Tuesday, March 20, 2007

"You can't buck the market!"

Buying property in the UK is an expensive business.

As far as I can tell, house prices rise as high as the market can bear. In February, according to the BBC, the average house price in the UK was about £185,000. That is something like seven times average household income (estimating from the National Statistics Online figures for 2004/5).

When I first started being aware of such values, I think the ratio was probably nearer three times - but at that stage, household income was much more likely to be based upon one person's salary than today. Today, two people need to work in most houses for them to afford property - with the consequent impact that this has on family life.

Again, for as long as I can remember, house prices have been rising seemingly inexorably, with just two 1-2 year periods of "correction". People have been saying for most of this time that this isn't sustainable, and there has to be a crash in prices at some stage - but it doesn't happen. Mortgages keep increasing in size - not only do we have 95-100% mortgages, but we have "interest only" mortgages now, where the precise arrangements for repayment are simply kicked into touch for a future date, and we are heading in the direction of possibly having lifetime interest only mortgages, where the term of the mortgage is not defined. All this is because the prices of the houses themselves have got steadily further out of reach.

Various things have been done by the government in an attempt to halt the rise of house prices. One of these was increasing stamp duty. When you buy a house, you pay the government 3% if the price of the house is over a certain threshold. Let's say you are in a house worth £300,000, moving to another with the same value (perhaps you are moving job, or something like that). The cost of moving would be:
- £9000 in stamp duty
- typically £4500 in estate agent fees
- typically £1000 in legal fees
- typically £600 for a Home Information Pack
- typically £1500 in other costs

That's over £16000. If you want to gain a bedroom (say around where we live), you are talking about adding around £80000 to the house price. So to move to a house with one more bedroom will typically cost you about £100000.

So if moving is so expensive, surely that should bring down the price of houses? No. Don't forget that you can't buck the market.

Given how much it costs to move, and that if you have room then for £40-£60000 you can add a bedroom and a reception room to your house, what has happened is that the supply of properties has plummeted. But there are still people looking for houses, who can't extend and who need more room. So the market is even more a seller's market than before, and property prices have continued to rise.