To Those Who Rent, Please Work Out What The House

[ShedDweller]

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.

I don't remember a flat rate of tax at 25%, and you don't include Miras (which did make quite a big difference)

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.

If we join the euro you might be right .. given the quantity of money the government has to borrow there has to be a reason to buy Sterling ..

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).

"This time it's different" this time it really may be .. with inflation at 2% the value of the repayments will be about 40% lower at the end of the mortgage term than at the beginning .. But you have to remember that (assuming you bought between 2004 and 2010) the property will probably be worth less than you paid for it .. Whereas someone who had rented for the 25 years would have paid less month by month and have money in the bank ..

The last 10 years has truly been the only time in history when it did not make sense to buy your own house in five years time it may make sense again ..

[andykn]

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.

Still nearly a 5% rental yield. Looks like there's some buy to let bargains around.

[Redback911]

Nice thread.

We live in a rural part of Hampshire. We have a detached 18th Century cottage with 3 small bedrooms. Approx 500m outside our local village with 1 acre of land. We have no neighbours and access to paddocks and a large wood to the side of the cottage. The cottage was valued early last year at 425,000.

Our rent is 1,000 per month. A 100% mortgage at 5.5% over 25 years would be 2640.28, which does not seem right.

The house is definitely not worth 425,000. The estate agent at the time was pitching for the client. They only valued the house for tax planning purposes as its owned by a Trust, but the estate agent did not know this. The cottage is a little tatty and requires constant attention, mostly which we do ourselves with the Trusts approval.

So lets value the place at 350,000. On a 20 year repayment scheme this would be 2440 per month. Either way the cottage seems over valued or we are getting a great deal.

Edited May 26, 2009 by Redback911

[PotNoodle]

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.

ouse.

I don't agree with your initial concept figures.

A 25 year mortgage is a VERY expensive way to buy a house.

It is far, FAR better to shorten the term considerably, overpay as often as possible and

put in lump sums whenever possible.

This requires a very flexible mortgage product, of course.

[bb7t6]

I don't quite get some of the figures that people are coming up with here, they are way out.

To calc the price equivalent to your rent you should only take the interest on a mortgage into account. If you assume a 5% fixed rate you simply multiply your monthly payments by 12 and divide by 0.05 (or just multiply by 240). E.g. a house which rents at 700 pcm would have to be bought at 168k to pay interest equivalent to rent.

[redgenieuk]

Mine in rental terms is about £68,400.

I would think they would be looking for about £120 to sell it.

Harsh drop.

I do think we pay well under the odds for rent however, so at a guess I would think probably if they bothered to review the rent, we'd have o pay an extra £100 a month without finding anywhere bigger to move. That would make it £84,700 ish.

[redgenieuk]

I quite liked this link (it was an advert from the HPOC site but found it quite amusing:

http://www.propertyfinderrevolution.com/

[babesagainstmachines]

The bulls do have a fair point on this thread, and that is that when you buy a place, you effectively lock in a lifetime rental cost.

However, they do also ignore transaction costs with buying initially, maintenance, the fact that you might actually want to move sometime, taxation and many many other costs.

[drrayjo]

My rent vs mortgage ratio is embarrassingly weighted in favour of renting.

We are talking in the region of 3-4 times cheaper to rent than own this high quality property in an excellent area.

That's based on likely current asking price of course, which I expect to fall hard in good time (quelle surprise!).

I will say this though, our current living arrangements and fantastic financial position are so good that it makes the achilles heel of all renters (tenancy termination by the owner) an even more appaling prospect. Knowing the owners' position though, we feel it's as safe a calculated risk as they come.

[andykn]

Nice thread.

We live in a rural part of Hampshire. We have a detached 18th Century cottage with 3 small bedrooms. Approx 500m outside our local village with 1 acre of land. We have no neighbours and access to paddocks and a large wood to the side of the cottage. The cottage was valued early last year at 425,000.

Our rent is 1,000 per month. A 100% mortgage at 5.5% over 25 years would be 2640.28, which does not seem right.

The house is definitely not worth 425,000. The estate agent at the time was pitching for the client. They only valued the house for tax planning purposes as its owned by a Trust, but the estate agent did not know this. The cottage is a little tatty and requires constant attention, mostly which we do ourselves with the Trusts approval.

So lets value the place at 350,000. On a 20 year repayment scheme this would be 2440 per month. Either way the cottage seems over valued or we are getting a great deal.

Even a 3.5% rental yield is better than you'd get putting 350 grand in the bank.

[Goat]

Even a 3.5% rental yield is better than you'd get putting 350 grand in the bank.

3.5% less say 13.5% capital loss equals minus 10% per annum.

Even Barclays have better rates than that!

[Mrs Imp]

Now do the same for the student house you were in if you were a student.

£200 per month x4 (6 years ago)

800/6.14 * 1000 = £130,293

Sold for 150k 2 years later

There's currently one near my first student house where the rent is 1k a month, which makes 162k

This one here is much cheaper. Probably needs some refurbishment tho.

I'm in no way trying to say that it's worth buying to rent to students. It's not coz they can be a lot of hassle and on the whole the maths doesn't add up. It's just that the figures are different for student lets, probably because landlords like to charge students more. When I met Imp, I was paying 200 a month for a tiny little boxroom in a house that needed a lot of TLC. He was paying the same for a large room in a nicely decorated house in a nicer area!

Anyway, this thread should be in Anecdotals.

[andykn]

The bulls do have a fair point on this thread, and that is that when you buy a place, you effectively lock in a lifetime rental cost.

However, they do also ignore transaction costs with buying initially, maintenance, the fact that you might actually want to move sometime, taxation and many many other costs.

But to offset that is the uncertainty of renting and possibly not being able to do much to the place.

[Goat]

But to offset that is the uncertainty of renting and possibly not being able to do much to the place.

Equally you could say, flexibility of renting and ability to move anytime you fancy a change.

[andykn]

3.5% less say 13.5% capital loss equals minus 10% per annum.

Even Barclays have better rates than that!

But you can't assume prices will go down to justify an argument that prices must go down!

I'm saying that all the prices given so far show good rental yields at today's prices. 

[andykn]

Equally you could say, flexibility of renting and ability to move anytime you fancy a change.

And how many people do you know who enjoy moving house and the associated "flexibility"?

[blunderpuss]

I can't remember where or when , but somewhere on this forum i read that " if you can buy your rented accomadation with the rent you pay between 12 to 15 years it's worth it"

In my case I live in a very nice 2 bed in an art deco block of flats in highgate, north london. I pay 2200 a month. Let's say in 15 years (at the top end of the example) i will have given the owner 396000. Currently this flat to buy would be about 550000. Therefore still a long way to go. It was bought in 2000 for 392000.

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[bb7t6]

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.

I'm assuming you've got an STR fund to pay a deposit, in which case you could get a 10 year fix at less than 5%. £725 gives rent of £8700 pa, which is the same as 5% interest on a £174000 loan.... so buying your neighbour's house would actually save you a few quid each month.

E.g. 25% deposit of 42k would lose you £105 per month (at savings rate of 3%).

Interest on remainder of £125500 that would be borrowed at 5% would be £523 pcm. So a total cost of £628 pcm, £97 CHEAPER per month than renting.

Factor in a 5% discount off the asking price, and buying your neighbour's carbon copy house seems to be a no-brainer!

[gravity always wins]

3.5% less say 13.5% capital loss equals minus 10% per annum.

Even Barclays have better rates than that!

Yes, I haven't seen any reference to depreciation costs the homeowner/landlord will have to pay for upkeep the tennant does not.

Surely the depreciation of bricks and mortar should be included somewhere?

Just to add any landlord worth their salt would factor in depreciation but IMO they rarely do.

[Goat]

But you can't assume prices will go down to justify an argument that prices must go down!

I'm saying that all the prices given so far show good rental yields at today's prices. 

And you shouldn't make 25 year investment decisions based on current short term interest rates.

3.5% might look quite good compared to savings rates, but compare it to a realistic mortgage rate and deduct various landlord costs and it looks pretty horrific.

So, for example:

Capital cost, £240,000, rent £1,000 pcm (5%).

Deduct say £1,000 as a void, £1,000 as agents fees, £2,000 repairs and you've got £8,000 p/a on £240,000.

Now deduct £16,800 interest at 7% and you've got a £8,800 loss.

[gravity always wins]

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.

You have been indoctrinated to a higher standard than most - well done!!

I'd keep it quiet if I were you else people might not take you too seriously!!

[Haventaclue]

I don't remember a flat rate of tax at 25%, and you don't include Miras (which did make quite a big difference)

My memory isnt what it used to be.... The basic rate was actually 30% in 1983. Apologies I need to reduce 'firemans' disposable income and purchasing power even further..........

http://www.ifs.org.uk/ff/income.xls

[allfiredup]

Looks to me like most mortgages would be a couple of hundred pounds more than the rents are.

Seeing as you end up owning the house at the end (probably worth half a million in 25 years), it really dont seem so bad!

[allfiredup]

The bulls do have a fair point on this thread, and that is that when you buy a place, you effectively lock in a lifetime rental cost.

However, they do also ignore transaction costs with buying initially, maintenance, the fact that you might actually want to move sometime, taxation and many many other costs.

Some STR's often forget this too.

[Guest BAREBEAR_soon to be ALIVA]

My memory isnt what it used to be.... The basic rate was actually 30% in 1983. Apologies I need to reduce 'firemans' disposable income and purchasing power even further..........

http://www.ifs.org.uk/ff/income.xls

Dont forget I was getting MIRAS.