I Cannot See Value

Charterhouse

OK. Slowly, here we go.

Money in the future is not worth the same as it is today. 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. So that £100 is worth about £96 in today's money. Now repeat that process for 30 years. 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.

It's not "fancy calculations", it's the way that you make financial decisions. If you want to bring numbers into the equation you have to do it right. There is no point saying "let's work it out in numbers" and then doing the maths the way a 7 year old would.

You don't understand it and you are clearly too lazy to go look it up.

jetta_wales

Charterhouse wrote: »

OK. Slowly, here we go.

Money in the future is not worth the same as it is today. 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. So that £100 is worth about £96 in today's money. Now repeat that process for 30 years. 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.

It's not "fancy calculations", it's the way that you make financial decisions. If you want to bring numbers into the equation you have to do it right. There is no point saying "let's work it out in numbers" and then doing the maths the way a 7 year old would.

You don't understand it and you are clearly too lazy to go look it up.

Just because some people don't agree with you why does that mean you have to lay into them for it? Chill out and calm down sheesh.

You also can't take into account money's worth changing over the years but not take into account how drasticly your rent will go up over the years.

To take into account only what benefits yours argument in the maths is skewing it to say what you want it to say.

There is no logic here that makes renting not look like a terrible idea in the long term but maybe if you can't buy (and for that I'd sympathise) then you're trying to paint it in a rosier light so it doesn't seem so rubbish to not be able to get on the ladder yourself?

Still no excuse to lay into somebody for not agreeing with you though. And everyone here is doing a very simple speculative form of maths since there are so many variables that nobody can predict.

Charterhouse

I estimated rent rising at 2% which is what the Bank of England's target for CPI is. We can put it in at a different level if you like, but that would in turn imply higher interest rates which would further erode the value of what the renter is paying further down the line.

We can model things however you like. I'm not saying that it's cheaper to rent, I personally hate renting and love owning, 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.

[Deleted User]

OK, so what you're trying to say in is that whilst you agree that over a lifetime buying costs significantly less than renting (lets just say 30% for arguments sake) that the 70% extra that you have to pay in rent will seem like a drop in the ocean in the future?

Well there's some truth in that.

However, look at it another way. In todays terms, rent takes up a significant chunk of our wages. Today £800 a month is a lot of money. What's the equivilent percentage of our wages likely to be in 25 or 60 years? To put it in perspective, I think a £100,000 anuity will buy you £600 a month for life at retirement age. We're essentially talking about being given £800 per month (in todays terms) for the rest of our lives from age 45 onwards - if we buy at a young age rather than rent for life. But in tomorrows terms it will be a lot more than £800 a month as rent will almost certainly be much higher then.

So how much would a renter have to save up to take out an annuity that gives them £800 a month from age 45 until they die? And remember, that's £800 per month in todays terms - in 25 years what's monthly rent likely to cost? In 60 years?

Nope. I don't understand your figures. I'm sure you understand the theory but i'm pretty sure you've overcomplicated things and got yourself into a muddle!

Charterhouse

OK, thanks for trying to follow my numbers, you are understanding the theory now I think, annuities is exactly the right way to look at it. In theory, interest rates are something around 2% higher than inflation. So it still makes sense. To try and answer your question, an annuity of around £800 a month would cost roughly the same as it does today (i.e. about £137k). But you don't need to buy it now, you buy it in 25 years time. To get that £137k in 25 years time, you need to put away £40,400 now at 5% interest. My £65k took account of the inflation that would be applied to that £800 per month to get a higher number needed by the annuity.

The real problem with the debate is that it is totally path driven - i.e. you can't really just build a simple model. Noone knows the real answer, not me, not Hamish - we don't know what rents will end up doing in reality, we don't know what will happen to wages, or house prices, or how many times a home buyer will move, how much additional interest they pay as they have to upsize their house (we've left that off totally), or how much stamp duty will be or other moving costs. There are too many unknowns. The only sensible way to try and get an estimate is to do what we have done, but it is far from ideal.

The reality is that depending on how you proceed, and what you view as being your likely wage over time and what costs you think you will need to pay out later in life, either will be better.

One very sensible argument, depending on individual circumstances, that would say that buying as early as possible would be better is the fact that by the time your kids hit 11-13 and you MAY have to start paying private school fees it would be better to have paid most of your mortgage down. So for me, say I have kids at 35-36, that would be 46-49. My mortgage will be paid off by the time I hit 47 assuming no overpayments, so there is an argument that says it benefitted me to buy early.

Mr_Matey

HAMISH_MCTAVISH wrote: »

Therefore my math is just fine, thanks.

No, it's not. You can't be doing a proper comparison by assuming your house will earn 5% but any other asset will earn 0%. It's the same as saying "I have £160k to invest. I can put it in an asset that earns me 5% or an asset that earns me 0%. The 5% return asset is significantly better. Who'd have thought?"

Put in an assumption of 5% investment return for your renting case, and I think you'll find that accounts for the difference in value between renting and buying in your scenario. Before you argue, just try it.

HAMISH_MCTAVISH wrote: »

In fact, buying at pretty much any price less than 300% of todays prices is better than renting for the long term.

Rubbish.

Deleted_User wrote: »

OK, take my example.

No, I'm not arguing against your example. You know your situation better than I do, and it's entirely possible that you made the right decision. I'm merely pointing out the problem in Hamish's theoretical example which he then uses in his assertions.

ukcarper

Charterhouse wrote: »

OK, thanks for trying to follow my numbers, you are understanding the theory now I think, annuities is exactly the right way to look at it. In theory, interest rates are something around 2% higher than inflation. So it still makes sense. To try and answer your question, an annuity of around £800 a month would cost roughly the same as it does today (i.e. about £137k). But you don't need to buy it now, you buy it in 25 years time. To get that £137k in 25 years time, you need to put away £40,400 now at 5% interest. My £65k took account of the inflation that would be applied to that £800 per month to get a higher number needed by the annuity.

The real problem with the debate is that it is totally path driven - i.e. you can't really just build a simple model. Noone knows the real answer, not me, not Hamish - we don't know what rents will end up doing in reality, we don't know what will happen to wages, or house prices, or how many times a home buyer will move, how much additional interest they pay as they have to upsize their house (we've left that off totally), or how much stamp duty will be or other moving costs. There are too many unknowns. The only sensible way to try and get an estimate is to do what we have done, but it is far from ideal.

The reality is that depending on how you proceed, and what you view as being your likely wage over time and what costs you think you will need to pay out later in life, either will be better.

One very sensible argument, depending on individual circumstances, that would say that buying as early as possible would be better is the fact that by the time your kids hit 11-13 and you MAY have to start paying private school fees it would be better to have paid most of your mortgage down. So for me, say I have kids at 35-36, that would be 46-49. My mortgage will be paid off by the time I hit 47 assuming no overpayments, so there is an argument that says it benefitted me to buy early.

Why did you pick 5% surely if you are going to assume no inflation you should have picked 2%

Charterhouse

ukcarper wrote: »

Why did you pick 5% surely if you are going to assume no inflation you should have picked 2%

I didn't assume no inflation go look at my post again.

ukcarper

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.

Graham_Devon

Deleted_User wrote: »

Loan of £160k @ 5% = £960 per month

IGNORING THE FACT THAT INTEREST RATE WILL FLUCTUATE OVER THE YEARS

Total paid = 12 x 25 x £960 = £288,000

Rent at 4% = £853 per month

IGNORING THE FACT THAT RENT WILL RISE STEADILY OVER 60 YEAR PERIOD

total paid = 12 x 60 x £853 = £614,160

Not having a pop here.

But you have chosen a pretty low interest rate for 25 years for the mortgage.

And a pretty high rental rate.

All I know is that where I am, a 160k property could not command an £853 rental per month, as a 160k property would likely be a nice 2 bed, or a basic 3 bed.

They go for around 550-700.

That massively alters your figures.

I think what would be easier is to look at the average mortgage rate over the last 25 years to figure out what you should base your rate on. It's the only fair way to do it, as the FTB today would NOT be able to get a rate of 5%.

Just to show what difference the average type figures I see around me would make...

Loan of £160k @ 7.5% = £1196 per month (roughly 5% BOE base rate)

IGNORING THE FACT THAT INTEREST RATE WILL FLUCTUATE OVER THE YEARS

Total paid = 12 x 25 x £960 = £358800

Rent at 4% = £700 per month

IGNORING THE FACT THAT RENT WILL RISE STEADILY OVER 60 YEAR PERIOD

total paid = 12 x 60 x £853 = £504,000


Then add in maintanance, moving costs.

Still cheaper to buy, but no where near the 30% used.