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A Wise Argument In Favour Of Renting: Mobility

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An American article, with a wise argument in favour of renting - mobility - particularly in this uncertain job market.

Summary: The worst time to be trapped in negative equity - if a new job would requires relocation.

http://www.economist.com/blogs/freeexchange/2010/04/homeownership

Rent or buy?

Apr 21st 2010, 15:15 by R.A. | WASHINGTON | USA

GOING into the housing bust, I would have accepted David Leonhardt's general framing in this piece: that the decision to rent or buy one's home is primarily about the relative costs, and that most people should at least consider buying if the price to rent ratio hits a certain threshold. These days, I think that's not at all the right way to think about the choice. Homeownership, let's recall, is in most cases a highly leveraged, undiversified, relatively illiquid bet, with a return that is highly correlated to local labour market conditions. In general, responsible financial planners would warn their clients away from such an investment. Sure, you get a roof over your head as part of the bargain, but the potential downside is enormous, as should be blindingly obvious to us all.

But Mr Leonhardt sets most of that aside and suggests that, hey, maybe you should play around with the New York Times' mortgage calculator, and think about buying. Problem one is that said calculator asks you to fill in the about by which "you expect home prices to go up each year". The correct assumption should be zero. Strikingly, the calculator gives you the option to estimate annual appreciation as high as 30%. It doesn't let you enter an annual decline of value of greater than 10%, despite the fact that over the past year, several markets have seen price declines of at least that much. The latest Case-Shiller index has Las Vegas showing a 17.4% annual drop in value. Given how leveraged home purchases are (even the responsible ones that involve 10% to 20% down payments), the danger of declining home values should be given significant weight.

Especially given the problem of illiquidity and the correlation of returns with local labour market conditions. Mr Leonhardt writes:

"In some once bubbly markets, prices have fallen so far that buying a home appears to be a bargain, based on a New York Times analysis of prices and rents in 54 metropolitan areas. In South Florida, Phoenix and Las Vegas, house prices — relative to rents — are as low as in places that never experienced a bubble, like Indianapolis and St. Louis."

Well that's lovely, but what is the value of having the option to pick up and leave these metropolitan areas at no cost? As of February, Las Vegas' unemployment rate was 13.9%. Should we be encouraging people to chain themselves to labour markets like this for at least five to seven years? One of the great virtues of the American labour market is its flexibility, and especially its geographic flexibility. In good times, home-ownership doesn't reduce this flexibility by all that much, but good times aren't when you need a labour market that can rapidly adjust to uneven economic conditions. I would hope that most Americans would have more sense than to look at the enormous declines in home prices over the past few years and see a buying opportunity, rather than a cautionary tale.

Edited by Tired of Waiting

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Yep, this is a big factor in my reasoning.

I love living where I do but the lack of work in what I do is very worrying. Now that the public sector cull is about to begin then my part of the work is going back to the 80s.

Currently, renting and being able move to work is a big plus BUT... one of the downsides for the UK is the minimum rental agreements - often 12 months in London and the SE - which could be very iffy if, for example, you move for a job, take a lease out and then the company you just started with gets into trouble and fires you.

Although there will probably be loads of people renting out a spare room in the country soon.

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Yep, this is a big factor in my reasoning.

I love living where I do but the lack of work in what I do is very worrying. Now that the public sector cull is about to begin then my part of the work is going back to the 80s.

Currently, renting and being able move to work is a big plus BUT... one of the downsides for the UK is the minimum rental agreements - often 12 months in London and the SE - which could be very iffy if, for example, you move for a job, take a lease out and then the company you just started with gets into trouble and fires you.

Although there will probably be loads of people renting out a spare room in the country soon.

Around here the standard minimum is 6 months. And (strangely) many landlords don't want longer leases. We tried to negotiate a 2 years lease recently, and the landlord refused. Didn't even agree with 1 year. I think she was planning to sell in the near future.

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An American article, with a wise argument In favour of renting - mobility - particularly in this uncertain job market.

Summary: The worst time to be trapped in negative equity - if a new job would requires relocation.

http://www.economist.com/blogs/freeexchange/2010/04/homeownership

Yeah but you could always rent out your home, while you relocate. Plus if you bought it a while back you could make some income as well as pay your mortgage - and please don't tell me I don't know what I am talking about as I have already done this with 2 properties.

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Around here the standard minimum is 6 months. And (strangely) many landlords don't want longer leases. We tried to negotiate a 2 years lease recently, and the landlord refused. Didn't even agree with 1 year. I think she was planning to sell in the near future.

How dare you try to disrupt the money making stratagy of some of our 'hard working' speculators. They demand the right to be able to sell their asset at whatever particular whim they fancy.

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Yes I enjoy knowing that I can up sticks and leave whenever I want.

Praise the Lord for all the BTL houses that mean I can go and live wherever I want around the country. Imagine how difficult it would be if I had to buy every house that I wanted to live in.

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Came across an IT consultant this week, about 40 years old - left school at 17, has always been employed in IT, specialised in recruitment software (he called it a niche market), no contracting - made redundant last year and went 10 months without a wage. Back in work in the same field on much reduced £3k per month, but commuting to London every day 200 mile round trip: gets up at 6am, home at 9pm. Has put house on market, but there are three other properties in his road up for sale. And he's just had a charging order against the house.

Decent guy. No mobility. Kinda screwed.

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Problem is the rents aren't exactly cheap!

Does anybody remember last week on unreported world?

They showed American cities falling apart with homeless, rents were circa $800 a month for small apartments.

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It is relevant, but i think far more relevant in America than here. If you live in the middle of the 'rust belt' you may as well live in Siberia given the distances involved. In the UK obviously distances are far less.

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(...) just had a charging order against the house.

Ouch. Sad.

Does that mean he still has some equity in the house though? I guess so, right? So why doesn't he lower the price to the real market level, and sells it?

BTW (sorry if side-tracking here, but...) what about all these government programs to support defaulting property buyers, if a creditor puts a charging order against the house? Will that finally force the "owner" to sell the property? If so, credit card debts would trigger forced sales, independently of government programs. :)

(If we still had Labour in power I bet they would then come with a "rescue scheme" to save "hard working families" from "evil"Credit Card companies... :rolleyes: )

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Mobility is all very well for people without dependents. If you have children whose schooling will be disrupted, an older / disabled relative who depends on you for accomodation or support and / or a partner who also has a job and will have to find another one in the new area, it's very much more complicated.

And even if you're single and without dependents, you will have to leave behind your social networks - clubs, sports team, just general mates.

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Mobility is all very well for people without dependents. If you have children whose schooling will be disrupted, an older / disabled relative who depends on you for accomodation or support and / or a partner who also has a job and will have to find another one in the new area, it's very much more complicated.

And even if you're single and without dependents, you will have to leave behind your social networks - clubs, sports team, just general mates.

Of course. Being forced to move is a great disruption for a family. But if moving is the only way to increase the family income (considering the wife's salary also), then it may be the only alternative. Better to have this option, than to be trapped by negative equity.

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You're all crazy! Renting is dead money! Buy! Buy! Buy! Buy! Buy!

The benefit of mobility is something the State can support well if it chooses to do so. The national curriculum is supposed to mean children can move to a new school without serious disruption to their education. Council dwellings (for paying tenants) are similarly a useful cog in the engine of production.

The ideal is that state provided 'stuff' should be at a dependable level of quality across most of the country. A problem is that it isn't. A nother problem is the fickle nature of politicians who keep changing targets and priorities. If this Government wanted to do something useful it should get all the changes out of the way in year 1 and leave things alone for the other 4 years. The private and public sector alike have spent the past 13 years constantly adapting to new rules, new regulations, fiddles with the tax system, additional statutory responsibilities, and on and on. Is it any wonder Britain is flagging economically when the workforce had to keep up with the rest of the world *and* the bureaucracy.

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You're all crazy! Renting is dead money!

It is. But you also have to pay rent on borrowed money. It just has a different name: "interest".

You have to compare the rent of a house, with the interest on a mortgage for a similar house.

Currently, with rates this low, interest are cheaper. But you have to consider the likelihood of rates going up.

And then you have to estimate if house prices will go up or down.

If you think interest rates will remain low, for many years, and if you think house prices will go up, then of course you should buy.

But if you think interest rates will go back to more normal levels, in the next few years, and if you think that house prices will come down to more normal levels, due to higher unemployment, salaries falls, and higher interest rates, then of course you should rent.

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Indeed, a property can be a millstone! :huh:

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Problem is the rents aren't exactly cheap!

Relative to the cost of buying rents are cheap.

Ive said for a while now renting is fabulous. I've moved 3 times now in 3 years ( twice for work and once because my LL sold up) and would probably not be in Paris if I'd owned a house in the UK.

If you can be flexible and move to where the work is you mnight well struggle to get a job if you need one.

Edited by TheCountOfNowhere

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Rent is still dead money and will not provide an income in later life like a well managed portfolio of property will.. You lot are really clutching at straws!

You're begging the question when you say "well managed" - that includes management of the debt taken on to acquire the portfolio. If it's too big, you ain't going to get income in later life - at best you merely service the debt.

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Mobility is all very well for people without dependents. If you have children whose schooling will be disrupted, an older / disabled relative who depends on you for accomodation or support and / or a partner who also has a job and will have to find another one in the new area, it's very much more complicated.

And even if you're single and without dependents, you will have to leave behind your social networks - clubs, sports team, just general mates.

Sometimes you just have to do it.

I am no spring chicken anymore, but, in the last five years, Mr DJ and I have crossed a total of 4,400 miles in order to earn income. We eventually ended up in a place that I swore I would never return to, where we had no friends or social networks, it was unbelievably hard the first few years, but it has been the best thing we ever did.

My dad has always said: "People don't like change, but change is good for people" and I think there is a lot of truth in that.

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Renting can be a good option but this doesn't mean buying is always a bad idea.

Rental costs aren't exactly cheap... in many cases you might well find that a mortgage costs you the same or less than renting and you get the added bonus of not having to line some BTL knobbers pocket.

If you are buying to live long term in a property or run an established business from commercial premises then buying gives you more security and less expense in the long run- at some point the mortgage is repaid... unlike rent which continues until you're dead.

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You're begging the question when you say "well managed" - that includes management of the debt taken on to acquire the portfolio. If it's too big, you ain't going to get income in later life - at best you merely service the debt.

Good post.

And the first step, even before managing the portfolio, is to know when to buy: not near the peak, just before a crash.

This chart and table are 6 months old, but I think it's still informative.

CFN682.gif

CFN683.gif

http://www.economist.com/research/articlesBySubject/displaystory.cfm?subjectid=2764524&story_id=15179388

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Sometimes you just have to do it.

I am no spring chicken anymore, but, in the last five years, Mr DJ and I have crossed a total of 4,400 miles in order to earn income. We eventually ended up in a place that I swore I would never return to, where we had no friends or social networks, it was unbelievably hard the first few years, but it has been the best thing we ever did.

My dad has always said: "People don't like change, but change is good for people" and I think there is a lot of truth in that.

Good post.

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The only argument I have at present in this climate for buying a house is if I had enough money to buy outright in a house that I knew I could live in for a very long time and still retain a fair wedge of savings if Mr DJ and/or I lost our job.

Such as sum, at present, would be somewhere in the region of £300,000. At current rates, it would take us 18 years to save up that much.

I just can't see how we could validate buying otherwise. There is a reasonable chance we could lose our jobs, for example; it's just safer for us to rent.

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The only argument I have at present in this climate for buying a house is if I had enough money to buy outright in a house that I knew I could live in for a very long time and still retain a fair wedge of savings if Mr DJ and/or I lost our job.

Such as sum, at present, would be somewhere in the region of £300,000. At current rates, it would take us 18 years to save up that much.

I just can't see how we could validate buying otherwise. There is a reasonable chance we could lose our jobs, for example; it's just safer for us to rent.

Exactly. And on a 300k house it is easy to lose the equivalent of a whole year savings. A fall of just 5.5% would do that.

Besides, if you had these 300k, you would have to consider also the cost of the missing alternative: put it in a savings account at 4%aa.

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  • 149 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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