House Market Opportunity?

[Dag_Nabbit]

Friends of ours have recently moved abroad and kindly offered their house at a reduced rent when their current tenants lease has expired (4mths time). Since our houses are identical (same size, same street) would it make sense to jump off the housing ladder, bank the property equity in an interest account and pay less in monthly rent than current morgage payments. Or will house price inflation (even though slowing down) continue to outstrip any interest accounts available and result in a backward finacial step. I would really like to know people opinions, as the bottom line is, I like my house and would really be quite upset if the effort resulted in little or no gain, but this seems an opportunity to be considered.

[secretspirit]

I think you'd be mad to do it because nobody knows what will happen with house prices and from your last paragraph it sounds like you don't really want to anyway. Isn't it better to live in your own house, and you can't know 100% that your friends won't suddenly decide to move back, leaving you with the same sort of house prices as now except you'll be worse off because of the solicitor's fees for selling and having the stress of moving again into the bargain. Sorry if that was bossy.

[Sylday]

Net interest rates on savings accounts (ie after tax) are currently less than 4%, so it's unlikely that your capital will keep up with house price inflation, especially taking into account the costs of moving, legal fees (inc stamp duty) etc mentioned by Secretspirit. Another factor to bear in mind is that doing business with friends can easily damage the friendship - eg suppose you cause some damage to their house while you're renting it; or you find some problem they haven't mentioned to you; or they suddenly find they need more money and put the rent up.

[BenDToy]

Good points from secretspirit and Sylday. Not much to add except that you are trying to beat the ups & downs of the market by timing, and will probably end in tears. How will you know when the market has peaked (or bottomed). Even if you do, how will you ensure that you can buy or sell quickly at the right price, and get out of your rental agreement quickly. What if you can't find a property you like when you want it. In short lots of risk and hassle, and potential losses anyway, because house prices are likely to rise faster than 4% on average. Good luck with whatever you decide.

[rekstout]

Personally I would not jump off the wagon. It is unlikely that you could find as safe an investment as property for the same returns - even given today's climate.

If you wanted to be really cheeky then you could move into their house at a reduced rent and let out yours at full price.

[WoWo]

Thats exaclty what I have done, called in Investment circles as STR (Sold to Rent). Risky as your trying to call the property market but the potential rewards are great (i'll explin in the next post). I think it greatly depends on where you live if your in the South East or London its something worth considering. Of course the difficult thing is calling the market at the right time, I believe that now is the right time, property has dropped in my area by 1.1% might not sound much but thats a 7% gain for me as my equity is in the bank earning me interest.

[WoWo]

OK what are these great rewards. I purchased my property for �100,000 in 2000, just sold for �165,000. Thats �65 k to invest, I'll save about �300 in mortgage payments and associated costs (no need for build insurance and life insurance in rentals) (I'll actually be saving about �1000 into an account but thats another story).
If
the property market goes down lets say by 35% which is whay many economists believe is correct then my �165,000 house becomes �107,250 less my now hefty deposit (lets just assume I haven't saved) of �65k so my new mortgage is just �42250.

[WoWo]

I'm not advising you to do this, but telling you what can be done. If you do consider it have a good look around at whats happening in the market where you are the latest land registry figures are a good start (but remember these are for Q1 and not reflective of the current market).

[rekstout]

WoWo - if property values go down by 35%? I see no sign of that, single figures maybe in some grossly inflated areas but I thought that the concensus was that the prices would plateau for a while. Your economists sound more like scaremongers to me.

[WoWo]

So how many economics and buisness magazines/websites do you read? Where do you get this concensus from. most headline figures you read are from those with a vested interest with the housing market Halifax/Nationwide etc. I was going to post a few links but thats pointless as anybody can prove one way or the other their point, but there's plenty of people out their saying and doing what I am. So you think its scaremongering do you, fair enough, I myself find the prospect of an out of control property market far more scary that one going back to realistic levels (which is all a 30% correction will do). People were saying exactly the thing you are during the last 3 property crashes.

[froggequene]

Maybe you should also consider the friendship angle not just the profit/loss angle. A friend of mine agreed to housesit for a friend of hers who was going travelling. There were several problems with the property while he was gone none of which were her fault, it was a new property & cowboys had been used to do several jobs by the owner which made the place unliveable when things went wrong. The upshot was she left the property earlier then intended and they are both minus a friend. Do you want to gamble your friendship as well your money?

[Miss Zippy]

My personal, humble, opinion is that you would be bonkers to sell your home for the rather remote prospect of making huge gains if the market goes bust. It is highly, highly unlikely that house prices will fall and certainly not in the way experienced in the late 80s/early 90s. Back then, interest rates were hiked up to 15% to try and cool the economy down but instead the housing market imploded spectacularly because people could not afford their mortgage and other credit repayments, forcing them to sell (or be repossessed) resulting in a flood of property on the market, hence seeing prices crash. That�s not going to happen now. Yes, property prices are high, but interest rates remain relatively low and they are not predicted to rise further than to 5.5% over the next 9 months or so and they will then slowly come back down again (though probably not to the 3.5% we had). Look at what the mortgage provider market is doing � they are still offering competitive fixed rate/discount rate deals because they know that interest rates aren�t likely to increase much further. Provided interest rates remain at these low levels, people will be able to continue their afford their mortgage and other commitments. On a purely cynical level, there�s a general election next year so I think the govt will pull out all the stops to prevent a property bust situation.

[WoWo]

"Highly, highly unlikely"....
br> doesn't seem to suggest that here.

http://www.thisislondon.co.uk/news/articles/12498949?source= Evening%20Standard

And the idea that it won't happen again.. they said the same thing last time. Read the on from the Times on the 03 JAN (spooky use of the words "highly unlikely)

http://www.housepricecrash.co.uk/FAQ-1989-what-the-papers-sa id.htm

Please don't think however I'm trying to convince Dah_Nabbit to sell their house.

[berty2001]

Just for those intereste found a good scottish housing site called www.scottishhousingnews.com

[rekstout]

WoWo - I run a high-turnover property development company in the Midlands so I have a vested interest in watching the property market and have umpteen experienced professional advisers. A 35% drop in prices is totally unrealistic given the existing government mechanisms for controlling the economy. I am not precluding a drop in prices but to wipe a third off the value of every property in the country is plain ludicrous.

[saffstar]

On a very selfish & personal level, I'm really hoping for a sharp 'correction' in house prices - but noone can give a cast iron projection of what's going to happen. Personally, I think you're far better off plugging away at your own mortgage, that seems like the safest option to secure your future. Even if house prices do plummet, they're going to go up again, because that's how it goes

[WoWo]

Fair enough rekstout. We will just have to wait and see won't we.

[WoWo]

Just one last post for those that think it won't happen this time. On the subject that house prices are affordable due to interest rates.

"The average house price is about 5.5 times the average pay packet, and with no sign of a downturn. Back in 1989, when the last desperate housing price crash began in Britain, that ratio reached the then troubling peak of 4.5."

Source

http://business.timesonline.co.uk/article/0,,8210-1213460,00 .html

Thanks for the discussion, sorry to Dag for hijacking the question a bit.

[vittoria]

Can you rent out your house at more than you would pay your friend, and save up that difference?

[Miss Zippy]

WoWo, I admire you for taking that kind of gamble and I hope you do not suffer any major losses. Despite having accrued a very healthy sum of equity in my property since purchasing it in early 2001 (as everyone else has, provided they haven�t remortgaged themselves to the hilt), I would actually welcome a downturn in prices because while my property has doubled in price since I purchased it, the kind of property I aspire to owning in my area has trebled in price since 2001, taking it out of the price range I�m willing to pay. If that property should revert back to its 2001 value, it would well within my price range even if my property also drops to its 2001 value. Unfortunately though I really don�t think that�s going to happen. The only real �winners� (aside from those who own investment properties) who can benefit from the current housing prices are those homeowners who have large properties who want to downsize to something smaller and cheaper and pocket the profit. The rest of us just have to ride with it and go with the property ups and downs.

[thewillow]

It all sounds very greedy to me. There's more to life than money.