Help me understand how the property ladder works??

[Keke94LND]

Hey all, so I am an idiot and don't understand how the property ladder works at all.. please help me with the following scenario..

Thinking about purchasing a 2 bed garden flat in London that needs work, price is £425k, 15% deposit which is £63,750, so we would be borrowing £361,250. We would put in an initial £30k to do the flat up (replastering walls, re flooring, new kitchen, new bathroom, do up garden) over time we are also thinking we could add a home office at the end of the garden, we would make the house look nicer from the outside to increase its curb appeal etc etc etc.

Other similar 2 bed garden flats, that are already done up, on the same street have sold this year for between £500k and £550k, so we are thinking, if we put in £30k to do it up, we could instantly increase the value by double that?

We would likely stay in the flat for 5 years, the flat is in an area of London that has been growing over the last 10 years and is still growing (for reference its an area close to Balham that could become similar to Balham in years to come). We are thinking that by doing the flat up and with added inflation over 5 years, there is potential that the flat could be worth up to £600k by the time we come to sell (maybe we are being naive and overly optimistic in thinking this??)

This is where my main confusion comes from.. I don't want to live in a 2 bed flat forever, and would want to move into a house outside of London in say 5-7 years, but I am concerned about being 'stuck' and not being able to afford to move when that time comes, as i know stamp duty and fees etc are all very expensive.

So how exactly does it work? Am I right when I say the following:

We save over the 5 to 7 years to afford the fees and stamp duty
We still have out £60k deposit
We could have £175k equity (if we were lucky)
So we would then have £235,000 to put towards the next house, would this be our deposit? so we could possibly buy somewhere for maybe £550k? and our next mortgage would then be £315,000

Am I on the right path or am I way off?

Thank you!

@Kite22

In theory, what you have said isn't wrong, except you have forgotten that, if your flat continues to rise in value, then all the terraced houses, or semis will also have increased at the same rate.

The advantage of being able to buy earlier on, is that you are paying down your own mortgage rather than your land lords. Rent is commonly more than a mortgage payment also.

However, most people get to 'move up' because they have got a new job / promotion at work, or originally bought as a single person then they meet a partner and are combining forces, or they get a lump sum from an inheritance or a competition win or Premium Bonds or lottery, not by "making money" on their first property - as any price rises in housing stock also mean the 'next step up' has also risen.

Yeah I hear you, this is one of my main worries in terms of being able to afford to move as I don't want to stay in a 2 bed flat forever, will we be able to afford to move to a house and to pay stamp duty and fees etc, my only thinking is that obviously we wouldn't be looking for a house in the same area and would be moving to a different county, where house prices are although still expensive, not quite London prices... my boyfriend is from Scotland so worst case scenario we could always move up there if we are really stuck 🤣 (just kidding, not that I wouldn't love to live in Scotland! But I need to be close to my family down south)

falling house prices tend to make it easier to move up particularly if you've owned for a while. Stagnation I'm not so sure as it depends on so many factors. FTBs in London tend to be older & already stretching themselves & even with salary increases if they have dc reduced hours or childcare costs all impact affordability & the ability to save for the next step. If your property was already expensive when you bought it & hasn't risen much despite the stamp duty & any work you did you may not make anything.

I agree that wfh will reduce attractiveness in prime areas & SM probably makes location less important.

My point was making money on property is much harder these days & that shouldn't be your goal really.

@countrytown

Oh & I think london rents are now cheaper than mortgages.

Hmm I'm not sure about that, me and my bf currently pay £1,650 p/m for a 1 bed garden flat (been there since august 2020) the flat we are looking at is a 2 bed garden flat 15 minutes down the road and the mortgage would be around £1,300 p/m.

@Keke94LND you could choose outer zones though as opposed to home counties vs z3.
Any areas near Balham have gentrified yrs ago unless you are referring to Mitcham?

If it suits your lifestyle buy a flat & stay, just don't bet on equity.

The article I read about rents a few wks ago was statistically so of course there will be individual differences.

Many first time buyers rely on recessions and subsequent property price crashes to get on the ladder. The chancellor decided to prevent a covid related crash by propping the housing market up with the stamp duty freeze. Thus fuelling prices to rise by over 100k in my area. Our house as doubled in seven years! It’s crazy. They cannot keep going up and up.

I don't want to stay in a 2 bed flat forever, will we be able to afford to move to a house and to pay stamp duty and fees etc, my only thinking is that obviously we wouldn't be looking for a house in the same area and would be moving to a different county, where house prices are although still expensive

How much are houses in that area now?

@FreeBritnee

Many first time buyers rely on recessions and subsequent property price crashes to get on the ladder. The chancellor decided to prevent a covid related crash by propping the housing market up with the stamp duty freeze. Thus fuelling prices to rise by over 100k in my area. Our house as doubled in seven years! It’s crazy. They cannot keep going up and up.

This is another thing I think about a lot.. the flat I currently rent is a 1 bed garden flat, on a decent street, ground floor of a terraced house, it was bought in 1995 for £42k lol, it's now worth just under £500k, so what in another 20 years is it gonna be worth a million pounds!? Surely not, surely at some point the value cannot go up any more 🤔

@countrytown

I don't want to stay in a 2 bed flat forever, will we be able to afford to move to a house and to pay stamp duty and fees etc, my only thinking is that obviously we wouldn't be looking for a house in the same area and would be moving to a different county, where house prices are although still expensive

How much are houses in that area now?

It varies a lot to be honest, we were looking at a 3 bed house in a village in Sussex that was up for £425k, I'd say between £425k and £450k is the average we have seen in the areas we've been looking

As others have said everything else roses in price too although if you are moving out of London may not be as big of an issue.

As an aside if you are talking about Streatham or Tooting they both have been potentially the next Balham for at least 20 years but never got there!

it's now worth just under £500k, so what in another 20 years is it gonna be worth a million pounds!? Surely not, surely at some point the value cannot go up any more

They can't hence why the government have had so many props & mortgages are now 35 yrs & all the family can chip in. We had a decade of wage stagnation from the 08 crash & that will happen again now most likely. 500k is still affordable to many, 1m less so & for 1m people will want a house. My area of Wandsworth stagnated since Brexit & only the SD cut boosted sales.

The expectation is that you’ll climb the property ladder by earning more and being able to pay a more expensive mortgage. Owners of expensive houses often don’t expect to ever pay the mortgage off - they plan to keep paying the mortgage until they die or downsize. You’re vastly under estimating the cost to do up the flat though. Completed flats are selling for £100k more because they cost that much to renovate. You’re also vastly over imagining how much the property value might go up - the government is trying to keep prices stable and avoid another bubble. They days of profiting from houses are gone, you should expect to break even.

As an aside if you are talking about Streatham or Tooting they both have been potentially the next Balham for at least 20 years but never got there!

There are some expensive pockets in those areas but they have been expensive for years. I don't think you can rely on much more gentrification. My school mum friends who traditionally would sell their 1.2m small Balham house for a bigger house in Streatham or Tooting are all moving out as they want bigger gardens & remote working has opened up new possibilities. We are going to move to z5/6 in the next few years whereas we would have never contemplated leaving z3 pre covid.

@countrytown I don't think OP or my aim is to make money in property per se... If anything, it's a hedge against inflation (money sitting in bank account for pathetic interest rate and losing value). If house prices fall, well it's not like I didn't need to pay for shelter. I think what we are worried about is ability to move to the next property. I don't think most people stay in their first property (correct me if I am wrong), they just make significant adjustments in order to move up whether it's moving area, getting a better paid job or like my MIL (staying in her 1 bed flat with 3 kids until she found a terraced house in her area she could afford to buy during a recession).

It varies a lot to be honest, we were looking at a 3 bed house in a village in Sussex that was up for £425k, I'd say between £425k and £450k is the average we have seen in the areas we've been looking

It's just about taking a gamble whether the house prices here will rise in line with your flat. Even if they are higher you may still be able to afford the move so not the end of the world.

@onlychildhamster the OP literally says

buy for 425k, do up for 30k & sell for 600k 5 yrs later.

@countrytown well continued low interest rates and inflation would lead to higher house prices. 1 million in 20 years might not be considered a crazy amount at all. Also inheritances will exacerbate housing inequality as the boomers start to pass on and leave their large houses to their descendants. I expect things like capital gains taxes/taxes on BTL landlords to increase as the government tries to repay the covid debt- this may make putting your money in your main home more attractive as it is political suicide to tax one's main home. Unlike the USA, we don't have yearly property taxes and council taxes is payable by all, council taxes in london are relatively cheap considering how expensive our properties are.

So a 1 bed flat in London could be a million but a starter house in the home counties would be even more. The gap between London and the regions would become smaller due to remote work which is probably not a bad thing but could be hugely distressing for lower earners in picturesque holiday destinations that have a tourism based local economy.

I don't disagree that taxes will increase particularly property related ones & regional gaps will shrink, this is predicted already. I just don't think most 2 bed flats will be 1m in 20 yrs time but we will have to agree to disagree. If I was a ftb now I would skip the flat stage if possible but that's just my choice.

This is another thing I think about a lot.. the flat I currently rent is a 1 bed garden flat, on a decent street, ground floor of a terraced house, it was bought in 1995 for £42k lol, it's now worth just under £500k, so what in another 20 years is it gonna be worth a million pounds!? Surely not, surely at some point the value cannot go up any more

Its difficult because its all relative.

If rent is more expensive than buying then people will always opt to buy if they can - regardless of the price.

Part of the issue in London is that because there is so much rental, and so highly priced (also propped up by the fact people will pay a premium to rent because stamp duty for anything under 5 years is no worth it due to house value) - the house prices keep on climbing.

I also think the higher wages are another issue - say outside of London average takehome per person is 1.5k and in London its 3k. Mortgage affordability caps this to around a third of income - but those in London will have 4k spending power left over as opposed to 2k after they make the mortgage. For a 6k pp couple thats 8k left over and up and up.

Thats a huge disparity and why London prices rise exponentially compared to outside. Because people have a lot of spare cash comparatively.

I also think it doesn't necessarily cost 100k to do up a flat if you pick the right project. Go on the 'Surprises after you moved in' thread and you will see its amazing what a bit of paint, style and clever dressing can hide.

@Paulinna

The expectation is that you’ll climb the property ladder by earning more and being able to pay a more expensive mortgage. Owners of expensive houses often don’t expect to ever pay the mortgage off - they plan to keep paying the mortgage until they die or downsize. You’re vastly under estimating the cost to do up the flat though. Completed flats are selling for £100k more because they cost that much to renovate. You’re also vastly over imagining how much the property value might go up - the government is trying to keep prices stable and avoid another bubble. They days of profiting from houses are gone, you should expect to break even.

My boyfriend and his family are in the building industry, he thinks £30k we would be able initially get the flat to a nice standard and then add things over time, plus we would save on costs by having family help us out which of course helps a lot

They days of profiting from houses are gone, you should expect to break even.

I dont agree its gone - We made over 100k on our first home recently with little more than a new bathroom, upstairs skim and a bit of paint.

But the point I do agree with is that no one has a crystal ball.

There is no guarantee and you should always buy a home with the thought that you may get stuck there for a while if prices crash or if they rise. Theres no guarantee either way.

In a way its worse if your house does rise to that price. Because it means your next home will also have risen that much. Say 50% increase on a 400k home is less than a 50% increase on an 800k home. The first is now worth 600k and where you want to go now costs 1.2 million.

Its no necessarily helpful.

Just keep fingers crossed and try not to be too spendy with the renovations.

What the OP should take away from this thread is, she shouldn’t expect to spend £30k doing up a flat and make a mint of money selling it.

Nor should she expect selling the flat to propel her into a bigger property without borrowing much more, to the detriment of her long term wealth.

Anyone who has seen a significant increase in the value of their home recently must know that prices were pushed up by the flight to the suburbs combined with the stamp duty holiday, so it’s got nothing to do with a quick paint job.

My rule of thumb is, when people who aren’t that smart - pub pundits, former members of boy bands, etc. - are talking up a particular asset class and declaring that you can’t lose by investing in it, it’s time to run in the opposite direction. So it was with property until the 2008 crash (when Dublin house prices halved between 2006 and 2011), and the same applies to cryptocurrency: some smart people who understand the game will have made money on crypto, but not the people piling in at the top of the market, convinced that they can’t lose.

As a PP wisely points out, prices are already too high for first time buyers in many areas. Which is why, even in an era of unbelievably cheap money and unprecedentedly low interest rates, we’ve still got 35 year mortgage terms, guarantor mortgages etc. All of those things inflate affordability, and hence prices.

That is why the only sensible reason to buy somewhere is to live in it and to give yourself some security compared to renting. As a speculative asset class? No.

The main thing if you really want to make money is your property has to beat the market - go up faster than other areas. Otherwise doesn't make much difference as your gains are the same as on the next property you want to buy.

Also the gap between London and other nice areas in SE and elsewhere already much smaller.

It's all a gamble. Nobody really knows what will happen with the property market. Personally I think that we're still a long way from the peak, particularly in the midlands and north where there is more scope for prices to climb.

When I bought my first home, I chose a very small 3 bed end terrace with a garage at the side. My reasoning was that the house had lots of potential for expansion (e.g 2 storey extension and/or loft conversion), if I got stuck in a situation where I couldn't move. I think flats are slightly more risky as there's no scope to extend, which is on of the reasons that I wouldn't have considered a flat.

This is another thing I think about a lot.. the flat I currently rent is a 1 bed garden flat, on a decent street, ground floor of a terraced house, it was bought in 1995 for £42k lol, it's now worth just under £500k, so what in another 20 years is it gonna be worth a million pounds!? Surely not, surely at some point the value cannot go up any more

countrytown saying "£500K is still affordable to many but £1m less so, and for £1m people would expect a house" shows how some people's mindsets have already been influenced by living or looking at house prices in particular areas. I would expect a 4 bed detached for £500K. The concept of paying that for a flat blows my mind. But then when I took out my first mortgage for £30,000, all my (older) colleagues thought it was absolutely shocking, and awful that young people had to saddle themselves with such enormous debt. £1m in 15 years or so is definitely feasible.
There is no point in looking at what house prices once were, or what they might be, in terms of making money from houses. My neighbours bought their 4 bed detached for just under £7000. At that point, the concept of it being worth £450K or similar it would reach now would have sounded laughable.

You don't 'make money' unless you no longer need a house, due to all properties increasing as your does. Our house has double in value in the time we have lived here, but so has any house we might choose to move to, so there is no real gain in terms of what we could afford. We can afford better as we are now both senior in our careers + are no longer paying childcare + we have saved for 15 years.

Where we have gained over people who didn't buy, is the fact we have paid off our mortgage and own our home.
My dh's Grandparents lived in the same home from when they married in the war until they died in their 90s and paid rent all their lives. Had they been able to to / made a decision to buy in 1946, they'd have finished paying their mortgage in 1971, rather than continuing to have to pay rent ever month for another 30+ years.