House Price Inflation: friend or foe?

There are two topics of conversation that gets (British) people talking and that’s the weather, house prices and Brexit.  I’ll leave the former and the latter for another day.

So, we are mad obsessed with house prices, but are rising house prices a friend or foe?  

Personally, I think that house prices should go alongside Sex, Politics and Religion and Brexit as topics we should not discuss with strangers and to be careful even with those whose opinions we think we know well.  At least we can all agree that the weather is shit!

For those of us who are young (I was born 1982 making me feel young but I distinctly don’t feel like a millenial – which is common), the cost of housing has been meant that our standard of living has been cut.  I love visiting London but could never imagine being foolish enough to live there.  Not only is brunch expensive, housing is even worse.

scottish weather.jpgI sometimes see jobs advertised in London at companies I’d like to work for – but I don’t want to shell out £1,200+ a month to rent somewhere when I have it much better in Scotland (but with worse weather).  That extra cost of living equates to about £10,000 a year from what we have at the moment – and says nothing about the drop in quality of living we’d experience.

When it comes to buying in the same area the cheapest (and nastiest) 3 bedroom houses all cost substantially more than our own home in Scotland.  Of course, we didn’t buy the most expensive house we could afford (or get a mortgage for) but there is a real problem in the UK and the only solution for overpriced property is to lend more money to people who can’t afford to buy.  What on earth could go wrong with that plan?

Sadly, the insane house prices in London would prevent me from moving there.  Geoarbitrage is one option but I’m a Gentleman’s Family Man first and foremost, but I can see the attraction.

House are Unaffordable

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That is not my opinion it is what the government think:  their Help to Sell Buy scheme can “help” you realise the dream of owning your own home in the capital. When you put down as little as a 5% deposit on a newly built home, you can get a Government equity loan – for up to 40% of the purchase price up to a value of £600,000.  That’s over 15 times the average salary and this degree of leverage is extremely risky.

The government would never look at anything to make property less expensive – more debt is all we need.  High house prices and ever unaffordable housing is defacto government policy and the government will do what it can to ensure that property is more expensive for every generation going forward.

There are risks to buying something you can’t really afford – but what we’ve seen over the last 25-30 years in the UK is that 1) interest rates came down to single figures, lowering the cost of mortgage debt.interest rates.png

2) House Prices Increased as banks lent more money since the debt cost less.  People ended up paying the same in interest but at least the property values went up.  That helped the banks’ balance sheets and allowed them to lend more freely – NOTHING COULD GO WRONG!

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3) Interest Rates Drop to the Floor for any number of reasons but remember that it was not caused by any actions of the UK Government and the solution to over indebtedness was cheaper debt – like the cure for heroin addiction is just cheaper heroin

Those three things look like they can’t be repeated.  You of course can have Negative Interest Rates and be paid to take on debt.  We have that already in real terms.  My mortgage is fixed at 1.79% for 5 years and CPI inflation is running at 1.8% and RPI is 2.7% – I’m being paid to borrow money!

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Overall, the position of house prices is precarious.  I can’t see how young people will be able to afford the million pounds houses of boomers when they pop their clogs.  Propaganda like Escape to the Country inevitable stars middle-aged people escaping from the waste land that is urban Britain.  Safe with their final salary pensions and HPI gains locked in from buying a normal house in 1990 and selling it for hundreds of thousands of pounds more to overstretched young ‘uns.

When I see property for sale in London I almost can’t believe the prices being charged.  Are people that rich and stupid to pay those sort of prices (for often just a 60% share of a flat).

Even second steppers are not helped in their search for a forever home.  If your dream house doubles in price and your crappy starter home doubled in price, you have to find even more to bridge the value gap.

My own view is that for any young person today, think very carefully before buying a home and avoid Help to Buy – the price of your hutch is inflated to cream off the government bonus.  Modern life is difficult and full of choices over which you might not have much control.  You might need to move to London to get the job you want – you might want to live somewhere for family or other reasons – but we are all facing the same challenges.  Too much of our financial resources is funelled into property.  Our modesly price house still costs over 4 times what the Lady and I take home after tax in a year – meaning we’d need to spend 4 years of our lives just paying for the capital (the interest is a different story.  House prices to Income ratios are even crazier in London – it’s genuinely looking like prices may collapse if the Ponzi system isn’t propped up.  And if prices do fall – the extra leverage from HTB and the tendency for new builds to not hold their value means that new property owners may end up losing lots.

So next time you hear someone comment that increasing house prices are good or that Brexit is causing uncertainty or whatever – ask them if they’d feel the same about the price of bread, petrol or milk.  And stay clear of HTB, it’s a weapon of wealth destruction!

 

Thanks ,  GFF

 

Think of HTB as a weapon of wealth destruction!

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4 thoughts on “House Price Inflation: friend or foe?

  1. Wish I could show this post to the young first time buyers I see come through the office….. just reading their mortgage offers fills me with worry should they come to remortgage and rates have inched upwards.

    Like

    1. thanks.

      I think that many new homeowners will not have any understanding of previous crashes – 2008 was years ago and lessons from history will show that property is a safe bet.

      The normalisation that expensive housing and inflation is a good thing is terrifying especially when second steppers are happy that their house has gone up by 20% / £50k but fail to understand that their next house has gone up 20% / £100k leaving them £50k worse off.

      Liked by 1 person

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