19-04-2006, 03:47 PM
By Nic Cicutti, MSN Money special correspondent
House prices might be reaching their peak but if you want to get into the house buying market now may still be the ideal time
Suddenly, like the first falling leaf at the end of a long summer, a few tremors are being felt in the housing market.
Surveys appear to show that property prices, for so long a one-way bet, are beginning to stall. In a few areas, it is being whispered, they are even falling.
The very horror of it! What on earth will we talk about at dinner parties now?
The practical consequence of scare stories is that, understandably, they are likely to put some people off buying their own homes. They will opt to rent instead.
Switching to renting a home may not be wise
Indeed, some existing homeowners are actively discussing the possibility of selling up, renting for a year or two and then buying back into the market again when prices have fallen.
Now, IÂ’m all for personal freedom of choice in these matters. If you want to incur costs of up to 3% when selling your home, plus many thousands more - including stamp duty of up to 4% - to buy one back, be my guest. You are obviously gambling on prices falling by at least 10%, probably nearer 20%, in very quick order.
But as far as IÂ’m concerned, people should keep buying. Not if you canÂ’t afford to, of course: in that case you ought to rent instead.
My own rough guideline is that you should never be paying more than 35% of your monthly take-home income on a mortgage – and you should also factor in the potential cost to you of mortgage rates moving up by 2% in your affordability calculations.
But if you CAN afford to buy and are wondering whether you should bother, here are five good reasons you should take the plunge.
1) Property is NOT an investment
In the past few years we have become used to the idea that property is an asset, in exactly the same way as the shares we hold in our pension fund or an ISA are assets.
ThatÂ’s simply not true. And hereÂ’s why:
You mainly buy a property because, at the end of the day, it provides a roof over your head. Whether it goes up or down in price should not really matter to you. As long as you like it, you can make the repayments and want to live in that area, nothing else really matters.
The only way you will "really make money" out of it is if you decide to sell up at some stage and keep the profits, or downsize and do the same.
True, a growing proportion of people do downsize. According to research from Assertahome, an online property finding firm, one in three house sales involve people selling up to move to a smaller property.
However, some 54% of those who downsize (average age 46), make the decision primarily to get rid of their mortgage, not because they want equity from their property as cash in hand. A further 15% are doing so because they have split up from their partners. Not much cash in hand there either.
Some 20% are retirees over 60. They too are looking to clear their mortgage - not surprising, given that they have an average annual income of £23,500. Only 12% of those who buy a smaller property (4% of the total number of buyers) actually take the cash - and even then they often "recycle" it, giving their children a leg up the property ladder instead.
In other words, property is not the cash-generative machine many people think it might be. And even when it is, the period between buying and selling can last for 20 years or longer.
2) Property IS a good long-term investment
Confused? Allow me to explain.
Even though a home SHOULD be treated primarily as a shelter and not an investment, no-one likes to buy a property, or anything else for that matter, only to discover that it is worth far less than they paid for it only a couple of years before.
Oddly enough, this feeling doesnÂ’t stop people splashing out on a brand new car - despite knowing that the minute it gets driven off a garage forecourt it will lose up to 35% of its purchase price.
But in the case of our homes, it is still nice to feel validated by the right choice, particularly as it is the largest financial purchase most of us are likely to make in our lifetimes.
In fact, evidence suggests that while property doesnÂ’t perform as well as shares over the long term, it does generally retain its value over the years.
The Halifax has been publishing its survey of house prices since 1983. Back then, the average UK property cost just under £30,000. Today, it is worth just under £160,000.
You can download an excel file of this data from the http://www.hbosplc.com website
Nationwide’s survey, which dates back to 1952, shows a similar set of figures. By the way, the average price of a property back then was £1,891 - and the average wage stood at £489.
You can download an excel of this data from the http://www.nationwide.co.uk website
Have prices kept pace with inflation over this period? NationwideÂ’s survey uses 1957 as its starting point and looks at what you could have bought with the money used to buy a house back then.
Moving forward 47 years, prices have outstripped inflation five times over.
You can download an excel file of this data from the http://www.nationwide.co.uk website
Equally, there have been long periods when, despite the fact that prices were rising, inflation eroded a significant part of those increases.
The trick with property is not to focus on the short-term but look ahead at least 25 to 30 years - roughly the amount of time it takes most of us to pay off our mortgage!
By the way, although changes in the property market happen with the speed of a huge tanker turning in the Channel, certainly when compared with shares, what is also true is that the recovery of prices in the mid-1990s was fairly rapid.
Up to mid-1994 they were still falling. But in the period between September 1994 and June 1995, they rose 8%. Miss out on that and you would regret it.
3) Negative equity is nothing to worry about
Every story about the last property market collapse focuses on what happened between 1989 and 1995, when prices collapsed.
Millions of people found themselves paying off mortgages that were greater than the value of the homes they were living in. In some cases, the disparity was upwards of 30% and I personally know a couple whose flat plummeted by 50% in value over that period.
At the same time, hundreds of thousands of people had their homes repossessed. They were unable to pay their mortgages and, in many cases, would symbolically march into their lendersÂ’ offices, hand over the front door keys and walk out again.
For them, the early 1990s were a miserable period.
But there is a danger of confusing things here: it was not negative equity that led to repossessions but a sharp economic downturn during which unemployment rocketed, coupled with high inflation, when interest rates shot up to 15% at one point.
For those who were able to continue paying off their home loans, negative equity was an unfortunate fact of life, but changed little: they were still able to live in the homes they had bought.
The major problems were faced by those who, mainly for work reasons but also in cases where couples split up, found themselves wanting to move but were unable to do so.
Lenders reacted by launching mortgage products on the market that allowed borrowers keen to move to do so.
Of course, a significant effect of negative equity was that there were pockets where prices fell more dramatically. This was either because they had bought “starter†homes (little better than bedsits) that no-one wanted, or because they lived in parts of the country that were badly affected by worsening economic conditions.
But for the rest of us – I was there too - if our £50,000 homes dropped in value to £40,000, the chances were that the one we were hoping to step up to had dropped by a similar percentage.
So moving was not impossible, just a lot more difficult.
4) Demographics are on your side
Prices of residential property are partly fuelled by mass psychology, as we know.
It is easy, when prices are booming, for individuals to make "rash" decisions, paying higher and higher prices because they think that unless they do, they will have to pay even more, further down the line.
But there is also a fundamental shortage of residential property in the UK, which few experts believe is likely to be resolved in the next decade or so. If anything, it could get worse.
The recent Barker Review of the UK property market, carried out on behalf of the Treasury, makes the point clearly:
In 2002, the last year for which figures are available, around 183,000 houses were built in the UK, 138,000 of which in England. Taking into account of demolitions and conversions, the net number of new homes was 134,000, a 0.6% increase in the UKÂ’s housing stock. This is more or less in line with homebuilding trends in recent years.
Official projections of "household formation", the number of singles or couples who require a home for themselves, indicate that the number of households in England alone is expected to increase by an average of 155,000 a year over the 1996 to 2021 period. In the 10 years to 2000, household formation is estimated to have been an average 196,000 households a year.
In other words, each year the number of homes built is about 20,000 less than what is needed.
For more information on the Barker report go to the http://www.hm-treasury.gov.uk website
The Council of Mortgage Lenders, which has also researched the issue, suggests:
By 2021 there are projected to be 2.1 million more married people in England, counterbalanced by 5 million more single adults and a further 1.5 million divorced.
Most of the net increase in household numbers comes from one-person households, with the number of married couples more than compensated for by an increase in the number of co-habiting households.
Obviously, a key driver for household formation is the relationship between income and affordability - what a person earns, relative to prices in the market.
If, as has been happening, the multiple of income to property prices rises from 3.5 to nearer 5 times earnings, many people will not be forming households: they will live at home or in rented accommodation.
However, that suggests prices are more likely to remain static for some time, rather than fall.
5) You can be your own master (or mistress)
Think about it: the chances are that if you live in rented accommodation, you have surrendered any decision about how the place should look to your landlord.
Because he or she is after an easy life, you probably have a nice white or beige colour scheme, with decently ordinary sofas and armchairs, a reasonably comfortable bed and appliances that work, for the most part.
Deep down, you yearn for something uniquely yours, where you can express your own personality rather than suffer someone elseÂ’s commercially-determined blandness.
You want lime-green walls with cerise curtains, rubber flooring and, yes, a genuine avocado colour bathroom suite. Oh, and donÂ’t forget the parachute, dyed black and strategically hanging, fully open, over your water bed.
If you rent, you will never really be able to decide how you live. If you buy your own property, you will never have to put up with someone else‘s good taste again.
Which is why I repeat: as long as you can afford it, you should consider buying regardless of the doomsayers who warn that property prices are set to collapse. They are probably wrong. But even if they are, you will be having a lot more fun waiting for the market to turn than them.
House prices might be reaching their peak but if you want to get into the house buying market now may still be the ideal time
Suddenly, like the first falling leaf at the end of a long summer, a few tremors are being felt in the housing market.
Surveys appear to show that property prices, for so long a one-way bet, are beginning to stall. In a few areas, it is being whispered, they are even falling.
The very horror of it! What on earth will we talk about at dinner parties now?
The practical consequence of scare stories is that, understandably, they are likely to put some people off buying their own homes. They will opt to rent instead.
Switching to renting a home may not be wise
Indeed, some existing homeowners are actively discussing the possibility of selling up, renting for a year or two and then buying back into the market again when prices have fallen.
Now, IÂ’m all for personal freedom of choice in these matters. If you want to incur costs of up to 3% when selling your home, plus many thousands more - including stamp duty of up to 4% - to buy one back, be my guest. You are obviously gambling on prices falling by at least 10%, probably nearer 20%, in very quick order.
But as far as IÂ’m concerned, people should keep buying. Not if you canÂ’t afford to, of course: in that case you ought to rent instead.
My own rough guideline is that you should never be paying more than 35% of your monthly take-home income on a mortgage – and you should also factor in the potential cost to you of mortgage rates moving up by 2% in your affordability calculations.
But if you CAN afford to buy and are wondering whether you should bother, here are five good reasons you should take the plunge.
1) Property is NOT an investment
In the past few years we have become used to the idea that property is an asset, in exactly the same way as the shares we hold in our pension fund or an ISA are assets.
ThatÂ’s simply not true. And hereÂ’s why:
You mainly buy a property because, at the end of the day, it provides a roof over your head. Whether it goes up or down in price should not really matter to you. As long as you like it, you can make the repayments and want to live in that area, nothing else really matters.
The only way you will "really make money" out of it is if you decide to sell up at some stage and keep the profits, or downsize and do the same.
True, a growing proportion of people do downsize. According to research from Assertahome, an online property finding firm, one in three house sales involve people selling up to move to a smaller property.
However, some 54% of those who downsize (average age 46), make the decision primarily to get rid of their mortgage, not because they want equity from their property as cash in hand. A further 15% are doing so because they have split up from their partners. Not much cash in hand there either.
Some 20% are retirees over 60. They too are looking to clear their mortgage - not surprising, given that they have an average annual income of £23,500. Only 12% of those who buy a smaller property (4% of the total number of buyers) actually take the cash - and even then they often "recycle" it, giving their children a leg up the property ladder instead.
In other words, property is not the cash-generative machine many people think it might be. And even when it is, the period between buying and selling can last for 20 years or longer.
2) Property IS a good long-term investment
Confused? Allow me to explain.
Even though a home SHOULD be treated primarily as a shelter and not an investment, no-one likes to buy a property, or anything else for that matter, only to discover that it is worth far less than they paid for it only a couple of years before.
Oddly enough, this feeling doesnÂ’t stop people splashing out on a brand new car - despite knowing that the minute it gets driven off a garage forecourt it will lose up to 35% of its purchase price.
But in the case of our homes, it is still nice to feel validated by the right choice, particularly as it is the largest financial purchase most of us are likely to make in our lifetimes.
In fact, evidence suggests that while property doesnÂ’t perform as well as shares over the long term, it does generally retain its value over the years.
The Halifax has been publishing its survey of house prices since 1983. Back then, the average UK property cost just under £30,000. Today, it is worth just under £160,000.
You can download an excel file of this data from the http://www.hbosplc.com website
Nationwide’s survey, which dates back to 1952, shows a similar set of figures. By the way, the average price of a property back then was £1,891 - and the average wage stood at £489.
You can download an excel of this data from the http://www.nationwide.co.uk website
Have prices kept pace with inflation over this period? NationwideÂ’s survey uses 1957 as its starting point and looks at what you could have bought with the money used to buy a house back then.
Moving forward 47 years, prices have outstripped inflation five times over.
You can download an excel file of this data from the http://www.nationwide.co.uk website
Equally, there have been long periods when, despite the fact that prices were rising, inflation eroded a significant part of those increases.
The trick with property is not to focus on the short-term but look ahead at least 25 to 30 years - roughly the amount of time it takes most of us to pay off our mortgage!
By the way, although changes in the property market happen with the speed of a huge tanker turning in the Channel, certainly when compared with shares, what is also true is that the recovery of prices in the mid-1990s was fairly rapid.
Up to mid-1994 they were still falling. But in the period between September 1994 and June 1995, they rose 8%. Miss out on that and you would regret it.
3) Negative equity is nothing to worry about
Every story about the last property market collapse focuses on what happened between 1989 and 1995, when prices collapsed.
Millions of people found themselves paying off mortgages that were greater than the value of the homes they were living in. In some cases, the disparity was upwards of 30% and I personally know a couple whose flat plummeted by 50% in value over that period.
At the same time, hundreds of thousands of people had their homes repossessed. They were unable to pay their mortgages and, in many cases, would symbolically march into their lendersÂ’ offices, hand over the front door keys and walk out again.
For them, the early 1990s were a miserable period.
But there is a danger of confusing things here: it was not negative equity that led to repossessions but a sharp economic downturn during which unemployment rocketed, coupled with high inflation, when interest rates shot up to 15% at one point.
For those who were able to continue paying off their home loans, negative equity was an unfortunate fact of life, but changed little: they were still able to live in the homes they had bought.
The major problems were faced by those who, mainly for work reasons but also in cases where couples split up, found themselves wanting to move but were unable to do so.
Lenders reacted by launching mortgage products on the market that allowed borrowers keen to move to do so.
Of course, a significant effect of negative equity was that there were pockets where prices fell more dramatically. This was either because they had bought “starter†homes (little better than bedsits) that no-one wanted, or because they lived in parts of the country that were badly affected by worsening economic conditions.
But for the rest of us – I was there too - if our £50,000 homes dropped in value to £40,000, the chances were that the one we were hoping to step up to had dropped by a similar percentage.
So moving was not impossible, just a lot more difficult.
4) Demographics are on your side
Prices of residential property are partly fuelled by mass psychology, as we know.
It is easy, when prices are booming, for individuals to make "rash" decisions, paying higher and higher prices because they think that unless they do, they will have to pay even more, further down the line.
But there is also a fundamental shortage of residential property in the UK, which few experts believe is likely to be resolved in the next decade or so. If anything, it could get worse.
The recent Barker Review of the UK property market, carried out on behalf of the Treasury, makes the point clearly:
In 2002, the last year for which figures are available, around 183,000 houses were built in the UK, 138,000 of which in England. Taking into account of demolitions and conversions, the net number of new homes was 134,000, a 0.6% increase in the UKÂ’s housing stock. This is more or less in line with homebuilding trends in recent years.
Official projections of "household formation", the number of singles or couples who require a home for themselves, indicate that the number of households in England alone is expected to increase by an average of 155,000 a year over the 1996 to 2021 period. In the 10 years to 2000, household formation is estimated to have been an average 196,000 households a year.
In other words, each year the number of homes built is about 20,000 less than what is needed.
For more information on the Barker report go to the http://www.hm-treasury.gov.uk website
The Council of Mortgage Lenders, which has also researched the issue, suggests:
By 2021 there are projected to be 2.1 million more married people in England, counterbalanced by 5 million more single adults and a further 1.5 million divorced.
Most of the net increase in household numbers comes from one-person households, with the number of married couples more than compensated for by an increase in the number of co-habiting households.
Obviously, a key driver for household formation is the relationship between income and affordability - what a person earns, relative to prices in the market.
If, as has been happening, the multiple of income to property prices rises from 3.5 to nearer 5 times earnings, many people will not be forming households: they will live at home or in rented accommodation.
However, that suggests prices are more likely to remain static for some time, rather than fall.
5) You can be your own master (or mistress)
Think about it: the chances are that if you live in rented accommodation, you have surrendered any decision about how the place should look to your landlord.
Because he or she is after an easy life, you probably have a nice white or beige colour scheme, with decently ordinary sofas and armchairs, a reasonably comfortable bed and appliances that work, for the most part.
Deep down, you yearn for something uniquely yours, where you can express your own personality rather than suffer someone elseÂ’s commercially-determined blandness.
You want lime-green walls with cerise curtains, rubber flooring and, yes, a genuine avocado colour bathroom suite. Oh, and donÂ’t forget the parachute, dyed black and strategically hanging, fully open, over your water bed.
If you rent, you will never really be able to decide how you live. If you buy your own property, you will never have to put up with someone else‘s good taste again.
Which is why I repeat: as long as you can afford it, you should consider buying regardless of the doomsayers who warn that property prices are set to collapse. They are probably wrong. But even if they are, you will be having a lot more fun waiting for the market to turn than them.