A demonstration of ludicrous house prices...

A_Nice_Englishman

kunekune wrote: »

We are paying £675 a month for a 4 bedroom very-swish new build that was listed for sale at £220,000. The builders on the site (still working on other houses) said they were gobsmacked when they saw it advertised. We reckon we have a bargain.

Clearly there are some very generous landlords around!

tr3mor

A_Nice_Englishman wrote: »

Clearly there are some very generous landlords around!

Beggars can't be choosers!

Generali

The thing is with BTL, if you're a cash buyer and can get a yield (after costs) of 3.5% and capital growth in line with GDP growth (say 2-3% real increase/6-7% nominal) then that's a pretty decent investment. Better than equities although you'd want a higher return due to the greater risk you're taking (illiquid investment, can't diversify etc).

The problem comes if you need to service borrowings at 6% on the back of it.

inmypocketnottheirs

Let's look at it another way.

Maybe the owner bought the property say ten years ago for £100,000.

At today's money he is seeing a return on his investment of 10.74%.

Perhaps he is not worried about selling it, and perhaps with the current housing drop/credit crunch he is thinking, 'ah well perhaps if could sell now, it might be a good idea. I'll try my luck at £399,000 and may be take £300,000'.

3 x capital appreciation. Let's be generous and say for the last ten years the property has been let for say 75% of the time at an average rental of £650 per month. That would equal £58500. Nett out a hypothetical £10,000 of fees and repairs, and that £48,000 odd would go a long way towards repayment of capital and interest.

Who is to say that is not the case?

Alan_M_2

A_Nice_Englishman wrote: »

But if they sold it for £340K and put the money in the bank at, say, 6% they would get £1700 a month - nearly twice the rental income.

That assumes they have no mortgage and own the house outright.

Which if they did, they might think there will still be more capital growth which will outstrip the £1700 (people do still think this...not me though).

Alan_M_2

CB1979 wrote: »

go on then Tremor, explain how it's overpriced??

surely come back in a month if it still isn't sold, then it's overpriced.

but just cos a house's rental income wouldn't cover the mortgage (assuming 90% LTV for instance) doesn't make the house overpriced. it could just mean that the rental incomes are underpriced

But what it does provide is a clear indicator of the disparity between income and house price.

Unlike mortgages which can be twisted, turned, repackaged and extended. Rent can't, so it's either a sign that houses are overpriced, incomes are too low or possibly both.

Rental incomes underpriced? I think not, they are driven by income only not house values.

BTW I rent a 2 bedroom house at £800 a month, a neighbours identical house has just sold at £275,000. A no brainer at the moment, but if things change, so does my opinion.

meanmachine_2

Take this as a basic example of how utterly ludicrous prices are:

Nice area of SW London.

Rental income on 1bedder £805pcm.

Average price of 1 bedder £240K

IO mortgage £1150

Tenant subsidy per month: £345

I guess someone's going to say that, "ah well, look at it as a type of pension investment".

I look at it as insanity.

Grogg

perhaps the owner only wants to rent for a limited period due to work forcing him/her to move elsewhere and the rent covers their mortgage repayments or the rent they have to pay on the place they are moving too.

CB1979_2

Alan_M wrote: »

But what it does provide is a clear indicator of the disparity between income and house price.

Unlike mortgages which can be twisted, turned, repackaged and extended. Rent can't, so it's either a sign that houses are overpriced, incomes are too low or possibly both.

Rental incomes underpriced? I think not, they are driven by income only not house values.

BTW I rent a 2 bedroom house at £800 a month, a neighbours identical house has just sold at £275,000. A no brainer at the moment, but if things change, so does my opinion.

i was kidding about underpriced rental.

but just cos a house is up for sale for a certain price and rental income wouldn't cover high LTV product, doesn't mean the house is overpriced, it just means it's not a wise investment if you're going to buy it as a BTL with a high LTV.

as shown by generali & inmypockets, it can work out well for an investor all depends where their funds come from.

@meanmachine - how do you know what the I/O repayment would be though??
the buyer could have a £150k deposit, etc etc yes again if you're talking about a high LTV then it's obvious which is the better deal to go for.

tr3mor

CB1979 wrote: »

@meanmachine - how do you know what the I/O repayment would be though??
the buyer could have a £150k deposit, etc etc yes again if you're talking about a high LTV then it's obvious which is the better deal to go for.

You have to remember to take into account the interest that could be earned on the £150k in savings elsewhere.

About £7500 per year.