House buying dilemma - criticize my thinking please.

ACCA

Hey lovely MSEs forumites! 

I’m a loyal reader of this community but post quite rarely. I’ve done some sort of analysis recently and wanted to share my views and computations and ask for your piece of advice. Many thanks for reading and apologies for a long post, any sort of piece of advice will be much appreciated.

Background: we are a couple (29 and 35) based in London and have been renting for unbearably long, mainly due to the flexibility and freedom available. Looks like we are going to consider expanding the family in some foreseeable future and most likely would need to settle down. We’ve been dreaming of a house with a garden in a quite & green area (who wouldn’t). Having done some numbers crunching we’ve got stuck with a dilemma, hence the post. Please do not be too strict about the numbers I’ve quoted below, these are averages in most of the cases.

Inputs:

   · timeline: looking to buy in the next 12-24 months

   · combined deposit: 140k

   · combined earn: 90k (30+60)

   · broker estimate of mortgage amount available: 320k

   · estimated interest rate: 3.5%

   · estimated term of the mortgage: 30 years

   · budget based on the above: ~460k or 70% LTV

   · currently renting a 1-bed in Zone-3 for £1,200 pm (plus utilities and counsil tax: £200 pm altogether), cycling to work within 45-50m, rarely using tube ~£20 pm

   · we normally work from office in the City

Preferences:

   · freehold

   · 3+ beds

   · green & quiet location

   · decent primary school

   · reasonable commute to the train station (bus or walk): up to 20m

   · commuter town to London (train): up to 60m

Analysis:

(a) Locations: for the budget and preferences listed above, we’ve shortlisted a couple of places (not without the help of this community – massive thanks): Stevenage, Leighton Buzzard, Milton Keynes, Hemel Hampstead, Tring, High Wycombe, St Albans, Hatfield, Cheshunt, Horsham, Redhill, Liphook, Godalming, Woking, Rochester, Sevenoaks, Tonbridge, Chelsfield, Orpington, Surbiton, Epsom. Have to confess – we haven’t seen every single place, but explored a couple of these and these were decent enough: Surbiton, Orpington, Epsom, St Albans, Chelsfield, Redhill; still working on the others.

I’ve got a table in excel listing the train duration (ranging from 20 minutes to 60 minutes) and prices (ranging from £220 to £590 per month).

(b) Economics:

    o Most of the properties we’ve seen ourselves or on Zoopla/ Rightmove would require a bus to the train station, that’s another £3-4 per day, or £74 pm (assuming median £3.5 per day and 21 days per month)

    o Train ticket price, even if we go the annual season ticket, that would set us back for £2,300 pa as a cheapest option (in Surbiton and Chelsfield) to the highest fare of £5,700 pa to Milton Keynes (‘MK’) or £5,000 pa Leighton Buzzard (‘LB’). Assuming we won’t be able to grab a deal for our budget in Surbiton, I’ve budgeted a median expense of £3,800 pa which is a price tag for Sevenoaks, Tonbridge, Redhill or Woking. That’s roughly £320 pm.

   o Tube in London: from/ to train station and the office, assuming peak hours use in Zone 1-2, I figured it’s roughly £6 pd or £124 pm (assuming 21 days in office).

   o We are not paying service charges atm and I am guessing a freehold won’t require us to pay one, but there would definitely be some outgoings for gardening, maybe roofing, minor bits here and there, my guess would be £100 pm (please correct me if needed). I acknowledge it massively depends on the property condition of course, but let’s assume we won’t get into the ‘deal’ of ‘requiring some modernization’.

   o Mortgage monthly payment would be around £1,450, this is based on 3.5% interest rate (I know some have secured great deals, but with base rate going up, we tried to go for the worst), 30 years mortgage (we of course will overpay, but do not want to overcommit, so playing safe). Out of the monthly payment, the interest bit accounts for £934 pm in the first months, so I’ve averaged that for the first 5 years and got £890 pm.

   o Utilities. Currently we are paying £200 per month: (annualized and normalized for seasonality) £120 counsel tax, £20 broadband, £30 heating and hot water, £20 electricity. I’ve heard that some houses are not as well isolated and my colleagues advised they are paying for gas & electricity around £250 pm (3-bed house, a family of 3 (incl a 2yo baby)). I am guessing the counsel tax and broadband would stay the same. Overall impact: additional £200 per month on electricity and gas expenses, let’s assume we can get this down to £150 given we have no kids yet.

(c) Housing market:

   o Interest rates: we all know what’s happening, the base rate is now 0.75% and there are rumours it to be moved to 1.0% in autumn. Outcome: mortgage rates are reflecting these movements. Negative impact on borrowers.

   o Supply: house supply is on its low atm and probably won’t be able to satisfy the demand for another decade. Outcome: negative impact on buyers as prices might creep up.

   o Income growth vs inflation. Current inflation (CPIH index) is exceeding the income growth (total pay real index), means in real terms the salaries are declining. Outcome: negative impact for buyers as disposable income will be limited.

   o Nationwide quarterly house price index: by looking at the dynamics since 1956 (that’s the earliest I could find), the actual average price has been increasing with a couple of downfalls in 1990s and 2008. A slight stationary market noted during Covid, but it’s picked up significantly since Jun-2020. Currently the average house price is at all highs peaks. One of the reasons is that people saved during Covid and got their deposits stronger which allowed them to buy, also not to forget the stamp duty relief (ie savings pushed up prices). Outcome: negative impact on current buyers as prices gone up without any value-added.

   o UK house prices to earnings ratio. Analysis horizon 1992 – 2022, source: Nationwide, ONS. The median is 4.5x, pre-2002 the index was averaging 3.0x, post-2002 started to go up and currently is at the 6.9x mark (all record high). Outcome: affordability is much weaker, unless your salary has gone up faster.

   o Geography of %-ge change in price. Source: Nationwide. Wales average gone up by 15%, London was the slowest of UK with just under 8% growth. Probably because of the valuation discrepancy throughout the UK.

   o Market sensitivity. Analysts played a couple of scenarios for the next 3 years: base case is that market will keep almost flat with a slight increase in house price of 0.7% per annum, the pessimistic and aggressive scenarios would show a -/+ 6.6% movement per annum. Outcome: perhaps the base case scenario says there is no point waiting.

   o Overall country economy: if there is a recession (yield inversion and inflation trigger already happened) banks won’t be willing lend eagerly so the multiples will be reduced. Outcome: detrimental for buyers.

Conclusion: based on the analysis described above, I can see two options:

(i) Buy. Advantages: more living space, garden, property ladder. Cons: commute time going up from 50m to 90m on average one way, commute cost: zero atm vs £520 per month per person, cost to maintain the property ~£100 per month, mortgage interest ~£445 per month per person vs current rent of £600 per month, additional £150 per month on utilities (discussed above), no or less flexibility. Total additional expense: £520 + £100 + £445 + £150 = £1,215 per person per month, vs £600 rent per month.

(ii) Not buy. If we do not buy, we will be saving additional £615 per person per month (or better said: not wasting), saving 80m per day per person on commute. In such a way we can keep growing our deposit and hoping that the market will not go up like crazy. We are not desperate for extra space at this point in time, but this might be needed in a year or so, we perhaps could continue renting or even renting a bigger property if we really need to.

As you can see, the main problems are commuting price tag, that’s the major cost that makes the entire buying experience look not that promising and affordable. Perhaps move to WFH would be an option, but this is not available atm.

Questions:

- What have I missed in my assessment above?

- Do you agree with the rationale of the assessment?

- Would you suggest a place within London that would suit our budget and preferences, and also allow not to spend a fortune on commute? Probably east London, we’ve never considered that part for some reasons..

- What alternatives do you see? Other than: wait and keep saving, try to increase deposit or mortgage, go further out or find a cheaper place, rent a 2 or 3 bed in London for ~£1,700 and keep saving, relocate to another place..

Once again – thanks for your time. M

JReacher1

Looks well researched. Maybe consider going smaller for your first house/flat e.g. 2 bed before moving to the 3 bed in 2-4 years. 

hazyjo

Blimey. Tbh I think you're overthinking it. Plus you seem to be comparing a 1 bed flat with a 3 bed house in a lot of that.

Where in the City do you need to get to? It's small, so maybe look at what goes into Liverpool Street, Fenchurch Street, Bank, Moorgate, Cannon Street, etc.

I'd add Hertford, Ware, and Bishops Stortford to the list (if that budget stretches, not looked there for ages) and delete the ones south of the river unless they go to Cannon Street. You might as well avoid tubes, plus that'll add loads of time - and stress - to your journey!

Loving Leigh-on-Sea, Essex. Fantastic town. Very reliable C2C line. 43-50 mins to Fen St. Budget may be a little tight, but doable.

ACCA

hazyjo said:

Blimey. Tbh I think you're overthinking it. Plus you seem to be comparing a 1 bed flat with a 3 bed house in a lot of that.

Where in the City do you need to get to? It's small, so maybe look at what goes into Liverpool Street, Fenchurch Street, Bank, Moorgate, Cannon Street, etc.

I'd add Hertford, Ware, and Bishops Stortford to the list (if that budget stretches, not looked there for ages) and delete the ones south of the river unless they go to Cannon Street. You might as well avoid tubes, plus that'll add loads of time - and stress - to your journey!

Loving Leigh-on-Sea, Essex. Fantastic town. Very reliable C2C line. 43-50 mins to Fen St. Budget may be a little tight, but doable.

Thanks for reading and for your pieces of advice.

Yes, you're right, comparing a 1-bed flat with 3-bed house is a non-sense, but that's where we are atm and have no real rush to be moving into a larger property (be it rented or owned), so essentially trying to work out whether it's worth waiting while continuing to rent.

Thanks for the places you've recommended, definitely will research those. Re City - i am in LB but work in professional services, constantly commuting to clients all over the place, my partner is in Fenchurch Street. 

FTB_Dan

I know you said not to look at the figures in too much details (and without knowing your finances) but you should typically be able to get 4-4.5X your salary for a mortgage. 

hazyjo

Would say choose somewhere that makes sense for Fen St then rather than for you then if you're going to travelling to different areas. It makes an enormous difference to my commute being only a 5 min walk from Fen St!

MovingSiren

I don't see St Neots on your list. We lived there and the husbot commuted into London for 18 months. It has most amenities and is a very walkable town. Also within driving distance of Cambridge, Peterborough and Bedford (which are also on the train lines into London)

hazyjo

Over £5700 a year from St Neots not including the tube, and around an hour each way just on the train. Not sure I'd go that far out with the budget the OP has. Not a bad option, but wouldn't be high on my list.

ironlady2022

You've done a lot of extensive research so well done, I do not live in that part of England so can't comment on location.

In terms of the interest element paid to the bank, forget about this. As renting is dead money anyway. The bank is lending you a big chunk of money so you can 100% own an asset in advance of you saving for it to buy outright. I rem looking at this when i was a FTB, it's a healthy debt and should be seen as that.

In terms of both your jobs, what about moving jobs or will you both definitely keep with same company? 

TallGirl

I would say move jobs or find jobs you can be home based but with the London wages. We moved back to South Hants from London I can get into Moorgate door to door in two hours walking to the station. Obviously not for everyday but fine for the odd occasion. There is lots of life outside of London. Good luck with your search. 

Rambosmum

Are you planning kids? My advice will vary massively depending on the answer! 

What's £1450 as a % of your combined take home pay?