...or perhaps not buying a house after all

[ciphergoth]

...at least for a while.

Met up with babysimon at BU last night. He made a *very* persuasive case that now is not a good time to buy. Various folk made the opposite case, but his was backed up with detailed quantative historical data. I'm sore about it, but I'm convinced. It's sad but at least it means I'll be able to get a rather better property for the same money when the crash comes.

Just spoke to an investment advisor, who said if I was only investing for a year or so and then hoping to buy property, I should put my deposit in bonds. I'll also of course put the maximum I can into an ISA. It'll keep 'till I need it.

So I guess I'm looking to rent once again... but we're not in a hurry.

Comments

[purplerabbits.livejournal.com]

Hmm. I wish there was any chance of a crash in Edinburgh, but from what I've seen we'd be as well buying now as later...

The blip of 1988-89 ...

[autopope.livejournal.com]

I got out of my first flat just in time in 1989, about one month before the market (in Leeds) stalled. Interest rates had gone up 3% in about six months, and my mortgage repayments had doubled in the 15 months since I bought the bloody place. As it is, I count myself lucky -- blind luck, as I had no idea then what was coming next. I later knew one couple, in London, who'd bought around the time I was selling, a four bedroom family home. They had a quarter million in negative equity, then she lost her job in the recession that coincided with the bubble bursting (can't think why that might have happened) ...

This is the wrong time to buy in the south east, where the average age of first-time buyers has just hit 34, where couples with a combined income over 40K can't get a mortgage on anywhere habitable, and so on. In Edinburgh, prices apparently rose >25% last year, so there's still some slack to be taken up -- but I think we're heading for a major crisis.

My project for the next couple of years is making capital repayments on my endowment mortgage as fast as I can (thank you, Standard Life, for crapping all over the policy that was due to pay off the mortgage in another 16 years -- luckily I was conservative when I bought the flat, and I can now afford to dig my way out of the trouble caused by the investment industry's slow-mo collapse). Then, if I can keep the habit up, I intend to start buying a new place in about, oh, 2-4 years' time, when they're about 20% cheaper than they are now.

(If they're not 20% cheaper, I'm going to be in real trouble with the book collection. Anyone know how much it costs to rent a small walk-in library?)

PS ...

[autopope.livejournal.com]

The four horsemen of Nigel Lawson's Apocalypse in 1989 were:

* Lots of buyers lying in order to mortgage themselves to the max

* A prolonged period of house price inflation (driven by enthusiastic buyers coming on the market for the first time, expecting to make a killing)

* Interest rates going up sharply after a long period of gentle decline

* Home-owners at full stretch going into default on their payments, combined with new buyers being unable to enter the market, causing prices to stall and then fall (reposessed houses go cheap), leading to more people going into negative equity and handing the keys back, causing more houses to come on the market for knock-down prices, leading to ...

Does this picture sound familiar? It's fifteen years since the last time in the barrel; I reckon we're about ready for another session.

Re: PS ...

[sqferryman.livejournal.com]

The only thing missing this time round is a financial pundit saying that there are going to be two types of people in the future, those who are living of the wealth in their homes and all the rest who didn't buy in time. Well look how accurate that turned out to be.

Don't forget that this time round the crash will probably be a lot harder. Any mortgage lender with a reposessed property on their books will dump it as quickly as possible to avoid the glut that happened last time round. And the buy-to-let punters are barely making any return on capital at the moment from rents. If prices go south and returns follow them then a lot of these properties will end up on the market at the same time.

Like the autopope, I'm staying where I am and hoping that the bust washes over me. Buying know looks like suicidal insanity.

[ajva.livejournal.com]

Welcome to the Bear Side, Luke. ;o)

[wechsler.livejournal.com]

I *really* wouldn't buy now; I think Simon's exactly right here.

[ex-pipistre.livejournal.com]

Northern Rock do some pretty good rates on fixed-rate bonds. Well as good as it gets with the current crap interest rates. Even better, there's not much of a difference in interest between 1 & 3 year bonds, so it's a good chance to invest for a year and then reinvest if interest rates continue to rise :)

[ergotia.livejournal.com]

I just think renting is crazy, constantly throwing away money to pay your landlord's mortgage. There are many more reasons to buy than investment, and if any of us *knew* what the market was going to do we would be billionaires and it would all be irrelevant anyway. I guess I am going to have to get Simon's detailed rant soon....

xxxxx

[chillies.livejournal.com]

I just think renting is crazy, constantly throwing away money to pay your landlord's mortgage.

The upside is one doesn't have to sleep on the street :)

What annoyed me over the last couple of years were adverts selling mortgages for buy-to-let properties. As a renter, seeing claims that rents from buy-to-let can cover the mortgage and provide some income started to piss me off when it was impossible to get a foot on the ladder in London.

[babysimon]

claims that rents from buy-to-let can cover the mortgage and provide some income started to piss me off

Fair enough. The fact that this is unlikely to be true may provide soem consolation.

[sqferryman.livejournal.com]

Renting isn't crazy when you realise that your landlord has assumed all the risk of capital depreciation for the property. 30% dop in property prices mean nothing when you're renting, except cheaper rents when landlords are fighting for tenants and against a glut of unsold properties on the market.

i am bitter.

[atommickbrane.livejournal.com]

Yes but I'm sure the hassle of being a landlord fades somewhat once they WIPE THEIR TEARS AWAY WITH 50 POUND NOTES, THE EVIL RIPOFF BASTARDS, o where o where are those deposits over the years, o where o where goes my money which I could be saving, OH IT'S IN YOUR POCKETS? Marvellous!

[ajva.livejournal.com]

There are many more reasons to buy than investment

True, but there are also many more reasons to rent than just not being able to buy.

I actively choose to rent because I like a) the flexibility (can move whenever I want without having to sell a place first) and b)the minimal stress (other people sort out maintenance, from little things like washing machines breaking down to big things like fixing roofs or dealing with subsidence).

Don't underestimate the advantages of renting as opposed to buying at this point in time, particularly now there are so many desperate landlords. Things have changed a lot in the last few years.

[ergotia.livejournal.com]

Also, if the crash does come and is as bad as you all say, you are *not8 necessarily going to get a beter place for the same money. Firstly you may lose your job and salaries will go down across the board, and secondly lenders become much more restivtive about who they will lend to and on what terms.

Not trying to talk you into buying, just not convinced.

pedantry alert (sorry)

[ajva.livejournal.com]

I have to take issue with the logic here.

You say that he might not be able to get a better place for the same money.

But what you then give is two reasons why he might not be able to raise the same amount of money, rather than why the same amount of money wouldn't buy a better place.

What if he doesn't lose his job? What if he was never planning to stretch outside the traditional lending criteria in the first place?

These 'what if?'s don't seem too big to me...

Re: pedantry alert (sorry)

[ergotia.livejournal.com]

Pedantry no problem, I just think none of you are old enough to remember the last time we had a recession with really serious unemployment, the sort that effects the middle classes. In a situation like that all this speculation about buying now or waiting for the slump is irrelevant, whether you are "lucky"" enough simply to be unable to buy a better place for the same money or unable to buy a place at all. And my point about lending criteria is that in a slump "traditional" lending criteria cease to exist...

But as I say, simply not convinced - quite willing to be :)

[lovingboth]

I think he's right, but a crash is an 'if' not a 'when'. With low interest rates, mortgages on stupid prices at silly multiples of earnings remain affordable.

I wonder if there's a financial derviative that enables you to make a bet on house prices? It'd be very interesting if so, because you'd be able to cover the risk of prices falling after you've bought.

Bonds are less of a good thing than they used to be. Because of the stock market losses of the past few years, lots of insurance funds have bought large quantities of bonds, so the price has fallen.

How much of risk do you want to take with the money?

[babysimon]

I wonder if there's a financial derviative that enables you to make a bet on house prices?

You used to be able to short house prices by spread-betting. The trouble was, as with all shorting it was very time-dependent. You had to predict exactly when the crash would happen.

Renting vs mortgage

[webcowgirl.livejournal.com]

The strongest argument I know for renting over buying is when you can find a rental at a really good rate. Here in Seattle, a mortgage on a moderately-priced condo at $200K will run you some $1500 a month over a 30 year term, with $100 each property taxes and insurance figured in. A $900 a month apartment is cheap by comparison if you are smart enough to take the difference and invest it wisely (I'm not that smart). It takes years before the amount you earn in equity actually adds up to something; after four years our equity in our house amounts to some $6K, whic is just crap. On the other hand, thanks to inflation and a low initial price our house has gained 50% in value since we bought it. But even though we live in a skanky neighborhood, we still can't sell it and move to something nicer, since the houses in the other neighborhoods have all gone up just as fast.

I'm very curious about what arguments your friend used against buying now. I think the very best one TO buy is the very low interest rates available now, as they can save you hundreds of dollars on a monthly basis, but I have no idea what the situation is like on your side of the Atlantic, either for rents or for mortgage financing.

Re: Renting vs mortgage

[babysimon]

I think the very best one TO buy is the very low interest rates available now

In the US, most mortgages are 25/30 year fixed, right?

In the UK, almost all mortgages are variable or fixed for a few years at most. Yet people are still paying twice as much for property because current interest rates have halved. When rates go up again, these people will be hurting badly.

Re: Renting vs mortgage

[webcowgirl.livejournal.com]

15 or 30 fixed are very popular, interest rates currently are 5.125%/5.5% (I stopped looking at them daily so I'm not sure). I would never get into an adjustable rate mortgage - but I've got the option not to. They really could be deadly.

Current low interest rates have allowed property prices to creep up in the US because people can still pay the same per month for a house as they would have when rates are higher. Is that what you're saying is happening in the UK, too?

[thekumquat.livejournal.com]

Paul - you started asking me for an opinion last night before running away.
There's various equations to consider here, as I see it.
1. Monthly rent versus monthly mortgage. My guess is these are currently about the same in Tooting (£800 for a 2-bed flat, with say a 10% deposit)
2. What to do with your proceeds from selling Mir - interest rates etc, compared to potential yields as part of a house
3. If you put down a substantial deposit, pay as high a mortgage as you can afford on a short-term (10-15year) mortgage, but ensure you could pay less if necessary, what are your chances of paying an entire mortgage off in say 10 years? If prices drop in that time, their chances of recovery are pretty high over 10-15 years. Even if they dropped by say a third, it might well be a good return on your investment compared to renting, even over 3-5 years.
Which isn't to say it might be better still if you did the same thing at some point in the future.

What are your chances of wanting to move or becoming unemployed in the next few years? I'd always suggest buying somewhere with rentable potential - either so you can work elsewhere for a bit or in the worst case scenario to rent out while you kip on someone's sofa.

Play with a mortgage calculator to see how payments change with various interest rates and repayment periods. Reducing the term of the mortgage if at all possible will probably save you the most in the long run.

[ciphergoth.livejournal.com]

Didn't mean to run away - sorry!

I'm going to write a big calculator which compares buying with renting for a variety of different scenarios, taking into account all the variables, and see how it all works out...

[babysimon]

I can tell you how it will work out:

You will be more confused than when you started.

1/2 p more

[karmicnull.livejournal.com]

When I was wokring down in Ipswich, I knew a whole bunch of people who had negative equity. Their problem wasn't that they couldn't pay, just that they couldn't move.
As long as you avoid negative equity, and can make your repayments, once you are on the housing ladder, it (grossly speaking) doesn't matter whether prices go up and down. We may have to move soon. If there is no crash, then the houses we target will be astonishingly expensive, but ours is worth commensurately more. If there is a crash, then our house will plummet in value, but so will those we are targetting.

If you are looking to up-size, then a post-crash environment is good as the cash difference between houses is smaller. If you are looking to downsize, then do it pre-crash, and release more money into your pocket.

Your situation is different. You have a sizeable deposit. You have to make a bet on house price futures. Will they be the best way to invest your money in the short term, or is it better to hold off 12-18 months, during which time you'll get a better rate of return from a bond, or other short term investment (eg money markets)?

Perhaps there's another question. What do you get in terms of improved quality of living from it being your own house? Certainly that's the clincher for us - even if house prices were to drop below the purchase price for our place tomorrow, I would view the enjoyment I've derived from our house to be easily worth it.

One last thing - ergotia cites some wise rules of thumb to ensure that you are protected against downturns of fortune - in particular the employment slump that might accompany a housing crash. Whilst completely endorsing those observations, I would note that in our industry the crash has already happened (as I know to my continuing pain), and we are now labouring slowly up the shallow slopes of recovery.