OH MY GOODNESS - the house price crash hits home!

julieq

Mr_Matey wrote: »

Can you elaborate on your argument here julieq?

Say I had £300k and decided not to buy a place. I rent a similar place and pay for it with the interest earned on my £300k. How does this add to my long-term cost of housing, whereas owning the house does not?

Similarly, whilst renting, Carol could be squirrelling away the difference between a mortgage payment and interest-only component so that she has a bigger deposit when she buys. Thus reducing the time it will take to pay off a mortgage when she does buy.

i.e. She may have knocked 3 years off her mortgage whilst renting.

It doesn't matter where the income comes from. This is where the bears get confused I think.

If you have £300K, you can buy a house outright, or you can choose to take a mortgage out and pay the mortgage from interest. This is just a transfer of one asset class to another.

Or you can pay rent from the interest on the £300K.

The condition for working out which one you would do would be on lifetime costs. You can calculate the benefit of having £300K in capital, you can calculate lifetime costs of rental plus inflation, you can calculate the cost of paying a mortgage for 25 years.

Personally I would choose having a mortgage offset by the capital, which reduces overall costs (because rental will always be more expensive than a mortgage over a lifetime), but because there is a significant opportunity cost in tying money up in a house. You can almost always beat mortgage rates with lowish risk investments.

This is actually counter to bear thinking, where they believe for some reason that it's better to have a massive deposit and no mortgage.

But it makes no difference at all whether you have capital, savings or not. You put your income from all sources on one side of the equation, and your housing costs over your lifetime on the other. Costs are costs, and you take whatever action you can to reduce them. Income is income, and you do what you can to maximise that.

But unless it's a new paradigm, you never reduce costs by increasing costs.

Yoshua

Whats your predictions for next year and the year after Carlot and silvercar?

Do you think this house will be 50% down from the top in a few years?

Mr_Matey

Harry_Powell wrote: »

Sure thing. If you had £300k in a bank account you'd be making, at most, a 2% return. £300k*2% /12 = £500. I'm guessing that you'll have to take a drop in accomodation if you're moving from a £300k home to a £500 per month rental.

It depends what she's invested in, but I agree that bank accounts pay rubbish returns at the moment. If she's getting an average 2% return, that's pretty woeful.

Harry_Powell wrote: »

Also, because you're using all of your capital interest to pay the rent, inflation is quietly eroding your capital. In 10 years it'll be worth the equivalent of £275k or less. In the same time, your house would have at least kept it's value relative to inflation.

Inflation has not eroded the capital in this case. The property has not increased in value, and that's what the capital will be used for. If she's dipped into her capital because of pathetic returns then yeah, back to the first point.

Harry_Powell wrote: »

You can only 'squirrel away' the excess if there is an excess. With interest rates so low at the moment I doubt that many people would find it cheaper to rent than to live in their +£300k home. It's easy for a single person or couple to 'slum' it for a while for financial gain, but less easy for a family due to concerns about schools and the sort of social environment you're raising your kids in.

For me, it's cheaper to rent than buy when you compare the interest-only payment on our property with the rent. BoE rates are low, but mortgage rates aren't that low. So it's quite easy to squirrel away the excess. Again I can't comment on Carol's situation.

Personal/social reasons are a different matter, and not really what I'm asking about, but I agree they should be considered.

carolt

Yoshua wrote: »

Whats your predictions for next year and the year after Carlot and silvercar?

Do you think this house will be 50% down from the top in a few years?

I don't know or care, as I don't plan to buy it.

Harry_Powell

Mr_Matey wrote: »

It depends what she's invested in, but I agree that bank accounts pay rubbish returns at the moment. If she's getting an average 2% return, that's pretty woeful.

I was commenting on your example case, where someone sold a house and banked the £300k proceeds. In that case, the STRer wouldn't have been able to put more than £7200 in ISAs (as that's the annual limit), though may have been lucky to buy a fixed rate or index linked bond (or bonds) with a decent rate before they all fell. In which case they may be subject to taxation on the returns and would also have been locking their money away for a set period - not good for snapping up a bargain house.

Inflation has not eroded the capital in this case. The property has not increased in value, and that's what the capital will be used for. If she's dipped into her capital because of pathetic returns then yeah, back to the first point.

In what case? I was commenting on your example.

For me, it's cheaper to rent than buy when you compare the interest-only payment on our property with the rent. BoE rates are low, but mortgage rates aren't that low. So it's quite easy to squirrel away the excess. Again I can't comment on Carol's situation.

I was commenting on your example.

Personal/social reasons are a different matter, and not really what I'm asking about, but I agree they should be considered.

Sorry, I'm getting confused here. My comments in red above.

carolt

julieq wrote: »

It doesn't matter where the income comes from. This is where the bears get confused I think.

If you have £300K, you can buy a house outright, or you can choose to take a mortgage out and pay the mortgage from interest. This is just a transfer of one asset class to another.

Or you can pay rent from the interest on the £300K.

The condition for working out which one you would do would be on lifetime costs. You can calculate the benefit of having £300K in capital, you can calculate lifetime costs of rental plus inflation, you can calculate the cost of paying a mortgage for 25 years.

Personally I would choose having a mortgage offset by the capital, which reduces overall costs (because rental will always be more expensive than a mortgage over a lifetime), but because there is a significant opportunity cost in tying money up in a house. You can almost always beat mortgage rates with lowish risk investments.

This is actually counter to bear thinking, where they believe for some reason that it's better to have a massive deposit and no mortgage.

But it makes no difference at all whether you have capital, savings or not. You put your income from all sources on one side of the equation, and your housing costs over your lifetime on the other. Costs are costs, and you take whatever action you can to reduce them. Income is income, and you do what you can to maximise that.

But unless it's a new paradigm, you never reduce costs by increasing costs.

Apart from the fact that you've failed to answer any of my previous points - now why IS that julie? :rolleyes: - your analysis falls down in that it takes as its starting point two opposite positions - position 1 being someone who never buys and position 2 being someone who buys now and then pays down a mortgage, without moving, for 25 years.

In reality, I am clearly nothing like the person who supposedly holds position 1 - in fact my anecdote is all about the fact I nearly bought a couple of years ago, and I've stated I expect to buy at some point after 2011.

So you're not comparing 2 people, 1 who always rents, and 1 who always buys, in a benign scenario where house prices rise year on year in a happy straight line.

You're comparing 2 people, 1 of whom buys just before house prices do a massive dive, and then pays a mortgage for 25 years (obviously making the rather large assumption that they never need to move in that time - although given that they're currently in NE, maybe that's a good thing... :rolleyes:); the other one buys 4 years later, when prices are cheaper (35K + in this example), and so saves money not just on that 35K plus, but on the interest that would have been paid on that 35K plus.

And then there's also the interest earned on the deposit over that time.

And the £200/month saved from the difference between the mortgage interest costs and the rent.

Clearly, if I never planned to buy, I'd be taking quite a gamble that property prices were never going to rise; but also that I wanted to stay in rented accomodation indefinitely.

I'm not terribly confident about the long-term future for house prices; I would however, like to own my own place, which is why I do plan to buy in the medium term, though now is an inconvenient time in personal terms.

So when comparing my situation to the one I would have been in had that house sale gone through, could you do us all a favour and compare it to a real scenario, rather than some fantasy bull/bear confrontation, which much as some on here would like, actually bears no relation to my reality, or any reality I'm aware of?

chucky

carolt wrote: »

And then there's also the interest earned on the deposit over that time.

savings accounts aren't that great for returns

carolt

No, they're not. But better than throwing 35K down the toilet.

Harry_Powell

carolt wrote: »

So when comparing my situation to the one I would have been in had that house sale gone through, could you do us all a favour and compare it to a real scenario, rather than some fantasy bull/bear confrontation, which much as some on here would like, actually bears no relation to my reality, or any reality I'm aware of?

But your analysis is also flawed carolt, it relies on specific time periods that suit your argument (i.e. the top of the market in 2007 to the bottom(ish) of the market now. It also factors in the damage to the property that would not have occurred if you had bought the property.

You haven't bought a house yet, so how can you (or anyone, I don't want to personalise this) say that you have 'saved £X by not buying' until you actually buy and then carry out the calculation?

chucky

carolt wrote: »

No, they're not. But better than throwing 35K down the toilet.

who did that? anyways... at least the mortgage could have been at least 20% paid off instead of paying rent for 5 years...

i really don't get these outrageous statements about "better than throwing 35K down the toilet."
it's just as bad as "rent is dead money"