Whether you choose to buy a house [1] or rent [2] is one of the biggest financial decisions you’ll ever make.
The sheer cost of houses compared to crisps, cars, and fancy shoes means this was true even 50 years ago.
Nowadays you could pay five or six times average earnings to get onto the property ladder. At today’s high house prices – even in the midst of a slump – the risks of making the wrong decision look greater than ever before.
Is there reason to believe today’s levels are justified, or will UK house prices fall?
In the next few posts I’ll explain how we got to today’s high house prices, and consider if there’s any justification for them.
I can’t tell you for sure if or when UK house prices will fall further, but hopefully you’ll feel in a better position to make your own mind up.
Why house prices matter
Most older people (say 50 or over) will tell you that you can’t go wrong in buying your own house.
Few of the older generation invested much money outside their home. The capital gains [3] they saw from rising house prices – even as inflation [4] reduced the burden of their once-daunting mortgage – was beyond their wildest dreams!
A few gnarly veterans do however warn that prices can go down [5] as well as up.
I see both sides.
I know that house prices can go down. But I also think that NOT buying my own home a decade ago was my biggest financial mistake [6].
True, saving hard for my aspirational loft apartment [7] (hey, I was young!) got me interest in investing [8], which is my passion now.
Would that be true if I’d bought a flat and spent my surplus income on broken boilers and Banksy prints?
I doubt it. Buying a house would have been a far easier path to wealth, however.
A little knowledge is a dangerous thing, and my knowledge that London property looked expensive compared to incomes and renting [9] kept me from buying. Yet prices still kept rising.
- Friends who bought naively thinking “London house prices never go down” made a killing.
- Those of us who knew prices had fallen before and so could again have paid for it.
Should you care about house prices?
You might ask what does it matter? Why are the British obsessed with property?
After all, you could choose never to buy a house, and to rent all your life. Some people do exactly that.
The huge advantage of buying your own home is that you lock in the cost of living in it when you buy. Once you’ve paid off your mortgage [10], you only need to pay the cost of maintenance to keep living there. No more rent!
In contrast, someone who rents will need to pay ever rising rents throughout the next 25 years, when they could have been paying off a mortgage – and beyond that into retirement, too.
They’ll also miss out on any capital gains from rising prices, which are especially attractive because price gains on your own home are tax free.
On the other hand, it’s much easier to move if you rent. You don’t have to pay for decoration and upkeep, either, which you can estimate will cost you about 1% of your house’s value over the long-term, unless you fancy living with the equivalent of an avocado bathroom suite for your whole life.
It’s worth noting that the house price indices completely ignore these extra costs of ownership, and also the cost of adding value through loft extensions and other improvements.
Even so, most people have made a good profit by buying a home in the UK over the past 40 years.
Are UK house prices too high?
This is a financial blog [11], and I am not going to consider the lifestyle benefits of living in your own home in any great detail.
I’m also not going to go into the morality of high house prices, and the fact that young people are disadvantaged compared to the old [12] by endless house price appreciation.
What you want to know is are house prices too high, or will they come down? The rest is personal opinion.
Next part: Historical UK house prices [13].