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

GreatApe

economic wrote: »

just to use some real numbers to see the benefit of buying young:

have owned my own home since 31 years old. i currently rent out my spare room for £700 a month. this equates to a return on "investment" of around 3.5% (includes rent i dont have to pay since i own). This is of course tax free!

now tell me where can i stash 300k away to earn 3.5% guaranteed tax free?

Low mortgage rates mean the risk free return is higher still if purchased using a mortgage

Assuming a property has a 5% yield and is purchased with a 20% deposit and the rest is funded with a 2.5% rate mortgage over 25 years.

The deposit earns an annual 15% risk free


The math is as follows. You buy a £100k house with a £20k deposit and borrow the rest at 2.5%
Your £20k deposit takes your housing cost from £5k to £2k per year therefore your £20k deposit is returning you £3k saving or 15% risk free each year.

economic

GreatApe wrote: »

Low mortgage rates mean the risk free return is higher still if purchased using a mortgage

Assuming a property has a 5% yield and is purchased with a 20% deposit and the rest is funded with a 2.5% rate mortgage over 25 years.

The deposit earns an annual 15% risk free


The math is as follows. You buy a £100k house with a £20k deposit and borrow the rest at 2.5%
Your £20k deposit takes your housing cost from £5k to £2k per year therefore your £20k deposit is returning you £3k saving or 15% risk free each year.

my LTV is around 50% so im not as levered hence lower return.

i just recalulated mine to match how you do it by taking the market rental figure assuming the whole property is let and deducting the mortgage interest - then divide by the total cash payment (deposit + transaction costs + property maintence) and i get 4.8%.

strictly its not a rental but live in landlord and the lodger.

westernpromise

mubeye wrote: »

If you say the long term odds are exactly zero of a fall over any ten year period. How is that different to crashers claiming to be able to time the market? You are claiming foresight too? if you really believe there is zero chance why not place more bets on it. There are loads of ways you could do this. Ladbrokes being one.

That's not what I said. I said that over any 10 years over the last 60, prices have generally not fallen. The point is that this being so, you need not time the market.

You don't need anyone's permission to try to time the market. If you do so and mess it up, however, ending up hundreds of thousands of pounds out of pocket, no sympathy will be due. Everybody made their choices and some people's were wrong.

Angry crashtrolls often insist that people who bought cheap 10 years ago took no risk and were just lucky. Well, they would say that. 10 years ago, crash trolls thought it too risky to buy.

lisyloo

Windofchange wrote: »

How about saving £250k in whatever vehicle over the years and buying your house cash? How about cashing in your pension after 40 years of work and buying a house cash? How about inheriting your parents home? How about inheriting £xxx and buying somewhere? Why is having a mortgage the only way to own a house?

Maybe renting just works for some? I stand to be gifted a home at some point in the next 20 - 30 years assuming my parents stay sane of mind and don't need an £800 a week care home. I'll not have paid a mortgage on it.

The problem with the first is that most people don't have the money for the investing AND buying the house cash.
Pensions are subject to income tax (other than the tax free lump sum) so cashing in large amount is subject to higher rates of tax.
Our relatives are living into their 90s. Want a home before we're in our 70s.
For most people a mortgage is the only way along with the bank of mum and dad.

I'll be 79 in 30 years time. Might be ok to wait for you but I don't think most people want to wait until their 70s or 80s t get a house - heck about 20% of them or more will have kicked the bucket by then.

GreatApe

mubeye wrote: »

But if you have no idea whether prices go up or down. buying is the punt. You are gearing up and betting on a rise with leverage. How is that less risky than renting. If the odds of appreciation are 50/50?

You completely missed the point, its better to buy, much better to buy even if prices stay exactly as they are.

If prices fall 20% over 5 years, again you are better off buying today rather than waiting for the 20% crash

The reason is a person pays 6% rental yield (in the Birmingham example) or 2% interest on the purchase. Over five years house prices need to fall 20% for renting to be equal to buying. If prices fell more than 20% then it might make sense to rent but a 20% HPC over 5 years is imo impossible. Even in the last crash when the whole world was in a financial crisis uk average prices fell only 10%

GreatApe

mubeye wrote: »

If you say the long term odds are exactly zero of a fall over any ten year period. How is that different to crashers claiming to be able to time the market? You are claiming foresight too? if you really believe there is zero chance why not place more bets on it. There are loads of ways you could do this. Ladbrokes being one.

Its quite reasonable to say house prices wont fall in nominal terms because the system is set up for inflation. The BOE targets 2% inflation which sounds small but over a decade it adds up.

You need a 20% house price crash in real terms just to keep nominal prices flat.

So when someone says house prices wont go down over a decade what they are actually saying is that they are confident house prices can not crash more than 20% in real terms over a decade. Thats quite reasonable and will likely turn out to be true for most places

economic

GreatApe wrote: »

Its quite reasonable to say house prices wont fall in nominal terms because the system is set up for inflation. The BOE targets 2% inflation which sounds small but over a decade it adds up.

You need a 20% house price crash in real terms just to keep nominal prices flat.

So when someone says house prices wont go down over a decade what they are actually saying is that they are confident house prices can not crash more than 20% in real terms over a decade. Thats quite reasonable and will likely turn out to be true for most places

i am now thinking of doing a property development project in london. looking for property to add square footage to and either let out of sell on. essentially if i dont get the price i want i let it out.

mubeye

It's a good point that expecting inflation is reasonable. Real terms is the best way to look at it, I guess.

Re leverage, I'm not sure, but I think it's possible to buy leveraged, geared up REITS that track the market. Though not sure what happens in case of negative equity with those.

But anyway... whilst I agree that for most people buying makes sense. I just don't agree that for 'all' people it makes financial sense. There is a minority for whom renting is financially fine. They are not all HPC nuts, waiting for a crash. Nor do I agree that renting is actively betting on the market. Any more than holding sterling is actively betting on the UK.

Some examples of people I half know, who don't own, could buy, but have 'financially' motivated' reasons for renting:

- A university lecturer, perpetually shafted by 18 month fixed term contracts which expire just prior to employment rights deadlines. She has moved 4 times in as many years all over the country following the work.
- A diplomat who has to move every two years to a different country.
- A London based sales exec worth 7 figures, who is paid in USD to a US account, which he then invests directly into a US held Vangaurd index.
- An online business owner who can get good returns from any spare capital who has no need to settle down.

None of these people 'believe' in a HPC, or are relying on one, but most wouldn't be opposed to a correction.

The lecturer could buy to eventually let, but wants to focus on her long term career, and doesn't have the spare time or inclination to be a landlord.

The sales exec invests USD earnings directly into a US index, with good results. The costs to convert to GBP based assets is a risky decision. So he waits. If he had bought in Chelsea 2 years ago, or somewhere pricey, I don't think he would be any richer now. He is not waiting for a crash. This doesn't mean he wouldn't buy a house if the numbers makes sense. This isn't timing the market. It's more like basic accounting.

And the business owner, well, owning a house is like having a business in some ways. Renting is less time consuming, so if he can get better returns on his time and money by renting and the time saving services associated with renting, maybe property proftis are not enough to outpace that.

There are loads of people who rent in the UK. And even if they hope for a crash, they are not relying on one, and are not necessarily foolish for not opting in.

GreatApe

mubeye wrote: »

It's a good point that expecting inflation is reasonable. Real terms is the best way to look at it, I guess.

Re leverage, I'm not sure, but I think it's possible to buy leveraged, geared up REITS that track the market. Though not sure what happens in case of negative equity with those.

But anyway... whilst I agree that for most people buying makes sense. I just don't agree that for 'all' people it makes financial sense. There is a minority for whom renting is financially fine. They are not all HPC nuts, waiting for a crash. Nor do I agree that renting is actively betting on the market. Any more than holding sterling is actively betting on the UK.

Some examples of people I half know, who don't own, could buy, but have 'financially' motivated' reasons for renting:

- A university lecturer, perpetually shafted by 18 month fixed term contracts which expire just prior to employment rights deadlines. She has moved 4 times in as many years all over the country following the work.
- A diplomat who has to move every two years to a different country.
- A London based sales exec worth 7 figures, who is paid in USD to a US account, which he then invests directly into a US held Vangaurd index.
- An online business owner who can get good returns from any spare capital who has no need to settle down.

None of these people 'believe' in a HPC, or are relying on one, but most wouldn't be opposed to a correction.

The lecturer could buy to eventually let, but wants to focus on her long term career, and doesn't have the spare time or inclination to be a landlord.

The sales exec invests USD earnings directly into a US index, with good results. The costs to convert to GBP based assets is a risky decision. So he waits. If he had bought in Chelsea 2 years ago, or somewhere pricey, I don't think he would be any richer now. He is not waiting for a crash. This doesn't mean he wouldn't buy a house if the numbers makes sense. This isn't timing the market. It's more like basic accounting.

And the business owner, well, owning a house is like having a business in some ways. Renting is less time consuming, so if he can get better returns on his time and money by renting and the time saving services associated with renting, maybe property proftis are not enough to outpace that.

There are loads of people who rent in the UK. And even if they hope for a crash, they are not relying on one, and are not necessarily foolish for not opting in.

its easy to tell who is speculating and who is not, the speculative renters get angry when house prices go up and their speculative shorts turn bad.

Anyway I think you are still missing the point, people have to rent or buy. Give the current known factors in most cases in most areas of the UK it makes sense to buy now even if there is a crash.

So this is not really a discussion of buying or renting being the better idea, this is explaining that if you know you are going to buy today or in 5 years time calculate how big a crash you need for it to be worthwhile. Low interest rates mean you need a crash just to stand still.

If rates were 6% then waiting for a crash might be a worthwhile risk, with rates at 2% you need a 20% crash over 5 years just to stand still

mubeye

Yes fair enough.

But worth stressing your argument is stronger at the lower end. Over 600k, you need much less of a fall over 5 years to break even. I think -1% YoY will do it, in my spreadsheet. if yield is low and the markets stay in the black, then 0% can do it.

Yes I think we can all agree that any one who actively tries to short property in short term, with their entire life savings, is a numpty. Maybe if they were gambling just a very small proportion of their net worth , it would be better. But often HPCers are betting all in. Which is the sad bit.