Warning. This post is a bit of a rant.
It really bugs me when we read about the households “enjoying house price rises”. Really who apart from landlords enjoy rising house prices?
Well people like me who would like to buy a home at some point certainly don’t, everyone knows first time buyers are getting royally shafted.
But it seems that most people think that rising prices are good for the majority of households, those that own their home. You’ll hear some homeowners say stuff like: “I feel so sorry for you. We’re the lucky generation who have benefited from rising house prices”. How exactly have they benefited?!
If you’re a homeowner, here’s some bad news. House price rises aren’t great for you either.
“House price rises will pay off your mortgage”
Umm how exactly does this work? The house price may go up but you still need to pay off that mortgage. Estate agents may say something like “you can extract the equity value from your house”. But it’s a lie, you can’t do anything of the sort while still living there. What they’re talking about is getting another, bigger loan. But guess what, you will still need to pay that back.
The only way you can “extract equity” is by selling the house.
But now you’re homeless, so you either live in your new Ferrari or you will have to buy another house. But ohh wait, prices have risen so you either need to downgrade or get another mortgage…
“It helps you up the property ladder”
It doesn’t, in fact it does the opposite. The next ‘rung’ on the property ladder is now further away than it was when you first bought the house. If you want to move up the ladder what you really want is for house prices to collapse. Even though your home has gone down in value you’ll be able to upgrade for much cheaper. But what if you have a mortgage? Don’t worry it will still be cheaper even if your mortgage is more than your current house.
Let’s say you buy a house for £200,000 with a £150,000 mortgage. The next rung of the ladder is at £300,000. You currently need £100,000 more to be able to upgrade.
Example 1: House prices double. You now sell off your house for £400,000. Woohoo profit! You roll the mortgage into the new house, but damn it, the next rung is worth £600,000 so you to find need another £200,000. You scrounge it together and now you have put in £250,000 of your own money and have a £150,000 mortgage.
Example 2: House prices half. You sell your house for £100,000 and roll the mortgage into the new house. The new rung is worth £150,000 so you only need another £50,000. Now you have put in £100,000 and have a £150,000 mortgage. It has cost you £150,000 less than example 1!
Who cares if in Example 2 you have made an on paper loss on your first home. You still have exactly the same house for £150,000 less.
“What about if you just want to stay in the same house till you die? Surely rising house prices is good”
Not really. It doesn’t matter to you at all, you still need to pay off your mortgage and while you can gloat to your neighbours that you have a very expensive house apart from that it doesn’t affect your life at all. You’ll never see any of that money. If your house goes down in value and you end up in negative equity, who cares. It’s the same house with the same mortgage payments.
“You can sell and move somewhere cheaper and have loads of spare cash to buy Ferraris with”
This one is at least true. But really whose dream for homeownership is to ‘downgrade’? The only way to move somewhere cheaper and not end up in a place half the size is to move to a place where property is cheaper.
For instance you could leave London and move to Wales. But then again, that place was cheaper when you first bought the house. Why didn’t you move there to begin with?
Yes some people have been lucky and own houses in places that have outstripped the areas nearby. But that’s not the norm. Lot’s of people seem to have a story along the lines of “my first flat was in Shoreditch. If only I’d stayed there it would be worth a fortune now”. But they didn’t and for good reasons to. It’s not worth living in a dump for 20 years on the off-chance the area will get gentrified and you’ll be able to move somewhere nice.
So in conclusion the only way for homeowners to benefit from rising house prices, is to quit life and start all over again. To leave their home, leave their friends and family and move to Wales.
“Sam stop being a complainy pants. It doesn’t help”
Ok. I’ll shut up now. Merry Christmas!