To Those Who Rent, Please Work Out What The House

[loafer]

Rent £2600 which gives £423k, roughly 50% of current value.

When I calculate this, I always add the approximate amount of equity a typical purchaser would have built up, so, in my case a 50 year old's family, probably built up £250k at least, giving a total value of c.£700k.

Good thread BTW.

Edited May 26, 2009 by loafer

[MississippiJohnHurt]

renting in IG10 for £1100 a month so 179k. I know that one sold at peak for 475k, so using these calcs it needs a 63% fall from peak. Looking at Land Registry figures over the last 8 or 9 years I'd say that 179k is too cheap. Probably, we got a good deal on rent (owners have no mortgage). Comparing to other properties, it shd be probably about £1500 pcm, which would be £245k or 51% from peak based on these calculations. At this level the figures are consistent with Land Registry data from 2001/2002, and consistent with my own views (comfortingly!)

Going the other way, I shd be paying £2900 pcm to cover £475k!

Interesting exercise, although I have to confess no knowledge of how rent and mortgage costs compare in boom, bust or normal times - would be interested in any further data on this.

[MississippiJohnHurt]

Yeh yeh but the example I gave has got 2 constant factors that can be compared then and now.

I/ I was a fireman

2/ the same flat

It simply tells you that basing it on 3 x earnings 2009's fireman would not be able to buy the same flat as I did by quite a long chalk or until prices fell by 30% or he got a substantial payrise.

Thats why the market is out of kilter.Thats why it must continue to fall.

This is when a bull steps in and tells you that supply issues have caused that level of change since 1983. Personally, I agree with you. Way out of kilter.

[andykn]

Opportunity cost. You invest the difference between the mortgage and the rent, and hope that it beats HPI.

If it was anything like the last crash, it took ten years to for prices to get back to where they were, so you've got a 10 year head start if you're renting.

Not from today's prices.

[bearbullfence]

I chose 25 years for the mortgage, but it may as well have been 50 years. I'm looking at this from the point of view of whether it is good to buy now or in 1, 2, 3 or 4 years time, not 25.

My rent has been going down these last 2 years so inflation doesn't seem to matter at present!

Whichever way you look at it, renting is still way better than buying a depreciating asset.

You seem to have (deliberately?) misunderstood my point. The 25 year comparison cost is for rental outgoings.

Re: your last sentence, something we both agree on as long as you time a purchase correctly.

[andykn]

This is when a bull steps in and tells you that supply issues have caused that level of change since 1983. Personally, I agree with you. Way out of kilter.

Given that 1983 was another "bottom" and that was lower (adjusted for inflation) than the 1995 "bottom" (with high interest rates) is it not reasonable to expect that the next "bottom" (with low interest rates) will be higher still. Are there no long term supply issues?

[othello]

Given that 1983 was another "bottom" and that was lower (adjusted for inflation) than the 1995 "bottom" (with high interest rates) is it not reasonable to expect that the next "bottom" (with low interest rates) will be higher still. Are there no long term supply issues?

In the long term we're all dead.

[zebbedee]

I pay £540 rent but this includes all bills so I'll call it £400 which gives £65000 but I only rent 3/4 of it so call it £87k and zoopla has it estimated at £115k or about 24% more to go on the average.

[DeepLurker]

We're currently renting close to the centre of St Albans, paying £825pcm.

There's a slightly bigger house up for rent on the next street at £1100pcm (too expensive IMO).

There's one house up for sale on our street, almost identical in layout to ours, asking price is £300K - using the example interest rate of 5.5% over 25 years, that gives a interest-only mortgage repayment of £1,375pcm.

[MississippiJohnHurt]

Given that 1983 was another "bottom" and that was lower (adjusted for inflation) than the 1995 "bottom" (with high interest rates) is it not reasonable to expect that the next "bottom" (with low interest rates) will be higher still. Are there no long term supply issues?

The supply point is another debate entirely. I do think they exist. But I certainly don't think that they've led to the differentials as illustrated in that post, and I'd be interested in any views to the contrary. In another thread probably, as it's a big subject.

Didn't follow the rest of your post - did you mean that the bottom in 83 was (say) 2.2x income and that it was (say) 2.5x income in 95? if that's the case, I'm not sure I'd have a view on whether it's reasonable to assume that the next bottom will be higher as you're only comparing 2 events. I do think it's reasonable to expect any market to undershoot from long term trend though, following a large boom

[EmpiricalBear]

I get 228k for the equivalent mortgage to my rent of

Currently houses like this are still at asking prices of 500k plus, so by that metric still 50% overvalued.

But of course, this area is different, and theres nothing as good to invest in as bricks and mortar!

[Lone_Twin]

The supply point is another debate entirely. I do think they exist. But I certainly don't think that they've led to the differentials as illustrated in that post, and I'd be interested in any views to the contrary. In another thread probably, as it's a big subject.

Didn't follow the rest of your post - did you mean that the bottom in 83 was (say) 2.2x income and that it was (say) 2.5x income in 95? if that's the case, I'm not sure I'd have a view on whether it's reasonable to assume that the next bottom will be higher as you're only comparing 2 events. I do think it's reasonable to expect any market to undershoot from long term trend though, following a large boom

Take two points, draw a straight line. Ta Da! instant trend.

The wonders of bull thinking.

===========================

I'm not renting at the minute but I can tell you what my last rented place cost me and what it sold for as when we moved out the LL flogged it.

£860 pcm Rent

Sold for £275,000 August 2007

Clapham, South West London.

===========================

[Monopoly]

The house we rent is a detached 3 bed with very big garden..rent is 1300 a month and the house got offered to us in January 2007 for 350k.

House prices fell about 15-20 since then over here...

Maybe somebody else could figure the numbers out here...

[Scott]

Oh so you're factoring in a postulated figure for assett value reduction now are you?

I thought the original argument for further house price fall was because rents were cheaper than mortgage repayments. Since I've shown for your case that it would be cheaper to own, then maybe this is actually a credible argument to say that we're currently at the bottom and that prices are on the up?

You estate agents (I mean bulls) are getting rattled, aren't you?

I don't need to postulate anything my friend. I know house prices have a lot further to go.

How have you shown that in my case it would be cheaper to own. If that is the case then would it have been a good idea to have paid £195k for the place we currently rent when it was up for sale when we moved in 12 months ago. And don't forget next door is a carbon copy and they have just put it up for sale at £167,500.

So I'd have paid more in mortgage payments compared to rent (£5,667 over the 12 months) and I'd have lost £27,500 in property value, so £33,167 in total. Err no thanks.

Edited May 26, 2009 by Scott

[abharrisson]

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!

I don't think your argument holds any water primarilly becasue of the "repayment " aspect.. using the same numbers then interest only its not far off, although you'd need to add a bit for insurance/up keep etc.

mostly though its not sensible as theres little natural correllation between yield and price for all buildings... very large manor houses would for example always fall foul of this "rule" and look massively over priced amd at the other end small say 2 bed houses or flats in some northern towns even now would register as a very strong buy based on your example.

As a way pf predicting house price falls I don't feel its useful at all.

[Haventaclue]

Yeh yeh but the example I gave has got 2 constant factors that can be compared then and now.

I/ I was a fireman

2/ the same flat

It simply tells you that basing it on 3 x earnings 2009's fireman would not be able to buy the same flat as I did by quite a long chalk or until prices fell by 30% or he got a substantial payrise.

Thats why the market is out of kilter.Thats why it must continue to fall.

.......... and as I pointed out, in 1983 you spent 40% of your disposable income, (at 30% income tax, 8 - 10% mortgage rates) and that same 40% of todays disposable income, buys you a lot more house. Even at the current prices.

Getting hung up on 3 x income is a mistake. When is a £ worth 50p? When the 'cost' to buy a house is half what it was historically. If wed had 4% mortages in 1983 do you think you would have bought twice the house for the same price it would have cost you to buy the flat? Or would you have stuck to your 3 x income calculation and lived in 2 rooms with cash falling out of your pocket every week? Fantastic car, but nowhere to park it?

[Guest BAREBEAR_soon to be ALIVA]

.......... and as I pointed out, in 1983 you spent 40% of your disposable income, (at 30% income tax, 8 - 10% mortgage rates) and that same 40% of todays disposable income, buys you a lot more house. Even at the current prices.

Getting hung up on 3 x income is a mistake. When is a £ worth 50p? When the 'cost' to buy a house is half what it was historically. If wed had 4% mortages in 1983 do you think you would have bought twice the house for the same price it would have cost you to buy the flat? Or would you have stuck to your 3 x income calculation and lived in 2 rooms with cash falling out of your pocket every week? Fantastic car, but nowhere to park it?

No I didnt it was a third,I remember it clearly, your forgetting miras

[grizzly bear]

Rent £2600 which gives £423k, roughly 50% of current value.

When I calculate this, I always add the approximate amount of equity a typical purchaser would have built up, so, in my case a 50 year old's family, probably built up £250k at least, giving a total value of c.£700k.

Good thread BTW.

re: the £250k equity -

1. that money could be in the bank instead, earning interest (although agree that at the moment this would be minimal), i'm not sure why should add it - surely the only benefit of it being in the house is the tax angle - ie saving yourself 40% tax on the interest income?

2. why would typical purchaser be 50 years old? surely typical purchaser of a family home would be younger?

3. if house prices stop rising, but don't fall either, then those starting later will not have built up any equity - so the higher price which includes the equity surely not sustainable?

4. you have chosen a totally artibrary number!

[loafer]

re: the £250k equity -

1. that money could be in the bank instead, earning interest (although agree that at the moment this would be minimal), i'm not sure why should add it - surely the only benefit of it being in the house is the tax angle - ie saving yourself 40% tax on the interest income?

2. why would typical purchaser be 50 years old? surely typical purchaser of a family home would be younger?

3. if house prices stop rising, but don't fall either, then those starting later will not have built up any equity - so the higher price which includes the equity surely not sustainable?

4. you have chosen a totally artibrary number!

Ha ha!

In answer;

1 I completely agree, but your average house purchaser does not understand the opportunity cost of capital

2 Not a £950k one, IMHO. You have to be earning relatively big bucks. Happy to bring it down a bit if you like.

3 True, but if you look at your typical purchaser of this type of house, they will have 20-25 years of a market behind them, with many ups and many downs, but more ups than downs.

4 You say arbitrary, I say judgement ;-). You are right that the number I have picked is arbitary, but it is based on the sort of finances I know my friends have, and who might be a typical purchaser earning £150kpa.

[grizzly bear]

Ha ha!

In answer;

1 I completely agree, but your average house purchaser does not understand the opportunity cost of capital

2 Not a £950k one, IMHO. You have to be earning relatively big bucks. Happy to bring it down a bit if you like.

3 True, but if you look at your typical purchaser of this type of house, they will have 20-25 years of a market behind them, with many ups and many downs, but more ups than downs.

4 You say arbitrary, I say judgement ;-). You are right that the number I have picked is arbitary, but it is based on the sort of finances I know my friends have, and who might be a typical purchaser earning £150kpa.

1. we are agreed on!

2. my point was that i didn't think a 50 year old would want to buy a big family house - surely more likely to be trading down? i would make the point that houses are too expensive if even well paid 40 year olds can't afford them.

3. see point 2 - surely after 25 years owning propery you are ready to start trading down not taking on a new 25 year mortgage at 3 times salary. hence surely family houses should be affordable to younger people?

4. judgement/arbitary - those living in London, and who can move to home counties might have made significantly more "magic money" that that, I have anyway and i'm 34, - but see 2/3 above - the point i am trying to make is that if there houses are only affordable to 50 year olds with £250k equity, prepared to take on a 3x salary mortgage then they are not really affordable!

[benzlife]

Pay £650 a month on a property that sold just a few months ago for about £140k to an investor. Think she must be crazy but go figure. Anyway by OP's figures that about £105K.

Makes you wonder how the BTL brigade with high LTVs (10% and less) and IO mortgages thought it was such a good idea. Seemed the only way they could make money was if the prices kept going up. Surely the removal of this speculative part of the market alone would have a serious affect on prices? I'm sure that many are hanging on to their portfolios at the moment and when they come off their -0.5% base rate trackers in the next few months prices will start to fall again at pace.

There's always going to be a place for sensible BTL with low LTV (or even no mortgage). Based on what's been posted on these forums, many have suggested that the recent and ongoing bull-trap has been fueled by investors with money. What happens when it's all been spent? There can't be much of it floating around, can there? I thought we were a nation in debt?!

[Ash4781]

Do you not do a discounted cashflow analysis ?

[betterToDo]

Renting for 800, identical place was bought for 205,000 mid 2007. Dunno what that means just in case that helps

[CrashedOutAndBurned]

We have a nice airy 2 bed flat in one of the most desirable and lively parts of the city for £700, so I suppose with a 100% mortgage on current deals that would be, what, around £110k to play with?

That would be 50k short of a crap one bed where we live now but would get a small 3 bed terraced house in a scummier part of the city. Scummy, but still probably better than the Greater London fringe where we used to live.

[andykn]

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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Which is why Buy to Let is so popular. I borrow 550k, buy the place and in 25 years you've paid off my loan and I've one flat which has cost me virtually nothing. It wouldn't matter to me much where it went in the next few years.