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!

The Bank of England decides base rates and that decision is informed by a range of factors, including inflation. You can’t seriously be suggesting that the B of E would decide to hold down base rates in order to keep the housing market buoyant, ignoring all of its other responsibilities?

If you predicted in 2004 that by 2008 B of E base rate would be 0.5%, most people would have laughed and said, “as if! That will never happen”. It did, though, because few people saw the credit crunch coming. Central banks were caught on the hop and had to react quickly. That was only 13 years ago. What makes you think that we won’t see something in the future that forces central banks to raise interest rates?

The 2008 credit crunch had its roots in the housing market. I recommend ‘The Big Short’ for anyone interested in this stuff.

I agree with @Iamthewombat. The country is bankrupt and printing money. Inflation will undoubtedly rise, then interest rates will follow. 2008 will seem like a practice run. If one person who wanted furlough to continue ad infinitum complains to me about being skint, negative equity, austerity in a couple of years I shall have zero sympathy.

Personally I think the UK is in for an inflationary cycle starting with a mini boom and then a mega bust. Wage inflation will erode the real value of property which I believe will stagnate for a generation. If I were mid 20s now I'd be on no hurry to get on the ladder.

Sadly, I suspect @RosesAndHellebores analysis is the most likely outcome.

The BoE seem to be crossing all their fingers and toes and hoping inflation doesn't let rip. If it does though, they may have to raise interest rates rapidly and further by that point.

I have played the property market since I was 21. I smell a significant change coming.
1981: bought 32K (sold £95k)
1986: bought 132K (sold 165k)
1993: bought £370K (sold £3.8m in 2015)
Dev project: bought 2013 for £965K, sold 2015 £1,7m (lived in it after developed whilst above property had the back ripped off)
2015: bought for £1.2m and refurbished completely - now worth c£1.7m and unlike London Market just outside seems still to be rising but we expect to stay here for the foreseeable.

We sold in London because we were very concerned about the £2m mansion tax and have positioned ourselves below that.

Please note figures always slightly changed to protect anonymity.

Congrats, you bought a house in London in the 90s. End of story.

@RosesAndHellebores We do have an ageing population which pushes down interest rates.

blogs.lse.ac.uk/businessreview/2020/09/18/the-great-demographic-reversal-and-what-it-means-for-the-economy/

'The rising inflation that we foresee in the future will raise nominal interest rates, but not necessarily real interest rates. There are multiple factors influencing the equilibrium real interest rate, r. We doubt whether the prospective slowdown in world growth will depress r. While slower growth will tend to reduce both ex ante saving and ex ante investment in the private sector, we tend to believe that savings will fall by more. If so, the public sector should ideally move back towards primary surplus to balance the economy. But rising health and pension costs, and the political unpopularity of tax increases, will hinder that. Political pressures may force central banks to hold short-term rates below the level consistent with inflation targets, thus keeping short real rates low, while market pressures lead to stronger increases in long rates, both nominal and real. The yield curve will become much more upwards sloping.'

Also from FT: www.ft.com/content/df61dc42-99fa-11e6-8f9b-70e3cabccfae

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The Federal Reserve has an awful hunch. It suspects that the world’s shifting demographics, as longer lifespans and reduced birth rates combine to increase the proportion of the aged within western societies, have rendered central banks powerless to raise long-term interest rates.

That was the conclusion of a paper published this month by economists from the Fed’s research division, capping a debate that has intensified over the past year. Citing an example based on the changing age structure of the US population, they said: “The model suggests that low investment, low interest rates and low output growth are here to stay, suggesting that the US economy has entered a new normal.”

You’ve cherry picked a paragraph from the LSE paper to support your ‘interest rates will be low forever and house prices will keep on rising’ narrative. Even the paragraph you’ve chosen is pretty lukewarm on the prospects for long term low interest rates. It ends with, “The yield curve will become much more upwards sloping.”.

I can’t access the FT article. However, I invite you to consider how effective the Federal Reserve were at predicting the 2008 crash. They were holding forth about another ‘new normal’ in 2007…oops!

@Iamthewombat I don't think house prices will keep rising in London and SE. They will stagnate or even go down in some parts due to remote work. But I think they will rise quite drastically in low cost parts of the country.i think London and SE are the places with the housing bubble anyway..The north has an earnings/productivity crisis- if they gain a lot of remote workers, this would mean the house prices rise even if local incomes don't.

So you do think that prices will rise. Why argue?

Yes I think the Bank of England will hold rates as low as possible for as long as possible and accept a degree of inflation - more than would have historically been accepted. They need people to borrow and spend money. They do not need people to save money.

@onlychildhamster- I'm not drawing the same conclusion as you from the FT article. At present, most of the headwinds seem to be inflationary. I agree that the Fed/ BoE, etc are clearly minded to accept some inflation (they have been slowly changing the goalposts on how much) and that they do no want to raise interest rates because governments and individuals are in such massive amounts of debt and a significant rise would likely lead to defaults on a large scale. We have all been positively encouraged to get into greater and greater amounts of debt. I can't see how it can end well and the pandemic has only made things worse.

It's the low interest rates which are supporting sky high property prices, when interest rates are low, buyers can offer more. The stamp duty holiday has sent everything crazy, friend is buying now and she said it is slowly down now it has finished. The stamp duty holiday has artificially raised the prices, although with a lack of supply due to covid and sellers hesitating to put their properties on the market as they can't afford anything bigger/vicious circle with the lack of supply.

I bought post-2008, I would be priced out now. It is more difficult to move on in a rising market as the gap between a smaller and larger property is bigger, it is actually easier to buy in a dip. I'm not sure there is a ladder anymore, I'm now priced out of a larger property. I'm lucky to have the one I have, it is very tough for FTBs now.

@countrytown

There was a good article in the FT how one of the major issues with property is getting stuck on the ladder (pre covid), that's why the stamp duty cut caused a flurry of activity as people didn't have to find so much money. Even with that activity I don't think London has seen too much growth, the problem is the bottom rung is so high & now it's very hard to build equity because there aren't so many ftbs who can get on the ladder. I think London will see stagnation, and other areas will grow more. Most people I know who moved up the ladder left London or had help from family to move up. A few did it because they got on the ladder years ago. As others said it's better to skip stages these days.

But allthe prices went up by way more than the stamp duty saving False saving

@cara3

It's the low interest rates which are supporting sky high property prices, when interest rates are low, buyers can offer more. The stamp duty holiday has sent everything crazy, friend is buying now and she said it is slowly down now it has finished. The stamp duty holiday has artificially raised the prices, although with a lack of supply due to covid and sellers hesitating to put their properties on the market as they can't afford anything bigger/vicious circle with the lack of supply.

I bought post-2008, I would be priced out now. It is more difficult to move on in a rising market as the gap between a smaller and larger property is bigger, it is actually easier to buy in a dip. I'm not sure there is a ladder anymore, I'm now priced out of a larger property. I'm lucky to have the one I have, it is very tough for FTBs now.

Yes. I feel really sorry for younger people/ those who haven't been able to buy a first property. The prices and levels of debt are ridiculous. While they may be affordable at 1% interest rate they will not be at 5%.

But allthe prices went up by way more than the stamp duty saving
False saving

Completely true. But psychologically it makes a difference to people. They own a house worth £x thousand and they didn’t have to pay tax or as much tax to buy it. The fact that the purchase price may be inflated isn’t obvious unless they now try to sell it.

Which isn’t very well explained - sorry.

However I think it underpins why people rushed to avoid SDLT

Also for some it's was easier to borrow 50k extra on a mortgage for a more expensive house then have the 50k in savings.

Talking about the ladder again, the term is misleading in many ways - lots mentioned already on this thread. I think it gives lots of people the idea that everyone who buys, can keep climbing to the big expensive properties, but they can’t.
One PP. mentioned reaching the top of her ladder about 5 years ago because she will only work for 10 years more and so the amount she can add to her borrowing is now limited and won’t allow another step up.
The top of each household’s ladder is determined not just, or even mostly by the equity that can build in property value, but also by salary levels which determine borrowing capacity. Most people never progress beyond the typical 3 bed semi and their ladder peaks when that is bought. They might fancy a 4 bed detached, but those properties are biggest growth and most family incomes aren’t large enough to comfortably stretch to the bigger mortgage needed, and the gap between the 3 bed semi and 4 bed detached just grows. Lots of kids grow up in the houses they were born in, with one in the box room and some projects to improve the space, like adding a loft conversion or a downstairs loo, to make it more loveable.
The people who made biggest gains over last 20 years borrowed big ....maxed out in their first property, and yes saw value increases which helped a lot, but also often had big wage rises or became 2 income households by the time of the move up and then borrowed even bigger and saw a big jump in mortgage for the next property. And that, added to further house price rises and often a willingness to borrow even bigger, got those people into their million plus homes in often 3 or possibly 4 jumps.

A number of things make it different/harder now. Yes, price rises aren’t as sustained over decades, but also the older age of first time buyers I think makes a big difference. First time buyers used to have a number of years before a first child and often get a couple of moves in before children. Now people buy later and many already have a child or have one pretty soon after and this often limits the borrowing capacity if there aren’t 2 full time workers or even just 1 who isn’t pushing their career ahead so much. It limits the number of times most people can move. London flats will almost always allow moving out to a house at the next phase, but flats elsewhere might not. For people with moderate or low incomes, stretching to a house in a cheaper area, to avoid needing to move again and saving those costs seems a good idea.

I live in a nice part of SW London where many people have good jobs. I don't know any of my peers who didn't have help to get on the ladder in the first place & plenty have help to move up the ladder. And this is significant help i.e 6 figs.

They might fancy a 4 bed detached, but those properties are biggest growth and most family incomes aren’t large enough to comfortably stretch to the bigger mortgage needed, and the gap between the 3 bed semi and 4 bed detached just grows. Lots of kids grow up in the houses they were born in, with one in the box room and some projects to improve the space, like adding a loft conversion or a downstairs loo, to make it more loveable.

That is very true. My DH (born in 1990) was born in a 1 bed flat and his mother had 3 kids in that flat before they moved to their current 3 bed terrace in North London (bought for 100k in 1997, now worth 750k). It is a lot cheaper than most areas in zone 3 north london as it doesn't have any good non- Jewish schools, has a fairly unloved high street and is really only appealing to Jews. So in a sense, if we progress from our 2 bed flat to a 3 bed flat in Muswell hill or similar at around £750k (many of such flats were 100k or even more in 1997), we wouldn't have done worse than his mum who was buying property in 1989 and 1997.

@countrytown

Also for some it's was easier to borrow 50k extra on a mortgage for a more expensive house then have the 50k in savings.

Though you can use equity for the stamp duty. It doesn’t have to be saved up (at least once you’ve bought your first house)

of course but some people would rather keep their savings/have money for renovation etc. And as you say equity only applicable to those already on the ladder.

@countrytown for pre covid FTB of

I don't understand your point? I never said only FTBs were benefitting from the SD cut.

I haven't read the thread answers but personally I would buy outside London now. You could probably achieve your forever home immediately for the price of a bit of a commute. The price you are paying for a 2 bed flat seems outrageous to me.