I Cannot See Value

HAMISH_MCTAVISH

Charterhouse wrote: »

It's not to do with a lifetime of rent or having the money upfront necessarily, it's working out what the future value of money today is,I assume you have SOME money today? It doesn't matter whether it's £100 or £1, the theory holds.

Oh dear, and now the backpedalling begins.:rotfl:

It's EXTREMELY relevant whether you have the money upfront. Because if you do not, you cannot rely on putting £96 away today to pay back £100 in one year.

Charterhouse, you are living proof for why a little knowledge is a dangerous thing.;)

Your theory is utterly irrelevant to calculating lifetime housing costs, because if you do not have the money up front to take advantage of the interest return based differential, you cannot realise the gain.

If you are unable to realise the gain, then it costs you the full amount.

If you work out what the future value of money today is, you can by definition back out the present value of money in the future.

All you need to do to work out the value of money in the future is to adjust for inflation.

But you cannot include gains made from unrealised interest based returns and then reverse the calculation to assume a fictional value today.

Ok, let's put it this way Hamish. I'll give you £50,000 in 35 years, if you give me £50,000 now? No? Doesn't seem such a good deal any more does it?

It''s irrelevant whether you have the money or not, it's working out the relationship between money today and in the future which is key. If you ignore that you are effectively saying that you are indifferent between receiving 50k tomorrow and 50k in 35 years, a deal that I will do with you ALL DAY LONG.

:rotfl:

By your own calculation, rent in 25 years will be dropping to £1800 a year in todays money.

Just have a think about how absurd that is, and then feel free to pop back in and retract your assertions any time.....

Or even better, let me put it this way......

If I give you 50K today, and you spunk it all on coke and hookers, (or rent) investing and saving not a penny, how do you expect to realise an interest based return?

So if in 25 years you have to give me back 50K adjusted for inflation, you cannot then backcalculate it to a lower amount AS IF you had earned 5% interest returns per year when you had not......

Charterhouse

There is no backpeddling, I'm not sure where you are seeing that. Everything that I have typed I stand by. You're either very stupid or incredibly stubborn, and there is simply no point debating "serious" topics with someone who doesn't understand the framework. If inflation is all that matters then fine, I'll take my 50k now and pay it back with inflation in 35 years time. Let's do it.

In all seriousness, PLEASE go read this article http://en.wikipedia.org/wiki/Time_value_of_money - if even Wikipedia understands it, it's rather embarrassing that you deny it.

FInally just a mistake I spotted in that last bit of reasoning by you. It costs less to rent than to buy for the early years. So in fact it's the buyer, not the renter that would need the extra money to "take advantage" of the interest differential. The whole sentence verged on nonsensical though.

HAMISH_MCTAVISH

Charterhouse wrote: »

In all seriousness, PLEASE go read this article http://en.wikipedia.org/wiki/Time_value_of_money - if even Wikipedia understands it, it's rather embarrassing that you deny it.
.

From your wikipedia article.....

The time value of money is the value of money figuring in a given amount of interest earned over a given amount of time.

:rotfl:

I've underlined the relevant part, in case you are genuinely thick as two planks and not just being deliberately obtuse.

If you spend the money on rent, YOU EARN NO INTEREST ON IT!!!!!!!!!

So you cannot then back calculate a value as if you had.

Thats pure fiction!!!!!!

Therefore your entire calculation is utter nonsense.

Charterhouse

You read what, the first 3 lines nothing else, you really are a clown. The rest of the article makes it very clear that TVM is the only way to properly value any strings of payments such as annuities or rental payments.

LydiaJ

Charterhouse wrote: »

This is brilliant. You are now saying that money must have a different value to different people? Amazing.

It's not to do with a lifetime of rent or having the money upfront necessarily, it's working out what the future value of money today is, I assume you have SOME money today? It doesn't matter whether it's £100 or £1, the theory holds. If you work out what the future value of money today is, you can by definition back out the present value of money in the future.

Ok, let's put it this way Hamish. I'll give you £50,000 in 35 years, if you give me £50,000 now? No? Doesn't seem such a good deal any more does it?

It''s irrelevant whether you have the money or not, it's working out the relationship between money today and in the future which is key. If you ignore that you are effectively saying that you are indifferent between receiving 50k tomorrow and 50k in 35 years, a deal that I will do with you ALL DAY LONG.

I am mystified by your argument, Charterhouse. As far as I can understand, you want to calculate the cost of paying rent for 35 years, starting in 25 years' time, by considering the amount of today's money that you would need to put aside NOW in order for it to mature (with interest) into a large enough sum to pay all that future rent. But that's not what renters do, is it? You say it's "only" £65k or something. Who's got £65k to put aside now towards rent in 25 years' time? Renters (myself included) may try to save a bit, but I'm not aware of anyone who's saving enough now that they'll be able to pay all their rent out of savings for the whole second half of their life.

PS When you reply, please don't shout at me. I am not a rampant bull, and I am not trying to be antagonistic. I genuinely don't follow what you are saying.

HAMISH_MCTAVISH

Charterhouse wrote: »

You read what, the first 3 lines nothing else, you really are a clown. The rest of the article makes it very clear that TVM is the only way to properly value any strings of payments such as annuities or rental payments.

Mate, you are the one wearing the big shoes and squeaky red nose.....

TVM is the only way to value a lump sum today versus a future income stream, where such income stream is dependant upon realising gains from interest on investment.

But it is utterly irrelevant to calculating expenditure, where no such gain from interest exists.

You really need to focus more, because even sleep deprived, I'm running rings around you.....

Once again, a little knowledge is a dangerous thing, and you have very little knowledge indeed.:cool:

Charterhouse

OK, let's start from this. If I offer you £1,000 in a year's time, what would you pay now to have that £1,000 in a year? It depends on the opportunity cost of the cash. You can both borrow money (via loans) and you can also lend money (i.e. get interest) which I think is what Hamish is missing. So if someone offers you £1,000 for that £1,000 in a year's time (which is worth less than that), you should do it, take their £1,000, put it in the bank, and then give them back £1,000 in a year's time.

On the other hand if someone is prepared to give you £1,000 in a year in return for say £900 today, which is pricing the £1,000 in a year too cheap, then you should go borrow the £900 today, give it to the person, wait a year, and get your £1,000, then pay back your £900 loan. You will have made money.

[e] Both of these assume the interest rate is 5%., for clarity. In the first example you would earn the 5% interest and make that as profit. In the second you would owe 5% * £900 an additional £45 in a year, but you would make £55 even after paying the interest.

The only way to calculate the future value of money is to work out what the opportunity cost of the money either foregone now or in the future is. It's not about whether you have the money today, since you can borrow money if you need it today and don't have it.

Sorry, I am probably not explaining well enough, please try reading the wikipedia article that I linked and see if it makes more sense.

[e] To Hamish:- I reassure you that I am not wrong. I do this for a living. What you are missing is that people can borrow money if the mispricing between the value today and in the future gets too big. If you disagree with me, let's do my experiment on a smaller scale since you clearly don't believe what you are saying enough to stake £50k on it. Give me £100 today, I'll sign a contract to return it with inflation added in 35 years time. It'll be the best deal I've done today, that's for sure.

LydiaJ

Then why do you say it doesn't matter whether you have the money upfront or not? Show me some calculations that involve taking the difference between rent and repayment mortgage, and investing that every month at compound interest over 25 years - so you don't have the whole 25 years' worth of difference to invest upfront. Then see if the result of the calculation will be enough to buy an annuity that would pay the rent for the 35 years after that. If that calculation works out, then I'll believe you. Otherwise, you seem to me to be finessing that 35 years of rent by saying you will pay it with "today's money" even though you haven't got all that money today to invest immediately for the whole 25 years.

HAMISH_MCTAVISH

Charterhouse wrote: »

You can both borrow money (via loans) and you can also lend money (i.e. get interest) which I think is what Hamish is missing.

But if you do not invest or lend the money, but instead blow it all on rent, you get no interest.

Why are you finding this so hard to understand.:eek:

And if you gain nothing from interest, then the value of the money remains unchanged other than through inflation.

And we used inflation adjusted figures to begin with!!!!!!!!!!

The only way to calculate the future value of money is to work out what the opportunity cost of the money either foregone now or in the future is. It's not about whether you have the money today, since you can borrow money if you need it today and don't have it.

Sorry, I am probably not explaining well enough, please try reading the wikipedia article that I linked and see if it makes more sense.

There is no opportunity cost!!!!!!

You have to pay the rent. You cannot just not pay the rent and invest the money instead.

So the true cost of rent is nothing more or less than however much money you have actually paid in rent for 60 years.

If you want to calculate that in todays money, you can only adjust for inflation, not opportunity cost or interest return based TVM.

Charterhouse

@ Lydia (I'm done talking to Hamish since everyone else seems to get it)

No, that's absolutely fine it's actually exactly the same. I think you get it. I am very happy to do it that way, but not til Monday I'm afraid, since as I say I do this for a living and I'm already way past by the time I'm supposed to stop thinking about numbers.

It isn't about having the money now or investing it all upfront at all, it's just about using interest rates to work out the difference between values now and in the future. Annuities and loans are exactly the right way to think about it.