SE1 House Prices Overvalued

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Thursday 17 April 2008 1.38pm
Here's something to think about

We all like our house prices to be on the rise don't we....unless we aren't on the property ladder...and then its hell.

We all feel better off if we see our house price rise and think we are all richer for it.

Think about this (figures are all very simplistic for ease of expalnation).

You buy a 1 bed property for 100k, but really you want a 2 bed one but that costs 200k - out of your range.

You get a mortgage for 100k to buy the place and live there for a few of years during which the value doubles....hurrah.

You sell and pay off the mortgage and pocket 100k...all good so far...

You then go and buy that 2 bed property you wanted and move up the property ladder...it too has doubled to 400k so you put down your 100k "profit" from the first home and get a 300k mortgage for the rest.

You now have a 2 bed home and owe 300k...if you could have bought it to start with you would have only had to borrow 200k.

You feel better because you think you've made 100k but in reality you now owe one-and-a-half times the amount you would have done had property prices not changed.

If you're at the top of the ladder and want to downsize or move to a less expensive area then rising house prices are great...but even for those on the ladder rising prices can be a bit of a double edged sword.

With the today's news about SE1 having some of the highest loan to value property prices in London its something else to bear in mind too.

Related news & features

PKM
Thursday 17 April 2008 2.54pm
Except that some of us buy property because we need the space to live in. So, if I was the buyer in your scenario, I would owe more money but as long I haven't overstretched myself I will be living in a bigger place. Its not always about making a profit.
Thursday 17 April 2008 2.59pm
Exactly my point.....we all need to live somewhere so wouldn't it be better if prices stayed pretty much flat rather than what has happened over the last few years...and which has led to lots of people now being very much overly exposed with the risk of negative equity back to spoil lots of people's lives.
Thursday 17 April 2008 3.40pm
This is stupid study. The reason LTVs are high in SE1 is because (a) property is expensive (with good reason imho) and (b)such property is mainly bought by young professionals who have not been on the property ladder for very long and do not bring a great deal of equity to the table when they acquire their B St. loft.

The fact that LTVs are high does not impact the likelihood of house prices rising or falling in SE1 and, provided you can continue to pay your mortgage, negative equity is irrelevant for somebody who has invested with a long-term view or has bought somewhere to live (again, with a long-term outlook).
Thursday 17 April 2008 4.11pm
Carmenes, you have a good point, of course, but imho it's only a partial explanation.

LTVs are to some extent irrelevant for the reasons you point out...but, I'd say that they are relevant in the context that we've been looking at generally rising LTVs across the board over the last years, due to the incredible rises in house prices (and to unusual lending practices).

...if you press it, they will come.
Thursday 17 April 2008 4.19pm
The lending practices are perfectly normal for a boom. I read recently that the proportion of 100% mortgages in c.1990 was higher than in 2007.

125% mortgages are not as bonkers as they sound. They are a 100% mortgage plus a personal loan. For many young professionals with good prospects and high levels of student debt they are a very good risk for a bank.

That said, banks did underprice risk - as they always do in a boom. When I sold my last house a first time buyer bought it - for a very cool amount of money. I'm glad I'm not paying his mortgage, but I wish I had his salary...

Edited to add that personally I think SE1 is cheap. Where else can you live and walk to work in the City so cheaply. You cannot.

The news article is indeed bonkers. It should say that in the event of a reduction in prices in the area, SE1 is an area where negative equity would be more widespread than most. It should not imply - for it is untrue (or at least, without a crystal ball nobody can know) - that prices are more likely to drop in SE1 than in most places, for there is no such corollary. Personally I think that SE1 continues to be undervalued.
Thursday 17 April 2008 5.48pm
Given that I live in an SE1 1XX post-code, I read yesterdays' article with interest. I wouldn't say I was worried though - my reasons are this:

I've bought my two bed flat with a friend, and we ain't going anywhere. We're not planning on selling up, so can ride out any storm. We are also young and feeling confident about our jobs and the sectors we work in. Even in the unlikely senario that the market bottoms out in SE1, we are employable, we live on the edge of one of the best job markets in the world and are therefore confident we will always be able to get work and could happily still pay our mortgage.

I do think a lot of this hype is because house prices are a national obsession and journalists know that a boom or bust story will always sell papers.
Friday 18 April 2008 8.50am
In the current financial climate, an area that has more high LTV mortgages WILL suffer a greater risk of price falls.

The reason is quite straightforward: as the repurcussions of the credit crunch move wider into the banking sector, so the banks have tightened their lending critera (simply to lower their own risk exposure). The first victims were the 100% mortgages, etc. Very few banks now offer these mortgages to new business.

Furthermore, mortgage providers are desparately trying to offload the more riskier elements of their existing mortgages - raising interest rates after the discounted period, etc, to encourage existing mortgage holders to seek refinance elsewhere.

These factors contribute to a tightening of the demand side of the housing market, but more concentrated in the sector of the market where the mortgage provision has been restricted... ie. high LTV mortgages.

Therefore, as SE1 currently has more high LTV mortgagees than anywhere else, that demand curtailment will be more strongly felt in SE1, with the net result that the risk of price falls is greater here than elsewhere.
Friday 18 April 2008 10.01am
se1fan wrote:
house prices are a national obsession and journalists know that a boom or bust story will always sell papers.

Quite - what would the Express in particular have done for headlines without this subject? For a calmer viewpoint take a look here
Friday 18 April 2008 10.18am
Indeed the FT measure (1 of so many these days) does seem to provide a calmer view of what is going on, but something again to remeber here is that whilst it may be a better coverage of all prices than some of the other surveys, by the time the Land Registry gets the figures they are several months out of date. The contractual price will have been agreed months ago and the whole transaction process will have taken several months so the prices you are seeing in this survey are really based on sales from around the turn of the year. What is much more interesting is not what has happened over the last few months but what is going to happen next and with the current turmoil no matter what happens in the banking sector lending criteria have been tightened agressivley for both new and existing borrowers...this is going to lead to some problems going forward. And whether you are bothered or not by the the high LTV issue with credit refrence agencies making these surveys, for anyone living in a refrenced post code it may count in your own credit scoring when/if you need to access credit in the future for whatever reason.
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