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To Those Who Rent, Please Work Out What The House


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using the OP's formula, [email protected]1500pcm = 25year 5.5% 100% mortgage of £244k . peak 2007 LR prices of identical properties were reaching £475k. now they might be closer to £400 but none in LR as of now.

I'm not quite 40, so let's say I'd need to pay rent for another 50 years.

Assuming no inflation that's £900k in total.

Or a 50yr 100% mortgage of £306k with my current outgoings.

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

Calculated risk mate. You feeling lucky that interest rates will stay at centuries-long, beyond-record lows for long?

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Well, are ya?

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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!

Not mine. Try a couple of grand more. I will buy when the gap narrows and still end up owning a house. This is not a permanent either-or.

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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

House probably could sell now for £175-185k (peak about £225-235k)

Renting for £800

Mortgage as described would be ~£1100

For the mortgage to match the rent, the house would be valued at £130k, which seems about right as this is what I would be happy to pay for it.

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To those who rent **snip**

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

I'm not necessarily agreeing with your calculations but using them:

My rent = £2k pcm

The flat was bought Nov07 @ £585k

Currently valued (Zoopla) @ £465k

Based on my rent it should be ~ £326k to buy so still has some way to go! The price it was bought in '07 was silly money :huh:

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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.

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.

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Dont forget I was getting MIRAS.

...which applied to the taxed income/interest amount on the loan only. We didnt get all 8% interest rate refunded via miras. Our 1983 fireman may indeed have seen an extra £20 in his pay packet, which yes was well worth having, but doesnt negate the crux of my argument. Its all about affordability, and now is just as good, if not better, to buy based on the affordability calculations, EVEN with house prices where they are.

Good thread tho...... Thank you OP.

One other line of thought tho, is reversing the argument regards existing home owners. Picking a date out of the air, 'Fred' bought a £230k property in 2004. On a tracker (which 50% mortgagees are on) his £210k mortgage is costing him £600 per month. To rent his property he would have to pay £1000 per month today. Why would 'Fred' sell to go and rent?

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Quite simply, I could never afford the mortgage on the one bedroomed garden flat I rent, in a million years. At current prices, I'd need to be on nearly £90k pa. !!! :blink:

Crikey, next to that my figures look almost sensible. Mortgage would be £800-£900 pcm; rent = £600. This implies a "true" value of £95,000 - £100,000.

I think that's too high; 10 x annual rental is where I think we'll end up, though we may undershoot this for a while. Nationwide this also ties up quite nicely with the 3x income rule of thumb.

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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.

OK, here we go then.

At 8% the payments would be £7.72 per £1,000 on a 25-year repayment mortgage.

So, taking my £725 rent over the next 2 years (as I'm planning to buy within those 2 years) and increasing it by 2% inflation gives us payments of £754.29 in two years time (although rents are still falling)

Now divide that £754.29 by 7.72 then multiply it by 1,000 gives me £97,705. So, a further fall of 41.66% from here.

Want me to calculate anymore?

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We bought our nice Georgian terrace in East London for the asking price of £395k in 05 (because of problems we completed in mid 06 but the seller was a gentleman on the price). That was then the highest price recorded on our street. Next door (nearly identical layout, exactly the same sq ft) sold mid 07 for the asking price of £470k, the new highest price ever recorded on our street and the buyer immediately rented it out for £400/week, so a yield of 4.4% on the price he paid. Which looks quite respectable now.

Incidentally another one has just come on the market for sale on our street, similar terrace, slightly different layout, same sq ft, 20 ft longer garden and the asking price is .................................wait for it............£550k! Don't these people know there's an HPC on!??

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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!

It does in a falling market. Factor in ~£3k losses per month currently just on the asset.

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I'm a little confused by the maths on show here. Assuming you rent a property and do not own it, means you'll be paying X until you do own a property plus any inflation. But if you have a repayment mortage over, say 25 years, you'll have an asset that despite losing money lately, would very much likely have increased in value over the 25 years. So unless you bought in August 2007, it's likely you'll have equity in the property. So, in 23 years, are you saying the property will only be worth what you paid for it? Or are you saying that it will only be worth what you have paid in mortgage payments?

What I do recognise, is that after say 25 years, if you have paid, lets say, 250k for a house, it is likely, after 25 years (historically) to have at least doubled in value.

But after 25 years renting, will you have an asset or will you have to continue renting?

Renting in the short term will work in times like we're experiencing now, in certain areas. In some areas it's not working.

Genuinely, if the person who started this thread has been at the top 5 uni's for MBA's, is he sure he actually studied there or cleaned the canteen?

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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!

I have. But that's not comparing like-for-like. My deposit to rent is the same as one month's rent - £725.

Why would I waste my STR fund on a deposit that will be gone in 12 months?

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I have. But that's not comparing like-for-like. My deposit to rent is the same as one month's rent - £725.

Why would I waste my STR fund on a deposit that will be gone in 12 months?

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?

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I have. But that's not comparing like-for-like. My deposit to rent is the same as one month's rent - £725.

Why would I waste my STR fund on a deposit that will be gone in 12 months?

Scott you keep missing the point. Going back to my Fred scenario, theres a huge percentage of the 'owners' population who could not afford to rent the properties they currently own. Thats the majority of home owners spending less per month on living costs, versus the cost to go out and rent. Even being extrememly simplistic, if I have the opportunity to 'rent' my house at the lower 'cost' than market rents (which I do via the mortgage), then 25 years says Ive saved myself loads just in monthly outgoings. There is also the brilliant double whammy that not only was it cheaper than renting, but on my 25th anniversary some nice bank manager said, oh go on then, you can now own it outright............. Does it matter what the 'value' is? Ive won on both fronts, monthly outgoing and a tangible asset in 25 years time.

Lets say you are spending £500 per month in rent, how on earth can that be a 'good' thing when your not buying any assets whatsoever with that £500? My monthly repayment is reducing a debt, not buying extra bricks..... You assume your STR fund would be 'lost' in a house purchase...... No, your 'rent' is equally 'lost'.

The fact that one tranche of money says 'savings' and the other tranche of money says 'pay packet', is irrelevant. Its still YOUR money irrespective of where its kept.

£500 per month rent, is still £6000 a year out of your STR fund. whether you like it or not.

edit: spelling!

Edited by Haventaclue
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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.

So your annual rent is 725 x 12 = £8,700

Research http://www.cepr.net/documents/publications...ity_2008_05.pdf and history suggests that a multiple of 15 to 1 makes renting and home ownership roughly neutral.

This formula implies

- a capital value of your house of £130,500 or a further 22% fall

- applying to my own house (comparing the rent of a similar house to a recent EA valuation) implies a further 19% fall - similar

- applying it to peak prices suggests a total fall of 35% from the 2007 peak to a long term level

All sounds sensible to me.

Of course, a temporary overshoot (a la 1996ish) is very likely, and this is the really smart time to buy.

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What I do recognise, is that after say 25 years, if you have paid, lets say, 250k for a house, it is likely, after 25 years (historically) to have at least doubled in value.

But after 25 years renting, will you have an asset or will you have to continue renting?

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.

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Guest BAREBEAR_soon to be ALIVA
...which applied to the taxed income/interest amount on the loan only. We didnt get all 8% interest rate refunded via miras. Our 1983 fireman may indeed have seen an extra £20 in his pay packet, which yes was well worth having, but doesnt negate the crux of my argument. Its all about affordability, and now is just as good, if not better, to buy based on the affordability calculations, EVEN with house prices where they are.

Good thread tho...... Thank you OP.

One other line of thought tho, is reversing the argument regards existing home owners. Picking a date out of the air, 'Fred' bought a £230k property in 2004. On a tracker (which 50% mortgagees are on) his £210k mortgage is costing him £600 per month. To rent his property he would have to pay £1000 per month today. Why would 'Fred' sell to go and rent?

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.

Edited by BAREBEAR_soon to be ALIVA
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Rent is £650 a week, 5 bed detached house in N London suburb.

At 5.5% thats £614k.

At 8% thats £423k.

Or using the 15 multiplier = £507k

He would have easily got £1.1m, maybe even £1.2m if he sold at peak.

A similar house on the road sold in 2003 for £750k and that that price I'd happily jump in - but only because of our STR money - see below.

re the comment

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.

this is totally true, certainly in our case - the only reason we can afford to buy this sort of house is because of the equity we have built up. we str in sept 08 and realised that it would be cheaper to rent our perfect house than to pay an IO mortgage.

i have thought for a while that this (larger houses only being financed through escalator ladder gains) is totally unsustainable, e.g. if you try to argue that house prices will be totally flat from here, (ie will not go down, just level off like the bulls said at the end of 2007) well, who will be able to afford to buy these houses when they come for sale, as those starting off after around 2002 would never have enough equity. where i live lots of houses for sale, and none selling as no one can afford them - eg £1.8m for a family detached house in an average London suburb. Even taking 4x a very good salary of £150k is no where near enough.

Edited by grizzly bear
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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.

Yes but by now you should have a working (equality......) partner who can help with the payments while the kids are at Nan's.

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

I wouldn't go near BTL at the moment. You seem to be ignoring rapidly falling values and once they have stopped falling, substantial interest rate increases. I'd want to see 10% yield on an 8% fix to contemplate BTL again. I guess you're already in BTL and probably unable to get out of it again! What are your LTVs?

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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?

Have you thought about a career as a politician? Don't go into property investment whatever you do!

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Guest BAREBEAR_soon to be ALIVA
Yes but by now you should have a working (equality......) partner who can help with the payments while the kids are at Nan's.

I did , she left to try to claim the equity,then the next one did as well.

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I wouldn't go near BTL at the moment. You seem to be ignoring rapidly falling values and once they have stopped falling, substantial interest rate increases. I'd want to see 10% yield on an 8% fix to contemplate BTL again. I guess you're already in BTL and probably unable to get out of it again! What are your LTVs?

Blimey, a "neither" that isn't a foaming at the mouth rabid bull. I didn't know such things could exist. :unsure:

Nice to see you.

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