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At What Point Does It Make Sense To Buy?

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Genuine question, so don't flame me on this

Been following a flat near to where I live for about 8 months now. In that time it's dropped in prices from 155 to 135k. So a 135k mortgage is 520pcm interest only (I have non-property investments that will cover capital).

Since a 1BR in the area I live is usually about 700pcm to rent, at what point does it make sense to buy? e.g. rent for now hoping that prices drop further = spend more but hopefully capital decreases will account for my overspend, or buy now?

Would appreciate ideas on how to assess...

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Genuine question, so don't flame me on this

Been following a flat near to where I live for about 8 months now.  In that time it's dropped in prices from 155 to 135k.  So a 135k mortgage is 520pcm interest only (I have non-property investments that will cover capital).

Since a 1BR in the area I live is usually about 700pcm to rent, at what point does it make sense to buy?  e.g. rent for now hoping that prices drop further = spend more but hopefully capital decreases will account for my overspend, or buy now?

Would appreciate ideas on how to assess...

I think you can ignore the rental value or what you need to spend on renting it. The property price is also largely irrelevant.

You need to be looking at your salary multiple, 3.5 seems to be the recognised figure of a sensible level.

So the time to buy is when a property you would be happy living in is available for 3.5 your income.

You also need to condsider that historically rents have been much higher than a mortgage payment, at the moment it's in reverse, so when it drops to say £20 less to buy than rent it might look like the time to jump in, I'd say it needs to be more like £200 less a month than rent before it becomes worth buying.

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Genuine question, so don't flame me on this

Been following a flat near to where I live for about 8 months now.  In that time it's dropped in prices from 155 to 135k.  So a 135k mortgage is 520pcm interest only (I have non-property investments that will cover capital).

Since a 1BR in the area I live is usually about 700pcm to rent, at what point does it make sense to buy?  e.g. rent for now hoping that prices drop further = spend more but hopefully capital decreases will account for my overspend, or buy now?

Would appreciate ideas on how to assess...

The salary multiple thing only really works if you are at your peak of earnings and don't plan to trade up in the future. If you're at or near to peak earnings now and buy a 1BR flat at 3.5 times salary, how will you ever buy a house in the future ?

If in the future you expect to earn a lot more than you're earning now then it's a different story.

But as a renter you will not incur the following costs:

Buildings insurance

Service charges for exterior maintenance

Interior maint / wear & tear - eg. boiler, re-dec etc.

If you rent for 3 years then buy a house, instead of buying a flat now and selling in 3 years time to buy a house, you will avoid:

Stamp duty - £1,350

Estate agent fee to sell, sat 1.5% + VAT - £2,400 (assuming you sell for £135K)

Solicitors fees to buy and sell - £1,400

Mortgage booking fee - £500

There's a lot more to it than just mortgage interest v rent.

Edited by fdk

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Whether you buy or wait really comes down to whether you think prices are going to continue to fall. If they do fall, buying always is a very bad investment (unless rents were significantly higher than you quoted).

You say that the difference between an IO mortgage and renting is £180 per month. Don't forget that buildings insurance, service charges and maintenance will almost certainly eat that saving completely. Be careful not to kid yourself on this!

However, if you think that prices have bottomed out now, you might consider buying, but make sure you've taken everything into account:

Check it really costs £700 pcm to rent a similar flat. Where I live, the rent on £135k flats is around £500 pcm, for example.

Check the mortgage figures, too. Presumably £520 a month is either due to a discounted rate, or because you have a deposit. Don't forget to take into account the income you'd get from investing your deposit elsewhere. If the payments are at a discounted rate, don't forget these will increase significantly!

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Thanks guys - I'm not actually planning to buy as I think prices are going to keep dropping for some time.

Useful info on considerations on when to buy though - much appreciated.

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The salary multiple thing only really works if you are at your peak of earnings and don't plan to trade up in the future. If you're at or near to peak earnings now and buy a 1BR flat at 3.5 times salary, how will you ever buy a house in the future ?

If in the future you expect to earn a lot more than you're earning now then it's a different story.

Mmm, interesting point. I'm 29 now and unless the planets align I'm not going to increase my earnings. I think I reached my peak earnings when I was 24 (in real terms, since I've stayed about level since then).

I suppose all I've been doing since then is increasing the size of my deposit. Guess I'm just going to have to buy low and rely on the next HPI.... :unsure:

Edited by Nijo

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Genuine question, so don't flame me on this

Been following a flat near to where I live for about 8 months now.  In that time it's dropped in prices from 155 to 135k.  So a 135k mortgage is 520pcm interest only (I have non-property investments that will cover capital).

Since a 1BR in the area I live is usually about 700pcm to rent, at what point does it make sense to buy?  e.g. rent for now hoping that prices drop further = spend more but hopefully capital decreases will account for my overspend, or buy now?

Would appreciate ideas on how to assess...

With IR's set to fall, don't forget to calculate the potential lower cost of owning over renting.

You landlord won't suggest lowering the rent with IR's......

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Mmm, interesting point. I'm 29 now and unless the planets align I'm not going to increase my earnings. I think I reached my peak earnings when I was 24 (in real terms, since I've stayed about level since then).

I suppose all I've been doing since then is increasing the size of my deposit. Guess I'm just going to have to buy low and rely on the next HPI....  :unsure:

A friend of mine went to a flat warming BBQ last Saturday. A work colleague of hers had bought new 1 bed flat in Putney for £200K, 100% mortgage, based on 4 x salary !!!

So how will he ever trade up ? If prices fall he's still got £200K debt at 4 x salary. If prices rise he's still got £200K debt at 4 x salary.

With a 100% mortgage he's already in negative equity, and it looks like he will be stuck there for quite a long time.

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Nobody can tell YOU when it is time to buy for YOU.

But I would suggest a general guide would be the rental yield - about 6.22% on the numbers you gave - or the general house prices-to-income levels (currently 5.7-ish times?).

A yield of 6.22% seems pretty low to me (given base rates of 4.5% and higher borrowing costs).

Personally, I'd want a yield nearer 7.5% and house-prices-to-incomes of no more than 4 times (preferably a higher yield AND a lower average incomes multiple).

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Another tip I was given from a trader was, buy when everyone is telling you to sell and sell when everyone is telling you to buy. I don't think that he was referring to 'everyone' in terms of the people who post on this site :lol::lol::lol: We have already hit the nevous stage in the house buying television (The Property Chain)

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With IR's set to fall, don't forget to calculate the potential lower cost of owning over renting.

I'm afraid you're the only one who thinks IRs are set to fall much further.

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Guest Time 2 raise Interest Rates

If you were to buy now don't forget to add in higher interest rates when they begin to rise in the New Year. Could be an important factor. ;)

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Mmm, interesting point. I'm 29 now and unless the planets align I'm not going to increase my earnings. I think I reached my peak earnings when I was 24 (in real terms, since I've stayed about level since then).

I suppose all I've been doing since then is increasing the size of my deposit. Guess I'm just going to have to buy low and rely on the next HPI....  :unsure:

look,there are always means of improving your earnings.I felt the same way you do a couple of years ago.when I was employed my pay rises were about 3% per year and I got sick of it.

My way out was when I realised that companies are:

a)able to expense away most taxable stuff

b)always looking to do things faster and cheaper.

I started taking an interest in automation and how to facilitate it to niche jobs it hadn't been considered for,then I went self-employed and started touting for work....a much larger chunk of my earnings are now in MY pocket,not the tax-man's!!

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Genuine question, so don't flame me on this

Been following a flat near to where I live for about 8 months now.  In that time it's dropped in prices from 155 to 135k.  So a 135k mortgage is 520pcm interest only (I have non-property investments that will cover capital).

Since a 1BR in the area I live is usually about 700pcm to rent, at what point does it make sense to buy?  e.g. rent for now hoping that prices drop further = spend more but hopefully capital decreases will account for my overspend, or buy now?

Would appreciate ideas on how to assess...

I have wondered about this too and I think it is a crucually important question, in fact the main reason why I come to this site.

Basically my reasoning is that you should buy as soon as it is cheaper to buy than rent again. salary multiples don't come into it (except than when it is cheaper to buy than rent, salary multiples are likely to be more reasonable again:it's an indicator, not a reason in itself: the reason in itself is that it is cheaper to buy.)

How you calculate this is important. In your example it's 520 vs 700, so on the one hand you could argue you should buy now.

But this is too simplistic. You need a view on waht IRs are likely to do (in my opinion, stagnate for a few months then slowly edge up, arguing mildly for a buy now scenario with fixed rates) and what house prices are likely to so (in my opinion, slowly decrease in real terms for a few years, arguing strongly for a rent now scenario).

you also need to take into account other ownership costs such as repairs etc.

It is also important how long you plan to stay put. If you plan to move to a larger place in the not too distant future, it is likey to be better to rent due to the high one off costs of buying.

I've modelled this (in a slightly simplistic way) in excel and what the models show is that makingt the right decision can be worth hundreds of thousands of pounds over the lifetime of a mortgage.

What I think is true (though I have yet to model this properly) is that even in a falling market, it can be cheaper to buy than rent because the capital hit you take is lower than the difference between the interesty paid on your mortgage and the rent, i.e it's probably better to buy slightly before the trough.

Getting the timing right for the lowest possible cost is I suspect almost impossible though and other factors such jobs moves, mariages, new kids etc are likely to be key factors.

That's my two pennies' worth anyway.

B.

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  • 302 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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