"Breakeven Crash Requirement"

Graham_Devon

westernpromise wrote: »

I am wondering whether others think about this in any roughly similar way. The STR trade may be rare but the prices-are-too-high-I'll-wait-till-they-crash trade is less so. I wonder if those who do it have thought it through and worked out that not buying in 2006 may mean they now need a 56% price crash; or whether they realise that finding a property at that level relies on sellers prepared to take a similar gamble.

To be completely honest, I don't think there are that many people sitting on the sidelines, cash in the bank, waiting for prices to fall before buying either.

The majority of those who do exist will be investors or those planning to buy second homes.

There will of course be a few, but they will be minuscule when looked at alongside the thousands who simply cannot buy because prices are too high and they are renting so can't save. What those people are suggesting is should house prices fall, they would be able to afford a mortgage.

I just think were talking about tiny numbers of people here, both STR's and those with cash in the bank waiting to pounce (in terms of buying a family home).

mwpt

Graham_Devon wrote: »

To be completely honest, I don't think there are that many people sitting on the sidelines, cash in the bank, waiting for prices to fall before buying either.

The majority of those who do exist will be investors or those planning to buy second homes.

There will of course be a few, but they will be minuscule when looked at alongside the thousands who simply cannot buy because prices are too high and they are renting so can't save. What those people are suggesting is should house prices fall, they would be able to afford a mortgage.

I just think were talking about tiny numbers of people here, both STR's and those with cash in the bank waiting to pounce (in terms of buying a family home).

I don't see the other guys posts (for my own sanity) unless someone quotes them. Responding to you, I was one of those who could have bought a long way back but didn't because I was young and didn't calculate value correctly. I got it wrong on several counts.

1. I thought a mortgage would be a huge weight on my back and not allow me freedom to do the things I was doing when I was younger (namely, contract, working in different countries and travelling).

This was vaguely correct but in hindsight I could have easily made it work, paying off to the point where a few lodgers would have covered the entire mortgage while I was free to come and go travelling when I liked.

2. I just plain miscalculated value. I house shared for the longest time. I have no idea why but I didn't consider that I could do the same thing but own the house. I didn't draw up cash flow spreadsheet until I'd long "missed the boat".

3. Due to not formalising things, I miscalculated the overall gain/loss scenario, thinking I'd just lose out massively if property crashed. Once I looked at it in much more detail, working out ways I could mitigate downside risk, I decided to suck it up and buy. I could still lose out massively but as each year passes the chance lowers and in any case, I have equity set aside to protect myself. And I'll still be able to rent out rooms if I so choose and even trade up if the opportunity was there.


That's not really addressing your point. It was by way of explanation why this one person didn't buy for many years though he had the ability. I have no idea how many people there are like me around, that have or had the ability to buy but sat out. It certainly seemed that everyone I spoke to about the bad fundamentals I saw in certain areas and property being overvalued didn't think very far at all. Ironically, they thought about it even less than I did initially and just assumed "can't lose in bricks and mortar" and bought when they could. Quite literally the only thing these people thought about was "can I afford the monthly payment for the next couple of years". Being relatively dumb paid off big time.

Of course, I have to always mention, there are lots of reasons the crash never materialised in my chosen area (London). If only for the meddling central bank and government.

N1AK

Graham_Devon wrote: »

....as many BTLs on here will testify as they timed the market perfectly apparently (as usual).

The point being - it's literally just a gamble.

Too true :beer:

I didn't buy in 2006 because I thought it was likely we would move within a couple of years, and prices seemed high (£160k for an apartment in Bedford!?). In 2009 when we moved out the same apartments were going for £120k, we'd have needed to rent it out because we couldn't handle the negative equity. Sales last year for houses in that area were still about £20k down on the 2006 price.

I have friends who've profited hugely, and friends who've been stuck with houses they can't sell, who bought within a couple of years of each other.

Graham_Devon

mwpt wrote: »

I don't see the other guys posts (for my own sanity) unless someone quotes them. Responding to you, I was one of those who could have bought a long way back but didn't because I was young and didn't calculate value correctly. I got it wrong on several counts.

Thanks for your responses.

The premise of the post I was responding to was that people sit with cash in the bank (by this, I mean they have the intention to buy and the means to buy), with the intention of waiting for a crash before they buy a house....and they, too, have therefore lost out.

Your points I would think apply to lots of people.

I just don't think theres that many (though there will be a tiny handful of people and probably 1 or two on this forum due to the forum it is) sitting there waiting for properties to crash to "grab a bargain".

I believe the real premise of this thread is, again, to let everyone know, with the aid of hindsight, that the people who bought in were "correct" and the other people (person?) on another forum were "wrong". Afterall, the very first line of this thread relates back to one of the catologue of HPC threads.

mwpt

Graham_Devon wrote: »

I believe the real premise of this thread is, again, to let everyone know, with the aid of hindsight, that the people who bought in were "correct" and the other people (person?) on another forum were "wrong". Afterall, the very first line of this thread relates back to one of the catologue of HPC threads.

Well, there are at least two amazing facts about this forum.

1. Most housing investors here do not suffer from hindsight bias in the way that other investors do. They knew all along that housing was a winner strategy and proof of this is the fact that they are rich.

2. Supply and demand is the primary driver of house prices. Except when it comes to BTL. Adding more demand in the market in the form of BTL buyers competing for houses has no affect at all.

It's a magical place.

Graham_Devon

mwpt wrote: »

Well, there are at least two amazing facts about this forum.

1. Most housing investors here do not suffer from hindsight bias in the way that other investors do. They knew all along that housing was a winner strategy and proof of this is the fact that they are rich.

2. Supply and demand is the primary driver of house prices. Except when it comes to BTL. Adding more demand in the market in the form of BTL buyers competing for houses has no affect at all.

It's a magical place.

3. Everything leads to rent rises. Always. Period.

mwpt

Graham_Devon wrote: »

3. Everything leads to rent rises. Always. Period.

Good point, forgot that.

HAMISH_MCTAVISH

In the simplest of terms the difference between delaying purchase while "waiting for better value" and "STR" is little different.

For STR...

200K sale price
Rent at 5.5% yield = 11,000 per year
Transactional costs of buying and selling = say, another 4,000
Stamp duty - depends on the price you buy back in but lets say 1.5K - 2K
Moving costs - Will differ for everyone - lets say around 2K x 2 so 4K.

And against that lets assume you're not willing to risk losing your house money, so put it in safe bank deposits with ready access, maybe 1% a year net returns at the moment.

So assuming a crash lasts 2 years and you time it absolutely perfectly, you need to see the house price fall £32,000 just to break even.

And for every year either a crash doesn't happen, or a crash takes longer than expected to conclude, you need another 11K.

So if you STR a year too early and the crash takes 3 years instead of 2 you now need prices to fall £54,000 (over 25%) just to break even.

Then take off the 1% net a year your STR fund is getting you in the bank, so £8,000 off the £54,000, and you can see why STR is a mugs game.

The falls required for it to make any kind of sense are astronomical, and the timing has to be absolutely perfect, otherwise you lose your shirt.


For "delaying purchase"....

200K sale price
Rent at 5.5% yield = 11,000 per year
Moving costs - Will differ for everyone - but renters move more often than owners - lets say around 2K every 2 years

And against that you balance off....

Mortgage Interest - 2.5% - 4500 p/a
A bit of interest on your deposit - maybe 2% on 20K - 400 per year

As for...

Transactional costs of buying = say, 2,000
Stamp duty - 1500

You'll need to pay those anyway at some point so not really a factor.

So you'll need to see falls of around £26,400 every 4 years just to break even. If prices rise at all you add that straight onto the cost line.

If prices rise by 20K in 4 years and then start falling it's £46,400 just to break even.

Or for those who have delayed since the last crash hit, it's £52,800 you need to see prices fall by from 2007 average levels, and in many parts of the country considerably more from today's values, just to break even.

Again, you can see why trying to time the market is a mugs game.

For most people, in most places, the smart thing to do is to buy a house as young as possible and spend as little time as you can buying a house for your landlord.

westernpromise

HAMISH_MCTAVISH wrote: »

In the simplest of terms the difference between delaying purchase while "waiting for better value" and "STR" is little different.

For STR...

200K sale price
Rent at 5.5% yield = 11,000 per year
Transactional costs of buying and selling = say, another 4,000
Stamp duty - depends on the price you buy back in but lets say 1.5K - 2K
Moving costs - Will differ for everyone - lets say around 2K x 2 so 4K.

And against that lets assume you're not willing to risk losing your house money, so put it in safe bank deposits with ready access, maybe 1% a year net returns at the moment.

So assuming a crash lasts 2 years and you time it absolutely perfectly, you need to see the house price fall £32,000 just to break even.

And for every year either a crash doesn't happen, or a crash takes longer than expected to conclude, you need another 11K.

So if you STR a year too early and the crash takes 3 years instead of 2 you now need prices to fall £54,000 (over 25%) just to break even.

Then take off the 1% net a year your STR fund is getting you in the bank, so £8,000 off the £54,000, and you can see why STR is a mugs game.

The falls required for it to make any kind of sense are astronomical, and the timing has to be absolutely perfect, otherwise you lose your shirt.


For "delaying purchase"....

200K sale price
Rent at 5.5% yield = 11,000 per year
Moving costs - Will differ for everyone - but renters move more often than owners - lets say around 2K every 2 years

And against that you balance off....

Mortgage Interest - 2.5% - 4500 p/a
A bit of interest on your deposit - maybe 2% on 20K - 400 per year

As for...

Transactional costs of buying = say, 2,000
Stamp duty - 1500

You'll need to pay those anyway at some point so not really a factor.

So you'll need to see falls of around £26,400 every 4 years just to break even. If prices rise at all you add that straight onto the cost line.

If prices rise by 20K in 4 years and then start falling it's £46,400 just to break even.

Or for those who have delayed since the last crash hit, it's £52,800 you need to see prices fall by from 2007 average levels, and in many parts of the country considerably more from today's values, just to break even.

Again, you can see why trying to time the market is a mugs game.

For most people, in most places, the smart thing to do is to buy a house as young as possible and spend as little time as you can buying a house for your landlord.

Well, yes. It's another way of approaching the same thing.

It seems pretty clear that selling to rent or delaying a buy are remarkably likely to leave you worse off in the current climate. A factor I haven't really included is that at current interest rate levels you can pay down principal very fast, so as long as you do so faster than prices fall you can still trade your house in.

Essentially, if you want to profit by a crash, buy as soon as you can. As has been noted elsewhere, if you want to know who'll own property after a crash, look at who owned it before.

Graham_Devon

HAMISH_MCTAVISH wrote: »

In the simplest of terms the difference between delaying purchase while "waiting for better value" and "STR" is little different.

For STR...

200K sale price
Rent at 5.5% yield = 11,000 per year
Transactional costs of buying and selling = say, another 4,000
Stamp duty - depends on the price you buy back in but lets say 1.5K - 2K
Moving costs - Will differ for everyone - lets say around 2K x 2 so 4K.

The point are fair ones, but the costs you assume seem high. I don't see why anyone who is STR'ing (and therefore keen to save money) would rent the equivalent house they left. You are assuming over £900 a month in rent. I'd say 7-8k a year in rent is more likely.

Your moving costs seem rather high too, as I would assume they are not moving an 8 bed house from Lands End to John O'Groats.

It would be something more like £600-800 per move (on a 3 bed house within 100 miles) should they get someone else to do it.

So I've wiped over 5k off your costs straight away.