What does having a house (to live in) actually 'cost'?

michaels

Bear with me on this one.

I am thinking of investing another 200k in in my own house (by moving) and am trying to work out what it will cost me per month to see if it is worth it - ie should I stay in the current house and have lots more disposable income or will I have a better quality of life by having a bigger place but less disposable income?

1) Easy answer is approx 1180 quid per month on a repayment mortgage with a 5% interest rate for a 25 year term.

2) However this includes the capital repayment and that money is not really 'spent' but more 'saved' as it is going towards an asset, so is the actual cost the interest bill over the period. Simplifying I will work on interest only (heroic assumption saving in to isa and repayment of mortgage are equivalent to each other) as otherwise loss of interest on monies used to pay off capital that could otherwise be saved are ignored. This gives an interest cost of £833pcm (5% again)

3) However this would leave the outstanding balance at 200k in 25 years time but of course in 2034 200k pounds will buy about 2 loaves of bread or probably slightly more but it is fairly certain that inflation will have eroded the value to some extent. So how to adjust for this? I am going to exclude any possible 'real' capital gains from the calculations so will assume that house prices have not changed in real terms (this may be conservative but of course I will still need a house to live in so any capital gains are not actually of any use to me). Rather than working out in real terms what the 200k of 2009 money will be worth in 2034 instead I am going to suggest that real mortgage rates are likely to be of the order of 2% over the period so rather than the 200k costing me 5% pa it only costs 2% (obviously this is a value calculation not a cashflow one - I guess I could look at it as allowing the 200k to remain constant in real terms by actually letting it increase by 3% pa in nominal terms and only paying the remaining 2% of the interest - is this mathematically equivalent to deflating the 200k?) so the total real cost pa of living in a house costing 200k more will be £333 per month.

Anyone who has any thoughts on whether this is a fair way of looking at the real affordability of property I would be grateful to hear, the reason for asking is obviously that the initial 1180pcm could fund a lot of improved lifestyle and the benefits of 2 more bedrooms, off street parking and a bigger garden do not seem to compensate.

Cleaver

Sorry Michaels, I know your post was well meaning but I lost the will to live somewhere between point 2 and point 3.

PasturesNew

I can pay cash for a house (not as much as you've got you rich bugg4h), just a little house ... for little me.

But I start to get "tight" when I realise that every pound I spend on it stops me saving that money and "investing" it elsewhere.

So you have to also put into the equation things like:
- instead of paying the interest each month, how would I get on if I just saved that? How much would that add up to over the same time, with compound interest?
- what if that money were invested in other things over that time.

£200k extra on a house is a fortune! It's also no longer liquid. If you're paying interest and your job finishes or you lose a leg, you can't just stop. If you're saving and investing you can just stop, then slowly claw it back if you want. Other things you can do with that money are more liquid.

You also need to factor in the extra costs over that time for:
- extra buildings insurance
- extra contents insurance
- extra heating
- extra council tax
- extra maintenance

Pobby

Blooming game ain`t it. Time was you bought a house, bit of second hand furniture. Proper inflation, not just HPI. So a bit more in the old wage packet. Job done.

dopester

michaels wrote: »

3) However this would leave the outstanding balance at 200k in 25 years time but of course in 2034 200k pounds will buy about 2 loaves of bread or probably slightly more but it is fairly certain that inflation will have eroded the value to some extent.

I'm so very hostile to this ridiculous assumption. 25 years is a spit of time in the shifts of a changing economy. Even 50 years is not long enough to assume what has been, will continue to be again, without any major setback.

In many parts of the United States and the world, property prices have skyrocketed since the 1970s. Many think such gains are permanent. We doubt it. Reliable statistics on property prices are skimpy, and few date back before World War II but the numbers that do exist suggest that real estate tends to give up most of its inflationary gains during each depression period.

I realise many people have got used to the idea of perpetual inflation since the end of WWII - and assume things are different in this modern age to centuries gone by because we're modern and have more knowledge and 'modern' insight into the world.. or there is more people now or whatever.

The current inflation period is the one episode in five centuries that has been different. The remarkable feature of the postwar world has been the magnitude and persistence of inflation. All previous inflations in US and UK history were wiped away with amazing regularity in deflations.

I believe we've reached at massive inflationary peak in the modern age, which was driven to massive heights through a combinations of reasons - and we are actually looking into the deflationary abyss.

A big-part of the house price rises in the modern period, has been driven by genuine economic activity, credit-expansion with it, but also cold-war inflation. I'm not going to go into depth about that here.... except to say the Cold War was very inflationary in the West... as well as importing a lot of U.S inflation. [The hostile attitude of Communist leaders towards capital assured that foreign investors would not peel away from the U.S as U.S bond yields rose. The menacing character of Communism was a powerful inducement to cooperate in extending the inflationary Cold War status quo.]

Over the long term of 500 years... yes.. house prices have risen, but there have been times to buy, and unhappy times not to buy (or maybe hold a large part of your wealth in property) houses during those centuries. Lasting decades.

In every case we can find, the boom periods before previous depressions have produced inflationary gains in property prices. These gains were never uniform across regions, and local effects amplified or even cancelled out small fluctuations.

Yet generally speaking, real property has tended to appreciate or depreciate in line with monetary forces of the economy. When inflation was extreme, property prices rose higher, and subsequently fell when deflation took hold. In short, the higher prices rose, the harder they fell.

Similar Pattern in Britain.

British data shows a similar pattern in prices of private homes and farm land for the previous "Great Depression" that began in 1873. It, too, wiped out the whole inflationary gain during the preceding boom.

Private houses in Britain rose in value by 13 percent from the period 1851-52 to their peak in the years 1876-77. They then declined by 19 percent over the next thirty-five years. In 1912, they were 9 percent lower than they had been in the period 1851-52.

The value of British farm land also tumbled. Tax records show that rental values rose by 24 percent from 1846 to 1875. This entire gain was then wiped out, as values dropped 37 percent over the next twenty years. By 1900, income yields from British land were 17 percent lower than they had been in 1846.

Total Inflationary Gain Wiped Out

A casual look at the Commerce Department data on home prices in the twentieth century would belie this conclusion, in part because U.S. statistics are formatted to start with 1929 as a base year. For example, at the Department of Commerce the price index for private homes in twenty-two major U.S. cities shows a fall from 100 in 1929 to 75.7 in 1933. This is a drop of 24.3 percent. It is hardly trivial. But it is more frightening when put in context.

The depression-era drop in U.S. housing prices (understated in government statistics) wiped out the total gain during the inflationary boom dating back to World War I. In 1914, the index stood at 78.1 - higher than in 1933.

Similarly, the index of the average value of farm real estate per acre in the United States (1967 = 100) rose from 28 in 1914 to a high of 48 in the early twenties. It then tumbled to a low of 19 in 1933. The total gain in farm land from the inflationary boom was wiped out in the depression. At the bottom, land was worth 33 percent less than it had been before the boom began.

The twenties were a period of a tremendous building boom. A higher percentage of the total economy was devoted to housing construction than at any time in American history. From 1921 to 1930, approximately $61 billion (in 1929 dollars) was invested in the construction of new private homes. Another $4 to $5 billion was spent of additions and alterations to existing homes. In spite of the huge investment and improved housing, total nonfarm residential wealth in the United States tumbled from $108.4 billion to just $81.3 billion at its low in 1935. This was 12 percent below the comparable figure for 1920.

Davesnave

Pobby wrote: »

Blooming game ain`t it. Time was you bought a house, bit of second hand furniture. Proper inflation, not just HPI. So a bit more in the old wage packet. Job done.

When was that though? The first house I bought in '77 was £9250, and when I sold it 10 years later it was £58K.

I'll agree with the bit about second-hand furniture, and add 21 year old car, no central heating and no fancy holidays!;)

ukcarper

My case bought 1st house approx 35yrs ago Mort payments approx £44
Highest Mortgage payment £300 now mortgage free If I had saved £300 per month at 4% would have approx £270,000 = £900 per month int at 4% to rent same house £1200 per month.

How much rent would I have paid in the last 35years

Davesnave

I think this is a calculation many of us make in a less analytical way when we decide whether to invest more in a particular property or move on. There are too many 'unquantifiables' for me, but I suppose this approach may work for some.

Certainly we didn't 'get back' what we put into our last property, when compared with others who did little, but we enjoyed the place for 21 years and had enhanced use out of it for much of that time. Above all, we liked the environment around and didn't have any certainty of matching it, if we moved.

In the term 'environment,' we'd include neighbouring people too. Good ones can be hard to discover in advance. Bad ones can wreck your investment, and you are powerless to do much about it, except move on again.

I like where I am now, but the environment is still a 'wait & see.' Looks promising, though.

michaels

Thanks for the comments so far - the inflation / deflation argument definitely needs consideration - will real interest rates adjust to a long run trend of about 2% under such circumstances?

How do people decide how to trade off the benefits of a 'better' house against other things money can be spent on? The relative time horizons seem to make it so difficult and thus the liquidity arguments also seem to come in to play.

Harry_Powell

I think that if you had £200k sat around in a bank account and decided to invest it in property, then after asking if you had adequate emergency savings and enough in your retirement fund and you thought you'd get a better return in the housing market than in other investments, I'd say that you should go for it.

As you're thinking of borrowng the £200k in order to invest it, I'd ask whether you'd borrow money to invest in other types of assets such as Gold, Shares or Bonds? If the answer is no, and you're only moving house for investment purposes, then I'd have to say I think the risks outweigh the gains.

Putting aside the cost of maintaining that level of debt (and the worries if interest rates start going up, or they start talking about staff cuts at work), the added utility, council tax and maintenance costs for a large house should also be factored into your sums.

ukcarper

michaels wrote: »

How do people decide how to trade off the benefits of a 'better' house against other things money can be spent on? The relative time horizons seem to make it so difficult and thus the liquidity arguments also seem to come in to play.

I would have thougt that was a personal thing would you prefer a bigger garden than a holiday abroad for example. Every time I have bought a house my decision has been base on what I want at the time and not any long term gains I might make on it.