House price crash

[ymu]

Let's take that £100k house with £90k owing on it.

Price rises to £130k over 5 years. Capital gains of 90% leaves you with a gain of £3k, and a £13k deposit on your next house.

No capital gains tax, as is currently the case here with first homes, leaves you with a gain of £40k over 5 years and a £50k deposit on your next house, 5 times as much as you had to put down 5 years earlier. That's just obscene.

 

[cesare]

Let's take that £100k house with £90k owing on it.

Price rises to £130k over 5 years. Capital gains of 90% leaves you with a gain of £3k, and a £13k deposit on your next house.

No capital gains tax, as is currently the case here with first homes, leaves you with a gain of £40k over 5 years and a £50k deposit on your next house, 5 times as much as you had to put down 5 years earlier. That's just obscene.

You haven't factored in the costs of buying, selling and moving.

 

[ymu]

You haven't factored in the costs of buying, selling and moving.

Not very different to renting when you consider paying for credit checks, lost deposits, dodgy and/or prepay meters, the effect of being a home-owner on your credit rating. Plus the costs of moving tend to be incurred more often by renters because of the fundamental lack of security offered by UK housing law.

 

[Chester Copperpot]

Love the tag on this thread.

 

[kabbes]

You haven't factored in the costs of buying, selling and moving.

You've also double-counted the deposit (how can a rise of £30k lead to a £40k profit?). And most crucially, you haven't factored into the equation what else you could have done with your £10k deposit. If you are willing to invest in leveraged vehicles then there are lots of ways of doing it other than buying a house.

See? Not comparing like with like.

 

[kabbes]

Not very different to renting when you consider paying for credit checks, lost deposits, dodgy and/or prepay meters, the effect of being a home-owner on your credit rating. Plus the costs of moving tend to be incurred more often by renters because of the fundamental lack of security offered by UK housing law.

That's nonsense on stilts. Renting is actually cheaper on a day-to-day basis, on average, than is buying the equivalent house. Rental yields are typically lower than the cost of capital (I.e. Mortgage rates) plus maintenance.

 

[ymu]

You've also double-counted the deposit (how can a rise of £30k lead to a £40k profit?). And most crucially, you haven't factored into the equation what else you could have done with your £10k deposit. If you are willing to invest in leveraged vehicles then there are lots of ways of doing it other than buying a house.

See? Not comparing like with like.

Bad edit - sorry. You've made £30k, and have quadrupled your deposit in 5 years.

 

[FridgeMagnet]

That's nonsense on stilts. Renting is actually cheaper on a day-to-day basis, on average, than is buying the equivalent house. Rental yields are typically lower than the cost of capital (I.e. Mortgage rates) plus maintenance.

In this "massive capital gains tax" hypothetical perhaps. Otherwise no way; I'm very aware that I'd have been far better buying the flat I am living in, had I been in a position to do so.

 

[ymu]

That's nonsense on stilts. Renting is actually cheaper on a day-to-day basis, on average, than is buying the equivalent house. Rental yields are typically lower than the cost of capital (I.e. Mortgage rates) plus maintenance.

That's not necessarily true. I bought in 1997 because I was sick of shared houses and the cheapest one-bed flat I could find to rent was £550/month. I got a mortgage on a one-bed flat for £280/month.

Regardless, you're surely not claiming that the cost of home ownership is equivalent to inflation x house price, each and every year of ownership? That mortgages go up by inflation in the same way that rents do? Utter nonsense.

 

[kabbes]

In this "massive capital gains tax" hypothetical perhaps. Otherwise no way; why would people rent stuff out?

Speaking as somebody who bought a place to rent out: for a number of reasons. Because the total yield is the key, not the running yield. Because it's a hedge against house prices running away from me before I'm ready to trade up. Because I'm not a bank so I can't make guaranteed mortgage rates on an investment, so I need alternative options.

Those are a few off the top of my head.

But believe me, running yield on a rental property is generally less than the cost of capital+maintenance costs. (Admittedly not at the moment with vase rates at 0.5%, but we live in abnormal times).

 

[kabbes]

That's not necessarily true. I bought in 1997 because I was sick of shared houses and the cheapest one-bed flat I could find to rent was £550/month. I got a mortgage on a one-bed flat for £280/month.

Regardless, you're surely not claiming that the cost of home ownership is equivalent to inflation x house price, each and every year of ownership? That mortgages go up by inflation in the same way that rents do? Utter nonsense.

You're still not comparing like with like. You have to take the capital you would have invested in the house plus the excess of the mortgage rate iver the running yield and look at the alternative return you could have received on this. This offsets against the inflation on the rent. The offset may or may not be bigger than the total inflation dependingon prevailing economic conditions.

If I had a spreadsheet in front of me rather than a phone then I'd go through the calculations. But if you use the example I posted earlier, you'll see a realistic example where you could do better by renting than by buying.

 

[ymu]

You're still not comparing like with like. You have to take the capital you would have invested in the house plus the excess of the mortgage rate iver the running yield and look at the alternative return you could have received on this. This offsets against the inflation on the rent. The offset may or may not be bigger than the total inflation dependingon prevailing economic conditions.

If I had a spreadsheet in front of me rather than a phone then I'd go through the calculations. But if you use the example I posted earlier, you'll see a realistic example where you could do better by renting than by buying.

Right. So in my example with house price inflation running at approx 5%, I managed to quadruple my £10k deposit in 5 years. If I don't buy the house, how are you going to invest my £10k for me so that I'm just as well off compared to renting a similar place?

 

[kabbes]

Right. So in my example with house price inflation running at approx 5%, I managed to quadruple my £10k deposit in 5 years. If I don't buy the house, how are you going to invest my £10k for me so that I'm just as well off compared to renting a similar place?

Leveraged investment trust that invests in the stockmarket. If the leverage ratio is the same and the stockmarket outperforms the property market then you'll have done better with the alternative investment.

Buying property is a risk. Especially on a leveraged basis (I.e. With a mortgage). There are alternative ways of taking risky investments.

The reason for buying a house is that it is a matched asset against the liability of needing somewhere to live. But that doesn't make it the only possible way of using the same money.

 

[ymu]

Leveraged investment trust that invests in the stockmarket. If the leverage ratio is the same and the stockmarket outperforms the property market then you'll have done better with the alternative investment.

Buying property is a risk. Especially on a leveraged basis (I.e. With a mortgage). There are alternative ways of taking risky investments.

The reason for buying a house is that it is a matched asset against the liability of needing somewhere to live. But that doesn't make it the only possible way of using the same money.

You can quadruple my savings in 5 years? Even Madoff didn't promise that kind of return.

 

[Giles]

I think we are still due for more price falls, alhough probably not on the scale of what's happened in Ireland.

Although ..... you never know, given the ongoing financial turmoil. If the UK really runs out of money and has to whack interest rates up, all bets would be off.

We sold some of our long-held rental places in 2007 to early 2008, and by doing so used the profit (after paying around £100K in CGT) to pay down the loans on the remaining ones, so I am not too worried about further falls.

Giles..

 

[FridgeMagnet]

Speaking as somebody who bought a place to rent out: for a number of reasons. Because the total yield is the key, not the running yield. Because it's a hedge against house prices running away from me before I'm ready to trade up. Because I'm not a bank so I can't make guaranteed mortgage rates on an investment, so I need alternative options.

Those are a few off the top of my head.

But believe me, running yield on a rental property is generally less than the cost of capital+maintenance costs. (Admittedly not at the moment with vase rates at 0.5%, but we live in abnormal times).

I did change the "why" bit after the fact as it's a bit general. But you can't just lump in capital required with things like maintenance - after all you get that part back, or can do, and can certainly borrow based on it.

In my present situation I'm paying at least £200pcm more than a reasonable term mortgage would be for the place I'm in, I generously estimate, and my rent is not at all atypical for the area. Even excluding the annoyances and insecurities of renting, if I'd had been in a position to buy I would be considerably better off financially, if you include assets, which really you have to.

 

[pboi]

the fundamental shortage of housing isnt going anywhere. the 7x multiplier isnt going anywhere.

more shared equity schemes coming about?> I reckon

 

[pboi]

also need a tax on second + homers

 

[ska invita]

People certainly have been saying that house prices were stupid and unsustainable and just had to crash soon for as long as I can remember - at least ten years - and they were right that it was stupid then, and it's just got worse since. However I think the property market really is going to be the last possible aspect of neo liberal debt society economics blah to go partly because there is simply too much political motivation to keep it that way. This is also why it will never be on the platform of a main party to cut or restrict property prices, and why you pretty much never see the idea in the mainstream press.

is it really possible for the state to maintain prices in the housing market as oposed to other aspects of the economy? how exactly?

Here in Ireland the market peaked in 2006 and has been crashing since. Prices are down around 45%, and many people believe falls of another 20-30% are probable. I know many people who were caught up in the property bubble here, people leveraged themselves to buy over-priced apartments, forgetting property prices can go down as well as up. there are many people in deap shit, a good mate of mine is in 100k negative equity already on the 2 bedroomed flat she bought in 2007. I was glad every single day that we resisted buying, hopefully in a year or two we will be able to buy somewhere very cheap and not be stuck in mortgage bondage for the next thirty years.

thanks for that - i had no idea that was the case. i still feel there is every chance that could happen here - we are in a state of limbo here in britain until the next government kicks in, but once it does and cuts kick in and taxes go up...

 

[Chairman Meow]

http://www.guardian.co.uk/commentisfree/2010/apr/29/dangerous-property-boom-divisive

 

[Kanda]

I bought a year ago. (well, completed in November but the price was as of a year ago)

 

[Chairman Meow]

http://online.wsj.com/article/SB10001424052748703357104575045253856927146.html?mod=WSJEUROPE_newsreel_personalFinance

 

[trevhagl]

3 things baffle me why there hasn't been a bigger crash already, all from a landlord point of view (I'm not a landlord but if i was....)

1)The govts ridiculous idea of paying dole claimants the rent money in their hands (which in most cases instantly converts into Wetherspoons money)
2)The govts nazi welfare 'reforms' which more or less rule out any landlord with any sense letting to people on the dole, because sooner or later they're gonna have their money stopped
3) There are no jobs that pay anything more than the minimum wage, meaning people will almost certainly default on the rent

Who the fuck would buy a house to rent out under those circs?

 

[kabbes]

I have attached a simple little spreadsheet that allows you to examine the inter-relation of the parameters that make up the rent vs. buy equation.

Running through them, these are:

Buying Parameters
* Initial Price of house (shown at 200k)
* Initial Deposit (shown at 10%)
* Mortgage interest (shown at 6%)
* "Receive", which is the money available for investment that year. This has an initial value (shown at 10,800, i.e. the cost of the interest in year 1) and an inflation rate (shown at 3%)
* House price inflation (shown at 2%)

Rental Parameters
* Initial rental yield (shown at 4%)
* Rent increase (shown at 3%)
* Interest earned on alternative investment (shown at 8%)

The columns from left to right are:

* Year
Buying
* House value at start of year
* Mortgage at start of year
* Interest paid on mortgage
* "Receive", i.e. income that will be used to pay interest and reduce mortgage
* Mortgage at end of year
* House value at end of year
* "Running Value", i.e. the value of the capital at year-end.

Renting
* Savings at start of year -- initially this is equal to the deposit
* "Receive", i.e. income that will be used to pay rent and invest. This is same as the "Receive" under the "Buying" option.
* Rent
* Interest received on savings
* Savings at year-end.

It's easy to come up with perfectly reasonable scenarios under which you are better off after 5 years if you buy. And it's easy to come up with perfectly reasonable scenarios under which you are better off after 5 years if you rent.

The rental option has an apparent disadvantage, in that the investment under the purchase option is geared. That means that with just a 10% deposit, for every 1% the house increases in value, the capital value increases by 10%.

This increases the risk of investment though. To compare like with like, it really should be compared with a similar geared investment under the rental option. I'm throwing this up as a caution now, because it explains why a 10% growth in savings is so poor compared with a 5% increase in house prices -- you aren't really comparing like with like.

By playing with the numbers, you'll see that although the homeowner stands to gain much more if house price inflation is high, he also stands to make giant losses if house price inflation is negative.

So sure, if we envisage a world in which house prices always zoom up then it appears that the heavily geared homeowner is always much better off. But investments always come with a risk. This thread is a prime example of that risk -- lots of people think that house prices will reduce. And the homeowner is choosing to buy into that risk and choosing to do so with a leverage most businesses would run a mile from. It's hardly a surprise that in a high inflation environment they do better than the renter. But they get the downside risk along with that upside.

 

[cesare]

Thanks for doing that spreadsheet kabbes. (Also, I hadn't realised that Office documents could be uploaded as attachments, that's smart).

 

[kabbes]

(Also, I hadn't realised that Office documents could be uploaded as attachments, that's smart).

Not quite as smart as it first appears, because it won't take xls files bigger than 19.5kb. Even a totally blank single sheet is 16kb! I couldn't make anything meaningful smaller than 25kb. So in practice it isn't any use.

But the fact you can zip them up and attach them is useful. Workbooks get compacted by about 75% when you zip them, so hurrah.

 

[kabbes]

I haven't included moving costs in that spreadsheet, incidentally. At the very least, you could add the cost of stamp duty to the initial savings for a renter. And an extra £1,000 at least to cover the additional solicitor, mortgage admin and surveyor fees versus rental fees.

 

[cesare]

Not quite as it first appears, because it won't take xls files bigger than 19.5kb. Even a totally blank single sheet is 16kb! I couldn't make anything meaningful smaller than 25kb. So in practice it isn't any use.

But the fact you can zip them up and attach them is useful. Workbooks get compacted by about 75% when you zip them, so hurrah.

Tis a clever little feature, sure enough.

 

[kabbes]

In fact, bollocks to it: here's the same sheet allowing for initial costs. It's the "initial" figure above the "Savings y/s" column. It's set initially to be stamp duty + 1,500.

Some of the initial inputs are not as they were originally, owing to me messing around with it, so beware if you are following the above description.

 

[shaman75]

I can't really see how prices will crash. I just think they will keep coming up with new and inventive ways to get people to buy houses.

The only way houses will become more affordable is if prices stall and inflation/ wage increases close the gap. But as long as people can borrow the money, they will keep offering silly prices.