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GBdamo

Buying In A Falling Market

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I’ve been trying to work out at what point, in a falling market, is it cheaper to buy than rent.

There must be a cut off point where your rent is more than your property losses/interest payments.

If as I believe we see a Japanese style 'death by a thousand cuts' correction to 50% from peak over 10 years, then it should be easy to work out exactly when this point arrives.

Problem is my maths isn’t up to it.

Any takers?

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I’ve been trying to work out at what point, in a falling market, is it cheaper to buy than rent.

There must be a cut off point where your rent is more than your property losses/interest payments.

If as I believe we see a Japanese style 'death by a thousand cuts' correction to 50% from peak over 10 years, then it should be easy to work out exactly when this point arrives.

Problem is my maths isn’t up to it.

Any takers?

Try the rent vs buy spreadsheets over at excelexperts.

VMR.

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I’ve been trying to work out at what point, in a falling market, is it cheaper to buy than rent.

There must be a cut off point where your rent is more than your property losses/interest payments.

If as I believe we see a Japanese style 'death by a thousand cuts' correction to 50% from peak over 10 years, then it should be easy to work out exactly when this point arrives.

Problem is my maths isn’t up to it.

Any takers?

Ultimately it's guesswork but the breakeven point is broadly where the interest payments plus the interest plus any expected losses is less than the rent over the period of expected drops.

So hypothetically, a £150,000 house renting for £700 p/m expected to fall to £100,000 over 4 years could be:

Capital loss: £50,000

Mortgage interest (say) £100,000 x 5% x 4 = £20,000.

Interest on deposit lost (say) £50,000 x 2% x 4 = £4,000

Total cost £74,000 over 4 years; total rent over the same period £8,400 x 4 = £33,600 - cost of owning £40,400.

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Guest DissipatedYouthIsValuable

Knowing in advance how far property will drop in price helps.

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Try the rent vs buy spreadsheets over at excelexperts.

VMR.

Cheers VMR, will play with that later.

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Knowing in advance how far property will drop in price helps.

Thought you were a member of the 90% club?

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Ultimately it's guesswork but the breakeven point is broadly where the interest payments plus the interest plus any expected losses is less than the rent over the period of expected drops.

So hypothetically, a £150,000 house renting for £700 p/m expected to fall to £100,000 over 4 years could be:

Capital loss: £50,000

Mortgage interest (say) £100,000 x 5% x 4 = £20,000.

Interest on deposit lost (say) £50,000 x 2% x 4 = £4,000

Total cost £74,000 over 4 years; total rent over the same period £8,400 x 4 = £33,600 - cost of owning £40,400.

Thats about as far as I got but then started getting confused with capital payments and, if I beieve corrctly, every mortgage payment there is an ever incrasing change in proportion of capital payment to intrest payment., admittedly very small.

Edited by GBdamo

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For me when the YOY figure is -4% then I need to think about buying.

I believe, we are not going to see much more than -4%/year but over the 6-8 years. Taking us to an overall 50% drop from peak.

Judging by this year we are likely to see spring gains offset by winter falls ending up net down by -4%.

I know people hate to have to mention it but what is this years % change figure. It has to be close to a net zero, Jan-Apr losses recovered by May-date gains? We should now see around 1%/month drops between Sept and Dec. End year -4%

IMHO, obviously :)

Edited by GBdamo

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rent and mortgage payments in a falling market, are both moving targets dontchaknow.

location and quality of the target house will make a difference too.

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mortgagesexposed is another great site for looking at why buying is normally cheaper than renting over 25 years. Put in some realistic numbers and many will be surprised. It's really cool to add in some overpayments too, just pop in a few extra quid each month and watch the repayments fall (or term shorten).

Personally it is my view that as long as you avoid buying at the peak and selling at the bottom you won't have done so badly. Of course in an ideal world we'd time it perfectly but life rarely works out like that. Just make sure you can afford it and have enough left over to maintain the lifestyle you want - what else do you really need....?

Best of luck with the buy!

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mortgagesexposed is another great site for looking at why buying is normally cheaper than renting over 25 years. Put in some realistic numbers and many will be surprised. It's really cool to add in some overpayments too, just pop in a few extra quid each month and watch the repayments fall (or term shorten).

Personally it is my view that as long as you avoid buying at the peak and selling at the bottom you won't have done so badly. Of course in an ideal world we'd time it perfectly but life rarely works out like that. Just make sure you can afford it and have enough left over to maintain the lifestyle you want - what else do you really need....?

Best of luck with the buy!

Using the excel spreadsheet VMR suggested, Here , I find myself £9000/year better off renting although I would like to look into it a little further before taking it too seriously.

BTW that is using -4% HPI and +3% on savings based on a purchase price of £130,000.

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I believe, we are not going to see much more than -4%/year but over the 6-8 years. Taking us to an overall 50% drop from peak.

Judging by this year we are likely to see spring gains offset by winter falls ending up net down by -4%.

I know people hate to have to mention it but what is this years % change figure. It has to be close to a net zero, Jan-Apr losses recovered by May-date gains? We should now see around 1%/month drops between Sept and Dec. End year -4%

IMHO, obviously :)

It is not that simple though is it?

The latest Rightmove HPI said it was advising sellers to take a lower offer from a cash rich buyer rather than a higher offer from someone who needed a mortgage because not only are there problems getting mortgages but problems getting valuations anywhere near the asking /or offer price! Lenders appear to be valuing property 25% + under peak and chains are breaking as a consequence.

Property just isn't selling, Under Offer / SSTC yes but SOLD ......is proving to be elusive in a great many cases.

Rightmove also believed that the shortage in lending isn't something that is going to change for years, and also said that approvals even in 2013 will be well under the level needed for house prices to stop falling .

So yes, as you say, what with the +'s over the summer we could end the year just - 4% yoy, however, at the start of the year Rightmove and Savills were telling sellers to reduce 25- 30% , and Rics said they believed Halifax and Nationwide indices were wrong, that their members agreed property had already fallen 30% , so does leave one asking how much is property actually selling for if it is selling at all?

There is a view that the only reason property looks like it is going up is because the only people who are buying are cash-rich and fussy, certainly RM's latest HPI seems to confirms this view also:

According to figures from Henry Pryor of HousingExpert.com, the number of properties coming on to the market has fallen from "a peak in February 2004 of over 7,400 per day to just 3,100 today." Meanwhile, the number of sales has dived from a "peak of 5,200 per day in the summer of 2007… to just 1,300 last Christmas" before recovering a little during the "spring selling season to 2,500 a day".

So both the number of sellers and number of buyers has dived – but the gap between the two has closed. So you've got more buyers chasing fewer properties. And if all of those buyers are cash-rich and fussy, they're only going to be chasing the best homes on the market. That suggests that the average price paid is going to be higher than you'd see in a more typical market with a larger number of transactions.

So what next?

IMO given that so few properties are actually getting to SOLD:

UK house prices (asking) have stopped their recent 'dead cat bounce' according to Miles Shipside and his team at Rightmove. Estate agents now have on average seventy properties each on their books, and are only selling ten per month according to RICS...

However, this RICS contention is not supported by recorded data. With only 35,000 property sales a month, according to Land Registry, and the head count of agents being circa the same this would suggest that agents are in fact only selling on average one property per month.

.......and so many are just sitting there, EA's are going to have to consider if they want 70 properties sitting on their books doing nothing or 70 that are marketable in todays market that is a market where lending is severely restricted and valuations are 25% + under peak?

What we are witnessing is far from a normal market, that is normal as in pre 2001 not normal as in wholesale market fuelled madness , but whether we will see the adjustment needed this winter really depends on a few negative figures and a lot more talk about what RECOVERY really means rather than the implication that NORMAL means a return to 2007 values!

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It is not that simple though is it?

A vary intresting point of view, one that I have posted elsewhere. That is the majority of sales are much reduced quality property and as a result the indices are being skewed upwards.

Although I agree that we have seen 20%+ falls across the board, looking forward I don't think those falls will continue.

First off cash buyers will dwindle to the point where they do not mees with the indices. Many 'Homeowners' will be stuck in NE (not Tyneside) and will not be able to sell. So year by year they will nibble away at thier mortgage, a bit of inflation and things wont look so bad and they will cut thier loses and start agian. All the time prices will be dropping slightly year on year.

It is within this set of circumstances that I need to look at when is the best time to buy and not look for some distant bottom of the market that may cost me 1,000s in rent waiting for.

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Course, its not buying the house that gets you...its when you cant afford the DEBT anymore.

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Course, its not buying the house that gets you...its when you cant afford the DEBT anymore.

A pHD is stating the obvious I see. Is that how people get thier post counts up round here?

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A pHD is stating the obvious I see. Is that how people get thier post counts up round here?

Obvious to some, not others.

people using affordabilty criteria dont see the debt, they see monthly repayments.

And I enjoy the site...its worth contributing to, if you please.

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Obvious to some, not others.

people using affordabilty criteria dont see the debt, they see monthly repayments.

And I enjoy the site...its worth contributing to, if you please.

sorry :unsure:

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Why not approach the subject on a different angle....but using the same figures quoted earlier as a baseline and think for a moment....

150K house - Say you buy it with 0 deposit today. same 5% rate. Rent 700pcm

Over 4 yrs, you will pay 28.7K interest. Rent meanwhile will be 33.6k. net loss with renting 4.8k.

To make it simple, your original capital of 150k will need to have depreciated by 3.33% after this 4 yrs period so that interest paid + capital loss = rent paid. Since 150k * 3.33% = 4.8k.

There are too many variables to make a call as this ignored inflation, assumed a fixed rate, ignored overpayments (hence less interest paid etc.......)

The key for me to look at if I were you is to ask yourself how much would you be prepared to lose/gain/breakeven in capital over this period of time and whether this outweight or not the benefits (or lack of it) of renting.

Edited by BrickandMortar

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Why not approach the subject on a different angle....but using the same figures quoted earlier as a baseline and think for a moment....

150K house - Say you buy it with 0 deposit today. same 5% rate. Rent 700pcm

Over 4 yrs, you will pay 28.7K interest. Rent meanwhile will be 33.6k. net loss with renting 4.8k.

To make it simple, your original capital of 150k will need to have depreciated by 3.33% after this 4 yrs period so that interest paid + capital loss = rent paid. Since 150k * 3.33% = 4.8k.

There are too many variables to make a call as this ignored inflation, assumed a fixed rate, ignored overpayments (hence less interest paid etc.......)

The key for me to look at if I were you is to ask yourself how much would you be prepared to lose/gain/breakeven in capital over this period of time and whether this outweight or not the benefits (or lack of it) of renting.

just wondering where a 150K small house with no garage gets £700 pcm?

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just wondering where a 150K small house with no garage gets £700 pcm?

There you go again... :P Just kiddin.

Round here 3 bed simi with garage would be £600-700 to rent.

To buy, £165,000-£200,000. Although I have seen one up for £139,000 - Repo.

The real problem is very few people can afford to sell thier houses for what they are worth... What people can afford to pay them.

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There you go again... :P Just kiddin.

Round here 3 bed simi with garage would be £600-700 to rent.

To buy, £165,000-£200,000. Although I have seen one up for £139,000 - Repo.

The real problem is very few people can afford to sell thier houses for what they are worth... What people can afford to pay them.

touche...so the 150K rent for 700 scenario is not a goer.

round here, yer 225K are going for 800-850, and these were 280K two years ago. rents went up then fell back.

Im payin 900 for a 400K place....at least. some flats, priced at £130K newbuild are renting....if they can for sub 400.

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snip

The real problem is very few people can afford to sell thier houses for what they are worth... What people can afford to pay them.

this is the problem and why the banks need to keep lending. oh, thats not a solution though is it.

in the US, default of 5% makes a bank unstable.

funny, the default rate system wide is over 6%.

I dont think a return to lending at 2007 levels is really on the cards.

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