An entire generation locked out of property ownership

Cleaver

Graham_Devon wrote: »

In FORTY YEARS TIME interest on savings is BOUND ot have changed.

The 30k you lost was explained to you. Compounded interest. But you insisted on adding unknown inflation again to rent to bring this figure down, and didn't add any extra interest fluctuations to the 40 year mortgage. Therefore leaving the renter at a disadvantage in your calculations as they suffered inflation, but the mortgagee didn't suffer any higher interest rates on their mortgage.

You are complaining I haven't allowed for HPI over the timeframe. Yet you cannot seem to grasp that I'm not complaining of the savings interest you have used. I'm simply accepting it.

YOU are complaining that I haven't accepted unknown HPI. Therefore I'm stating I haven't factored in unknown higher savings rates either. Therefore I'm not being biased.

God damn this is hard work.

If anyones got the time, or indeed, inclination, please work it out properly.

Average house price £160k.

Average mortgage cost (for new mortgages today)

Average rental cost (I believe £692)

Average maintanance costs.....enough information here to digest and figure out http://www.statistics.gov.uk/pdfdir/efsh0107.pdf so no one can complain of bias.

Average savings rate 0.8% (but I shall be nice as that figure is silly and includes loads of non paying accounts, 2-3%)

Average deposit, 27%. (I think?)

Ahh go on, I'll give it a try then. Can we assume an overall inflation rate of 3% over the forty year period? That seems sensible and we need a figure to do the calcs. And let's assume that the renter isn't an idiot and saves their deopsit in a cash / investment plan that manages to attain 4% after tax and puts in any money saved from renting in comparison to the mortgage in to this 4% investment plan.

Buyer

The buyer sticks his 27% deposit in to his house and gets a mortgage that averages 8% over the 40 year term. Let's also assume that he adds a £2,000 fee to the mortgage.

Over the 40 years the mortgage will cost £830.21 a month, or £398,500 over the forty years.

I've already added £2,000 for fees on to that mortgage, but let's say he remortgages 8 times over forty years at a cost of £1,500 a time. That's another £12,000 in fees.

Your link stated that the average home spends £25 a week on decorating, repairs, maintenance etc. Let's adjust that each year by 3% for inflation and you have a total of £98,289 over the 40 years.

Shall we say that they take out mortgage protection at £40 a month, also effected by 3% inflation? This would be another £36,192.

Think that's everything. So the buyer has spent:

£398,500 (mortgage)
£12,000 (fees)
£98,289 (repairs etc.)
£36,192 (mortgage protection)

TOTAL = £544,981

However, they have an asset (the house) worth £506,724 if we're taking in to account inflation.

So in summary at the end of the 40 years for the buyer:

TOTAL SPEND = £544,981
TOTAL ASSET WORTH = £506,724

Renter

Our renter sticks the £43,200 deposit in an investment portfolio that manages to get 4% after tax over the course of 40 years, beating cash savings. We have annual inflation at 3%. So for the first 73 months, or just over six years, your rent will be less than the buyers mortgage. Let's assume that both were at the envelope of affordability and their rent / mortgage doesn't leave them with spare money. But the renter has 73 months where they pay less than the mortgage holder, so they invest this money in to their 4% investment plan.

Taking all of the above in to account the £43,200 plus the extra money you can add each month for the first six years as your rent is less than your mortgage, you'll have £237,331 at the end of the 40 years.

Your rent over the 40 year period, allowing for 3% inflation, adds up to a total cost of £640,833.

If we've taken in to accout fees for our buyer, we should for our renter. Let's say they pay fees through an agency of £100 a year for contract renewals etc. With inflation this is £7,540.

Think that's everything. So the rent has spent:

£640,833 (rent)
£7,540 (fees)

TOTAL = £648,373

However, they have an asset (the investment portfolio) worth £237,231 if we're taking in to account 4% growth after tax.

So in summary at the end of the 40 years for the renter:

TOTAL SPEND = £648,343
TOTAL ASSET WORTH = £237,231



I can't see any way in which the renter could be better off than the buyer under the figures you've given, unless mortgage rates go above historical highs, or the renter invests in a risky fashion etc. From my calcuations the renter has spent £103,392 more than the buyer. But not only this, the renter only has assets worth £237,231 compared to an asset value of £506,743 of the buyer.

So overall, the renter is down around £372,903 in total over the 40 year period.

And, without getting ahead of ourselves, the buyer now doesn't have to pay a mortgage from this point forward, whereas the renter needs to rent. The £237,321 that the renter now has in his investment portfolio will only buy 46% of the average house, and if he can get 4% interest off this pot of money after tax he'll only get £790 income a month which won't cover the cost of his £2,288 monthly rental (which is what it costs after 40 years of 3% inflation).

If we're looking from a pure financial perspective, buying wins for me. Anyway, lots of figures in that so happy to be shown wrong!

wotsthat

Cleaver wrote: »

I can't see any way in which the renter could be better off than the buyer under the figures you've given. From my calcuations the renter has spent £103,392 more than the buyer. But not only this, the renter only has assets worth £237,231 compared to an asset value of £506,743 of the buyer.

There's absolutely no way that the renter can be ahead based on Graham's scenario. I'm glad to see more than one person has ended up with similar outcomes to me. You hear so much about renting being cheaper than buying that if you didn't do the sums you'd start to believe it.

What's even more compelling is when the calculations are done over 40 years but with a more standard 25 year mortgage. They make today's house prices look cheap.

I see home ownership as an essential part of pension planning. Not for income purposes but to reduce outgoings thus allowing retirement income to go much further.

Graham_Devon

Cleaver wrote: »

If we're looking from a pure financial perspective, buying wins for me. Anyway, lots of figures in that so happy to be shown wrong!

Buying wins for me too. Fourth time I've said it.

What I can't do, is argue when 3% inflation is added to the total. I said right at the start, there was a reason that the media article removed inflation. We just don't know what it will be, and we don't know the ups and downs in the 40 year term. For instance, if rents carried on rising fom now at 3%, they would simply be unaffordable for the majority (we already have a rising rental arrears percentage) unless wages carried on rising with inflation. They haven't though. (same happened with houses).

With an inflation guestimate included, the renter will always lose. No doubt about it.

If we look at house price falls with inflation added, it's a different kettle of fish, and suddenly we have to ignore inflation as thats comparing to "chocolate and bananas".

Cleaver

Graham_Devon wrote: »

Buying wins for me too. Fourth time I've said it.

What I can't do, is argue when 3% inflation is added to the total. I said right at the start, there was a reason that the media article removed inflation. We just don't know what it will be, and we don't know the ups and downs in the 40 year term.

We don't, so all we can do is take a look at history and make a best guess. Nationwide goes back to 1952, so you can basically look at house price inflation for the 50s, 60s, 70s, 80s, 90s and 00s and see what house price inflation was on average each year during each of those decades. When you do that you get the following (roughly speaking):

1950s = 3% HPI per average year
1960s = 9% HPI per average year
1970s = 14% HPI per average year
1980s = 8% HPI per average year
1990s = 6% HPI per average year
2000s = 5.5% HPI per average year

Or if you want to look at it as a whole, we've had an average 7.7% HPI figure each year since 1952.

Rents are likely to follow house prices, I think we can all agree on that. If house prices fall, the cost of mortgages fall and therefore the rent people charge falls. That's pretty logical.

So whilst we don't have any evidence that inflation will continue, we can look at the past and see that we haven't had any decade without HPI and the average is around 7.7%. So I think using a 3% increase for both HPI and rent is on the conservative side of things.

The average UK wage in the 1950s was around £150 according to this source. So wages have grown by just under 9% a year if the average wage is deemed to be around £24,000 now.

So wage inflation has outstriped house prices if you look at the period between 1952 and now. Obviously that figure would look very different if you looked at the last ten or twenty years.

But in summary, you'd have to have a pretty wild theory as to why 3% inflation is seen as an excessive figure.

ukcarper

I can see house prices and rents falling in the short term but over 25 year period I wouldn’t expect them to lag behind inflation by very much if at all.

Wage inflation has exceeded general inflation in the past and could again and if Rents only rise in line with wage inflation, people who can afford them now will be able to in the future.

Graham_Devon

Cleaver wrote: »

But in summary, you'd have to have a pretty wild theory as to why 3% inflation is seen as an excessive figure.

Its not the 3%.

Do the same maths on 2006 figures. (I say that because, as below, just the different factors can totally change the argument).

ALL of them will be wrong. The house asset price way overvalued. The rental undervalued. The savings would be well overvalued. Not least (though not all that important to this mathmatical argument) the 40 year mortgageee would be well and truly stuck.

But seriously, the reason I take issue with a bog standard inflation rate over 40 years is look at the rent it will command. We are already hitting 9% arrear statistics. That is the reason I can't see rents, from this level, simply increasing 3% a year. If they do, I can't see the average savings rate being just 4% a year.

I'm not taking issue with your sums, they are totally correct and I can't argue them. But the blanket 3% inflation figure? It's the one figure that has totally destroyed my (and the article from the media's) article. Just change is slightly to 3.5% The home owner will be raking it in even more. Whack it up to 5%, and the home owner will leave the renter for dust. It's the one figure that can be tweaked to completely change the maths.

Trouble is, it's the one figure that will probably apply to both house prices and rents the least. As I say, if it does, we'd either need some serious wage inflation (and therefore higher interest rates and higher savings rates, certainly higher than 4%) or we'd, as a country, be in the knackers yard.

Wages have risen nowhere near house prices over the last decade.

Cleaver

Graham_Devon wrote: »

Trouble is, it's the one figure that will probably apply to both house prices and rents the least. As I say, if it does, we'd either need some serious wage inflation (and therefore higher interest rates and higher savings rates, certainly higher than 4%) or we'd, as a country, be in the knackers yard.

Well, wages would need to go up 3% to keep up with rents going up at 3%. And as I've just shown, wages have risen at an average of nearly 9% a year since the 1950s. So is 3% wage inflation really that high?

Graham_Devon wrote: »

Wages have risen nowhere near house prices over the last decade.

No, they haven't. But we were talking about a 40 year period weren't we?

If we look at how the housing market seems to work, we see peaks and troughs. Let's say house prices fall 35% from now until 2017. Then what do you think we'll see? I reckon a boom. That's what always seems to happen. So looking at this over one decade isn't really reliable, you need to look at 40 or 50 year periods (as we've been doing all thread).

At the end of the day you're correct, we don't know what inflation will bring. But if I were a betting man then 3% average HPI per year over the next 40 years would be at the very lower end of what I'd predict. Obviously within the next four decades they'll be periods of falls, stagnation and rises far away from 3% in both directions.

Graham_Devon

Ok, I shall put this in graphical form to show my problem with the blanket 3% inflation thingymebob.



Anyone see an issue? (apart from the overlay tooltip that is)

ukcarper

Graham_Devon wrote: »

Ok, I shall put this in graphical form to show my problem with the blanket 3% inflation thingymebob.



Anyone see an issue? (apart from the overlay tooltip that is)

Can you explain that to me please

Cleaver

Graham_Devon wrote: »

Ok, I shall put this in graphical form to show my problem with the blanket 3% inflation thingymebob.



Anyone see an issue? (apart from the overlay tooltip that is)

Erm, no, I don't really see an issue! This is the same graph as this right? You take wages, rent and house prices and apply 3% inflation over 40 years?



The average wage in 2011 is £24,000 and the average house price is £162,000. That makes the average house 6.75 the average wage. Make of that what you will.

Then if you apply 3% inflation to all then this ratio is always the same - housr prices cost 6.75 the average wage. So whether you argue whether house prices are sustainable now isn't really an issue, the fact is that graphs that you and I have posted show house prices, rent and wages all rising in harmony with one another in a sustainable way. Unless I've missed something?

You can post this another way. Let's say that Mars Bars cost 50p, Lion Bars cost 80p and you get paid £7 an hour. You get a 3% wage rise a year, Mars Bars go up 3% a year and so do Lion Bars. The graph over 40 years looks like this:



It looks as though your wages are going up way more than the cost of Mars Bars over 40 years, but they're not. Today you can buy 14 Mars Bars an hour with your wage, and 40 years later you can 14 Mars Bars with your wage. So Mars Bars and wages are rising at exactly the same rate.