Advice on reducing asking price

BV88

[Deleted User] said:

BV88 said:

In order to determine the monthly cost difference between renting and buy you need to take the monthly rental yield (minus monthly interest on cash savings) and compare it to the monthly interest costs (not capital repayment) of buying the equivalent property.

Average U.K. rental yield = 3.6% 

Average U.K. house price = £296,000

20% deposit = £59,200

Average 5 year fixed rate mortgage = 5%

Average 5 year fixed risk free cash saving rate = 4.5% 

For the average at the moment month one looks like this, cost of renting:

£888 (rental yield) minus £223 (cash yield on deposit in fixed rate account) = £665. Note that the £223 may be lower depending on individual tax situation. 

Versus cost of buying:

£986 (mortgage interest in first month on £236,800), remember we ignore the capital repayment so the actual cost of the mortgage will be higher than this 

So at current averages renting is cheaper per month by £321. Of course there is huge variation  and this is just an average, but it shows the dramatic impact interest rate changes have on the economics of buying vs renting. When the base rate was 0.1% things were skewed far more favourably to the buyer than the renter. 

Now the big uncertainty is what will happen to the value of the asset over time. Over longer periods the value will almost certainly increase and therefore so will the rent. So over time the economics get worse for renting and better for buying. Buying is almost always better in the long term for appreciating assets like houses. 

However with pretty much universal forecasts suggesting nominal house price falls in the next 12 to 18 months, or even if they stay flat, renting could be better than buying. Due to the now much higher cost of capital, your landlord may essentially be subsidising you to live in the property. Plus they will also be taking the hit of any capital value depreciation if indeed house prices do fall. 

This is a difficult situation for many people to get their head around as things have been so heavily skewed in recent years toward the house buyer rather than the renter. People always say ‘Rent is dead money’, well guess what interest payments to the bank are equally ‘dead money’ as rent! This is basically caused by the fact rent may have increased by 15% but the cost of capital has increased 300%, it’s totally distorted the market dynamics of the past 14 years. 

As with anything it is totally dependent on personal situation but the rent = bad, buying = good, has really been flipped on it’s head in a world where house prices are flat or declining and interest rates are higher. 

Thanks for the figures. Just trying to understand where the 223 in savings is coming from for the rent option but not applicable to the buy option?

It’s the deposit of 20%, if you buy that money is then tied up in the property. If you rent you still have that cash which you can earn interest on. 

[Deleted User]

BV88 said:

[Deleted User] said:

BV88 said:

In order to determine the monthly cost difference between renting and buy you need to take the monthly rental yield (minus monthly interest on cash savings) and compare it to the monthly interest costs (not capital repayment) of buying the equivalent property.

Average U.K. rental yield = 3.6% 

Average U.K. house price = £296,000

20% deposit = £59,200

Average 5 year fixed rate mortgage = 5%

Average 5 year fixed risk free cash saving rate = 4.5% 

For the average at the moment month one looks like this, cost of renting:

£888 (rental yield) minus £223 (cash yield on deposit in fixed rate account) = £665. Note that the £223 may be lower depending on individual tax situation. 

Versus cost of buying:

£986 (mortgage interest in first month on £236,800), remember we ignore the capital repayment so the actual cost of the mortgage will be higher than this 

So at current averages renting is cheaper per month by £321. Of course there is huge variation  and this is just an average, but it shows the dramatic impact interest rate changes have on the economics of buying vs renting. When the base rate was 0.1% things were skewed far more favourably to the buyer than the renter. 

Now the big uncertainty is what will happen to the value of the asset over time. Over longer periods the value will almost certainly increase and therefore so will the rent. So over time the economics get worse for renting and better for buying. Buying is almost always better in the long term for appreciating assets like houses. 

However with pretty much universal forecasts suggesting nominal house price falls in the next 12 to 18 months, or even if they stay flat, renting could be better than buying. Due to the now much higher cost of capital, your landlord may essentially be subsidising you to live in the property. Plus they will also be taking the hit of any capital value depreciation if indeed house prices do fall. 

This is a difficult situation for many people to get their head around as things have been so heavily skewed in recent years toward the house buyer rather than the renter. People always say ‘Rent is dead money’, well guess what interest payments to the bank are equally ‘dead money’ as rent! This is basically caused by the fact rent may have increased by 15% but the cost of capital has increased 300%, it’s totally distorted the market dynamics of the past 14 years. 

As with anything it is totally dependent on personal situation but the rent = bad, buying = good, has really been flipped on it’s head in a world where house prices are flat or declining and interest rates are higher. 

Thanks for the figures. Just trying to understand where the 223 in savings is coming from for the rent option but not applicable to the buy option?

It’s the deposit of 20%, if you buy that money is then tied up in the property. If you rent you still have that cash which you can earn interest on. 

Yes i just realised. It all sounds about right what you are saying. Mortgage rates up, savings rates up. Anyone with the dilemma to rent or buy right now can take note.

lookstraightahead

BV88 said:

In order to determine the monthly cost difference between renting and buy you need to take the monthly rental yield (minus monthly interest on cash savings) and compare it to the monthly interest costs (not capital repayment) of buying the equivalent property.

Average U.K. rental yield = 3.6% 

Average U.K. house price = £296,000

20% deposit = £59,200

Average 5 year fixed rate mortgage = 5%

Average 5 year fixed risk free cash saving rate = 4.5% 

For the average at the moment month one looks like this, cost of renting:

£888 (rental yield) minus £223 (cash yield on deposit in fixed rate account) = £665. Note that the £223 may be lower depending on individual tax situation. 

Versus cost of buying:

£986 (mortgage interest in first month on £236,800), remember we ignore the capital repayment so the actual cost of the mortgage will be higher than this 

So at current averages renting is cheaper per month by £321. Of course there is huge variation  and this is just an average, but it shows the dramatic impact interest rate changes have on the economics of buying vs renting. When the base rate was 0.1% things were skewed far more favourably to the buyer than the renter. 

Now the big uncertainty is what will happen to the value of the asset over time. Over longer periods the value will almost certainly increase and therefore so will the rent. So over time the economics get worse for renting and better for buying. Buying is almost always better in the long term for appreciating assets like houses. 

However with pretty much universal forecasts suggesting nominal house price falls in the next 12 to 18 months, or even if they stay flat, renting could be better than buying. Due to the now much higher cost of capital, your landlord may essentially be subsidising you to live in the property. Plus they will also be taking the hit of any capital value depreciation if indeed house prices do fall. 

This is a difficult situation for many people to get their head around as things have been so heavily skewed in recent years toward the house buyer rather than the renter. People always say ‘Rent is dead money’, well guess what interest payments to the bank are equally ‘dead money’ as rent! This is basically caused by the fact rent may have increased by 15% but the cost of capital has increased 300%, it’s totally distorted the market dynamics of the past 14 years. 

As with anything it is totally dependent on personal situation but the rent = bad, buying = good, has really been flipped on it’s head in a world where house prices are flat or declining and interest rates are higher. 

Thank you, enjoyed reading this. Much more eloquently put than I could ever do.

mi-key

As we are looking at 5 year terms. Renting for £800 a month for 5 years = £48,000. At the end of that 5 years you have nothing to show for it, that money has gone.... And that is discounting any rental increases, which will happen during that period.

You don't own any of the property. You haven't gained any equity ( which will happen over 5 years on a place you have bought )

On £100K of borrowing at 4.5% you will have paid off around £15K of the capital, plus the gain in equity from house price increases. 

JJR45

mi-key said:

As we are looking at 5 year terms. Renting for £800 a month for 5 years = £48,000. At the end of that 5 years you have nothing to show for it, that money has gone.... And that is discounting any rental increases, which will happen during that period.

You don't own any of the property. You haven't gained any equity ( which will happen over 5 years on a place you have bought )

On £100K of borrowing at 4.5% you will have paid off around £15K of the capital, plus the gain in equity from house price increases. 

But you can buy at any time when renting, so if prices are falling, it is a good Idea to wait for the right house at the right price.
You could get that £15k off in a matter of months with current house values.
It is not a case of doing one or the other, it is a case of doing what is most cost effective at the time.

BV88

mi-key said:

As we are looking at 5 year terms. Renting for £800 a month for 5 years = £48,000. At the end of that 5 years you have nothing to show for it, that money has gone.... And that is discounting any rental increases, which will happen during that period.

You don't own any of the property. You haven't gained any equity ( which will happen over 5 years on a place you have bought )

On £100K of borrowing at 4.5% you will have paid off around £15K of the capital, plus the gain in equity from house price increases. 

That is a flawed analysis that does not take into account the deposit or principal that the buyer is paying. You cannot simply ignore the cost of capital (interest rates).

If you took out a 5% fixed rate mortgage repayable over 25 years with a 20% deposit on a property worth 266,666 (a 3.6% yield to your 800 pcm), then by the end of year 5 you will have paid cumulative interest of 50,463 and cumulative principal payment of 24,359, leaving your mortgage balance at 188,970. So the buyer has 77,696 in equity. 

If the renter put the deposit into a fixed rate cash savings account paying 4.5%, plus the monthly excess principal payment that the buyer is paying down off the mortgage, over five years compounded the value would be 94,023. They would be 16,327 better off than the buyer at exactly the same monthly cost...

The determining factor then is does the house price appreciate over that five years by more than 16,327. My guess would be absolutely it does, so the buyer is still better off. But it is marginal and it requires that house prices rise, if they do not then the buyer could be worse off than the renter. Hence in the short term, at the moment, the cost of renting vs buying is absolutely not as cut and dry as it was previously. If prices really are going to fall in the short term over the next 12 to 18 months, the case for renting (even at the current elevated levels) is very strong, not simply because you could buy a cheaper house in the future but because the monthly cost is less.

People have stopped thinking this way because they have simply ignored the cost of capital over the last 14 years, understandably so as it cost basically nothing to borrow and you could earn basically nothing on your savings. That world has rapidly changed and the cost of capital is once again a critical factor.  

SprostonGreenHead

In addition to all the above financials of renting vs buying, one can’t easily assign a value to 

- doing what you like and can afford to change / update your living environment
- not having to worry about what pets you can and can’t keep
- assuming you can afford rate changes or are in fixed period, never having to worry about being given 2 months notice to move out, or your landlord putting the rent up.

lookstraightahead

SprostonGreenHead said:

In addition to all the above financials of renting vs buying, one can’t easily assign a value to 

- doing what you like and can afford to change / update your living environment
- not having to worry about what pets you can and can’t keep
- assuming you can afford rate changes or are in fixed period, never having to worry about being given 2 months notice to move out, or your landlord putting the rent up.

But also, if you rent:

you can move easily to a different area / for work / change 

You are free to purchase without being in a chain 

you have very little upkeep 

If you don't like your neighbours it's not a big deal

you can try before you buy

theoretically you don't have to move for ages, and rents are only increased once a year.

Presently you'll probably also get a great deal when you do buy.

Isn't there also some sort of pet ruling now as well?

JJR45

SprostonGreenHead said:

In addition to all the above financials of renting vs buying, one can’t easily assign a value to 

- doing what you like and can afford to change / update your living environment
- not having to worry about what pets you can and can’t keep
- assuming you can afford rate changes or are in fixed period, never having to worry about being given 2 months notice to move out, or your landlord putting the rent up.

Or

-Not having to worry or pay for the maintenance or anything going wrong. Boiler blows up, not your problem, water leak, not your problem.

-Not having to worry about if you can keep pets, as you can get properties that allow you.

-Not having to worry about interest rates going up, or if you can afford it after your 2 year fix rate from 2020 comes to an end.

It is very easy to put straw man arguments in place either way.

SprostonGreenHead

JJR45 said:

It is very easy to put straw man arguments in place either way.

A straw man requires one to be arguing with someone, and actively trying to convince them of something. I’m just making observations.

Of course there are pros and cons to both. I offer only my own perspective. For me, the non financial benefits of owning far outweigh those of renting. I’m only just in the process of buying my first home, well into middle age after a lifetime of renting. Just my 2p fwiw.