Low rates mean its foolish to wait for a house price crash

GreatApe

Looking at Birmingham as a non London example. Median two bed home cost £130,000 to buy or £650 pm to rent. If someone has £130,000 in the bank and is considering buying or renting and looking forward five years

Renting: Min cost £39,000 rent. Deposit interest gain £6,600 at 1% savings account difference £32,400

Waiting for a crash will therefore cost over £30,000 so even if the house crashed from £130,000 to £100,000 waiting was the bad financial choice. A 24% house price crash and you are worse off waiting for it

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Same situation but a person with £30,000 deposit, £100,000 borrowed at 5 year fixed at 2.09% and £1k fee. Renting costs £25,500 more than the mortgage and lost interest on your deposit.

If the house crashed from £130,000 to £105,000 a 20% HousePriceCrash you are still worse off for waiting.

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So while there may be a house price crash* or correction, waiting for it has been foiled by low rates

GreatApe

Others make this point and it is so underappreciated

Carl31

I dont think there are many waiting for a crash, a lot of people arent buying as they cant get the deposit together

20% of an every increasing cost, at the highest its ever been, isnt something thats easy to manage, especially if you are paying ridiculous rent

not impossible though

norm_

You haven't factored the prospect of negative equity when buying and the inability to move if your job required. Renting gives that option.

Obviously if you have a secure job and a desire to stay in one area for the long term buying is the correct choice as house price is largely irrelevant then.

westernpromise

norm_ wrote: »

You haven't factored the prospect of negative equity when buying and the inability to move if your job required. Renting gives that option.

At current mortgage rates the risk of negative equity is trivial.

In the example given of £30k down and a £100k mortgage, after 5 years the balance on that mortgage would be less than £84k. So unless you saw a price collapse of more than 35%, you would not be in negative equity after 5 years.

You'd be in some difficulty in between times but renting wouldn't be any better.

GreatApe

There has never been a crash that bad.

The cheerleaders at hpc were dancing around proclaiming S24 would stop landlords buying and make landlords forced sellers which would crash the market very soon. However Landlords sold big time in the 1970s and 1980s and population growth was much less and house building higher. The result was a 5% real house price crash per decade. Hardly anything and it was fully masked by inflation. Prices went up 10x in the 70s but actually fell 5% vs wages.

Likewise 1997-2000 landlords were out of the market no net purchases and prices increased quite a lot.

I used to think it silly of posters who said the best time to buy is always now but maybe they were right all along. Trying to time buying in a dip doesn't work and with low rates waiting for a HPC is likely to be a costly mistake

westernpromise

The other point to note is that in your example, you would spend £26k on mortgage repayments over 5 years, versus a presumptive £39k on rent.

After 5 years, therefore, the homeowner has spent £26k and would need a windfall of £84k to clear the mortgage. The renter has spent £13k more on rent than the homeowner has spent on the mortgage, so to break even, he needs the house to cost not £84k to buy, £71k. This would mean that in each case they own the house after 5 years for a total outlay of £110k.

So the renter actually needs a price crash of £59k, from £130k to £71k, which is 45%. If you delay long enough you eventually get to the point where you need an impossible price crash of more than 100%.

Probably there have been 45% price crashes over 5 years in the past, somewhere or other. But in the event that some economic calamity befell us sufficient to cause one like that here, the kind of people who imagine they're going to gain by it will resemble people welcoming a tsunami because of the surfing opportunity.

mubeye

Should we consider investment returns? More realistic for someone with 130k in the bank? Particularly, the difference between HPI and share index returns. Assuming you had good exposure to USD markets , then renting was not automatically a bad choice over last 3 years or so.

I reckon stamp duty changes at high end is the big needle mover at the mo.

padington

New account mubeye or random same picture ?

mubeye

padington wrote: »

New account mubeye or random same picture ?

You lost me. Random same picture?

westernpromise

mubeye wrote: »

Should we consider investment returns? More realistic for someone with 130k in the bank? Particularly, the difference between HPI and share index returns. Assuming you had good exposure to USD markets , then renting was not automatically a bad choice over last 3 years or so.

I am a HPC wisher (not a hugely confident one) and currently rent. The sums work for me, but it is different for every area, every street even. The house I rent only yields 2.5 percent with flat HPI. Im not down for renting over last couple of years. I did some projections recently and assuming stock market returns stay in the black, it would only take a 1% drop YoY in house prices for next 3 years to make renting the better option. That projection is looking less and less likely, sadly. But just because I was wrong, doesn't mean it was a bad strategy. Hindsight is 20/20.

If I bought this house, stamp duty alone would cost 35k, or 2 years rent. So unless housing booms +7 YoY again (unlikely in this street) , any net loss over 3-4 years would likely be small, less than mid 4 figures in total, which to me is a acceptable price for liquidity and freedom to move, which is valuable to some more than others, granted..

But in the 130k example it plays a bit differently. I reckon stamp duty changes at high end is the big needle mover at the mo. Not convinced about interest rates mattering that much. (45% bought in cash is it?)

In a low-HPI and low-yield environment, there can indeed be intervals where there is not much to choose between renting and owning. I doubt that you have been in one recently though.

I say this because if the house you're in would cost £35k in stamp duty to buy, it must be worth £900k (plus £35k stamp duty = £935k). The 2.5% yield you indicate points to the property being somewhere in the south-east or south-west, and therefore it is very unlikely that there has been "flat HPI" over the last 3 years. About 20% is more likely, meaning that 3 years ago you could have owned it (or something similar) for £750k plus £30k stamp duty = £780k.

So its price has probably gone up by £155k.

If you'd bought it in 2014 with a 90% mortgage at 2.09%, you'd have spent £104k in mortgage repayments, but the balance owing would now be £611k. The total cost to own it would thus be that £104k in payments, plus £611k owing, plus the original £75k deposit, plus the £30k stamp duty, which is a total of £820k.

If you had rented it at a 2.5% yield on its average value over those three years, you would have spent £62k on rent, but to own it today would cost you £900k to buy it plus £35k stamp duty plus the three years of rent you paid. That is £997k, i.e. £177k more.

For retning to break even versus buying, you'd need the price today to be £735k. The stamp duty would take that to £752k, the rent you've paid would take that to £816k, and the £75k deposit and £30k stamp duty you've had invested since 2014 have probably earned you another £4k. So you'd then occupy and own the same property for the same cost of £820k in either case. You would in fact need annual house price deflation of -0.67% over the last three years to break even.

It seems quite unlikely that this actually occurred wherever you are in the south-east.

It could be argued that your £105k cash stash would have made more than £4k over the last three years. It might, yes, but if in things like stocks and bonds that go up and down you'd have to be sure not to cash out at the wrong time - so you're having to call the market again. It could be argued that buyers have maintenance costs that renters don't; then again renters have relocation costs that buyers don't so over short terms these probably cancel.

What HPCers tend to forget is that when you buy you fix the price, and then the balance owing never goes anywhere but down. When you rent your rent tends to rise and even a very small percentage rise in house prices makes renting look poor.