MONEY COMMENT
Why Property Investing Frightens Me

By Cliff D'Arcy
November 5, 2003

My wife and I are struggling with a difficult decision at the moment. The birth of our second child means that our modest Victorian terrace is now bulging at the seams. When guests visit, our lounge starts to resemble an intimate game of Twister!

Okay, so we've outgrown the house that we bought as a young couple at the end of 1992. Over the last ten years, it's done us proud, both as a home and an investment. By sheer luck, we bought in an area that went on to enjoy one of the strongest housing booms in Britain. As a result, our humble abode is now valued at over 3½ times our buying price.

What's more, thanks to the effect of gearing (borrowing money to invest alongside your stake), our 10% deposit has become a hefty chunk of equity. So far, so good! The problem is that our next step up the property ladder involves buying a bigger house. In London, that means raising another £200k to £250k, which is a lot of money by anyone's standards!

Having been reckless with money in the past, I've learned my lesson and now have a cautious approach to major financial decisions. Do I really want to burden myself with an extra £200k of debt, even with the base rate expected to remain below its long-term average? According to our mortgage calculator, borrowing this sum over 25 years will mean paying back:

Average annual interest rate             Total amount repayable (£)
             4%                                   316,701
             6%                                   386,580
             8%                                   463,089

Even the lowest of these three figures is many times my gross annual earnings. In fact, I'd be paying the majority of my take-home pay to my mortgage lender for quite some time!

Despite being an impoverished writer (take note, Ed!), I earn a higher-than-average wage. Even so, on my own, I couldn't raise a mortgage to buy even the average-priced British home (a snip at just £137,780, claims the Halifax). Five out of six British workers are in the same position, according to the Investors Chronicle.

However, all is not lost. My wife brings home far more dough than I do, even though she works part-time. Indeed, we're quite well-off, with no debts other than a small mortgage, a portfolio of shares, a pile of cash, plus other assets and more money on the way. Throwing the missus and our other assets into the mix makes buying our next home easily affordable.

Still, despite our comparative wealth, I do worry about channelling so much money into bricks and mortar. Prices have fallen by around 10% in our area over the last year, yet I firmly believe that they have further to fall. My view is: why sell a chunk of attractively valued shares, only to put the proceeds into the tail-end of a property boom? Hence, we're going to do one of four things:

1. Do nothing: sit on our hands until my wife returns to work and our situation is clear.
2. Sell our home now, bank our profit, and rent a property until the local market looks attractive once more.
3. Move away from London and buy a lovely house elsewhere. I'll write from home or endure a longer journey to work, but my wife may have to give up her job.
4. Buy and be damned: find a nice home locally and enjoy a higher standard of living today.

I'll let you know what we decide, but don't hold your breath!

More: Home-owning and Mortgages Centre | Twelve Easy Ways To Devalue Your Home | Getting On To The Property Ladder | House Prices, Techs And Bubbles.

The author owns shares in HBOS, the parent company of Halifax.