Golf courses or homes

The Guardian reports  that more of Surrey is devoted to golf course than housing.

Golf is perhaps a fun sport, but it seems that it offers less to overall human welfare than housing. And the idea of greenbelts are presumably not to lock up large areas of land, so that they can be used by a handful of people. Presumably the idea is to have open spaces on which city folk can roam, where we can grow food on this small isle of ours and to preserve nature. Golf course are the preserve of a tiny minority, preoduce no food and our as unnatural as a factory.

I do agree with the principle of not concreting over the whole country, but large belts of land that cannot be built on offer benefits largely to existing home owners who benefit from the increase in prices caused by the lack of supply. I suspect any change in the law might initially benefit golf club owners as they would presumably rush to build houses on their prize courses if they were allowed too. 

None of the political parties seems keen to reform these planning laws.I feel that this and Sunday Trading Laws are areas where there are big increases in welfare available if only the government would unlock them.

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Three Ways to Increase Equity in your home

There are three easy ways to increase the equity in your home.

Changes in the market

A change in the general level of houses will change your equity. This might be because the area is improving(or getting worse) or it may be because house price are rising in general.

Leverage

An increase in the property market is great for those with mortgages. A house purchased using a mortgage is what is called a leveraged investment, meaning that much of the cost is funded through borrowing. For example if you purchase a £100,000 house with a £10,000 deposit and a £90,000 mortgage you will have a £10,000 equity. If prices increase by 10% the house is worth £110,000, the mortgage is still £90,000 and your equity has doubled to £20,000.The disadvantage is a 10% fall in prices would wipe out the equity.

Improvements to your house

 There are lots of ways to improve houses and this acts to make your property more desirable to other potential purchasers.

It may be that improvement spend does not increase the value. This may be because the quality of workmanship is poor or it will not appeal to potential buyers. Also any new spend is likely to fall in value - a new bathroom is very pleasant, but once it has been in place for a few years it adds little to the value.

The best ways to increase value are normally to increase living space(an extension) or to add a garage.

Capital Repayments of your mortgage

Mortgages are typically offered on the basis they will be repaid. Some mortgages are interest only meaning that the amount borrowed is repaid by some other form of investment. But concerns around this kind of mortgage have been growing and so they are less common.

Repayment mortgages work on the basis that  your payments remain the same throughout the term of your mortgage(assuming interest rates remain unchanged). At the start your payments are used mostly to repay the interest, but gradually as the amount borrow is repaid more and more is used to pay off the original loan.

 

 

 

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Interest rates low for next three years

The Bank of England has announced interest rates are unlikely to be raised for three years(based on a test linked to unemployment). This ought to be good news for borrowers and bad news for savers.

The policy ties interest rates to unemployment. and makes official the reality that the Bank of England was always more interested than just inflation.

Impact on House Prices

Rental yields

The price of houses ought to be the equal to the discounted cashflow of rental payments achievable. This broadly that investing in property ought to provide a similiar return to investing in government bonds(actually slightly higher as there is slightly more risk). Otherwise people would choose to simply invest in government bonds instead.


Simplified Example

An investor ought to be relatively indifferent between a £100,000 worth of bonds yielding 3% and a £100,000 property yielding 3%. We will assume the underlying property price is unchanged, rents are flat across time, it can be sold without cots and ignore inflation and the difference in risk.


If interest rates fall to 2% then the £100,000 property is now more desirable than the bonds. People will sell bonds and buy property. This will lead to the price of the property increasing to £150,000

Situation 1 :
£100,000 bonds yield £3,000 year(3%)
£100,000 house yield £3,000 year(3%

Situation 2:
£100,000 bonds yield £2,000 year(2%)
£150,000 house yields £3,000 year(2%)

Affordability

Interest rates reducing ought to operate via a more simply mechanism and allow people to be able to afford larger mortgages and so be able to pay more for houses. This ought to increase demand and drive up prices.

Will it impact property prices?

I am not sure it will have much of an impact on house prices and I doubt that is what the policy is designed to do to. Interest rates are already low and cannot get much lower, and many people probably did not forsee mortgage rate increase in the next three years. But it is probably more a way of signalling that there is a lower chance of interest rates rising and so people can feel more relaxed about borrowing over the next few years.

Property prices are more volatile than interest rates and many factors feed into them: supply, affordability, tax systems, mortgage availability and future expectations.

This is probably good news for people on tracker or base rate mortgages as these are going to remain cheap for three years, which should allow people to either spend money on other things or make mortgage overpayments. Those on trackers will have enjoyed seven years of rates at 4.5% below the pre-crisis 5%

The bad news is that low interest rates will lead to the value of the pound falling. This is likely to increase the price of imported goods and so mean that inflation is likely to be higher over the next few years.
 

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Quick Sale

Selling houses is a time consuming process.

Even if things go well it can drag on. This is because a prospective purchasers needs to check that you actually own the land that you are trying to sell, they also need to get a survey to check the property is not about to fall down. Finally they need to somehow get the money to pay for this; normally this is via a mortgage(in which case they need to prove to the mortgage company they have the ability to repay) or by selling another property.

As we live in a Wonga era where people can get access to money instantly it is not surprising that firms have emerged that offer to unlock the equity in a property quickly. This is done by firms which offer to buy houses at a steep discount(10%-25%), they provide the money within a week or so and take the risk in selling the house on.

These firms offer a useful albeit rather niche service. I struggle to see why someone would be prepared to pay tens of thousands to save themselves a few weeks of stress or to get money quickly. But I guess there are some cases where this is valid or necessary.

The other option for a quick sale is via an auction. After an auction the funds have to be transferred with 28 days and a ten percent deposit paid at the time of the auction. The problem with auctions is that a limited supply of cash buyers means properties can go cheaply. It tends to be something that happens more with commercial or development properties, rather than residential properties. Repossessed properties are often sold via auctions as well, as the quick sale element ensures interest does not keep adding to the debt and mortgage companies have a duty to obtain the best price(an auction price is the highest available on the day).

The quick sale properties are being investigated by the OFT. It is an area which is probably under-regulated(a bit like Wonga) and where there is a degree of ignorance and desperation by sellers that could be exploited. The problems seem to mostly be that the companies suddenly drop the value they are prepared to offer, or that not much is put in writing. I suspect we will end up with a code of best practise being introduced.

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Shops into houses

The government has announced plans to turn shops into houses.

This is a policy that ought to kill two birds with one stone; increasing the supply of housing and also dealing with the problem of empty shops on the high street.

There are some problems. Firstly a lot of government policies get announced and then are abandoned when the details are found to be problematic or other interest groups are seen as getting hurt. In this case the risk is probably that many small towns may lose important shops and therefore their sense of identity. The alternative solution might be to allow rents on shops to fall so new business can afford to move it.

The other problem is the supply impact on housing might be somewhat limited. Empty shops are said to number 7,000 in London. But London's population is set to grow by 1,000,000 over the next decade. This means that at least for London converting shops to houses is going to only be a small part of the problem. And some empty shops are not always problem as you need some space into which new business can expand. There are probably other parts of the country where there are more empty shops, but there is probably less demand for housing too.

The idea of having mixed residential and retail does seem quite good and a lot of towns have been adopting it anyway. The benefits are probably more to do with regenerating town centres by increasing footfall and removing unsightly empty shops. In order to be truly transformational the density of housing would need to be quite high, perhaps by bringing flats of students into the town center.

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Good time for homeowners?

Nationwide reported today that prices rose by 3.9% in the past year.  The rise in July was 0.8%. This differs somewhat from the Daily Mail's claim that prices only rose 0.3% in July.

Inflation has risen by 2.9% in the year till  June so prices are rising a bit quicker than inflation, but we are still some way away from a boom. And adjusted for inflation prices are still below their peak.

However rising house prices will increase the equity of most homeowners, this is because they will have a mortgage that does not adjust in line with inflation. For someone with a £150,000 house the increase will have increased their equity by approximately £5,850. There is probably a greater expectation that interest rates will remain low for the foreseeable future.

It is hard to see much changing in the near term, government is keen to stoke up demanding for housing on one hand. On the other hand affordability is an issue and so prices are unlikely to accelerate. Homeowners are probably happy as low interest rates make a mortgage not much more expensive than renting. This means that weak demand and few transactions are likely to continue for the foreseeable future.

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Leasehold versus Freehold

There are two main types of land ownership in the UK - leasehold and freehold.

Freehold

A freehold means that you own the property outright and forever. You cannot do exactly as you would like to it, as there are laws and other parties have an interest in it. However there is no point in time in which ownership reverts to anyone else.

Leasehold

Leasehold property  means you have a right to occupy a property for a specified period of time, after this property will revert to the freehold. This is not really a problem in the case of 999 year leases which are sometimes granted, but when leases get below 75 years it becomes more difficult to obtain a mortgage.

Leaseholder often have to pay  ground rent charges to be paid - this is a fee each year.  It is generally quite small.

Finally leases may have restrictions - such as ownership of pets or size of trees, etc.

Leasehold are common in flats as it helps to deal with problems regarding who will repair the roofs or common area. These issues becomes a matter for the freeholder. In return leaseholders have to pay management/service fees to their freeholder.

Right to extend a leasehold

Once the lease drops below about 80 years the resale value of a leasehold property will fall. Leasehold can extend their lease, and this requires negotiation with the freeholder.This is a complex area and requires a solicitor.

Share of Freehold

Freeholders in flats charge leaseholders for repairs and maintenance. As they are able to pass on these costs they may not have a strong incentive to find the cheapest suppliers or insurance, or they may not carry out repairs promptly. Leaseholders have legal protections and right to see details of invoices.

Another option is for more than half the leaseholders to get together and purchase the freehold. They can then either set up a company or run it as a group of trustees. Each individual flat owner is said to own a share of the freehold. This is a complex matter, especially with a lot of flat holders. It requires legal advise and can be expensive.

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Generation Rent

Generation Rent refers to those who feel they will be unable to ever purchase their own property and will be forced by economic necessity to live in rented property .

This is regarded as something new, and at least in the media leads to a feeling of resentment. So how did we get here?

History of UK home ownership

The charts shows data from the Office of National Statistics on housing categories.

There are three categories of housing:

• Social Housing - this is housing provide by charities or local councils. This category scarcely existed prior to 1918, but following the World Wars councils were required to provide housing. Councils expanded further after 1945 as they rebuilt the depleted housing stock. The Right to Buy scheme saw much council housing sold off in the 1980s at a steep discount. Additionally much council housing has also been transferred to Housing Associations.
• Private Rented - This was the largest category after the First World War. However controls on rental prices were imposed in 1915 and this made renting a less profitable investment. In 1988 new laws on tenancies made owning properties to let out a more attractive position. There also arose new Buy-to-Let mortgages which fuelled many investors purchasing properties to rent out. This is a tax efficient form of leasing property as the interest costs can be offset against the tax on income received from rent paid.
• Owner Occupied - Housing that owners own or have a mortgage against. This rose steadily throughout the last century. However the percentage of people in this category fell in 2011 vs 2001 for the first time in a century. Within this category there was an increase in absolute number of people from 14.9m to 15m. However the number owning outright(no mortgage) rose by 0.8m, the number with a mortgage fell by approximately 0.7m.

Reasons for decline in Owner Occupied Housing

There are several reasons why owner occupancy fell and might be expected to continue to fall.

• Lenders now require greater deposits. Previously lenders were prepared to offer loans up to 100% of the properties value, now they require at least 95% deposits. This is made worse as the cost of renting are not necessarily that much higher than servicing a mortgage.
• Lenders are more careful in who they lend to and require perfect credit records for loans with lower deposits.
• Graduates now leave university with much higher debts than in the 1990s, the repayment of these loans is a drag on disposable income available to pay mortgages. New graduates may face loans of c£60k and so be wary of taking on additional debts even if these are available.
• House prices are higher than they were in the 1990s(even accounting for inflation)
• Wages have failed to keep pace with inflation over the last decade. This means individuals have less money to spend on mortgage payments or save towards a deposit.

Generation Rent is the media friendly name given to a problem of lack of affordability for property for First Time Buyers. The government has attempted several schemes to resolve this, but the problem still appears to persists.  

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Why Wait?

The HousePriceCrash forum is populated by people who believe house prices in the UK are going to crash.
House prices did fall recently, but they were still above the level that they considered reasonable. This is a pretty pessimistic forum, even by the standards of the internet.

I don't believe a major crash is likely, certainly not to the extent house end up costing only a bit more than cars. But many of them hold this position and have done since the early 2000s. This post caught my eye.

So, regardless if if its realistic or not, sentiment is improving. The doom is not as bad as it was. With government meddling (QE, negative rates, help to buy, etc) they have prevented a full blown crash. Now it looks as though they are inflating houses prices to win an election although they will not ever admit that.

10 years I have been at HPC. Summer 2003 I became effectively a STR'er, although my rent is a shared ownership. I have crap neighbours, the house is a tiny poky box but I have not moved and put my life on hold for all this time because to put all my savings into a house in a market that was 30% - 40% overvalued seemed insane. But prices carried on going and went up beyond expectations due to Brown's meddling then crashed a fair bit but are above 2003 levels which has made the whole exercise pointless. So at various stages I considered buying, but I have always believed that eventually the market must return to normal. The end never comes, it's one new scheme after another, I never would have dreamt the extent that governments would go to to prevent house prices falling.

So in this 10 years my HPC ethic has really been on of the main causes of the failure of my relationships. Why?
1. GF wanted to live together, then arguements would ensue over not buying one. So bad that we would split before even trying renting instead.

2. In this 10 years through not buying and being ultra annoyed at everything going on I have cut expenditure to the minimum as a response to negative rates, invested as well as I could, worked a lot of OT, and saved up a big HPC fund ready to use when the time actually comes, this has caused me more problems.
It has made me rather worried that a woman could take half of it, again this is an obstacle to happiness. If they want kids, even worse, you know how much they cost and women at my age who don't have kids are running out of time with the biological clock. Another cause of relationship failure.

3 The lack of a HPC has made me very angry and maybe a bit bitter and twisted since everything I have done or not done for the last 10 years is because of it. I am not the fun person I used to be because everything about the economy and high HPI holds me back through the anger I have stored up. So in dating if the topic of money comes up its like opening a can of worms, most women do not understand the system at all, to them I have now turned into a man obsessed with money and doom and gloom rather than a catch.

If I had just bought a house in 2003, got married, had kids I would have been in a different place today.

What to do?
1. Give up and buy in the UK. They might go up 10% after buying before something happens to trigger the full blown crash but hey at least I have moved on and not waited anymore.
2. Wait some more, save some more, but how long for? it would be another 3 years before a crash if any comes. Then I will be 43.
3. Buy abroad in a place that is having a proper correction. I can only think of Spain or Ireland, but these places are not good for my sort of work.
4. Find a woman financially on par with me? Not likely since to have a house without a large amount of debt would mean they would have had to buy pre 1997. Not many women around who did that still single who are not way over 40.

I am sort of at the end of my tether, hence this frustrated post. Maybe I am being way too negative, but I woke this morning thinking what the hell am I doing with my life. Only a HPC'er would understand my situation. Any comments bad or good anything at all would be gratefully received.

I am not sure houses are going to do much price-wise over the next few years. But it seems quite sad to have allowed a belief to have stalled one's life dreams. And for money to have tainted someone's future romantic interactions.

This is nothing against those who believe house prices are going to fall(they are sometimes called Bears)The same applies to those who are waiting for prices to rocket(Bulls)

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Is the property market cooling down?

There is an article in today's Daily Mail claiming house price growth cooled in July.

The underlying data does not seem so sensational with prices increasing by 0.3% per month down from 0.4% in the previous two months. It will be interesting to see if this is a trend that we can expect to continue or if it is merely some sort of statistical blip. Even a rate of 0.3% implies an annual increase of over 3% which is a little bit higher than inflation. We need to adjust for inflation to see the real rate of increase, and it seems prices have been broadly static - up a bit, down a bit - since 2009.

It seems we can assume the market may or may not be cooling down. But the market is currently rather tepid.

The other interesting point in the article is that the average deposit by a first time buyer is now £26,859(I am not sure of the source). I am not sure what the source of that information is. But it is clearly a huge amount of money - equivalent to almost a year's worth of income for the average household before paying for any items of expenditure.  You can see why the government is keen to offer support to those who wish to buy.

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