House Prices are Seriously Overvalued
Now is not the time to buy houses
Hi Folks,
There is very little in the way of really unique properties for sale at the moment, and the quantity of houses for sale has dropped considerably since last year. Interest rates are rising, and will continue to rise, and prices are falling. I do not advise buying property at all at the moment. Not only that, but house prices have moved way out of whack with everything else. They are hugely over-priced. Let me give you some examples.
If you have bought my book on real estate then you will know the various charts and calculations I give to show you how to buy real estate at the right price. And I am the only person in this business who tells you how to properly value a house, and the last place you go for real value is an estate agent.
There can be several prices for a house, but the main two prices are the emotional value and the intrinsic value. I always say that if there is a property you really really want, and you are prepared to pay over the odds for it, then by all means do so, but if you are concerned not to be ripped off, and you are looking for real value, then you need to know how to calculate the intrinsic value.
Let me give you an insight into what is currently going on in the property markets in the UK. Whether you pay any attention to what I say is another matter, but if you are concerned to pay the right price, and not get caught out in market downturns you need to pay attention to what comes next.
Let me start by saying that house prices go up and house prices come down. Anyone who says differently is an idiot who has no grasp of the history of house prices. I am not going to rehearse here why house prices rise, and have done so at certain times. If you want to know why then buy my book, I go into great detail explaining these matters. Here’s the link. Here I am simply concerned to go through a series of recently advertised deals and show you why they are, every single one, vastly over-priced.
How about this 2 bed flat in Torquay? I used to live in Torquay so I know the area very well. Please note the estimated value leads you to believe you are buying into extra equity. There is a marketing phrase for this spoof. It’s called Buying below market value. If you believe that you’ll believe anything. There is no such thing as buying below market value. Market value is what someone is prepared to pay on the day. If you are paying over the odds that’s the market value. It certainly isn’t intrinsic value. If you buy below what would normally be a commercial level, that is also the market value. In other words, the deal you strike, whatever that happens to be, is the market value. There is no such thing as below market value. It may be a good deal or a bad deal, but that is quite another matter.
Sooner or later prices are going to come back into line with reality. If you’ve bought on the assumption that you have a good deal but the maths dont stack up, then you are likely to be stuck in negative equity at some point in the future. The way to avoid such a situation is not to be caught buying above real intrinsic value in the first place.
Let’s have a closer look at these examples. Here is that Torquay deal again.
Description: 2 bed flat
Estimated rental: £650 pcm
Purchase price: £93,500
Estimated value £110,000
Estimated value? Whose estimate? Do the maths. Dont believe what you are told. In my book I show you how to work out these figures and I also show you what happens when you pay too high a price.
Most valuations are based on what some other person thought the value of a similar property was, based on what a salesman told him. Commercial maths never came into it. Someone said “that’s the price”. Most people dont bother to check, mainly because they dont know how to.
Based upon simple maths, and the commercial use of money, and the underlying value of the property, the true value of the property above is roughly half the estimated value. You can buy my book to see exactly how I calculate value, and why I use those calculations, and what happens in a market downturn if you dont pay attention to those values.
Let’s try another example:
Description: 3 bed house
Estimated rental: £800 pcm
Purchase price: £188,500
Estimated value £228,000
This deal is woefully over-priced. Indeed the estimated value is more than twice the intrinsic value.
Let’s try one more:
Description: 4 bed terraced house
Rental: £995 pcm
Purchase price: £140,000
Estimated value £183,000
Intrinsic value is a little over £100,000. The estimated value is way over the top, the actual purchase price is 40% over what it should be. If you buy into such a deal your housing costs are likely to be way over what it would cost to rent.
I always, repeat, always buy after a crash. My houses cost me nothing, and I mean that. I buy a house and rent it out while living in rented accommodation. The person renting the house I bought is paying for it, not me. When the price rises, I mortgage it or remortgage it, and when the next crash comes round I buy another. I’m paying nothing for my houses, except that original rent charge. How much are you paying for yours?
In the above example the “equity growth” is stated at £43,000. What the deal should say is that the purchase price is over and above the real value by that same amount; £43,000. Over the life of a mortgage just think how much more you will be paying in interest alone on that extra figure.
Be warned. Now is not the time to buy real estate. It is hugely overpriced.
If you really want to understand how the maths work you do need to read my book. I dont have the space to cope with the charts and explanations here. The book also gives you the background to how property markets work. There’s no guesswork here.
Next week I shall be discussing the metrics that are going to affect house prices in the near future. See you then.