Buying a house vs renting

LydiaJ

IronWolf wrote: »

I thought 6% was quite low, a basic tracker has done 10% a year over the last 20 years in the US alone

I don't know about the US. Here's what Wikipedia has to say about endowment returns in the UK. Sorry I haven't time to track down a more reputable source of info - I have a life outside of MSE!

Wikipedia wrote:

The underlying premise with endowment policies being used to repay a mortgage, is that the rate of growth of the investment will exceed the rate of interest charged on the loan. Toward the end of the 1980s when endowment mortgage selling was at its peak, the anticipated growth rate for endowments policies was high (7-12% per annum). By the middle of the 1990s the change in the economy toward lower inflation made the assumptions of a few years ago look optimistic.

Significantly, endowment mortgages continued to grow in the 1980s even after Life Assurance Premium Relief had been abolished (1984). Moreover, their share of the mortgage market held up in the 1990s despite the fact that the Treasury began to steadily reduce MIRAS, which also worked in favour of interest only mortgages, and despite a prolonged period of relatively low inflation (something which worked against interest only mortgages). The fact that endowment mortgages were later found to have been systematically mis-sold probably explains this disjunction.

Regulation of investment advice and a growing awareness of the potential for regulatory action against the insurers lead to reduction in anticipated growth rates down to 7.5% and eventually as low as 4% per annum. By 2001 the sale of endowments to repay a mortgage was virtually seen as taboo.

neverdespairgirl wrote: »

High? ISTM that rental yields in central London at the moment are very low indeed. 3% is far from uncommon.

Not necessarily. Not everyone has to justify his own choice by blinkered views.

If I were living in central London at the moment and deciding whether to buy now, it would be a very difficult decision indeed. Certainly not an obvious one, to rent or buy.

Indeed. There are also lots of people who are currently renting who believe that buying is best but can't afford to. I used to be one of them. In the debate on this board, my sympathies are still largely with people who are still in the position that I used to be.

lisyloo

Did you use the American calculator or the British one?

You're right got a different answer.
Will have to look at the maths more carefully and possibly do my own.

Unfortunately can't get a mortgage at the moment anyway, but useful to know.
Don't know how long we'd be staying in London but I guess with a spreadsheet you can work out where the cut-off point is.

People who rent will always try to justify it as better. Some people at least.
And people who buy will do similar for their choices.

I do agree that some people are entrenched in their views, but not all of us.
I'm both a homeowner and a renter (london bolt hole) at the moment.
I'm looking for the correct answer not for something that says I'm right, so not everyone has closed mind.

LydiaJ

lisyloo wrote: »

I'm looking for the correct answer not for something that says I'm right, so not everyone has closed mind.

The trouble is that the correct answer depends on all sorts of unknowable things - like what is going to happen in future to interest rates, house prices, rents, and whatever savings/investments you might have your deposit money in.

michaels

I think it would work better if the models were calibrated to current pounds so use after inflation rates - my guesses might be hpi and investment returns of RPI plus 2, rent increases of RPI plus 1.5 and then also factor in a house move every 7 years (cgt and fees being 4%?) which I think is average and a rental move(average cost 1 months rent?) more often?

Locally it is not unusual for a 500k property to rent for 1500 a month or less.

lisyloo

The trouble is that the correct answer depends on all sorts of unknowable things

Oh tell me about it !!
DH recently couldn't find a job locally but found one in London, so there's the whole work location thing.
He's on a contract so no idea how long it will last - could be 1 year, could be 10. Even people in permanent jobs get re-located sometimes and if you have a good job with a good company then obviously you want to hold onto that as they aren't that easy to come by.

At our age retirement comes into it.
DH is 48 so will he work for 10 years or 20?
We hope and plan for it to be nearer to 10 but with unknowable job prospects and health in the equation as well as longevity, investments etc. it's unknowable even to say 10 or 20.

Two of my colleagues died recently in their mid 40's. Not common but people do die and get ill.

What you CAN do, is run a variety of scenarios and see where the cut-off point for renting bs buying is.
So lets say (made-up) you're better off buying if you're staying 8 years plus, then you can decide whether that's a risk worth taking.

Also no-one knows what's going to happen with house prices.
London looks a safe bet and many people say it is but confidence can turn on a sixpence and unexpected things can happen (911 being an example).

As you say many unknowable things.

We would probably be looking to buy if we could but I would feel it was a risk (worth taking).
Unfortunately with the business being new, we're going to have to wait a little.