How will the future property market work?

[confuseddotcom2]

Hello all

I've namechanged & aplogies in advance as this is London/SE centric.

So as a young inexperienced property novice can someone try to explain to me how the market will work in the future?

We are looking at flats priced at 500k & would plan to sell in 3-5 yrs to upsize. Where I'm confused is historically when its time to sell our budget would be determined through a combination of house price growth (say 200k), paying off some mortgage & wage increases so the next property we would buy would be in the region of 750-800k. This would ideally afford us a house if we moved out a bit.

However I don't see now see how our 500k flat is going to increase by much in the future, so how will we be able to afford a house? Plus there are very few areas where 750k will get you a decent house in a good catchment area.

At the moment, it's hard to tell. My DD is in the same position as you, buying in London. Maybe you are my DD!
I cannot see property prices rising in the short term- maybe the increased interest rates will also have a negative impact. However, a lot of people live in London/ South East and people will always need somewhere to live, so they should go up eventually.
Hopefully, someone with more experience will have some more informed advice.

Remembering the last two house price crashes, new build flats (if that's what you're buying) suffered the worst - some halved in value. It's hard to believe but I can see it happening again with Brexit etc. Future proof now and buy a 3 bed semi even if it's further out.

Don't buy something you'll outgrow in the immediate foreseeable future.

Thanks for the feedback.

lazy maybe!

MrsPatmore not a new build, purpose built maisonette. I'm steering clear of new builds as so many have been built.

I agree on paper it makes sense to get the house now, unfortunately this would meaning leaving London (to get house for 500k). Myself & my husband are Londoners with both families close by, & we dont quite feel ready to leave. Now if we could get them both to downsize...😛

"Where I'm confused is historically when its time to sell our budget would be determined through a combination of house price growth (say 200k), paying off some mortgage & wage increases so the next property we would buy would be in the region of 750-800k."

OK, I'm no expert but I'll give this a stab!

Increases in value tend to go through a particular market. So if the lowest rung of the ladder increases, say, 20% in value in one area then the middle level of the ladder tends to increase as well in that same area. With the caveat that "market" is a loose term, and is highly regionalised (you could argue down to a street), if you sell and then buy in the same market, the increase in value of your existing house will be more or less wiped out by the increase in value of your purchased house. The way to cash in is to sell in one market and buy in another which has been governed by a different dynamic. For instance, if you bought a house in London in 2008 and you sold it and moved to the north east in 2015 you would benefit from the growth in London over the last decade and the comparative stagnation in the north east.

I think you're right, however, that many people have become used to constant house price growth in the SE, and this looks to now be flatlining. Which I guess means that wage growth/increased equity which allows increased debt will be the main ways to move up the property ladder??

I live in Zone 4 - just on the borders of Mottingham and Chislehurst - and there are 3 bed houses available for as low as £300k. I'm always baffled when people say it would mean leaving London to afford a house as there are plenty around here.

purpose built maisonette

Ex-LA? In a falling market ex-LA fall first and further so I'd potentially caution against that.

You 'old market' situation doesn't work how you think it did. You are saying your 500k flat would have gone up 200k (40% increase) and you'd have paid off some mortgage and higher wages so could afford 800k.

But that 800k house would have suffered the same % increase in prices (unless you move somewhere less desirable) over that time so you haven't really stepped from 500 to 800 but from 500 to 565ish or 700 to 800. Your step up hasn't been paid by house price inflation, it has been paid for by your higher wages and mortgage pay off.

If the starting difference was 500 and 800 then actually by the time you came to sell your 500 flat for 700 the 800 house would be 1.1m after a 40% increase meaning it was still out of reach.

The only way you 'won' on house price inflation was if you won on the asymmetry and arbitrages and got in to a high growth area at 500, and then cashed out and moved somewhere cheaper (not yet gentrified, further out, whatever) for your step up.

So basically I think you are saying that the type of house you want costs 800 now, but you only have 500. How will you be able to afford 800 in a few years?

You have a better chance now in a stagnant or falling market. In a falling market, if the falls are syetrical between the two property types and areas then e.g. 10% off 800 is more than a 10% fall of 500. So the gap moves form being 300 now, to 270 after a 10% price decrease.

I agree on paper it makes sense to get the house now, unfortunately this would meaning leaving London (to get house for 500k)

To be fair, that is a pretty silly thing to say. What you mean is you can't buy a house in zone 2 for 500k or

I think historically people were able to move 'up' because of wage/salary increases rather than building up equity. On a repayment mortgage you repay relatively little of the capital in the first 10 yrs.

Slightly different with endowments of course.

In fact as another pp has said aren't you better off if the market has fallen when you want to trade up? (Provided you aren't in negative equity - a big 'if')

In recent years things have changed - much more money from bank of mum and dad (particularly in London and South East), other inheritance etc, overseas buyers, btlers, so house prices have not been tied to salaries any more.

I think Silver has got it and this is what we are hoping for (moving from 3 bed flat to house) in that our flat might sell for less but we’ll be able to buy a house for less. Add in wage rises and paying down the mortgage (and overpayment seriously help too) then it should make moving up easier in a falling market.

Incidentally where are you looking to buy? We’ll be selling a lovely 3 bed flat in se London near a tube station in the near future 😁

Given that successive governments have fucked about with the housing market to avoid a massive crash (the 2008 crash was really only a little one compared to how bad it should have been) there is every chance there will be further tinkering. For example by reducing the massive levels of stamp duty which are starting to become a barrier to moving. So basically you never know! If people could predict the future we would all be a lot richer :-)

silver no not ex LA, but zone 3 & unfortunately not 5 min from tube. Not help to buy or shared ownership either.

I specifically said the "old way" would afford us a house by moving further out, not stayed in the same area. So is my theory still wrong?

As whiskyowl said is the only way to do it now by taking on much more debt/longer terms?

Avii I don't know much about those areas, would they be in good primary school catchments?

Of course there are London properties for cheaper prices. But because I'm in SW it makes sense for me to go Surrey or perhaps Kent direction.

Stamp duty is raising a lot of revenue though - one of the taxes which is relatively difficult to avoid. I think I read that revenues had gone up from it quite substantially since the recent rate increases (despite falling sales vols).
So I would be surprised if it was reduced substantially in this budget given the pressures on spending - except perhaps for ftbs?

But quite true that the property market is unpredictable over the short to medium term!
Then there's the will they/won't they about whether government will fund substantial new house building. They will probably do something but whether it's enough to affect existing house prices is anyone's guess.

I understand that if prices fall it can be favourable when upsizing. Where I'm nervous is because properties for FTB buying today seem very toppy.

Friday keep me in mind! Have you bought recently?

I specifically said the "old way" would afford us a house by moving further out, not stayed in the same area. So is my theory still wrong?

is the only way to do it now by taking on much more debt/longer terms

Nope.

House price growth/decline will not be the same area to area to if you are clever/lucky you can still benefit from an arbitrage in the market.

And you still have an increase in earning power (hopefully you aren't at the 'top' of your profession). And ability to save and pay off your current mortgage.

Where I'm nervous is because properties for FTB buying today seem very toppy.

@confuseddotcom2 they do seem v toppy and we are quite likly at the top of the market for now, it is a very valid concern. I would try and future proof your purchase as much as possible so that you can be happy there for longer than you would ideally like.

House prices will be affected by supply and demand. This is why the London market is expensive and in other areas it’s stagnant and has been for years. There are always blips in London of course but unless supply is hugely above demand, prices won’t fall by a massive amount. Brexit may affect prices and that is an unknown as may interest rates if they take a sizeable hike but that’s unlikely.

The equity you may build up in a property is wiped out by the price going up for the next property. 20% of £800,000 is a bigger chunk to find than the 20% of £500,000 you have accrued. Therefore you need even more to trade up.

The options then become: earn a lot more, take out a very long term mortgage, acquire money from parents, bite the bullet and move out of London but within range of family, stay in London and accept it will be a bit cramped with a family.

We moved up the property ladder due to enhanced earnings. No inherited money or money given. However in the sticks, prices were within range. We will shortly be looking for a flat in London for DD and I totally understand the problem but you have to start somewhere and if it’s just the two of you at the moment, enjoy a flat and the location. A baby is ok in a flat but then think about where to go a bit later. Surrey is expensive but you could look at Maidenhead in Berkshire for example. Cross rail makes that attractive.

Another thing I don't quite understand is people get so excited by the x amount of equity in their property but unless your one of the lucky ones without kids or happy to move far away all that cash will help your kids onto the ladder/be used for social care. So if properties were more affordable you still are in the same boat, if that makes sense.

I wouldn't assume house prices will rise and give you a big load of equity without having to do much at the point you are ready to move, but generally London bounces back before elsewhere, so even if Brexit is destructive, long term you'll be ok - problem comes if you have to move.

So I would avoid being in a position to be a forced seller when things are looking a bit bleak, if you definitely want to stay in London, then pick a flat with a decent sized second bedroom (so you could put 2dcs in it if need be), outdoor space and an ok school nearby.

Save and overpay on your mortgage as much as possible to get yourself in the best position if prices fall.

If you buy something that needs both of you working full time to pay for, and are planning children, think about nursery costs and if you could afford that.

I agree with PPs if your property goes up x% then so will the larger properties. So actually the best time to go up the property market is in a dip because 5% on 100k house is less cash than on a 200k house iyswim? I would rather buy a bigger property that lasts you over a longer period of time than buy something that won’t suit in a few years because you don’t know how the market will change in that time. Plus moving is expensive and dead money. You want to go from your 1st house to your ‘forever/long term’ house in the shortest amount of steps

"people get so excited by the x amount of equity in their property but unless your one of the lucky ones without kids or happy to move far away all that cash will help your kids onto the ladder/be used for social care."

Absolutely. In fact if you have dc you are worse off as a family as a whole if prices rise above the iht threshold, because you can't leave the dc the whole value of the house, whereas when they were under the iht threshold you could. (Unless you downsize to give assets away early etc, which raises its own issues.)

But then not all dparents do aim to help their dc to get on the ladder, or alternatively that seems a long way off when the dc are under 5! - so at that point house price increases look like a 'real' gain. And indeed they are a real gain in one way, in that they get you a lower interest rate when you come to remortgage, because you are lower loan to value borrowers.

I agree with not buying new build. Instead I would opt for something standard, indeed boring, in an established area, which should help ensure that it is saleable in any market. Similarly make sure it ticks most of the boxes, in terms of being within 10 minutes of a station etc. Worry less about dated bathrooms etc., These can be sorted in due course.

One option when I was young was to stretch and buy a two bed and then let out the additional room till you could afford to be without flatmates.

When trading up, worry less about price, but more about the "cost" of an extra bedroom/garden etc. Also factor in the cost of fares and the value of your time, when deciding whether to stay central or commute. (And schools but that is a whole other thread.) The equity goes from one property to another, so in some ways is irrelevant. What matters more is that your salaries have gone up and you can get enough extra mortgage to bridge the gap.

We managed to buy more space whilst staying central by accepting a more compromised location (our forever home so we could decide the problems would not worry us, and if we sell we will wait till the market is strong), and not worrying about a garden. London children like parks, there are bags of other things to do many of which are free, and many of their friends do not have gardens either.

Think carefully about moving out. Reports from friends suggest that home counties living can be very dull. It depends on you priorities, but does the off street packing and garden compensate for the commute and easy access to everything London has to offer. Certainly by the time they are teenagers, they will forgive you the slightly cramped living when they have access to an Oyster card.

Lots too think about so appreciate all the opinions.

I guess my wobbling comes from the uncertainty of Brexit, future of interest rate rises, potential unemployment/wage stagnation etc. Oh what a time to be young. ;)

Can I ask if making the jump to the next property is largely about wage increase/saving as opposed to equity, how do so many people afford 1.3m+ plus houses. They can't all be earning 300k? Or do I need to retrain!

500k & would plan to sell in 3-5 yrs to upsize

No one has a crystal ball, but in your shoes I would be looking to see where the next couple in 3-5 years is coming from. By that I mean do you think the London professional job market (I assume that on the basis you must be on a decent joint income) will continue to thrive? If not, then the supply chain of FTBs who can afford 500k for a flat is going to dwindle and you may be lucky to just get back what you paid. Of course that will filter up, and the upsize homes you'd be looking at may also come down a bit.
No one can predict the outcome of brexit 100%, but I'd err on the side of caution. There's no doubt some financial institutions will re-locate, and there is always a big knock-on effect to companies that service them, so 50,000 jobs moving to the EU could affect several 100,000s of others.

The London property market is broken, with many couples unable to break out of renting either because they are on modest incomes or because they can't afford to rent and save simultaneously. I suspect either the magical 'market' will sort it out, all there will be some political intervention, we are at a point where many essential people can't afford to live and work in London (think emergency services, teachers etc), and with relatively high employment many may be tempted to leave, which would have social impacts on the whole city.

In your shoes I'd be looking to move out from the centre and buy somewhere you'd could live in, and maybe extend, to see you through until any children are starting secondary school. At least you'll have somewhere to live and can start planning to move if things become more affordable. Don't forget, children = £10,000s, especially child care if you both need to work.