Ten things you didn't know about the property market

In the war of words waged over the property market, a lot of vital facts go unnoticed or unreported.

Here we list ten key things you may not have known about the UK property market.

1) The key index

The Land Registry House Price Index is based only upon two million of the nine million transactions carried out since April 2000. It covers only those properties that have been sold at least twice, and therefore does not represent the whole of the market

2) The range of data

The house price indices based upon the widest range of data show the least house price falls and those from the mortgage lenders, which are 100 per cent made up of people reliant on mortgages, show the highest house price falls.

3) Lenders' indices

Halifax and Nationwide house price indices are based only on their own company’s mortgage approvals, not the UK market as a whole

4) Valuations

Stuart Law of Assetz, the specialist property company, says many valuers are owned by the lenders and in addition lenders often only have a limited panel of valuers who get nearly all of their business. It would be a big blow to a valuer to be taken off a bank’s panel.

5) Valuers' clients

Valuers are usually paid for by the homebuyer but actually act for the lender in terms of the accuracy of their valuation

6) Danger of over-valuation

Valuers can be sued by a lender if they ‘over-value’ a property but if they cautiously ‘under-value’ a property then the lender is protected and the buyer is able to negotiate a better price with the unfortunate seller. Fears over professional indemnity legal claims are rife in the valuer market at present.

7) Mortgage shortage

The current mortgage shortage applies primarily to customers with poor credit history. Most experts agree that people with normal credit records should be able to obtain a mortgage on reasonable terms provided they have moderate equity in their home, or a good deposit.

8) Property versus shares

If you compare the Halifax House Price Index with the FTSE All share index, the cumulative rise in house prices has been ahead of equities for only nine of the past 20 years.

9) Property yields

If you leave borrowing costs to one side residential property yields about 3.5 per cent a year net of costs, which is remarkably similar to the dividend yield on the FTSE 100 index.

10) Mortgage payments

The percentage of first-time buyers’ take-home pay swallowed up by mortgage payments peaked in 1989 and, contrary to many reports, it has never reached the same level in the latest boom. It currently falls short of the 1989 level by about 7 percentage points.

By Mark Atherton

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Comments

[NR]

Simon refers to a £350K semi for an average earner at age 30. This sounds like tosh to me. I would never pay that kind of money for housing, and I earn a lot more (combined family income of over £100k). What is wrong with a flat in outer london? These can still be had for around £175K for a 2 bed flat. Live in one and rent out the other and put the tax free rent you get into your mortgage to build equity. The main problem is that people want to live at the limits of what they can afford rather than what they need.

[Derek Bevan]

Doesnt Barry mean his income was £900 ? Or his mortgage was £28,000 !
I believe the latter.

[Barry Bunn]

On a related and expanded note. Especially Re Simon, with whom I concur.
In 1984 I was a firefighter. I earned approx £9000 a year and bought my first property for £2800. I needed to put down 12% deposit and it took me 10 months to save that. So my mortgage was just 3 times my income and took about 22% of my net income to service the dept.

Last year the same property was selling for £180 000, first year fireman were earning about £25 000. More than 7 times their incomes. If they got a mortgage on this on 88% of the value it would take over 70% of net income to service.
As Simon says this is just not possible.It can not continue. That property should be selling for around £80 000 for it to be affordable. Such a drop will not happen. Even if it did the effect on GDP and employement would be devasting.
However the above calculation should be considered when we, the afluent or even the middle classes talk about reckless borrowing and greed. Millions of people in average employement and people in public service just had no choice.
They can only live a certain distance from London for eg. They must live somewhere. They can't get social housing. And then they were encouraged 'blagged' into taking out loans..just to live.
Sure Fireman, Nurses, social workers, normal office workers etc are in a real hole but please consider why and how they got into it before congratulating yourself on your wisdom and their foolishness.
The above also kills the lie that 'we all benefitted from the glory days! Average workers became worse off. The % of money they had post payement for a home was drastically reduced.

Many have second jobs not for luxuerys but to pay mortgages. These second jobs will disappear and they will not meet their depts. After being re-posseesed they will be bad depters and never get loans again.
The repecussions re this near criminal con by 'the market' are going to run really deep and cause serious pain.

[Eve]

I agree with Simon. Based on a mortgage of that size it would be impossible to save much extra, and even if it was a repayment mortgage after 5 years (say of 25 year term) the repayment element would be quite small.

Anyone who says that from experience they could build equity whilst owning probably bought when prices were lower and they didn't have to stretch themselves so far to service debt.

The reason I am sure he is right is that we just sold our 3 bed semi for £660k (a 15% drop from peak) and guess what, all the viewers were downsizers rather than couples moving out of their flats (like we were in 2001) why - because the house was too expensive for young couples.

My younger brother and all his friends have little equity and big mortgages on their London starter flats and now they just can't move up at all, unless prices significantly drop.

[Paul]

The long comment aboves' (Simon)calculations are impossible to follow, possibly gibberish. I am assuming its based on interest only mortgages as no equity is built up in the calculation over time. And from experience you can still save up money to pay moving bills and increase equity oven whilst paying a mortgage.

[David Legg]

Sorry guys, but this is complete gibberish:

>

[Matt]

There are some well informed pros on here, and some fairly deluded ones too (Simon). In 20 years I bet you my £2m portfolio will be worth at least £6m in 20 years times worth of money, but when you lose you have to pay me the difference of £4m plus existing equity. Deal?! Put your money where your mouth is.

[Tony]

So basically saying now is a good time to buy property. Things his article doesn't say;

1. Financial figures can be selected to say anything you want.
2. Financial performance cannot be predicted reliably, and money made from this is just luck and 'growth' it distorts the economy and devalues the rest of it, therefore stock markets on finance offer no intrinsic value to society, (expect insults from stock brokers and investors). The liquidity it brings is what causes the problems of instability now. It allows people to avoid risk rather than do something about it.
3. Advertised prices from property have not reduced as much as the selling price and both are still much more than the 3.5x salary long term average.
4. The housing market was hugely distorted by banks offering more money to more people. This has now stopped but the prices have not returned to the norm yet and will likely undershoot it as confidence and interest in buying disappears.
5. The banking problems have yet to completely play out and some think it will break down completely, probably due to the above problem of invented money.
6. Renting at the peak was around 1/3-1/4 the price of a similar house 100% mortgage, buying presents no financial benefit while the market is going down. You will know the market has settled when renting cost the same or less than a mortgage. This means house prices could drop by over 60% from peak.

[David Owen]

"cumulative rise in house prices has been ahead of equities for only nine of the past 20 years."

I don't dispute this, but most people use debt to buy property, which has a leveraging effect on the actual returns on their deposit.

[Simon]

Surely you must have realised by now the obsession with ever rising property prices is what has brought us to the present banking crisis.

The simple fact is that, by any normal measurements of affordability, house prices will HAVE to halve.

Ask yourself this question - and try thinking it through. Say an 18 year old now hopes one day to buy a 3 bed semi - priced currently at 350k - in an Outer London suburb when he is, say, 30 years old. How big a mortgage will he need?

Assuming he puts in 5% deposit to buy his first flat (priced at say 200k) he will need a 190k mortgage for his first flat. As he moves up the property ladder (assuming no house price inflation) he will have to increase his mortgage to bridge the gap. So, to move from his 200k flat to a 275k terrace he'll need to add 75k (plus stamp duty and estate agents fees - say another 5k) and, to move up to the 3 bed semi when he is 30 years old, he'll need to add another 75k (plus stamp duty and estate agents fees - about 12k)
All other things being equal, assuming he hasn't inherited money and assuming he only earns an average wage - and can't save anything worth talking about as he services his mortgage debt and lives - to own a 350k 3 bed semi when he is 30 he will need to have about a 360k mortgage.

How will the average person be able to afford that?

Ahh, but house prices go up so he'll build up equity! But, of course, if you actually THINK about this, it makes it worse. If house prices inflate during the 12 years he is working his way up to the 3 bed semi, the gaps between the rungs on the property ladder grow wider and he'll have to take on much more than 75k extra on his mortgage to make each move up the ladder. Maybe he'll have to increase his mortgage by 125k each time. Maybe he'll need a 450k mortgage to one day afford the 3 bed semi.

This is why house prices MUST and WILL come down. Unless we have massive wage inflation - unlikely in our new global economy - house prices will have to come down or young people will never be able to buy. If this happens on a large scale, people in the market who need to sell will find there are no buyers who can afford current prices. Hmmm, bit like NOW! And prices will have to fall to meet affordability constraints.

So, if you are a property owner, you need to face some facts. In 20 years time your property will still be worth less than it is now.

Current house prices are based on ever increasing supplies of ever cheaper debt.

In case you had not noticed, the debt tap has been turned off.

You can claim what you like about the statistics - and there were no complaints about ANYTHING when house prices were rising - but you can't alter the fact that, where I live, almost NOTHING is selling. A house up the road from me went on the market for 400k about 6 months ago. It's 330k and still no takers! A nice, detached family house in a very nice (sought after even) location. Will this 'fall' appear in the statistics? No, of course not.

All the housing indices are rigged by the vested interests that, until recently, wanted to lend more and more money against assets they thought (weirdly!) would always go up in value. We are living in strange times.

[Andrew Barnes]

Point 8 is incorrect for everyone bar those who pay 100% of their property price in cash. Those who borrow are geared and subsequently outperform equities. Sorry, you're simply wrong. Also, point 9 is nonsensical. The gross yields available are not contingent upon whether you borrow or not. If you don't borrow, your gross is virtually equal to your net of costs income and in many areas yields are already in excess of 10% gross. If you borrow you can still earn in excess of 3.5% which is a silly generalisation.