theblacksheeple Posted December 28, 2007 Share Posted December 28, 2007 I have friends who have the same 'long term' view of the market.A friend of mine has just bought a 500K house this year on an interest only mortgage. His reasoning is that "over any 10 year period house prices will always be higher after 10 years". I have to admit it makes some sense.......but why not wait and pick up some bargains? That 500K mortgage is going to feel like a real weight during any period of neg eq. Quoting Doctor J here to make a point relevant to the thread rather than Doctor J's friend in particular. In the above example what happens if in the future Borrower cannot refinance because . Banks no longer do interest only. . They reduce income multiples and do not allow self cert? It means the borrower would be trapped on SVR... Now add to this SVR could raise, making things uncomfortable for this borrower. Forcing a sale.... Many will be in this situation. Lots of properties on market, means increased choice. As mentioned above new lending is restricted meaning less people will qualify for the mortgage to pay the £500k Doctor J's friend paid for it originally... Fewer people chasing more properties = price falls Quote Link to comment Share on other sites More sharing options...
redwing Posted December 28, 2007 Share Posted December 28, 2007 I guess most 'insane' investors look at the potential leveraging that can be gained by purchasing property.There are of course risks that go along with this, such as loosing your job etc, but you need to weigh these factors up before purchasing. I have a property in NZ which I have to put in a $100 a week to top up the mortgage or $5200 per year. I purchased the property with 60k deposit, in the time I have bought it it , I have paid approximately 11k in mortgage, insurance and rates, however in the time I have owned it is has gone up in value by approximately 25k. So for the 11k I have spent I have potentially gained 14k (gross) if I sell tomorrow, sure that is not allowing for the potential interest gain by depositing the 60k say in the bank, but even so that would only be worth about 8k net PA. The market might fail tomorrow and I could end up with a big lemon, if I do, so be it, but I am prepared to take the risk and I have a long term view that it will go up even if it does crash in the mean time. I am sure most of you will love what I have written here, and I may have some flawed logic, by all means tell me as I am prepared to listen. Edit : I am from NZ so I bought this property as I was nervious about not being able to afford one when I got back. Well done. You've discovered the amazing power of leverage. And how it can magically make your little bit of equity grow like Jack's beanstalk. It'll be fun watching you learn lesson no. 2 about the amazing power of leverage and it's ability to completely wipe out all your hard earned savings as the value of your assets wither. Quote Link to comment Share on other sites More sharing options...
DoctorJ Posted December 28, 2007 Share Posted December 28, 2007 Quoting Doctor J here to make a point relevant to the thread rather than Doctor J's friend in particular.In the above example what happens if in the future Borrower cannot refinance because . Banks no longer do interest only. . They reduce income multiples and do not allow self cert? It means the borrower would be trapped on SVR... Now add to this SVR could raise, making things uncomfortable for this borrower. Forcing a sale.... Many will be in this situation. Lots of properties on market, means increased choice. As mentioned above new lending is restricted meaning less people will qualify for the mortgage to pay the £500k Doctor J's friend paid for it originally... Fewer people chasing more properties = price falls So how often do the banks alter the conditions of a mortgage? for example - changing the mortgage from IO to SVR. There was a good thread on here a couple of months ago about LTV ratio in a falling market. Has anyone heard of banks asking for money to cover changes in LTV? Quote Link to comment Share on other sites More sharing options...
damianlsmith Posted December 28, 2007 Share Posted December 28, 2007 Well done. You've discovered the amazing power of leverage. And how it can magically make your little bit of equity grow like Jack's beanstalk.It'll be fun watching you learn lesson no. 2 about the amazing power of leverage and it's ability to completely wipe out all your hard earned savings as the value of your assets wither. I am prepared to take that risk, it is a long term view. I dont see anything wrong with taking a few risks to ensure a secure future. Quote Link to comment Share on other sites More sharing options...
piece of paper Posted December 28, 2007 Share Posted December 28, 2007 No it probably does make sense to you, the thing is, as you are probably well aware, property prices on average since the beginning of time go up. Yes there are falls, but long term it will go up and this what they are looking at. As do most things. It is easier to see this with houses as they are (were, at least were) quite durable so a like-for-like is clear. Houses will return to their 2007 prices. The questions are: 1) How far will they drop before the recovery? 2) How long will the process take? You seem inclined to conventional wisdom. I don't agree with you or our resident mushroom cloud. I am with the body of thought that we are entering a phase that has not been experienced before and no-one really knows. The outlook seems grim to me and the UK is simply too reliant on house prices and financial services to do well. At the bottom of the trough, I believe that it is possible that average house price/average annual salary may be as low as two - and still unaffordable for most due to the cost of everyday essentials like food. NZ may seem like an attractive alternative before then. p-o-p Quote Link to comment Share on other sites More sharing options...
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