gov.uk/reports/120/120016.pdf

Only for ages 7-11, but certainly my assumptions in a previous post about poor schooling are clearly wrong.

Billy Shears

Edited April 8, 2006 by BillyShears