Reminder: buying a house is a financial decision

dippy

moneymatt wrote:

You'd be surprised actually, dippy. Round here, there's been loads of new builds of flats and 4/5 bed houses. A lot of these are up for let presumably having been bought off plan by investors (they're too pricey for most people round here). And because big houses don't cost much more to rent than smaller ones, I could let out my current place and rent one of those for very little more. Certainly a lot less than I'd have to fork out to buy one.

I bet these BTL investors thought they were going to make a killing. How much were the 4/5 bed houses going for in your region? At least, it means there's an abundant supply of rental stock.

deemy2004

dippy wrote:

I bet these BTL investors thought they were going to make a killing. How much were the 4/5 bed houses going for in your region? At least, it means there's an abundant supply of rental stock.

As with everything whether it be dot coms, or house for let, joe public piles in at the top !. Just before the trend turns.

If the stock market continues to recover then thats where new money will flow and those holding property will be where those who bought stocks in 1999/2000 were .

dippy

Except in the case of property, the banks are happy to keep the credit flowing.

dougk_2

moneymatt wrote:

If you make a direct comparison between paying the rent and paying the interest only on a mortgage, you'll most likely find it cheaper to rent. For example:

Buy house with £100k mortgage @ 6% = 500/month in interest (i.e. that's without paying anything off the value of the house - it's just what you give to the bank in interest charges).
OR
Rent same house at 400/ month, plus all repairs paid for by landlord.

This is not true - it is very regionalised.

To examples Reading and Norfolk....
To Rent in Norwich 2 bed terrace - approx £500 -£600 per month
To buy £110k (Mortgage therefore approx £450 per month at 5%)

To rent Reading 2 bed flat approx £800 to £850 per month
To buy £130k (Mortgage therefore approx £500-£550 per month at 5%)

Its still cheaper to buy than Rent and you have something that is your own and long term increases in value.

bunking_off

It strikes me that if it is cheaper to rent than buy, then that's evidence of an imminent market shift.

Let's look at a dispassionate investor in a house. They have to finance the purchase of the house, which will either be via a mortgage, or if they have savings, via loss of interest on said savings.

They then rent out the property. What do they charge? Well, the ceiling is the market rate. The floor is their costs, which is the cost of financing, plus cost of maintenance, plus an amount to cover when it's vacant. It therefore follows that if a property is being rented at a lower cost than the associated (interest only) mortgage payments, the landlord is clearly making a loss.

It could be argued that the landlord could make their decisions based on their actual mortgage (which due to house price rises could be far lower than it would be if they bought the house today). However, the price originally paid for the property is irrelevant : if they sold the property today, they'd get today's price and have that amount of money free for other investments. As such, anyone renting out a property for less than what the mortgage payments would be is acting irrationally....unless I'm missing something.

Now, if all the BTL folks in an area did reach this conclusion and sold their property the effect would be to reduce property values and things would regain equilibrium. Perhaps that's what's going to happen/is happening in some areas.

What I would say is this is all very academic for many locations. I used to live in the SE, and yes, one had the choice of whether to rent or buy. Up here in the NW, so far as I can see the rental market is very restricted, and if I want to live in 4 bed detached house my option is to buy or to buy. Sure, you can rent a small semi or a terraced, but there's not a particularly active market in larger properties. Why? I guess because when you're laying out so much money per month, you like to feel like you own your surroundings.

dippy

Dougk, the repayments you have quoted are for interest only mortgages. At the end of the day, you will still owe the bank the full £110k and £130k respectively for your two examples. You have zero equity in the house and don't own anything, the bank does.

Pray to god that the day you have to sell, the market value of the house is higher than you've paid for, especially if you've bought at the peak of the cycle.

In London, rents for two bed flats in nice places are about £1000. The price of the flats are usually £250k. On an interest only mortgage, you'd pay £1050 at 5% over 25 years and you pay £1500 for a repayment mortgage. When you're renting, you don't have to pay for repairs, such as washing machines, cookers, heaters and especially boilers. Nor do you have to pay for ground rent which can be quite expensive in mordern blocks of flats with nice big communal areas.

dippy

bunking_off wrote:

It strikes me that if it is cheaper to rent than buy, then that's evidence of an imminent market shift.

Have a look at the financial times. This is an article dated last Friday.
http://news.ft.com/cms/s/2e8f6bac-81e1-11d9-9e19-00000e2511c8.html

"New buy-to-let investors should expect to make a monthly loss on their properties, according to new figures from Savills, the property consultants.

The margin between borrowing rates and gross property yield has dropped from nearly 5 per cent in 1996 to just 0.4 per cent in the last quarter of 2004."

Rob_B_8

Me & my girlfriend are starting to look at buying (will be 6months at least) but its damn confusing! living with the folks at the moment so thats nice and cheap!
Hoping to have a 10k deposit and can afford £400/month max (looking around the 65-75k mark for house price) We've looked at renting but never considered it as owning is a big goal for us, now you lot have thrown another train of thought with the talk of renting, i still have the thoughts that renting is a waste, i realise that mortgages aren't exactly much more secure but you will NEVER own if you just rent so it casts doubt on its security for the future.
Any hints/tips for us as this is amjor turning point in our lives and we can't get it wrong!

Cheers,


Rob

dippy

I don't think anybody here is advocating renting for ever. Just that in current market conditions of very high house prices, renting makes as much financial sense, if not more, than buying in the short term. There are some bargains to be picked in this falling market from last summer's peak. There's more to come if you believe in further falls. Anyway, if you're not pressured to buy, whether living at home or renting, you can better evaluate where the market is going and cherry pick.

Buying is a huge investment (or liability if you talk to the experts) that you'll spend a long time repaying. Why saddle yourself with more debt than you need to, especially at a pretty low rate of 5% which may rise to more in the future?

You also have to ask yourself why house prices have risen so much while rents have not risen by nearly as much. Both obey the laws of supply and demand. If there was so much demand for houses, so much so that most FTBs have been priced out of the market, demand should have shifted to the rental market and rents should have risen. Where have all those FTBers gone? Shouldn't they be renting if there's such a high demand for housing in general??????

Is there really a high demand pressure on housing to justify these high house prices?

frugal_dougal_3

dippy wrote:

I don't think anybody here is advocating renting for ever. Just that in current market conditions of very high house prices, renting makes as much financial sense, if not more, than buying in the short term.

That's impossible to guage. If you delay buying for 5 years then you will be 5 years older when your mortgage is finally paid, and if you are say 60 by this time you will be really wishing you had that rental money back again.

I'm afraid it's a fact that the longer you leave buying a house the harder it gets.