The Equity Ladder

135

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  • ManAtHomeManAtHome Forumite
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    Part of the Furniture Combo Breaker
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    An alternative view - all assets are a millstone really, money which can never be spent as somebody else has to buy them (so we have several trillion locked away forever in the housing and stock markets).

    Would we be any less wealthy as a society if all assets didn't appreciate in value..?
  • frankleefranklee Forumite
    3.9K Posts
    Part of the Furniture 1,000 Posts Photogenic
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    CB1979 wrote: »
    !---5 bed---!
    !---4 bed---!
    !---3 bed---!
    !---2 bed---!
    !---1 bed---!
    !---studio---!

    Nah, I'm thinking more:

    !---4 bed, land---!
    !---4 bed, couple of acres---!
    !---3 bed, small garden---!
    !---studio, no garden---!

    :rotfl:
  • macaque wrote: »
    Edit 2.
    Spread sheets don't cut and paste well on this format however this is the way I did it:
    I assumed the house values were:
    £125K
    £175K
    £250K
    £350K
    £450K
    £550K

    I then calculated stamp duty at normal rates. Solicitors fees at £1500 per transaction and estate agents at 2%. I then assumed that the owner stayed in each property for 4 years and calculated the interest on the money at 6%. The total came to £151,516.60p.

    This sort of calculation is informative. Such substantial transaction costs go to show what a waste of time and money that selling to rent (STR) is.

    I saw something in the Sunday Times a while back saying that STR would only make sense if house prices fell by at least 5% per annum
  • macaque_2macaque_2 Forumite
    2.4K Posts
    nollag2006 wrote: »
    This sort of calculation is informative. Such substantial transaction costs go to show what a waste of time and money that selling to rent (STR) is.

    I saw something in the Sunday Times a while back saying that STR would only make sense if house prices fell by at least 5% per annum

    Well thats not a very intelligent response.

    These transaction costs illustrate is the folly of buying and selling too often (unless you can cover these costs by buying at below market value and selling above market value). The old idea of moving up a ladder by increments is less practical today due to higher transaction costs.

    The 5% on STR reflects the cost of selling and buying and is therefore a one off cost (not per annum charge). If you look at it on a per annum basis the 5% cost repadily shrinks to zero the longer you stay out of the market (assuming house prices stagnate). The reason for this is that renting is much cheaper than owning these days. Thus if house prices fall by 1% over 5 years, the STR will make a healthy financial gain.

    This is all somewhat irrelevant to me as I prefer renting anyway.
  • CB1979_2CB1979_2 Forumite
    1.3K Posts
    also I have £40k "invested" in my property, please do tell what dividend I could receive on that £40k invested elsewhere, as opposed to in little under 1 year my flat has "gone up in value" by £40k, now that to me seems a much better 100% return as opposed to the piddly 3-4% you're quoting ;)

    oh but then again i did have £2200 of moving costs (inc stamp duty)
  • macaque_2macaque_2 Forumite
    2.4K Posts
    CB1979 wrote: »
    also I have £40k "invested" in my property, please do tell what dividend I could receive on that £40k invested elsewhere, as opposed to in little under 1 year my flat has "gone up in value" by £40k, now that to me seems a much better 100% return as opposed to the piddly 3-4% you're quoting ;)

    oh but then again i did have £2200 of moving costs (inc stamp duty)

    I get the feeling that simple arithmatic is not your trump suit.
  • CB1979_2CB1979_2 Forumite
    1.3K Posts
    enlighten me macaque please do.

    I don't have £160k to invest elsewhere, I had £40k if i sold the place tomorrow I'd have "made" £40k less any costs, so for arguments sake let's take a reserved estimate of £10k, leaving me with a £30k profit in the bank, and now my £40k cash has now turned into £70k.

    think that's simple enough to understand, whereas by your reckoning i could've turned my £40k into £44k (10%)???? if i went the route of investing it in otherways.
  • macaque_2macaque_2 Forumite
    2.4K Posts
    CB1979 wrote: »
    enlighten me macaque please do.

    I don't have £160k to invest elsewhere, I had £40k if i sold the place tomorrow I'd have "made" £40k less any costs, so for arguments sake let's take a reserved estimate of £10k, leaving me with a £30k profit in the bank, and now my £40k cash has now turned into £70k.

    think that's simple enough to understand, whereas by your reckoning i could've turned my £40k into £44k (10%)???? if i went the route of investing it in otherways.

    Good grief it is not very difficult. You are confusing capital returns with income.

    If you buy a property and rent it out, the yield will be between 3-4%. That is about the same as shares.

    If you sell the property for more (after inflation) than you paid, you make a capital gain. The gain however does not exist until you sell the property. Until that time, it remains a paper profit. Dividends/rent on the other hand represent a real return on your investment.

    If you borrow £120K to buy an investment property and put down £40K deposit, the net yield will be neglible or even negative (since the cost of servicing the debt offsets the income gain).

    When you buy a property with borrowed money, you are speculating on a leveraged investment. In a bull market this can be very profitable. In a bear market however is can decimate your wealth.

    Remember leveraged investments are not just for houses. There is nothing to stop you buying equities with borrowed money (providing someone will lend you the money). Alternatively you can buy warrants. If you buy £160K of shares with a £40K deposit and the shares double, you make £160K for a £40K deposit. I would argue that your chances of making that sort of return in shares is significantly higher than property (at the moment).

    Just think about this. If properties were to double again the yield would fall to around 1% and only a tiny fraction of people would have enough money to buy a house. Come on! It is just cuckoo land economics.
  • CB1979_2CB1979_2 Forumite
    1.3K Posts
    i agree with you it's cuckoo land economics, and it don't make sense one tiny little bit.

    but thanks for the economics lesson, i'll stick with my easier option though :)
  • GeneraliGenerali
    36.4K Posts
    10,000 Posts Combo Breaker
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    macaque wrote: »
    Good grief it is not very difficult. You are confusing capital returns with income.

    If you buy a property and rent it out, the yield will be between 3-4%. That is about the same as shares.

    If you sell the property for more (after inflation) than you paid, you make a capital gain. The gain however does not exist until you sell the property. Until that time, it remains a paper profit. Dividends/rent on the other hand represent a real return on your investment.

    If you borrow £120K to buy an investment property and put down £40K deposit, the net yield will be neglible or even negative (since the cost of servicing the debt offsets the income gain).

    When you buy a property with borrowed money, you are speculating on a leveraged investment. In a bull market this can be very profitable. In a bear market however is can decimate your wealth.

    Remember leveraged investments are not just for houses. There is nothing to stop you buying equities with borrowed money (providing someone will lend you the money). Alternatively you can buy warrants. If you buy £160K of shares with a £40K deposit and the shares double, you make £160K for a £40K deposit. I would argue that your chances of making that sort of return in shares is significantly higher than property (at the moment).

    Just think about this. If properties were to double again the yield would fall to around 1% and only a tiny fraction of people would have enough money to buy a house. Come on! It is just cuckoo land economics.

    You've got an interesting argument but it is deeply flawed.

    A PPR isn't just an investment (in fact IMO it shouldn't be considered an investment at all). A PPR and a share portfolio are completely different things.

    PS I was interested to note that you didn't respond to my pretty comprehensive destruction of your OP. House prices are very (too?) high. It doesn't make your arguments right though.
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