People who think that the increase in value of their home means money in the bank

T

Theo

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From reading some of the threads in some of the forums, it seems that a number of people are equating an estimated increase in value of their home with money in the bank.

One poster i recall yesterday said that his/her apartment had made a profit of Euro50,000 since bought! This despite the fact that he/she lives there and has probably never seen a cent of money enter his/her bank account from it.

I saw another post today that got excited about a valuation that was higher than the purchase price. I do not understand how an arbitrary value on a home that a person lives in means that the person is suddenly wealthier. How can people lack the financial intelligence that should tell them that it is only worth these values when the deal has been signed and you have your money in the bank?

Personally, the way I see it, my home costs me money, not the other way round. I have to pay a mortgage, maintenance and upkeep etc. Surely, the feeling of wealth that people seem to get when they think about the price of their home should only apply to investment properties that pay for themselves.

I think this lack of financial intelligence must be contributing greatly to a lot of the madness going on in the property scene at the moment.
 
It's a common mistake not to consider that one's PPR is indeed an investment asset (often the single most expensive/valuable that most individuals will ever hold) even if one lives there. Remember that it can always be liquidated and the money (in particular any excess over outstanding mortgage) used for other purposes. A good example might be cashing in on any capital gain (tax free!) by trading down. Another issue might be using the equity in a PPR to gear up for further investments (property or other asset class). A PPR is not just a place to live or a drain on resources. It is also an important part of an individual's overall investment portfolio. Not recognising that fact would seem to me to be more akin to financial unintelligence to be honest.
 
Theo said:
From reading some of the threads in some of the forums, it seems that a number of people are equating an estimated increase in value of their home with money in the bank.

One poster i recall yesterday said that his/her apartment had made a profit of Euro50,000 since bought! This despite the fact that he/she lives there and has probably never seen a cent of money enter his/her bank account from it.

I saw another post today that got excited about a valuation that was higher than the purchase price. I do not understand how an arbitrary value on a home that a person lives in means that the person is suddenly wealthier. How can people lack the financial intelligence that should tell them that it is only worth these values when the deal has been signed and you have your money in the bank?

Personally, the way I see it, my home costs me money, not the other way round. I have to pay a mortgage, maintenance and upkeep etc. Surely, the feeling of wealth that people seem to get when they think about the price of their home should only apply to investment properties that pay for themselves.

I think this lack of financial intelligence must be contributing greatly to a lot of the madness going on in the property scene at the moment.
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True up to a point.

However, it is always useful to know the current market value of your home, so that for example you can shop for a cheaper mortgage rate when your LTV goes below 80%.
 
MonsieurBond said:
.. when your LTV goes below 80%.
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I don't know what this means - can you elucidate for my benefit please ?

The market value of my house is approx. €750K.
My mortgage is currently €74K with 14 years to go.

Notional equity is significant but that doesn't help any making ends meet month on month.
 
I think what MonsieurBond is referring to is that it may be possible to renegotiate/shop around for a better mortgage deal once you go below a certain LTV threshold.
 
LTV = Loan to Value i.e. the outstanding mortgage loan amount on a property expressed as a percentage of its value. Sometimes the lower the LTV ratio the cheaper the mortgage rate available (most likely due to the lower risk to the lender represented by borrowers who already own a good chunk of the equity in their home). In many cases the LTV will decrease from its initial level due to a combination of (a) annuity mortgage repayments chipping away at the original capital sum borrowed and (b) capital appreciation due to market/supply&demand issues. At some stage the LTV may drop into another lower bracket (e.g. from > 60% to < 60%) qualifying the borrower for a cheaper rate with their existing or another lender.
TarfHead said:
I don't know what this means - can you elucidate for my benefit please ?

The market value of my house is approx. €750K.
My mortgage is currently €74K with 14 years to go.
Click to expand...
So your LTV ratio is (€74K / €750K) * 100 = < 10%.
 
MonsieurBond said:
True up to a point.

However, it is always useful to know the current market value of your home, so that for example you can shop for a cheaper mortgage rate when your LTV goes below 80%.
Click to expand...

This will hopefully be of benefit to us as we are coming off our fixed rate soon.

I get the point about the money not being of use to you but agree there are lots of folks thinking that they do have that extra 50k worth and are maxing out credit cards on the strenght of it. After all they live in a good/expensive area and should have the lifestyle to match. However as someone said just cause my house in theory is worth more i still have the same bills, mortgage etc.
 
If people should not get all excited when their house goes up in value does that mean they should not worry if it does down in value (even to the extent that they are in negative equity)?
I agree with Clubman above but I do accept that people thinking that they are in the money (and behave as if they are cash rich) because an asset that they have no intention of selling goes up in value is nuts. I think that this is what Theo was alluding to, but I could be wrong.
 
Purple said:
I do accept that people thinking that they are in the money (and behave as if they are cash rich) because an asset that they have no intention of selling goes up in value is nuts.
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Some people. I don't know if there is any objective measure of how many people might be throwing caution to the wind in this sort of context so (a) it may be more or less common that people may be assuming it to be and (b) so what - it's up to them to make choices and if the ones that they make are not prudent and lead to discomfort later on then that's their problem.
 
I agree ClubMan. I was just making a general point.
Adults are responsible for their own financial affairs. I can’t abide people blaming banks or credit card companies for their money woes.
 
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