To buy or not to buy (a house)
August 10, 2007 6:25 AM Subscribe
Economics filter: to buy a house or not? (UK)
So I've been looking at buying a house for a long time (since prices were less than half what they are now, sigh), and given some scary threads here, am now wondering how wise it is, especially since I'm danger of actually getting my hands on one in the next few months.
I'm in Glasgow, which has a hottish market, but not blistering. The houses I'm looking at are around the £150,000 mark, which is about £20,000 over their 20-year rental value (at current rates). I'm not a bad risk, mortgage-wise, and could probably get a few years at fixed-rate.
However, I know virtually nothing about financial markets/the world situation, and have no idea whether I'd be an ass to buy at this time and find myself badly burnt in a few years, or what, and am looking for AskMe advice.
So I've been looking at buying a house for a long time (since prices were less than half what they are now, sigh), and given some scary threads here, am now wondering how wise it is, especially since I'm danger of actually getting my hands on one in the next few months.
I'm in Glasgow, which has a hottish market, but not blistering. The houses I'm looking at are around the £150,000 mark, which is about £20,000 over their 20-year rental value (at current rates). I'm not a bad risk, mortgage-wise, and could probably get a few years at fixed-rate.
However, I know virtually nothing about financial markets/the world situation, and have no idea whether I'd be an ass to buy at this time and find myself badly burnt in a few years, or what, and am looking for AskMe advice.
This is all purely anecdotal but i bought my house 3 years ago - was being told at the time that the Market was bound to start cooling. House was on the market at 74,000 and we bought it for 86,000. Seemed insane at the time.
House across the road is now selling for £195,000. Bloody bonkers if you ask me for a 2 bed terrace. I had thought 86,000 was crazy three years ago though.
One thing I've been reading is that there is such a demand for houses in the UK that it is unlikely there will be a crash... who knows though.
If you can get a few years at a fixed rate and can afford the payments (comfotably that is!) I reckon you should get it.
posted by twistedonion at 6:46 AM on August 10, 2007
House across the road is now selling for £195,000. Bloody bonkers if you ask me for a 2 bed terrace. I had thought 86,000 was crazy three years ago though.
One thing I've been reading is that there is such a demand for houses in the UK that it is unlikely there will be a crash... who knows though.
If you can get a few years at a fixed rate and can afford the payments (comfotably that is!) I reckon you should get it.
posted by twistedonion at 6:46 AM on August 10, 2007
A) Get a fixed rate, don't buy without one;
B) Buy the smallest house you can possibly live with;
C) Pay as much as you possibly can, keep the loan as small as possible.
D) Buy in an area that hasn't seen strong house inflation over the last few years.
Why C? Because if the price goes down, it's a giant set of handcuffs keeping you trapped where you are.
Even in bad times, it's okay to buy ONE house. Just be super-prudent, and don't expect to make money over the short or even the medium-term.
posted by Malor at 6:50 AM on August 10, 2007 [1 favorite]
B) Buy the smallest house you can possibly live with;
C) Pay as much as you possibly can, keep the loan as small as possible.
D) Buy in an area that hasn't seen strong house inflation over the last few years.
Why C? Because if the price goes down, it's a giant set of handcuffs keeping you trapped where you are.
Even in bad times, it's okay to buy ONE house. Just be super-prudent, and don't expect to make money over the short or even the medium-term.
posted by Malor at 6:50 AM on August 10, 2007 [1 favorite]
Response by poster: I'm looking at the west end, Nugget. Malor: the thing with D is that almost all of the city has seen massive house inflation!
posted by bonaldi at 6:54 AM on August 10, 2007
posted by bonaldi at 6:54 AM on August 10, 2007
If you need a house, buy a house. Don't buy a house as an investment.
Know that with a mortgage for £150,000, then you're gonna be giving the bank about half of your £1,000 mortgage (more in those early days). If you can rent the same place for £600 or less, then do it and put the extra in a savings account.
They say there's a small chance of a crash over the next two years, but I wouldn't bet on it. My personal opinion is that unless interest rates are pushed up past 15% there's not going to be a crash. I don't see interest rates being pushed up that high.
Also, most people say that any crash is only going to rip 10% off current valuations. (maybe more in Scotland) I've no idea where they got that figure, but £15,000 is not a huge amount of money to lose on an investment of £150,000.
There's also still a shortage of houses, and this will continue for the forseeable future. (The increase in people living alone seems to be the prime factor here.)
So - If you want it to live in, then I'd say go ahead.
Please note that I'm no financial wizard and this advice is probably ill conceived on many fronts.
posted by seanyboy at 6:56 AM on August 10, 2007
Know that with a mortgage for £150,000, then you're gonna be giving the bank about half of your £1,000 mortgage (more in those early days). If you can rent the same place for £600 or less, then do it and put the extra in a savings account.
They say there's a small chance of a crash over the next two years, but I wouldn't bet on it. My personal opinion is that unless interest rates are pushed up past 15% there's not going to be a crash. I don't see interest rates being pushed up that high.
Also, most people say that any crash is only going to rip 10% off current valuations. (maybe more in Scotland) I've no idea where they got that figure, but £15,000 is not a huge amount of money to lose on an investment of £150,000.
There's also still a shortage of houses, and this will continue for the forseeable future. (The increase in people living alone seems to be the prime factor here.)
So - If you want it to live in, then I'd say go ahead.
Please note that I'm no financial wizard and this advice is probably ill conceived on many fronts.
posted by seanyboy at 6:56 AM on August 10, 2007
There's a 30% chance of a fall in house prices in real terms by 2010 according to a PWC report released at the end of last year.
Buying property is never going to be an intrinsically bad idea. You should bear in mind though that houseprices are not homogenous - an average annual average houseprice rise of (for example ) 7% has a HUGE range. Even if the market does fall by 2010, I am hugely confident that a big chunk of the most marketable properties (probably those suitable as a first rung on the property ladder for professional young families) will stay pretty stable. I personally find it hard to imagine that if you are conservative in the way that go about buying you will have any problems. I was also advised (in 1999) to not buy as the market was overinflated and certain to bust soon. Glad I ignored that advice!
At the start of an uncertain market with rising interest rates (although they are still historically relatively low), I'd try to follow these principles:
1. don't borrow more than 85 - 90% of house value
2. get an interest + principal mortgage
3. buy an easily marketable property (ie no rooms in unusual places, noisy pubs over the road, not a house that is much bigger / more expensive than other houses on the same street etc)
4. take out income protection insurance
The point of this is mainly to put you in a position where you can hopefully ride out disadvantageous circumstances (eg redundancy without immediate prospect of reemployment) without being forced to sell your property in a rush at the bottom of a slow market, and thereby of course also hopefully avoiding the negative equity trap. As long as the property you buy is somewhere that people in general would like to live, and as long as you don't take on too much risk in terms of mortgage to income ratio then you should always have a possible exit, either by selling or renting the property.
posted by bifter at 7:03 AM on August 10, 2007 [1 favorite]
Buying property is never going to be an intrinsically bad idea. You should bear in mind though that houseprices are not homogenous - an average annual average houseprice rise of (for example ) 7% has a HUGE range. Even if the market does fall by 2010, I am hugely confident that a big chunk of the most marketable properties (probably those suitable as a first rung on the property ladder for professional young families) will stay pretty stable. I personally find it hard to imagine that if you are conservative in the way that go about buying you will have any problems. I was also advised (in 1999) to not buy as the market was overinflated and certain to bust soon. Glad I ignored that advice!
At the start of an uncertain market with rising interest rates (although they are still historically relatively low), I'd try to follow these principles:
1. don't borrow more than 85 - 90% of house value
2. get an interest + principal mortgage
3. buy an easily marketable property (ie no rooms in unusual places, noisy pubs over the road, not a house that is much bigger / more expensive than other houses on the same street etc)
4. take out income protection insurance
The point of this is mainly to put you in a position where you can hopefully ride out disadvantageous circumstances (eg redundancy without immediate prospect of reemployment) without being forced to sell your property in a rush at the bottom of a slow market, and thereby of course also hopefully avoiding the negative equity trap. As long as the property you buy is somewhere that people in general would like to live, and as long as you don't take on too much risk in terms of mortgage to income ratio then you should always have a possible exit, either by selling or renting the property.
posted by bifter at 7:03 AM on August 10, 2007 [1 favorite]
My understanding was the opposite of Maylor's C). If you put as much money as possible into the down payment, then you do not have reserves to make payments in the case of a job loss or other unforseen major expense. In an emergency you could sell the house, but that takes time.
posted by a robot made out of meat at 7:09 AM on August 10, 2007
posted by a robot made out of meat at 7:09 AM on August 10, 2007
The problem with fixed-rate mortgages is that, depending on how long they are, you're locked into them no matter what happens to interests rates. The FT reports, this morning, that inflation should be - should - back at their target rate of 2%; in order to do this, interest rates will need to rise and they'll probably be going up a few more points later this month. However, presumably they'll almost certainly come back down again soon after. If you're absolutely set on going fixed-rate, it's probably better to do it now before they rise any higher.
As far as the housing market bubble bursting goes... unlikely for quite a while. Prices rise in strict correlation with supply and supply is severely limited. Government projects aimed at building new properties are, realistically, going to take 10-15 years to implement and they're stalling at the moment, anyway. Add into the fact that the population is growing and you'll see what I'm getting at.
Property is still a good investment.
posted by Zé Pequeno at 7:09 AM on August 10, 2007
As far as the housing market bubble bursting goes... unlikely for quite a while. Prices rise in strict correlation with supply and supply is severely limited. Government projects aimed at building new properties are, realistically, going to take 10-15 years to implement and they're stalling at the moment, anyway. Add into the fact that the population is growing and you'll see what I'm getting at.
Property is still a good investment.
posted by Zé Pequeno at 7:09 AM on August 10, 2007
Someone yesterday linked to the House Price Crash website, which is generally quite alarmist. However, I thought the curve on their front page was quite interesting. It says that the long-term trend since 1975 is about 2.5% per annum increase. So, looking at it from the long-term perspective, a lowish, inflationish number, with some big peaks and long troughs.
I have just bought a place and I think bifter and seanyboy give good advice. Something like 1m immigrants have come to the UK in the very recent past. Pressure on housing stock. There is already a shortage, and response to building social housing has been slow.
I took a variable rate loan with a small premium and it sucks when the rate rises, but it encourages fiscal discipline. Look for another increase before Christmas.
The country needs something like 3m housing units by 2020 and the government is poorly placed to pull these off, so there's unlikely to be a glut. A lot of those units, if you believe what you hear, are meant to cater to singletons, or lone parent families, or older folks. But the advice about buying a starter family home has to be good - at some point demand will always be there.
I also think there's London and there's the rest of the UK and the rest of the UK hasn't behaved like London. More moderate but steady growth is the general picture outwith London. There has to be a trickle-down effect as some of that bubble bleeds out into the rest of the country.
posted by sagwalla at 7:17 AM on August 10, 2007
I have just bought a place and I think bifter and seanyboy give good advice. Something like 1m immigrants have come to the UK in the very recent past. Pressure on housing stock. There is already a shortage, and response to building social housing has been slow.
I took a variable rate loan with a small premium and it sucks when the rate rises, but it encourages fiscal discipline. Look for another increase before Christmas.
The country needs something like 3m housing units by 2020 and the government is poorly placed to pull these off, so there's unlikely to be a glut. A lot of those units, if you believe what you hear, are meant to cater to singletons, or lone parent families, or older folks. But the advice about buying a starter family home has to be good - at some point demand will always be there.
I also think there's London and there's the rest of the UK and the rest of the UK hasn't behaved like London. More moderate but steady growth is the general picture outwith London. There has to be a trickle-down effect as some of that bubble bleeds out into the rest of the country.
posted by sagwalla at 7:17 AM on August 10, 2007
Malor's first point ("Get a fixed rate, don't buy without one") applies to the US, not the UK. I think American mortgages tend to be fixed-rate for the whole period of the loan. This isn't the case in Britain, which has a very different mortgage market. In the UK with a fixed-rate mortgage, rates are only fixed for a short period of time (2-5 years, generally). Of course, you pay for this certainty. You might decide to go for a fixed-rate anyway depending on your circumstances, but it's not a clear-cut decision. The American and British housing markets are very different in general, so make sure someone giving you advice has experience of the British market.
posted by Aloysius Bear at 7:24 AM on August 10, 2007
posted by Aloysius Bear at 7:24 AM on August 10, 2007
Take a look at www.propertysnake.co.uk. It shows how much people are dropping their prices to shift their properties. Of course, some people start out wilfully optimistic with their prices, particularly if they're in no rush to move house. But that optimism, or lack of it, can also be very telling.
Personally, unless I was desperate, I wouldn't buy right now. Everybody is a bit too twitchy. It feels a bit like people are looking at everybody else to see who runs for the exit first.
posted by long haired lover from liverpool at 7:51 AM on August 10, 2007
Personally, unless I was desperate, I wouldn't buy right now. Everybody is a bit too twitchy. It feels a bit like people are looking at everybody else to see who runs for the exit first.
posted by long haired lover from liverpool at 7:51 AM on August 10, 2007
The West End's a desirable area, prices there haven't been rising as quickly as other areas in the city, and you should get a really nice flat for your money.
Depending on where in the West End you want to be, I do know that there's a very nice top floor flat for sale on West Princes Street (runs parallel to Great Western Road) in a townhouse conversion.
I only know cause I've a friend who was looking in the same area. She fell in love with the bathroom but couldn't stretch her budget to buy it..
posted by Nugget at 8:44 AM on August 10, 2007
Depending on where in the West End you want to be, I do know that there's a very nice top floor flat for sale on West Princes Street (runs parallel to Great Western Road) in a townhouse conversion.
I only know cause I've a friend who was looking in the same area. She fell in love with the bathroom but couldn't stretch her budget to buy it..
posted by Nugget at 8:44 AM on August 10, 2007
I recommend Nationwide for a mortgage - YMMV, obviously, but we got a 2-year fix in December at 4.97%, and they allow overpayments even on a fixed-rate. Overpayments are capped at £500 a month, and as my income is higher than expected we're making the full overpayment and at that rate can knock 8+ years off the term (or reduce payments in case of job loss, pregnancy etc).
You wouldn't get a rate as low as that now, but there are some good deals still. I know this isn't a long-term housing market forecast, but thought it might help :)
posted by altolinguistic at 9:24 AM on August 10, 2007
You wouldn't get a rate as low as that now, but there are some good deals still. I know this isn't a long-term housing market forecast, but thought it might help :)
posted by altolinguistic at 9:24 AM on August 10, 2007
I have to study the mortgage market as part of my job and would say this:
Buy now. Even if prices fall slightly, I do not think there'll be a crash such as there was in the early 90s.
Get a fixed rate mortgage. Nationwide do one for 25 years, but there are deals around for 2-5 years, which will give you some stability at the start of your home ownership. But be aware that there are always early repayment charges (ERC) applicable on fixed-rate products if you want to change mortgages. Sometimes the ERC is simply for the duration of the term for which the interest is fixed, and sometimes there's a tie-in period during which the ERC will be payable after the expiry of the fixed term.
Get a capital and interest repayment mortgage, not an interest-only mortgage. If you get interest-only, your repayments will be lower but you'll also be expected to run alongside the mortgage what is called a 'repayment vehicle' - some kind of investment plan which is designed to generate sufficient capital to pay off the mortgage at the end of the term. In the 80s and 90s a lot of people took out 'low cost endowment plans' which were intended to do just that and they have crashed and burned spectacularly with just about everyone now finding they have a shortfall to make up at the end of their mortgage term.
email is in profile if you want any further information.
posted by essexjan at 10:18 AM on August 10, 2007
Buy now. Even if prices fall slightly, I do not think there'll be a crash such as there was in the early 90s.
Get a fixed rate mortgage. Nationwide do one for 25 years, but there are deals around for 2-5 years, which will give you some stability at the start of your home ownership. But be aware that there are always early repayment charges (ERC) applicable on fixed-rate products if you want to change mortgages. Sometimes the ERC is simply for the duration of the term for which the interest is fixed, and sometimes there's a tie-in period during which the ERC will be payable after the expiry of the fixed term.
Get a capital and interest repayment mortgage, not an interest-only mortgage. If you get interest-only, your repayments will be lower but you'll also be expected to run alongside the mortgage what is called a 'repayment vehicle' - some kind of investment plan which is designed to generate sufficient capital to pay off the mortgage at the end of the term. In the 80s and 90s a lot of people took out 'low cost endowment plans' which were intended to do just that and they have crashed and burned spectacularly with just about everyone now finding they have a shortfall to make up at the end of their mortgage term.
email is in profile if you want any further information.
posted by essexjan at 10:18 AM on August 10, 2007
Property is a great long term investment. That said, my opinions on the matter:
-interest rates are now 5.75%. They will most likely go up to 6 and maybe 6.25%. However, I think we may be at the top of the interest rate cycle. If you do a fixed rate, I would definitely do a short term one.
-house prices are slowing down in general (although in London this may not be the case), but I do not expect the UK to see the type of price deflation that we are seeing in the US. I think we are in for a soft landing.
posted by triggerfinger at 10:32 AM on August 10, 2007
-interest rates are now 5.75%. They will most likely go up to 6 and maybe 6.25%. However, I think we may be at the top of the interest rate cycle. If you do a fixed rate, I would definitely do a short term one.
-house prices are slowing down in general (although in London this may not be the case), but I do not expect the UK to see the type of price deflation that we are seeing in the US. I think we are in for a soft landing.
posted by triggerfinger at 10:32 AM on August 10, 2007
The wisest advice I've heard is this: if you can see yourself being truly happy in that house for at least 10 to 15 years and can afford your mortgage payments by a comfortable margin, then there isn't really a bad time to buy.
If you want to buy just to get 'a foot on the ladder', benefit from capital appreciation because 'prices only ever go up' or are considering an interest-only mortgage or a loan that would strangle you if interest rates increased by a few percent, then it may not be a good choice.
The notion that there is a a shortage of housing isn't entirely accurate. It's true that we haven't been building much good-quality family housing for some time, but look around any good-sized UK town or city and you'll see vast numbers of new-build flats, a great many of them purchased off-plan by investors and sitting empty. The UK market in particular has seen rampant buy-to-let speculation and growth of second-home ownership, and these properties may be off-loaded in volume should the market get spooked or if over-extended amateur investors continue to get squeezed by higher interest rates.
The official inflation statistics (CPI) quoted at 2% to 3% are simply nonsense, and under-report real cost-of-living increases by a significant margin. Likewise, unemployment and immigration figures bear little relation to reality. The UK carries colossal debt following government/BoE tactics to avoid recession at the start of the decade. Personally I don't believe in Gordon's miracle economy, but smarter people than me have said they do. We've been promised the end of boom-and-bust economics (somehow), but I seem to remember the same chap promising in 1997 that he would not allow house prices to spiral out of control. I'm no economist, but the near-term financial future doesn't look too rosy to me.
Prices in many areas of the UK are now stagnating, and appear to be heading downwards. Whether this will be a soft landing or the start of a major downturn I haven't a clue. If I could find a dream house and could afford it I might buy, but personally I'd rather rent for the rest of my days than risk getting trapped by debt and negative equity in a place I want to escape just for the sake of owning a property.
Good luck with your decision - it's a tough one right now.
posted by boosh at 1:55 PM on August 10, 2007 [1 favorite]
If you want to buy just to get 'a foot on the ladder', benefit from capital appreciation because 'prices only ever go up' or are considering an interest-only mortgage or a loan that would strangle you if interest rates increased by a few percent, then it may not be a good choice.
The notion that there is a a shortage of housing isn't entirely accurate. It's true that we haven't been building much good-quality family housing for some time, but look around any good-sized UK town or city and you'll see vast numbers of new-build flats, a great many of them purchased off-plan by investors and sitting empty. The UK market in particular has seen rampant buy-to-let speculation and growth of second-home ownership, and these properties may be off-loaded in volume should the market get spooked or if over-extended amateur investors continue to get squeezed by higher interest rates.
The official inflation statistics (CPI) quoted at 2% to 3% are simply nonsense, and under-report real cost-of-living increases by a significant margin. Likewise, unemployment and immigration figures bear little relation to reality. The UK carries colossal debt following government/BoE tactics to avoid recession at the start of the decade. Personally I don't believe in Gordon's miracle economy, but smarter people than me have said they do. We've been promised the end of boom-and-bust economics (somehow), but I seem to remember the same chap promising in 1997 that he would not allow house prices to spiral out of control. I'm no economist, but the near-term financial future doesn't look too rosy to me.
Prices in many areas of the UK are now stagnating, and appear to be heading downwards. Whether this will be a soft landing or the start of a major downturn I haven't a clue. If I could find a dream house and could afford it I might buy, but personally I'd rather rent for the rest of my days than risk getting trapped by debt and negative equity in a place I want to escape just for the sake of owning a property.
Good luck with your decision - it's a tough one right now.
posted by boosh at 1:55 PM on August 10, 2007 [1 favorite]
I suppose one fear is that I get a three-year rate and emerge from it to 17% interest, which would kill me.
Realistically, nothing like that is going to happen. There's plenty of scaremongering on the web, particularly in America, about how we're all doomed. The probability of 17% interest rates in three years' time is non-zero, of course, but it's so low enough that you can safely ignore it.
posted by Aloysius Bear at 3:55 PM on August 10, 2007
Realistically, nothing like that is going to happen. There's plenty of scaremongering on the web, particularly in America, about how we're all doomed. The probability of 17% interest rates in three years' time is non-zero, of course, but it's so low enough that you can safely ignore it.
posted by Aloysius Bear at 3:55 PM on August 10, 2007
This thread is closed to new comments.
Property is a good long term investment and although interest rates are likely to rise again, there are still a number of good fixed rate deals available.
Despite the current world market situation (decent BBC summary here), indications are that house prices will continue to rise. So with proper budgeting and planning, and if you can afford it, then I would go for it.
There are no guarantees that prices will fall and the longer you wait, the harder it'll be to get your first place.
posted by Nugget at 6:45 AM on August 10, 2007