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House buyers could be paying off their mortgage in retirement

UK house

Pity first-time house buyers. Having finally seen the ladder lowered from the great property juggernaut in 2008, most could still only scramble on-board with a loan from the Bank of Mum and Dad.

And as mortgages have become easier to get in 2009, house prices have shot back up, reversing the UK house price crash before it had barely begun.

Some 45% of house purchases in May 2009 were by first-time buyers – a huge number by the standards of recent years. But by November the percentage was down to 19%, according to the National Association of Estate Agents.

An article on the BBC quotes Graham Saunders, a would-be home owner:

“My dad is a bus driver and my mum works in a book shop,” he says.

“They have no savings of their own and they are paying their own mortgage so they can’t help me out. And I wouldn’t expect them to offer to help either.”

This is leading to a growing sociological rift: The average age of a first-time buyer is around 31, but the average age of those buying their first home without parental help is up to 37.

People expect to work until 65 and the typical mortgage is for 25 years.

If the average age of first-time buyers continues to rise, they could one day be paying off their mortgage with pension money!

Housing market horrors

I have long called the UK housing market wrong, so take anything I write on the subject with a pinch of salt.

In fact, I don’t even own a house – I tried to be clever back in 2004 and pulled out of a hunt for a flat, believing everyone was in cloud cuckoo land and that prices would tumble.

When the credit crisis struck I felt vindicated, even if collapsing property prices took my equity portfolio with them.

But the downturn has proved short-lived. Bankers bonuses and the cheap pound have already taken some parts of prime London back to their pre-crash level, while the UK market rose nearly 10% in 2009. Most pundits predict prices will either be stable or rise in 2010, too.

I can afford to buy but I’m so far choosing not to – I can’t spend £350,000 on a two-bedroom flat just because I’d like to paint the walls the colour I choose.

UK house prices still makes little sense to me – it remains cheaper to rent than buy in most of London. And people forced to pay off their mortgage in their 60s smacks of an ongoing bubble.

We may not see the sort of falls in residential housing that produced bargains in the U.S. and in UK commercial property last year, but it’s surely unthinkable that house prices will rocket from here.

What do you think? Am I just stubborn? Should 2010 be the year I buy?

{ 14 comments… add one }
  • 1 Lemondy January 15, 2010, 3:26 pm

    I think you should buy if you want the stability of owning your own home rather than having the flexibility of renting. A house would certainly be a poor investment for most people (highly illiquid, leveraged, most of your wealth into a single asset without diversity). Long-term trends in house prices and property being a reasonable inflation hedge are all this market has going – maybe that’s enough.

    IIRC buying a house is the second most stressful thing in a persons life after divorce too 😉

    [full disclosure: I’m a homeowner who has done pretty well out of the boom/bubble so far]

  • 2 Faustus January 15, 2010, 8:27 pm

    The extent to which property is overvalued in Britain amazes me. On most calculations prices would have to drop by about a third I think to become reasonable value again.

    Renting is indeed cheaper than buying in most of the south of england, and parts of the midlands too, once you add in the cost of maintenance, interest payments, and opportunity cost. Anyone on above average disposable income (say £25K after tax) would, for a very ordinary three bedroom in central south england, need to pay at least £50K deposit and a £200K mortgage, translating into £15K annual payments for most of their working life and little or nothing left for saving and investment. What’s the point?

    A correction will come, even if it happens slowly: prices cannot continue to rise above earnings at the rate they have done over the last decade. The great obstacle is the ingrained belief, reinforced by the media, the government, and television shows, that buying is best.

    In the meantime, a couple of suggestions to help housing return to fair value. First, get the Bank of England to include house prices in their inflation calculations again, and set a low target to prevent another bubble. Second, force non-UK citizens or non-permanent residents to pay a stiff property tax, which would help to curb the foreign property speculation which has distorted the market in London.

  • 3 RetirementInvestingToday January 15, 2010, 11:54 pm

    What the article is forgetting is the situation where interest rates have to rise to head off the inflation which is coming. We must remember the Bank of England today have interest rates at their lowest ever in history. If interest rates ever get back to a sensible level the amount of pressure this will place on prices will be incredible.

    I think they are left with two choices today.

    One, protect the housing bubble by allowing inflation to erode peoples debts while prices hold and maybe salaries rise to keep purchasing value in real terms. This is obviously house prices falling in real after inflation terms except most voters won’t notice this. Additionally if you are highly leveraged you are benefited as your debt is also eroded while the savers out their are punished as their savings are devalued.

    Or two, raise interest rates to head of the inflation which will push prices down.

    I don’t hink it will be long before we find out which route they choose.
    .-= RetirementInvestingToday on: Further Reasons Why I Use the Shiller PE10 =-.

  • 4 Jahangir January 16, 2010, 12:52 am

    The problem of high house prices is I think the belief that an increase in house prices is good and that a decrease is bad. I’ve never seen a news report which doesn’t paint a drop in house prices in doom laden terms. News readers breathe a collective sigh of relief when price data shows a recovery or upward movement.

    This is not just a news-reader problem. People on the street believe this too. It’s actually quite irrational. No one cheers when the price of bananas go up. No one cheers where the cost of petrol rises. Why do they cheer when the cost of a house goes up? They cheer because homeowners believe that they are now ‘richer’, even though the asset is not capable of being liquidised without a loss in the standard of living.

    The government is glad because house prices now seems to be a barometer marking the health of the economy. The Chancellor is especially glad because it makes it more likely that an estate will cross the inheritance tax threshold.

    When the UK realises that houses are for living in, not for making money out of, then house prices will become affordable and stay affordable. Sadly, it will never happen, and so house prices will have to come down suddenly and unexpectedly when some major economic event tips the marginal owner (who can just about keep up repayments) over the edge.

    I would really like to own a property like my dad. He’s paid off his mortgage, and lives rent free in a nice house, so his pension pennies stretch further. He’s not lining someone else’s pockets. That’s the situation to be in. He worked in a factory all his life, and yet somehow, he’s been paid off for 15 – 20 years (now aged 77). I’m a professional, and I can’t even think about getting on the ladder.

  • 5 Faustus January 16, 2010, 2:09 am


    I have an uncomfortable feeling that BoE will run for the former option, if only under pressure from politicians keen to avoid nominal public spending cuts. The resulting stagflation would be very nasty, leading to further collapse in the value of sterling, depressing saving and investment rates, and would blow a hole in the UK bond market.

    It is perverse that policymakers in this country continue to reward debtors/profligacy and punish savers/investors, using the very policies which created the disastrous asset and credit bubble in the first place.

  • 6 William Reeve January 16, 2010, 2:46 am

    As ever, a very wise and sensible post.

    As well as historically-low interest rates, there is another factor propping up UK prices: the low pound. This makes property cheaper for our continental friends, and many others. In Euro terms, many houses have halved from their peak; this makes an interesting buying opportunity for overseas buyers and helps sustain prices.

  • 7 RetirementInvestingToday January 16, 2010, 8:20 pm

    I agree with you fully and have blogged on this previously. It’s the easy route.
    .-= RetirementInvestingToday on: Further Reasons Why I Use the Shiller PE10 =-.

  • 8 Lemondy January 17, 2010, 9:34 pm

    I’m always curious about claims the UK housing market is “overvalued”. Relative to what? The market is what it is. Prices are set by supply and demand. Prices have been driven up by supply outstripping demand.

  • 9 Lemondy January 17, 2010, 9:34 pm

    Uh, yeah, demand outstripping supply.

  • 10 CodeGimp January 18, 2010, 2:31 am

    Another good article.

    The property time-bomb is still ticking. Bailing out the more obviously insolvent banks, dropping central bank base rates to negative levels (in real terms) and straightforward money creation with a fancy-schmancy new label (“quantitative easing”) has prevented the almighty property crash predicted by the terminally bearish. Doesn’t stop the bears from being right, though: UK property is way overvalued and a reversion to the mean is inevitable despite house prices being “sticky down”.

    I suspect we’ll see the carnage begin as interest rates start to creep up.

  • 11 The Investor January 18, 2010, 1:01 pm

    Great comments guys!

    The trouble with the supply and demand argument is that it if the fact they aren’t making land anymore etc was a cast iron rule, we’d not see crashes in the US, the big crash in Japan, the UK in the early 1990s, etc.

    I think it’s therefore more supply *of money* and demand. Credit has been curtailed but foreign money has come into London.

    Quite right that the cheap pound has supported London prices – I read somewhere 50% of all Central London purchases have been by Italians recently (they’ve also got a tax amnesty windfall to spend). In general, I think Internet doomsters underestimate how good the falling pound has been for the UK, although obviously there could be long term inflation consequences if it went into true free fall.

    I definitely haven’t forgotten the low interest rate environment etc. I’ve just seen everything thrown at UK housing for 5 years now and still it refuses to moderate significantly. As I say, I still think prices are too high, but I’m nothing like confident they’ll correct, and especially not to order. I’ve just seen too many ‘triggers’ fire blanks before.

  • 12 kosmo @ The Casual Observer January 24, 2010, 3:24 pm

    Yikes. It sounds like the UK market makes the US market seem like a relative bargain.
    .-= kosmo @ The Casual Observer on: The Greatest Inventions of All Time =-.

  • 13 The Investor January 25, 2010, 9:45 am

    @Kosmo – Yes, we never got the big correction you guy saw. Rather, in my view we just got the froth blown off. Admittedly that was 20% plus in most areas, but those peaks were very recent and there’s a lot of froth! Ignoring base rates (assuming they’ll revert to c.5% soon enough) I think house prices are still at least 30% over-valued. But I’ve thought this for several years as I say, and rarely looked right for more than 3-4 months in a row.

  • 14 Andy R April 1, 2010, 5:17 pm

    The article doesn’t go far enough in stressing a point – that Gordon Brown has devlaued the pound in order to keep up the value of the house.

    In other words, the house has become the unit of currency, replacing sterling. Pity there aren’t enough to go round, eh? And it’s a bit difficult to fit one in your pocket, or spend it a bit at a time.

    More seriously, this deliberate policy of inflation is a sneaky way of robbing savers in order to pay home owners. But if there’s no point in saving, then where will the money come from to pay for mortgages? Will we just keep merrily printing it until we end up with Zimbabwe type inflation?

    And to regard foreign purchase of our houses as “good for Britain” when we haven’t enough for our own population is insane.

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