Wednesday, Dec 16, 2009

Why buying what you can't afford (yet) is always a mistake

BBC News: Mortgage lenders 'too fast to repossess' homes

Back to my point re jobs and unabated "homeownerism"
"The loss of a job or a drop in income were the most common reasons given for mortgage arrears, and low-income households were the most likely to lose their homes, the charities said."
So if you rent, have your savings elsewhere, you could tap into them for a while to pay the rent. It would help you a lot more than a forced sale, all the hassle of the public humilitation, paperwork changes, the poor credit record of a defaulted mortgage, thus future higher interest charges....
In a rented house, less or lost income means your savings reduce to pay the rent. Your long-term credit rating is not influenced. You don't have all the stigma and family issues caused by the stress.
Tax is the answer for a change (however you read it!)

Posted by growler @ 09:52 AM (1665 views)
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18 Comments

1. Leo Dumpmen said...

Realistically we are in for a period of house price falls so surely its better for a stuggling homeowner to be repossessed early than stuggle on in a belief that, like Mr McCawber 'something will turn up'.
The reality being that the only thing will 'turn up' will be bailiffs.

Wednesday, December 16, 2009 10:09AM Report Comment
 

2. str 2007 said...

Giving all the credit checks I had to go through to rent, I doubt anyone who'd been repossessed would pass them.

Further, it's more expensive to rent than pay interest only on the same sized house. Therefore I don't see how someone who is repossessed could afford to rent even if they passed the credit checks.

I feel very sorry for those that will have to go through it. Some will have been stupid with their money. Some will have just been unlucky though.

Wednesday, December 16, 2009 10:19AM Report Comment
 

3. brickormortis said...

really, are they not to SLOW? Is that not the whole problem?

Wednesday, December 16, 2009 11:02AM Report Comment
 

4. growler said...

Hi STR

The idea - and I missed a cruicial intro to the post - is that you extend CGT to include 1st residence gains.

The whole dynamic of home ownerism needs to change in the UK.

- Rent CAN BE more expensive in a like for like house - but people do not look at like for like. You need to look at 100% interest only mortgage costs (at a historical average interest rate) plus cost of ownership versus rent.
- There is inherent interest in inflating house prices as gains are tax-free (unless BTL) - so it's easy to sell home ownership as a retirement nest-egg. Those retiring at the bottom of a house price crash would disagree.
- I've never met a person that really includes all the running costs of home ownership on top of the mortgage.
- I've met lots of people that fear job changes and trouble making payments as they've stuffed all their savings into the house
- The UK has one of the highest "life on credit" populations. See above as to why.

The idea of taxation on 1st residence disposal gains is a deflationary influence on house prices - as well as one of taxation equality. Since all other gains and work are taxed, why should with cash already get any tax-free benefit. Remember all the fuss about the brige that sold for millions - due to the tax-free toll. People were outraged at the ancient relic of tax-free benefit. Errr. But your flipping house deals are OK to be tax free?

The outcome is step-change in the UK.

- You'd compare a house investment much more carefully as margins are a lot less rose-tinted.

- Rented is the mainstream and people self-evidently are perfectly liquid and spend money - see the wealthy nations in Europe (where property gains are taxed)

Which leads to a change in assumptions for the general point you've made: ### Further, it's more expensive to rent than pay interest only on the same sized house ###

Wednesday, December 16, 2009 11:03AM Report Comment
 

5. a saver said...

Wonder what advice people get if they have way overcommitted themselves?
The obvious answer is to sell asap and downsize, but that could mean a lot of upfront fees.
This is an area where the gov and banks could work together to come up with a fair solution -not focused on keeping people in 'their own home' at all costs. As others have pointed out, the woeful lack of reasonable rental housing in this country needs addressing too.

Wednesday, December 16, 2009 12:49PM Report Comment
 

6. str 2007 said...

Hi Growler

I see the point you're driving at, however with the current level of house prices and the short term tenancy agreement in place, I don't believe renting as a long term option is viable.

Short term house running costs (owner as opposed to renting) can be postponed for a year or two (depending on the maintenance issue of course).
Rent by it's nature needs to cover the interest payments (plus a bit) of 75% of the value of said property. That in itself implies the renter (present company excepted) doesn't have a deposit or they'd have bought.

If they haven't managed to save before they've got involved in living in their own house, why would they manage to save once the extra bills come in.

And on a long term basis a bigger pension would be required (50-100% bigger) to cover rent during retirement.

Personally I thnk our tax free first home situation works quite well. The unfortunate thing is that governments have sat back while banks have increased lending multiples (including 2nd incomes) and not done anything about it, hence the problem of the current bubble we're in.

Now if the government want to raise some tax going after 2nd homes and BTL's, this a perfect way to raise alot of money and keep prices in check.
Further, it should be fairly easy and low cost as you can't move houses about. They seem to know who owns every car and whether or not it's taxed, MOT'd and insured. Houses should be a walk in the park by comparison.

Wednesday, December 16, 2009 02:15PM Report Comment
 

7. vindicated said...

@STR 2007

I'm clearly an oddity as I have a deposit of approx £170k yet have been renting for just over six years. I feel no need to buy my own house. Our rent has not increased by one penny in 6 years. All of our maintenance is completely covered and my husband and I remain completely transient which is how we like it. We like to be in a position to just up and move whenever it suits us without having to try to sell a house. This house has allowed us to save so much that in the not too distant future we could buy outright and if we had to move.... hey ho. No mortgage to worry about whilst we waited to sell.

Everyone's different I guess.

Wednesday, December 16, 2009 02:45PM Report Comment
 

8. str 2007 said...

Hi vindicated

I did say present company excepted. I think the majority of HPCers whilst not all necessarily possessing a large deposit are certainly brighter than the average out there when it comes to money

Might I enquire if you've gathered your savings whilst renting or whether it was from a previous property sale ?

Also, you don't mention kids and whilst being able to move quickly as adults can be an advantage, add in the complication of kids and schools and the level of security of tenure currently offered is woefully inadequate.

Wednesday, December 16, 2009 03:03PM Report Comment
 

9. mark wadsworth said...

@ Growler, as I've said before I don't believe in capital gains tax (it's fiddlier than you think) and discourages mobility. Land Value Tax will do the trick much better. Pensioners are a non-issue. By definition, they live off mainly taxes paid by other people, so up the LVT rate a bit and increase the state pension so that for pensioners the extra pension and extra tax even out, problem solved.

Wednesday, December 16, 2009 03:05PM Report Comment
 

10. str 2007 said...

Mark

If pesioners are a non issue because they live off the tax others pay, surely that is going to become a big issue when we all start retiring in 20 years or so and the people retiring now will all be still going strong (now they've all given up smoking).

And let's not forget that the generation we will be relying on to cover our pensions, whilst achieving ever better results at school arrive at Tescos for jobs apparently requiring reading and writing lessons according to the CEO.

Wednesday, December 16, 2009 03:16PM Report Comment
 

11. vindicated said...

Hi STR.... so you did. My mistake. Speed reading!!
We had approx £90k of savings prior to renting (from selling a house and splitting profits 50/50 with my ex).... the remaining £80k has been amassed whilst renting.

We've got a wee one too. Not quite school age so yes it is definitely easier for us right now. Not sure how we'll feel when he starts school mind.

Additionally, you're right about security of tenure. We do seem to have it quite 'safe' with our current rental. I think the landlord sees us as a safe bet too though. We have considered moving to a larger rental but were nervous that it might go up for sale 6 months after we moved in. A lot of places round our way tend to be advertised for sale and to let at the same time. Doesn't bode too well for the renter.

Wednesday, December 16, 2009 03:36PM Report Comment
 

12. growler said...

Interesting points - and amazingly no posts from slumdog...

In principle, the point we all make - by different means - is that some sort of taxation is needed. I'm sticking to CGT - or a type of it - for the home owner.

The other points assume a rental sector as we know it today. These are not helping the rented sector. But with tax-free benefits to ownership, it's not exactly a suprise to me to see this in the interests of freeholders.

You can't fix the boom-and-bust property philosophy in a forum post in a day. It will take years. All I see is that the nature of tenure hasn't harmed Continentals - much the opposite.

Conversely, the UK is full of boom and busts, land and property law, full of indefensible lending practices, finds itself presiding over ludicrous liar-loans..... and sitting back taking no action for the future.

When there isn't a bust, not surprisingly everyone (including me) gets back into a nice little tax free earner.

When I retire to the Continent, I'll be very happy thank you UK taxman.

... and that's the point.

Wednesday, December 16, 2009 04:04PM Report Comment
 

13. powerofnow said...

@str 2007: "If they haven't managed to save before they've got involved in living in their own house, why would they manage to save once the extra bills come in."

yes the stupid people, too thick to realise the benefits of property ownership and too lazy to save; really come on, could the reason they can't save a deposit be because that average income in Cornwall is well below the average income of people in places like London or other cities who have been able to take part in the over inflation of housprices while those on local wages are priced out.

As you point out elsewhere, the remote landlords need the Cornish renters to cover the mortgage on their investment nest egg forcing them to spend most of their incomes on subsidising second home owners retirement portfolios.

I'm with Mark Wadsworth, LVT is the only way to effectively pri ck the bubble of land speculation

Wednesday, December 16, 2009 04:42PM Report Comment
 

14. mark wadsworth said...

@ Growler "You can't fix the boom-and-bust property philosophy in a forum post in a day." Agreed, this is the first battle - the idea that rising prices are a good thing. They are not, they are poison. Hence why I coined the expression "Home-Owner-Ism" so that we know who and what we are up against.

I've no moral objection to CGT on primary residences, it's more a practical thing. It jsut so happens that far greater minds than mine have, for centuries, pointed out that taxes on land values are the least bad taxes (and possibly even beneficial taxes - the purists reckon that it wouldn't matter if the government collected land value tax and threw the proceeds into the North Sea).

PON, thanks.

Wednesday, December 16, 2009 05:02PM Report Comment
 

15. mark wadsworth said...

PS, I'm glad to see that I'm not the only person who says "Home-Owner-Ism".

Wednesday, December 16, 2009 05:05PM Report Comment
 

16. str 2007 said...

Vinticated
Even if you're secure with your current landlord, the point I was making is that (assuming you have a normal short hold tenancy agreement) he can give you 2 months notice and that's it your out.

This to me (and I'm in a remarkably similar situation to you) is quite ridiculous, particlarly when kids and schools are involved.

Growler
''All I see is that the nature of tenure hasn't harmed Continentals''

I think that's because lanlords there have to give far more notice to tenants, I think 6-12 mnths. Also rents are alot cheaper.

Powerofnow

Sorry you misunderstood me. That sentence was in context to making the point that someone being repossessed wasn't going to see a saving in rented accomodation.

I feel very sorry for those in Cornwall who've been swamped by Londoners. Having said that coastal resorts and 'fishermans cottages' are Cornwalls assets and should be let out for holiday makers IMO. But the local authorities should make more provision for locals housing needs (further back from the seas edge at sensible prices.

As to who owns the fishermans cottages is another matter. IMO not Londoners etc but they should be owned by a Cornish Company/Consortium in which Cornish people could buy shares and benefit from the rental returns in the form of dividends.

That way it would be open to all income levels not just rich people who can afford a 'whole' house.

Wednesday, December 16, 2009 05:31PM Report Comment
 

17. powerofnow said...

@str 2007 "As to who owns the fishermans cottages is another matter. IMO not Londoners etc but they should be owned by a Cornish Company/Consortium in which Cornish people could buy shares and benefit from the rental returns in the form of dividends."

....so everyone gets to share a little in the underlying value of the land, I like it; welcome to the Land Value Tax

(sorry for the misunderstanding, tough day, stubbed toe, a nice cup of tea has put everything back in perspective)

Wednesday, December 16, 2009 06:18PM Report Comment
 

18. growler said...

@str: I used to live in Germany. And you're 100% right. Sadly, what you live is is also a lot better built than your average UK house...

@mark. Copyright of homeownerism fully acknowledged ;-) I use it and have even heard others use it now. BTW, how do you get the italics and links working??!

Thursday, December 17, 2009 12:13AM Report Comment
 

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