An entire generation locked out of property ownership

Graham_Devon

So we will just continue on on an exponential curve?

Graham_Devon

ukcarper wrote: »

To be fair to Graham lets say house prices fall 10% this year and then stagnate for another 4 before following inflation.
£160k less 10%= £144k then 35years at 3% the property will be worth £400k at the end of 40 years even so the renter would still be down £270k.

And to be fair, rents would most likely follow down (reducing the cost to the renter).

I'm not, and never have said renting is better overall.

But I do believe it's better currently than a 40 year mortgage, what with the cliff edge we seem to be hanging on to. I certainly cannot see house prices rising as they do in that graph, and as they do in cleavers sums above. That would have to suggest we have absolutely no house price issues and things can just carry on as they are now, increasing 3% each year.

ukcarper

Cleaver wrote: »

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!

To be fair to Graham lets say house prices fall 10% this year and then stagnate for another 4 before following inflation.
£160k less 10%= £144k then 35years at 3% the property will be worth £400k at the end of 40 years even so the renter would still be down £270k.

ukcarper

Graham_Devon wrote: »

And to be fair, rents would most likely follow down (reducing the cost to the renter).

I'm not, and never have said renting is better overall.

But I do believe it's better currently than a 40 year mortgage, what with the cliff edge we seem to be hanging on to. I certainly cannot see house prices rising as they do in that graph, and as they do in cleavers sums above. That would have to suggest we have absolutely no house price issues and things can just carry on as they are now, increasing 3% each year.

Graham the total rent in cleavers example is £640k to be better off that would have to drop to £370k.

Cleaver

Graham_Devon wrote: »

I certainly cannot see house prices rising as they do in that graph, and as they do in cleavers sums above. That would have to suggest we have absolutely no house price issues and things can just carry on as they are now, increasing 3% each year.

Apologies, let me explain. I've assumed HPI over the next 40 years of an average of 3% a year. So I think the actual graph will have booms, busts and periods of stagnation, just like the last 40 years. So the graph is just a smoothed version of HPI looking at 3% a year average.

If you take a period of 40 years from now, what do you think will be the average HPI per year? 3% seems quite conservative I think.

Cleaver

Graham_Devon wrote: »

So we will just continue on on an exponential curve?

Yes. Well, I can only base it on history, but that's what's happened in the past. Obviously graphs won't ever look like that, as they all have peaks and troughs, but what is the issue with wages and the cost of everything all rising in proportion to one another? It's what's happened for centuries now without much of an issue. As long as the ratio doesn't change that much between wages and everything else it means things pretty much stay the same price, relatively speaking.

If your wage in 1970 was £1,000 and a house is £10,000, that's the same as your wage in being £100,000 in 2050 and the same house being £1,000,000. Both have risen exponetially yet remained tied to each other. So although the graph would look strange, they are the same values as they were before.

Graham_Devon

Cleaver wrote: »

Apologies, let me explain. I've assumed HPI over the next 40 years of an average of 3% a year. So I think the actual graph will have booms, busts and periods of stagnation, just like the last 40 years. So the graph is just a smoothed version of HPI looking at 3% a year average.

If you take a period of 40 years from now, what do you think will be the average HPI per year? 3% seems quite conservative I think.

Conservative?

LOL. Cleaver, the country is bust as it is.

For those wage rises to happen, the government would have to start paying them too. The government would have to start paying 3% increases in LHA and other benefits each year too.

We've just hit crisis point. Just tonight, greece has announced it's going to start selling off it's assets to pay for some of it's debt. It won't be enough, and we'll have to cough up again.

How on earth is the government going to pay these rises in both public sector pay and also benefits in cash and benefits for housing?

I know it's 40 years. But we have a long way to go yet to clean up the current mess and we are still borrowing more than we make. So that could be 10 years to clean up, 5 years dusting down, then 25 years to "make up" for the lost ground. You'd be seeing the government and benefits racking up at 4,5,6% each year to play catch up.

God knows what may happen to house prices. But rental prices rely on the government heavily. So do wage rises.

Cleaver

Graham_Devon wrote: »

Conservative?

LOL. Cleaver, the country is bust as it is.

For those wage rises to happen, the government would have to start paying them too. The government would have to start paying 3% increases in LHA and other benefits each year too.

We've just hit crisis point. Just tonight, greece has announced it's going to start selling off it's assets to pay for some of it's debt. It won't be enough, and we'll have to cough up again.

How on earth is the government going to pay these rises in both public sector pay and also benefits in cash and benefits for housing?

I dunno Graham. We've been through this stuff before and come out the otherside. I think 3% HPI over the next 40 years is conservative, you don't. And that's fine, neither of us know! Remember that house prices aren't just linked to wages. Anyway, the 3%, 2% thing doesn't matter. If we use my example from above, all stuff rises / falls together. The renter who put his deposit in an inevstment portfolio won't make 4% after tax if the country stays screwed.

I have to smile a little bit, as I work in the public sector and got my yearly rise up the payscale last month which was 3.86%. We don't get cost of living allowance any more, but I still get a payrise. Baffling really.

Graham_Devon

Cleaver wrote: »

I dunno Graham. We've been through this stuff before and come out the otherside. I think 3% HPI over the next 40 years is conservative, you don't. And that's fine, neither of us know! Remember that house prices aren't just linked to wages. Anyway, the 3%, 2% thing doesn't matter. If we use my example from above, all stuff rises / falls together. The renter who put his deposit in an inevstment portfolio won't make 4% after tax if the country stays screwed.

I have to smile a little bit, as I work in the public sector and got my yearly rise up the payscale last month which was 3.86%. We don't get cost of living allowance any more, but I still get a payrise. Baffling really.

I don't. No. Not from the point we are at, and the kind of wage inflation we'd need to see to play catch up.

Also, if we did have this kind of inflation, your sums would be wrong using that 4% savings income. Would be higher. Unless rates stay below 1.5% for the next 40 years.

This, would be why the media article didn't include guestimates. Even Gordon Brown is now on record after saving the world stating that the crisis we just went through was just the warm up!

ukcarper

ukcarper wrote: »

Graham the total rent in cleavers example is £640k to be better off that would have to drop to £370k.

Applying the house price fall etc to rent, total rent would be about £510k.