We've Decided To Buy A House.

[OMG]

I don't post here much but have been visiting regularly since 2006. I'm now in the process of buying a house so I thought I'd share an edited version of our story. I don't include this all to in some way justify our decision as I'm purchasing with my with eyes wide open; I just thought that as per the title of this board it might be of anecdotal interest to some.

Firstly, on financials.

STR 2007, mostly based on the arguments found here. Everyone we knew told us not to what with the house being in a 'nice' leafy part of East London, near Stratford and on the tube, bound to rise in value meteorically due to the Olympics (interestingly prices seem to have remained static looking at similar properties today). Anyway, renting it out from 2006-2007 was a royal PITA especially with us now living on the other side of the country and with 100% of people telling us not to sell we figured that selling was the right move.

We took a 6 figure chunk of cash but not enough to buy outright and there was no way I was going to buy back then. Had a number of near heart attacks 2008/2009 worrying about the money that we had stashed in multiple accounts. Pulled out of Icesave before it got hairy. Bought loads of gold at $700 p/oz sold it all immediately (doh) soon after as I realised that I couldn't afford to lose it, instead stashed it into a Northern Rock bond after UK Gov bailed it out. Maxed out (stocks and shares) ISAs, premium bonds etc, didn't touch stock market except through ISAs. That worked out OK; didn't touch ETFs, can't be bothered with day trading so bought things like funds or Lloyds at bottom and BP after the Mexico thing (though sold soon after as holding BP stock didn't sit well with me). Bought physical shiny stuff too as well as investing in forestry related qualifications and directly useful hand tools for woodworking as it's an area that interests me.

5 years on, taking into account the physical assets that we own I'd say the pot has reduced by 20% but we've spent more of it than that including using it to fund rent for a least 2 of those 5 years whilst I was getting my business settled.

In hindsight I could have micro-managed the money thing a whole lot less and trusted my initial instincts. Overall I've no regrets, though.

On Renting.

Renting has been good to us. It has enabled us to move around the country (with 3 school age kids) with low transactional costs (except to my poor back!) per move. Initially we lived semi-rurally, in a couple of big houses. Then, as other global issues such as resource depletion made themselves known to me initially through some of the more TFH post on here, we tried out some slightly more out of the box options.

Firstly a community set-up. Didn't work out on a number of levels. Then middle of no-where on a hilltop in Wales. Loved it, even when snowed in for 2 weeks winter 2010 (was glad of our TFH food stash I can tell you) but needed to drive everywhere and growing season noticeably shorter. Tried to set-up a housing co-op, but that didn't work out. Then converted our pensions into a woodland and moved near that. Have been renting a house worth 5x our purchasing pot since then.

This year we got *really* fed up of renting. No, we got fed up of having no security of tenure. We got fed up of not being motivated to start a garden that we might have to leave soon. Of making compost piles that we never had the time to use. We also wanted to be somewhere we could grow old and not need to rely on vehicles both for us, or ferrying the kids everywhere.

So, the start of this year we started looking seriously at buying in the local town.

On the market.

Talking with EAs and based on our own research the market has definitely picked up here (North Shropshire) for more interesting properties (big gardens, outbuildings etc) going between £200k - £300k (our budget). Properties that have been on for 2 years are now being sold and similar properties that are coming on are shifting. Stuff under £200k is staying on the shelf, unless it's quirky, especially estate houses.

We're buying a house in the middle of a small market town with good amenities including branch line train station with connections to decent main lines, good schools, police and fire station as well as local shops and a seemingly thriving small industrial estate. The town is surrounded for miles by quality agri land and has a canal network within 5 miles. It's also not touristy, the infrastructure is there to support the locals.

The house has been on for 2 years. It went to auction recently and didn't sell, that's when we went to look at it. It's south facing, has an excellent size 3/4 acre south facing garden and being custom built by the current vendor in the 1970s, seems of good quality construction and well maintained. We're getting it for 55% of the price it was 'worth' in 2010 (which we could never have afforded). They wanted offers over an amount, we went in at 5% under. They told us to bog off and we walked. 3 weeks later they came back to us and we're now proceeding at that price.

Due to us buying a building plot nearby - another plan, now discarded due to the hassle factor and realising that we'd have to take a mortgage out to fund the build - a lot of our cash is currently tied up until we sell it (after us getting residential PP, which we will according to a positive pre-panning enquiry). So, we've scrabbled around selling everything not tied down and have managed to make a 25% deposit. I'm self employed with 5 years accounts but with decent credit (except being unfurnished tenant and moving lots). Incidentally I'm really glad that I kept a credit card account going, purposely keeping a balance on it and paying some interest each month, that's definitely helped with our credit score.

Mortgage was surprisingly easy even though we're self employed. Given we've got a lump of around 50% of the mortgage that we'll want to use to pay it down when the land is sold we've opted for an offset. The remaining balance will equate to 2x earnings. Interest rate is fixed at 2.39% for 2 years then onto SVR. Payments at current SVR and for the full loan amount equal the rent we're currently paying.

So, that's where we're at. I fully expect the house to continue depreciating in value but it genuinely doesn't concern me; what's more important is that we'll have that longer term security of location and we can start putting some roots down, literally. Going back to having a mortgage is obviously a concern given my negative expectations for 'the economy' (read: infinite growth paradigm being unmasked as the ponzi scheme that it is) but I've decided that I can't wait any longer.

Good luck all and sorry about the essay, I got carried away a bit.

[Keep Walking]

Good luck & best wishes to you & family

[GloomMonger]

Well done OMG, great post. Apart from selling your gold you appear to have put a lot of thought into your decision, I hope we can join you soon. Good luck.

[24gray24]

I cannot understand why you would do that, knowing the mortgage rates are going to double at some point and the house prices halve.

House prices lost 90% of their value in the 1929 crash. 90%.

[getknk]

Great post mate..

My opinion is if the House is worth the money go for it

2.39% for 2 years is very good rate.

[pdip2k]

House prices lost 90% of their value in the 1929 crash. 90%.

Don't think the government will allow this to happen because they know country will be doomed if it does. They will do everything possible until there last breath to prop up the market. So far the interest rate is concerned they will keep it low as long as possilbe just like Japan is doing.

Was holding back for the past 5-6 years hoping the prices will fall but now it seems so obvious that it won't happen. I think the price will remain the same rather than fall. Will it really make a huge difference if the price falls by 1 or 2 percent in the coming years? Sick and tired of paying rent now.

[Bruce Banner]

Sick and tired of paying rent now.

Then buy now and pay mortgage interest instead.

Personally, I expect house prices to fall 30% to 40% over the next few years, so I'll wait.

[Si1]

Don't think the government will allow this to happen because they know country will be doomed if it does.

oh purlease. why?

They will do everything possible until there last breath to prop up the market. So far the interest rate is concerned they will keep it low as long as possilbe just like Japan is doing.

Was holding back for the past 5-6 years hoping the prices will fall but now it seems so obvious that it won't happen. I think the price will remain the same rather than fall. Will it really make a huge difference if the price falls by 1 or 2 percent in the coming years? Sick and tired of paying rent now.

so despite a burgeoning currency crisis across europe, trade-protectionism (especially including energy) across the world, a diminishing US power block and growing strength of China, nuclear and chemical weapons proliferation and continuing oligarchies across the business world and a global unemployment epidemic...

... the major risk to the UK economy is that house prices might become affordable...!

what, precisely, are you smoking?

Edited May 2, 2012 by Si1

[Si1]

sick and tired of paying rent?

well no, but I AM sick and tired of reading financially and numerically illiterate nonsense from the renting-is-dead-money braindead brigade

[Son of Taeper]

sick and tired of paying rent?

well no, but I AM sick and tired of reading financially and numerically illiterate nonsense from the renting-is-dead-money braindead brigade

But renting is dead money.

There is no way it can ever be anything else.

With property, sure, the value could go up or down, but even if it went down to £0:00 at the end of your 25 year ball and chain, you should own it outright. That means you get the next 25 - 50 years of your life living for free.

The renter on the other hand will spend the next 25 - 50 years continuing to fork out. Not too bad if that's the way they want to live, but when they retire, they still need to find £10, 000 a year when they have no income.

What you seem to be saying here is that you will never buy a house.

I'd like to see some financial genius from you that proves that is a wise move.

[Georgia O'Keeffe]

But renting is dead money.

There is no way it can ever be anything else.

With property, sure, the value could go up or down, but even if it went down to £0:00 at the end of your 25 year ball and chain, you should own it outright. That means you get the next 25 - 50 years of your life living for free.

The renter on the other hand will spend the next 25 - 50 years continuing to fork out. Not too bad if that's the way they want to live, but when they retire, they still need to find £10, 000 a year when they have no income.

What you seem to be saying here is that you will never buy a house.

I'd like to see some financial genius from you that proves that is a wise move.

You now own the house after saving/paying the mortgage (say 500K ), you now have 500K tied up in the asset that cannot be alternatively invested, this is also dead money from an alternative investment perspective, it is stuck in the house with the yield being you living there the imputed rent. If you want to release that Value to invest elsewhere you will have pay interest or rent

Identically the renter has at the same time saved that 500K which can be invested elsewhere that may or may not create an income/yield that more than covers the rent.

All investments have opportunity cost, the inability of you being able to recognise this is simply sloppy thinking and not understanding the mechanism, Of course this ignores the vagaries of taxation which at any time can and will change to favour one form of investment over another but the fundamental is renting is no more or less dead money than owning all costs being equal however at any time the investment performance of one will return greater than the other but this is irrelevant to your lack of understanding of opportunity cost and the opportunity you have foregone having dead alternative investment capital tied up in the property if it underperforms other assets.

Which has been better in the past is irrelevant, which is better right now and in the future wont be known until the future has happened.

To be fair youve only been a member for six years so have probably missed Bruces 4 billion posts highlighting this physical financial reality

Edited May 3, 2012 by Georgia O'Keeffe

[worried1]

But renting is dead money.

There is no way it can ever be anything else.

With property, sure, the value could go up or down, but even if it went down to £0:00 at the end of your 25 year ball and chain, you should own it outright. That means you get the next 25 - 50 years of your life living for free.

The renter on the other hand will spend the next 25 - 50 years continuing to fork out. Not too bad if that's the way they want to live, but when they retire, they still need to find £10, 000 a year when they have no income.

What you seem to be saying here is that you will never buy a house.

I'd like to see some financial genius from you that proves that is a wise move.

It all depends on how much the interest on the mortgage is compared to renting an equivalent place, and how much you expect house prices to increase compared to other investments.

Say I could rent a flat for £1,000 per month or buy it for £1,500 per month (£1k interest, £500 repayment). If I rent, I'd pay out £300k in dead money to a landlord every month, if I buy I'd pay out the same in dead money to a bank, but I'd also 'invest' £150k in buying the flat.

If I rented and invested that £150k over the period, I could actually end up with a sum worth more than the flat would have been worth, or at the very least use the money to pay the rent for the next few years.

Of course, if interest rates stay this low in the long term buying becomes more attractive.

[Son of Taeper]

75% profit on the sale of my first house in 5 years

45% profit on the sale of my second property also in 5 years

30% profit on the sale of my third property, again in 5 years.

(this was sold at a peak and it was obvious the market was headed down so I rented for a year.)

My current property was a downsize to a property with planning potential. Purchased almost at the bottom of the market, I used 70K residual from my previous property plus an extra 40K to extend it up back and to the front.

Current valuation is £550,000 so we are looking at a round 25% profit on that (also in just over 5 years).

That is in total less than 25 years.

How much a month would I need to invest in order to gain £500,000 in 21 years (I say £500,000 as the loan on this one is all but paid off)?

[worried1]

75% profit on the sale of my first house in 5 years

45% profit on the sale of my second property also in 5 years

30% profit on the sale of my third property, again in 5 years.

(this was sold at a peak and it was obvious the market was headed down so I rented for a year.)

My current property was a downsize to a property with planning potential. Purchased almost at the bottom of the market, I used 70K residual from my previous property plus an extra 40K to extend it up back and to the front.

Current valuation is £550,000 so we are looking at a round 25% profit on that (also in just over 5 years).

That is in total less than 25 years.

How much a month would I need to invest in order to gain £500,000 in 21 years (I say £500,000 as the loan on this one is all but paid off)?

I think most on this site would agree that the past 25 years (and the past 17-18 in particular) have been quite unusual for sustained house price growth. On top of that, you have obviously done well on individual buying and selling decisions.

If similar growth happens over the next 25 years, I agree that there is likely to be nothing that could match houses as an investment. I personally don't think that will happen and I am not nearly as bearish on house prices as most here.

[Rozza]

Well As any easy way of working it out

Taking the maximum cash amount allowed for a couple £11,280 to invest in an ISA and use average saving interest rates for the last 21 years Taken from here

After 21 years you would have £503,666.72 but for Zero risk

HOWEVER

If someone was paying attention to their saving account interest rates they would always beat the average savings rate by at least 0.5% (e.g nationwide currently pay 4.25% which smashes the 2.75% average) And in this case they would have £536,003.15

The difference comes when we go further in time, assuming you pay the mortgage for the full 25 years we can speculate your investment may go up, down or stay the same (I would currently speculate down)

The savings example however with no interest rate rise will definately hit a minimum of £622,571.99 in the same period

*The rates used are gross, its too hard to work out the net effect,but thats why i have said you can beat it by at least 0.5% personally for the last few years i have beaten the average by at least 2% which would more than take care of the gross/net aspect

Edit to add, im not saying this means buying or renting is better, 21 years ago you could have bought a house for peanuts so it would be daft for me to say otherwise, im simply showing that 500k over 21 years is achievable, Also edited because i pasted the interest rates in the wrong cells in excel originally thus making the figures wrong, and i fully understand that 21 years ago saving almost 1000 a month was far from possible for most people

Edited May 3, 2012 by Rozza

[worried1]

Well As any easy way of working it out

Taking the maximum cash amount allowed for a couple £11,280 to invest in an ISA and use average saving interest rates for the last 21 years Taken from here

After 21 years you would have £441,912.59 which is 60k a bit off your £500k but for Zero risk

It is interesting to see how quickly that can mount up with zero risk cash accounts, but £11,280 per year is almost £250k and I guess Son of Taeper will not have had to invest that much in the capital repayment element of his mortgage over the years. £1k per month + interest would have been a hell of a mortgage in 1990!

[Rozza]

Totally agree, doubt many mortgages were anywhere near that figure in 1990

Also as you may have spotted the numbers are acutally larger than i originally listed due to a copy paste error of mine when working it out in excel

But yes it is interesting, in fact if people sat down and worked it all out for themselves more people would probably save more!!

Also interestingly, I took Son of Taepars figures and worked backwards, which causes the following

Current house £550,000.00

Take off 25% leaves £412,500.00

Take off 30% leaves £288,750.00

Take off 45% leaves £158,812.50

Take off 75% leaves £39,703.13

Putting the mortgage payment at around £200 a month... I would LOVE that monthly rent/mortgage payment!!

Edited May 3, 2012 by Rozza

[Son of Taeper]

True, it is effectively dead money, that cannot be invested without paying interest, but you now have £1,500 spare each month as you no longer have the mortgage, where the guy paying rent only has £500 spare each month. Multiply that by another 20 years and the home owner is sitting very well indeed.

To be fair youve only been a member for six years so have probably missed Bruces 4 billion posts highlighting this physical financial reality

Son of Taeper Joined:18-July 06

Bruce Banner Joined:15-December 07

Georgia O'Keeffe Joined:18-March 09

Edited May 3, 2012 by Son of Taeper

[Son of Taeper]

It all depends on how much the interest on the mortgage is compared to renting an equivalent place, and how much you expect house prices to increase compared to other investments.

Say I could rent a flat for £1,000 per month or buy it for £1,500 per month (£1k interest, £500 repayment). If I rent, I'd pay out £300k in dead money to a landlord every month, if I buy I'd pay out the same in dead money to a bank, but I'd also 'invest' £150k in buying the flat.

If I rented and invested that £150k over the period, I could actually end up with a sum worth more than the flat would have been worth, or at the very least use the money to pay the rent for the next few years.

Of course, if interest rates stay this low in the long term buying becomes more attractive.

Not so as you are only investing £500 the first month, not a lump sum of £150,000

Worse case scenario on both sides of the argument, are that both the house and the alternative investment are worth zero at the end of a 25 year term. The property investor still has a roof over his head though.

[Georgia O'Keeffe]

on second thoughts its not worth the fonts

Edited May 3, 2012 by Georgia O'Keeffe

[Son of Taeper]

It is interesting to see how quickly that can mount up with zero risk cash accounts, but £11,280 per year is almost £250k and I guess Son of Taeper will not have had to invest that much in the capital repayment element of his mortgage over the years. £1k per month + interest would have been a hell of a mortgage in 1990!

The ISA was not around when I got my first mortgage but we did have Miras

Miras ended the year after Isa was launched.

To be absolutely fair, we would have to compare joint Miras with joint Isa which cannot be done as joint Miras ended in 1988.

Look at that spike of people rushing to buy before the deadline -

http://www.housepricecrash.co.uk/graphs-nationwide-percentage-change.php

We did have some hefty interest rates for a while though which would have benefited a saver.

I'm trying to paint a fair picture here of how it was at a particular period, not saying it would work for the next 20 -25 years as no-one can answer that quest with certainty.

[Si1]

on second thoughts its not worth the fonts

+1

[Bruce Banner]

You now own the house after saving/paying the mortgage (say 500K ), you now have 500K tied up in the asset that cannot be alternatively invested, this is also dead money from an alternative investment perspective, it is stuck in the house with the yield being you living there the imputed rent. If you want to release that Value to invest elsewhere you will have pay interest or rent

Identically the renter has at the same time saved that 500K which can be invested elsewhere that may or may not create an income/yield that more than covers the rent.

All investments have opportunity cost, the inability of you being able to recognise this is simply sloppy thinking and not understanding the mechanism, Of course this ignores the vagaries of taxation which at any time can and will change to favour one form of investment over another but the fundamental is renting is no more or less dead money than owning all costs being equal however at any time the investment performance of one will return greater than the other but this is irrelevant to your lack of understanding of opportunity cost and the opportunity you have foregone having dead alternative investment capital tied up in the property if it underperforms other assets.

Which has been better in the past is irrelevant, which is better right now and in the future wont be known until the future has happened.

To be fair youve only been a member for six years so have probably missed Bruces 4 billion posts highlighting this physical financial reality

Opportunity cost makes a nonsense of that well worn estate agent mantra "renting is dead money". But, there are none so blind as those who will not see.

[Bruce Banner]

But renting is dead money.

There is no way it can ever be anything else.

With property, sure, the value could go up or down, but even if it went down to £0:00 at the end of your 25 year ball and chain, you should own it outright. That means you get the next 25 - 50 years of your life living for free.

The renter on the other hand will spend the next 25 - 50 years continuing to fork out. Not too bad if that's the way they want to live, but when they retire, they still need to find £10, 000 a year when they have no income.

What you seem to be saying here is that you will never buy a house.

I'd like to see some financial genius from you that proves that is a wise move.

Poppycock!

I am retired and rent out of choice. The interest I receive on the money I would have to draw out of the bank to buy the house I'm renting more than pays the rent and I don't have my money tied up in an illiquid, depreciating, asset.