negative equity, bought a lemon, now working over seas

Dithering_Dad

keeprenting wrote: »

I guess I was the one who needed to read the OP more closely.

no probs, I tend to speed read too, but I did make the effort this time.

keeprenting wrote: »

However, this doesn't excuse what you have been writing. "If he doesn't sell then the only loss is the amount he has to subsidise his renters for." The idea that it doesn't matter if the value of your property drops, so long as you don't sell, is wholly untenable. If my house is worth 100k and drops to 80k, I have made a loss of £20k irrespective of whether or not I sell at 80k. I could have sold at 100k and re-bought at 80k, leaving me in the same position but with 20k more cash (minus costs).

If the market hadn't crashed and the OP had said "I bought my house for £100k and it's now worth £120k - I made a profit of £20K!!!" everyone would jump on him and say that he hasn't made any profit until he sells the house and banks the money. It's the same the other way.

If I buy shares in HBOS at 400p a share and the market dives, leaving the price at 300p a share. If I sell the shares then I've made a loss of 100p per share and my bank account is much lighter. If I just leave the share until the market recovers to 400p a share then I didn't lose any money and my bank account is unaffected. It's the same with property.

keeprenting

"The tax situation cannot go against him simply because he isn't making a profit on the rent and so his rental 'income' will not need to be declared."

I think the issue is that the interest costs will exceed the rental income and that he won't be able to set the loss against his Belgian employment income - so part of the interest costs will be "wasted."

keeprenting

Dithering_Dad wrote: »

no probs, I tend to speed read too, but I did make the effort this time.



If the market hadn't crashed and the OP had said "I bought my house for £100k and it's now worth £120k - I made a profit of £20K!!!" everyone would jump on him and say that he hasn't made any profit until he sells the house and banks the money. It's the same the other way.

If I buy shares in HBOS at 400p a share and the market dives, leaving the price at 300p a share. If I sell the shares then I've made a loss of 100p per share and my bank account is much lighter. If I just leave the share until the market recovers to 400p a share then I didn't lose any money and my bank account is unaffected. It's the same with property.

I don't think we are going to agree on this. Most believe that the property market will continue to fall (dispute that if you want). So the better analogy with your HBOS shares is as follows. You bought at 400, the current price is 300 and the price is expected to bottom out at 200 before (arguably) recovering to 400 again.

You might say "given that it will recover to 400, I won't really make a loss." However, you have missed the chance to bank your 300 and put it in the bank, where (a) it will earn interest, and (b) you won't take the hit when the share price drops to 200. If you believe that the price will ultimately recover to 400, the rational course of action would be to sell at 300, put the money in the bank and buy back in at 200.

I suppose your numbers work if you believe that 300 is the bottom of the market. But you would be hard pressed to find anyone who agrees that the property market has already bottomed, if that is what you believe...

Dithering_Dad

keeprenting wrote: »

I don't think we are going to agree on this. Most believe that the property market will continue to fall (dispute that if you want). So the better analogy with your HBOS shares is as follows. You bought at 400, the current price is 300 and the price is expected to bottom out at 200 before (arguably) recovering to 400 again.

You might say "given that it will recover to 400, I won't really make a loss." However, you have missed the chance to bank your 300 and put it in the bank, where (a) it will earn interest, and (b) you won't take the hit when the share price drops to 200. If you believe that the price will ultimately recover to 400, the rational course of action would be to sell at 300, put the money in the bank and buy back in at 200.

I suppose your numbers work if you believe that 300 is the bottom of the market. But you would be hard pressed to find anyone who agrees that the property market has already bottomed, if that is what you believe...

I think we may have to agree to disagree about this.

Just for the record, I'm not a property bull or bear or landlord, though I did rent out my home when I worked overseas (just as the OP is doing). Basically, I have no hidden agendas other than trying to advise the OP on the best way to retrieve the situation, or at best, not make the situation any worse.

The trouble with the share scenario is that if you buy at 400p and sell at 300p, you still have some capital left to hold in a bank until the price bottoms out and you can buy back in. In this case, the OP has negative equity, so has no capital to 'buy back in' with.

If the OP sells now, he will have anything upto -£40k of debt, which means that by the time he's paid off his debt (10 - 15 years?) and saved up a good deposit (5 years?), house prices will probably have recovered back to where he bought his house in the first place.

Meanwhile, if he had held, his negative equity would have gone and he and his renters would have paid off his mortgage. It's the difference between breaking even in 15 years and being left with nothing or hold his nerve and have a property fully paid off and bringing in rent. In reality, he might find that in 10 years or less, the combination of HPI and rental income would wipe out his neg equ. anyway.

keeprenting

I see the OP linked to another page, which I didn't bother to read.

On a quick skim read, one question that strikes me is this. If he sells now (assume for 90k) he will realise a capital loss of £43k (purchase price £133k). Is there anything useful he can do with that loss under Belgian tax law? Under UK tax law, probably there wouldn't. The loss would be a capital loss which he wouldn't be able to set against his other income (unless he seeks to argue that the purchase and sale of the property was in fact a trading rather than an investment transaction - because e.g. he bought the property with a view to flipping it rather than holding it for the long term - which doesn't look like the case on the facts).

If under Belgian tax law he could use the 43k loss to reduce his Belgian tax liabilities, that would be a strong argument in favour of selling. If (as is prob more likely) he can't, someone needs to look at the numbers to work out the least bad option (which I suspect will still be to sell up at a loss).

EdInvestor

keeprenting wrote: »

You might say "given that it will recover to 400, I won't really make a loss." However, you have missed the chance to bank your 300 and put it in the bank, where (a) it will earn interest, and (b) you won't take the hit when the share price drops to 200. If you believe that the price will ultimately recover to 400, the rational course of action would be to sell at 300, put the money in the bank and buy back in at 200.

Or hold the shares and pocket the (tax free) dividend which is likely to be higher than the interest at the bank.

There is certainly no point in the OP crystallizing a loss and having to borrow to sell when if he does nothing, the problem is likely to go away.

Have to agree with DD's views, mine are expressed on the other thread.

keeprenting

EdInvestor wrote: »

Or hold the shares and pocket the (tax free) dividend which is likely to be higher than the interest at the bank.

A nice idea, the flaw being that dividends aren't actually tax free at all. They are taxed at an effective rate of 25% if you are a higher rate taxpayer (32.5% of the gross dividend, with the benefit of a 10% tax credit).

Dithering_Dad

keeprenting wrote: »

A nice idea, the flaw being that dividends aren't actually tax free at all. They are taxed at an effective rate of 25% if you are a higher rate taxpayer (32.5% of the gross dividend, with the benefit of a 10% tax credit).

Unless it's held in an ISA. Bit off topic though the share talk

GDB2222

keeprenting wrote: »

I see the OP linked to another page, which I didn't bother to read.

On a quick skim read, one question that strikes me is this. If he sells now (assume for 90k) he will realise a capital loss of £43k (purchase price £133k). Is there anything useful he can do with that loss under Belgian tax law? Under UK tax law, probably there wouldn't. The loss would be a capital loss which he wouldn't be able to set against his other income (unless he seeks to argue that the purchase and sale of the property was in fact a trading rather than an investment transaction - because e.g. he bought the property with a view to flipping it rather than holding it for the long term - which doesn't look like the case on the facts).

If under Belgian tax law he could use the 43k loss to reduce his Belgian tax liabilities, that would be a strong argument in favour of selling. If (as is prob more likely) he can't, someone needs to look at the numbers to work out the least bad option (which I suspect will still be to sell up at a loss).

Numbers? That's my thing!

Assumptions:
1. House prices recover to current levels in 10 years time. (That is to current nominal levels, not inflation-adjusted.)

2. House prices will go much lower in the intervening 10 years, rather than recovering straight away.

3. The shortfall in costs averages £250 per month over the 10 years. (I know it's £100 per month now, but I bet the OP has not allowed for repairs, replacing the furniture, etc. In any case, he talked about £500 per month, depending on tax position.)

Scenario 1: Sells the house, makes a whacking loss and is made bankrupt.
After 1 year, he is discharged and can save £250/mth into a bank account. At the end of year 10, he will have £33,000 in the bank (including interest) but no house. Net worth £33,000.

Scenario 2: Sells the house, makes a whacking loss and agrees to pay that off in instalments. After 10 years, he's paid it off maybe, if he's lucky.
At the end of year 10, he will have nothing in the bank and no house. Net worth £nil.

Scenario 3: Keeps the house and continues meeting the shortfall. So, nothing saved in the bank because it's been spent on the shortfall. At the end of 10 years, he has a house worth say £133k, and a mortgage of £120k. Net worth £13k.

Obviously, it depends on what house prices do, but scenario 1 looks mighty attractive to me.

motch

Dithering_Dad wrote: »

Exactly, so the house is no longer a home it has become an investment property. Usually people have to sell their houses at a loss either because they can't afford the mortgage or because they have a job in another area and need to buy a new house (i.e. they have a family to settle). The OP is neither of these, hence my comments. I suggest you read my posts a little more closely!

I'm glad that you're not my financial advisor - "if he sells now, he'll only make a loss of £33k, but if he sells in a year's time he will have a 53k loss!". Putting aside the fact that you don't know how low the price will drop, if he doesn't sell then the only loss is the amount he has to subsidise his renters for. I believe another poster on this thread has already done the calculations. I suggest you look at them.

Let's also remember that he had to pay solicitors fees & stamp duty to buy the house and will have to pay solicitors fees & estate agent fees if he sells now - so the cost of selling (and therefore his losses) will be even greater than the £33k (anything upto 40k).

He will not lose a penny if he holds and continues to rent the house, especially if he pays down the mortgage as I have suggested.

p.s. your remarks about buying at the peak of the market are a little moot here. The OP made the mistake of buying at the peak - lets not compound this error by telling him to sell in a trough.

At this moment in time we are just off (below) the peak. We're in no trough as yet. thats some time away