Does It Make Sense To Carry On Renting Now?

[swissy_fit]

A few months ago, situation for someone having STR sitting on a fund of (say) 300k was :

Approx interest income 1300-1400 a month(based on 5.5% of 300k).

House price falls approx 4000 per month (based on 2% of a 200k house)

Rental expenditure 1000-2000 per month depending on area/property.

Net gain 3300 to 4300 per month.

Current situation is :

Approx interest income 625 a month(based on 2.5% of 300k).

House price falls approx 1000 per month (based on 0.5% of a 200k house, this is my estimation of the situation, prices are clearly not in freefall any longer.

Rental expenditure 900-1800 per month depending on area/property(have allowed for a drop as you'll see).

Net gain(loss) (175) to 725 a month.

When you take into account tax on income, the risk of financial collapse and hyperinflation etc, the picture isn't looking as pretty any longer for STRers. We need higher interest rates for our position to be obviously better.

B*stards - have they beaten us?(Brown and co)

Edited April 23, 2009 by gleeful_expat

[the end is a bit nigher]

B*stards - have they beaten us?(Brown and co)

Well, the numbers are definitely closer, but a lot of that's due to prices falling.

If we get genuine wage inflation across the board e.g. 5% for public sector workers, then I will think it maybe time to buy.

Or, another 15% - 20% off where we are now would also do it.

[richc]

It makes absolutely no sense to buy right now.

If people are currently stretched to pay their mortgages when rates are at 4%-5%, what's going to happen if there is real inflation and rates go to 8% or 10%?

I would have to at least double my current payment if I were to buy the place I currently rent, and that would be with an interest only loan at 4%.

[LiveinHope]

B*stards - have they beaten us?(Brown and co)

Well apart from feeling thoroughly beaten by the system and agreeing with much of what you say, prices in my area are still so far above what I consider to be fair value that I think I am still safer in the bank than in bricks. If my money wasn't for a house then I would be more concerned.

PS my savings were for a house in the UK, but I now feel that was a stupid dream too and that I should think further afield; apart from ruining the Global Economy, Labour have also banned pretty much everything worth doing here... and what they haven't banned they watch

[three pint princess]

Don't you have to include a mortgage as well

[bobthe~]

I am factoring in the possibility of this being a deep recession and the likelihood of being out of work for a period, and/or having to downsize our lifestyle due to a drop in income.

If we bought now, we could easily be in a position where we have to sell again a year or 2 down the line, thus blowing a large amount of stamp duty (possibly 4% of purchase price which is upwards of 20k on a 500k house), not to mention we could be distressed sellers, thus losing more on the purchase price as well.

If we carry on renting we can downsize by paying a sum of money to a removal company, probably between 1500 and 2000.

[Selling up]

You're predicting only 6% PA house price falls from here onwards?

Are you crazy?

Furthermore:

You've concluded that your purchasing power is changing by something between -125 and +725 a month... OK, I don't agree with your 6% PA assumption but let's run with it...

That still beats buying, where you would have an ongoing capital loss of £1000 per month (by your own assumptions)

Edit for logic!!!

Edited April 23, 2009 by Selling up

[Concrete Jungle]

The low interest rates may currently be eating away at your STR fund and confidence. However rates may well have to go back up in the future, putting more interest pcm in your pocket and possibly pushing house prices further down. IMHO it makes sense to carry on renting and saving for the next 2 years, but periodically reviewing the situation.

[Lander]

A few months ago, situation for someone having STR sitting on a fund of (say) 300k was :

Approx interest income 1300-1400 a month(based on 5.5% of 300k).

House price falls approx 4000 per month (based on 2% of a 200k house)

Rental expenditure 1000-2000 per month depending on area/property.

Net gain 3300 to 4300 per month.

Current situation is :

Approx interest income 625 a month(based on 2.5% of 300k).

House price falls approx 1000 per month (based on 0.5% of a 200k house, this is my estimation of the situation, prices are clearly not in freefall any longer.

Rental expenditure 900-1800 per month depending on area/property(have allowed for a drop as you'll see).

Net gain(loss) (175) to 725 a month.

When you take into account tax on income, the risk of financial collapse and hyperinflation etc, the picture isn't looking as pretty any longer for STRers. We need higher interest rates for our position to be obviously better.

B*stards - have they beaten us?(Brown and co)

wtf?

[Willy Weasel]

You have to factor in the extra interest you will pay on a higher priced property over the lifetime of the mortgage.

Assuming you take out a 25 year mortgage then if the average price drops from, say, £150,000 to £100,000 then by waiting until prices drop to £100,000 you save 25 years of interest on £50,000.

[Kyoto]

Only the most bearish HPCer would have owned a £300k pwoperdee outright, sold up for cash at the peak, and then sat on that £300k in cash. I would guess that average STRer on here probably has < £100k in the bank, which changes the figures substantially.

[Fairies Wear Boots]

House prices went down 4 percent over the last quarter. Volumes may have increased, but I believe the indexes will show greater falls. If you wanted to buy you should have done it a couple of months back and fixed your rate for ten years. When interest rates go back up, 2 percent falls per month will be the small ones.

[swissy_fit]

You're predicting only 6% PA house price falls from here onwards?

Are you crazy?

Furthermore:

You've concluded that your purchasing power is changing by something between -125 and +725 a month... OK, I don't agree with your 6% PA assumption but let's run with it...

That still beats buying, where you would have an ongoing capital loss of £1000 per month (by your own assumptions)

Edit for logic!!!

Yes I'd lose approx 1000 a month in capital but I wouldn't be paying rent(of more than 1000 a month in my case).

It's my belief that price falls have slowed dramatically and we'll be lucky to get 6% a year with interest rates so low. Here (in Switzerland) I can get 2.95% fixed for 10 years! (with 25% deposit).

Then there's the danger of a banking collapse......

[swissy_fit]

wtf?

I have a family....

[swissy_fit]

You have to factor in the extra interest you will pay on a higher priced property over the lifetime of the mortgage.

Assuming you take out a 25 year mortgage then if the average price drops from, say, £150,000 to £100,000 then by waiting until prices drop to £100,000 you save 25 years of interest on £50,000.

No mortgage required.

[swissy_fit]

Only the most bearish HPCer would have owned a £300k pwoperdee outright, sold up for cash at the peak, and then sat on that £300k in cash. I would guess that average STRer on here probably has < £100k in the bank, which changes the figures substantially.

I can't speak for others of course, but I have more, and I've seen plenty of posts implying STR funds of 500k+

[swissy_fit]

House prices went down 4 percent over the last quarter. Volumes may have increased, but I believe the indexes will show greater falls. If you wanted to buy you should have done it a couple of months back and fixed your rate for ten years. When interest rates go back up, 2 percent falls per month will be the small ones.

This is the only thing keeping me in cash right now. And, as you see, I'm wavering.

As another poster has pointed out, I'm pretty bearish. Anyone nearer the norm with a big STR fund may well be buying now, which might explain the large number of cash sales being seen recently.

[Selling up]

Yes I'd lose approx 1000 a month in capital but I wouldn't be paying rent(of more than 1000 a month in my case).

Okay, yes, I see.

£1000 is the cost of accomodation, whether it is technically rent or capital depreciation.

So your sums are indeed correct for your assumptions. I still disagree with your -6% PA prediction though.

[The Masked Tulip]

It is becoming something I am thinking about - some areas are proving stubborn in price falls. Whether this wil lchange this Summer or not I ain't sure.