Property Search 
Feathering the Nest?
01/11/2008
When taking a first step onto the housing ladder, it is usual to scrape together a cash deposit but to rely for the most part on a mortgage.
An increase in the amount of our equity is anticipated over time. But by how much?
How about an average of 113% per annum every year for 25 years , on the original cash paid into the home that you live in?
Or put it another way, when you purchased 25 years ago you used £5635 of your own cash and 25 years later you have £165,188 of equity!
Well thats what would have happened if you had purchased your home at the national average price* at the end of September 1983 with 20% cash and a 80% mortgage and paid off the mortgage at end September 2008, at the end of the 25 year term.
Whereas house price indexes and news reports always refer to % changes to the whole value of property, the true return on your cash in the home you live in, caused by the “leverage” factor is usually completely overlooked. Put very simply if the value of your family home rises by 10% as a whole, over time, then the equity (assuming the same loan to value ratio above) increases by 50%! Not convinced? Try the maths.
It is this leverage factor which has created the escalation of wealth that most of us work for, to pass on to our families and is fundamental to our society and the UK economy.
I suspect some of you reading this article may ask, but what about the growth in “real terms” and also shouldn’t the cost of repayment of the mortgage be taken into account. Well personally I don’t agree that either of these comments are valid.
On the first point, when comparing the return on any other types of asset, we do not judge them compared to real terms growth. For example if you leave your cash in the bank, you do not say, but in real terms that is worth less. Notwithstanding this, analysis of the above figures indicates that the rate of growth in real terms was still a staggering 48% per annum.
On the second point, we all need a roof over our heads and our mortgage is paid by our household salary and not by our original cash payment. Our mortgage is just part of our many other cost of living outgoings. If we were not to buy a house but rented instead then we would have seen no return on all that money.
But again just to satisfy the curiosity of those that disagree with this view, the increase in the original cash paid into the above family home, even after taking into account repayment of the capital of the original mortgage was an impressive 97% pa and still 43% pa in real terms.
Of course nobody can accurately predict what the future holds. Since producing the above figures, house prices have declined further. But the economy and house prices move in cycles and indeed within the last 25 years during which time the above figures were generated, there was a prolonged recession. Within part of that period, house prices reduced by in the region of 25%. Furthermore the average bank base rate was much higher than in recent times/today.
Finally, don’t forget, we usually own a Home for more than 25 years. Have you have ever asked your grandparents, how much they paid for their first property?
Well, I suspect their answer would be met by a shout of WOW or a laugh! 50 years ago the average house price was £2058! and assuming the same loan ratio that would have meant a cash payment of £412 !!!!
Now that’s leverage!!
* All figures taken from The Nationwide House Price Data
