| |
Major Site Upgrade in Progress |
 |
|
 |
|
bobcat
Beginning Saver
Joined: 23 Sep 2004
Posts: 37
Cash Points ££ 135.00
|
|
|
 |
|
 |
|
 Posted: Tue Mar 07, 2006 10:05 am Post subject: Interesting - Why you should not buy a house in the UK today |
 |
|
|
 |
|
 |
|
|
|
|
I came across an interesting article on why not to buy a house in the uk now ! from http://www.firsttimebuyerhelp.co.uk/articles/article.aspx?id=3
In this article, we present the argument to make you think twice about taking out a mortgage to buy a house in Britain today, because, contrary to popular opinion, it could be a bad financial decision in today's market.
Of course, we know that this is something of a moot point for countless First Time Buyers now who presently cannot afford to buy even the smallest property at today’s outrageous prices – and you would not be alone in feeling frustrated and cheated.
The statistics clearly show that the number of First Time Buyers in Britain today is at a record low, but there are still some FTBs buying.
Even a vested interest organisation such as the Council of Mortgage Lenders released a detailed report in July 2005 putting First Time Buyers at 29% of purchases (compared to an historic average of nearly 50%). On the 20th July, the CML also said that FTBs had fallen to just 27% of purchases in June 2005.
More statistics by the National Association of Estate Agents (another vested interest group), reported the proportion of FTBs to be just 10.9% in May 2005.
And, in a widely reported and stark statistic, the Halifax building society (perhaps the biggest vested interest of them all) said in January 2005 that 92% of British towns are unaffordable to First Time Buyers. In what looks like a coordinated PR exercise, the Government announced a few days later new “initiatives” to help FTBs.
A Stranded and Crippled Generation of Young People
These statistics aren’t surprising, because after this long property boom the price of what is essentially a collection of bricks, mortar and plasterboard has spiralled out of control, to levels beyond any reasonable definition of fair value (unless of course you are a seller in today's market and won't entertain dropping the price of your house just 20% to sell it even though your house has gone up by 200% since you bought it).
Monthly mortgage repayments as a proportion of income for First Time Buyers is now so high that it is leaving many with very little disposable income and is putting them into poverty, and the total debt burden of Britain (mostly mortgages) now stands at an astronomical £1.1 Trillion (source: Credit Action debt stats)
Young people, desperate to get on the property “ladder” like their parents did a generation ago, have, in pursuit of this goal, saddled themselves with very large mortgages because of price rises that have far outstripped wages, and those who haven’t been able to raise a sufficient deposit or buy in time have felt stranded on the sidelines and forced to rent or stay for longer with their parents. In 2003, it was reported that the average deposit paid by a First Time Buyer rose 250% in just five years !
The average age of a First Time Buyer is now 34, and as the graph below shows (source: Nationwide), houses have never been more expensive compared to the wages we earn - the ratio is even higher than it was just before the last house price crash.
But, even faced with today’s scandalous prices and blatantly obvious affordability problems, there are still some First Time Buyers out there buying property even now, and would either seem not to be aware of, or indeed worried, that the bigger picture of Britain’s housing boom is of a worldwide economic bubble in house prices which is the biggest in history.
But, the attitude of some is that if they think they can afford it, by whatever means necessary, then they will do it. These buyers typically take out very large mortgages, often borrowing from their parents (who have re-mortgaged their own property) or take out a 100% or even an Interest Only mortgage.
And why are they taking such huge financial risks? Because they still believe, as popular opinion does, that you can’t go wrong to buy into the housing market, and most believe that property is a good investment. The old adage "as safe as houses" is alive and well. The perception still remains that property only rises in value because this property boom has gone on for so long that young people especially have never seen it any other way.
There is still a strong notion of the “property ladder” etched into the British psyche and the prosperity it supposedly brings. Much of our perception comes from how well our parents have done out of property, and consequently what they tell us.
And we now live in a culture that is addicted to debt - some people do not even care they are drowning themselves under mountains of credit cards, bank loans and mortgages. And so they are happy to take on irresponsible levels of debt because the lenders have often allowed them to, and because everyone seems to be doing it !
This is a complete reversal of how debt was perceived during our parents’ generation.
It Is Time To Get “Real” About House Prices
It probably goes against everything you believe about the housing market to be told not to buy, but by bypassing the hype of the TV and the media which has played it’s fair share surrounding the mania of this property bubble, it is worth showing you some sobering facts and figures about the market as it really stands today.
Property prices at the moment have never been more expensive in “real” terms (i.e. adjusted for inflation).
Across Britain, the boom of the past several years has typically left house prices 40% over the long-term trend. The Nationwide Building Society’s own figures confirm this (see graph below).
Some other sources, such as the Economist magazine, go further and say that house prices are overvalued by 60% when you take into account the large price difference between buying a house and renting it.
The boom in house prices is now largely over, but although prices have not yet been seen to crash like they did between 1989 and 1995, a correction is now definitely underway in the market. This correction will mean falling prices, and the definite possibility of a full-blown house price crash.
Therefore, the risk of sinking into Negative Equity is surely too great to buy now.
Because inflation is low (and it is the deliberate policy of the Bank of England to keep it low), going into Negative Equity would be a lot more serious and long-lasting than the last crash in the late Eighties, because, unless inflation is allowed to get out of control, it will not come to the rescue as it did in previous housing market corrections to help erode the mortgage debt.
We are now in a rare situation in which Renting could actually be more financially advantageous than Buying. It is up to your own financial circumstances to decide whether this is true in your own individual case - but it is worth doing the calculations and take a long-term view. The common myth is that Renting is “dead money”, and that buying is best. This is true in a boom. But past the peak of the bubble, it may well make much more financial sense to Rent for the time being, to see what happens with the housing market. When house prices have come back to a more reasonable level, you can then confidently buy.
House prices are 40% over their long-term average
The graph below is from the Nationwide Building Society and shows movements in house prices since 1957.
It can be clearly seen that the whole market has seen swings and troughs (more commonly known as Boom and Bust) since the 1970s. The blue line on this graph is the inflation-adjusted price, which is a lot more informative than simply looking at the actual average price (the grey line).
In 1974, actual prices of houses did not actually fall - they simply stood still whilst rampant wage inflation (due to factors such as the Trade Union movement and an oil price shock) rose very quickly to make mortgages affordable to wages again. This is why the grey line doesn't fall even though the blue line clearly does.
In 1989, actual prices did fall by about 20% from peak to trough, and the rest was accounted for by inflation. The eventual real-terms fall was 37% over six years.
It is difficult to ignore today's extraordinary peak in prices. And given the pattern in this graph, it looks abundantly obvious as to what will happen next. But whilst nothing is ever 100% guaranteed, past performance makes the current situation look very ominous.
For anyone who remembers the last house price crash, it looks like we've been here before. Have we learnt nothing from history ?
Is History Repeating itself ?
So, is history really going to repeat itself, and will we see a crash on the scale which devastated the housing market in the early 1990s and coincided with a recession ?
The graph below expands on the one above, and again is based purely upon the Nationwide Building Society's own figures.
This graph demonstrates more effectively the established Boom and Bust cycle that the housing market seems locked into. It clearly shows that in fact, the magnitude of this deviation in house prices is actually comparable to the one in 1973. At that time, prices peaked at 45% over and above the long-term average. In 1989, prices peaked at 37% over trend.
A more interesting observation, however, is that once the "Year-on-Year" house price index as measured by Nationwide turns negative (as shown by the pink line), house prices keep on falling until they revert back to the trend again, and in fact always overshoot to some degree.
At the time of writing, the Nationwide "Year-on-Year" house price inflation index is due to go negative, sometime towards the end of 2005.
For house prices today to fall back to the long-term average, they would need to drop 40% from current levels, taking the average price of a house today from around £160,000 back to about £100,000. Remember, that over a 25 year mortgage, this would represent a considerable saving in interest payments.
The Negative Equity Nightmare
One very important variable with a crash this time around would be what is happening with general price inflation.
Today, it has been a deliberate policy of the Bank of England to make Interest Rate decisions to prevent inflation returning of the type seen in the 1970s and 1980s. But a consequence of this means that a bursting of this bubble should in practice mean that most of the price falls are actual price falls. This would mean that the effect of Negative Equity will be much more pronounced and devastating than it was during the 1990s crash. This will be potentially very damaging for the economy.
This is also precisely the point that industry-insider Stuart Fowler made when his letter "The First Crash To Feel Like A Crash" was published in the Financial Times.
The extent of actual nominal price falls of the kind which would be required to bring house prices back to their average have never happened before in the U.K, but there's always a first time for everything !
Will there be a House Price Crash ?
Since the middle of 2004, the housing market changed direction after an interest rate rise to 4.75% and warnings made about the market by the Bank of England Governor. Ever since, the market has been on a clear downwards trend, and the number of buyers who were there in the Spring simply dropped away towards the end of the year. 2004 was very much a year of two halves.
The housing market indicies (published by the mortgage lenders) have shown relatively few price drops so far, leading to persistent predictions that the market is experiencing a "soft-landing" (in other words, no crash). But then, the Estate Agents and mortgage lenders would say that, wouldn't they ?
But, when you look at other indicators in the market, things don't look quite so optimistic. In the housing market, other indicators are recorded, the movements of which point to where prices are going.
The above graph shows the number of mortgages approved by the UK banks over the past 10 years (the data is freely available from the Bank of England's website). Towards the end of 2004, these approvals collapsed to their lowest level since 1995, an event which was enough to be given coverage by the media. This fall was faster than that which led to the last crash.
This sudden drop in approvals is mirrored in the number of properties actually changing hands as recorded by the Land Registry. The next graph shows marked fall in volumes towards the end of 2004 (mirroring that of the fall in mortgage approvals). This lack of buyers is obviously very bad news for Estate Agents, and despite the public face they have put on, they have seen their business drop dramatically.
So, given that mortgage approvals and transactions have had a hard landing, why should prices have a soft landing ? And given the past history of house prices (that work in a very cyclical fashion), isn't there reason to be very sceptical about any claims of a soft-landing ? Surely this prediction would seem merely to be just a lot of wishful thinking in the minds of vested interest groups.
The mortgage lenders and Estate Agents do not really know more than anyone else where the market is going - they are just crossing their fingers that there won't be a crash and are giving their predictions in the media that suit their own interests.
Conclusion
Mervyn King, the Governor of the Bank of England, has said publicly that he has no idea where house prices are heading. And who can know for absolute certainty ?
But we hope that the graphic evidence we have presented to you in this article has shown that the future of the market is looking far from certain, and a lot more ominous than you might have seen presented in the media.
Several Economic "think-tanks" have predicted falls in prices - Investment back Durlacher are forecasting a 45% collapse, whilst others such as Hometrack think that this is ridiculous and are predicting falls of just 5% before house prices start rising again.
This boom went on for far longer than anyone could ever have predicted. But finally, sentiment in the market was dealt a decisive blow in the Summer of 2004 - and arguably sentiment is more important than Interest Rates in determining house prices.
Some have said that prices haven't collapsed more suddently like they did 1990 - one factor hastening the collapse was a big rise in Interest Rates at the time. And so the argument is that because Interest Rates are low, the housing market can't crash. But one thing is shown clearly from history - the market is cyclical. And it seems now that it is not a matter of whether house prices will fall - but how far they will fall and how long it will take.
Consider that the housing market can be compared to an oil super tanker - it spends a long time going in one direction, and takes a long while to change course - but when it does change course it tends to stay on that new course for a considerable amount of time.
Price falls are now clearly evident, especially in parts of the South East, and the housing market seems locked into an increasingly more extreme "Boom and Bust" cycle which began in the 1970s.
So, if you are still considering buying, then the question you have to ask yourself is this - why buy a house now, when you can buy it for cheaper later ? Why buy now when your savings are increasing and the price of houses is falling ? It does NOT make any financial sense to buy, and nor should it until house prices have come back to more reasonable levels.
The fact is, there is nothing to lose and everything to gain by waiting for longer, and reminding yourself how liberating and less stressful it can be to be mortgage free, and also the flexibility it gives you.
Stick to your guns. Do not buy. Do not become a mortgage slave for the next 25 years for an overpriced house. Good things will come to those who wait ... |
|
|
|
|
|
|
 |
Online Finance Tools & Calculators |
 |
| Credit Score Calculator |
Easy to use online Credit Scoring tool - Calculate your credit score now online for FREE ! using the Moneyforums.co.uk credit scoring tool. Also TEN Tips on improving and mainting a good credit rating ! |
|
| Quick Health Calculator |
Easy to use quick health calculator to help you get started on the path to fitness. Calculates your body mass index (BMI). |
|
| "When will I die ?" Calculator |
Calculate when will you die based on your current life style and then more importantly what you can do about extending your lifespan ! |
|
| Mortgage Calculator |
Easy to use online Mortgage calculator tool - Calculate how long it will take to pay off your mortgage and what your monthly repayments will be as well as interest charged per month per each year. |
|
| Savings Calculator |
Use the flexible savings calculator to estimate the amount of interest you would earn given a level of monthly savings, with many optional settings. |
|
| UK Tax Calculator |
Check your tax and NI liability using this easy to use online tool. Outputs, Tax, Ni, Net pay and gross pay on an annual, monthly and weekly basis, also estimates your tax burden and the number of days a year you work for the tax man ! Plus lots of tax saving tips. |
|
|
 |
|
 |
|
Money
Forums Guides |
|
| Credit
Card Stoozing |
The
following guide explains the basics of credit
card stoozing in a step by step basis. |
|
| Discount
Vouchers |
Online
discount vouchers giving upto
50% off in stores such as Dixons,
Tesco, Avon, Currys, Boden and more. Many
of the vouchers are time limited - So check
back regularly |
|
| Money
Saving Guide |
Guide
to saving money on household bills & personal
finances - Start saving thousands of £'s
every year TODAY ! |
|
| Savings
Tree |
A
guide to Savings Accounts, from Cash ISA's to
Regular Savers to Premium Bonds, all explained
in an easy to understand manner. |
|
|
Users
Groups | Profile
| Messages
| FAQ | Sponsers
& Links | Member
list | Recommend this site | Top Money Saving Sitee
© 2004 - 2007 Moneyforums.co.uk / Market Oracle Ltd - Asserts copyright on all topics & posts made on this site. Moneyforums are open forums, and thus posts are NOT endorsed by Moneyforums.co.uk / Market Oracle Ltd . Any and all information provided within the Website is for general information purposes only and nor is or shall be deemed to constitute, financial or other advice. We recommend that independent professional advice is obtained before you purchase any product and/or service. All tools and guides are provided as is for general information purposes only.
|
|
|
