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The Curious Case Of The Owner-occupier And The Great House Price Crash

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There's always a bit of vested interest involved when talking about house prices. As a renter, I naturally have a vested interest in seeing prices drop. It's natural to assume that owner-occupiers all have an opposite vested interest - to see prices remain stable or rise. This is not necessarily the case. In fact for a lot of owner occupiers the house price boom has been a disaster - and for some a crash would be extremely welcome.

Here's an example - I may have missed something crucial here and therefore be completely wrong - feel free to point this out!

Consider five people, Andrew, Bob, Charles, Dave and Edward.

Consider three times - 2002, 2007 and 2010 (dates picked purely as an example)

Lets assume that all house prices doubled between 2002 and 2007.

Lets also consider 2 scenarios for 2010, one where house prices remain stable, and one where prices drop 40%. I.e in the latter scenario a house which cost £100k in 2002 would go up to £200k in 2007 and drop to £120k in 2010.

In 2002, Andrew is still at university, Bob is a first time buyer currently renting, Charles and Dave are owner-occupiers and Edward is looking to sell out and go travelling round the world on a yacht.

In 2002 Bob buys Charles' 2 bed London flat for £200k. Charles buys Dave's 4 bed house for £500k and Dave buys Edwards palatial mansion for £1m. Edward goes off into the sunset and Andrew is getting drunk in student bars.

By 2007, Andrew is now a renter in London. The rest are still living in the same houses. Bob's 2 bed flat is now worth £400k, Charles' 4 bed house is worth £1m and Dave's mansion is worth £2m. Everyone is a happy bunny because of the money they've "made".

By 2010, Andrew is ready to buy, Dave wants to go off Yachting, and Bob and Charles want to move up the ladder.

Which scenario is better for these four? The one where there has been a crash or the one where house prices have remained stable?

Lets consider the stable situation. Andrew buys Bob's 2 bed flat for £400k. Bob gets £400k for this and has to spend £600k more to buy Charles' 4 bed house for £1m, and Charles gets his £1m and spends £1m more to buy the mansion from Dave for £2m. Dave takes £2m and goes off Yachting.

In the crash situation, Andrew buys Bob's 2 bed flat for £240k (400 - 40%). Bob gets £240k and spends £360k more to buy the 4 bed house for £600k. Charles gets £600k and spends £600k more to buy the mansion for £1.2m. Dave takes £1.2m and goes off Yachting.

As can be seen, everyone benefits from the Crash apart from Dave, since they all have exactly the same houses in each scenario, but the people at the beginning and the middle of the chain have to shell out much less money to get to their end state.

The only people who will genuinely suffer from a house price crash are those who go into negative equity and can't get out of it or people who never intend to trade up from their current house. They will have lost money and won't be able to move. Those who are in negative equity on their houses but CAN get out of it will be fine.

Consider situation 3 where, instead of house prices going down by 40% they go down by 60% by 2010.

Andrew buys Bob's 2 bed flat for £160k (400 - 60%). Bob gets £160k. He's lost £40k on his house purchase price. However, lets assume that he has £80k of savings, and so is able to move. He buys Charles' house for £400k,(£1m - 60%) i.e £240k extra. Lets ignore the savings - they are just a mechanism I introduced to enable Bob to move. So in the 40% crash scenario, Bob spends, in total, £200k for his first flat, and £360k extra for the new house = £560k total. In the 60% crash scenario, Bob spends £200k for his first flat and £240k for the next house = £440k total. Even though as an owner-occupier his house went into "negative equity", Bob is still better off with a huge price crash.

Edited by auk

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good scenarios.

the only things missing there are the availability of credit and the mortgage rates

I left them out for simplicity. Let's assume that interest rates and credit availability remain constant. The scenarios are just meant to show why owner-occupiers should often welcome an headline asset price decrease, not to talk about the leverage elements.

Edited by auk

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Thats right, house price increases other than those that pay for improvements and wage inflation, benefit nobody except speculators, lenders and the beneficiaries.

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We will not be stopping at 2002 prices though, like The Time Traveller in the famous book and film we are going to continue back through the mists of time until we arrive at LEAST 1997 prices. This credit crunch is only getting started and banks are still lying through their teeth about how exposed they are. If anyone has employment at the end of this the average tenement is going to be £30,000 and a house better be a bit special to raise £100,000. I got confused reading your post, how can price depreciation benefit the person owning the house? If they bought years ago and have no mortgage they might not lose money, but it can`t be nice knowing that the value the nice young man from the EA gave you is about 60% too high? Most people heading into this gathering dustbowl did not buy years ago and are as near to mortgage free as I am to Julia Roberts crotch.

Edited by dances with sheeple

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I got confused reading your post, how can price depreciation benefit the person owning the house? If they bought years ago and have no mortgage they might not lose money, but it can`t be nice knowing that the value the nice young man from the EA gave you is about 60% too high? Most people heading into this gathering dustbowl did not buy years ago and are as near to mortgage free as I am to Julia Roberts crotch.

I agree, it wasn't the most clear post ever. I think what you are saying is that someone who bought at the peak in 2007 is bound to lose out horribly if prices crash. Intuitively, this seems obvious - but it entirely depends on what they are going to do next.

Consider Fred, who buys a 2 bed flat at the peak in 2007 for £400k. House prices drop by 50% to 2010 and his flat is worth £200k. Lets assume that he had an interest only mortgage, so has paid off none of his mortgage.

Fred has lost £200k. There's no getting around this. If he had held out till 2010 he would have been able to buy the same flat for £200k less.

However, the fact is that Fred did buy, so let's consider whether he would want prices to crash or remain stable.

The crucial assumption here is that Fred wants to move "up the ladder" and buy, for example, a four bedroom house.

Let's ignore the difficulties that negative equity brings to people's ability to move for a minute.

If prices remain stable, then Fred's flat is worth £400k. He decides that he wants to move up to a 4 bedroom house worth £1m. He has to pay £600k more. He has paid a total of £1m.

If all prices drop by 50%, then Fred's flat is worth £200k and the house has dropped in value from £1m to £500k. He pays £500k for the 4 bedroom house - 300k more than the amount he's made from selling the flat. He has paid out a total of £400k (for the flat) and £300k for trading up - £700k in total. He has therefore saved £300k thanks to the crash. Of course if he had just waited till 2010 and purchased the house as his first purhcase, he would have paid £500k in total, and saved even more money.

Lets get back to negative equity. The reason that this is a VERY BAD THING for homeowners is that it usually stops them trading up, since they have no equity, and therefore banks won't lend to them. But in fact, as can be seen, if they are able to move (for example through tapping other sources of equity such as savings) then the house price crash actually benefits them, even if they are in negative housing equity. Negative equity can prevent them taking advantage of cheaper house prices.

Edited by auk

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Absolutely agree. All other factors being equal, falling house prices benefits those moving up the ladder [in relative terms they have to pay less to upgrade]. Rising prices benefit those moving down or selling up and moving to sunnier climes.

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'Dave' would be an idiot to sell up and go yachting - he'd be better off renting his house out while he was away - most people who have tried long-term living on a boat will tell you that, however attractive the option seems initially, the gloss eventually wears off and the urge to be a 'landlubber' once again will return - and it's always a good idea to keep - and occasionally revisit - a property in your preferred country of residence if going travelling for a long time. Yachts might be good fun, but they rarely appreciate in value, and have high maintenance and mooring costs, to say nothing of the increasing cost of insurance and fuel. I would have thought that someone who had aquired a house worth 2 million (or 1.2 million!) would be savvy enough to know all of this already!

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  • 295 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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