The Property Snake!

D

DerKaiser

Registered User
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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???
 
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...
 
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.
 

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.
 
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.
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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.
 
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.
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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.
 
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!
 

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.
 
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.
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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.
 

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.
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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.
 
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.
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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.
 
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.
Click to expand...


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.
 
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.
 
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...
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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.
 
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.
 

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.
 
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.
 
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!
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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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