Investopedia.com's take on the property market

Landlord Expert
By Landlord Expert May 19, 2011 08:54

The statistics surrounding home ownership are worrying. A new report by the Joseph Rowntree Foundation has reported that just one in four couples will be able to afford to buy a home in the future. It warns that Britain is turning into a "rotten borough", where an entire generation will be locked out of buying their own homes.

I am increasingly concerned that I might be in this group. In my late 20s, and with a reasonable salary, the huge deposit required and lack of first-time buyer mortgages available are just two of the barriers blocking any journey into home ownership.

The next generation of homeowners

According to the BBC, the average property price in the UK is a terrifying £233,000 — even with the current economic situation .

In fact, the average property is eight times the average salary, and mortgage lending has fallen to its lowest level in nine years. Many first-time buyers are struggling to get onto the property ladder without financial assistance.

This financial assistance, also known as "the bank of mum and dad", could also mean that home ownership will increasingly become a privilege for the children of the better off.

With high property prices, the removal of the cap on university fees and a desperate employment market, it is hard to see how the next generation is ever going to conjure up a deposit.

Actually, never mind the next generation, how am I ever going to conjure up a deposit?

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Your home is your castle … Or is it?

I'm sure that it is engrained in us at an early age that "an Englishman's home is his castle".

We've all been led to believe that the very best thing we could possibly do with our hard-earned cash is put it into property. But however much I'd like my own front door, a dream kitchen and exact choices of Farrow and Ball paint, I am starting to wonder if homeownership might be somewhat overrated.

After all, I often hear people talk of their "cursed mortgage", which keeps them in a job they hate, prevents them from holidaying at will, or leaves them wishing their lives away — until, of course, that wonderful moment when the mortgage is paid off and they are finally free.

The perils of ownership

Common wisdom (which strikes me as far removed from common sense) is that you should take on the largest mortgage you possibly can.

By doing this, you are able to fool yourselves and others that you are rich enough to live in the smart part of town. And, because your mortgage is just more than you can really afford to comfortably pay, the hardship you will have to endure to make those payments will prevent you from admitting how totally unglamorous it all is.

Renters among you will be familiar with the phrase "throwing money down the drain", which is often applied to paying rent. But let us examine the moral high-ground of our homeowner friends.

Let's say a homeowner has a £200,000 mortgage. On a 25-year term at a 5% interest rate, this homeowner will pay more than £150,000 in interest. So in many cases, the idea that this person owns the house is a myth. In fact, the bank owns it, and is selling it back to them at a ludicrous mark up.

£350,000 for a £200,000 flat? I think wonga.com has better rates.

If my boiler explodes — I call my landlord, whereas a homeowner gets a colossal bill. When you own your own home, every time something breaks, you have to fix it — or often more accurately, you have to pay to have it fixed.

Renting a home also has a distinct advantage when it is time to move. Those who rent a property can leave at the end of their tenancy, and have the flexibility to move on relatively short notice.

The only costs to pay when moving from a rented property are any agents' fees and the payment of a returnable deposit.

On the other hand, selling your home takes a substantial amount of time and money. Estate agents take a cut, stamp duty eats into budgets, and solicitors, surveyors and mortgage companies all demand large fees.

Of course, home ownership brings security and the possibility of profiting from your investment. That's one way of looking it, but the other side of the coin is that it can be an organised method of throwing money down a different drain.

Not even a good investment

When people put money away for their future they apply a completely different set of rules to those buying a home. But both sets consider it an investment.

The latest report from the Council of Mortgage Lenders shows that the average deposit for a first-time buyer is now £26,000 — almost a year's salary.

And it's money you won't see again, or at least won't see for 25-odd years, as each time you move you take it with you.

On top of that, it's all wrapped up in a single property — while every investment expert says you should spread your risks — that could suffer all sorts of problems, you can't get at it in a hurry if you need it, and you need to get into a huge amount of debt to buy into this investment. Debt that must be paid for.

At least with a pension (money that you also won't see for years) you get a tax break and your employer often helps out (and will soon be forced to), with a property you are taxed when you buy and taxed when you move. Considering property is currently in the middle of its worst slump ever, according to the National Institute of Economic and Social Research, there's even doubt that you will make any money at all after all your expenses.

The bottom line

I won't deny that I'd very much like my own front door, but for now at least, I'll enjoy leasing the one I've got, and try and keep the usurers away from it for another month.

Landlord Expert
By Landlord Expert May 19, 2011 08:54

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