Is Buying Property Really Safe as Houses?
Heralded as the safest form of investment, it is also the UK ideal: owning your own home. However, according to market analysts, private rent pricing is now equivalent to only two-thirds the cost of the mortgage, so are mortgage hunters going to extreme lengths in order to get on the property ladder when they might be better off exercising caution? In addition, many experts are currently predicting a substantial dip in the UK property market over the following months, possibly causing problems for those who have stretched themselves in order to get onto the property ladder over the last few years.
Is now the best time to get a mortgage?
The UK property market has gone from strength to strength over the last decade, principally in the south east. While many homeowners have seen excellent return on investment during this time, it is now resulting in many people (first time buyers in particular) taking out much larger mortgages than they might otherwise be comfortable with. The problem is being additionally compounded by over-stretched budgets being further battered by rising interest rates. This is making getting onto the property ladder seem a necessary evil for first time buyers. But is it necessary? The common attitude towards buying property is that you are better off repaying your own mortgage each month than to be funding your landlord’s buy-to-let portfolio while renting. Rent money is often seen as dead money; it can seem like an endless cycle that makes it impossible to save a down-payment for your own home. But with house prices predicted to fall, perhaps renting is not the financial dead-end that many people believe.
Homeowners
With property prices rising in the UK year on year over the past decade, owning a piece of the action has proved one of the most risk-free forms of investment. However, the reality is fast becoming that homeowners are finding themselves vulnerable to the situation caused by rising house prices. A couple looking to sell up and buy a new home, and move up the property ladder - perhaps from a starter flat to a larger family home - may find that as they have watched the price of their own home rise, the price of the type of house they are looking to purchase has risen in greater measures. As a result of this, fewer people are selling, simply because they cannot afford to buy elsewhere. Growing in popularity, particularly in larger cities, is homeowners choosing to extend their current property to cope with their changing requirements rather than moving. In an area such as the capital where space is at a premium, adding extra rooms to their home by extending into the loft, garden or even digging out the area beneath the house is now becoming a much cheaper alternative for homeowners seeking the next step on the property ladder.
Proceed with caution to avoid negative equity
With the example set by the sub-prime mortgage lending crisis in the US, borrowers should exercise caution when seeking a mortgage. Borrowers may find that they are being offered mortgages by lenders and brokers that are unaffordable in order to keep the market strong – or worse still, they might not find themselves over-committed until it is too late.
Furthermore, having your wealth tied up in your home can be a risky practice, particularly if house prices begin to drop, or interest rates push your monthly repayments out of your comfort zone. The property that serves as a substitute for retirement nest-egg or other savings may well be impossible to sell at its currently perceived value at some stage in the future – don’t forget that this has happened before in the UK in the early 1990s.
Renters
So, for non-homeowners, is renting such a terrible option at the moment? Perhaps not. In the current market you are far more likely to be able to afford a home of suitable size and location by renting than buying; and renting often offers much greater value for money, particularly if moving from renting to buying means a downsize in property size and a longer commute.
With homeowners’ finances being stretched month on month as interest rates rise, the best option for renters may be to sit tight while renting and wait for properties to enter the market at reduced value, either as a result of foreclosure, property price drops, or as developers begin to sell off non-profitable investment.
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