Property is big business and a large part of your own worth. Houses, flats, apartments – they can cost a lot of money and if you buy and sell at the right time you can make a fortune or lose a lot! But what’s going on now with Corona-Virus and your house value?
There are a few bloggers out there who’ve got bitten by the property bug. People like this guy are a reminder that slogging it out in a cubicle torturing computers for 20 years is not the only way to retire early. Leverage can do the hard work for you. But that’s property investing – I want to talk about just owning a home today.
First of all, the title is a little deceiving as there has been a lot of discussion about people asking “do you include your home in your net worth”like this and this and this – basically there are those that say “yes!” and those that say “no way”. I’m on the fence in this one. Yes, I do count it and I check the value every month or so as the UK House Price Index is released and update my house value. But, no I don’t include it in all my sums, so I’m not counting on it – you’ve always got to live somewhere. I basically split our family wealth into 3 camps:
- 1) Pensions
- 2) Non Pensions and
- 3) Housing Equity (Value less Mortgage/Debts)
This keeps things separate as I can’t touch the pensions but can contribute and play around with them – it’s like a sailboat gliding off through choppy waters to retirementville. The non-pension stuff I can access/spend, play around with or move from one pot to another – this is like a speedboat with me at the helm. The Housing Equity I can’t really do much with – it’s like a supertanker. It’s fully loaded, show moving, doesn’t turn very fast and if it runs aground or hijacked by pirates, then I’m f**ked.
The housing equity bit is of interest because when you apply for a mortgage you need to put down some of the value of the house as a deposit and borrow the rest. This is known as the Loan to Value – LTV. The higher the loan to value the worse the interest rate you’ll get. 5% deposit = 95% LTV = risky = <3% mortgage. 40% deposit = 60% LTV = low risk = <2% mortgage. And 1% on a £200,000 mortgage is £2,500 a year and with compounding it’ll make a massive difference to your life.
Having a large deposit gets you better rates (just one example of how having money saves your money). So keeping an eye on your home value is important as you may be able to save a lot of money by lowering your LTV when you get a new mortgage by paying some of it off. Likewise, if your house goes up in value, you could use your house as an ATM to cash in on that equity you’ve worked for and increase your mortgage amount – Mortgage Equity Release as it’s known.
So how does GFF value his house?
Same way I’ve done it since I bought my first flat in 2006. Take the price you paid for it and find out the average price for the area when you bought it. That ratio can then be applied to subsequent months/quarters to update the price. I don’t count on any home improvements changing the value as I think that most home improvements are sunk costs and will never be recovered – or at least I am not banking on it.
What about Future Prices & Coronavirus Impact?
There’s now way of knowing but it’s not going to help things. The recent Stamp Duty holiday might have a short lived effect but overall it’s got to be a drop? Signs from the Nationwide are that prices are on their way down but it’s too early to say by how much and for how long. I’ve got a definition in my net worth spreadsheet which says that house prices increase by 0.25% a month or around 3% a year – the same as my RPI definition. 0.25% might not sound like a lot but it would be £750 per month on an “average” £300,000 house. Given the shock the economy has taken, betting in a £750 a month increase ad infinitum looks a bit foolhardy.
So, I’m assuming that house prices will drop by 3% a month until the end of the year meaning my house will drop in value from its recent peak at around £250,000 to £200,000 or so. Quite a drop – £50,000.
Pessimism or Pragmatism?
Who knows if I’m being sensible or not. The drag on my net worth has already been felt. But given that the ROS and ONS are not giving out any numbers it’s maybe a sign that the market is not healthy. I would have to accept that I’m not looking to sell and if I was, I’d probably hold on for a while. So if price is just what someone is willing to pay for something, I’m not selling. If I was to look to rent out our house it might fetch 6.5% gross yield. Going back to the argument of including/excluding in net worth – you must remember that a house is a machine for living in first and foremost. It’s our home and I don’t look at it and see pound and pence.
Me dropping the house price value in my spreadsheets is just a cautious approach to bookkeeping. I may be proven wrong (or right!) with Covid but the thing to remember is that you can’t eat equity – house prices are subjective but debt is real and there’s no such thing as a free holiday.