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!

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!?
There was a bubble in the housing market between the mid 90s and 2008. House prices increased massively. Since then there have been dips and recoveries, but prices haven’t (and can’t) return to what they were before the bubble. The government has shown that they intend to support current house prices and keep them stable, with the hope that eventually inflation will cause prices to fall in relative terms. So prices won’t keep going up, no. Government policy will keep them approximately the same going forward.

@Kite22 I said 500k is affordable to many because it is in London. 2 good earners with a good deposit can afford that. Does that mean I don't think the prices are high or that it's crazy to have so much income committed to property? No. It's nothing to do with mindset just stating a fact.

I'm fully aware of how crazy the property prices are as a born & raised Londoner & the impact of that.

@Paulinna exactly! there is a reason we've had decades of low interest rates, long term mortgages, help 2 buy etc.

@Kite22 its a global thing. Non government housing in my home country (singapore) makes london housing look cheap- we are talking the equivalent of £1 million for a condo and £3-5 million for a house with garden (thankfully locals can buy subsidized 1000 square feet 3 bed flats from the government for as little as £250k or 500k SGD but they are pretty basic even if they are well connected and have good amenities; and there are all sorts of rules on who can buy them/whether you can rent them out). At the other end of the spectrum, New Zealand the other day (population of 5 million in a countr y larger than the UK), average home in Auckland is $1.14 million. If you compare london house prices with the likes of New York, San Francisco, they are much lower but Londoners also earn less (though I still think we have more disposable income due to not paying huge amounts for health insurance).

I can't actually think of a capital city in a developed economy that doesn't have crazy house prices. and in London's case, this trickles down tot the rest of the country.

Help to buy is supporting the housing market by getting people on the ladder at the lower end. Same with those LISA accounts where the government gives people a cash bonus when they’re saving for their first house. And there would have been a Covid house price crash but the government prevented it by cutting stamp duty to stimulate the housing market. Everything points to the government trying to keep house prices the same going forward. They can’t afford a massive crash that would ruin the economy. Equally they can’t allow prices to soar away out of reach because eventually that collapses the market and the economy (as we saw in 2008) - they will implement taxes and interest rate rises to prevent it.

To give a real life example, I lived in shitty flat shares to save my first deposit then took this route over around 20 years (from mid20s to mid40s; I bought the first two places alone and after that bought jointly with my husband):

2 bed flat - approx 250k. 5% deposit. Rented out second room to make things less tight. Sold for around 385k (period of London property madness)
3 bed semi - approx 450k. Put in deposit of around 200k from flat sale and savings. Sold for 750k. While I was here got married so then had two salaries to input.
6 bed detached (moved out of London) - approx 750k. Parallel move so no extra borrowing required. We are currently in the process of selling this for around 950k with only around 50k left on the mortgage.
Next house? We are in the process of buying another detached for 1.2m. It needs some work so we are borrowing around 400k. We hope this will be our last mortgage

@Paulinna

Annual house price growth across the OECD group of rich nations hit 9.4 per cent — its fastest pace for 30 years — in the first quarter of 2021

the house prices rose in a lot of other countries where there wasn't a stamp duty cut. Basically governments spent trillions, placing money in the hands of the people. A residential home became more than just shelter- it was also a place of work and a mini school for many children. And there were lockdown savings though, so that must have been a lot of morning coffees, holidays, petrol and train journeys for the average person to justify the increase of tens of thousands in the house price. I think (but don't have the data) that the people moving during the pandemic were more affluent individuals whose priorities were re-aligned due to covid i.e. giving up a Kensington mansion apartment for a huge Surrey house. Which is why I was monitoring the prices of 2 bed terraces in towns like Hitchin/Wycombe over the pandemic and they haven't actually increased all that much since 2019. It was the larger houses that have really increased in price but I would never have been able to buy them back in 2019, at least not in London/SE.

it was a race for space, but not really for those 2/3 bed terraces which often have similar floor space to flats.

when did you get on the ladder @eurochick as there aren't many 95% mortgages these days as lending tightened up after 08?

@eurochick thanks for thisl. How long did you take to upgrade from the 2 bed flat to 3 bed semi?

The space between the rungs of the ladder has expanded too much for "the property ladder" to be a meaningful thing any more.

When I bought, first property was expensive, so shared ownership of an apartment with a friend, did it up, sold it for 50% more than bought it for, equity got a bigger mortgage on a terraced 2 bed, did it up sold it, equity enough to buy our own terraced 2 bed, did it up, sold it, got my 3 bed detached, paid off mortgage, cannot afford a mortgage on anything bigger, the gap in price between 3 bed and 4 bed detached is way too big to mortgage for the 10 years I plan to work for. So the ladder stopped 5 years ago for us.

We’re in a weird situation right now. There’s a bit of a recession but property is still at a premium because people are being forced to spend more time at home. Prices have risen recently but if it continues I fully expect the government to come our with new rules and taxes to squash prices down again. There is already a boom in home improvements so maybe the government will encourage people to stay in their current homes by relaxing planning rules etc.

We used a big chunk of lockdown savings to do our garden up last yr.

@Paulinna they are trying to get us to save Pret. getting us to come back to the office would squash the prices in the South West, many of those places are not really commutable to London. No one seems convinced. Maybe wfh tax? I can imagine that to be political suicide (and therefore unimaginable) but massively popular with their donors.

the thing is a lot of companies have also benefited from remote working I think for many the hybrid model is here to stay.

@countrytown

when did you get on the ladder *@eurochick* as there aren't many 95% mortgages these days as lending tightened up after 08?

As I said in my post, it took around 20 years so I was fortunate to get goi with only a 5% deposit. In fact I was being offered 110% mortgages - utter madness

[quote onlychildhamster]@eurochick thanks for thisl. How long did you take to upgrade from the 2 bed flat to 3 bed semi?[/quote]
The move from 2 bed flat to 3 bed house took around 5 years I think. It was a time of slightly crazy house price inflation in london.

so early 00s. My boss borrowed 5 x her low salary on an interest only mortgage with 5% deposit in those days. She made about 800k in equity despite not paying anything off.

@countrytown

so early 00s. My boss borrowed 5 x her low salary on an interest only mortgage with 5% deposit in those days. She made about 800k in equity despite not paying anything off.

Woah that’s crazy!

Ten years ago I bought a 1-bed flat in London for £250k with a £45k deposit. I did some cosmetic work to it and it’s worth around £425k now. The mortgage has always been lower than rent would be. If I sell now, I’d walk away with around £275k. I can’t think of any other way I could have afforded to house myself and save. It only works, of course, if property prices continue to move upwards, but in the long term that seems extremely likely.

@countrytown yep, early 2000s. I could have borrowed much more than I did, but I was reasonably cautious. It was silly back then. I think things have swung too far the other way with people being refused mortgages that would be much lower than the rent they are paying. Somewhere in the middle would be about right.

It's very different post 08 & again post Brexit

I think things have swung too far the other way with people being refused mortgages that would be much lower than the rent they are paying.

That is because interest rates are at rock bottom. It wouldn’t take much of a rate increase to render the massive mortgages people are taking out, unaffordable. So a mortgage might be lower than rent on a similar property now, but it won’t always be.

Bank of England base rate averaged around 5% from 1993 until the 2008 crash. It’s 0.5% now. Could the people campaigning to be given a mortgage against the banks’ judgment “because it’s much cheaper than renting” afford repayments if the base rate increased by a multiple of ten? Unlikely.

The average first time buyer mortgage in the U.K. in 2020 was £200k, £360k in London. For that London mortgage, you’d need to find another £800 per month if rates rose to the 5% average. How many people could do that, especially if they had already stretched themselves to afford a big mortgage?

Completely agree with @Iamthewombat's posts.

@Keke94LND, I think you are probably being overly optimistic about the likely gains from the flat. The property ladder doesn't really exist. There are many very fortunate people who bought property > 20 years ago in London/ surrounds and have made huge amounts of money from doing nothing/very little. It's not going to be the same over the next 20 years. Buy the flat if you want to live in it.

@Paulina23- what makes you think that the government want house prices to stabilise now and are likely to introduce new taxes? They have seemed intent on firing it up throughout the pandemic with QE/ zero percent interest rates and now the government backed 95% mortgage scheme.

In line with IAmTheWombats observations. My £54,000 mortgage in the late 80s or early 90s hit £800pcm at one point. I can't remember the exact amounts but I do recall £23,000 in 1983 costing £245pcm.

@Iamthewombat

I think things have swung too far the other way with people being refused mortgages that would be much lower than the rent they are paying.

That is because interest rates are at rock bottom. It wouldn’t take much of a rate increase to render the massive mortgages people are taking out, unaffordable. So a mortgage might be lower than rent on a similar property now, but it won’t always be.

Bank of England base rate averaged around 5% from 1993 until the 2008 crash. It’s 0.5% now. Could the people campaigning to be given a mortgage against the banks’ judgment “because it’s much cheaper than renting” afford repayments if the base rate increased by a multiple of ten? Unlikely.

The average first time buyer mortgage in the U.K. in 2020 was £200k, £360k in London. For that London mortgage, you’d need to find another £800 per month if rates rose to the 5% average. How many people could do that, especially if they had already stretched themselves to afford a big mortgage?

But there is no reason for interest rates to increase like that at least in the medium term and the government no longer controls interest rates. Push them up too much and you crash the housing market - after the last 18 months no one is going to do that.