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I was asked this week whether the housing market is slowing and whether now is a good time to buy a house.
The straight answer is: I don’t know. And I don’t think anyone else can know either. There are too many factors to consider when looking at the UK property market; interest rates, stagnant income, rental costs, ability to save a deposit, not to mention government-backed initiatives, politics and economics.
If you can make the right guess on all of those factors you’re lucky.
I’m not going to make guesses but the question about whether it’s the right time, or not, to buy somewhere to live did get me thinking about how we view property in this country.
Surely the questions you need to answer are: can you afford to buy somewhere without overstretching yourself or falling into hardship if your circumstances change; and do you want to buy somewhere?
The question the person really wants me to answer is if they buy somewhere will the price keep going up? I don’t know the answer to that either and it’s a gamble you take.
After decades of house price growth, we’ve come to expect property to be a one-way bet, particularly in London. People jumping onto the property ladder now want to know that they’ll be able to make as much money on their home as the generations before them did.
I don’t think that’s a realistic assumption to make anymore. Office of National Statistics figures show the average income to house price ratio in England and Wales is now 7.6, meaning the average house is now 7.6 times the average income. This compares with half that 20 years ago.
When you’re taking out a huge amount of debt to cover an average property, it’s unlikely that the price will rise enough to effectively inflate the debt away (ie, the cost of the property grows so much that the mortgage because relatively insignificant).
Figures from the latest Hometrack UK house price index shows house price inflation in London has slowed to the lowest level for five years, it is now at 3.3% from 14% a year ago. Growth is expected to plateau for the rest of the year.
Of course, figures like this are only a snapshot in time but it shows that you can’t rely on property to just continue climbing at a steady rate.
It’s doubtful that people buying today will be able to sit back and watch their property nearly quadruple in price as those who bought in 1996 have. Nationwide data shows the average property at the end of 1996 was a little bit over £55,000, while at the end of 2006 the average cost was a shade under £206,000.
This doesn’t mean that you shouldn’t buy a home, if you can afford it, because that’s what it should be first and foremost: a home, not an investment.
You need somewhere to live so unless you are forced to sell it doesn’t really matter what it’s worth while you live there. And if you own a house, it’s likely that you’ll have a big mortgage so the bank owns most of it anyway.
The most sensible thing you can is not worry about what it will be worth in the future. Instead think about what you can really afford and whether you are happy to make compromises on where you live and what sort of property you buy in order to reduce the amount you have to borrow.
Once you’ve made the decision to buy then overpay the mortgage as quickly as you can. Just because the term of your mortgage says 25, 30 or even 35 years, you don’t have to take that long to clear it. You can overpay your mortgage - meaning you can make extra payments on top of your standard repayment - with most lenders allowing you to overpay 10% of the balance a year (so if your mortgage is £150,000 you can overpay up to £15,000 a year) or up to a certain amount each month.
It may seem like a stretch in the short term to overpay but you’re doing yourself a favour in the long term as you’ll reduce the number of years you will pay your mortgage for and you will pay less interest on the mortgage.
No one knows whether house prices will go up or down or whether you will become a property winner in the future. All you can do is buy somewhere you want to live, rather than trying to buy an investment, and make sure you take steps to own as much of it as quickly as possible.