House Price Inflation Pros and Cons

[Alan Dale]

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[Mark]

I think a lot of it depends if you see a house as a home or an investment. I think it's unfortunate that a basic human need (a home) has got such a high financial value on it especially for first time buyers but it's a fact of modern British life and I accept it.

[Muttley]

I'd say that price levels and the gobsmacking relentless rise in prices are now detrimental to East Dulwich life. In the 1990s I moved from an SE22 flat to a house. The move cost about ?3,000 including all fees, stamp duty, the lot. It was an irritation, but easily hidden in the mortgage. The exact same move today would cost ?30,000 or more, over ten times as much, which for many people is more than a year's salary simply being handed over to the taxman and professionals. And that's ignoring the six figure mortgage that would be needed. This means it is now much harder for a person to relocate in the area as their family grows. So we are losing people who would love to stay.

The other negative impact on ED life is the inevitable change in the nature of people who are now able to buy. In the 1990s it was relatively easy, and common, for regular musicians, actors, designers, BBC employees etc. in their twenties to buy a big flat or a house in East Dulwich. Many still live here. Today, this category of young professional wouldn't stand a chance of starting on the ladder here unless they had an inheritance or a well-paid partner. I regret that loss of diversity, which is what created a lot of ED's personality in the first place.

[Alan Dale]

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[timtim]

You'll find lots on this very debate on www.housepricecrash.co.uk/forum/

I'll warn you now, there are some really crazies on that forum :)

[*Bob*]

I'm a musician and have a lovely house in ED.. that must really get up your nose, eh Alan?

[Alan Dale]

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[Huguenot]

Good observations all.

However, I'd just like to touch on the 'investment in houses' side.

What we haven't touched on is that house prices growing don't generate cash - they just make more financial institutions willing to lend you money with your house as collateral. You still have to pay back the loan and interest.

This is fine if someone still wants to buy your house, but extending debt and spending masses of cash on more houses is still reliant on the confidence that you'll be able to recoup your investment and pay off the loans.

This is why house prices 'bubble' (swell and pop). Because when the confidence drops (for whatever reason), the buyers aren't there and you're locked into negative equity: you find you can't continue to borrow to pay off existing loans and interest and the bovver boys come to reposess.

House price speculation is just like taking out extra credit cards to pay off the interest on the first ones.

Investment speculation only works if the interest on the loan is less than the acquisition of value on the house. Most loans run at 6% - 7%, so you need house prices to increase by over 8% to make any difference...

Even so, at a 10% increase (like the last 12 months) that would give you only a 3% annual return, whereas ISAs and others are delivering 6%-7%. Your money is better spent elsewhere.

In this sense, whether house prices are likely to drop is irrelevant, don't even bother with the argument - investing in houses is already a bad idea unless you want to live there!

Similarly, from a long term perspective, I think we are all going to be underwater soon?

This is not free money...

Alan, I notice that on other threads you recommend disinformation as a route to financial gain - is this urging to buy houses a reflection of your willingness to capitalise on defrauding others about value? ;-)

Always take good advice before trying to invest!!

[Alan Dale]

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[Muttley]

Alan Dale Wrote:

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> Totally agree about stamp duty. It is a very

> unfair tax but if anything it does restrain the

> house price inflation that you object to.

>

In Ireland, I believe stamp duty is nearer to 10%. Doesn't seem to have done much to damp the insane house price inflation over there. Talking of the Irish, there used to be quite a contingent in East Dulwich (frequenting the Castle, EDT). Have they been replaced by a new breed of Irish, the overseas property investment type? Irish landlord anyone?

[Alan Dale]

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[blinder999]

Our flat used to be an Irish shop. They converted the shop and the flat above into two self-contained flats, cashed in their chips and went back to Ireland many years ago.

[mockney piers]

A quick aside to answer Muttley; talking to the remaining community that hangs out in the castle reveals that most of their chums cashed in during the early days of the property boom and went back to Ireland to enjoy the fruits of the Celtic Tiger, and have no doubt done equally well out of the ridiculous property market there.

Mind you, if ever there was a bubble going to burst it's the Irish housing market. The US has already popped, Ireland next...you can see the direction it's headed folks.

[nutty]

Alan Dale Wrote:

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> You are ignoring gearing.

>

> A 3% gain on an asset that you have only but down

> 10% of your own capital equates to a 30% return on

> capital.

>

> If you could put ?3000 in an Isa but get

> investment return on ?30,000 then it would be a

> significantly better investment.

Well said Alan - It's the equivalent to posting a margin in trading - you can only lose what you put in, fortunately the lender loses the rest! Of course, that's still not pleasant if it's your home...

>

> There is no fraud . There are rumours about a

> bakerloo line extension to Camberwell. I choose to

> embrace them.

[Ant]

We have a two-bed terrace in ED. It's lovely, but since the kids arrived it's a bit small for us. We'd love to move to a bigger house in ED, but it's just not possible on our salaries, even though we both have decent jobs and are, by most standards, doing OK. So we have two choices: get a loft conversion or leave ED.

I really don't want to leave ED.

[Parker's Folly]

So which type of people are buying here now? By the tone of your message, I assume you think its the wrong sort of type?

[Huguenot]

Alan, excuse me for being abrupt, but your maths is bonkers...

Ignoring confusing use of 'gearing' terms...

Imagine a ?200,000 home which you've bought with a down payment of ?20,000 on an interest only loan

End Year One:

Liabilities:

Outlay Fees/Searches etc. (?5,000)

Downpayment: (?20,000)

Interest (@ 7%): (?12,600)

Ongoing annual maintenance and fees: (?2,500)

Outstanding Loan: (?180,000)

Total Liability: (?221,100)

Assets

House Value (at 10% annual growth): ?220,000

Now the loan is someone else's money, so let's take that away from both sides:

Your 'equity' (house price minus loan) is ?40,000

Your 'expenditure' is ?40,100 (not including maintenance)

That's -?100 return on ?40,100 (your ISA would have delivered ?2,807)

After year two, total outlay rises to ?55,263 with that year's interest charges, and if we had the unlikely prospect of another 10% rise in equity (a very big ask, I think you'll agree for 2009), that may deliver back ?6,000 - approximately the same as your ISA.

Now let's consider risk:

That calculation is reliant on house price growth of 10%. If this were to drop to 4% (god forbid!!, but a more reasonable 25 year average, and the current growth outside of London)...

First year you lose 30% of your investment, and by year 25 YOU HAVE STILL LOST 12% of your total investment.

This doesn't matter if you live there, because it replaces rent. However, as a speculative investment it's just lunatic.

So your recommendation hinges entirely on sustaining house price growth in excess of 10% for many years to come!

Now, how likely is that?? We could hope for disastrous mass inflation I suppose...

This is why house prices are too high - the only people making a killing here are the banks.

[James]

Unfortunately the rises are accelerating the gap between rich and poor - wider than under Thatcher, according to yesterday's BBC news. Shameful for a Labour government.

I don't think it's a coincidence that we're seeing a growing rabid chav underclass in this country who have no respect for anything or anyone. A policeman told me that there has been an alarming spate of burglaries in ED recently...

[jim_the_chin]

Ant, go loftwards my son. we're in the same positon and don't want to spend 20k just to move, and to where and for what - 1 extra box room? we're going to spend 40k and get a 4 bed house with 2 bathrooms. it's a no-brainer.

[Muttley]

Not necessarily the wrong sort of type, but probably a much narrower range than in the past. Mrs Muttley briefly taught at a school in Kensington. One day, the author Michael Rosen came in to talk to the kids. In one bit of audience participation he asked the kids what their mums and dads did. The answers were...lawyer, banker, banker, lawyer, lawyer, banker...zzzzz. Rosen was dismayed at the narrowness of the children's backgrounds. I fear SE22 is going the same way.

[Alan Dale]

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[Mark]

jim_the_chin, someone's posted a 4 bed, 2 bathroom house for sale on the forum earlier today, you can see it here

[*Bob*]

I'm loving this financial shootout between Huguenot and Alan - spaghetti western style. Though in truth I understand none of it (and am thankful I don't, to be honest)

[Alan Dale]

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[cookie]

I too think it's valid to find something so dull that it's hard to muster up the energy to understand it.

I'll join *Bob* in enjoying watching the feathers fly from the sidelines though :)