I Cannot See Value

LydiaJ

Errr... is that meant to be me?

HAMISH_MCTAVISH

LydiaJ wrote: »

Errr... is that meant to be me?

:rotfl:

I can't believe you read that far in!!!!!!!!!

No, not you, just pulling names at random......;) (mostly)

lostinrates

LydiaJ wrote: »

Errr... is that meant to be me?

I would think its because you are lovable sweetie...more than the rest of those of us Hamish thinks might tolerate a 'Bear'

Procrastinator333

Deleted_User wrote: »

Procrastinator333 - Actually, in my example I wasn't a first time buyer. We had a deposit of 25% - the proceeds of profit made on properties my husband and I owed separately. Our mortgage was actualy 6 hundred and something pounds a month - can't remember exactly.

I don't know for sure what rent was back then. I know my house would cost £750 - £800 a month to rent today. If I was still paying off my morgage I think it would be about £400 a month at todays rates. So regardless of what the renter started out paying 10 years ago, today they'd be paying nearly twice as much as the buyer.

I think for me I think it works out at less than 30% but we paid off our mortgage early (8 years instead of 25).

The fact that the buyer only pays out for 25 as opposed to 60 years for the renter makes a huge difference. Especially when you take account of the fact that, due to inflation, the renter is paying significantly more each month than the buyer ever did for most of their renting lives.

Then your example should have started with the renter having that 25% deposit in the bank earning interest to be like for like.

In the early years of a comparison, the renter would have a lower bill and so as to remain comparable, the difference should be placed in to a savings account. As the years go on, the buyers bill will reduce, but the renter will also be earning interest on the savings.

I don't doubt buying is better long term as a) long term house prices have shown a clear growth rate in excess of inflation and b) interest receipts from savings are lower than interest expense on a mortgage. Is it 30%, my gut tells me no. I'm actually curious, so may work it out at some point. But it is a long calculation. As a starter I reckon you need:

Start both on 0.
Calc mortgage cost on 25 year mortgage.
Calc rent
Reducing mortgage rate as the 25 years
Interest rate on savings of renter
Rental expense inflation
House maintenance costs
Higher Purchase costs of the buyer
House Price increase over 25 years


Then this all needs to be discounted to present value.

This still doesn't feel like a comprehensive list.

Trouble is, even if I do work this out, it would then be forever and a day of arguing about what %, this cost, that cost.

Procrastinator333

HAMISH_MCTAVISH wrote: »

John and Jill are two young people going to Uni a decade ago.

John's parents cough up 10K for a deposit, and young John buys a flat. He then gets a flatmate to help him pay the bills for the next 4 years, and it is cheaper than renting. Jill does the same.

After graduating Uni, both John and Jill keep their flatmates for a few years, and one day they are out drinking in a bar and meet each other. John and Jill fall in love, and after a few months of embarrassingly loud lovemaking sessions, decide they want to move in together.

John asks his flat mate to move out, and Jill moves in. But Jill is a sensible lass, and decides she'll keep her flat "just in case" it doesn't work out with John. Jill rents her old room out to someone else, and her mortgage gets paid for her.

Several years later, John and Jill get married and decide they'd like a bigger house.

So they sell both the flats, which by this time, ten years after purchase, have around 65% equity through HPI and mortgage paydown.

Each flat sells for 120K, and John and Jill now have a deposit of £156,000.

They see a house they like for 300K, and buy it.

They take a mortgage out for the remaining £144,000, and on their dual salaries as 30 year old University graduates, making slightly more than the national average, at 35K each, have a loan to income of just 2 times joint income. With such a huge deposit, they also pay rock bottom mortgage rates as they have less than 50% LTV.

John and Jill live happily ever after, and thats how ordinary people afford 300K houses in their early 30's.

.

In the meantime, one of their mates from Uni, we'll call him Procrastinator, doesn't buy but rents instead. He always finds a reason not to settle down. He wants the "freedom" that renting gives him.

As the years progress, Procrastinator has a great time. Out with the lads every weekend, foot loose and fancy free, spends his money on holidays, girls and cars, and still manages to save a bit, because of course, he is paying FAR less in rent than those silly house buyers do on their mortgages.

Until one day he realises, after failing to pull for a while, that those 19 year old girls don't like 30 year old blokes with a bit of a beer belly.....

So being an intrepid sort, Procrastinator tidies up the house, washes all the dirty laundry festering under the bed, and makes an effort to find a nice girl to settle down with. After a few mis-steps, and a lucky escape from a psychotic harpie (whose name escapes me, but I think it was karen, no, maybe catriona.... Oh yes,thats right, it was Carol), our hero eventually meets Lydia, the love of his life and a fellow renter too, and they settle down together.

Now Procrastinator and Lydia, being canny renters, have managed to save a few bob over the years. They have each put away a bit of money now and again (once they got serious about saving), and have now amassed a fair deposit, once interest and a bit of return from the company share scheme is included, of around £40,000.

So they start looking at houses, but discover, of course, that HPI has eroded the value of that saving. And furthermore, that small deposit, combined with the higher interest rates that FTB's attract, means the 300K detached house they want is well out of their reach. In fact, the only proper house they can afford is a nasty ex council terrace in a dodgy area.

So they rent for a while longer, but also start researching the housing market. After a while, they start posting on MSE and HPC, and get slightly bitter about house prices. They of course feel priced out, and after talking to so many other priced out people, they form a bond, and encourage each other to hold out "until the crash comes", when houses will be cheap and the streets will flow with milk and honey.

And then, finally, the crash comes. Except then prices recover, and they still can't find a house they can afford.

So they buy a small flat, get ever more bitter and resentful, and spend the rest of their days posting on forums discouraging people from buying young, because as we all know, misery loves company.

And thats how ordinary people can't afford 300K houses in their early 30's.



And the moral of the story?

Never read a long rambling post from Hamish expecting a serious point to be made, because that's 5 minutes of your life you won't get back.....:D

I didn't even read your post on my first pass. But that made me chuckle.

Procrastinator333

Procrastinator and a good friend Bah Bah finish uni together.

Bah Bah has a hero, Kirstie Allplop. Bah Bah sees an add in the metro on his way to work one day for a brand spanking new duplex apartment in a fantastic location next to the city centre with amazing transport links. He starts to think like Allplop and works out just how much value he can add. Just think what it will be worth if he uses mirrors to give the appearance of more space. Realising he can't afford it on his lonesome, he clubs together with Bah Bah 2 and Bah Bah 3. They slap in a sealed bid that they know is a bit high, but hey, if the bank will lend that (plus a bit extra for that new car) and as Allplop says the only way is up, it will be fine.

Meanwhile, Procrastinator is a bit more sceptical. Can house prices rise for ever at that rate? He looks around and realises he will be stretched to buy a flat. That combined with the fact he knows his wages will double in about 3 years convinces him to wait as he will only want to move again soon anyway.

A year later Bah Bah picks up the Metro, what is this, a fall in house prices? How is that possible? He bought a flat overlooking the city centre next to the station (though it can be noisy with the window open). He starts to tire of walking down in the morning to find another mans pants on the radiator. If only he could move. He will wait a bit longer, prices will rise and he can then sell his share to the others. He grits his teeth and carries on.

Procrastinator meanwhile has found a similar flat, but saves up the money he saves via renting and knows things are going well each time he reads about further falls in prices.

Moving forward and what is this, after 25% falls, prices start to turn. Procrastinator decides he actually needs a bigger and quiter place as some pain in the butt neighbours just moved in next door. Not a problem for the renter. So a few hundred pounds and a weekend later and he is in a new place with his Fiancee. The landlord is a forced landlord who accepts a 15% reduction of the asking price. Happy days.

Bah Bah is crying, how can he ever leave? He owes more than he could ever sell for. The service charge on his flat has just doubled. He has got a new job, but it is a 90 minute commute away. He is tired from 3 hours of travelling every day. He picks up the metro, not wanting to read more about house prices, but what is this, a house price rise? He starts to look around on the internet and finds HPC and MSE. He doesn't ever go near HPC as they scare him. But on MSE he finds a Messiah. He doesn't understand it all, after all, how can it all just come down to a lack of houses, it surely can't be that simple?

A year of rising prices and Procrastinator is still content, if he bought now he would still be on top. He isn't sure what the future holds for house prices, but he does see a lot of trouble on the horizon. No real harm in wating until the election to see what happens as government support is withdrawn and the cuts kick in. Maybe things don't go the way of the pear, but by that time he still won't be worse off than if he bought back in the day.

Poor old Bah Bah though, while some of the market is recovering, it just isn't happening for flats. They still can't sell. He wants to buy with his Fiancee, but he is stuck. They can't even buy out his flat mates as nobody will give him a mortgage. So he keeps paying the mortage, commuting 90 mins to work and struggling to find time to see his Fiancee.

If only Bah Bah had watched the A-Team instead of Allplop.

P.S By this time Procrastiantor does have a bit of a belly.

treliac

Mr.Brown wrote: »

Assuming the mover sold a house they have estate agents fees. Also if a woman is involved they have new carpets, curtains, cushions,. candles, furniture, decoration, appliances, blinds, lampshades, bathroom and kitchen suites....

Maybe you don't know the 'right' kind of women.

sjaypink

Great post hamish

Don't want to de-value the effort you put in by pointing out NO-ONE (except possibly Euan Blair with the help of his sleazy parents, a slick conman & a sex-mad crystal thearpist) buys whilst at uni .... so ignore I just said that :A

Great post hamish

treliac

carolt wrote: »

That's certainly nonsense where I live.

HAMISH_MCTAVISH wrote: »

Well that may be true...... But only because you live in LaLa Land.

No she doesn't, she lives in the wealthy south-east of England, while you live in the remote east of Scotland.

[Deleted User]

Procrastinator333 wrote: »

Then your example should have started with the renter having that 25% deposit in the bank earning interest to be like for like.

That makes no sense. Where would the lifetime renter get that 25% deposit? Ours came from profit made when we sold previous homes.

In the early years of a comparison, the renter would have a lower bill and so as to remain comparable, the difference should be placed in to a savings account. As the years go on, the buyers bill will reduce, but the renter will also be earning interest on the savings.

Well hubby and I both bought our first places because the monthly payments when buying worked out cheaper than the monthly payments when renting. So in actual fact the BUYER was in a better position to put a little in the bank each month.

I'm not sure what the rental would have been on our house 10 years ago, but right now it's 750 - 800 per month. I know that 9 years ago one of my neighbours moved to Australia for three years and rented out her house while she was away. The rent she recieved covered all of her costs (mortgage, agents etc).

I find it hard to believe that the rent 10 years ago would have been less than the payments on a 75% mortgage. Otherwise how could anyone afford to rent out places like ours? And people most certainly did rent them out to pay off their mortgage.

I don't doubt buying is better long term as a) long term house prices have shown a clear growth rate in excess of inflation and b) interest receipts from savings are lower than interest expense on a mortgage.

As the renter typically pays more than the buyer each month then the buyer will typically have more to save than the renter. Certainly in the later years, but in most cases in the early years too.

And you're completely missing the most significant factor - that the buyer typicaly only pays out for 25 years with monthly payments becoming more and more afordable whereas the lifetime renter pays out for 60 years....with monthly payments increasing as the years go by.

Is it 30%, my gut tells me no. I'm actually curious, so may work it out at some point. But it is a long calculation. As a starter I reckon you need:

Start both on 0.
Calc mortgage cost on 25 year mortgage.
Calc rent
Reducing mortgage rate as the 25 years
Interest rate on savings of renter
Rental expense inflation
House maintenance costs
Higher Purchase costs of the buyer
House Price increase over 25 years


Then this all needs to be discounted to present value.

This still doesn't feel like a comprehensive list.

Trouble is, even if I do work this out, it would then be forever and a day of arguing about what %, this cost, that cost.

I think the key thing is that you're calculating mortgage costs over 25 years but rental costs over 60 years.

Mortgage payments will stay pretty much constant for the life of the mortgage (with fluctuations due to varying interest rates) whereas buyers salary can typically be expected to ramp up quickly at the rate of inflation or above. After a few years they quickly start to represent an ever decreasing percentage of the buyers income.

Rent will increase in line with inflation and will always represent the same percentage of the buyers income.

That amounts to a saving of hundreds of thousands for the buyer over a lifetime. That's over and above what the house is now worth.