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It's Not Magic, It's Work!

10 Jan 2010

Mortgages And The House Price Ladder

The UK has the smallest average sized homes of the "developed" countries, about one third the size of a typical Australian house. The UK also has some of the most poorly built modern houses and a large body of inefficient and in need of replacement old houses.

For most of the last half decade house building has been a mixture of shoddy standard and poor design and worst of all far too few houses have been built, constantly missing targets for decades at a time. The Overall result is that houses are absurdly expensive and stupidly small. They are probably the wost value for money anywhere in the "developed" world.

An "average house" is now well above the acceptable level at which a mortgage is normally lent to someone on "average income". In 2003 the national average ratio was around 3.4 by the height of the boom it had reached 5.1. This is utterly insustainable in the long run and has been a contributing factor in the recent price correction.

Because a sensible house it so stupidly expensive in the UK, an absurd concept of a "buying ladder" has developed. You buy a house you can afford but don't want, pay some mortgage off on it, then after a few years you sell it and buy a bigger one and so on until you arrive at the house you do want. Given that house prices tended to rise faster than inflation in the 70s and 80s this would mean each trade up you could use the gain in property prices of the lower rung to fund the deposit on the higher rung. The fact that the rungs tend to get farther apart as house prices rise, was silently ignored by the bulk of the population.

When we moved to the village the "normal UK" thing to do would have been to buy a house and by now we'd be on our second or third house. Instead we chose to rent and even though we are being forced into our third house I still think we are ahead financially. If we had bought the first house we lived in for the price it was probably worth then of about £180k it would now be worth around £200-210k, a capital gain of £20-30k. We would have paid a monthly mortgage of at least £1k, or at least £250 per month more than our rent, which over the years means we have saved more than the house would have appreciated. Over the years we would have paid some of the mortgage off but we'd have also had much higher maintenance and service charges for owning the house and that excludes all the legal costs.

As it happens we have actually save considerably more than above figure, so other the inconvenience of having to probably move twice this year we should be able to buy the house we (nearly) really want this year with less of a problem than if we had done the "normal" thing.

PS. Trying to explain a house buying ladder to foreign relatives is very hard - it seems so illogically!