Debate House Prices


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Who won in the end?

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Comments

  • mwpt
    mwpt Posts: 2,502 Forumite
    Sixth Anniversary Combo Breaker
    edited 10 July 2015 at 11:22PM
    Since I don't know you guys, I don't know if you're actually smart or not. The problem is, so far, HPI has been rampant for a variety of reasons, and so you have confirmation bias believing your reasoning was foolproof. Note, I now own a house because I eventually realised that my reasoning was flawed. I didn't factor in the (to me) surreal state of government intervention in the market. Without intervention I believe we would have had a much deeper correction in prices. I mean, you guys do realise that certain areas in the UK did indeed suffer a large price drop?

    In any case, forgetting all that, here is an example that I fabricated to show under certain conditions, renting makes better financial sense than buying. In this example, after 25 years you have more equity than had you bought. You could then buy the same house and have a bunch of cash extra.

    I'm not saying it is a likely scenario but it isn't not incredibly unlikely. The figures are not too wild imo.

    EDIT: removed embedded image, wasn't showing nicely.

    Link: http://imgur.com/ed4BOTA
  • mwpt
    mwpt Posts: 2,502 Forumite
    Sixth Anniversary Combo Breaker
    If the embedded image doesn't show correctly, try here:

    http://imgur.com/ed4BOTA
  • Mistermeaner
    Mistermeaner Posts: 3,024 Forumite
    Part of the Furniture 1,000 Posts
    There's some optimistic (pessimistic) assumptions in there

    How about set house value to 150k, term to 20 years, other costs to 2k, rent to 550 and return on cash to 1.5%
    Left is never right but I always am.
  • mwpt
    mwpt Posts: 2,502 Forumite
    Sixth Anniversary Combo Breaker
    Better to buy:
    http://imgur.com/mlE5bBZ

    In general, in the presence of reasonable HPI, it's almost always better to buy because you're using leverage. But that can work against you too. And in my initial case, I tried to simulate an overheated area in London where rents are still reasonable but people are paying over the odds to buy. I assumed this area was now fully priced and wouldn't experience much more capital gains over the long term (maybe a small correction and just regular inflation). I also assumed a literate investor to get 7% return on equity in the markets (dividends, capital gains, etc).

    My point was, you can do analysis like this and come to your conclusions but it's quite infuriating when I'm patronised and accused of knowing nothing.
  • chucknorris
    chucknorris Posts: 10,793 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    edited 11 July 2015 at 8:24AM
    mwpt wrote: »
    And in my initial case, I tried to simulate an overheated area in London where rents are still reasonable but people are paying over the odds to buy. I assumed this area was now fully priced and wouldn't experience much more capital gains over the long term (maybe a small correction and just regular inflation). I also assumed a literate investor to get 7% return on equity in the markets (dividends, capital gains, etc).

    Good luck with finding a 25 year period where house prices do not increase, yet it is easy to make 7% per annum on shares in that same 25 years.

    I don't think there has even been a 25 year period where a London house price hasn't increased in recent history (say the last 50 years), even if you cherry pick a time period from a peak to a trough (and that would of course be an unreasonable choice).

    EDIT: I'm not against shares, I have recently (last few years) invested over £500k in shares, and that is probably where a significant part of my property equity will go when I sell up. In the meantime that is where my spare cash goes, into shares.

    By the way next May will be the 25th anniversary of buying my first investment property. It is a 3 bed flat in Battersea (SW11), I bought it for £70,500 and its current value is approx. £575,000. I'm not saying that is typical, but it is real. The initial rent was £750/month, currently £1,767/month (although that has fallen behind the market, we have a vastly inferior flat a few streets away, that we let for £1,800/month which is smaller, has no ensuite, no garden and is in a much inferior block). I think the market rent is about £2,000/month, but we don't tend to charge near the market rent until tenants vacate.
    Chuck Norris can kill two stones with one birdThe only time Chuck Norris was wrong was when he thought he had made a mistakeChuck Norris puts the "laughter" in "manslaughter".I've started running again, after several injuries had forced me to stop
  • Landofwood
    Landofwood Posts: 765 Forumite
    There are no winners or losers when it comes to buying or renting.

    We all, hopefully, go through life with a roof over our head one way or another.

    There are many ways to calculate success, and money is a long way down the list.
  • mwpt
    mwpt Posts: 2,502 Forumite
    Sixth Anniversary Combo Breaker
    Good luck with finding a 25 year period where house prices do not increase, yet it is easy to make 7% per annum on shares in that same 25 years.

    Reasonably sure there will be parts of the UK where property has only increased compound 2% a year. 7% ROI in shares is debatable, yes. I am running at 14% over the last 5 years but of course we've seen a lot of capital appreciation and I saw some big returns on small caps that I took a risk on.
    By the way next May will be the 25th anniversary of buying my first investment property. It is a 3 bed flat in Battersea (SW11), I bought it for £70,500 and its current value is approx. £575,000. I'm not saying that is typical, but it is real. The initial rent was £750/month, currently £1,767/month (although that has fallen behind the market, we have a vastly inferior flat a few streets away, that we let for £1,800/month which is smaller, has no ensuite, no garden and is in a much inferior block). I think the market rent is about £2,000/month, but we don't tend to charge near the market rent until tenants vacate.

    Interesting that the value of that property has increased 8.1 fold in those years but the rent only increased 2.7 fold. Strong argument for falling cost of credit pushing up the underlying asset price. Do you think we have much more room for cost of credit to fall? What would you expect to happen to HPI over the next 10 years? (Average time someone holds a house before selling)
  • wotsthat
    wotsthat Posts: 11,325 Forumite
    mwpt wrote: »
    Since I don't know you guys, I don't know if you're actually smart or not. The problem is, so far, HPI has been rampant for a variety of reasons, and so you have confirmation bias believing your reasoning was foolproof. Note, I now own a house because I eventually realised that my reasoning was flawed. I didn't factor in the (to me) surreal state of government intervention in the market. Without intervention I believe we would have had a much deeper correction in prices. I mean, you guys do realise that certain areas in the UK did indeed suffer a large price drop?

    In any case, forgetting all that, here is an example that I fabricated to show under certain conditions, renting makes better financial sense than buying. In this example, after 25 years you have more equity than had you bought. You could then buy the same house and have a bunch of cash extra.

    I'm not saying it is a likely scenario but it isn't not incredibly unlikely. The figures are not too wild imo.

    EDIT: removed embedded image, wasn't showing nicely.

    Link: http://imgur.com/ed4BOTA

    It's a bit cheeky accusing others of confirmation bias and then show us a spreadsheet that puts your own bias on display. It's a good spreadsheet (I'm going to copy it later) but the assumptions are way out. 5% post inflation on cash for 25 years - yes please.

    Costs for the owner but not the renter = £6k - now you've bought you'll realise that's fanciful.

    Move out of London (where there hasn't been the big increase in price) and the rental yield doubles.

    How much profit is your landlord making in this scenario. It looks negative what with a mortgage rate above his yield and all those 'other' costs.

    You've built a world where a made up monthly benefit to renting is compounded for 25 years by another made up number which, obviously, leads to an impressively big made up number.

    No one would ever consider buying in your scenario or running a lettings business.
  • mwpt
    mwpt Posts: 2,502 Forumite
    Sixth Anniversary Combo Breaker
    wotsthat wrote: »
    It's a bit cheeky accusing others of confirmation bias and then show us a spreadsheet that puts your own bias on display. It's a good spreadsheet (I'm going to copy it later) but the assumptions are way out. 5% post inflation on cash for 25 years - yes please.

    Yes, of course. I'm selecting something that shows a particular point of view, why would I select figures that don't? That's not cheeky. The figures may not seem realistic to you because it isn't what you have experienced.
    Costs for the owner but not the renter = £6k - now you've bought you'll realise that's fanciful.

    I should have clarified. The £2k was pa cost over long term (roof, boilers, etc). The £4k was a one off cost of solicitors fees, surveys, etc.
    How much profit is your landlord making in this scenario. It looks negative what with a mortgage rate above his yield and all those 'other' costs.

    That is my point. I lived in a place in Wimbledon paying £1600 rent where the property would have sold for ~£800k-£1m. The landlord was obviously under-charging but not by that much vs other flats nearby. Why would I have bought such a place?
    You've built a world where a made up monthly benefit to renting is compounded for 25 years by another made up number which, obviously, leads to an impressively big made up number.

    I think you've understood the point modelling cash flow, yes.
  • mwpt
    mwpt Posts: 2,502 Forumite
    Sixth Anniversary Combo Breaker
    Btw, I obviously tried to estimate fairly pessimistically when I bought my current house. 2% HPI over the term. 5% ROI on equity.

    I'm £110k better off after 10 years, and £582k better off after 30 years. For me, it made much more sense to buy.

    I guess when I said something like that on HPC, mods took offence and I got banned. But when I try to play devils advocate here, using figures that are not that wild, showing how in some cases you're better renting, I get just as much heat :|
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