Risk

macaque_2

Framps wrote: »

Not quite - after a limited period of time, usually 25 years, the property is yours and you pay no-one for the right to live there. Over those 25 years the price will undoubtedly rise and fall - who cares, so long as you can afford the repayments...

If you do not buy then you will always pay someone else for the right to live in their house. Your monthly rent carries no long-term benefit so is merely an ongoing (until the day that you kick the bucket) short-term liability... sounds extremely risky to me.

Thank you for attending Macaque's advice clinic. Clearly your arrival is not a moment too soon.

The first thing to bear in mind is that you don't acquire unecumbered ownership of a property until you have repaid the capital debt. The lender does not give you the deeds just for keeping up with interest payments over 25 years.

Secondly, you need to be more rigorous in your analysis to get to the truth. Here is an example by way of illustration:

EXAMPLE

Imagine a home owner buys a property and sells it after 25 years. He pays £250k with a 100% mortgage. If we see a repeat of the Japanese experience, the value of the home may only be £150,000 at the end of 25 years.

Costs to the home owner
Stamp duty (3%) - £7000
Estate agent (2%) - £5000
Legal fees - £3,000
Maintenance (1% per annum) - £62,500
Mortgage costs (repayment mortgage at 6.5% interest) - £525,000
Total cost of ownership = £602,000
Money left after sale of property = £150,000
Net loss after sale of property = £452,000

Someone else however decides to rent and invest the difference. He can rent a comparable property for about £800 leaving him £950 a month to invest. If the renter gets compound growth of 6.5%, he will have a nest egg (after tax) of about £500,000.

So here is the summary:

Net capital loss after 25 years
Home owner - £452,000 loss
Renter - £24,000 loss

Nest egg after 25 years
Home owner - £150,000 in the bank
Renter - £500,000 in the bank

In other words, the home owner would have one house and no savings at the end of 25 years. The renter by constrast could buy three similar properties and put £50k in the bank.

Macaques tip of the day: Property is not the only option for investment.

ess0two

What the odds of a Japanese experience?can you give some other variables than this?

macaque_2

ess0two wrote: »

What the odds of a Japanese experience?can you give some other variables than this?

Excellent question!

This time I have assumed that the buyers home holds its value but interest rates run at 10% to support the £

Net capital loss/gain after 25 years
Home owner - £527,000 loss
Renter - £454,000 profit

Nest egg after 25 years
Home owner - £250,000 in the bank
Renter - £1,154,000 in the bank

HAMISH_MCTAVISH

macaque wrote: »

Excellent question!

This time I have assumed that the buyers home holds its value but interest rates run at 10% to support the £

Net capital loss/gain after 25 years
Home owner - £527,000 loss
Renter - £454,000 profit

Nest egg after 25 years
Home owner - £250,000 in the bank
Renter - £1,154,000 in the bank

Macaque, there is a greater chance of monkeys flying out of my ar5e than there is of seeing zero % HPI for 25 years in a high inflationary environment requiring 10% interest rates.

Now back in the real world, if you completely ignore all the massive inflationary pressures on house prices, and make the laughably low estimate that they will only rise in line with inflation of between 2% and 3% per year, even with 6% mortgages and net savings rates at 5%, buying beats renting by £100,000 over 25 year.

If you use the long term hpi average of inflation PLUS 2.9%, then the difference becomes more like £450,000 ahead for the buyer versus the renter, as follows.....

250K house, 15% deposit, 85% mortgage, interest rate of 6%...

versus

rent of £800 and net after tax savings rate of 5%, investing the deposit and monthly difference to mortgage costs...

and

allowing for HPI of 4.9% (inflation plus 2.9%, the long term average) and Rent Inflation of just 1% per annum, ie, below inflation.....

The buyer ends up a whopping £450,000 ahead of the renter in just 25 years.

You can make your own calculation here.......

http://www.timesonline.co.uk/tol/money/calculators/article5771800.ece

julieq

The idea of houses remaining with their owners because no-one else can afford to buy them is the historic norm, oddly enough. In fact in the case of most parts of London and a lot of flats it's still how property "ownership" works, the freeholders sell a lease for a period, not absolute title.

No reason at all why that shouldn't be the case again really. But the fact that there is very high owner occupation here means it would take a while to unwind.

macaque_2

HAMISH_MCTAVISH wrote: »

Macaque, there is a greater chance of monkeys flying out of my ar5e than there is of seeing zero % HPI for 25 years in a high inflationary environment requiring 10% interest rates.

Now back in the real world, if you completely ignore all the massive inflationary pressures on house prices, and make the laughably low estimate that they will only rise in line with inflation of between 2% and 3% per year, even with 6% mortgages and net savings rates at 5%, buying beats renting by £100,000 over 25 year.

If you use the long term hpi average of inflation PLUS 2.9%, then the difference becomes more like £450,000 ahead for the buyer versus the renter, as follows.....

250K house, 15% deposit, 85% mortgage, interest rate of 6%...

versus

rent of £800 and net after tax savings rate of 5%, investing the deposit and monthly difference to mortgage costs...

and

allowing for HPI of 4.9% (inflation plus 2.9%, the long term average) and Rent Inflation of just 1% per annum, ie, below inflation.....

The buyer ends up a whopping £450,000 ahead of the renter in just 25 years.

You can make your own calculation here.......

http://www.timesonline.co.uk/tol/money/calculators/article5771800.ece

Excellent point! I have now included for house price inflation.

Net capital loss/gain after 25 years
Home owner - £375,000 loss
Renter - £454,000 profit

Nest egg after 25 years
Home owner - £402,000 in the bank
Renter - £1,154,000 in the bank

HAMISH_MCTAVISH

macaque wrote: »

Excellent point! I have now included for house price inflation.

Net capital loss/gain after 25 years
Home owner - £375,000 loss
Renter - £454,000 profit

Nest egg after 25 years
Home owner - £402,000 in the bank
Renter - £1,154,000 in the bank

Monkeyman, your figures are a joke. Either explain your calculations or go away.

the_ash_and_the_oak

HAMISH_MCTAVISH wrote: »

I take it you do realise that the absolute number of homes in owner occupancy can increase, whilst the percentage of homes in owner occupancy decreases?

Could you explain this a bit? The only way I can make any sense of this drop from 70% to 60% at same time as rising overall figures is if this period includes a 17% rise in the number of properties currently in britain

HAMISH_MCTAVISH

the_ash_and_the_oak wrote: »

Could you explain this a bit?

Yes. I screwed up in the earlier post, sorry about that.

As population increases, the total numbers of people living in owned housing can increase whilst the percentage of people living in owned housing decreases.

I phrased it incorrectly earlier, as this would not change the percentage of homes in owner occupation, just the percentage of people living in owner occupied homes.

chucky

Generali wrote: »

So what do you see as future house price changes? 100% rise in real terms in 15-20 years? Or nominal something?

I only ask as it might help the rest of the board. I'm bored of you so on ignore you go.

Byee!

he's actually right Gen over a 20 year period it would only need HPI at an average of 3.5% over the period for house prices to double. that's the point that i think H man was trying to say.

whether salaries keep up with this i don't tend to think so but that what was probably said in 1991.