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

GreatApe

mubeye wrote: »

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.

The price is not important the sums rely on rental yield vs interest rates

The difference in the two is the crash needed. So if a five year mortgage is 2% and a £600,0000 house yields 5% then over the five year term you need a 15% house price crash to break even

westernpromise

More than 15% if you 1/ sell up first and re-enter 5 years later and 2/ factor in that you'll have depleted the mortgage over 5 years i.e. added the equity 3/ further factor in that any crash will be from the peak, not what you bought at; if you get 4.5 years of HPI and then a crash you may still have more equity than when you bought.

mubeye

Yield is massively important. I think you have that wrong. Maybe a flat gets 6%. But average yield for higher priced property is more like 3% as far as my 5 mins of research of London can tell. As I've said, mine is definitely 2.5. And seems pretty consistent with property I tend to rent.

For example. To use your crash figures. And a 5-year fixed rate bond return of 3% on a 33% deposit.

deposit 200000
mortgage 400000
purchase price 600000
stamp duty 20000
buying costs 3000
1% setup / maintenance 6000 (probably cautious)
selling costs 2000
total crash 0.85
selling price 510000
mortgage balance 337,954.52 (25 year 2% no fee exit)
total costs 41000
ending balance 141,045.48

rent at 5% yeild 150000
value of fixed bond at 3% 231000
net balance 81000

owners profit after 5 years 60,045.48

But adjusting yeild down to 3% and suddenly things look different.

rent at 3% yeild 90000
value of fixed bond at 3% 231000
net balance 141000

owners profit after 5 years = 1k


If you assume a more realistic long running average of 6% for cash return. You get this at 3% yeild.

value of fund at 6% 267000
net balance 177000

owners profit after 5 years -35,954.52

And finally, if you take a more modest crash of 1% drop per year for the 5 year period. to 570k. Then owner is up about 25k in england, or 10k in scotland.

So in the case of a 600k property, a 2% YoY fall and long term average returns on the deposit, would likely lead to a loss for an owner.

If you object to the 6% return. Then to use 2.5% which is the current 5 year high street fixed savings rate. Then by my calcs a crash of 3.5% YoY is required over the 5 years. to break even. About 18% over the 5 years.

So 1% does make a difference.

However considering that property has more short term risk than a fixed term bond over 5 years, I don't see why the calcs should use a return LOWER than the fixed bond. So maybe it is fairer to use the something closer to 6% average return on passive trackers, than 3%.

But in any case, there are lots of variables. I disagree it is black and white. 10000s or people living in London have these kinds of circumstances, so it's not exactly an outlier either.

GreatApe

Your examples are unnecessarily complicated, simply put the cost of buying using a 5 year fix is 2% of the cost of purchase (75% LTV mortgage at 1.94% fixed for 5 years and 25% Deposit not earning 2.25% on a fixed five year bond).

A buyer then simply needs to know the yield to rent minus the 2% cost of buying and multiply the difference by 5

So for Birmingham the yield to rent a 2 bedroom house (not flat) is 6% therefore the crash needed is roughly 20% to break even in renting or 30% in real terms. Waiting for a crash is thus gambling that house prices will crash more than 30% over 5 years in real terms

You may think Birmingham is a rare example of high rents low prices so lets run down the list of large uk cities looking at zoopla for 2 bedroom houses (not flats) and taking the average asking price and the average rent for the same 2 bed house and figuring out the yield

Birmingham

---

6% Yield
Leeds

---

6.1% Yield
Sheffield

---

5.4% Yield
Bradford

---

5.2%
Manchester

---

6.9%
Liverpool

---

6.5%

All those areas, and much of the north and midlands wales and Scotland are similar, need a more than 30% real term HPC over 5 years to make it worthwhile renting

London Yields

Enfield

---

4.0%
Haringey

---

3.5%
Waltham Forest---3.9%
Daginham

---

4.3%

Even London at 4% Yield needs a 20% real crash over 5 years to make it worthwhile renting

And as WP points out, this is only true if you have the bad luck of buying on the very peak month of the peak year before a crash. If you bough 1-2-3-4-5 years before then things are even better for you.

Simply put low rates have destroyed the idea that waiting for a crash as a possible option being a good bet

mubeye

GreatApe wrote: »

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

Fair point yes it is over complicated. Can we look again at your first cash purchase example? Just for simplicity. (ignoring leverage just for this point)

Also maybe we could use an average UK yield of 4.17%, according to google? Yields vary wildly in Brum. From 1.17% in B17 to 6.20 in B19. Seems sensible to use an average.

Best high street 5 Year fixed savings account is exactly 2.25% from paragon.

purchase 130000
buy 1500
sell 1500
maintenance 2000
crash 15% selling price 110500
balance 105500

fixed rate bond @ 2.25 145298
rent @ 4.17% 27105
rent balance 118193

owner profit -12693


I know there are plenty of cases (eg leverage) where the numbers work differently. But I just want to question the original premise.

GreatApe

mubeye wrote: »

Fair point yes it is over complicated. Can we look again at your first cash purchase example? Just for simplicity. (ignoring leverage just for this point)

Also maybe we could use an average UK yield of 4.17%, according to google? Yields vary wildly in Brum. From 1.17% in B17 to 6.20 in B19. Seems sensible to use an average.

Best high street 5 Year fixed savings account is exactly 2.25% from paragon.

purchase 130000
buy 1500
sell 1500
maintenance 2000
crash 15% selling price 110500
balance 105500

fixed rate bond @ 2.25 145298
rent @ 4.17% 27105
rent balance 118193

owner profit -12693


I know there are plenty of cases (eg leverage) where the numbers work differently. But I just want to question the original premise.

Why are you selling the property in 5 years time and thus adding buying and selling costs? The idea is to buy now or buy in five years

Also your 4.17% yield is silly, I did look at the whole of birmingham on zoopla where it lists the average at 6% for 2 bedrooms. And having another look on zoopla right now your 4.17% yield = £450 per month and in the whole of birmingham there are no 2 bedroom properties to rent for £450 per month so clearly your quick google is wrong use 6% as its the median price and rent for a 2 bedroom for the whole of Birmingham

mubeye

GreatApe wrote: »

Why are you selling the property in 5 years time and thus adding buying and selling costs? The idea is to buy now or buy in five years

Also your 4.17% yield is silly, I did look at the whole of birmingham on zoopla where it lists the average at 6% for 2 bedrooms. And having another look on zoopla right now your 4.17% yield = £450 per month and in the whole of birmingham there are no 2 bedroom properties to rent for £450 per month so clearly your quick google is wrong use 6% as its the median price and rent for a 2 bedroom for the whole of Birmingham

Why is 4.17 silly? I've since looked deeper, and actually there are more sources claiming 3.2%. eg
https://www.globalpropertyguide.com/investment-rating I don't trust the Zoopla figure.

But anyone, does your theory only work in areas with above average yields? I could easily name loads of places with 2% yields if you want to cherry pick an area with non typical yield.

Take away the selling costs and renting is still cheaper in your scenario. Using the national average.

GreatApe

mubeye wrote: »

Why is 4.17 silly? I've since looked deeper, and actually there are more sources claiming 3.2%. eg
https://www.globalpropertyguide.com/investment-rating I don't trust the Zoopla figure.

But anyone, does your theory only work in areas with above average yields? I could easily name loads of places with 2% yields if you want to cherry pick an area with non typical yield.

Take away the selling costs and renting is still cheaper in your scenario. Using the national average.

Seriously?

Just ignore everything that does not fit with your confirmation bias?

Why would you not trust the listed home prices and rents on zoopla or rightmove? Why is globalpropertyguide.com more accurate than the two primary sites for selling and renting uk property?

And I did not cheery pick birmingham, in fact I listed the yields for multiple UK cities here they are again

Birmingham

---

6% Yield
Leeds

---

6.1% Yield
Sheffield

---

5.4% Yield
Bradford

---

5.2%
Manchester

---

6.9%
Liverpool

---

6.5%

All those areas, and much of the north and midlands wales and Scotland are similar, need a more than 30% real term HPC over 5 years to make it worthwhile renting

London Yields

Enfield

---

4.0%
Haringey

---

3.5%
Waltham Forest---3.9%
Daginham

---

4.3%

Feel free to list your 2% yield areas but use rightmove/zoopla not some crap nonsense website. To me it looks like 4% in London is typical and 6% outside. I think its also likely the yields would be higher if a person compared like with like, renters tend to rent the lower end of the market compared to the average house for sale.

Anyway I dont care, feel free to rent if you want to rent but dont come back in five years and cry about it

mubeye

Okay I feel I've overstayed my welcome in this thread. So I'll just leave the requested info, and duck out of this one I think.

Here is a list of low yield areas according to telegraph. If I'm honest, I've no idea if it's accurate.

beaconsfiled 1.7%
Worcester 1.6% (average rent £402)
chelsea 2.09%

Here are some more:
http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/11113813/Buy-to-let-the-10-postcodes-with-the-lowest-yields.html

according to guardian...
Average UK rent is 921
Average House price 234,794.
Average yield 3.9%

according to zoolpa asking prices
Average UK rent is 1695
Average House price 395724
Average yield 4.2

But happy to concede this might mean very very little! Just wanted to add some counterpoint.

economic

mubeye wrote: »

Okay I feel I've overstayed my welcome in this thread. So I'll just leave the requested info, and duck out of this one I think.

Here is a list of low yield areas according to telegraph. If I'm honest, I've no idea if it's accurate.

beaconsfiled 1.7%
Worcester 1.6% (average rent £402)
chelsea 2.09%

Here are some more:
http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/11113813/Buy-to-let-the-10-postcodes-with-the-lowest-yields.html

according to guardian...
Average UK rent is 921
Average House price 234,794.
Average yield 3.9%

according to zoolpa asking prices
Average UK rent is 1695
Average House price 395724
Average yield 4.2

But happy to concede this might mean very very little! Just wanted to add some counterpoint.

What's the point of this post if it may mean very very little? Why not stop wasting your time and either post stuff that is actually correct instead of made up Stuff. And averages are meaningless if it is the mean.