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

michaels

It isn't for investment purposes at all - it is a question of what will bring most benefit/utility/happiness to me and my family - a bigger house with a big garden and off street parking or £1180/£833/£333/Some other amount if you make different assumptions re property and general prices....

michaels

Crossed post, this is exactly my question - how do I trade off some unknown amount of money over a 25 year time horizon with immediates like clothes, holidays, ballet lessons etc?

ukcarper wrote: »

I would have thought 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.

carolt

To me, an extra 2 beds, bigger garden and off-street parking should not cost £1180/month. I'd suggest you're being robbed, given you can rent a whole house with big garden and 3+ beds and off-street parking for that or less. In your area.

Whether you think it's worth it to me has as much to do with how secure you think your income will be over that time, how confident you are house prices will stay at current levels or above, in case you need to sell promptly, and how much that extra £1180/month is relative to your income.

To me, it's a lot. So I wouldn't consider it. If it's small fry to you, then go ahead.

Actually, thiking about it, have a close friend who underwent exactly your dilemma. They were living in a slightly manky 3 bed house, worth about 250K, sufficient for them and 2 kids. Thet decided to trade up, as had more or less paid off the old mortgage. Bought for 440K in Dec 2007 (I did try to warn her...), 5 bed house with massive outbuilding, virtually another house in the garden, in slightly better area. Personally, I think it was vastly overpriced even when they bought it - despite extensions, it still cost nearly 200K more than the previous ceiling price for the street. :eek: No idea what it's worth now - but less. Husband's self-employed and has been undergoing a rocky spell. So lots of stress for my friend.

On the positive side, she gets to live in a much nicer 5 bed house, kids have an art room, she has an office, husband has a music studio and office in the garden.

So, at least she has a nicer house to have sleepless nights in.

If husband can keep earning enough, their gamble will have paid off - eventually. I don't think about the alternatives - she's a close friend.

julieq

Bit of a classic case of death by business plan this one. If you try to plan all risk out of any transaction, you end up finding reasons not to make the transaction, so it fails at the first hurdle. The best way of not winning bets is not to take any.

Dopester's post is the usual enjoyable nonsense and falls into the trap of saying that if a risk is conceivable it must be the overriding consideration. As a matter of verifiable fact, the number of 25 year periods without inflation on the cost of housing is vanishingly small over the last (say) 500 years, or 100 years, or even 25 years. Where there have been factors changing this, they are localised and affected for example by the mortality rates from disease or World war. So OK, there is potential for deflation over 25 years, but you are talking about a tiny tiny number in terms of the probability calculation, so it can be discounted to well sub 1%. There's also the point that in a globalised world you can have deflation by the repositioning of a currency relative to a basket of other currencies, it's how we've had 40% housing falls already without deflation in amounts measured in sterling.

Employment: there is risk of job loss, this can be mitigated by saving, very few people with decent levels of qualification will be unemployed for lengthy periods of time early in their careers, the risk increases as you get older. You can measure that risk, it's going to be in the 5-10% range. You have the same risk if you rent anyway, the consequences are essentially identical.

On the other hand there is a very high probablity that you will survive 10 years into retirement, during which time you will have to have investments and savings that pay your rent, elevated by inflation. That gives you a massive cost now, as you have to build those savings.

If you really want to calculate this, list pros and cons of renting v. buying, list all the risks you can see for both sides of the equation and attempt to quantify them (it's called a risk register). Then see how you can mitigate the risks. So "cost of maintenance" can be mitigated by saving before doing major work and having a buffer fund. Some risks are unavoidable so you have to weigh up whether to chance them on the balance of benefits.

As a caution, what tends to catch you out are the risks which are "outside the rules of the game", for example there is a classic example where a snooker player is playing a shot, the object ball is heading for the pocket so must go in, and then a plane crashes on the house. Anticipated risks can be priced in by definition, but the unusual things, bank collapses, defaults in Dubai, etc, catch most people on the hop.

But don't take specific advice from random people in single issue forums on the internet, particularly when they're at the extreme end of the spectrum in terms of what they believe.

michaels

Thanks CarolT - I agree it is not worth 1180 a month hence my original question about what it will actually cost. I am fairly happy to consider that the repayment part of the monthly cost is the equivalent of saving so it is probably only the interest bit that applies but even then 800 plus per month feels like a lot compared to the advantages hence my question of whether a 'real/nominal' adjustment also makes sense?

michaels

Thanks JulieQ, very interesting post - I am wondering a lot what line of work you do...

ukcarper

It's all personal I stretch myself a bit to buy a 4 bed house for personal reasons and thought that giving up certain things was worth it. I have friends who have stayed in a 3 bed terrace all their lives. I don’t regret my decision and I pretty sure he doesn’t regret his.

The only thing I would say is that now I am reaching retirement age I am very glad I own my own house and do not have to pay rent and I don’t think the fact that it's a 4 bed detached not a 3 bed semi makes an enormous difference.

carolt

I'm no economist, but surely the real/nominal adjustment only works if the real bit takes wages and house prices specifically into account. No good if loo roll goes up by your 2% per annum in real terms, or whatever, if the house you've just spent an extra 200K on goes down. Or if wages fail to keep pace with the rising cost of loopaper, thus making you poorer off in real terms.

Plus how on earth can you factor in 25 years of inflation, when no-one has a clue which way it's going to go even in the next 5, let alone beyond?

It could pan out as the dopesters predict - and we could enter a massive deflationary spiral. (Personally, I doubt it, but I could be completely wrong.) Or we could enter another period of high or een hyper inflation as we attempt to deal with all our debt. (Seems more likely, personally, but what do I know..)

I agree with you about the 1180 v 800 - only consider the interest part as at issue - the repayment is obviously just saving by another name.

carolt

julieq wrote: »

Bit of a classic case of death by business plan this one. If you try to plan all risk out of any transaction, you end up finding reasons not to make the transaction, so it fails at the first hurdle. The best way of not winning bets is not to take any.

Dopester's post is the usual enjoyable nonsense and falls into the trap of saying that if a risk is conceivable it must be the overriding consideration. As a matter of verifiable fact, the number of 25 year periods without inflation on the cost of housing is vanishingly small over the last (say) 500 years, or 100 years, or even 25 years. Where there have been factors changing this, they are localised and affected for example by the mortality rates from disease or World war. So OK, there is potential for deflation over 25 years, but you are talking about a tiny tiny number in terms of the probability calculation, so it can be discounted to well sub 1%. There's also the point that in a globalised world you can have deflation by the repositioning of a currency relative to a basket of other currencies, it's how we've had 40% housing falls already without deflation in amounts measured in sterling.

Employment: there is risk of job loss, this can be mitigated by saving, very few people with decent levels of qualification will be unemployed for lengthy periods of time early in their careers, the risk increases as you get older. You can measure that risk, it's going to be in the 5-10% range. You have the same risk if you rent anyway, the consequences are essentially identical.

On the other hand there is a very high probablity that you will survive 10 years into retirement, during which time you will have to have investments and savings that pay your rent, elevated by inflation. That gives you a massive cost now, as you have to build those savings.

If you really want to calculate this, list pros and cons of renting v. buying, list all the risks you can see for both sides of the equation and attempt to quantify them (it's called a risk register). Then see how you can mitigate the risks. So "cost of maintenance" can be mitigated by saving before doing major work and having a buffer fund. Some risks are unavoidable so you have to weigh up whether to chance them on the balance of benefits.

As a caution, what tends to catch you out are the risks which are "outside the rules of the game", for example there is a classic example where a snooker player is playing a shot, the object ball is heading for the pocket so must go in, and then a plane crashes on the house. Anticipated risks can be priced in by definition, but the unusual things, bank collapses, defaults in Dubai, etc, catch most people on the hop.

But don't take specific advice from random people in single issue forums on the internet, particularly when they're at the extreme end of the spectrum in terms of what they believe.

Unless I misunderstood, I don't think the OP was considering renting at all - he was considering buying somewhere bigger - or not.

michaels

carol

No you didn't misunderstand me but I guess similar arguments apply about whether to invest a further 200k in to property or not - an extreme solution after all would be to STR - after all, read the current deflation thread and it would seem being extremely flexible to the extent of being able to quit the UK altogether might be the smart play.

carolt wrote: »

Unless I misunderstood, I don't think the OP was considering renting at all - he was considering buying somewhere bigger - or not.