A Nation Hypnotised By TV Property Porn? Property isn’t as safe as houses

I’ve just come back from doing BBC Breakfast where I talked about mortgages following the CAB’s report that many are struggling to meet their repayments (watch the BBC’s Real Player video of it). I can’t applaud Citizens Advice enough. As I’ve discussed here before (eg in my blog House Prices Could Fall) I’m fearful we’re pushing ourselves further into trouble, with people overextending themselves on their home loans (if that’s you, do read the Remortgage Guide which could at least cut your costs).

My view is much of the problem has been caused by TV property porn shows. Many of the property gurus, often, understandably, work in the property industry themselves, and of course therefore are quite happy to see continued price rises. There’s so much of this on our TV screens that we’ve been hypnotised into certain beliefs about property ownership. Let me set out some of what I believe are the misconceptions:

We’ve been hypnotised to believe…

1. Property ownership is a right

If you don’t own a home, you’re seen as the underclass and renting is pooh-poohed as a dirty word. Of course in the long term home ownership is a good goal, yet this is confused with “I must immediately get on the housing ladder or I’m a loser.???

Yet by leaping into home ownership many people risk borrowing much more than they can afford, overstretching themselves and getting into financial ruin. A home is just another asset – admittedly an important one that provides us with security; yet a mortgaged home isn’t yet ours – fail to repay and the mortgage company can sell it from under you.

I’ve spoken in the past (see my blog) of my depression at meeting a couple of 21 year olds while out filming a Tonight with Trevor programme who believed they’d already missed getting on the ‘housing ladder’.

This is because we’re persuaded that this is the be-all and end-all of financial security. It isn’t. It’s one aspect, a solid aim, but so is having some savings, managing your money, and not building up other debts. There is a great danger that people are over-pressured into buying a home.

2. House prices can only go up

You hear this all the time, and when it’s challenged by a sensible ‘well property prices could drop’, many people reply ‘yes, yes of course that’s true but they’re not going to are they, especially not in (INSERT WHERE YOU LIVE)?’

That’s a very bizarre statement to me. I’m nowhere near clever enough to know what’s going to happen to property prices, and anybody who tells you they do know is talking nonsense. House prices may well continue to rise steadily or they may boom; equally they may stagnate, drop or even crash.

All of these are possible options in a market-driven environment, and the property market certainly is just that. The house price market tends to be cyclical and we’ve had a long-term run of price rises. At some stage we’re likely to have, at the very least, a cooling off – in fact I’d bet every penny I have on it. Yet I can’t tell you when this will happen, it could be this year, the next year or in 20 years time…. as I said I just don’t know…. nor in truth does anyone.

It’s also worth noting a continued house price rise isn’t necessarily the best thing for the UK. What we need in the UK is a sustainable housing market – one that’s affordable. At the moment there’s huge money flowing in from investors in the buy to let market, pumping up prices and taking them out of the reach of many people.

You may be saying “yes but I’ve made £100,000 on my house!???, yet unless you downsize this is only a paper gain you can’t spend it. Of course you could ‘release the equity’ in your home, as many have – which is great, though all it really means is you are increasing your borrowing and hoping there’s no drop in prices.

3. Not owning a house is a terrible thing for your finances

Charlie, the Breakfast TV presenter, asked me a question that reflects the view of many in the UK today, “but surely if you’re paying rent when you could be paying off a mortgage, you’re throwing your cash away?”

This is a precept that only holds true if you believe ‘house prices can go only go up’. If property prices were to crash, those who are renting would be the winners; they’re not locked into paying a mortgage that’s possibly bigger than the house’s value (i.e. negative equity)… So no, paying rent isn’t always the worst thing for your finances, though of course historically in recent times property prices have continued to rise, so it has been true.

Now don’t misunderstand me, I’m not predicting a crash, just saying it is one possible circumstance. Nor am I saying never buy a house nor get a mortgage; it’s more about being aware things can change. Arbitrarily forcing yourself into an unaffordable mortgage isn’t good, yet it’s increasingly common. Many who have a terrible credit history still find it sensible to borrow at 7% or 8%, a huge expense and potentially risking everything to try and buy a property.

Over a long-term period home ownership is very likely to be a boon to your finances. The market tends to rise over the long term (though nothing is ever guaranteed) so saving up for a deposit and getting an affordable mortgage to buy the home you live in, providing it doesn’t curtail the rest of your life, is wonderful. Yet having no spare income and eking out every last penny you can to try and own a property that you may not be able to afford in the long run can be a disaster.

4. If a mortgage company will lend it you can afford it

The average house price in the UK is £180,000. To get a mortgage for a property worth that much, as a single person you would need a salary of £50,000 and as a couple a joint income of £70,000. Now take a look at the UK’s average earnings of around £25k. This quite simply means that home ownership is unaffordable for many.

Yet of course if the mortgage company says it will lend us that amount, we must be able to afford it, mustn’t we? Baloney!!

Mortgage companies lend us what they consider to be a good amount to maximise their profits. As I always say, a company’s job is to make money out of us – not to be a beneficial financial friend. And just as credit card companies post ‘pre-approved’ letters through our mail boxes, even if we don’t need them, mortgage companies push us to borrow – it’s how they make their money.

Now don’t think I’m saying mortgage companies are irresponsible, on the contrary, they are very responsible… to their shareholders generally. Of course, they’re not stupid, they don’t lend people amounts that are totally impossible to repay. Yet if you’re left overstretched and desperately eking out repayments, they’re still making profits.

Better still for them, the fact it stretches people’s finances may mean it’s not affordable and could force you to take out unsecured lending like credit cards and loans, at a high rate, possibly from the same company, leaving them grabbing even more from your debts and profiting. Don’t worry though, if the worst happens and you can’t pay, the mortgage company will still be fine, it can always grab your house… why do you think it did a valuation in the first place?

Perhaps this is going a wee bit over the top. Many mortgage companies do show a level of responsibility. They’re not really my target, I simply want to emphasise that only you can really take responsibility for what happens. Many people get mortgages on the brink of their financial affordability, grabbing as big a house as possible in the hope of raking in oodles of investment returns.

Yet interest rates seem to be on the up – no one knows where they will go. So don’t ask yourself “can I afford the repayments?”, instead ask yourself “could I afford the repayments if interest rates rose by 2%?”… the answer for many is probably no (for more details on getting a sensible mortgage see the mortgage or remortgage guides)

Admittedly there is slightly less worry if you have a fixed rate mortgage as you’ve a couple of years’ or more protection in the event that rates rise, but on the back end you will still be at the mercy of the market.

Have I scared the pants off you?

If I have, well perhaps that’s a good thing. My aim isn’t to make predictions, just to try and undo some of the false assumptions we’ve been fed. House prices could continue their relentless march upwards, and then many will profit.

Yet equally things can go wrong. Plan for the worst and hope for the best.

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