You'd be crazy to buy a home right now
09-09-2014
Wrong move not Rightmove: First-time buyers will get burnt if they pile into the overheated London market
Couple looking through window at estate agents. Mortgage lender Paragon upbeat on 2011 as profits rise 32pc
First time buyers in the Captial should think twice before grabbing hold of the bottom rung of the property ladder Photo: Photolibrary.com
Anna White By Anna White, Property correspondent
When my most conservative of friends are rushing to buy their first home in Twickenham, before the area becomes even more expensive, you know the Greater London market is overheating.
Despite various signals that the capital's core and commuter zones, which have enjoyed rampant price growth over the last two years, is starting to cool, those in their late 20s and early 30s are still talking about buying.
New findings from Knight Frank and Markit Economics show us that 6.7pc of householders polled intend to move within the next year.
Undeterred by looming interest rate rises, this group has grown from 6.2pc in June, is higher than the 6.5pc reported in May and 5.1pc in April, according to an Ipsos Mori Poll.
While such "PR" suits estates agent talking up the market, now is not the time to buy your first home.
There has been a wave of panic across Greater London as first time buyers (FTB) stretch themselves to get on the property ladder in their area before price rises shut them out of the market altogether.
This, of course, has been self-perpetuating, driving values up further, with open house viewings and sealed bid competitions common practice.
But these price hikes - 20pc over the last 12 months to May - are not sustainable and not supported by wage growth.
The mainstream London market is already showing signs of cooling - as property portal Rightmove tells us today. In fact, the rate of growth, month-on-month, has started to slow earlier this year and today we see our first drop of 0.4pc in Greater London. We've hit an affordability ceiling until pay packets and the economic recovery catch up.
An expensive business
It's not just the extraordinarily high house prices that should make you wince but all the associated, long term costs.
Interest rate rises are looming and now is not the time to stretch yourself, with incremental increases expected from November onwards.
With the introduction of the Mortgage Market Review in April - stricter lending guidelines designed to curb the irresponsible practices seen prior to the 2008 housing market crash - the interest-only mortgage is becoming extinct.
First-time buyers now need enough monthly income available to make full repayments - which are far higher than an interest-only commitment. Sensible in the long run as you're effectively saving, but a hefty financial burden all the same in the early fragile stages of an economic recovery.
Buying a home is expensive - not to mention stressful - and analysts tell us that a FTB needs £70,000 cash just to make the move thanks to removal costs, estate agent fees and stamp duty.
The cost of the average first-time-buyer dwelling in London is £351,783, with a 3pc stamp duty fee attached to that. In Clapham, south west London, that gets you a two-bed flat in an ex-council tower block.
And herein lies the crux of the problem. Space.
If, as a first time buyer, you are purchasing a family home, in an area suitable for young kids, in which you hope to live for the medium to long term, the price is almost irrelevant. It will increase in value in London, due to supply constraints and the growng popularity of the region, regardless of any economic undulations.
If, eager to just get on the property ladder, you buy a home that you will outgrow in the short term, then stay put.
Gone are the days of 20pc house price rises in a year, flipping your property and capitalising on low interest rates and interest-only mortgages.
You will simply pay stamp duty twice in the space of a few years.
And, judging by London prices, your second home could well breach 4pc stamp duty threshold.
Life outside the Capital
The average home in London is now 2.2 times that of the rest of the UK (£233,000).
Now could be the time to take advantage of the lag in the housing market recovery, sell in London and move out, and I don't mean to leafy, ahem, pricey Surrey.
Northamptonshire is commutable and boasts house prices below the UK average. For those looking to move their careers outside the City, the county is home to some major bluechip businesses such as Carlsberg and Barclaycard and has a growing shoe manufacturing sector once again.
Chinese investment into Birmingham manufacturing has created 1,000 more jobs in the last two years and enjoyed a £1.7bn trade surplus in 2013 a flourishing economy. Plus the development of a High Speed Rail 2 terminus in the city centre, and an HS2 head office, is going generate another 14,000 jobs. The financial district is just 20 minutes drive from beautiful villages.
While a clamp down on mortgage lending, over-inflated house prices, and the summer holidays have caused a seasonal dip in values, London property values will continue to climb.
But without matching wage trajectory making monthly mortgage repayments more comfortable, price growth will not revist the recent frenzied surges that have excited current home owners and frightened prospective buyers...I'd bet my house on it.
After all, home ownership should be about far more than making money.