Search: Latest house price figures
- Read more Pryor on Property features
- Share your thoughts on the property market
If I'm honest I've never really understood where the extra money actually comes from when shares and the stock market rises, and the same goes for houses.
If my house has doubled in value like most homes in this country have since 2002, then has it been taken into account on some great balance sheet somewhere at the Bank of England? Has a note been made of the notional increased net asset value of my house?
It's not real until you sell
Unless I actually sell my home then any increase is purely a 'paper profit'. I could borrow against it, I could be taxed on it (if I were to die or pass it to my kids) but unless I actually do something other than just feel good, the increase is never actually crystallised and therefore not recorded anywhere.
I think it's just invented money. House prices don't form part of the mythical shopping basket that goes towards calculating inflation - neither by the way do mortgage repayments which you might think were a significant chunk of the average monthly outgoings for Mr & Mrs Joe Average, particularly today.
So, for the individual, when asset prices like shares and houses rise in value, the increases isn't physical. It isn't real unless you decide to sell them. The other thing that I'm often reminded is that for most people, buying and selling in the same market means that prices are all relative.
It doesn't really matter exactly how much it is really worth, if you home is worth five Smarties and the house you might want to buy is eight then if your home goes up in value to say ten Smarties then the house you want to buy will go up in the same proportion.
It's all about the difference between the two - the amount you either have to save or more likely borrow in order to make the move.
Burning £50 notes
We have just witnessed eleven straight years of increasing house prices. All 24 million properties in the UK have nearly tripled in value without anyone having to print a single new note. We are now in what I suspect will be a savage downturn where values could fall by up to 50% for some from their peak last year. (In Japan house prices in their crash fell by up to 80% and didn't rise for ten years!).
The point is that while we will all feel poorer, you never actually had the increased value that the papers told you your house was worth. House prices have fallen notionally but this drop isn't recorded anywhere. No one is burning £50 notes.
I hope I'm wrong but if prices were to fall by 50% the those who will suffer most are those who bought in the past four years. Those who borrowed against the value of their home either to finance their business, to buy a second home or possibly just to pay for a trip to DFS.
Many of these 5 million will quickly find that they paid more (and in many cases borrowed more) than their home is now worth but as with a rising market this doesn't matter unless they actually sell. If you can afford the payments and you don't have to sell then sit tight.
What you buy will also have fallen.
So don't despair, most people will find that whilst their own house is worth a lot less than they had thought it once was, when the time comes the one they want to buy will also be pleasantly less than they had expected it to be.
Think of it this way, the value of your house never really went up - it was always worth what you paid for it (plus whatever you might have subsequently added to the mortgage!).
You just felt better because you were told it had gone up. Now you're being told it is worth less but remember it is still the amount you paid that will establish if and when you have lost money. Until you actually sell it's all just in your mind.
Share your thoughts
Do you disagree? Or agree? Let us know what you think and help shape future articles by emailing PryorOnProperty@mac.com
Why do we do it? - Security. In a stable or rising market, it is a sensible place to put your hard earned (& taxed) money. Sadly, in a falling market, such as we have now, this security shrinks and home-owners get nervous, spend less and the economy feels the effects. For anyone who has bought recently this worry is that much worse.
What do we want? Stability. Not a raging boom as we have had.I only hope our government not only stabilises the present crisis but also works out why we arrived here and fixes the problem!
Last time I looked at prices around here (a year ago), a 3 bed semi was about £300K and a 4 bed detached £450K.
Cost to change would be £150K (plus any remaining mortgage).
Say they both dropped by 33% to £200K and £300K - cost to change is now £100K.
If they both go back up by 33%, the cost to change goes up to £133K.
Conclusion - if one needs to sell and trade down, a rising market is the best one to sell in !
Which kind of thinking is largely responsible for the upcoming recession.
-------------------
And as someone else mentioned the prices dont quite move in tandem. If you buy a 50k starter home , and your dream home is 100K, you are 50k away. If the prices double your home is now 100K but your dream home is 200 - and you are 100k away!
I dont see the benefit in rising prices let alone falling :)
moral: At the end of the day its all gotta be paid for and nothings for free.
So don't tell me it doesn't matter!!!
Sure changes are based on percentages - so the fall means that moving up (or joining the ladder) gets easier. Moving down gets less profitable - I.e. you will have to move down further to get the same cash in your hands.
I think that few people are in the situation where they want to move down the ladder!
Some people have got into a mess with repayments that they cannot afford, but the ability to make repayments is not related to house value - so I would say those people are in a mess regardless of the dropping house prices.
For most people the best thing to do is sit tight and wait for the next upward cycle. But if you have overstrtched yourself with big repayments then yes you're gonna loose out. For first-time buyers the drop can signal a way onto the ladder (possibly in a year or so when the fall has hit bottom.
rents will also be affected so you can see that we are all on the same "elevator" - we all go up, or doen, together. It IS relative and for most of the population it is also irrelevant. The few who are trying to step off the elevator will lose out. thos about to step on will benefit.
This is the opposite of the past ten years, where people joining the market were finding it harder and harder and those leaving (like myself) got big widfalls of cash.
Swings and roundabouts - the next few years will be for buyers, the last ten were for sellers.
I am grateful that I sold when I did, and I donn't resent the buysers finally getting their chance.
One is when the owner wants to borrow money, as with equity release, an increase in an existing mortgage, or a re-mortgage. The amount that can be raised will relate to the market value assessed by the lender. People considering equity release this year will find that they are offered far less than they would have been last year.
The other situation is when a house owner wishes to trade up or down. An owner trading down this year in order to raise cash for retirement or nursing home care, will receive far less than last year. In the same way somebody trading up will have to pay less.
The reason for this is that in a rising market prices tend to increase as a percentage of their value. This means that the difference between low and high value houses is greater when the market is high. The reverse occurs when the market drops.
It is also worth noting that in the case of ordinary unsecured loans and credit card limits the equity that an owner has in a house is taken into account when credit is assessed.
The third situation is where somebody wants to buy a house for the first time or to trade up on a limited income. Obviously it is easier to buy a cheap house than an expensive one!
The fourth is where somebody has bought an expensive house with a maximum mortgage andwishes to sell it, only to find that they have negative equity on a falling market.
I have not mentioned the effect of a falling house market on banks and other institutions which have rashly overlent on the hyped-up value of housing and the ability of buyers to repay their mortgages. I think that we are all now aware of the effects of this particular stupidity.
There is real cash involved in the rise and fall of house values and anybody who thinks that it does not matter is somewhat deluded.
Page: 1