Another Interest Rate Prediction

Procrastinator333

RenovationMan wrote: »

Well I dont want to argue about it, I used your own example data and came back with a £2k per year saving. It all comes back to my original point (which seems to have vanished for some reason, but you luckily quoted it in your reply) which is that in the real world you cant sit and make pure mathematical calculations to decide whether to buy a house or not, the decision is way more involved than that.

I don't disagree the buying decision is more complex, but in your OP, you were arguing it is the "perfect time" to jump on because of financial savings.

That I don't think is true. Buy for any one of the other countless reasons, but don't buy because you think renting is dead money. The FTB is likely to gain financially by waiting in a stagnant market. Well, at least until they are offered the same rates as everyone else.

EDIT:

I also don't feel like we are arguing, this actually feels like more of a debate for once, is that not a good thing? It is nice for a thread not to descend in to name calling for once. And I do like your OP and the comments you have made previously on your approach. I hadn't thought about it too hard as it isn't my situation, but reading your posts and having applied the same sort of logic I use for the FTB situation, I agree. The savings the 50% equity holder can make with a 2.19% tracker are just so vast that buying and overpaying seems like the best course to me too.

RenovationMan

Procrastinator333 wrote: »

I don't disagree the buying decision is more complex, but in your OP, you were arguing it is the "perfect time" to jump on because of financial savings.

That I don't think is true. Buy for any one of the other countless reasons, but don't buy because you think renting is dead money. The FTB is likely to gain financially by waiting in a stagnant market. Well, at least until they are offered the same rates as everyone else.

I never said that renting was dead money, never have and never will. It's exactly the same as an Interest Only mortgage, which is why I used an IO mortgage in the example.

Your whole argument seems to rest on the fact that a renter can live with his/her mum and dad or live in a studio apartment while saving up for a home. Yes, they can but for those who dont want to or those who rent in a place similar to what they would buy, then the fact remains that it does make better sense financially to buy during a sustained period of low interest rates than to wait until they rise and end up paying more each month.

Procrastinator333

RenovationMan wrote: »

I never said that renting was dead money, never have and never will. It's exactly the same as an Interest Only mortgage, which is why I used an IO mortgage in the example.

Your whole argument seems to rest on the fact that a renter can live with his/her mum and dad or live in a studio apartment while saving up for a home. Yes, they can but for those who dont want to or those who rent in a place similar to what they would buy, then the fact remains that it does make better sense financially to buy during a sustained period of low interest rates than to wait until they rise and end up paying more each month.

I apologise for putting owrds in your mouth, not the intent, but it is the view of many and a personal gripe of mine. I took it as an implication of your initial comment that now was the perfect time to buy and start overpaying.

There are too many variables, even if they do want the same sized place (but I still ask how many FTB's actually do that?), it then depends on the numbers.

The rental % varies a lot across the country and within towns. We rent at £1,100 a month. Similar properties are selling for £250k, so we are at 5.3% rent. Another might be at 6% or 4%.

Some may not be willing to take a tracker, so the interest rate they should use is more like 5 or 6%.

These all change that equation and result very quickly, even for identical properties.

Reducing the mortgage value seemed to be the thrust of your initial post, and most FTB's will have more equity in their eventual home by buying in 12 months instead of buying now and overpaying if prices are stagnant.

julieq

Yes, it's possible to construct a set of circumstances where it's neutral or advantageous to sit out a market, but the reality is that you're taking a punt on house prices staying flat in absolute terms at a time when supply is heavily constrained.

In essence it's taking a risk on something that is high impact, high probability, and low detectability (i.e. at the time you discover it it's too late). Anyone who understands risk management would tell you that that would put it right at the top of the risk register.

Very few people do understand risk management though. And in this case people are choosing this higher rated risk in preference a lower risk (forced sale against sustained short term absolute house price falls), which is lower probablility and more easy to mitigate, though oddly enough the mitigation involves reducing the amount of money locked into the house so there's a cash buffer.

Nothing wrong with that really, it's personal choice. The danger is when it's portrayed as a safe option, when in fact it's a seriously risky game. The procession of bears taking "the worst investment decision of their life" demonstrates that this is increasingly becoming apparent to everyone faced with the reality of events as they unfold.

And often it seems to me to be an excuse for fence sitting to avoid the worry of getting something wrong. In the event, worry about the risk of a crash becomes the overriding factor. Risk management is about transforming worries into quantifiable risks so they can be dealt with rationally.

Graham_Devon

RenovationMan wrote: »

I worked through your figures for example 2 :

Example 2:

Interest only mortgage of £180k @ 4.5% = £8100 or £675 per month.

Rental on similar property = £11,000 or £916.67 per month.
Interest on 20k Deposit in ISA @ 3% = £600 or £50 per month.

Not sure what it's like where you live.

But to rent the equivalent 180k house here, would cost £680-£780 a month.

Makes a big difference to the calculatons. £916 a month would get you a better house than you could buy at 180k.

Procrastinator333

julieq wrote: »

Yes, it's possible to construct a set of circumstances where it's neutral or advantageous to sit out a market, but the reality is that you're taking a punt on house prices staying flat in absolute terms at a time when supply is heavily constrained.

In essence it's taking a risk on something that is high impact, high probability, and low detectability (i.e. at the time you discover it it's too late). Anyone who understands risk management would tell you that that would put it right at the top of the risk register.

Very few people do understand risk management though. And in this case people are choosing this higher rated risk in preference a lower risk (forced sale against sustained short term absolute house price falls), which is lower probablility and more easy to mitigate, though oddly enough the mitigation involves reducing the amount of money locked into the house so there's a cash buffer.

Nothing wrong with that really, it's personal choice. The danger is when it's portrayed as a safe option, when in fact it's a seriously risky game. The procession of bears taking "the worst investment decision of their life" demonstrates that this is increasingly becoming apparent to everyone faced with the reality of events as they unfold.

And often it seems to me to be an excuse for fence sitting to avoid the worry of getting something wrong. In the event, worry about the risk of a crash becomes the overriding factor. Risk management is about transforming worries into quantifiable risks so they can be dealt with rationally.

I have seperated out facts, such as the maths itself from the opinion, the numbers I plug in and my expectation of flat prices.

Of course if you think rises are on the way, the same logic will mean it makes sense to buy.

You apply your own thought to the risk analysis just as I have done in my example, and give - high impact, high probability, low detectability. I disagree.

You suggest waiting is the more risky option. What is the alternative, buy on a 4% over base rate tracker with only a small amount of equity? That to me is a far bigger risk in an uncertain market. It only takes a small fall in prices and a small rise in interest rates for you to be stuck in a property with an ever increasing mortgage bill.

I really can't see how a 4% boe tracker, close to 100% mortgage is the safe option?

If you don't buy, for me there is medium impact (might end up paying a bit more or have a slighlty smaller place), low probability (For reasons that can be discussed seperately I think stagnation or small falls) and medium detectability (You can see the indices every month and watch the local market - house prices move slowly)

Compare that to buying and the risk of losing money:

Medium impact (point above in reverse). Medium probability (same as above). Low detectability (Interest rates can move a lot faster and sharper than house prices).


Your last line talks about quantifying the risks, that is exactly what I'm doing. Equally I can plug the numbers in and see how much I may lose if prices do rise. I use this information to make a decision.


I don't get why so many get defensive about such a simple point. The FTB, in a stagnant market will more than likely own more of their home by waiting and saving. Why is that controversial?

By all means disagree that the market will be stagnant, that is a seperate point, but why does this fact in itself upset so many?

Graham_Devon

julieq wrote: »

Yes, it's possible to construct a set of circumstances where it's neutral or advantageous to sit out a market, but the reality is that you're taking a punt on house prices staying flat in absolute terms at a time when supply is heavily constrained.

In essence it's taking a risk on something that is high impact, high probability, and low detectability (i.e. at the time you discover it it's too late). Anyone who understands risk management would tell you that that would put it right at the top of the risk register.

Very few people do understand risk management though. And in this case people are choosing this higher rated risk in preference a lower risk (forced sale against sustained short term absolute house price falls), which is lower probablility and more easy to mitigate, though oddly enough the mitigation involves reducing the amount of money locked into the house so there's a cash buffer.

Nothing wrong with that really, it's personal choice. The danger is when it's portrayed as a safe option, when in fact it's a seriously risky game. The procession of bears taking "the worst investment decision of their life" demonstrates that this is increasingly becoming apparent to everyone faced with the reality of events as they unfold.

And often it seems to me to be an excuse for fence sitting to avoid the worry of getting something wrong. In the event, worry about the risk of a crash becomes the overriding factor. Risk management is about transforming worries into quantifiable risks so they can be dealt with rationally.

You are missing a huge factor out here when calculating risk.

If you do not buy, but continue to save, you are not tied down. You can move with the market, even if that puts you back a few steps in terms of affordability. You can choose how to move with the market, i.e. put more money in, or take a step back etc

If you buy now, you are locked in. You HAVE to move with the market. You HAVE to make the payments, there is no choosing if you would like to step back a bit. You can't be fluid, you are committed.

When talking about risk, surely this should be taken in to account.

Which looks the riskier here, considering we are talking about jumping in with little capital instead of waiting?

julieq

It's not being defensive, it's about pointing out that the analysis is flawed.

Let's do the risk analysis.

The desired outcome is home ownership. The decision is between buying now or buying after an unspecified wait. The two risks I'm considering are:

1) You do not buy now and prices continue to increase in absolute terms.

2) You buy now and prices decrease and a forced sale is necessary

Risk 1 is highly likely. It is the consensus opinion and it is the historical norm.
Risk 1 has high impact, because if it happens, the strategy of waiting fails.
Risk 1 has low detectability, because at the time it becomes apparent it is too late.

You have to choose whether to accept, avoid or mitigate this risk. There aren't many obvious mitigations apart from being prepared to move quickly if the risk starts to crystallise. The avoidance strategy is to buy regardless. The acceptance strategy is not to buy, but as this is a high scoring risk, that is a dangerous move.

Risk 2 has low to medium likelihood. House prices aren't likely to fall in a sustained way. If they do, forced sale is unlikely unless you also lose your job. It's a combination of two medium likelihood risks.
Risk 2 has high impact (loss of house and potentially ongoing debt, risk of ruin).
Risk 2 has low detectibility (you find out about it when its too late)

Again, choose to accept, avoid or mitigate. It's a high risk, so acceptance is not a sensible option. Avoidance is not to buy (but this is implicitly accepting Risk 1). Mitigation is working on the one factor you can control which is your ability to avoid a forced sale, i.e. you keep a cash buffer so you can cope with payments during unemployment.

The best option is avoidance of risk 1 and mitigation of risk 2.

The worst option is acceptance of risk 1 and acceptance of risk 2 (you eventually take this option having not mitigated the risk). This appears to be your strategy.

No combination of options removes all risk incidentally. Life is like that. It's also worth pointing out that you get risk 2 whenever you buy. You can mitigate by buying below a previous peak, but without knowing the future, you can't do much more than that.

There are other risks which you can deal with in a similar way. One which comes up a great deal is the risk interest rates will increase to "silly" levels. So let's define "silly" as 7% and the time frame for this to happening as 5 years and look at the risk. Let's also be clear about what the risk is which is that we have a combination of mortgage rates increasing past affordability and prices decreasing below the amount lent (which would crystallise any loss, otherwise you can bail out without a loss and return to the previous state).

Likelihood is low. There aren't many realistic scenarios in which you get high mortgage rates and falling prices. In fact if prices fell, rates are likely to become supressed as we've seen over the last 2 years.
Impact is high (risk of ruin)
Detectability is medium, you can see rates rising and you can see inflationary pressures building.

It's a high scoring risk because of the impact. Avoid, Accept or Mitigate. High scoring risk, so acceptance is dangerous. Avoidance is not to buy. Mitigation is to decrease the amount on which net interest is paid while rates are low (the question of whether to overpay or offset is the subject of another risk assessment process).

This is all basic risk management. It's an extraordinarily powerful methodology for getting the emotion and complexity out of decision making and making decisions which are more likely to be good than bad. Unfortunately you can't eradicate risk altogether.

But there's a sort of penny-wise pound foolish approach which actually increases the chances of making bad decisions by setting the default strategy to "avoid". It's a very poor savings and investment strategy never to take a risk at all. The key is to structure the way you deal with it.

julieq

Graham_Devon wrote: »

You are missing a huge factor out here when calculating risk.

If you do not buy, but continue to save, you are not tied down. You can move with the market, even if that puts you back a few steps in terms of affordability. You can choose how to move with the market, i.e. put more money in, or take a step back etc

If you buy now, you are locked in. You HAVE to move with the market. You HAVE to make the payments, there is no choosing if you would like to step back a bit. You can't be fluid, you are committed.

When talking about risk, surely this should be taken in to account.

Which looks the riskier here, considering we are talking about jumping in with little capital instead of waiting?

Yes it should be taken into account. Actually I've introduced the concept of opportunity cost into discussions on the dangers of overpayment, and that's built into my risk 2 mitigation.

But you're oversimplifying. If the desired outcome is to buy, which I'm guessing it is, then the danger is the market runs away. Because you can't see that until it's too late (detectability criteria), it's a higher ranking risk than the corresponding risk on the "purchase now" side that you get locked into a situation. You only actually lose money on a house at a point when you're forced to sell it, see the analysis of risk 2 above.

Also it's not as if rental is isolated from other aspects of housing costs. You're not avoiding the risk that your rent will go up by accepting the risk that the market runs away. Rents will tend to be fixed at a percentage of capital value over time.

And you end up locked in at some point anyway assuming the outcome is to own. You're just taking a punt on the initial condition, best case that gives you a little mitigation (see risk 3).

Procrastinator333

julieq wrote: »

It's not being defensive, it's about pointing out that the analysis is flawed.

No, the point that a FTB will likely own more equity in their home by waiting if prices are stagnant is not flawed. There is no error in that maths. It is simple.

As I said, you can disagree that prices will stay flat, which changes everything, but the point above is correct.

julieq wrote: »

Let's do the risk analysis.

The desired outcome is home ownership. The decision is between buying now or buying after an unspecified wait. The two risks I'm considering are:

1) You do not buy now and prices continue to increase in absolute terms.

2) You buy now and prices decrease and a forced sale is necessary

Risk 1 is highly likely. It is the consensus opinion and it is the historical norm.
Risk 1 has high impact, because if it happens, the strategy of waiting fails.
Risk 1 has low detectability, because at the time it becomes apparent it is too late.

Hang on. Ok, point 1 we can just disagree on and move on. I don't think rises are liekly, others do. We disagree.

But point 2, that is a bit stupid - It is high impact because it fails? That doesn't make it high impact. The impact is the extra cost. So say the price rises by 3% over the course of the year and the renter misses out on £6k on a £200k property. That is annoying, but not high impact like risk 2 and the risk of ruin.

And point 3 you have just restated your previous point of it is too late. House prices move slowly. You will not just wake up tomorrow and find you are £50k worse of.

So for me it is:

Risk 1 low probabity
Risk 1 med impact
Risk 2 Med detectability

julieq wrote: »

Risk 2 has low to medium likelihood. House prices aren't likely to fall in a sustained way. If they do, forced sale is unlikely unless you also lose your job. It's a combination of two medium likelihood risks.
Risk 2 has high impact (loss of house and potentially ongoing debt, risk of ruin).
Risk 2 has low detectibility (you find out about it when its too late)

Don't really disagree with this, but interest rates should be in there too.

julieq wrote: »

No combination of options removes all risk incidentally. Life is like that. It's also worth pointing out that you get risk 2 whenever you buy. You can mitigate by buying below a previous peak, but without knowing the future, you can't do much more than that.

Who said it was? I have said many times that people should consider all the other factors such as the possible negative outcomes from buying or selling to decide what is best for them. But a useful factual starting place for that consideration is that if prices stagnate, the FTB will likely own more of thier home by waiting.

julieq wrote: »

There are other risks which you can deal with in a similar way. One which comes up a great deal is the risk interest rates will increase to "silly" levels. So let's define "silly" as 7% and the time frame for this to happening as 5 years and look at the risk. Let's also be clear about what the risk is which is that we have a combination of mortgage rates increasing past affordability and prices decreasing below the amount lent (which would crystallise any loss, otherwise you can bail out without a loss and return to the previous state).

Likelihood is low. There aren't many realistic scenarios in which you get high mortgage rates and falling prices. In fact if prices fell, rates are likely to become supressed as we've seen over the last 2 years.
Impact is high (risk of ruin)
Detectability is medium, you can see rates rising and you can see inflationary pressures building.

Rates don't ned to rise to "silly" levels to cause a problem for a FTB with low equity and a 4% boe tracker.

Also, I find it strange you think interest rate movements are easier to detect than house price movements. Quite the revers is true in my opinion.