# The Property Snake!



## DerKaiser (6 Feb 2007)

Asked a friend the other day what the opposite of a ladder was and he suggested Snake (ala snakes and ladders).  If property values start to fall will people be on the "property snake"?  If David McWilliams can take credit for coining the term Celtic tiger I just want to get in there first with "Property Snake"!  Or does this phrase already exist???


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## ClubMan (6 Feb 2007)

Sorry - you're not the first judging by .


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## DerKaiser (7 Feb 2007)

Oh well!!  Missed out on a house last year with a bid of €660k.  Similar house nearby now going for €600k.  Between the €60k stamp duty and €60k loss it could have been a sticky situation if you ran into trouble repaying the mortgage...


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## ClubMan (7 Feb 2007)

If you were living in it with no immediate plans to move or release equity from it then a €60K drop in the valuation would be largely immaterial.


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## KalEl (7 Feb 2007)

DerKaiser said:


> Asked a friend the other day what the opposite of a ladder was and he suggested Snake (ala snakes and ladders). If property values start to fall will people be on the "property snake"? If David McWilliams can take credit for coining the term Celtic tiger I just want to get in there first with "Property Snake"! Or does this phrase already exist???


 
Surely the phrase "property ladder" has nothing at all to do with the rises in the market as a whole?
Getting on the property ladder means getting your first home, getting on the first rung of a ladder leading up to your ultimate family home.


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## Afuera (7 Feb 2007)

ClubMan said:


> If you were living in it with no immediate plans to move or release equity from it then a €60K drop in the valuation would be largely immaterial.



In fairness, the OP was pointing out that the recent purchaser could stand to lose a lot if they ran into trouble servicing their mortgage.


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## Afuera (7 Feb 2007)

KalEl said:


> Surely the phrase "property ladder" has nothing at all to do with the rises in the market as a whole?
> Getting on the property ladder means getting your first home, getting on the first rung of a ladder leading up to your ultimate family home.



Without building up equity in your initial property, you're not going to be getting anywhere nearer your ultimate family home though.

The two ways to build up equity in your property are to be lucky enough that the value of it increases or to pay off the mortgage bit by bit.

Since you're mostly paying interest at the beginning of a mortgage, it can take a long time to build up equity on a starter home if there are no increases in its value. For example, on a 30 year 100% mortgage you will only have gained about 20% equity after 10 years.


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## Persius (7 Feb 2007)

Gotta be careful here as I don't intend discussing future house price directeions in Ireland.

But, IMHO, the concept of getting on the "property ladder" only makes sense in a rising market. Otherwise why bother buying a "starter home" with the intention of selling it a few years later in order to buy a "family home". The transaction costs (stamp duty, lawyers fees etc) and interest on your "starter mortgage" would be too expensive. You'd most likely be better off renting and saving a deposit for your ultimate "family home". Its price is not racing out of reach as we're no longer talking about a rising market (in this hypothetical example).

Property prices in Germany have been pretty static for the last 15 years which is actually a fall in price in real terms. Admitidly they also have a low home ownership figure, but they do not have a concept of, or a phrase for, "property ladder".


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## KalEl (7 Feb 2007)

Persius said:


> Gotta be careful here as I don't intend discussing future house price directeions in Ireland.
> 
> But, IMHO, the concept of getting on the "property ladder" only makes sense in a rising market. Otherwise why bother buying a "starter home" with the intention of selling it a few years later in order to buy a "family home". The transaction costs (stamp duty, lawyers fees etc) and interest on your "starter mortgage" would be too expensive. You'd most likely be better off renting and saving a deposit for your ultimate "family home". Its price is not racing out of reach as we're no longer talking about a rising market (in this hypothetical example).
> 
> Property prices in Germany have been pretty static for the last 15 years which is actually a fall in price in real terms. Admitidly they also have a low home ownership figure, but they do not have a concept of, or a phrase for, "property ladder".


 
Not really...I would have thought it had as much to do with your changing family and financial circumstances.
And without risking the wrath of the powers that be, I don't think too many people would disagree that prices will increase over the course of a lifetime!


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## room305 (7 Feb 2007)

Afuera said:


> Without building up equity in your initial property, you're not going to be getting anywhere nearer your ultimate family home though.
> 
> The two ways to build up equity in your property are to be lucky enough that the value of it increases or to pay off the mortgage bit by bit.
> 
> Since you're mostly paying interest at the beginning of a mortgage, it can take a long time to build up equity on a starter home if there are no increases in its value. For example, on a 30 year 100% mortgage you will only have gained about 20% equity after 10 years.



Assuming roughly equal percentage rises across the board, your target home will be moving further and further away from you. Surely a flat market is preferable in this scenario? This way the owner need not fear negative equity and they can seek to purchase their eventual target when salary and circumstances deem it favourable.

I don't see why they need to build up equity in their current home in order to trade up.


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## ClubMan (7 Feb 2007)

Afuera said:


> In fairness, the OP was pointing out that the recent purchaser could stand to lose a lot if they ran into trouble servicing their mortgage.


Only if forced to sell. Most lenders will come to some arrangement to reschedule the loan if the lender in trouble alerts them ASAP and would only foreclose as a very last resort.


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## Afuera (8 Feb 2007)

room305 said:


> Assuming roughly equal percentage rises across the board, your target home will be moving further and further away from you. Surely a flat market is preferable in this scenario? This way the owner need not fear negative equity and they can seek to purchase their eventual target when salary and circumstances deem it favourable.



With a roughly equal increase in prices across the board your target home would only be moving further and further away from you if house inflation was greater than wage inflation... but that makes no sense in the long run as the price of property has to be underpinned at some level by wages. If rises in property prices continued to exceed wage increases then you would have a diminishing pool of people in a position to buy and would leave a large overhang of unsold property (which according to the laws of supply and demand would cause a correction in prices).

A flat market would mean that a couple who bought a house for 250k, but really wanted to end up in another house which cost 500k, would only have saved up 50k in equity after 10 years on a 30 year mortgage. To trade up to their target house of 500k would now cost them 450k but they would also have to come up with stamp duty and would negate most of that gain. 



room305 said:


> I don't see why they need to build up equity in their current home in order to trade up.



You're right, building equity is not the only way to trade up but it is certainly the fastest way to achieve it. It can be a slow journey up the career ladder and not everyone will make it to the top.


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## Afuera (8 Feb 2007)

ClubMan said:


> Only if forced to sell. Most lenders will come to some arrangement to reschedule the loan if the lender in trouble alerts them ASAP and would only foreclose as a very last resort.



Yes, I agree forced selling would only be a last resort.

The situation the OP mentioned makes a marked difference from last year however. Last year a recent buyer would have built up so much equity in a matter of months that even if they ran into trouble with the mortgage they could sell up and still walk away with a profit. Any current buyers don't have this safety net to fall back on.


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## cjh (8 Feb 2007)

ClubMan said:


> Only if forced to sell. Most lenders will come to some arrangement to reschedule the loan if the lender in trouble alerts them ASAP and would only foreclose as a very last resort.


 

The rescheduling would most likely involve reverting to interest only (akin to renting off the bank) or a longer mortgage term with associated higher interest payments, both of which equate to a financial loss for the buyer on the transaction, without having sold the property.


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## ClubMan (8 Feb 2007)

Only if the total repayments (capital plus interest) exceed the resale of the property in the long run. Either way this is like saying that rent is "dead money" when, in fact, it is a payment for a service like any other.


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## room305 (8 Feb 2007)

Afuera said:


> With a roughly equal increase in prices across the board your target home would only be moving further and further away from you if house inflation was greater than wage inflation...



I really don't follow your argument and I fail to see what relevance wage inflation has to my statement that a flat market is preferable for those planning on trading up.

Say I buy a "starter home" for €200k with the dream of buying a €500k home in five years. Imagine by the time I go to sell, I've paid €20k off the capital of the home and both homes have increased in value by 20%.

Although I have equity in my home of €60k, my target home now costs €600k. So I need a mortgage of €540k to trade up. If on the other hand the market remains flat, I only have equity of €20k in my home but would only need a mortgage of €480k to trade up.


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## DerKaiser (8 Feb 2007)

Persius has hit the nail on the head for me.  The €60k stamp duty would cover 3/4 years rent.  Buying a "starter home" with a view to trading up within a few years is not a viable idea (due to stamp duty) in a stable market.  I think the Ladder effect refers to the build up of equity.

Just seems to be a lot of unhealthy propeganda around the need for people to own their own place.  Especially younger people who don't need the stability until they have families.  A house is like any other asset e.g. equities.  Everybody accepts that gearing up to buy equities is a risky business, why is property any safer.

I know you need shelter,  but just because you eat dosn't mean you have to own a farm.


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## Afuera (8 Feb 2007)

room305 said:


> Say I buy a "starter home" for €200k with the dream of buying a €500k home in five years. Imagine by the time I go to sell, I've paid €20k off the capital of the home and both homes have increased in value by 20%.
> 
> Although I have equity in my home of €60k, my target home now costs €600k. So I need a mortgage of €540k to trade up. If on the other hand the market remains flat, I only have equity of €20k in my home but would only need a mortgage of €480k to trade up.



But inflation begets inflation i.e. wages will also have to rise. Without taking this into consideration you're only looking at half the picture.

Paying a mortgage of 540k with a wage that has inflated by 20% is cheaper in real terms than paying a mortgage of 480k on a wage that has not increased.

Wages don't even have to increase by as much as 20% for the buyer to benefit from the inflation. If their wages increased by 12.5% or more, they would be closer to reaching their target property than they would in a flat market.

There's no point in examining what would happen if house price inflation exceeded wage inflation indefinately as clearly this is fundamentally impossible.


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## Superman (8 Feb 2007)

The problem with wage inflation (with the exception of those enjoying benchmarking)  is that it is subject to international competition.  
Just ask those who work in Motorola or Pfizers.

With the Euro, there is no way of getting oneself out of the predicament of overly high wages other than wage deflation.  With a national currency, there is at least the possibility of devaluing the currency.


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## JumpShot (8 Feb 2007)

KalEl said:


> And without risking the wrath of the powers that be, I don't think too many people would disagree that prices will increase over the course of a lifetime!


 
Not if you were born at the end of the Napoleonic Wars.
Just before industrial revolution started and developments in global travel (rail and steam ships) brought down the cost of labour and introduced more global trade.
If you read literature from the 1800's if features encumbered estates. Wealthy people who had an unencumbered estate and money invested in govt bonds were considered fortunate.
An encumbered estate could be runious because of deflation on agricultural produce and rents and the inability to service debt.
It will never happen again though, sustained deflation has not happened in western countries (excluding Japan) in living memory, so it can't happen.
But is global cost of labour going up or down?

[broken link removed]


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## room305 (8 Feb 2007)

Afuera said:


> But inflation begets inflation i.e. wages will also have to rise. Without taking this into consideration you're only looking at half the picture.



Usually it works the other way round - inflation in wages feeds inflation in house prices. However, the wage inflation issue relates only to the affordability of the mortgage and that is subject to other factors like interest rates. It doesn't change the size of the loan needed for trading up. If interest rates are at 1% it might be easier to obtain and repay a loan for €500k but it is still a €500k loan.

You made a blanket statement that when houses prices are not rising across the board, trading up from a starter home to a family home becomes more difficult, whereas in fact it is the opposite. If house prices are rising across the board, trading up is actually more difficult. Now you appear to be introducing this absurdity about wages always rising to match house price inflation to cover up your mistake.


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## Afuera (8 Feb 2007)

room305 said:


> Usually it works the other way round - inflation in wages feeds inflation in house prices. However, the wage inflation issue relates only to the affordability of the mortgage and that is subject to other factors like interest rates. It doesn't change the size of the loan needed for trading up. If interest rates are at 1% it might be easier to obtain and repay a loan for €500k but it is still a €500k loan.


Plain and simple, inflation is caused by an increase in money supply. Whether it feeds first into wages or assets is irrelevant. You can't just  view inflation (or lack of) in one and disregard it in the other. The interest rates affect all buyers in roughly the same way so I don't know why you're bringing that up.



room305 said:


> You made a blanket statement that when houses prices are not rising across the board, trading up from a starter home to a family home becomes more difficult, whereas in fact it is the opposite. If house prices are rising across the board, trading up is actually more difficult.


The example that you used to try and prove that it's easier to trade up in a flat market was useless as you're not comparing like with like. 480k may be less than 540k in nominal terms, but in real terms when you consider inflation it's not. A trader upper in a flat market will ultimately have to put more of their wage towards purchasing their target home than someone who has gained from inflation. I find it hard to see how it's easier for them to get into the house they want in this scenario. (Also remember that this is even before we take the stamp duty issue, brought up by Persius, into consideration.)



room305 said:


> Now you appear to be introducing this absurdity about wages always rising to match house price inflation to cover up your mistake.


If you can find anything to prove that wages and house prices do not  have any correlation over the long term then by all means, show me.


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## TTV (8 Feb 2007)

So afuera do you see wages rising consistently over the next few years to match the rise in house prices? Thats an ideal scenario, why worry about inflation at all because wage inflation will match it. Sure why are the ECB worried about inflation at all..


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## Afuera (8 Feb 2007)

To revert to the mean, wages will either have to rise or property prices will have to fall. The ECB are worried about inflation because they've just seen the increase in money supply at its highest level since the Euro came into being. They are dedicated to ensuring price stability so hyperinflation would be a problem in trying to attain that goal.


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## room305 (8 Feb 2007)

Afuera said:


> The example that you used to try and prove that it's easier to trade up in a flat market was useless as you're not comparing like with like. 480k may be less than 540k in nominal terms, but in real terms when you consider inflation it's not. A trader upper in a flat market will ultimately have to put more of their wage towards purchasing their target home than someone who has gained from inflation. I find it hard to see how it's easier for them to get into the house they want in this scenario.



Thanks for the economics 101. I know what inflation is. No amount of hedonics will pervert basic math so you either don't really understand what you are talking about or are deliberately trying to distort your original claim.

It really is simple, if you take a number and a larger number, then increase both by an equal percentage the difference between the two will increase.

Issues such as how much your wages have increased (nominal or real), how much the bank is willing to lend, the global macro-economic climate and the fortunes of the Irish soccer team may all be relevant to your situation when you are trading up but they do not change the basic facts. A trader-upper is in a better position if neither home has increased in value than if they both have.



Afuera said:


> If you can find anything to prove that wages and house prices do not  have any correlation over the long term then by all means, show me.



I never made any such claim. They are intricately linked. You may be mixing up cause and effect though. Wage increases may result in (but are not the only reason for) HPI but the reverse rarely holds true.

Think about it for a second. If my boss gives me a huge raise I might buy a bigger house. However, I doubt I'd have much joy lobbying for a raise on the basis that I just purchased a bigger house.


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## Afuera (9 Feb 2007)

Sorry room305 if I'm not explaining this clearly. The important thing to take from the concept of inflation is that it means you can't compare two nominal figures with each other if they've been reached under different circumstances. You suggested that since one number is less than another, then it must be easier to trade up if that number is less. I disagree completely with this presumption.

Maybe if I put it into figures, it will be easier to see why I think it's easier to trade up when there are rises in house prices than in a flat market:

<Flat market scenario>
A couple buy a starter home for 200k, but the one they would eventually like to own is 500k. After 5 years, with no increase in prices, they've earned about 20k equity. This means that they have saved enough to purchase 4% of the house they really want (which still costs 500k).

<Moderate house prices increases>
Same couple, same houses, again at prices of 200k and 500k. After 5 years there has been a 20% increase across the board. Now the house they finally want to end up in costs 600k, their own one is worth 240k, and it means that they have equity of 60k. They have now saved up 10% of the price of the house they really want.

<High house price increases>
Same scenario starting off, but this time after 5 years all prices double. At this point the house they want to buy costs 1 million, their own is worth 400k, and they have build up 220k of equity. 220k equates to 22% of the price of the house costing 1 million.

The way I look at it, the greater the increase in house prices, the easier it gets for them to own their perfect house outright. Under the flat market scenario, it would make more sense for the couple to try and save 20k in 5 years or less and try and purchase their perfect house first time around, rather than attempting to trade up. This of course would only be possible to see in hindsight though.

Does this make sense or do you see any problems with this way of looking at it?



room305 said:


> A trader-upper is in a better position if neither home has increased in value than if they both have.


Do you still think that the nominal figure is more important than the percentage of equity being built up?


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## shanegl (9 Feb 2007)

Surely the percentage figure only becomes relevant if wages have increased by a similar amount, otherwise the nominal figure is more important? In the long run you expect house prices to be linked to wage inflation, however a housing boom could outpace wage inflation in the short term and the nominal figure would be more important if you were looking to trade up at that time?


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## polaris (9 Feb 2007)

In your 3 examples, the new mortgages the couple will be applying for are: 480k, 540k and 780k respectively. 

Surely these figures are more relevant than the percentages of equity being built up?


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## room305 (9 Feb 2007)

Afuera said:


> The way I look at it, the greater the increase in house prices, the easier it gets for them to own their perfect house outright. Under the flat market scenario, it would make more sense for the couple to try and save 20k in 5 years or less and try and purchase their perfect house first time around, rather than attempting to trade up. This of course would only be possible to see in hindsight though.



Well even in a flat market the couple have to buy/rent somewhere if they want to live together. Presumably this is part of the theory (I'm not 100% sure how the whole "housing ladder" thing is supposed to work). Buy a small place, with the consequent small mortgage and then when they have sufficient money through savings and salary increases, sell their current place and buy a bigger one. HPI only works against this because no matter how much prices inflate, the nominal gap between their current home and their desired home just gets larger.



Afuera said:


> Does this make sense or do you see any problems with this way of looking at it?



I see now where you're coming from although I still disagee with your reasoning. The way I see it HPI is great for investors, good or irrelevant to those who already own their "final home" and bad for anyone who plans on trading up or buying.

What percentage I have as a deposit is not relevant if I cannot afford the loan amount. Look at the number of people posting on this board who cannot understand that even though they have a huge amount of equity in their home, the bank will not allow them to remortgage because they cannot afford it. In effect, they are trying to get a mortgage for a home with a large deposit but the bank won't lend them the money. I couldn't buy a €2M house even if someone was generous enough to lodge €1M into my bank account. Not even GE money would believe I could service the debt when I show them my salary slips.



Afuera said:


> Do you still think that the nominal figure is more important than the percentage of equity being built up?



Absolutely. The banks loan nominal sums not percentages. If HPI runs ahead of wage inflation then the couple in the starter home may be in a better position to trade up than if they hadn't bought but they would be even better off again if prices stayed flat.


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## Remix (9 Feb 2007)

The OP's scenario of possible negative equity and facing higher interest and penalties from the bank reminded me of an exchange I came across on a US website.

A poster with negative equity and mortgage problems was allowing a homeless person with a car to park and sleep in the car overnight 
on his property for a small fee. 

When the homeowner made a negative remark about the homeless guy's situation ,someone reminded him that the homeless person with the old car probably had higher net worth then the "homeowner" !!


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## Afuera (9 Feb 2007)

room305 said:


> The banks loan nominal sums not percentages.


Point taken, and this is why I think wage inflation must be taken into consideration...Unfortunately, it's not too easy to estimate this though.

The only really long term study I've seen on housing, the Herengracht Index, shows tight coupling between rents and wages, and looser coupling between the price of rents and the price of houses. This does suggest that house prices and wages align eventually but clearly there can be frothy times where they go out of sync.



room305 said:


> If HPI runs ahead of wage inflation then the couple in the starter home may be in a better position to trade up than if they hadn't bought but they would be even better off again if prices stayed flat.


I think that this again depends on wage inflation compared to HPI. Even if HPI ran ahead of wage inflation, they could be better off in the rising market than in the flat one. I'll use two of the same scenarios as my last post, to try and explain what I mean:

<Flat market>
5 years have gone by, they want to trade up to the nicer house which costs 500k. Because of their equity of 20k, they will need to take out a mortgage of 480k. To service this over 30 years @ 5% will cost them 2,575 p/m. This would be around 40% of a combined annual wage of 77,250.

<Moderate increases in market>
 Same story; after 5 years they want to trade up. This time houses across the board have risen by 20%, so they now need to pay 600k for the nice house. Due to the equity they've built up of 60k, they'll need to get a mortgage of 540k. A 30 year term @ 5% will cost 2,899. 40% of an annual wage of 86,970 would cover those payments.

While HPI has risen by 20%, the amount of wage increases they would need to buy the same house has not risen by such a high percentage. In fact 86,970 represents a 12.5% increase on the wage they would have needed to get the house in the flat market.

After looking at all this, do you still think that the blanket statement that it's easier to trade up in a flat market holds true? As far I as I can see in a flat market you're better off to rent and save up for the house you really want to buy. In a rising market then "property ladder" rules come into play and you get left behind if you're not on it.

BTW, I think that this excercise is mostly academic anyway. How often does a market just flatline for a long period of time in reality?


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## Afuera (9 Feb 2007)

Remix said:


> When the homeowner made a negative remark about the homeless guy's situation ,someone reminded him that the homeless person with the old car probably had higher net worth then the "homeowner" !!



Funny, but true


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## room305 (10 Feb 2007)

Afuera said:


> Point taken, and this is why I think wage inflation must be taken into consideration...Unfortunately, it's not too easy to estimate this though.



When you say "wage inflation" do you also include the general increase in wages that occurs as workers gain experience (and hence increased productivity) or just that - an inflation in wages to compensate for the reduced purchasing power of fiat money over time? One will be general across the whole economy, the other specific to the individual.



Afuera said:


> The only really long term study I've seen on housing, the Herengracht Index, shows tight coupling between rents and wages, and looser coupling between the price of rents and the price of houses. This does suggest that house prices and wages align eventually but clearly there can be frothy times where they go out of sync.



Longterm this makes the most sense to me, house prices should track earnings.



Afuera said:


> I think that this again depends on wage inflation compared to HPI. Even if HPI ran ahead of wage inflation, they could be better off in the rising market than in the flat one. I'll use two of the same scenarios as my last post, to try and explain what I mean:



It is quite probably that a young worker would experience a 12.5% wage increase over five years without it being "inflation". In which case he still benefits more in a flat market. One thing to remember is that central banks specifically track and set interest rate policies based on "wage inflation" (an increase in wages without consequent increase in production) so interest rates may well increase in this environment. They don't do the same for asset inflation. So if the worker's wages have inflated he may find interest rates are higher as a result, negating your point. Globalisation means a 1970's style wage/price spiral is unlikely in the near future.



Afuera said:


> After looking at all this, do you still think that the blanket statement that it's easier to trade up in a flat market holds true? As far I as I can see in a flat market you're better off to rent and save up for the house you really want to buy. In a rising market then "property ladder" rules come into play and you get left behind if you're not on it.



Absolutely. In a flat market it is quite possible that the couple can increase their earning power and the gap between their current home and their target home is not increasing. In a rising market it is a definite that the gap between their current home and their target home is increasing but there is no guarantee their wages will rise to commensurate this gap (and if they do interest rates may rise to counteract this).

I'm not necessarily saying that buying a starter home and then trading up is the way to go. Renting won't always be cheaper than buying (I can remember time when it wasn't and I'm still in my twenties) and given that it might be quite a number of years before buying the desired home is feasible (regardless of market conditions) the couple may prefer to buy in the meantime. This will provide security of tenure but as yourself and Persius have pointed out - may not be preferable from a taxation perspective.



Afuera said:


> BTW, I think that this excercise is mostly academic anyway. How often does a market just flatline for a long period of time in reality?



Most of the time I would say the market is flat (in real terms at least) tracking earnings as a whole, up or down. When credit standards are lowered things may get out of kilter - like the strange times we live in today for example. However, what cannot continue by definition will not continue.


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