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Buying Property 'still Better Value Than Renting'


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Guest prudence
Interesting article;

It is £37,000 cheaper to buy a property over 25 years than to rent one, despite soaring house prices, research showed today.

http://money.guardian.co.uk/businessnews/s...1510743,00.html

This is probably correct over that timeframe, but completely irrelevant to those who want to get optimum financial benefit from property ownership. For those people market timing is and always will be of maximum importance............

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Figures for me:

What a house I'd want would cost today: £250,000

If I buy today assuming interest rates remain the same, cost

over 25 years: £463,739

If I rent for 3 years at current rental price: £21,600

Then buy, assuming identical IRs, on 22 year mortgage, and

a 30% reduction (£175K): £286,813

And these figures assume I tie up £20K+ of capital as a deposit on a house. I could invest that £20K elsewhere and make some money instead.

[used same IR for both calculations]

So, by renting for 3 years whilep prices fall 30%+ I will save approx:

£463,739 - £286,813 - £21,600 = £155,326

This means I actually save most of the purchase price in scenario 2. This is how compound interest works folks..... don't fall for it.

Edit to take into account rental spending.... doh!

You also need to factor in the maintenance costs if you buy rather than rent.

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Guest charles Knight

Who would thunk it - A mortage company producing a report suggesting that getting a mortage is the best idea!

Shouldn't those types of "reports" have a disclaimer that says something like:

NOTE: The above report was produced by a company that has a vested interest in people obtaining a mortage.

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Hello all

Discovered this website a few days ago and am very inspired and just a tiny bit obsessed!  Ive always been thinking along the lines of the relative mortgage payment pain gradually getting less over the years compared with rents going up (as above).  Yet I have decided that instead of trying to upgrade to a 2-bed flat in London from a 1-bed (buying)...which was scaring the hell out of me (£1000pm mortgage with £45k deposit-interest rates up after 3-year fixed rate.. terrifying, possible neg equity and stuck for 10 years..no way!!).  Anyway am going to rent for a year (same as current mortgage payments) then re-assess.  Always hated renting tho and now have a baby, but will forego security and follow instincts and take a gamble (tho the other senario is a terrible gamble as well)

Thank everyone for all your opinions

Would be interested to know what you all say about the decreasing mortgage versus rising rents theory.

When we put our house on the market early 2004 we fully intended to buy another house straight away but as the completion stretched on we realised that the house prices had reached a peak and decided to rent instead. (We sold as "no chain" so intended to rent/stay with parents for a little while anyway).

At the time we worked out that as long as prices stayed the same we would be better off in the short term (initially only intended to rent for a year but now looking at at least another two). I feel it was a good decision because even if house prices stay the same we are better off and at the moment there are houses for sale in our old road for 10-12% less.

We have three children, all under 4 but I don't worry about security and I have never regreted selling up. The great thing about kids is they don't care where you live as long as it is a happy household. We are financially better off, (interest more than pays the rent) and even if we moved back into the same road tomorrow we would still be well up on the deal and mortgage free. I have not visited B&Q since we moved in because I have no desire to decorate the place, so we are also saving quite a bit on household goods.

Good luck with your move.

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Guest magnoliawalls

The Herald gives some of the assumptions:

The Abbey's figures assume a 4.6% per annum inflation rate over 25 years, with buying costs based on a 90% repayment mortgage at a fixed rate of 5.5% over 25 years and include maintenance costs at 4% per annum inflation rate.

Do these seem realistic?

One thing this research does highlight is that if you wish to live in a high end property it really makes sense to STR - since even using the assumptions above you save money.

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Mortgage Broker here... just for a few minutes though. Bear in mind people that most homeowners INCREASE their mortgage during their life as they upgrade and buy a bigger house.

Read an article the other day that compared rental income on a property to earnings on a share. The argument went on to say the P/E ratio on property, i.e. value of property / rental income per annum was at a historical low.

If property were a share everyone would be shorting it! But they'd be buying it back later when the long term average was reached.

There are no absolutes in this game, people. Renting for 25 years would be foolish. Renting and buying and renting... etc to take advantage of the market; that's the wiser man's strategy.

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Who would thunk it - A mortage company producing a report suggesting that getting a mortage is the best idea!

Shouldn't those types of "reports" have a disclaimer that says something like:

NOTE: The above report was produced by a company that has a vested interest in people obtaining a mortage.

I asked the Guardian why there were publishing the figures without any further comment or analysis, and got the follwoing reply:

Thank you for your email regarding yesterday’s story about homebuying. It

is very useful to get feedback from the people who read our stories.

As with all our stories regarding property prices it is clear from the

start who has published the research so that readers are aware who is

making the claim. We have also put the claim in quotes in the headline so

that it is clear that this is a statement from one organisation, not a

fact. However, I agree that we should have reinforced this later in the

piece.

The piece is just one of a large number of articles on the subject and

elsewhere on the site – in our special report on house prices and the

property section – we present a wider picture of the market. We also have

information about the pros and cons of buying and renting.

I appreciate your comments on this piece and in future we will do our best

to put pieces of research like this in better context.

Best wishes,

Hilary Osborne

Acting Money editor

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WRONG.

Mortgage in 26 years 0. But what about the opportunity costs of the money now locked up in the property?  (opportunity costs = what you could earn with that money if it was invested elsewhere).

Exactly. Abbey put out a similar report about a year ago. When I tracked down the author I asked at what rate of return the deposit had been invested. Answer: "What deposit".

So, from the article in question:

"DESPITE soaring house prices, it is still £37,000 cheaper to buy a property over 25 years than it is to rent one, according to the country's second biggest mortgage lender.

Buying an average property over a 25-year period now cost £326,849, while renting one would cost people 11% more at £364,499, according to the High Street bank."

According to the ODPM the average house price in April05 was £181,832.

The ODPM also reported in Jan05 that :

"In the early 2000s average loan to value ratios were around 66%"

http://www.odpm.gov.uk/stellent/groups/odp...hcsp#P143_25123

That makes the average deposit 181832 * 0.34 = £62k

According to the UK Debt Management Office (issuer of all government debt), you can buy ~25 years gilts with a yield of

4 1/4 Treasury 2032: Yesterday's implied yield to redemption = 4.371188

Investing our deposit of £62k in this gilt @ 4.37%, compounding over 25 years would produce a sum given by:

Average Deposit invetsed in gilts for 25 years = 62000 * (1.0437)PWR25 = £180k

So the opportunity cost of not investing the deposit = 180 - 62 = £118,000

This totally wipes out the £37k supposed benefit.

OR, MoneyNet shows data for FTBs:

The average value of a property for a First Time Buyer (FTB) was £195,282

FTBs were looking for an average mortgage amount of £130,518, a 67% LTV

That makes a £65K deposit, compounding to £189K over 25 years, making the opportunity cost of buying £124K totally obliterating the supposed £37k advantage.

Whilst I recognise that any capital appreciation of property would change the maths, Abbey's report talks only of costs, so it i sonly right to include opportunity costs, something they have failed to do in the past.

I shall wait for Abbey's reply before I put any faith in the ThisIsMoney story.

Edited by Sledgehead
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Where does this incredibly naive idea come from that if you have not "bought" a house, you cannot possibly make money in another way?

What idiotic monkey believes this?

Mortgage in 20 years time still £705 - Rent in 20 years time £1100 ?

Mortgage in 26 years time £0 - Rent in 26 years time £1300?

I am very sorry to have to point out that you have not got a grasp of the concept of "other asset classes".

If I get a 5% p.a. one asset class but I could invest the same money (e.g. the deposit ) in another asset class and make more than 5% p.a., I would be silly to stay in the lower yielding asset class if the aim was to make money.

There is nothing MAGICAL about property. It is just another asset class. Its value can go up as well as down. And it is illiquid. Meaning that despite the claims of Estate Agents and Mortgage Lenders (who have a huge vested interest in hyping up the property market), you may not be able to sell even when "the house is worth 50% more than I bought it for". Count that chicken when you have completed the transaction and transferred the relative value into another asset class.

Sure, you can talk about leverage, but then there is the horrendous illiquidity associated with housing transactions.

Remember that "cash" too can crash. Think of Argentina in 2002. We may be even seeing the mighty USD doing an impression of a heavy stone in water.

Renting, amongst other things, means you have more flexibility to invest in other opportunities or to take a different risk approach. It depends on the individuals circumstances and motivations, coupled with his/her skills.

If you are a low-risk type of person, stay in property. If you have no marketable skills beyond copying everyone else, stay with what makes you comfortable.

But please don't claim that buying a house is the best/only longterm investment you can do. That is plainly not true. Just look at a list of the wealthiest self-made folks in the UK and see how they got their start. Only a small number did it with property alone.

Top100Millionaires1_20.pdf

Top100Millionaires1_20.pdf

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Hello all

Discovered this website a few days ago and am very inspired and just a tiny bit obsessed!  Ive always been thinking along the lines of the relative mortgage payment pain gradually getting less over the years compared with rents going up (as above).  Yet I have decided that instead of trying to upgrade to a 2-bed flat in London from a 1-bed (buying)...which was scaring the hell out of me (£1000pm mortgage with £45k deposit-interest rates up after 3-year fixed rate.. terrifying, possible neg equity and stuck for 10 years..no way!!).  Anyway am going to rent for a year (same as current mortgage payments) then re-assess.  Always hated renting tho and now have a baby, but will forego security and follow instincts and take a gamble (tho the other senario is a terrible gamble as well)

Thank everyone for all your opinions

Would be interested to know what you all say about the decreasing mortgage versus rising rents theory.

Welcome fellow believer.

Dames :)

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Abbey: "The biggest benefit of owning a property over renting is that your home is also an asset, which can appreciate in value. Whilst nobody should bank on this as a 100% certainty, owning a property does give the homeowner more options than the rental tenant in terms of trading up, downsizing and releasing equity."

You have more options holding an illiquid asset than by renting? I think not. This is so wrong it is almost criminal. And as already pointed out, it implies that if you rent you'd effectively put all your savings in a drawer and forget about it for 25 years.

Abbey: In the last 15 years, house prices have fallen as well as risen, and interest rates have fluctuated by more than ten per cent, showing that repayments can vary significantly.

A 10% fluctuation on something that is currently 4.75%. Oh they really mean a 300% "fluctuation", nothing to worry about there then.

JY

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Where does this incredibly naive idea come from that if you have not "bought" a house, you cannot possibly make money in another way?

What idiotic monkey believes this?

I am very sorry to have to point out that you have not got a grasp of the concept of "other asset classes".

If I get a 5% p.a. one asset class but I could invest the same money (e.g. the deposit ) in another asset class and make more than 5% p.a., I would be silly to stay in the lower yielding asset class if the aim was to make money.

This is all very well, but a house is not a tulip bulb. It has an inherent value and use - you can live in it, and everyone needs to live somewhere, so if you don't buy a house, much of what you're not paying in not byuing one will be eaten up in rent. And if you have a family, you can't really go and rent a studio flat in the wrong side of town to maximise your cash for investment elsewhere.

But please don't claim that buying a house is the best/only longterm investment you can do. That is plainly not true. Just look at a list of the wealthiest self-made folks in the UK and see how they got their start. Only a small number did it with property alone.

Why do people bang on about property being an investment? It's not.

Most people just want somewhere to live, that they like, that they can do with what they wish. You can divest yourself of an investment and swap it for cash. The only time you don't need a house is when you die. By buying a property you're taking a gamble by front-loading your lifelong housing costs into the time when you're economically active. You win if you live a long time without needing residential care, you lose if you die at 55 (but your kids win bigtime - have seen this happen).

If you're a non-smoker with a healthy lifestyle, you could be a pensioner for as long as you pay a mortgage. Or in other words, you could end up paying rent for twice as long as you pay a mortgage if you never buy. Drawing down for that long is going to put a lot of strain on the dividends from your investments you built up instead of buying a house when you can no longer work in your old age. Sure, buying at the peak of the market would be madness (I remember the last HPI & HPC very well), but over the longterm it makes a lot of sense if you buy at the right time, unless you want to be yet another parasite sponging off the state in your dotage as you can't afford anywhere to live when you're 80.

I have two surviving, very elderly grandparents, one from each side. One refused to get into any debt throughout their life, and always lived in a council. She now cannot manage to live in her own house, and can't easily find an alternative. The only reason life is OK, is that she has four children who live nearby who can help out. The others were a little more astute and had a balanced view to risk and bought a house to live in. They were able to move sideways to a bungalow when they got older, which they can adapt for their needs, and they are pleased to have a legacy to pass on when the time comes. I know who's the happiest in retirement.

Q. That $700K house of Warren Buffet's. Does he own it?

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Sure, buying at the peak of the market would be madness (I remember the last HPI & HPC very well), but over the longterm it makes a lot of sense if you buy at the right time, unless you want to be yet another parasite sponging off the state in your dotage as you can't afford anywhere to live when you're 80.

er, this is the whole point. Abbey is saying it is better to buy than to rent NOW.

Q. That $700K house of Warren Buffet's. Does he own it?

What do you think? Would he have paid $700K for it though, that is the question.

JY

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This is all very well, but a house is not a tulip bulb. It has an inherent value and use - you can live in it, and everyone needs to live somewhere, so if you don't buy a house, much of what you're not paying in not byuing one will be eaten up in rent. . . . By buying a property you're taking a gamble by front-loading your lifelong housing costs into the time when you're economically active. You win if you live a long time without needing residential care, you lose if you die at 55 (but your kids win bigtime - have seen this happen) . . . Sure, buying at the peak of the market would be madness (I remember the last HPI & HPC very well), but over the longterm it makes a lot of sense if you buy at the right time, unless you want to be yet another parasite sponging off the state in your dotage as you can't afford anywhere to live when you're 80.

You are right, it is smarter to take on a mortgage earlier rather than later in one's life, which is what makes the current situation so intolerable for would-be first-time buyers. They either continue to rent as their productive years pass by, or buy something in today's market which most first-time buyers can't afford. I don't think anyone on here wants to be 'yet another parasite sponging off the state', but is it worth it to get an 8x income mortgage now for some cr#p flat to avoid this? Or, would it be better to save money and look around in five years' time? The only way the second option does not work is if real prices have still increased. Will we then have to get 10x mortgages? At some point that model falls apart -- most people on hpc believe that point is now.

Too many people think that getting a house early in life is the only way to avoid being 'yet another parasite sponging off the state', having no pension, etc. When large numbers of people think like this, with access to cheap money, the effect is a house price bubble where prices no longer bear relation to what people earn. Ten years from now, people will shake their heads at the size of mortgages people casually take out today. 8x income mortgages -- it's absolutely insane.

jrb

------------------

Edited by jrbxyz
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HomeOwner595, can you please explain to me what you mean by a House has "inherent value"?

Does a house have more value than something else tradable INHERENTLY?

This is all very well, but a house is not a tulip bulb. It has an inherent value and use - you can live in it, and everyone needs to live somewhere, so if you don't buy a house, much of what you're not paying in not byuing one will be eaten up in rent. And if you have a family, you can't really go and rent a studio flat in the wrong side of town to maximise your cash for investment elsewhere.
Why do people bang on about property being an investment? It's not.

You yourself end your post saying that buying a house is a better longterm investment than renting. Is this a contradiction or not?

When BTLs or BTS (Buy to Sell, aka flippers) are engaging in the property market they are doing bond trading. They are playing a type of yield arbitrage they do not really understand.

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Even taking into account a 30% crash over the next two or three years, the figures on the Motley Fool suggested that buying is a better bet than renting over the long term. That's based on a comparison of the savings made through renting versus buying being invested in a high interest deposit account, and taking into account the build up of equity in a purchased home.

However, the bears (that must be all of you :) ) will be pleased to hear that it'll take around 20 years for a house purchase to outperform renting and saving. So renting is still a better short term strategy, and investing the savings in a higher yielding vehicle (e.g. an ISA tracker fund) could win against buying.

In response to DrBubb's comments about rents, you can't make assumptions about future behaviour from past performance, and just because they're been flat for five years doesn't mean that they'll be flat for the next twentyfive. Anecdotally, the cost of renting a one bedroom flat in Clifton in Bristol has increased from around £450 to £600 pcm over the past seven years, which is ahead of wage inflation.

Secondly, any increase in the demand to buy property tends to reduce demand to rent (and vice-versa). The housing market has slowed over the last year, whilst I've heard rents are starting to go rise.

Graeme

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  • 444 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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      • up 5%



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