Town-country Comparison For Past 10 Years

[Holger]

Dear Price Crash Community,

I made an interesting observation, but I am not sure what to make of it. Perhaps you can enlighten me:

I bought my current home almost exactly 10 years ago, shortly after I started my first job. At the time, my only choice was between a Victorian terraced or a newly built. For the sake of this argument, I would like to put them both in the same basket and call them "mass market homes", because the majority of the population seem to live in either one of those.

Over the past 10 years, I have seen the price of such homes increase 5-fold (40k then to 200k now). Considering that my salary (I am still in the same job!) has only increased by factor 1.5 in the same time, it becomes very clear that the current increase rates are not sustainable for much longer.

In my personal situation, I was never quite happy with the Victorian terrace I bought then. I always considered it a starter home and was dreaming of a nice country house, detached, 4 bedrooms, double garage, panoramic views etc. Unfortunately (and this seems to be in the nature of this market sector), such a home always seemed to be slightly out of my reach.

Back in 1996, I picked up an estate agent's brochure with very exclusive properties. I used to look at those pictures and thought: "Gosh, who can afford a house for £200,000 ? I'll never make that."

I still have this brochure and here comes the interesting bit:

Looking at the same sort of home now, I find that it only saw a price increase by factor 2.0 or 2.5 at the most, i.e. you can have the above property costing £200k then for around £450 now. This is still out of my reach, but occasionally you can find a good offer for around £300 and that would not be impossible with today's lending practice.

Here are my thoughts and questions:

1. Will the mass market home ever catch up with the country home? Probably not, because then you would have everyone chasing after them. It looks like they will always be "slightly out of reach", but may increase at a slower rate than the mass market.

2. What happens when the current trend reverses, i.e. if we have a slowdown or crash, will country homes loose less value than the mass makret? In this case they would develop from "slightly out of reach" to "far out of reach", is this correct?

3. At the moment, I am enjoying a low mortgage. On the one hand, I could stay put and keep laughing when everyone else is going bancrupt. On the other hand, it is tempting to make the most of the high equity now, especially since it seems possible move up for the first time in 10 years. I suspect that once the crash happens, lending rules will tighten very quickly and I will find that my dream home is moving ever "further out of reach". Obviously, I did do my homework, have a spending limit and will by no means go to the absolute limit, but nevertheless, it means increasing my borrowing considerably. It could pay off, though, as I am catapulting myself out of the volatile segment. BTW, it should be said that my job seems fairly secure. Further pay increases are on the horizon.

4. Even if waiting for the crash might be the better option, what is your predicted time-frame for the "market correction"? I'd be happy to stay put for another 5 years, but not for another 10 or 20.

Sorry if this sounds too much like I am seeking personal advice, but I think this might be a wider issue and hope to get into an interesting discussion with you.

Holger

[bachelor]

Dear Price Crash Community,

I made an interesting observation, but I am not sure what to make of it. Perhaps you can enlighten me:

I bought my current home almost exactly 10 years ago, shortly after I started my first job. At the time, my only choice was between a Victorian terraced or a newly built. For the sake of this argument, I would like to put them both in the same basket and call them "mass market homes", because the majority of the population seem to live in either one of those.

Over the past 10 years, I have seen the price of such homes increase 5-fold (40k then to 200k now). Considering that my salary (I am still in the same job!) has only increased by factor 1.5 in the same time, it becomes very clear that the current increase rates are not sustainable for much longer.

In my personal situation, I was never quite happy with the Victorian terrace I bought then. I always considered it a starter home and was dreaming of a nice country house, detached, 4 bedrooms, double garage, panoramic views etc. Unfortunately (and this seems to be in the nature of this market sector), such a home always seemed to be slightly out of my reach.

Back in 1996, I picked up an estate agent's brochure with very exclusive properties. I used to look at those pictures and thought: "Gosh, who can afford a house for £200,000 ? I'll never make that."

I still have this brochure and here comes the interesting bit:

Looking at the same sort of home now, I find that it only saw a price increase by factor 2.0 or 2.5 at the most, i.e. you can have the above property costing £200k then for around £450 now. This is still out of my reach, but occasionally you can find a good offer for around £300 and that would not be impossible with today's lending practice.

Here are my thoughts and questions:

1. Will the mass market home ever catch up with the country home? Probably not, because then you would have everyone chasing after them. It looks like they will always be "slightly out of reach", but may increase at a slower rate than the mass market.

2. What happens when the current trend reverses, i.e. if we have a slowdown or crash, will country homes loose less value than the mass makret? In this case they would develop from "slightly out of reach" to "far out of reach", is this correct?

3. At the moment, I am enjoying a low mortgage. On the one hand, I could stay put and keep laughing when everyone else is going bancrupt. On the other hand, it is tempting to make the most of the high equity now, especially since it seems possible move up for the first time in 10 years. I suspect that once the crash happens, lending rules will tighten very quickly and I will find that my dream home is moving ever "further out of reach". Obviously, I did do my homework, have a spending limit and will by no means go to the absolute limit, but nevertheless, it means increasing my borrowing considerably. It could pay off, though, as I am catapulting myself out of the volatile segment. BTW, it should be said that my job seems fairly secure. Further pay increases are on the horizon.

4. Even if waiting for the crash might be the better option, what is your predicted time-frame for the "market correction"? I'd be happy to stay put for another 5 years, but not for another 10 or 20.

Sorry if this sounds too much like I am seeking personal advice, but I think this might be a wider issue and hope to get into an interesting discussion with you.

Holger

Some interesting points there Holger, here's my 2p worth.

1. I'm not so sure what you mean when you say country home, there is a wide mix of country home from terraced to mansions. In my village prior to the boom a semi was only slightly more expensive than a town semi but unfortunately things have changed dramatically. So yes I do agree that there would be a price difference but from what Ive seen it should not be great.

2. At the moment it is currently fashionable to live in the country and there are many townies that wish to move (to the detriment of locals). By using the massive equity in their homes they have forced up prices in rural areas making homes even more unaffordable, so once the urban areas go into decline the rural areas will follow, i.e. when all the liquidity dries up.

3. Well done for having low mortgage, many would kill to have that! Have you thought of STR?

4. If you're happy to wait for 5 years then IMHO you could well see significant price falls.

Whatever you choose, good luck.

Bachelor.

[Holger]

> 1. I'm not so sure what you mean when you say country home, there is a wide mix of country home from terraced to

> mansions. In my village prior to the boom a semi was only slightly more expensive than a town semi but unfortunately things

> have changed dramatically. So yes I do agree that there would be a price difference but from what Ive seen it should not be

> great.

I realise that there is a wide variety of "country homes". I am looking for something detached, 4 bedrooms, not being part of a large development. That's perhaps an average upmarket property.

> 2. At the moment it is currently fashionable to live in the country and there are many townies that wish to move (to the

> detriment of locals). By using the massive equity in their homes they have forced up prices in rural areas making homes

> even more unaffordable, so once the urban areas go into decline the rural areas will follow, i.e. when all the liquidity dries

> up.

Hope nobody gets cross with me for being a townie.

> 3. Well done for having low mortgage, many would kill to have that! Have you thought of STR?

What is STR?

> 4. If you're happy to wait for 5 years then IMHO you could well see significant price falls.

But then the price of my current home will fall as well, wiping off the equity. Add to that tightening lending rules and I may end up in the same situation where I started 10 years ago.

To be really clever, perhaps I should sell now and go into rented accommodation. But what if the crash does not come? If prices keep going up, I won't even be able to buy my own home back (or something similar).

Hm...

Holger

[bachelor]

STR = Sell to Rent, a number of the members have done this, cashed in on their equity, invested it and will possibly come back to the market when things have cooled down.

IMHO for house prices to rise significantly is a 'best' highly unlikely given the current economic climate -

- rising unemployment

- massive consumer debt

- first time buyers priced out

- interest rates rising around the world

If you choose to STR make sure your money grows as much as house price inflation, if not more!

[Holger]

> If you choose to STR make sure your money grows as much as house price inflation, if not more!

That means a risk investment and I'd be a bit hesitant to sell my home AND put the proceeds on the line.

At the moment, property still gives you the highest yield. The big question is when to bail out. Certainly well before everyone starts to panic. But also not too soon, in order to make the most of it.

Holger

[bachelor]

> If you choose to STR make sure your money grows as much as house price inflation, if not more!

That means a risk investment and I'd be a bit hesitant to sell my home AND put the proceeds on the line.

At the moment, property still gives you the highest yield. The big question is when to bail out. Certainly well before everyone starts to panic. But also not too soon, in order to make the most of it.

Holger

The safest investment is to simply open up a high interest account where you could gain around 5% per year, aletrnatively there are tracker funds, direct investment in companies and bonds. The stock market has the greatest risk of all but the returns are much greater, historically the ftse 100 has on average given a 10% return per year, the current yield on a buy to let property is around 4% and house prices up by about 5% this year (depending on who you listen to).

It would be better and safer to invest a STR fund into several areas e.g. 30% cash, 30% bonds, 30% shares 10% property.

Its very important to research these different types of investment first to avoid loss and ensure maximum return.

As for the right time to sell thats entirely up to you, (sorry) but IMHO a significant rise in house prices is not a possibility, it does look as though we are approaching the top of the cycle.

Edited July 20, 2006 by bachelor

[geranium]

If you're a higher rate taxpayer then your return in a low risk account will be 3% net or thereabouts.

If you have a significant deposit (sounds like you do) and you're a higher rate taxpayer, buying a decent-sized (eg 4-bed) house can be cheaper than renting that house and it'll be easier to find one you'd like to live in, probably.

It's only when you have a small deposit and you want to buy smaller property that it can be cheaper to rent.

Anyway, do the maths:

1. compare whatever return you'd be hoping to get from eg cash (3% if you're a higher rate taxpayer, 5% if not, or equities, if you're prepared to take that risk) with your view of how the housing market will perform over the longer term (for as long as you hope to stay in that house). Equity (your deposit) in the house needs to rise at the same rate or faster than your invested cash would if you were to STR. Granted, you need to guess whether you think the housing market will go up more or less than 3% (or whatever rate you're using) per annum and the answer to this is unknowable.

2. compare the interest only on the mortgage you would need (include stamp duty, fees and any renovation costs) to buy the house with the cost of renting a similar house

If you can pay the mortgage and are not too worried about job security, then it might seem sensible to buy the country house if, as above, you're a higher rate taxpayer with a good deposit, the numbers stack up on mortgage interest versus rent and you believe the house will rise in value by 3% per annum for as long as you will be there.

[iangilb]

I am interested in this and expect there are many HPCers who are in a similar situation. It is called "climbing the ladder".

If you're a higher rate taxpayer then your return in a low risk account will be 3% net or thereabouts.

Which of course = 0 gain when you take into account inflation. A mixed fund of investments is certainally a good idea but, as it has been pointed out, there is risk. The economic curcumstances are not looking good at the moment so it may be a bumpy ride unless you are a professional investor. I doubt many of these willingly gamble their homes on the market, despite what you may read on this board.

I also have a nagging doubt that STR is ethical. It seems a form of speculation to me and I don't believe people should speculate on residential property. That's just my opnion though.

Noone has raised the issue of demographics. These are actually hard to read. On one hand we are told there are more and smaller households being formed but on the other, newbuilds are generally 1/2 beds and in towns and so go someway to plugging this. Another factor is that HPI tends to encourage people to hold onto property as they see it as an investment. While most BTLs are 1/2 bed, I bet a sizeable chunk is held up in the "family home", which the olds hold onto despite the kids leaving years ago. MEW encourages this so in effect there is a hidden investment market out there, liable to be offloaded either in a crash or gradually so the banks get their hands on the cash (i.e. much less handing property down the family).

[Oxoniensis]

I am interested in this and expect there are many HPCers who are in a similar situation. It is called "climbing the ladder".

Which of course = 0 gain when you take into account inflation. A mixed fund of investments is certainally a good idea but, as it has been pointed out, there is risk. The economic curcumstances are not looking good at the moment so it may be a bumpy ride unless you are a professional investor. I doubt many of these willingly gamble their homes on the market, despite what you may read on this board.

I also have a nagging doubt that STR is ethical. It seems a form of speculation to me and I don't believe people should speculate on residential property. That's just my opnion though.

Noone has raised the issue of demographics. These are actually hard to read. On one hand we are told there are more and smaller households being formed but on the other, newbuilds are generally 1/2 beds and in towns and so go someway to plugging this. Another factor is that HPI tends to encourage people to hold onto property as they see it as an investment. While most BTLs are 1/2 bed, I bet a sizeable chunk is held up in the "family home", which the olds hold onto despite the kids leaving years ago. MEW encourages this so in effect there is a hidden investment market out there, liable to be offloaded either in a crash or gradually so the banks get their hands on the cash (i.e. much less handing property down the family).

The other thing of course, is that you can STL (sell-to-let) and invest the money in a property fund

Edited August 18, 2006 by Oxoniensis

[OzzMosiz]

Go find the place you love and offer 30% off asking. Don't offer a penny more.

[Civil Servant]

Hi Holger,

Welcome to the site. This thread bears great similarities to the one I started last week at

Similar Thread

I, however, am lucky in that it looks likely I will have the luxury of not being in the UK for the next few years. The general upshot of our conclusions is that we think we should continue as 'homeless' STRs (Sell to Rent-ers) - although I'd be interested to hear alternate views.

The logic of our conclusion is that if we continue as STRs we at least give ourselves the CHANCE of living in our dream house (house prices fall back a bit, our savings grow, bingo) whereas if we sunk our 'fortune' into housing now we guarantee we'll never be able to afford to live in that dream house (house prices fall back, so does our equity in the house, can't step up the ladder - house prices rise, the gap between the two gets bigger, can't afford to jump up....).

Obviously there is also a potential 'downside' to our strategy - i.e. house prices rise further and we are left even worse off - but even the most optimistic bull isn't predicting big rises in teh medium term.

CS