Savings And Investments John on 11 Jun 2008 07:53 am
Is Now The Time To Buy A House?
With the BBC reporting that thousands are facing negative equity, the number of house sold per estate agency dropping to just 17.4 in the three months to May the housing market is not looking good.
The BBC spoke to a representative of the Department of Communities and Local Government who pointed out that:
The long-term demand for housing remains high and the fundamentals of the economy are sound with low unemployment and historically low interest rates.
That I think is a key point, yes the market is in a mess at the moment, but it’s largely being caused by the difficulty in arranging mortgages, not because the demand has disappeared.
On the other hand if the economy doesn’t improve soon demand may start dropping, especially if we do enter a recession. While I hope we don’t, I do believe we are in for an economic slowdown which could be bumpy for some.
So would I buy a house now?
Yes, I would. While I believe the market will continue to fall for at least another six months I don’t think I’m smart enough to predict the bottom of the market. So I won’t even try, instead I’ll judge a purchase on it’s merits at the time.
If it’s a home for me and my family I’ll consider these questions:
- Can I afford to buy the house (making sure I’ve factored in all the costs)?
- Will I still be able to afford it if interest rates went up by 50%?
- Is the interest on the mortgage less that or roughly the same as what it would cost me to rent an equivalent property (I ignore the costs of the repayments in the mortgage/endowments/ISAs because they are not a direct cost of the mortgage)?
- If property prices fall would I be happy staying living in the house, or can I rent the house out and will the rent cover the interest payments on the mortgage?
If the answer to all these questions is yes, then I’d buy, no matter what the market is doing. If I’m considering the property as buy-to-let then I’d consider these questions:
- Is there a demand for such rental properties?
- Is there anything that might impact upon this demand in the near future (i.e. a glut of new builds)?
- What is likely the rent?
- After subtracting the cost of the interest payments on the mortgage and other running costs (insurance, maintenance and agents fees) does the property generate a positive cash flow (profit)?
If the answer to all of these is yes, then I’d consider buying the property as an buy-to-let. Unlike many property “investors” (arguably they are speculators) I believe in buying for cash flow not capital growth (which I view as a nice bonus if it happens). After all cash flow is passive income and passive income is vital to becoming financially free.
on 11 Jun 2008 at 2:50 pm 1.Tristan said …
With the right amount of equity, any property would generate passive income. What maximum percentage of equity would you be prepared to put down as a deposit on an investment property to gain passive income?
on 11 Jun 2008 at 7:20 pm 2.John said …
I don;t have a maximum in mind, instead I’d define my limit based on what I have available to use and the minimum required to create a positive cash flow.
That said one of the benefits of property is the gearing available, so there’s no point investing in property if you’re not making good use of the gearing.
As a result I’d probably never put in more than 30% and would probably aim for around 20-25%.
on 12 Jun 2008 at 11:08 am 3.Tristan said …
In the current financial climate you’d have to be putting in 25% to get a half decent BTL mortgage, and with the average property being in the region of £170,000 that’s £42,500 deposit!
Then again, you can still buy 1 bed flats for around £120,000 so you’d only need a £30,000 deposit.
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