housing transition trap?

DullGreyGuy

docrob900 said:

GDB2222 said:

Most people sell and purchase at the same time. Is there a reason you can’t do that?

You are taking a risk, because house prices could rise while you are renting. There’s no way to invest the sale proceeds to keep pace with house prices. Apart from that, you will paying roughly 5% in rent, and you can only earn roughly half of that in interest, after tax. 

'Most people sell and purchase at the same time', but what if there isn't one to purchase at the time of selling? Or are you saying, 'wait till you find the right place, then sell'? My worry is that if I get an offer accepted, I might not be able to sell my own quickly enough that the new house wouldn't fall through because of the delay.

You normally do the two things at the same time, unless you are particularly picky or have unrealistic expectations on the value of your property for the majority of people it works. 

Even if you sell your house quickly or if you sell it in advance there is no guarantee that any given sale will definitely go through. There is always the risk that the sellers pull out, get a better offer etc or their purchase has a problem with a knock on effect to you. 

I agree its not really a trap, and assuming its a bad thing means you are guessing that the returns on the money sitting their are less than the impact of inflation on prices. Right now house prices dont seem to be moving up quickly, though there will be some regional exceptions, indeed in our area prices are down not up. 

Ideally you be using your income to pay for the rent, given you won't be having a mortgage to pay, so it won't be eroding your savings. 

Albermarle

You should also take into account that in some regions the demand for decent rental properties outstrips the supply.
You may well have to commit for minimum 12 months and even pay up front. Plus timing the sale of your house and the start of the rental will be difficult.

GDB2222

The purpose of selling your home is not to sell it. The purpose is to move to another place. So, don’t concentrate on selling, but focus on moving. 

Grumpy_chap

Why is the OP looking to sell, rent and then buy?

Regardless of reason, the OP can work out the effective loss of value that might be experienced.

Say the OP sells their house and pays off the remaining mortgage and hopes to buy next house cash.

We do not have figures, so assume the current house will sell for £1m, clearing mortgage £500k leaving £500k to buy the next house.

OP might make (after tax) 2% interest on that £500k invested, so £10k per year.
The OP is renting a property, worth £500k at rental around 5%, so £25k per year.
The default is then that the OP is depreciating the capital at a rate of £15k per year.

The risk is that properties increase in value, say 5% per year, that's £25k per year.
It makes the effective loss (against housing market) of £40k per year.
Of course, house prices may fall, in which case, this risk becomes an opportunity.

The only further mitigation that the OP has against that £40k per year impact is to "invest" the £500k so that the after tax interest (or dividend or other yield) is higher.  Limited opportunities here given the desire to keep the funds liquid.

The OP can substitute their own figures and assumptions into the above to get a "for them" take on the £40k per year potential loss of capital.

Alternatively, the OP can simply sell and buy on one day as many people do.

Hoenir

docrob900 said:

No, nothing like that. If I sell, and don't have a new place to buy quickly, I still need to live somewhere. That costs money, and reduces the amount I then have to buy a new place when one becomes available. That gap may be months or years, eroding the money I get from selling the house. That's the trap and the dilemma.

Continue to save. That's a personal choice. 

SiliconChip

user1977 said:

What you do is anticipate that possibility and budget for it accordingly.

Exactly this. I did it when I sold my previous house in Scotland in 2014, rented for about 15 months, and bought my current house in England. Yes, some of the capital is used up in rent payments, but you also need to factor in that you're not making any mortgage payments in that time and you're also earning interest on the capital. Just do your sums and see if it works for you, if it does go ahead (although bear in mind that finding a suitable rental property may not be as easy as you think), if it doesn't then rethink your plan.

Bigphil1474

OP, have you not moved house before? Selling happens first. [In England] You advertise your house, someone likes it, puts an acceptable offer in, and you are then sold subject to contract. Next step is that you find a house you want, offer, price agreed, they are then sold subject to contract. If they then buy an empty property, that would be your completed chain, otherwise the next person has to find another property, and so on. You all sort the paperwork and move at the same time. No renting required. Sometimes you can be unlucky and someone pulls out, but most people in the chain understand it takes time. It can take a couple of months or more. Typically 3-4 months, but can get complicated and take longer. Why waste money renting? As above, you might not even get a suitable rental. 

jimbog

grumpy_codger said:

docrob900 said:

No, nothing like that. If I sell, and don't have a new place to buy quickly, I still need to live somewhere. That costs money, and reduces the amount I then have to buy a new place when one becomes available. That gap may be months or years, eroding the money I get from selling the house. That's the trap and the dilemma.

If you spend your cash on a house and own it, you in fact pay a hidden 'rent' - in form of the interest that you could have earned if you had that cash in a savings account.

Counteracted by ‘hidden inflation’ that will depreciate that money sitting in the bank?

bobster2

docrob900 said:

I’m facing what ChatGPT calls a 'capital-preserving housing transition dilemma': I need to sell my current home and pay off the mortgage completely, to fund a new one that I hope to pay cash for, but I’m concerned that renting in the interim, whilst I find the right place, will erode the equity I’ve built. I can't be the only one to experience this; what do people do in the transition period?

As others have pointed out - most people aim to not have a transition period - and they complete their sale and purchase on the same day.

Find a buyer for your home - then find a place you want to buy - agree completion date and you have a "capital-preserviing house transition".

housebuyer143

docrob900 said:

born_again said:

docrob900 said:

No, nothing like that. If I sell, and don't have a new place to buy quickly, I still need to live somewhere. That costs money, and reduces the amount I then have to buy a new place when one becomes available. That gap may be months or years, eroding the money I get from selling the house. That's the trap and the dilemma.

You do what millions of people do each year, they sell theirs, buy the new one. It creates a chain & sale & purchase all go through together.
So you move out & move to new house on same day.

Just shows how poor the likes of ChatGPT are, if it does not understand how most house sales/purchases are handled in the UK.


capital-preserving housing transition dilemma 🤣

They do, of course, but my question has been about what happens in the gap between selling and buying if the selling stage takes a lot longer than anticipated. GPT did understand how house sales work; but it also understood the question I was asking.

You pay rent instead of a mortgage. You are saving money on your mortgage and instead using that to pay rent. You get interest on your money, thus further reducing money spent on rent. 
Its not really a dilemma unless you rent for so long that house prices rise loads.