Friday, Jun 27, 2008
Sad old VI truisms being trotted out again
Telegraph: It's cheaper to buy than to rent
According to new figures from Abbey people are increasingly better off buying rather than renting. The Bank says it is now more than £10,000 cheaper to buy a house than to rent in many parts of the country - six months ago, it was just £5,800 cheaper to buy than rent over 25 years.
The greatest savings depend on where you live. In the South East, you will be almost £60,000 better off by paying off your own mortgage rather than your landlord's.
Phil Cliff, director of Abbey Mortgages, said: "The housing market has changed. A person is better off, in terms of the payment cost, by getting on the property ladder in all but three of the UK's regions."
Posted by little professor @ 12:40 AM (1067 views) Add Comment
15 Comments
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1. quiet guy said...
"Today, those living in the South East can make the biggest savings. Buying a property in the region will leave you more than £91,000 better off than 25 years of renting."
OK. What does the above actually mean? If I swear to rent whatever the state of the property market for the next 25 years then it seems reasonable that the above could be true (in nominal cash terms). Of course if I wait until prices have dropped for the next few years or so until at least the worst excesses of the boom have been burned out of the system then I will very likely be better off by renting for a while.
We are witnessing the unwinding of one of the biggest asset bubbles in history yet The Times keeps bullish about property! Perhaps they are worried about alienating a significant part of their target audience?
2. montesquieu said...
No opportunity to comment here .. which says a lot.
The key spin element here is 'over 25 years'. Yes, perhaps, if a FTB intends to stay in a flat his/her whole life (even so, multiplying up the figures doesn't leave muc margin for error - £5k over 25 years? Lost in the weeds of fractions of pecentages).
But overwhelmingly the evidence point to hold off for 2-3 years, by when the market will have fallen consideraby. Why swallow a loss, which will be felt most strongly just when FTBs want to move, in 4-5 years time?
This is a truly shoddy piece of VI spin. As I said, no opportunity to comment which speaks volumes.
3. Yaco said...
Hummm I rent a 220k flat (peak price), pay 800 pcm. Even if the price has come down to 180k (which has not yet, I live in Bournemouth where prices have only started to come down recently), a IO mortgage (6% interest - low in the current context) for that amount would cost £900pcm, plus £120 pcm of service charge, plus maintenance. So, If I was to buy it would cost me around £1150 pcm. If a 7% IR is considered (more reasonable), add £150 pcm - £1300 pcm. If IR keep going up (looking at HPC they will!)... The value of the flat is likely to be 150k in 2 years - 30k of negative equity. Surely not better off buying!
4. hpwatcher said...
In a predominantly bear market, there will always be people who will put the case for buying.
The thing is that the banks are now very severely damaged - look at their share prices - and will probably take years to return to normal.
5. Imhal said...
This is great - what they are saying is that in the last year alone the case for holding off buying has netted a STR a saving of £10k - so by this reasoning if you pay £10k in rent then you have lost nothing because the properties you where going to buy keep getting that much cheaper.
Its a good arguement - it pays the rent.
HAL
6. uncle tom said...
Not a bad piece - they've seen through Abbey's narrow take and added some wise words of their own..
7. last_days_of_disco said...
Its incredible, its almost like nothing has happened. No market crash.
Their figures ignore the crippling effects of inflation on people's ability to afford property.
Does anyone know how they calculate this.
And why should I step in and buy a property so I can have negative equity for most of my life with no ability to move. Its mad stupid "research". They ignore the key issue with investment and the is the psychology of investing. Luckily no one will believe them now because the herd has halted and is in the process of moving in the other direction.
8. it_is_going_with_a_bang said...
Actually I think the headline doesnt really reflect the article content.
Most of the article points to not buying 'now' - which is just common sense.
When did the Abbey come up with the figures? before or after they put their rates up?
9. mark wadsworth said...
As UT says, the headline and the Abbey rubbish is totally misleading and completely criminally wrong, but all the other people they talk to are saying "hang on for a year or two".
That Melanie Bien is well fit.
10. Britishblue said...
I am due to make a QUARTER of a MILLION on the property I rent
How?
Basic mathematics
The house I live in is valued at £600,000. It is a house in London. I pay £1400 a month rent. I have negotiated a deal where the owner can only ask me to move the house if he sells (not re rents) and my rent rise can only be the same as the Retail price index.
So lets look at some simple figures
On a 7% internet only mortgage my interest repayment would be 7% of £600000. This is £42,000 a year or £126,000 over three years. Conversly my rent is £1400 a month, which is £16,800 a year for year one (with a 4% increase in the second year to £17,056 and a 4% increase in year two £17,738 ) or £51,194 over 3 years. I will therefore save£74,806 by renting just on the difference between rent and interest. What people don't seem to realise is that there is no difference between rent and paying interest. Except with rent you don't have the liability of maintenance.
However even the most pessimistic of economist are now suggesting that there will be a 10% house price drop per years over two years. History tells us, it will be three or more years , so lets take a look at the savings made from a depreciating asset of 10% over three years
House value year 0 £600,000
10% depreciation £60,000
Value year 1 £540,000
10% depreciation £54,000
Value year 2 £486,000
10% depreciation £48,600
Value £437,400
Total loss in value £162,600
Because I rent, I don't pay the building insurance at £500 a year (£1500 over three years). I also don't pay maintenance. Having had a similar house which I owned before a cost of £2,000 a year minimum would have to be added by the time you allow for one off events like drains clogging ups, boiler problems, tiles falling of a roof, etc, etc. So conservatively this is a further £6,000 over a 3 year period.
So lets take a look at the figures:
SAVINGS by renting not owning
Savings on interest payments £74,806
Savings on depreciating asset £162,600
Savings on insurance £1,500
Savings on maintenance £6,000
Total savings £244, 906
Whats stunning isthat if I bought this property now on an interest only mortgage I would own a brick on it in three years time. I I rented and saved the money I could buy the property in three years for much less and pay for 56% of it in cash from the savings I had made renting.
11. quiet guy said...
Channel 4 seem to have picked up this 'story' as well. Buying houses must be in out DNA or something.
http://www.channel4.com/news/articles/business_money/buyers+better+off+than+renters/2303277
12. str 2007 said...
Well done British Blue thanks for the effort.
Your £1400 a month rent is low against a 600k house.
£1400 would normally get you a £400k house
I think the interest rates can be got for 6%
And I think the maintenance would be nearer £2k over 3 years.
But you're absolutely right now is the right time to be renting, make sure you do save up though over the next 2-3 years.
It's very tempting to spend savings as property prices fall (thinking to yourself you're no worse off). Exact reversal of people Mewiing as prices rise. (Although it will be real money your spending not money borrowed over 25 years.
13. mark wadsworth said...
British Blue - thou art a star!
STR2007, no I think 7% is about right altho' I agree with you on maintenance. Further, if BB pays £1400 a month for a £600k house, that looks about right to me, we pay £1700 on a £800k house.
We did this competition recently and some people's notional rent was barely 2% of 'current market value' (i.e. what it would have been worth a year ago!)
14. richc said...
The numbers produced by Abbey are a crock of sh!t.
I tried to find the data behind Abbey's numbers, but, unsurpisingly, they don't release the details, just the total cost of renting vs total cost of buying, and I could only find those numbers for the last report they did back in October of last year. I cross referenced the Abbey numbers with the figures issued by ARLA (the Association of Residential Letting Agents) on average capital values and rents for houses and flats, and the two numbers are totally off. Not surprising when you realize that the basis for the Abbey numbers consists of a survey of only 3 estate agents per region (i.e. 36 estate agents for the entire UK).
Abbey defines the costs of owning vs. renting as the total payments on a 90% LTV 25 year repayment mortgage + maintenance vs total rent over 25 years inflated over time by current CPI. According to them, the total cost over 25 years of buying in the UK in Ocotber of last year was 437k vs the total cost of renting of 444k. They said that they used a 6.5% interest rate. They didn't say what they used as current prices and rents.
If you apply that methodology to the data issued by ARLA based on their survey of 517 letting agents in the 4th quarter of last year, the total cost over 25 years of a flat comes out at 549K to buy and 503k to rent, and a house in the UK comes out at 879k to buy and 763k to rent. I used a repair rate of 0.5% of capital value per year, which is very low.
The numbers issued by Abbey are just plain fantasy. If you apply the latest ARLA data to the model and take account of rising interest rates, the numbers only look worse for buying, not better. How are Abbey allowed to get away with this level of deceit and fraud?
15. jonb said...
It costs about 6% of the property price to rent, and that includes things that the landlord pays for that you would have to pay for if you owned the place, such as buildings insurance and service charges.
Tell me where I can find a mortgage for less than 6%, and I will consider it. I can tell you where you can get savings accounts for more than 6%, and indeed over 7%.
At the moment, even if you had the money to pay cash, it would still be better to leave the money in the bank, and use the interest you earn to pay the rent; and that is before you consider the risk to capital from buying an overpriced house.