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Scott

To Those Who Rent, Please Work Out What The House

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To those who rent, if you know the current value of the house you rent please use the figure below to work out what the rent would be if you could get a 100% mortgage (bears - I know I'm being ultra fair to the bulls by allowing 100% mortgages).

Now I'm going to be ultra fair again and choose 5.5% as a fixed rate for the mortgage. Now 5.5% over 25 years on a repayment mortgage is £6.14 per £1,000 of mortgage.

My family currently rent a 3-bed semi at a cost of £725. So if we were paying a similar amount on a mortgage the property would have to be £118,000 to buy currently. i.e. (725/6.14) * 1000

Next door is a carbon copy and is on for £167,500. So a further fall of 30% is required.

(And yes, you Bulls could argue that renting means you don't end up with the property at the end of the 25 years, but conversely you also don't have an asset that is falling by ~£3k each month either. And this is only working out why we shouldn't buy for the next few years, while house prices are falling. Of course it is logical to own you own home eventually if your circumstances match).

So anyone else? We're currently on 30% further falls on my example!

Edited by Scott

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Guest BAREBEAR_soon to be ALIVA

Dont know what my place would sell for.

2 bed garden flat in nice road in sutton. I'll guess at 170k, 20% of that is 34k leaving 136k that times 6.14.

Equals around 820 odd. Im paying 750

Of course without the deposit its well over 1000.

So yeh another 30% to go is about right.

Dont forget as well the overshoot. When I bought my first place all the talk was about buying is cheaper than renting and it was by quite a way. Now its the opposite by quite a way. The big factor is the deposit and the arrangement fees.

Edited by BAREBEAR_soon to be ALIVA

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Guest BAREBEAR_soon to be ALIVA

I'll give you an even better indicator.

In 1983 I was a fireman on 7.8k a year and I bought my first place for 25k. Around 3 times my salary with a 10% deposit.

Same flat today is 140k

Firemans earnings are currently 30k pa.

Go figure.

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£6.14 per £1,000 of mortgage.

We pay 1100 a month so using your calculations the place should be worth 180k. I reckon it'd fetch 450-500k currently. So that would be about a 60% fall needed.

TBH though, I think we just got a very good deal on the rent.

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Renting - The house I rent I pay £585pm, £7,020 pa rent. 25 years = £175,500

Current values of similar properties are about £125k (about 25% off peak sold)

Mortgage of £125k @100% over 25 years @5.5% = £777pm or £9324 per year

or £233,100 over 25 years

However .......

Buying - With a £25k deposit and a £100k mortgage (5% 25 years) = £7,092 pa repayment. 25 years = £177,300

A £25k savings pot at 4% =£1000pa. Savings pot after 25 years =£66,645

I think the rental prices V's house prices near me are getting closer.

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We rent a large 3 bed detatched house in Petersfield (not living with the inlaws any more!). I'm guessing it would be valued at more than £400k, possibly £500k (though that would have been at peak). £1600 per month rent. So, that compares to £2.5k - £3k in mortgage payments each month.

If I had £3k to spend on housing each month, I'd still be better off renting and putting the remainder into savings. More of my money would be going into my savings than would have been paying off the mortgage capital.

BTW, I think you're perfectly justified in comparing the rental value against a 100% mortgage as you don't put any of your own money down when you rent. I still have my STR fund for instance but I wouldn't if I'd have bought.

There's a large dependence on housing equity in our area to prop up the house prices. There are very few places that anyone could afford as a first home. Most people I know lived somewhere else (flat in Portsmouth for instance) before moving to our town.

Edited by LivingWithTheInlaws

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Last two I've rented were 3 bed semi AB10 (Nov 08-Apr 09) £600/month = £97710 which was about half what was paid 4 years ago

and £350/month 1 bed first floor flat = £57000 which again was market value when I started renting it 7 years ago

Got good deals by the looks of things.

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Now I'm going to be ultra fair again and choose 5.5% as a fixed rate for the mortgage. Now 5.5% over 25 years on a repayment mortgage is £6.14 per £1,000 of mortgage.

So anyone else? We're currently on 30% further falls on my example!

Peak value - 500K so mortgage would have been £3070 pcm

Now value - 425K? => £2609 pcm

Rent £975 pcm

So a significant fall to come using your method.

However, larger homes have tended to be more difficult to rent out at any kind of sensible yield. I'd buy without hesitation at 300K and consider up to 350K.

Also, I can get an offset mortgage at 3.75% (variable) so that would significantly reduce mortgage costs.

VMR.

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To those who rent, if you know the current value of the house you rent please use the figure below to work out what the rent would be if you could get a 100% mortgage (bears - I know I'm being ultra fair to the bulls by allowing 100% mortgages).

Now I'm going to be ultra fair again and choose 5.5% as a fixed rate for the mortgage. Now 5.5% over 25 years on a repayment mortgage is £6.14 per £1,000 of mortgage.

My family currently rent a 3-bed semi at a cost of £725. So if we were paying a similar amount on a mortgage the property would have to be £118,000 to buy currently. i.e. (725/6.14) * 1000

Next door is a carbon copy and is on for £167,500. So a further fall of 30% is required.

(And yes, you Bulls could argue that renting means you don't end up with the property at the end of the 25 years, but conversely you also don't have an asset that is falling by ~£3k each month either. And this is only working out why we shouldn't buy for the next few years, while house prices are falling. Of course it is logical to own you own home eventually if your circumstances match).

So anyone else? We're currently on 30% further falls on my example!

Lets redo that equation and fix a couple of the things you got wrong.

Fistly the timespan. You calculated over 25 years... this is of course an arbitrary figure you chose simply because that is how long the mortgage lasts. Lets redo the calculation with the full life costs. ie. you intend to rent until you drop which, if you are calculating over 25 years is a fairly safe assumption. Assuming you are 35 now with an average life span of 75 you've another 40 years of rental payments to go. Of course you could buy a house after 25 years, but that would make this calculation completely pointless.

Secondly inflation. Lets assume a modest 2% inflation in rental payments a year over those 40 years. The average monthly rental figure for calculation now becomes: £2186

So to be better off renting the house would need to be on at £356k.

That's not to say there is no value in renting for a short period of time right now, but this just proves that it is not a simple relationship between house prices and rental values. Your conclusion that there is 30% to go may be completely correct, conversley it may be complete wrong, but for certain I can tell you the method at which you arrive at that conclusion is absolute garbage.

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For larger houses, the numbers can look ridiculous. I rent a nice, big house, on 2 acres in a nice village, about a 30 minute train ride out of London. My rent is 1900 a month. The value of the rental income stream is about 400,000 pounds. The house would go on the market for about 1.75 million (2 million, 18 months ago). So prices only need to fall about 75% for it to make sense to buy rather than rent (using this calculation).

What this tells me is that houses at the higher end are driven entirely by buyers using equity in their old house to trade up, as no one could afford to finance the loans required to buy without equity. If you think about it, this represents a huge amount of capital tied up in property that is going to be earning minimal (or negative) returns. Not sure how sustainable that is.

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Lets redo that equation and fix a couple of the things you got wrong.

Fistly the timespan. You calculated over 25 years... this is of course an arbitrary figure you chose simply because that is how long the mortgage lasts. Lets redo the calculation with the full life costs. ie. you intend to rent until you drop which, if you are calculating over 25 years is a fairly safe assumption. Assuming you are 35 now with an average life span of 75 you've another 40 years of rental payments to go. Of course you could buy a house after 25 years, but that would make this calculation completely pointless.

Secondly inflation. Lets assume a modest 2% inflation in rental payments a year over those 40 years. The average monthly rental figure for calculation now becomes: £2186

So to be better off renting the house would need to be on at £356k.

That's not to say there is no value in renting for a short period of time right now, but this just proves that it is not a simple relationship between house prices and rental values. Your conclusion that there is 30% to go may be completely correct, conversley it may be complete wrong, but for certain I can tell you the method at which you arrive at that conclusion is absolute garbage.

If you're going to make the assumption that rents increase at 2% a year based on historical averages (they're actually falling at the moment), then you need to also assume a more historically accurate interest rate, say 8%. Setting aside the matter of what will happen to capital values if interest rates go to 8%, you can't change one side of the equation without changing the other. The original calculation was much more accurate than what you're proposing.

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If you're going to make the assumption that rents increase at 2% a year based on historical averages (they're actually falling at the moment), then you need to also assume a more historically accurate interest rate, say 8%. Setting aside the matter of what will happen to capital values if interest rates go to 8%, you can't change one side of the equation without changing the other. The original calculation was much more accurate than what you're proposing.

Happy for you to rework the calculation to show what house prices would need to be at 8%. If you can.

Secondly, I'm not proposing anything except cold hard figures. You can choose to bury your head in the sand. I don't care. Up to you really. Doesn't really change the nature of the beast.

Change to capital value is irrelivent for this calculation. This is a comparison of outgoings. Nice try though.

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you also can't assume rent appreciation over 25 years @2%pa. peaks and troughs. it'd gain inflation, but nowhere near 2% compounded.

garbage theory all round here.

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The house we are renting was new in 2007. Landlord paid £190,000 for it. Nice little 3 bed detached.

We are paying £570 rent per month.

For that to cover the mortgage the house would need to be £93000!!!!!!

Either we are paying really cheap rent or he massively overpaid on this house!

Probably would be marketed aound the £180,000 mark looking at the current local market. (some very stubborn EA's/Sellers around here.)

Cant ever imagine it dropping down to £93000! Maybe £130,000-140,0000 realistically.

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Happy for you to rework the calculation to show what house prices would need to be at 8%. If you can.

Secondly, I'm not proposing anything except cold hard figures. You can choose to bury your head in the sand. I don't care. Up to you really. Doesn't really change the nature of the beast.

Change to capital value is irrelivent for this calculation. This is a comparison of outgoings. Nice try though.

I have a degree in economics and an MBA (from top 5 universities) -- I can do the calculation as well as I can recognize a red herring like the one you're trying to throw into the debate.

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To those who rent, if you know the current value of the house you rent please use the figure below to work out what the rent would be if you could get a 100% mortgage (bears - I know I'm being ultra fair to the bulls by allowing 100% mortgages).

My family currently rent a 3-bed semi at a cost of £725. So if we were paying a similar amount on a mortgage the property would have to be £118,000 to buy currently. i.e. (725/6.14) * 1000

I think this shows how far out of whack the property market is. I agree with another poster who said that larger houses can only be financed with the escalator ladder gains of the last 12 years.

My example is eye watering for the owner. 5 Bed detached house on big plot probably twenty years old , good construction breeze block inside and proper floors etc etc. Private estate of only 12 big uns (don't think you would get permission for that today) It was nearly decorated prior to us moving in last month. In town i.e 12 min walk to town centre.

At peak probably worth 900k I reckon still worth 700k ( and in spite of the figure below would probably buy at that, want a home etc...)

Rent is £1900 a month which using the figures gives £309,446

For all you bulls out there the above seems to prove that market has some way to go. Before anyone says my landlord can obvioulsy afford to rent at a low figure, he can't, I see his post and there are a lot of official brown envelopes.

Anecdotally there are three of the other houses rented

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rent/owning comparisons should be done with an I/O mortgage as the repayment part of a mortgage is equiv to saving an amount each month...

The 100% I/O mortgage on my place is less the cost to rent it.

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you also can't assume rent appreciation over 25 years @2%pa. peaks and troughs. it'd gain inflation, but nowhere near 2% compounded.

garbage theory all round here.

It doesn't have to "gain inflation" at all. The mortgage it is being compared against doesn't rise with inflation at all.

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£1000 a month would i think get me a mortgage of about £160k

I know for a fact the landlord bought the place for £285k back in 2006

i also know that he has spent over £2k on maintenance since i moved

in 6 months ago and that my monthly rent falls way shy of his monthly

mortgage payments - which i assume he must have fixed. I also

assume that my rent will continue to decrease in line with everyone

elses.

with the money i save each month I plan to buy the place from him for

about £100k when he gets wiped out on rate rises.

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The original calculation was much more accurate than what you're proposing.
I have a degree in economics and an MBA (from top 5 universities)

You say you have a degree in economics and an MBA, yet also say that a calculation based on full life costs is less accurate than one that is based on an arbitrary timespan chosen to in order to present a predetermined conclusion.

Basics of business case analysis... use full life costs. Did they not teach you that on your MBA or economics degree?

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I'll give you an even better indicator.

In 1983 I was a fireman on 7.8k a year and I bought my first place for 25k. Around 3 times my salary with a 10% deposit.

Same flat today is 140k

Firemans earnings are currently 30k pa.

Go figure.

To 'figure'.....

Rates bobbled around the 10% mark in the 80's dropping to 8% on a good year to 15% on a bad. So just plucking £200 per month cost (for your £25k less deposit and some for a bobbling rate), tax was at a flat rate of 25%, you were taking home around £500 per month. Your approx mortgage cost you 40% of your take home pay in 1983.

Rates will remain low for a far longer time than this forum gives credence to, and in fact, I dont believe we will see double figures again for a generation. So to merely translate your buying capacity of 40% of income to a mortgage cost would give you a fireman today £800 per month mortgage spend. I make that £160k worth of property purchasing power. Whilst its nerves thats pulling the market price down, the reality is you can buy a better house today for the same 'cost' than you could in 1983. Thats what will hold the housing market, and the income multiples of 4 - 5 x income.

Also noting that as BBF has pointed out, renters are only planning to live in a house for 25 years? Where are you living for the other 30? 'Mortgagees' become 'rent free', and generally far earlier that the full 25 years. (the last 5 years of mortgage is cheaper than the average family annual holiday).

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To those who rent, if you know the current value of the house you rent please use the figure below to work out what the rent would be if you could get a 100% mortgage (bears - I know I'm being ultra fair to the bulls by allowing 100% mortgages).

Now I'm going to be ultra fair again and choose 5.5% as a fixed rate for the mortgage. Now 5.5% over 25 years on a repayment mortgage is £6.14 per £1,000 of mortgage.

My family currently rent a 3-bed semi at a cost of £725. So if we were paying a similar amount on a mortgage the property would have to be £118,000 to buy currently. i.e. (725/6.14) * 1000

Next door is a carbon copy and is on for £167,500. So a further fall of 30% is required.

(And yes, you Bulls could argue that renting means you don't end up with the property at the end of the 25 years, but conversely you also don't have an asset that is falling by ~£3k each month either. And this is only working out why we shouldn't buy for the next few years, while house prices are falling. Of course it is logical to own you own home eventually if your circumstances match).

So anyone else? We're currently on 30% further falls on my example!

You aren't comparing like with like. And comparison only really works if you've got deposit money available, earning negligible interest at the moment.

You either have to compare a fixed 25 year mortgage with 25 years of renting (allowing for the rent to rise with inflation over those 25 years) or pick a shorter term, say 3 years, with mortgage rates as they are today. 

And you can't count both capital repayments and potential losses.

So if you made an offer and got next door for 160k with a 16k deposit a 4% interest only mortgage would only cost you 480 a month.

And 725 per month on 167,500 is a rental yeild of over 5% for a buy to letter, fine money today.

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We rent a 3 bed terrace near Walton on Thames, one sold around the corner for £240k last month.

We rent for £975, mortgage would be £1470.

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If you're going to make the assumption that rents increase at 2% a year based on historical averages (they're actually falling at the moment), then you need to also assume a more historically accurate interest rate, say 8%. Setting aside the matter of what will happen to capital values if interest rates go to 8%, you can't change one side of the equation without changing the other. The original calculation was much more accurate than what you're proposing.

But if are looking at 25 year costs you can fix your mortgage at 6% for the full term.

Rents may be falling now, as is RPI, but the difference between indexed and flat annuity rates at the moment shows that inflation long term will still be positive. The original calculation did fix the mortgage but you can't fix rental payments and they are bound to rise long term.

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