The price of a house

bob79

My first post.....

In my view, the current high house prices are for a large part due to the fact that people saw houses as an investment rather than a place to live in (with the Buy To Let craze and stuff like that). House prices taken by themselves are therefore for a large part meaningless. That also applies to historic prices. So in my view statements such as "we are going back to 200? prices" (?=0,1,2,3,4,...) often made on these boards cannot be applied to individual houses and should not be relied upon when pricing a house (whether buying or selling it).

House prices have had nothing to do with reality for years now and we should rethink what a house is worth.

I my opinion we should be looking at the rental market. This is not spoiled by the 'a house is an investment' male cow doo doo, people pay what it's worth for them to live in the house. And people in rented accommodation move more, so the invisible hand of Adam Smith works better: people move if the rent gets too high.

It's of course a bit difficult to translates rents into house prices, but let's give it a try. Renting and paying interest on a mortgage are really the same thing (repaying the mortgage is something completely different, that is like saving). If we assume 6% interest then we have to multiply the monthly rent by 200 to get the price of the house. Of course the 6% is somewhat arbitrary, I picked it because it is a bit above what 10 year fixed mortgages go for (the bit higher is to take maintenance into account). Computing with the current BOE rate or a short term fixed rate that is basically based on it is delusional.

So let's do some cases studies with this figure.

I rent the front of the second floor of a big Georgian townhouse for 650 a month. My upstairs neighbours bought the front top floor flat of the house in September 2007 for 185k. Both are 1 beds and the top floor of a Georgian townhouse is certainly less desirable than the second floor (smaller windows, sloping walls,...), as comparing rents of second floor and top floor flats in Georgian townnhouses also shows. Given the rent prices in my area, I wouldn't pay more than 600 pounds a month for my upstairs neighbours flat. So their flat is worth 120k. So it has to go 35% down from what they paid to reach a realistic price level. Sorry upstairs neighbours.

Two of my friends share the first floor flat of a Victorian terraced house. They pay 700 rent per month, which seems reasonable for a 2 bed flat in my area. The house is up for sale for 155k. Factoring in a 10% reduction on asking price, that's a sale price of 140k. This is spot-on. So in spite of the House Price Crash, this flat shouldn't have to go down in price anymore.

Anyone else with some case studies or somebody that wants to shoot holes in my argument?;)

fatpig_2

bob79 wrote: »

My first post.....

In my view, the current high house prices are for a large part due to the fact that people saw houses as an investment rather than a place to live in (with the Buy To Let craze and stuff like that).

Krusty and Phil are getting it in the neck again I see. :rotfl:

puddy

if you work out house/flat prices based on 3x average earnings for people in various areas, what does that give you for properties? is it in line with the calcuations you have just shown?

personally i would always rather have a top floor flat rather than have someone above me, but thats my personal choice, i dont know if others feel th same, therefore i would pay more for the top flat, not the bottom

dopester

bob79 wrote: »

Anyone else with some case studies or somebody that wants to shoot holes in my argument?;)

All your rent calculations seem to assume that wages can't fall significantly, across most if not all sectors.

From The Times
December 12, 2008
Employers say widespread pay cuts can’t be ruled out

Employers, unions and pay experts gave warning yesterday that pay cuts could sweep across industry as companies attempt to reduce costs while retaining skilled staff. The CBI said that even such imaginative moves would not be enough to avoid large-scale job losses in the coming months.

http://business.timesonline.co.uk/tol/business/economics/article5327682.ece

Welcome to deflation. You were warned time after time.

PasturesNew

My rent x 200 equals the peak price.

We're 22% below that price based on the last 3 sales of identical properties within 250 yards of here.

As you said, every area and property is different.

158xrent would be the current correct multiplier.

neverdespairgirl

jenner wrote: »

personally i would always rather have a top floor flat rather than have someone above me, but thats my personal choice, i dont know if others feel th same, therefore i would pay more for the top flat, not the bottom

depends how high the building is, and whether there's a lift!

We have people above and below us, and no problems with either.

bob79

jenner wrote: »

if you work out house/flat prices based on 3x average earnings for people in various areas, what does that give you for properties? is it in line with the calcuations you have just shown?

I don't think that this is the way to calculate a 'fair' average price. I must admit that in the past I've used the same reasoning, but now I find it flawed.

Reason 1:
The 3x average salary rule of thumb is based on a 25 year term (and higher than current interest rates, but let's not get into that now). Most people will however be willing to pay a mortgage until they retire, so say 35 years. This seems perfectly reasonable to me.

Reason 2:
I also think that nowadays people spend relatively more money on housing than before and that this is a reasonable thing since housing on this small island with lots of planning regulations is fundamentally scarce (other product like food, electricals and foreign holidays are not fundamentally scarce and have become a lot cheaper in relation to earnings over the past decades). So I think that a 'fair' average price is more than 3x average earnings. Probably more in the neighbourhood of 5x if we were still a one income per family country. This brings us to reason 3.

Reason 3:
You also have to factor in that more people are joint earners now. I have friends in Sweden (where virtually every couple are joint earners) and there it is impossible to buy or rent anything as a single earner even with a pretty decent paying job. The second salary in Sweden goes completely towards the mortgage. This fact really really changes things.

The properties that I mentioned are not average, so even if I knew the average earning in my area, it wouldn't say much about the prices of these properties.

----
Then the top floor thing. I agree with you in general, but Georgian townhouses are an exception. The top floor feels much much smaller: small windows, low ceiling. The second floor has a very high ceiling and very big windows.

bob79

dopester wrote: »

All your rent calculations seem to assume that wages can't fall significantly, across most if not all sectors.

Deflation on a grand scale is such a horror that the government will do anything to stop it (probably including printing money which is a very easy way to stop deflation:D).

It is none the less realistic to expect rents to go down in a recession (at least in a low inflation recession like the current one seems to be) and in my area rents have actually fallen slightly. In a properly functioning housing market I would expect the same for house prices. The drop on top of that which we see now is the bubble bursting. There are actually two things going on simultaneously (in my humble opinion of course;)).

bob79

PasturesNew wrote: »

My rent x 200 equals the peak price.

We're 22% below that price based on the last 3 sales of identical properties within 250 yards of here.

As you said, every area and property is different.

158xrent would be the current correct multiplier.

You are paying too much rent!

But now without kidding: your figure corresponds to 7.6% interest. Maybe that's the right figure, my 6% was only a (somewhat reasoned) estimate.

Gorgeous_George

I agree with the OP on this one.

A house provides an environment in which to live and overall, it doesn't matter whether it is rented privately, from a HA, from a council or owned. (Other than a small adjustment for the security of owning weighed against the flexibility of renting).

As a BTL opportunity, I have a general rule of thumb that a house should not cost more than 100 x the monthly rent.

I'm more flexible when buying my own home. The security of living in my own home has a large value and I want to be mortgage and rent-free before I'm 50. So, I'd run to 200 x the monthly rent when buying my own home.

GG

Dualcyclone

I still consider my house an investment; regardless of whether house prices don't seem to make sense.

Like you say, renters will pay what they think its worth; home buyers apply the same logic.

I bought my house because I thought it was worth the money at the time. And when I've paid the mortgage off in 5ish years, I won't need to pay any rent - while based on your scale, any renter will still have 11+ years of renting left.

I agree renting in the short term is good considering these market conditions; however, long term, renting is basically the same as throwing money into the wind; at least my purchase means I have something to show for it at the end!