40

I can see several cases in which it obviously IS important if the market is high or low. e.g:

  • if I'm buying my first house
  • if I'm retired and selling my last house
  • if I'm moving to a very different country/city, whose housing markets aren't very tightly bound together.
  • "negative equity" where selling the house is no longer sufficient to cover the remaining cost of the mortgage.

But those are all somewhat edge cases. My mortgage started at 40% deposit, so the last option is all but inconceivable. And "I'm moving from a house in a city to another house in that same city" seems like a very standard thing to do. Either to live in a different part of the city (e.g. for a better commute) or to upgrade to a larger house.

So if that's what I'm doing ... do I care whether the market is high or low at the moment?

It feels like "no". The fluctuations affect both the sale and the purchase, so, the gains / losses should cancel one-another out?

This seems at odds with the media, in general, reporting on rises and falls in the housing market as though they were a big deal.

Am I missing something?


If you think it's relevant, I'm in London, UK.

  • 27
    You get more bang for the buck in a down market if you are buying a better home and you do better in an expensive market if you are downsizing. – Bob Baerker Jul 21 at 16:09
  • 5
  • 2
    Lots of good answers here but also worth noting London is very district fashion dependent - moving between an area that is gentrifying or in decline etc can be as stark as moving between whole different UK cities, and these will often not be in sync with where you want to move to/from. – Philip Jul 22 at 15:25
  • You can take use either situation to your advantage. For instance when the prices are at a peak houses might sit on the market for a long time; you can often make a very low offer on such a house and it might be accepted. If the prices are low you might see quite a few that refuse to drop their price and therefore sit on the market. After a year or two of sitting on the market, many sellers will respond to an offer below what they would have rejected the year before. Also, being in a position where you don't have to sell your house quickly can help you get the best price for it. – Bill K Jul 23 at 21:20
  • Or the opposite, in a recession prices nobody's buying, so houses might sit on the market for a long time...and accept lower offers... :) – rogerdpack Jul 24 at 15:51
37

There are often taxes (by whatever name) that scale with the property price. Agents’ fees are also often a percentage of the property price. These costs are usually a small but noticeable percentage of the total price.

Aside from this, you’re mainly looking at the difference between what you get and what you pay. If you are buying and selling properties at about the same price, this difference is small. But if you are significantly upsizing or downsizing, you’ll probably find that the absolute prices magnify the difference.

For example, when property could be had for under $100,000, a $50,000 difference would be half the price - and reasonably, the better property is twice the size / quality / etc. When prices are at 10x that, I doubt you’d be able to get twice the property for an extra $50,000. Property-related taxes will also likely scale with property prices, so they should be considered when up/downsizing.

Depending on jurisdiction, you might also have to pay capital gains tax if the price of your property has appreciated. This leaves you with less cash-in-hand to purchase your next property. Unfortunately, this doesn’t reduce the amount you need to pay for the new property proportionally (or at all). This effect is larger the greater the property price.

  • 12
    Plus if you upsize while the prices are high, and then it drops, you're suddenly underwater for a much larger amount than before, which is very bad. – Nelson Jul 22 at 1:39
  • This may not apply to the UK, but in some US states (see "Prop 13") the property taxes are keyed to the purchase price, and only allowed to rise a certain percentage (usually the inflation rate), regardless of increases in the housing market. (Coincidentally, I got my property tax bill today: without the indexing, the tax would be about double what it actually is.) – jamesqf Jul 23 at 1:33
  • @jamesqf Does that mean that in those jurisdictions, buyers are likely to pay significantly more property taxes than the place they sold, even if the sale and purchase prices were similar? – Lawrence Jul 23 at 6:03
  • @jamesqf in the U.K. ongoing property tax (called council tax) is keyed to the value of the house in 1990 equivalent pounds. Each house is put into a “band” from A to G. D is approximately the ‘average’ house. It can rise at a maximum of 4.99% per year (there’s some complex mechanism for raising it more than that). – Tim Jul 23 at 10:47
  • 1
    @Lawrence: Exactly. Say I bought my house 20 years ago for $150K. I would be paying property tax on that amount, increased by an inflation factor (about 3% this year), so about $1200. But the assesed valuation is about $300K, which would make the tax $2300 if I bought the house for that price today. (Then there's the difference between assessed valuation, set by the county, and the actual market value of around $450K...) – jamesqf Jul 24 at 3:53
12

You care if you’re trading up or down, which is very common. The amount that you have to pay to trade up, or receive when trading down, shrinks and grows with the average house price.

You also care about the effect on the ease of buying and selling. Generally speaking, in a booming market it is easy to sell but hard to buy, while in a declining market it’s easy to buy but hard to sell.

  • No, actually, you don't. If you are trading up, the new house is more expensive then the old, regardless of whether the whole market is moving up or down. The reverse applies if you are trading down. – Paul Smith Jul 21 at 23:00
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    @PaulSmith But the amount by which the new house is more expensive than the old increases if prices increase, and it decreases if prices decrease. If I sell for £100,000 and buy for £150,000 then I have to put in £50,000. If prices double, I’m now selling for £200,000 and buying for £300,000, so I now have to put in £100,000. – Mike Scott Jul 22 at 6:20
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    @MikeScott it would be great to include that comment in your answer – Notts90 Jul 22 at 12:24
  • 1
    Exactly! Unlike other investments here percentages don’t matter but nominal amount does! – ssn Jul 22 at 17:51
  • 1
    Also, prices may fluctuate differently for different types of houses. – SQB Jul 23 at 11:25
6

Houses don't all appreciate at the same rate.

You'd care a LOT if, for example, the house you're selling appreciated 30% in the time you've lived there, but the house you're buying has appreciated 60% and happened to by 3x as expensive when you bought the first house.

£100,000 x 1.30 = £130,000
£300,000 x 1.30 = £390,000
£300,000 x 1.60 = £480,000

What should have been £390,000 is now £90,000 higher, meaning that realtor/transaction fees and yearly property taxes, etc will also be commensurately higher.

  • 1
    I see what you mean, but the price history of the house you're buying doesn't directly have any impact on you, other than perhaps fueling regret you didn't buy earlier. Or, perhaps it supports the idea that growth will continue or alternatively that prices will mean-revert. But, there's no concrete impact. – poolie Jul 22 at 1:08
  • 1
    OP is in London so you'd need to add at least a zero to make those price examples realistic ;-) – gerrit Jul 23 at 9:06
  • In the UK the annual property taxes - Council tax - does not depend upon the purchase price. It is fixed for a property and depends upon the tax band allocated by the local authority. – uɐɪ Jul 24 at 12:04
4

yes, you do. Its an ironic situation where people with housing think they're getting richer when house prices go up.

But consider this: years ago, you might have bought a flat in London for £100k (yeah, 20 years ago!) and moving to another one would set you back, say 1% estate agent fee and no stamp duty - or £1000.

Imagine that flat doubles in price, now you want to move, it'll cost you 1% EA fee, and stamp duty at 2% - or £4000. You are £3k worse off.

Of course flats in London have risen a lot more than doubled - a flat I might have bought in New Cross for £75k back in the day is worth £400k now, a £1k cost of moving would today be £4k + 5% stamp duty, or £24k in total.

  • 1
    Stamp duty on a £400,000 flat for someone who’s not a first-time buyer but doesn’t own any other properties (not counting the one they’re selling) is £10,000, not £20,000. The 5% rate only applies to the part of the price that’s in excess of £250,000, and then 2% on the amount between £125,000 and £250,000 and nothing on the amount up to £125,000. – Mike Scott Jul 22 at 11:55
4

Depends on what the original price for the house you're moving to was compared to your previous house. Suppose that you own a $500,000 house, and were looking at buying an $800,000 house. While you're considering your decision, both houses go up 10%. The price difference is (800,000 * 1.1) - (500,000 * 1.1) = 330,000 rather than the original $300,000 difference. On the other hand, if the housing price went down by 10%, the difference is (800,000 * 0.9) - (500,000 * 0.9) = 270,000.

This is actually an important point. If your house went up by 10%, it's easy to have the illusion that you made $50,000 on the sale. In reality, the net result of the transaction is that you pay $30,000 more than if you had just bought the $800,000 house in the first place - in other words, you lost $30,000.

If you're downsizing, the logic holds in reverse; if you're selling the $800,000 house and buying the $500,000 one, you made $30,000 off the transaction because 10% of 800,000 is more than 10% of 500,000.

4

You're correct that in theory it should't matter; "sell low + buy low" is effectively a "wash sale" in terms of your equity.

But you bet you care. If you are trading a house when the market is soft...

You may not be able to get financing

The reason prices went up in the first place is that you had many people bidding on the available housing stock, and they had a bigger bag of money to bid with than they did before.

Where did that come from? The bank loaned it to them (when they didn't before). Almost everyone buys on mortgage, and the size of their mortgage (thus their "bag of money") is limited by the size of the mortgage the bank will give them. In housing run-ups, banks are typically more liberal with the loans they are writing. They are a) offering marginal loan products such as teaser ARMs, IO loans, neg-am loans etc. that allow a bigger loan to be made on the same monthly payment, or b) offering bigger loans to people with worse credit than they normally lend. In other words, housing prices go up because credit is loose and flowing freely.

Flash forward to your down market. Why is it down? Nobody's bidding the prices up. Why aren't they? They can't get loans.

Well, neither can you.

You can sell the old house (can you?) and pay off that loan easily enough, but loans don't just "transfer" (even in the UK, they don't transfer without the bank's consent, because it must be willing to accept the new home as collateral). And that's the problem: in a down market, the bank isn't so happy with the house as collateral.

For cash buyers, it's the reverse

On the other hand, an up/bubble housing market is bad news for cash buyers, because borrowers' "bag of bidding money" are getting larger and larger at the whimsy of the bank. They are the vast majority of house buyers, so they set the market. Cash buyers can get priced out, and told "get a mortgage like everyone else".

But just wait. When the market is down, and nobody's writing mortgages, it tends to crash housing prices. And then, the cash buyer is king. In 2008, San Francisco flipped from 90% of sales being extreme mortgages (IO or neg-am), to 90% of sales being cash.

Also, you could be upside-down on your mortgage

In a down market, you lose equity in your home. That means you could find yourself either entirely upside-down on your mortgage, or simply with too high an loan-to-value ratio to get a comparable mortgage.

Say you buy a $250,000 house with a $150,000 note (normal 60% LTV). You're ready to move, but the house has fallen to $150,000. Good news is you paid off $15,000, so you have $20k equity (you owe $135k, 90% LTV). In this bad market, nobody's willing to write you a 90% LTV loan, so buying a comparable $150,000 house is right out. At a normal 80% LTV loan, your $15,000 down will only get you a $75,000 house. Ouch.

The fact that they're already in a mortgage relationship with you doesn't mean they want another one today based on their current, more conservative underwriting doctrine.

Your credit may not be as good

Down markets tend to have knock-on effects that impact a lot of people. Job loss, revolving credit lenders canceling credit lines, lenders being more itchy about calling notes... nobody's credit gets better in a down market, and you have a fair chance of it getting worse.

For instance even if you never get laid off, if your bank sees your employer is doing rounds of layoffs, it gives them pause to write a loan.

  • 1
    @AndyT Added. The problem with porting is when you say "most lenders allow it", you mean most of the time. In a damaged market like 2008, they're far more likely to say "no" - for the exact same reasons they aren't writing new loans. Also, I've removed the term "big cash" and converted it to "pot of money". I'm not sure about the UK but in the US, cash buyers are an outlier, and market prices are set by people with mortgages. This makes a bubble market a terrible time to cash-buy, and a down market a good time. I'll add that too. – Harper - Reinstate Monica Jul 23 at 15:00
  • Ta @Harper, much improved with your edits. Although i have to say the phrases "teaser ARM, IO and neg-am" mean nothing to me. The gist is still understandable to a UK based user though. – AndyT Jul 23 at 15:53
3

One reason you might care about whether the housing market has gone up or down is your own financial situation. If you are tight on cash but not cash flow, you might want to use the equity in your existing property to roll into the down payment on a new property.

Let's say you bought for £100k, you put £20k down, and the property is now worth £120k. Further, let's say that you need to put 20% down on the new property.

Total equity = £120k - £80k = £40k

Since you need to put 20% down on the new property, the maximum price you can afford (based solely on the down payment) is 1 / 0.2 or 5x:

Maximum price you can afford = £40k * 5 = £200k

Property values have increased 20%, but the amount you can finance if you are constrained by down payment has doubled!

Now suppose that as you enter the market prices are falling. Suppose that by the time you get an offer, the market has fallen 5%. So now you get an offer for £114k.

Total equity = £114k - £80k = £34k

Maximum price you can afford = £34k * 5 = £170k

But that £200k house while also falling 5% is now sitting at £190k, which you can no longer afford.

Where you are constrained (monthly payment or down payment) will likely change at some point as the market goes up or down.

1

House price fluctuations are going to affect your loan-to-value (LTV) ratio when you move. That can dictate the amount you're eligible to borrow and the rate offered.

Simple example: You have a £25k deposit which you use to buy a £100k house (clearly not an example tailored to your location). Your LTV is 75%.

If house prices in your region have risen by an average of 20%, you've potentially gained 20% on the value of the house; not just your deposit. You sell your house for £120k and pay off the mortgage leaving you with £45k.

If you were then to buy a very similar property, for the same amount, your LTV would be 62.5%. Your larger deposit also potentially means you're able to purchase a larger property.

  • The question briefly touches on this point with mention of negative equity. That's the extreme case, but the equity percentage is significant until you reach 40% (which is 60% LTV). In this answer you don't explain the effect of LTV - Namely that you'll have a greater choice of loans and that as equity builds, the interest rate you will be asked to pay will reduce. – thelem Jul 23 at 11:21
  • Yeah, you're right. My response is fairly short and just tries to draw attention to something important that I felt other answers were skipping over: LTV and leverage. Negative equity may not be a concern but if you bought with a 40% deposit and prices have fallen by 5% when you come to sell, you're down (exceptionally simplified of course) 12.5% on what you put in. – Nathan Dawson Jul 23 at 15:34
-3

Property that you live in is not an investment since if it goes up, so does the house next door, and if it goes down, next door goes down too. Unless you are changing market as you have described, then it doesn't really matter which way the market goes (and I don't agree with your negative equity argument - the fact that you owe more then you own doesn't change the price of your house, or of next door's).

The movement of the market only matters if a) you are actually in the market, i.e. if you are lucky enough to own property that you do not live in, or b) if you are able to get back out of the market to take a profit.

The media interest is because the media sells advertising to investors and investors are the people who able to get into and out of markets. Knowing that your house is earning more then your are is a cool thing to say at diner parties, but makes no difference to your day-to-day life.

  • This is true for "the house next door" but not for "houses in rural and urban areas" or "houses in a different part of the country". So it depends where the OP is are planning to move to. – alephzero Jul 22 at 1:10
  • Other answers have pointed out why this isn't so: The house next door can change value more or less if it was worth more or less to begin with. You're unlikely to sell your home just to move into another one that is exactly the same, so the relative changes matter. – user3067860 Jul 22 at 18:21
  • The negative equity does matter. It means that you (most likely) may not be eligible to borrow for your next house if you don’t have any equity. If you were allowed to take up a new mortgage for a new home and you have debt with you that is going to be unsecured = much higher interest rate than if you stay in your current home with “negative equity”. As long as you didn’t realize you are only “technically insolvent”, meaning the debt is still secured in your home = low interest rate. As soon as you realize, the debt is going to become unsecured, which could eventually bankrupt you. – ssn Jul 22 at 19:28
  • This answer is a bit strange. I mean, it's kinda hitting on some relevant points, but it's saying some really weird things to get there. In particular, the first sentence is just flat-out wrong; arguing that live-in property isn't an investment is a bit silly. If Alice buys a $300k home and Bob buys a cheapo $50k home, then housing prices double, it's clear that Alice has a heck of a lot more buying power. Sure, any house they want to buy is also more expensive, but that doesn't change the fact that Alice has $300k more than she started with. – Kevin Jul 24 at 15:57
  • @Kevin Alice only has more buying power then Bob if she has somewhere else to sleep and is able to sell. While she continues to live there, she does not have a single penny more then she started with. – Paul Smith Jul 25 at 14:37

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