Asking prices up 3% in a month according to June rightmove report ...

mwpt

HAMISH_MCTAVISH wrote: »

*sigh*

That's London, and not just London but a tiny sub-set of London with unusually low rental yields, I could just as easily give you examples of flats in Aberdeen where rent is £1200 and the cost to buy is c. 200K.

But putting that aside for a moment

That was the area I lived in, I don't think I should put it aside. That was my reality and I think a pertinent example to show why I *would not* pay £550k for a flat at 6% interest rates (I declined to pay that price at 2% rates choosing to relocate). I strongly believe that at 6% rates there are almost no buyers who would pay £550k and repayments of £1000 more than rent for a two bedroom flat. I do find it odd that I have to debate this so much, it seems so obvious to me that repayments that high would be unaffordable to most people looking for such a flat and deemed not worth it. Price of asset would have to decrease accordingly.

I've plugged those numbers (Purchase Price = £550000, Interest = 6.0%, Deposit = 20%, Term of Loan = 25 years, You expect to live here = 25 years, Monthly Rent = £1600, Rent Rate Increase = 2%, Expected House Price Inflation = 2%) into a rent/buy calculator and it comes out as follows:

Renting:
-Rental Payment at the end of 25 years: £2,573.50
-Total Payments: £622,481.75 over 25 years
- Debt paid off: £0
- Profit on leaving: £0

- Total Spent: £622,481.75*

Buying:
-Mortgage Payment at the end of 25 years: £2,834.93
-Total Payments: £850,477.85 over 25 years
- Debt paid off: £440,000.00
- Profit on Sale: £352,333.30

- Total Spent: £58,144.55

And that is only over the comparatively short term of a mortgage, when you look at lifetime housing costs from a buy/rent perspective, which is what I actually said, the numbers get even bigger in favour of buying.

Over 50 years of residency with a 25 year mortgage term, and your numbers as above, the buyer is £3,272,928 better off than the renter.**

Well, without seeing our workings I think this is becoming hard to compare. I'll try share my google spreadsheet for critique. You say you haven't ignored the initial deposit but you seem to have ignored the extra £12k you add to your investment each year when renting.

Anyway, it's just a model, with completely unknown variables. We have no idea what inflation or hip will be over 30 years so it's probably mostly meaningless. Like most other models of the economy. If I plug 5% HPI into the sheet, it tells me I should be leveraging to the hilt regardless of mortgage repayments and spend every last penny I have on them because the house will be "earning" more than I can hope to. That's ok, my children will pay off these increases with their future productivity.

wotsthat

mwpt wrote: »

Anyway, it's just a model, with completely unknown variables. We have no idea what inflation or hip will be over 30 years so it's probably mostly meaningless.

In your example where rent is £1600 and mortgage £2600 I'll be renting because it's too good to be true. Probably because the variables are, to some degree, not independent of each other i.e. I wonder if it's really a valid assumption to assume rates are 6% but nothing else changes. Landlords will want to increase rents (no saying they'll get it but the pressure would be there), you might also assume inflation is higher than 2% and inflation is the buyers friend.

History, not necessarily a future indicator, shows that over the longer term buying a house vs renting, depending when you buy, has either been been brilliant, great or just good. Yes, it's easy to get into the safe as houses mantra but that's how it's turned out. Most of the arguments here are people wanting to buy a house because they think it's better than renting but jealous because they perceive it was even better for others.

I'm always slightly dubious of the idea that right about now is the high water mark and, for the first time ever, renting is about to be a better longer term bet than buying especially when so many have been saying the same for years and were categorically wrong.

I can't see a world where renting from a landlord is going to cheaper than renting the capital from a mortgage lender for anything other than short periods of time.

HAMISH_MCTAVISH

mwpt wrote: »

That was the area I lived in, I don't think I should put it aside. That was my reality and I think a pertinent example to show why I *would not* pay £550k for a flat at 6% interest rates (I declined to pay that price at 2% rates choosing to relocate). I strongly believe that at 6% rates there are almost no buyers who would pay £550k and repayments of £1000 more than rent for a two bedroom flat. I do find it odd that I have to debate this so much, it seems so obvious to me that repayments that high would be unaffordable to most people looking for such a flat and deemed not worth it. Price of asset would have to decrease accordingly.

I think the point you're missing is that most people wouldn't be in the market for such a flat to begin with, and of those that are, comparatively few would be stretching to the limits with credit to buy it.

As you note... You relocated rather than pay that.

In more normal situations that are more typical of the market on average, so where rental yield is much higher and prices are much lower, then your example is not remotely representative of the reality on the ground.

And for that part of the market, which is in reality the vast majority of the market, raising average mortgage rates to 5% or 6% won't make the slightest bit of difference to house prices.

Well, without seeing our workings I think this is becoming hard to compare.

Anyway, it's just a model, with completely unknown variables.

If I plug 5% HPI into the sheet, it tells me I should be leveraging to the hilt regardless of mortgage repayments and spend every last penny I have on them because the house will be "earning" more than I can hope to.

Sure.

HPI has been around 5% in the last 12 months. And rent inflation has averaged 4.8%.

What those numbers will be over the next 10, or 20, or 30 years, and what wages will do, is of course the big question.

But to come back to my original point I'll leave you with something to think about....

Last year population rose by around 500,000 and we built just over 100,000 houses. The shortage of housing is already estimated at being over a million houses today, and it's now worsening at the rate of another million houses or more every ten years.

We don't have a huge homeless problem and people are (so far anyway) squeezing into the available housing stock, but to achieve that the market is rationing goods in scarce supply through price.

By forcing more and more people to share in HMO-s, multi-generation family living, flatshares, taking in lodgers, etc, the market is also driving up the average income in each of these housing units, and consequentially, the ability to pay more for the privilege of living in them.

Every time two young workers live in a flat where one used to, or four young workers live in a house where a couple used to, their ability to pay rent doubles...

Every time a young person is forced to live with their parents for a decade their ability to save a big deposit increases exponentially....

And every time someone rents a room to a lodger, it increases their net income by 5K per room, per year....

An awful lot of money is being redirected into the ability to support higher house prices, higher rents, and yes, higher costs of credit and it's difficult to see how this changes without a really significant increase in housing supply.

I wouldn't bet against UK house prices any time in the foreseeable future, as the shortage is such a big factor and is reallocating housing in such a big way, that I think any likely rate rises will be inconsequential by comparison.

Other opinions are, of course, available from other posters....;)

That's ok, my children will pay off these increases with their future productivity.

If we keep up the current rate of building versus population growth, your children will view sharing a room for 40% of their income to be just as normal as the young today view sharing a house for 40% of their income, whereas the young of a few decades ago got a house all to themselves for that percentage of their income.

That is where we are headed unless supply increases massively.

Physics

Credit (for anyone) seems cheaper than ever before.

It's a bit outlandish to suggest that this is a constraint when the UK has one of the most onerous planning systems in the world.

I suspect constraints on housebuilding is planning rules and NIMYism, not finance for building.

Of course it's hard to argue with things like this:

HAMISH_MCTAVISH wrote:

If we keep up the current rate of building versus population growth, your children will view sharing a room for 40% of their income to be just as normal as the young today view sharing a house for 40% of their income, whereas the young of a few decades ago got a house all to themselves for that percentage of their income.

It was mere decades ago that sharing a room was the typical standard in the northern mining towns. There's no rule we won't go back to that - maybe a little ironically, in the southern London commuter towns this time! .Unless we do something to remove the restrictions on housebuilding (whatever they are) we will be certainly going back to it.

mwpt

wotsthat wrote: »

In your example where rent is £1600 and mortgage £2600 I'll be renting because it's too good to be true. Probably because the variables are, to some degree, not independent of each other i.e. I wonder if it's really a valid assumption to assume rates are 6% but nothing else changes. Landlords will want to increase rents (no saying they'll get it but the pressure would be there), you might also assume inflation is higher than 2% and inflation is the buyers friend.

Oops, I missed this post previously. You just make a point I'm interested in. We can examine what you say quite easily by looking at what happened previously. Landlords repayments were slashed after 2008 onward till present day. If you believe that a rise in rates and repayments means landlords will increase rent, you should also believe that lower repayments will mean they decrease it (efficient market). That didn't happen, rents rose. I happen to believe that wages and supply/demand determine rents, not landlords and their repayments. And the evidence indicates this is true.

So 7 years ago, rent in Wimbledon for a two bedroom flat was perhaps £1300. Today it's around £1600. Gradual inflation style increases. But rates required to service payments on these assets fell, if the asset prices had stayed the same, the yields would be enormous compared to pretty much anything else. The result? Asset prices increased, as any model would indicate they should.

I can't stress how baffled I am that this is even debated, that lower cost of credit increases yielding asset prices serviced by that credit (unless the assets are virtually unlimited of course).

HAMISH_MCTAVISH

mwpt wrote: »

I can't stress how baffled I am that this is even debated, that lower cost of credit increases yielding asset prices serviced by that credit (unless the assets are virtually unlimited of course).

I don't think anyone is debating that the cost of credit can have an impact on asset prices. We are just noting that it is not the only factor, or even the biggest factor, by a long way.

So within the context of a range of mortgage interest rates between, say 2% and 6% in the UK today, changing the interest rate will have virtually no effect on house prices on average.

Other factors dwarf the impact of rates at the moment.

Just to be clear, I think average mortgage rates will increase as the economy recovers, and I think house prices will increase as well.

Because the factors likely to cause rate rises, increasing employment, increasing wages, too much money chasing too few goods, are simply not conducive to falling house prices.

wotsthat

mwpt wrote: »

Oops, I missed this post previously. You just make a point I'm interested in. We can examine what you say quite easily by looking at what happened previously. Landlords repayments were slashed after 2008 onward till present day. If you believe that a rise in rates and repayments means landlords will increase rent, you should also believe that lower repayments will mean they decrease it (efficient market). That didn't happen, rents rose. I happen to believe that wages and supply/demand determine rents, not landlords and their repayments. And the evidence indicates this is true.

I didn't say landlord repayments determine rents (a strawman). I was careful to say higher mortgage payments wouldn't necessarily lead to higher rents but the first thought of any business when faced with increased cost is to pass that cost on to the consumer. Market forces will determine whether that is possible but landlords will be looking to make it happen.

I don't quite know why you'd think I'd think landlords would conversely lower rents if their costs went down. (a strawman). Prices are sticky - the first thought of a business when faced with lower costs is to make sure the savings find their way into the margin.

I don't really know how on one hand you've used static rents/ falling finance costs/ efficient markets as evidence then, on the other, used an example of a £1000 differential between rent and mortgage payments as evidence too because that doesn't sound particularly efficient either.

mwpt wrote: »

I can't stress how baffled I am that this is even debated, that lower cost of credit increases yielding asset prices serviced by that credit (unless the assets are virtually unlimited of course).

You're baffled because you keep using strawman arguments. Absolutely nobody is disagreeing that the price of assets (especially those predominantly purchased by credit) is influenced by the cost of credit.

Do you really think that's the main factor why someone is willing to pay £1600/ month in rent for a pokey flat in Wimbledon. They're not paying that just because rents are set by wages and it would seem rude not to pay more. They're paying that because there's a shortage of supply and landlords currently have the upper hand.

You might say well if there's such a shortage why are yields low. Well it's a low yield world so maybe renters should be grateful for small mercies. Anyway, every landlord knows prices only go up so they can make more yield than competing asset classes and look forward to bumper capital gains too.

Here's the first two bed for £1600 on Rightmove

http://www.rightmove.co.uk/property-to-rent/property-34989201.html

£1600/ month for that? I'm thinking a shortage of supply trumps your worries about credit.

mwpt

wotsthat wrote: »

I didn't say landlord repayments determine rents (a strawman). I was careful to say higher mortgage payments wouldn't necessarily lead to higher rents but the first thought of any business when faced with increased cost is to pass that cost on to the consumer. Market forces will determine whether that is possible but landlords will be looking to make it happen.

I don't quite know why you'd think I'd think landlords would conversely lower rents if their costs went down. (a strawman). Prices are sticky - the first thought of a business when faced with lower costs is to make sure the savings find their way into the margin.

Maybe I'm naive but I'd expect competing business to mean lowered costs to consumer if the business costs are lower. You disagree with this?

I don't really know how on one hand you've used static rents/ falling finance costs/ efficient markets as evidence then, on the other, used an example of a £1000 differential between rent and mortgage payments as evidence too because that doesn't sound particularly efficient either.

Precisely my point, it's not efficient and if you read back to my original post on it, you'll see I don't believe the mortgage repayments would remain £1000 higher, they would have to fall for anyone to invest (buy) in that asset. That was the entire point I was trying to make and that is why I said I'd expect prices to be lower if interest rates were at 6%. So I say it again: I don't believe rents would rise to match repayments if mortgage rates rose, I believe the underlying asset price would fall so that repayments made the yield sustainable.

This all started because I was debating with Hamish when he said that supply and demand is the only factor. I believe cost of credit is another factor.

You're baffled because you keep using strawman arguments. Absolutely nobody is disagreeing that the price of assets (especially those predominantly purchased by credit) is influenced by the cost of credit.

Hamish was, that's why this all started. You can read back or here:

HAMISH_MCTAVISH wrote: »

Supply/Demand is always the cause.

There is nothing else.

Do you really think that's the main factor why someone is willing to pay £1600/ month in rent for a pokey flat in Wimbledon. They're not paying that just because rents are set by wages and it would seem rude not to pay more. They're paying that because there's a shortage of supply and landlords currently have the upper hand.

You might say well if there's such a shortage why are yields low. Well it's a low yield world so maybe renters should be grateful for small mercies. Anyway, every landlord knows prices only go up so they can make more yield than competing asset classes and look forward to bumper capital gains too.

All of this may or may not be true but seems kind of orthogonal to my point. I am trying to stick to my original point that asset prices are influenced by availability and cost of credit. You agree with this I think. Hamish doesn't.

mwpt

HAMISH_MCTAVISH wrote: »

I don't think anyone is debating that the cost of credit can have an impact on asset prices. We are just noting that it is not the only factor, or even the biggest factor, by a long way.

So within the context of a range of mortgage interest rates between, say 2% and 6% in the UK today, changing the interest rate will have virtually no effect on house prices on average.

Other factors dwarf the impact of rates at the moment.

Just to be clear, I think average mortgage rates will increase as the economy recovers, and I think house prices will increase as well.

Because the factors likely to cause rate rises, increasing employment, increasing wages, too much money chasing too few goods, are simply not conducive to falling house prices.

Ok. I think I'll leave the debate for now. This isn't a science, so I can't know who is correct, but I disagree that if rates were 6% we wouldn't see much difference in prices. I still maintain the underlying asset would have to come down to make yields workable. People do not have infinite money to pay rent, but rates in theory have no upper bound.

We have more overlap on this than we probably think. Thanks for the chat.

wotsthat

mwpt wrote: »

All of this may or may not be true but seems kind of orthogonal to my point. I am trying to stick to my original point that asset prices are influenced by availability and cost of credit. You agree with this I think. Hamish doesn't.

Yes I do agree with this. If you look a couple of posts above you'll see Hamish does too. You've got a good argument - why spoil it with poorly disguised strawmen?

As much as you'd like it to be this isn't an argument about which is the only factor to influence prices and rents i.e, a shortage of supply or credit it's about which is the major factor right now.

Anyone paying £1600/ month for that pokey flat I posted is doing so because there's a shortage of supply. !!!!!! why else would you pay that especially if the rental market isn't influenced by the cost of providing the rental in the first pace. It's the London bug - once infected the woods are difficult to see for the trees. Drive 150 miles North, where as well as electricity we now also get mortgages too, and you'll see London as the exception it is rather than the norm on which to base your baseline view of the world.