The Harvey files 2: housing market part 2

The great fear of homeowners is that a drop in prices will leave them in the state of negative equity—when you can only sell your home for less than you still owe on it—that afflicted so many at the end of the 1980s. But the joys of positive equity—being able to realise a net capital gain—are not unconfined. The current state of the housing market does not necessarily benefit homeowners to the extent we tend to assume.

Suppose, back in 1992, you had just managed to raise the resources to buy your first house, for £100,000 (or, more likely, £99,975). You had had your eye on an even more attractive place but, at £125,000, it was completely out of reach. You took out a 25-year mortgage of £90,000.

Now your house is worth £320,000. The apple of your eye is back on the market, however, it now costs £500,000. But, you say, there is a capital gain of £220,000 which will help make the whole thing possible. Not so fast.

By now you will have paid off around £40,000 of the original mortgage. But then, two years ago, you borrowed another £20,000, releasing part of your equity, to buy a car and have a well-deserved holiday. So you still owe £70,000. You will also have paid out perhaps £15,000 over 15 years on maintenance and repairs, so your real net capital gain is £235,000. Moving will involve (apart from removal costs) estate agents’ and solicitors’ fees, plus stamp duty of £15,000 and some inevitable spending on redecorating and improving the new home: you will be lucky if the total of these items is less than £35,000.

So you have around £200,000 in hand. Unless you have other capital to draw on, you will need a mortgage of £300,000 to complete your purchase. So you will end up with monthly payments of around four times the present level.