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Sybil13

Theoretical Gains And Losses Buying Now Or Later

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Jury is still out with regards whether I will return to HPC and post on a regular basis.

Meanwhile was interested in some thoughts from a friend today, and wondered what you all think with regards what they said. I can hear people on HPC getting exasperated by the "bear of little brain" logic of this one.

I have several friends all waiting to buy, cash buyers.

One couple are fed up of waiting, and a house came up a few months back that ticked most of their boxes.

Nothing wildly exciting just an average home really but it was right for them where other more expensive properties were not. Builder modernised, high quality fittings, parking garage, nice garden attractive outlook.

At peak the property would have been around the £210000 mark.

Small 3 bed semi but done up nicely by a builder.

They offered 25% off peak for it £157000, but EA said they had had loads of other higher offers on it but obviously none accepted as the property is still unsold.

Friends decided that they would increase their offer to £180000, what's that about 14% below peak, but now just don't know what to do.

This is what they said to me today but I just got more and more confused trying to think about this .

If they wait until October / November there is a good chance they will find a property 30% below peak.

So for their £180000 they could get a £260000 property with 30% off (OK that would be about £182000), instead of a £210000 property with 14% off at £180000

Buying a £260000 property with 30% off effectively means they have gained £78000 should the property ever go back up, or gained by buying in 2009 instead of 2007 .

They said that buying the £210000 property with 14% off they will have potentially lost £48000 , that is the difference between £78000 theoretical gain buying a £260000 property at 30% below peak compared to a £30000 theoretical gain on a £210000 property bought at 14% below peak.

Good property at £210000 at peak were few and far between so buying at £210000 property rather than a £260000 will also make it difficult for them to trade later should they so wish without having to take a mortgage.

If they buy a £260000 property 30% off peak and it loses another 10% they will lose £26000. (OK only a loss if you sell but it IS a gain as they have the cash if you see what I mean).

If they buy the £210000 property with 14% off and it drop another 26% they will lose £54000. (If they try to sell ).

So what they were trying to say was that if they buy the £210000 property now at 14% off peak they will have theoretically lost the £48000 (that is the difference between paying £180000 for a £260000 property or a £210000 one + £54000 if the property loses another 26% ='s a TOTAL theoretical loss £102000

I know the % loss after purchase is actually on the £180000 not the original figure.

But if we keep at peak minus 14% and peak minus 30% etc for the sake of this argument and then peak minus 40% as that is the way they are looking at this.

Still not sure if this makes any sense but will post and see what you think.

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Jury is still out with regards whether I will return to HPC and post on a regular basis.

Meanwhile was interested in some thoughts from a friend today, and wondered what you all think with regards what they said. I can hear people on HPC getting exasperated by the "bear of little brain" logic of this one.

I have several friends all waiting to buy, cash buyers.

One couple are fed up of waiting, and a house came up a few months back that ticked most of their boxes.

Nothing wildly exciting just an average home really but it was right for them where other more expensive properties were not. Builder modernised, high quality fittings, parking garage, nice garden attractive outlook.

At peak the property would have been around the £210000 mark.

Small 3 bed semi but done up nicely by a builder.

They offered 25% off peak for it £157000, but EA said they had had loads of other higher offers on it but obviously none accepted as the property is still unsold.

Friends decided that they would increase their offer to £180000, what's that about 14% below peak, but now just don't know what to do.

This is what they said to me today but I just got more and more confused trying to think about this .

If they wait until October / November there is a good chance they will find a property 30% below peak.

So for their £180000 they could get a £260000 property with 30% off (OK that would be about £182000), instead of a £210000 property with 14% off at £180000

Buying a £260000 property with 30% off effectively means they have gained £78000 should the property ever go back up, or gained by buying in 2009 instead of 2007 .

They said that buying the £210000 property with 14% off they will have potentially lost £48000 , that is the difference between £78000 theoretical gain buying a £260000 property at 30% below peak compared to a £30000 theoretical gain on a £210000 property bought at 14% below peak.

Good property at £210000 at peak were few and far between so buying at £210000 property rather than a £260000 will also make it difficult for them to trade later should they so wish without having to take a mortgage.

If they buy a £260000 property 30% off peak and it loses another 10% they will lose £26000. (OK only a loss if you sell but it IS a gain as they have the cash if you see what I mean).

If they buy the £210000 property with 14% off and it drop another 26% they will lose £54000. (If they try to sell ).

So what they were trying to say was that if they buy the £210000 property now at 14% off peak they will have theoretically lost the £48000 (that is the difference between paying £180000 for a £260000 property or a £210000 one + £54000 if the property loses another 26% ='s a TOTAL theoretical loss £102000

I know the % loss after purchase is actually on the £180000 not the original figure.

But if we keep at peak minus 14% and peak minus 30% etc for the sake of this argument and then peak minus 40% as that is the way they are looking at this.

Still not sure if this makes any sense but will post and see what you think.

I'm sorry but you were right first time this really doesn't make any sense.... besides it's all rather theoretical isn't it on the basis that the "higher" offer of £180,000 still hasn't been accepted apparently.

In any even should your friends ever decide to buy all these calulations won't do them much good until they can find someone to accept an offer.. and on the basis they appear to have failed to sell a 14% offer in an apparent 20% off market what hope do you think they really have of getting 30% or 40% off if the market even gets that far. I am afraid its all about what one buyer can get from seller and salivating over the numbers is just theory until then.

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This reads like they are buying a house as an investment - which is rediculous in the current climate: Tell them to give the money to me if its burning a hole in their pockets.

However if they have found their dream home and they plan on living in it for a very long time and can't wait for the price to come down - then go for it.

Edited by Neil B

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there are other important factors:

1. mortgage rates - they are artificially low at the moment because deflationary pressures have driven the BOE base rate down

2. inflation profiles - at some point QE (money printing will cause inflation - regardless of what they say!)

I am in a similar position and plan on spending a few hours this weekend analyzing some scenarios. My bet is base rates will increase significantly once it's clear the market won't by UK Gilts and US Treasuries at current offer rates. If they rise significantly in then dont expect a 1 for one gearing - mortgage rates will rise rapidly to 6-10%. I spoke with a Savills agent today who told me her husband is a banker and he was in agreement with my predictions. He is betting on a property price crash in Q4. Caveat Emptor.

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They offered 25% off peak for it £157000, but EA said they had had loads of other higher offers on it but obviously none accepted as the property is still unsold.

Yeah right...this is an estate agents standard negotiating tactic. First reply to this should have been. "Well, submit my offer in writing please and send me back their written response. If you are unwilling to do this I will a) Approach the vendors directly and offer as you are in breach of contract and B) I will report you to trading standards".

Offering more money at the start of a negotiation is the silliest thing anyone could do. Offer what the market rate is, not what the vendor wants. If they dont want to sell, f**k 'em there are millions of houses in this small country !!!!

People are just stupid.

Tell 'em to retract their offer immediately and tell them they have found somewhere else at a reasonable price and wish the vendor every luck selling at ridiculous price..

Thats how you negotiate !!!

Edited by TheCountOfNowhere

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Jury is still out with regards whether I will return to HPC and post on a regular basis.

Meanwhile was interested in some thoughts from a friend today, and wondered what you all think with regards what they said. I can hear people on HPC getting exasperated by the "bear of little brain" logic of this one.

I have several friends all waiting to buy, cash buyers.

One couple are fed up of waiting, and a house came up a few months back that ticked most of their boxes.

Nothing wildly exciting just an average home really but it was right for them where other more expensive properties were not. Builder modernised, high quality fittings, parking garage, nice garden attractive outlook.

At peak the property would have been around the £210000 mark.

Small 3 bed semi but done up nicely by a builder.

They offered 25% off peak for it £157000, but EA said they had had loads of other higher offers on it but obviously none accepted as the property is still unsold.

Friends decided that they would increase their offer to £180000, what's that about 14% below peak, but now just don't know what to do.

Hi Sybil - amazed that your friends increased their offer, unless its the real dream house (and they are very fussy about location) or if no suitable rental accomodation where they want to live. Doesn't sound like good bargain. People just now just seem to be focused on the 14% reduction they already have rather than the reduction the later buyers will get.

We are looking in a very small geographic area and are very fussy, and although we are not happy to buy now when the houses are still at peak prices, will happily buy with 25% off peak even though I know they will go down more.

I think a lot depends on how long you plan to live in the house for - we are looking at a house to live in for 25 years AND we sold our previous house (in wrong area and too small) at only 15% off peak. Basically we are looking for a 2003 differential in prices between old house and new house.

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Jury is still out with regards whether I will return to HPC and post on a regular basis.

Meanwhile was interested in some thoughts from a friend today, and wondered what you all think with regards what they said. I can hear people on HPC getting exasperated by the "bear of little brain" logic of this one.

I have several friends all waiting to buy, cash buyers.

One couple are fed up of waiting, and a house came up a few months back that ticked most of their boxes.

Nothing wildly exciting just an average home really but it was right for them where other more expensive properties were not. Builder modernised, high quality fittings, parking garage, nice garden attractive outlook.

At peak the property would have been around the £210000 mark.

Small 3 bed semi but done up nicely by a builder.

They offered 25% off peak for it £157000, but EA said they had had loads of other higher offers on it but obviously none accepted as the property is still unsold.

Friends decided that they would increase their offer to £180000, what's that about 14% below peak, but now just don't know what to do.

This is what they said to me today but I just got more and more confused trying to think about this .

If they wait until October / November there is a good chance they will find a property 30% below peak.

So for their £180000 they could get a £260000 property with 30% off (OK that would be about £182000), instead of a £210000 property with 14% off at £180000

Buying a £260000 property with 30% off effectively means they have gained £78000 should the property ever go back up, or gained by buying in 2009 instead of 2007 .

They said that buying the £210000 property with 14% off they will have potentially lost £48000 , that is the difference between £78000 theoretical gain buying a £260000 property at 30% below peak compared to a £30000 theoretical gain on a £210000 property bought at 14% below peak.

Good property at £210000 at peak were few and far between so buying at £210000 property rather than a £260000 will also make it difficult for them to trade later should they so wish without having to take a mortgage.

If they buy a £260000 property 30% off peak and it loses another 10% they will lose £26000. (OK only a loss if you sell but it IS a gain as they have the cash if you see what I mean).

If they buy the £210000 property with 14% off and it drop another 26% they will lose £54000. (If they try to sell ).

So what they were trying to say was that if they buy the £210000 property now at 14% off peak they will have theoretically lost the £48000 (that is the difference between paying £180000 for a £260000 property or a £210000 one + £54000 if the property loses another 26% ='s a TOTAL theoretical loss £102000

I know the % loss after purchase is actually on the £180000 not the original figure.

But if we keep at peak minus 14% and peak minus 30% etc for the sake of this argument and then peak minus 40% as that is the way they are looking at this.

Still not sure if this makes any sense but will post and see what you think.

The market hit the bottom in Feb, they could had they bought Nov/Dec time got lucky and got a seller who was scared/desperate when there was no competition and maybe got 25-30% off.

Now 14% off peak sounds about right, but leave it a few months and they will be looking at 10%.

Sellers have a lot less incentive to sell on the cheap when they think they have just passed the bottom.

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there are other important factors:

1. mortgage rates - they are artificially low at the moment because deflationary pressures have driven the BOE base rate down

2. inflation profiles - at some point QE (money printing will cause inflation - regardless of what they say!)

I am in a similar position and plan on spending a few hours this weekend analyzing some scenarios. My bet is base rates will increase significantly once it's clear the market won't by UK Gilts and US Treasuries at current offer rates. If they rise significantly in then dont expect a 1 for one gearing - mortgage rates will rise rapidly to 6-10%. I spoke with a Savills agent today who told me her husband is a banker and he was in agreement with my predictions. He is betting on a property price crash in Q4. Caveat Emptor.

By my understanding BoE rates don't effect the price of new mortgage offers, only those existing ones which are currently tracking the BoE overnight rate. QE has probably artificially lowered the cost of long term debt so I agree with your idea that rates will eventually go to 6-10%, although most 5 year fixes I have seen are currently around 5% (6% if you have a small deposit) so it would not take much to push them up to that.

If anyone can fully clarify this though I would be grateful.. particularly the link between Swap-rates and gilt yields if possible :)

@ Sybil: I don't have a clue what your friends are thinking.. tbh they probably think the correction is over but don't want to tell you straight incase they are wrong. I have a friend in a similar situation.. I am not going to try and stop him (I wouldn't want to be responsible if I'm wrong).

Edited by libspero

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there are other important factors:

1. mortgage rates - they are artificially low at the moment because deflationary pressures have driven the BOE base rate down

2. inflation profiles - at some point QE (money printing will cause inflation - regardless of what they say!)

I am in a similar position and plan on spending a few hours this weekend analyzing some scenarios. My bet is base rates will increase significantly once it's clear the market won't by UK Gilts and US Treasuries at current offer rates. If they rise significantly in then dont expect a 1 for one gearing - mortgage rates will rise rapidly to 6-10%. I spoke with a Savills agent today who told me her husband is a banker and he was in agreement with my predictions. He is betting on a property price crash in Q4. Caveat Emptor.

pigs rushing down the cliff into the sea

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Jury is still out with regards whether I will return to HPC and post on a regular basis.

Jury is back and finds the defendent guilty.

Still not sure if this makes any sense but will post and see what you think.

I have seen properties that I would buy at 25% below peak, even though I think drops will eventually get to 40% nominal, 50% real.

At -25%, my overall gain from selling, renting cheaply then buying is more than 2.5x my gross income. Holding on for the next 15% just isn't worth the trouble.

VMR.

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If anyone can fully clarify this though I would be grateful.. particularly the link between Swap-rates and gilt yields if possible :)

Google for "what drives swap spreads" for a number of articles. The spread is the difference between the swap and treasury curves. There are a number of driving factors, principally credit and liquidity as well as risk appetite.

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Jury is still out with regards whether I will return to HPC and post on a regular basis.

Meanwhile was interested in some thoughts from a friend today, and wondered what you all think with regards what they said. I can hear people on HPC getting exasperated by the "bear of little brain" logic of this one.

I have several friends all waiting to buy, cash buyers.

One couple are fed up of waiting, and a house came up a few months back that ticked most of their boxes.

Nothing wildly exciting just an average home really but it was right for them where other more expensive properties were not. Builder modernised, high quality fittings, parking garage, nice garden attractive outlook.

At peak the property would have been around the £210000 mark.

Small 3 bed semi but done up nicely by a builder.

They offered 25% off peak for it £157000, but EA said they had had loads of other higher offers on it but obviously none accepted as the property is still unsold.

Friends decided that they would increase their offer to £180000, what's that about 14% below peak, but now just don't know what to do.

This is what they said to me today but I just got more and more confused trying to think about this .

If they wait until October / November there is a good chance they will find a property 30% below peak.

So for their £180000 they could get a £260000 property with 30% off (OK that would be about £182000), instead of a £210000 property with 14% off at £180000

Buying a £260000 property with 30% off effectively means they have gained £78000 should the property ever go back up, or gained by buying in 2009 instead of 2007 .

They said that buying the £210000 property with 14% off they will have potentially lost £48000 , that is the difference between £78000 theoretical gain buying a £260000 property at 30% below peak compared to a £30000 theoretical gain on a £210000 property bought at 14% below peak.

Good property at £210000 at peak were few and far between so buying at £210000 property rather than a £260000 will also make it difficult for them to trade later should they so wish without having to take a mortgage.

If they buy a £260000 property 30% off peak and it loses another 10% they will lose £26000. (OK only a loss if you sell but it IS a gain as they have the cash if you see what I mean).

If they buy the £210000 property with 14% off and it drop another 26% they will lose £54000. (If they try to sell ).

So what they were trying to say was that if they buy the £210000 property now at 14% off peak they will have theoretically lost the £48000 (that is the difference between paying £180000 for a £260000 property or a £210000 one + £54000 if the property loses another 26% ='s a TOTAL theoretical loss £102000

I know the % loss after purchase is actually on the £180000 not the original figure.

But if we keep at peak minus 14% and peak minus 30% etc for the sake of this argument and then peak minus 40% as that is the way they are looking at this.

Still not sure if this makes any sense but will post and see what you think.

Unless you intend to live at that property for 25 years then there is little point in doing the comparison for the full 25 year period. You may need to move because of job, income, health or family issues.

Even if your mortage is fully portable, i.e. you can take it with you when you move to a different property it may not be sufficient to meet the needs of the new property.

Knowingly going into negative equity is a bad idea IMHO.

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Firstly tell them to stop calculating profit based on peak prices, that will only be relevant when prices reach those levels again (in how ever many years). Tell them to do a simple calculation based on potential loss if prices drop another 10%, then they have to decide if the value to them of living in that house is worth that potential loss.

I am in a similar position; I sold in May last year and have seen a house that finally ticks all the boxes for me. If I can get this at 20% off peak I might be tempted, anything less than that and I'll sit out a bit longer in the belief prices have further to fall.

My philosophy is that a house is a home and not an investment, but if I can increase my net worth by buying at the right time without inconveniencing myself too much then I will.

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Google for "what drives swap spreads" for a number of articles. The spread is the difference between the swap and treasury curves. There are a number of driving factors, principally credit and liquidity as well as risk appetite.

Swap rates aren't really that important right now anyway. What's more important are credit spreads, where banks can actually fund themselves unsecured. That drives where they need to lend the money in order to make a reasonable spread.

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Swap rates aren't really that important right now anyway. What's more important are credit spreads, where banks can actually fund themselves unsecured. That drives where they need to lend the money in order to make a reasonable spread.

Er...not necessarily true if HSBC can raise funds at Libor +100bp on a floater but want to offer 5 year fixes.

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The market hit the bottom in Feb, they could had they bought Nov/Dec time got lucky and got a seller who was scared/desperate when there was no competition and maybe got 25-30% off.

Now 14% off peak sounds about right, but leave it a few months and they will be looking at 10%.

Sellers have a lot less incentive to sell on the cheap when they think they have just passed the bottom.

bull_trap.jpg

post-278-1246530657_thumb.jpg

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Er...not necessarily true if HSBC can raise funds at Libor +100bp on a floater but want to offer 5 year fixes.

Erm, you basically say I'm wrong, then quote a credit spread (+100).

If your example is right, then where HSBC can give out mortgages at the absolute cheapest is around 4.70% (the 5yr swap rate + 100bps).

So both bits are equally important. But my point is that credit spreads, and financing in general, are more problematic right now than rising swap rates.

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One couple are fed up of waiting, and a house came up a few months back that ticked most of their boxes.

Hi Sybil. Yes, I am one half of another couple fed up of waiting. Not too sure about this focusing on "peak price" thing. How do people work that out? I am veiwing a place tomorrow (2nd veiwing). It ticks all our boxes ( apart from one small one!). Last sale date according to Zoopla was August 08 at £165k. Now at £129k. EA says there is lots of interest blah blah. I have no idea whether or not that's true :angry: Don't really know what to offer, or maybe just say sod it and offer the asking price? Zoopla estimate thingy puts it at £132k.

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The market hit the bottom in Feb, they could had they bought Nov/Dec time got lucky and got a seller who was scared/desperate when there was no competition and maybe got 25-30% off.

Now 14% off peak sounds about right, but leave it a few months and they will be looking at 10%.

Sellers have a lot less incentive to sell on the cheap when they think they have just passed the bottom.

awooga.......

note to self: 'add murray mint to list of dohnuts.'

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Hi Sybil. Yes, I am one half of another couple fed up of waiting. Not too sure about this focusing on "peak price" thing. How do people work that out? I am veiwing a place tomorrow (2nd veiwing). It ticks all our boxes ( apart from one small one!). Last sale date according to Zoopla was August 08 at £165k. Now at £129k. EA says there is lots of interest blah blah. I have no idea whether or not that's true :angry: Don't really know what to offer, or maybe just say sod it and offer the asking price? Zoopla estimate thingy puts it at £132k.

they've had it less than a year and are selling already and willing to take a £36k hit. They need to sell, probably a distressed sale, unless it is a place that will attract a lot of interest then you are in the driving seat, play hardball.

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awooga.......

note to self: 'add murray mint to list of dohnuts.'

new trolls turning up recently.

Are they some of our old friends reincarnate having been cast out to the trolls group? or are they multiple i.d's because they need to reinforce each other?

I don't think being put in the trolls section is enough, they should all get a nice hairdo like sibley did.

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they've had it less than a year and are selling already and willing to take a £36k hit. They need to sell, probably a distressed sale, unless it is a place that will attract a lot of interest then you are in the driving seat, play hardball.

The story from the EA, is that the guy now selling it, bought it only to complete a chain which involved him selling a much bigger and more expensive house. He then rented it out for a while, but now just wants rid of it. It's currently empty. He put it on a couple of months ago at 150k (no interest) and has now dropped to 129. This drop, according to the Ea, has created a lot of viewings. I will almost certainly make an offer, just don't want to be dismissed as a time waster. I expect further falls in prices, but not too bothered. I can wait a few months, maybe a year, but having been looking for the last couple of years, I know how hard it is to find a place that is right. There is an awful lot of rubbish on the market.

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I think in simple terms......why buy when prices will drop another 20% from today.... :D

+1, except prices are going to more than half from where we are today. 60% drops from peak.

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Erm, you basically say I'm wrong, then quote a credit spread (+100).

If your example is right, then where HSBC can give out mortgages at the absolute cheapest is around 4.70% (the 5yr swap rate + 100bps).

So both bits are equally important. But my point is that credit spreads, and financing in general, are more problematic right now than rising swap rates.

In order not to have a flame war, let's agree that credit spreads and swap spreads are both important in determining the cost of fixed rate mortgages.

Interestingly, HSBC CDS have come down from a high of around 170bp in March to 75 now which is only 15 or so above where they were pre Lehman. At the same time, 5 year swap rates have risen from about 3.0% to 3.7% which has negated much of the improving credit environment (these two facts are of course related).

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