The Fascinating HPC Debt Slave Conundrum

HPC_Ghuol_Hunter

All the HPC lunatics are hardcoded with the mantra that thou shalst not be a debt slave. But what is the difference between being a mortgaged homeowner debt slave and a rent forever loser debt slave? In fact being a mortgaged homeowner debt slave you are more likely to escape debt slavery as soon as your mortgage term has completed. Meanwhile the rent forwever loser debt slave has yet to even start paying off their own mortgage.

:huh:

Perplexing irrational thinking for the HPC goon gang I think you will agree.

LHW99

Also when inflation reaches more normal levels the effective amount (value?) of debt in a mortgage falls over time.

Arklight

If only those on the forum hpc.co.uk would see sense. But they persist in their perverse thinking.

HPC_Ghuol_Hunter

LHW99 wrote: »

Also when inflation reaches more normal levels the effective amount (value?) of debt in a mortgage falls over time.

Good point, I didn't think about that. :money:

westernpromise

It's a general symptom of the financial innumeracy that is quite widespread these days. Your average HPC type misunderstands debt as some ghastly and unimaginably huge liability. Rent, in contrast, is easy - you just owe the current month. Therefore, to be a renter is safer than being an owner, because you owe less.

The obvious flaw in this thinking is of course that it compares 25 years of the cost of housing yourself with one month's cost of housing yourself. The latter is thus not the actual alternative to the former at all. The real alternative to a mortgage for 25 years is a lifetime of rent. This is a much larger liability than the mortgage.

Someone aged 35 who takes out a £200k 25-year mortgage will spend about £1000 a month servicing it. Their total outlay will be £285k and after that, for say the next 20 years, they pay nothing. Someone aged 35 who fears that debt, and rents for £1000 a month for the same 45 years, will spend £540k on rent over that term.

Many on HPC do not grasp that £540k is a larger number than £285k. The latter is a huge scary debt; the former is invisible - they just see £1000 (one month's rent). Much safer.

Fewer still grasp that the borrower will owe £171k after 5 years, whereas the renter will owe £480k (40 more years of rent).

This is without even considering the effect of inflation. Inflation means the renter's rent will drift up over time; so will his wages. Net, the £1000 a month will be the same in real terms in 45 years' time as it is now. The buyer's wages will also drift up, but the loan is fixed. So in reality the renter's £540k in rent will always be £540k in rent, whereas the owner's £285k may be eroded by say 2% inflation to a true cost of £220k or so.

Furthermore, at the end of the 25 years the owner owns something. Even if there were no house price inflation and then a 90% price crash the day the mortgage is paid off, the owner now has something worth £20k and lives free. It's more likely that the house in real terms will be worth about what he paid, i,e. £260k at 2% inflation.

So after 25 years the buyer owns a £260k house and now lives free, whereas the renter owns nothing and faces 20 more years of rent.

This makes him about half a million worse off and it is clear that this has happened to posters in this very forum because they do not understand the above and think buying riskier than owning.

Herzlos

A very valid point. You still need to keep paying rent or you'll have nowhere to live, so it's just as much of a liability (in the financial sense) as a mortgage. It does give you a lot more flexibility, though.

I've always viewed my mortgage the same as renting, with the exception that it'll drop over time (hopefully) and eventually become free by the time I retire.

westernpromise

In the above example you can pay £285k to own something worth £260k or you can pay £540k to own nothing. One choice is £515k better than the other.

Flexibility is important and is often crucial if you are in an area short term, but personally I wouldn't blow away £515k just to obtain it. I can be very accommodating for sums like that.

HPC_Ghuol_Hunter

westernpromise wrote: »

It's a general symptom of the financial innumeracy that is quite widespread these days. Your average HPC type misunderstands debt as some ghastly and unimaginably huge liability. Rent, in contrast, is easy - you just owe the current month. Therefore, to be a renter is safer than being an owner, because you owe less.

The obvious flaw in this thinking is of course that it compares 25 years of the cost of housing yourself with one month's cost of housing yourself. The latter is thus not the actual alternative to the former at all. The real alternative to a mortgage for 25 years is a lifetime of rent. This is a much larger liability than the mortgage.

Someone aged 35 who takes out a £200k 25-year mortgage will spend about £1000 a month servicing it. Their total outlay will be £285k and after that, for say the next 20 years, they pay nothing. Someone aged 35 who fears that debt, and rents for £1000 a month for the same 45 years, will spend £540k on rent over that term.

Many on HPC do not grasp that £540k is a larger number than £285k. The latter is a huge scary debt; the former is invisible - they just see £1000 (one month's rent). Much safer.

Fewer still grasp that the borrower will owe £171k after 5 years, whereas the renter will owe £480k (40 more years of rent).

This is without even considering the effect of inflation. Inflation means the renter's rent will drift up over time; so will his wages. Net, the £1000 a month will be the same in real terms in 45 years' time as it is now. The buyer's wages will also drift up, but the loan is fixed. So in reality the renter's £540k in rent will always be £540k in rent, whereas the owner's £285k may be eroded by say 2% inflation to a true cost of £220k or so.

Furthermore, at the end of the 25 years the owner owns something. Even if there were no house price inflation and then a 90% price crash the day the mortgage is paid off, the owner now has something worth £20k and lives free. It's more likely that the house in real terms will be worth about what he paid, i,e. £260k at 2% inflation.

So after 25 years the buyer owns a £260k house and now lives free, whereas the renter owns nothing and faces 20 more years of rent.

This makes him about half a million worse off and it is clear that this has happened to posters in this very forum because they do not understand the above and think buying riskier than owning.

Thanks for the detailed analysis. You can't argue with these cold hard figures but I'm sure the loons might try. It's clear that these RFL's are dumb as well as bitter.

michaels

I always look at is as 'own no houses' = short the housing market by 1 house, own one house = neutral the housing market, own 2 houses = long housing'.

This is different from owning shares or similar where you don't need any so as soon as you own one tou are 'long'.

Thrugelmir

westernpromise wrote: »

It's a general symptom of the financial innumeracy that is quite widespread these days.

Someone aged 35 who takes out a £200k 25-year mortgage will spend about £1000 a month servicing it. Their total outlay will be £285k

Suggesting that interest rates are going to be (under) 3.5% for the next 25 years could be described as wishful thinking.

caronoel

Thrugelmir wrote: »

Suggesting that interest rates are going to be (under) 3.5% for the next 25 years could be described as wishful thinking.

In November 2008, suggesting base rates would remain at (or below) 0.5% for almost a decade would have been described as wishful thinking.