The window where you can put off buying a home is tiny

Hectors_House

There is, equally a window within which you can earn your most and set aside savings.

If the age of getting on the housing ladder has shifted I’m sure someone will come up with the bright idea of youngsters working into their eighties to pay off their late mortgage.

SouthLondonUser

triathlon wrote: »

In 2019 there is probably the smallest ever window to make a start on house buying before you have left it too late, leave it only five years as a very young person and finished.

While it is true that, generally, over very long time horizons, and unless you move too many times, it tends to be cheaper to buy rather than to rent, even if property prices go down in the meanwhile, I am always shocked when I hear these very general statements, which spit out advice that should supposedly be valid for all, and do not give any guidance whatsoever on how to make a decision based on one's unique circumstances.

It depends! Everyone's case is different!

A finance worker looking to buy in certain areas of London is in a very different situation to, say, a nurse in Liverpool.

You cannot forecast the future. No one can. But you can and should run some numbers to compare the cost of buying vs renting over a certain horizon. For example, for anyone buying in London right now, it is not inconceivable to worry that property prices may be flat or slightly down after 5 years. If that happens, there are many situations (depending on exact values, LTV, interest rates etc) in which buying will have been more expensive than renting.

Anyone wanting to give advice should explain these factors. Generic statements are misleading and useless.

westernpromise

SouthLondonUser wrote: »

But you can and should run some numbers to compare the cost of buying vs renting over a certain horizon. For example, for anyone buying in London right now, it is not inconceivable to worry that property prices may be flat or slightly down after 5 years. If that happens, there are many situations (depending on exact values, LTV, interest rates etc) in which buying will have been more expensive than renting.

This is what crashtrolls never do.

At typical mortgage rates you can borrow on a 5-year fix that will pay off 15% of the principal over that time. Add in your 10% deposit and prices would have to fall by 25% in nominal terms for you to be in negative equity.

Renting the same place will cost much the same as buying in most parts of the country, but after 5 years, you'll own none of it. You will only be better off if prices crash more than 15% over that time. So you would have to hope that you could buy it for £85,000 in five years' time, which is the same as buying it for £100k now and paying off £15k by that time.

As far as I know, there has only been one period in the last 60 years when that was possible, and that was between 1989 and 1996. The other 90% of the last 60 years you would have been better off buying sooner. Even within that 89-96 period buying became harder not easier, because things like LTV tightened and availability fell.

These are not good odds, so really, the main determinants of whether to buy now or later should be other lifestyle, family and career considerations. Speculating on timing is frankly lunacy even you are a very sophisticated investor, which one-note crashtrolls by definition are not.

SouthLondonUser

westernpromise wrote: »

This is what crashtrolls never do.

At typical mortgage rates you can borrow on a 5-year fix that will pay off 15% of the principal over that time. Add in your 10% deposit and prices would have to fall by 25% in nominal terms for you to be in negative equity.

Wrong. That's not how you calculate a comparison.

You are not comparing the real costs.

You are also forgetting all the fixed upfront costs of buying a property, especially stamp duty, which can be very high in London.


Let’s make a London-centric example and compare a property that you can rent for ca. £2,300/month or buy for ca. £850k
Stamp duty: £32.5k
Let’s say you get to £40k with legal fees, some furniture, minimal redecorating and other expenses you don’t incur if you buy.
Let’s say you have a 15% deposit, i.e. £127,500 and find a 25-year mortgage with a 5-year fix at 2%
After 5 years you will have paid ca. £66k of interest + £ 40k between stamp duty and other costs = £106k

Note that capital repayments are not a cost because that's money you pay to yourself.

If you rent, over 5 years you pay £2,300 x 12 x 5 = £138k. Call it £142k assuming some rent increase
If you rent, the £167.5k (deposit +40k of costs) remain available; you’ll probably want to invest them in a safe saving account and not in shares. Say you get 1.5% a year. That's ca. £13k of interest over 5 years. So renting costs £142k - £13k = £129k

Over 5 years, £106k (the cost of buying) is lower than the £129k it would cost to rent.

This is if property prices remain flat. Clearly, if they go up, it will be even better to buy; if they go down, it will be better to rent.
For example, if they are 5% down, the cost of buying becomes £148,500 (= £106k + 5% x £850k).
If they are 5% up, the cost of buying becomes £63,500 (=£106k -5% x £850k)

So in this very specific example, the break even point is ca. -3% over 5 years: if property prices are down more, it's cheaper to rent, if they go down less or increase, better to buy.

Of course everyone’s numbers will be different. And of course there are lots of unknowns and assumptions. But this is the general framework I’d use to compare buying vs renting.

Stamp duty rises more than proportionally, so the higher the value of the property, the longer it takes for buying to become cheaper than renting (all else being equal).

PS Of course there are non-financial benefits to buying, like the security of your place, and non-financial disadvantages, like being tied to a place and finding ti harder to relocate eg for a better job.
I am also comparing buying vs renting comparable freehold properties, for which all the expenses utilities etc would be roughly the same. With leaseholds, you'd need to add ground rent and management charges to the cost of buying.

westernpromise

SouthLondonUser wrote: »

You are also forgetting all the fixed upfront costs of buying a property, especially stamp duty, which can be very high in London.

My assumption is that we're talking about buying now versus buying later, not about buying now versus not buying at all (in which case you would not look at a 5-year timeframe, but at a 25-year mortgage term versus your life expectancy). You'll therefore pay the upfront cost whether you buy now or later, either at the start or end of the five years, so they are not a differentiating factor. The recent trend has been for stamp duty to get higher, so if anything it is an argument for buying sooner.

What you are actually doing here is computing the Breakeven Crash Requirement, to which I'll return (https://forums.moneysavingexpert.com/discussion/5398321/breakeven-crash-requirement&highlight=breakeven+crash+requirement#1). What I have been doing is estimating what level of price decline would trap you in negative equity.

After 5 years you will have paid ca. £66k of interest + £ 40k between stamp duty and other costs = £106k

As noted above the comparison is between buy now versus buy later, so the costs of buying don't enter the calculation (the costs of renting do, however, because they are costs you needn't pay).

Note that capital repayments are not a cost because that's money you pay to yourself.

Agreed, but the less convoluted way to look at it is to take your 85% mortgage of £722.5k, and note that after spending £184k on the mortgage over 5 years, you owe £605k (near enough), which is £118k of it paid off. You have spent the difference between £184k and £118k on interest, and that £66k is your total cost.

If you rent, over 5 years you pay £2,300 x 12 x 5 = £138k. Call it £142k assuming some rent increase
If you rent, the £167.5k (deposit +40k of costs) remain available; you’ll probably want to invest them in a safe saving account and not in shares. Say you get 1.5% a year. That's ca. £13k of interest over 5 years. So renting costs £142k - £13k = £129k

If you want that deposit available at any time in case you change your mind within 5 years, you'll struggle to get better than perhaps 1%, so you'll gain £6k in interest.

You can knock that £6k off the rent as a benefit obtained by keeping your deposit, I suppose, but on the other hand there are costs around renting such as check-in and check-out fees, deposit deductions, and (soon I would guess) charges for a reference when you move on. Those are quite capable of eating your £5k, so in fact you are out the whole rent.

Over 5 years, £106k (the cost of buying) is lower than the £129k it would cost to rent.

The correct numbers are £66k versus £142k. So renting costs you about £75k more than buying.

So in this very specific example, the break even point is ca. -3% over 5 years

It's actually about 9% using the correct assumptions from a BCR perspective, i.e. you'd need to be paying £775k or cheaper in five years' time in order for renting the £850k property to work out cheaper than buying it now.

The crash troll refrain is "What if you buy and later can't sell?", the answer to which is that you can always sell at some price; and the sooner you start in on paying a mortgage off the greater resilience you gain. From that perspective, i.e. what degree of price crash could you weather, you are in the clear if it fell as low as about £620k, which is a 27% crash from £850k. At that level, you could sell up and still pay off the mortgage balance.

Of course you'd lose your deposit in doing so, but you wouldn't be trapped. In a falling house price market, rents obviously go up too, so it is not an option to escape the 27% price crash by paying rent instead.

But this is the general framework I’d use to compare buying vs renting.

Best to count correctly then.

Stamp duty rises more than proportionally, so the higher the value of the property, the longer it takes for buying to become cheaper than renting (all else being equal).

Exactly wrong. Stamp duty gets higher with both price and, empirically, time. There has rarely been a time when the stamp duty bill for the same property was lower after five years. An assumption should be that the stamp duty will be higher in the future than now.

SouthLondonUser

A comparison over 5 years requires lots of assumptions but is still doable and can still give a broad indication. Of course the margin of error of these calculations is quite large so best not to obsess over small amounts.

A comparison over 25 years is impossible. Sure you can calculate whatever you want, but how will you come up with ‘assumptions’ for what happens over 25 years? Impossible. And often pointless – you will remember I said at the very beginning that, for very long time horizons, unless you move multiple times, buying is almost always cheaper than renting, even if the property market goes up and down in the meanwhile, so you don’t need to convince me that buying is better than renting over 25 years. Exceptions can be if there is a very specific and irreversible market crash, e.g. the industries of a once booming town all disappear and many people leave the area. It doesn’t really apply (IMHO) to London as a whole.

If I understand correctly, you seem to focus on what price decline would bring you to negative equity, but this ignores the fact that there can be less extreme price declines which do not bring you to negative equity but still mean that renting is cheaper over a specific time frame.
Ask those who bought properties in certain areas of Fulham, Chelsea, or who bought flats in certain “luxury” developments along the Thames 2 to 3 years ago. Quite a few regret buying and would have found it cheaper to rent, even if they may not be in negative equity! Price drops of 10 to 20% in these cases (which are extreme and not representative of the whole of London) are not rare.

This is also another reason why, even if you compare buying now vs buying later, you can’t just say that the upfronts costs are not a differentiating factor. They’re not if prices stay flat, they are otherwise. In my examples of prices gone down, you’d spend much less in stamp duty buying those properties now; similarly, if prices go up massively, you’ll spend much more buying later.

I suppose I could have been clearer on what exactly I was trying to compare and why. I was trying to compare the cost of buying vs renting for a 5ish-year period. I am not too familiar with the rest of the country, but, for someone buying in London, with all the Brexit uncertainty at the moment, this kind of comparison makes a lot of sense. For example, right now I would be reluctant to buy in London if, with flat property prices, it takes more than 5 or 6 years for buying to become cheaper than renting. Of course this is my subjective opinion and of course not everyone will agree with it.

To put things in context, 6-7 years ago my opinion was that it made sense to buy as soon as you could, even if it meant compromising on quite a few things, because prices were rising too much and you risked being priced out otherwise. Just in case you were wondering, I am not crashy or one of those trolls.

You want to compare buying now vs buying later. This is different from what I was trying to do. I don’t plan 25 years at a time, I (try to) plan 3 to 6 years at a time. So I am interested in comparing the cost of buying vs renting over this type of horizons. In this context, you can’t deny that, all else being equal, the more expensive the property, the higher (even proportionally) the stamp duty, and therefore the longer it takes for buying to break even vs renting.

In summary, my line of thinking is: I don’t know what’s going to happen in 20 years but I know that, for the next 3 to 6 or so, I’d like to be in this area. I have two options: buying or renting. How much will one cost me vs the other if prices stay flat, if they go down 5%, if they go up 5% etc?

Also, I don’t find “buying now vs buying later” the best type of comparison. Whether buying is worth it depends, among other things, on what happens to house prices, so a meaningful comparison requires assumptions on what happens to house prices over certain horizons. If prices go up x%, it will cost £z more to rent than to buy, etc. By comparing buying now vs buying x years later, you completely ignore what happens after year x.

As for your other comments:

The Goldman Sachs Marcus savings account currently pays 1.5%. What rates will look like in 5 years is anyone’s guess. At 0.8% over 5 years, it’s ca. £6,700. At 1%, it’s £8,500. Who knows.

I don’t understand how check in, check out and other fees can possibly amount to £5k over 5 years, unless you rent a different property every 9 months. I have never paid more than a few hundred pounds for these things. Deposits are now protected so landlords can’t just keep a deposit because of non-existent damage.

To be very precise, if you want to compare your net wealth if you buy vs if you rent, you should also factor the transaction costs from selling your property. But there are so many variables and unknowns it’s best not to complicate matters too much.

Also, I don’t agree that you can always sell at some price. In big cities typically yes, unless there is some colossal ****-up , eg you bought a property with Grenfell-like cladding which is very expensive to replace (there are such cases); in small towns and rural areas it’s a different story.

westernpromise

SouthLondonUser wrote: »

A comparison over 25 years is impossible.

And not necessary. If the direction over 3, 5 or 7 years is clear you don't need to go all the way out to 25 years. A key point here though is that no crashtroll ever adds the net present value of a surefire lifetime of renting and then compares that cost to buying.

If I understand correctly, you seem to focus on what price decline would bring you to negative equity, but this ignores the fact that there can be less extreme price declines which do not bring you to negative equity but still mean that renting is cheaper over a specific time frame.

As I showed, in the above example you'd a net 9% fall for renting to break even. That's the endpoint price versus the start point price. You could have three consecutive annual 10% rises from £850k followed by declines of 20 and 15%; that would also take you back to 9% under the original price. So even in the wake of a 35% crash over 2 years, you'd still be no better off for having dodged it by renting.

A steady nominal price decline of 1.8% per annum forever would break you even indefinitely versus renting, but in this country, it seems unwise to assume any such thing.

Ask those who bought properties in certain areas of Fulham, Chelsea, or who bought flats in certain “luxury” developments along the Thames 2 to 3 years ago. Quite a few regret buying and would have found it cheaper to rent, even if they may not be in negative equity! Price drops of 10 to 20% in these cases (which are extreme and not representative of the whole of London) are not rare.

So what? Anyone can do the same due diligence.

In my examples of prices gone down, you’d spend much less in stamp duty buying those properties now; similarly, if prices go up massively, you’ll spend much more buying later.

Not necessarily so at all. The stamp duty on a £2 million house in 2014 was £100,000. On the same house now priced at £1.8 million it would be £130,000. It is very unwise to assume that stamp duty rates will not ratchet up, since they have only ever done so.

In this context, you can’t deny that, all else being equal, the more expensive the property, the higher (even proportionally) the stamp duty, and therefore the longer it takes for buying to break even vs renting.

Of course I can because it's not true. Renting doesn't avoid paying stamp duty. It just defers it. You'll pay it in the end. Otherwise you could say your mortgage is free because from the 1st to the 29th of the month you pay nothing. So you need to put stamp duty into both calculations and you should probably further assume it will be higher on the same property in the future than now, whatever its price, because the state spitefully takes house prices as a proxy for wealth when they are in fact just an expression of inflation. As a result, the cost of it on the same property has rocketed. I bought a flat in 1999 and paid £2,500 in stamp duty; today it would be £39,000, yet the flat's value has gone up maybe 4x not 15.6x.

If prices go up x%, it will cost £z more to rent than to buy, etc. By comparing buying now vs buying x years later, you completely ignore what happens after year x.

We've just done that. We've established that on some indicative numbers for an £850k property it would need to fall >9% in value for the renter to be ahead. On all other outcomes the renter loses. If it goes on longer than 5 years, then the renter loses more, meaning the eventual compensatory fall has to be higher.

I don’t understand how check in, check out and other fees can possibly amount to £5k over 5 years, unless you rent a different property every 9 months.

How much does it cost to move house, which for the present is still in your landlord's option?

To be very precise, if you want to compare your net wealth if you buy vs if you rent, you should also factor the transaction costs from selling your property.

Yeah, I did that in the 2017 thread I linked, which was based on sell-to-rent economics.

SouthLondonUser

westernpromise wrote: »

And not necessary. If the direction over 3, 5 or 7 years is clear you don't need to go all the way out to 25 years. A key point here though is that no crashtroll ever adds the net present value of a surefire lifetime of renting and then compares that cost to buying.

I think it is pretty clear we both agree that, over very long time periods, unless you move house constantly, buying is almost always cheaper than renting. Can we agree on this and stop bringing it up?

westernpromise wrote: »

Not necessarily so at all. The stamp duty on a £2 million house in 2014 was £100,000.

? I mentioned properties in some parts of Fulham, Chelsea and some riverside developments bought 2-3 years ago. Stamp duty hasn't changed since then.

westernpromise wrote: »

Of course I can because it's not true. Renting doesn't avoid paying stamp duty. It just defers it.

Again, it depends on what you want to compare and why.
You are only interested in comparing buying now vs buying later.
I am interested in comparing buying vs renting for a given period (say 3 to 6 years). Why? Because I have no idea where I'll be in 15 years, what I'll be doing, what will have happened to interest rates house prices etc.

If my professional and personal situation were different, I'd be more inclined to follow your approach.

Look, I couldn't care less what you think or why. I'd just like to be helpful to other users, which is why it's important we are clear on what differs in our approaches and why.

westernpromise wrote: »

You'll pay it in the end.

I can't stress it enough: it depends on what you want to compare and why. Say that after 6 years you might move to another part of the country where prices are very different. The thinking that "you must pay stamp duty in the end" no longer makes sense then.

westernpromise wrote: »

We've just done that. We've established that on some indicative numbers for an £850k property it would need to fall >9% in value for the renter to be ahead.

By 9% if you are comparing buying now vs buying later.
By 3ish% if you are only comparing renting vs buying over 5 years, e.g. if for all you know you might need to relocate to Liverpool after that.

westernpromise wrote: »

How much does it cost to move house, which for the present is still in your landlord's option?

Not £5k! If you live in a 2-bed flat with not much furniture, probably £200-400 with a man and van.
If you have a big house and call a professional firm that does it all, £900 to £1,500.
How you can possibly get to £5-6k is beyond me.

westernpromise

You aren't establishing properly what your alternative, your base case, is. There is one course of action you default to, and it's that to which you compare your alternatives, fully-costed. You either do the base case or some other thing, but you can't just ignore costs by kidding yourself that in 5 years you still won't have picked one, or you'll be living in Wales.

The options we've been considering are buying now versus renting now. If the argument is that I might not buy in 5 years' time either, then logically, you don't look at 5 years but at some longer period. The utility of the exercise is that if you lose 9% over 5 years you aren't going to lose less over 7, 10 or 30 years without making some heroic and improbable assumptions.

It's actually just this failure to do the forward planning properly that has put our house crashtrolls into the limbo they are in. At every point over the last 23 years, Crashy has persuaded himself that a crash is imminent. In this way he has gone virtually an entire mortgage term renting. If he'd bought 23 years ago he'd have two years left, but he's in his mid-50s and so he may have not two years of rent left but 20 years, 25 years, 30 years...

SouthLondonUser

I think we may have some communication issues but the underlying things we say are not too different after all!

You mean after 5 years, i.e. that I haven’t established what my alternative will be after 5 years?
Well, given the choice, I’d stay in the same area. However, I cannot rule out that, because of work, we might have to move to another part of the city. The chances of moving to another part of the country or abroad are very slim.
Having to move 3 times in 12 years or so would not be impossible (everyone’s case is different, of course); if that were to happen, the fixed cost of the stamp duty would really add up. If property prices pick up and start growing again, stamp duty won’t be a huge issue, in the sense that the house appreciation is more likely to more than compensate for that. If house prices stay flat(ish) or grow very little, it’s more of an issue.
The whole point is I do not know. If I knew I’d have to move every year there would be no question – better to rent. if I knew I’ll never move till the day I die then no question – better to buy.


Like I said, if I had more certainty about staying in the same area for a very long period of time, I’d be more inclined to agree with your approach.

I think it’s important that we be clear on the fact that we have different approaches because we are comparing different things in light of different situations. For someone who will never move, it makes more sense to think they will have to pay stamp duty sooner or later. For someone who may move more than once, it makes more sense to think of the stamp duty as a dead cost.

I don’t know why you bring up Crashy and what my approach has to do with his.
I already said multiple times that, over very long time periods, it is almost always better to buy. I don't know if/when I'll be buying in the next 4 to 6 years, but I know I want to buy (again) and don't want to rent all my life.