I Cannot See Value

HAMISH_MCTAVISH

Charterhouse wrote: »

OK. Slowly, here we go.

Money in the future is not worth the same as it is today.

Agreed. It is worth less, due to inflation.

If the interest rate is 5% and I am going to pay £100 in a year's time, I only need to put away (100/(1.05)) today.

Yes, but only if you actually have the £96 to put away today and earn interest on. Otherwise it will cost you the full £100 in a year.

So that £100 is worth about £96 in today's money. Now repeat that process for 30 years.

Hold on..... You didn't just do that, did you???

You based your whole argument on discounting rental costs against how much cheaper it would be IF you had a lifetime of rent to put away in a savings account TODAY, to earn compound interest on for 60 years.

Give me a freaking break.......

The money that you are so worried about is worth naff all today. The money that has been saved by the renter earlier on virtually makes up for the 35 years, because of how far out those cash flows are.
.

Utter tripe.

And you had the audacity to berate scarter for schoolboy errors.

Forget my earlier statement about sleep. You are just plain wrong.

I really miss that rolleyes smiley.

HAMISH_MCTAVISH

Charterhouse wrote: »

but what I am saying is that these numbers that Hamish keeps on spouting are absolutely made-up rubbish. The difference simply is not as great as he seems to think.

Nonsense.

My numbers are spot on.

You are having to make up fictional returns from savings not in the equation to justify yours.

jetta_wales

HAMISH_MCTAVISH wrote: »

Agreed. It is worth less, due to inflation.



Yes, but only if you actually have the £96 to put away today and earn interest on. Otherwise it will cost you the full £100 in a year.



Hold on..... You didn't just do that, did you???

You based your whole argument on discounting rental costs against how much cheaper it would be IF you had a lifetime of rent to put away in a savings account TODAY, to earn compound interest on for 60 years.

Give me a freaking break.......



Utter tripe.

And you had the audacity to berate scarter for schoolboy errors.

Forget my earlier statement about sleep. You are just plain wrong.

I really miss that rolleyes smiley.

Ok fair do's Hamish you seem pretty sharp there even without the sleep lol I'm useless if I haven't had 6 hours of sleep at least.

Mr.Brown_4

jetta_wales wrote: »

Ok fair do's Hamish you seem pretty sharp there even without the sleep lol I'm useless if I haven't had 6 hours of sleep at least.

Yeah, but. You can't buy a house for £100.

Procrastinator333

HAMISH_MCTAVISH wrote: »

I'll take an example based on national averages, but the same holds true to a greater or lesser extent in all markets.

The average house price is around 160K.

The average mortgage interest is around 5%.

The average rent is around 5% yield.

The average person has around 60 years to house themselves after they turn 18.

So......

A 160K house will cost you £120,614 in interest over a 25 year term with a full repayment mortgage at 5%. Plus the principal, but of course you still own the house which is likely worth far more by then, but I've excluded HPI to simplify things.

Rent for a 25 year period, at 5% yield, and completely excluding any inflation at all, is £199,800. So you are already ahead through buying at 25 years, even with no inflation in rental costs. (which is impossible)

But rent for a 60 year period, before allowing for inflation, is £479,520. I do not have access to an inflation calculator, but if anyone wants to figure it out, feel free. My guess is rent for a lifetime will cost well over one million.

Versus the cost of £120,614 for buying.

Now, I have not included the principal, because you are merely converting one asset (cash) into another asset (property) which you still own.

But even if you do include it, and allow for inflation in rent, the costs of buying are still a tiny fraction of renting for a lifetime.

In a word. No.

You can't ignore the £160k. If rental cost = interest cost. Why does the buyer have this extra money to pay the repayment element? Not exactly like for like.

The comparison should have the renter with £160k in the bank earning interest that offsets the rent. Of course it will be less, but it wipes out some of the margin.

Leaving that point aside. As even being done properly, buying will win long term, no doubt.

The more important point of this is that if you strip out HPI, at todays rates etc, if you don't have a 25% deposit, you are actually better off renting and saving until you have access to the lower interest rate. Interest costs of around 6% compared to rental costs of around 5% make it a bad idea to buy if you think house prices are going to be flat.

Assume you can make 2% interest on savings. After 10 years a buyer will only have paid off 23.4% of their mortgage. So all other things being equal, you probably still don't have access to the cheaper rates.

So after 10 years.

The buyer has a remaining mortgage of £122k. Is paying interest of around £7.3k on the remaining balance.

The renter is paying rent of £8k. However they now have £38k in the bank earning interest at 2%, or £0.8k. So the renter is paying net £7.2k.

Even at this point. After 10 years. The renter still has the advantage. Of course, that will probably only last another few months as then it switches to a 25% deposit with lower rates and the whole thing starts to unwind for the renter very quickly.

Yet more mathematical proof that renting for short to medium term under certain circumstances is the right choice.

HAMISH_MCTAVISH

Procrastinator333 wrote: »

Even at this point. After 10 years. The renter still has the advantage. .

*sigh*

No, he doesn't.

Do you really think we will go 10 years with no HPI?????

And you are assuming no rental increase for 10 years, also highly improbable.....

And you are assuming that interest rates for buyers will stay at 25% deposit needed to get the best rates, whilst ignoring the constant lowering of rates for higher LTV's we have seen for the last year.

And you are assuming the gap between mortgage and rent allows the saver to continue saving the balance, whcih from the above points seems improbable.

And you are using the most favorable start point for your calculations, whereas in some areas rent is already more than a full repayment mortgage.

But other than that........ :rolleyes:

In the real world, renting for a year or two makes little difference. Especially if prices are stagnant or falling. Even I concede that.

But if we get 10% annualised HPI (as we are about to have) the renter is deeply screwed.

If we have 5% annualised HPI (the mainstream forecast average for the next few years) the renter is deeply screwed.

If we have HPI and Rent increases in line with inflation, the renter is screwed.

IF prices fall, and IF this fall takes place in a very short timeframe, the renter can come out ahead. But prolonged periods of even very mild inflation totally stuff the renter.

ukcarper

ukcarper wrote: »

With no inflation is this a simple way to look at it. Rent a 2-bed house in my area rent £775 per month to buy similar house to buy £175, with a 100% mortgage at 5% £1025 per month. Save £250 difference at 2% at end of 25 years you will have £100k. Therefore house prices have to drop 40% to break even.

Carry on renting invest £100k at 2% and carry on renting for next 35 years £100k increase to £200k
Buyer invests the £775 that renter is paying for the next 35 years he ends up with £470k + house.

What’s wrong with this way of looking at it based on real houses if you increase mortgage int to 6% mortgage repayments increase by £100 so renter can save £350 per month and will have £135k at end of 25 years and £270k 35 years after that. The buyer’s figures are unchanged.

Graham_Devon

HAMISH_MCTAVISH wrote: »

Do you really think we will go 10 years with no HPI?????

Certainly happened on this graph, roughly 11.5 years, between 1990 and 2001.

Procrastinator333

HAMISH_MCTAVISH wrote: »

*sigh*

No, he doesn't.

Do you really think we will go 10 years with no HPI?????

No. But I do think that prices will at best stagnate, or more likely fall over the next year or 2. Whether you agree or disagree with that is a different debate.

If they stagnate, I still come out on top (which for me is the upper end of my expectation). So a very happy renter. If I'm wrong and they rise, well, tough, we all make our choices.

HAMISH_MCTAVISH

Procrastinator333 wrote: »

No. But I do think that prices will at best stagnate, or more likely fall over the next year or 2. Whether you agree or disagree with that is a different debate.

If they stagnate, I still come out on top (which for me is the upper end of my expectation). So a very happy renter. If I'm wrong and they rise, well, tough, we all make our choices.

I added material in the edit....