The Illusion of Increasing Property Values
The UK has, over the last decade, experienced an unparalleled growth in the value of domestic property; fuelled by low interest rates and demand exceeding supply. Some areas of the country have experienced annual increases of over 20%.
This growth has led to a feeling of smug self satisfaction among those who own property, and has underpinned a consumer boom; as people release the perceived excess equity in their homes, and use it to satisfy short term desires and whims.
However, the perceived increase in personal wealth has a number of drawbacks:
The growth in prices is slowing down, and in some parts of the country gone into reverse. This has placed some of those who have borrowed heavily in the uncomfortable position of having negative equity; they have become financial prisoners within their own homes.
The increase in prices has made it more difficult for first time buyers to fund the purchase of their first home; without borrowing excessive multiples of income, sometimes up to five times their annual salary.
A house is a lifetime commitment, the debt that goes with it usually takes twenty five years to pay off. I know of no one who can, with certainty, look twenty five years into the future; and guarantee that income, taxes and other issues will not conspire against them to impede their ability to pay off the debt.
The feeling of greater wealth, that increases in property values brings about, is illusory. You have to live somewhere, if your home has risen by 20% then others have done so as well. Should you wish to move to a larger property, in a few years time, the ongoing increases in prices make that more difficult.
Take the following example:
Property A is worth £100K
Property B is worth £200K
The net difference is £100K
After one year prices have risen by 20%.
A is now worth £120K and B £240K, the net difference is now £120K.
In one year it is now £20K more expensive for the owner of A to sell and buy B.
The only way to benefit from a rising market is to downgrade, and buy a smaller property or live in a cheaper area.
Finally I would caution all to be very wary of the current Administration’s greed for tax revenue. It is eyeing the rise in property values with great avarice. It will most definitely find a way to grasp an undeserved slice of these gains for itself.
In short, don’t be seduced by the rises; you are probably worse off.