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apom

What Is A House Worth..

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What the house is worth?

A conversation with my girlfriend last night bought from her a comment about the rented house that her and her family live in while they wait for their new build to be finished.

The Rent is £1000 a month and at a purchase cost of £350,000 it would be cheaper to buy the thing..

(she had just moved in, to be honest moving house and stress attached may have clouded her judgement..)

I pointed out to her that if the Landlord had paid £350,000 he was subsidising them quite nicely.. I explained with the below sums..

4 bed town house, market value £350,000 in Exeter, nice new development. Good size bedrooms and three bathrooms..

Rent yield at £1000 a month.

So what is the landlord making?

At £350,000 and working against a 15% deposit that means a mortgage for the BTL Landlord of

£297500

Working at 5% interest against the loan that would be

£14875 a year

Or a cost to the Landlord of £1239.58 a month.

On an interest only mortgage that would be a loss of £239.58 a month.

If the interest against the loan was all that was paid. And no costs or tax were added.

Costs for the property are laid out below, But I estimate a conservative £200

A loss of £439.58 a month before any profits are made or any capital is paid back.

Now work back from the £1000 gathered from the investment.

What sort of mortgage, or borrowing would £1000 actually support?

Take £1000

Take away costs

£100 for maintenance and to pay a leasing agent to manage the property.

£50 insurance (building, presuming unfurnished)

And Tax, its income… lets be generous (very) he only pays £50 for this.

So £800 is left to service the loan still at 5% interest.

That would be a break even if the house was worth £192,000

£158,000 overvalued.

That’s 45% less then the current perceived value before it could be considered to be rented WITHOUT LOOSING MONEY.....

That is the key point, that is the value of the house where a landlord breaks even.

the Loan is not getting paid of. Inflation is all he makes..

Does that still exist?

So the House is worth £192,000

So what is £350,000?

£350,000 is what people used to pay.

One more point.

This is just to service the loan. No capital is being paid back at all and I have also not allowed for any profit.

Profit must be garnered from the inflation of the values of the house.

As a non homeowner with no debt I then took my girlfriend out for dinner..

She was looking happier.. I think finally she sees the house prices can only be temporarily this high..

Edited by apom

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This is just to service the loan. No capital is being paid back at all and I have also not allowed for any profit.

Profit must be garnered from the inflation of the values of the house.

As a non homeowner with no debt I then took my girlfriend out for dinner..

She was looking happier.. I think finally she sees the house prices can only be temporarily this high..

Exactly, have a look at the long thread started by TtRTR called "The fate of those who never buy." I was called a "BS'er" when I mentioned that myself and my nextdoor neighbour are saving £2200 and 2700 / month respectively by not buying. Add that up over a few years, and youv'e bought yourself a house cash. Buying in the current market is for mugs only.

Nomadd

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Dr Bubb has an excellent formula for valuing a property.

Take the weekly rent and add three noughts; in the case of the above property that's roughly £250 per week. Add three noughts and you arive at £250,000.

On that basis it's over-valued by £100,000.

Edited by Red Baron

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My sums suggest more.

Mine left the owner with NO PROFIT..

and very geneous running costs..

and no repayment at all against the loan.

Essentially my price was the maximum you could pay for it and not loose money.

Are there any flaws in my logic.?

I would be intrigued to know.

I may have missed something..

But sometimes financies are simple.

any more expensive and you loose.

and you need far more a month to start paying of the loan.

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Exactly, have a look at the long thread started by TtRTR called "The fate of those who never buy." I was called a "BS'er" when I mentioned that myself and my nextdoor neighbour are saving £2200 and 2700 / month respectively by not buying. Add that up over a few years, and youv'e bought yourself a house cash. Buying in the current market is for mugs only.

Nomadd

By not buying over the last 20 years you've made an absolute fortune then!

Not buying over the last 20 years has really been a hugely successful strategy for you. I bow to your brilliance.

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My sums suggest more.

Mine left the owner with NO PROFIT..

and very geneous running costs..

and no repayment at all against the loan.

Essentially my price was the maximum you could pay for it and not loose money.

Are there any flaws in my logic.?

I would be intrigued to know.

I may have missed something..

But sometimes financies are simple.

any more expensive and you loose.

and you need far more a month to start paying of the loan.

I don't think you are on the wrong track mate, just one or two things you forgot to mention.....

The purchaser does not save by using his own funds as a deposit. His money or the lending institutions money, it makes little difference. Either he forgoes interest on his 'stake', or he get charged more interest.

Then we have........

Purchase and selling costs.

Letting agents fees.

Insurances.

Breakages and renewals.

Local council taxes.

Accountants fees.

Void periods.

and at the end of the day.....Capital gains Tax :)

That is assuming of course that the 'wannabe landlord', ever makes a "Profit"

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This is not about houseprices.

this is only about "can an investment work?"

irrelevent that this is a house price forum for this question.

Look at it as .. you are intelligent people I want your unbiassed point of view.

Look at my figures.. think of it not as a house but as an investment.

Do my figures hold water? have I missed something?

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At £350K, he has a very low-yielding asset - AND the risk of capital loss

do my figures not demonstrate that the capital loss is having an impact monthly as he has to "subsidise" the rent anyway.??

the house in question is a development which is less then a year old.

30 town houses all bar threee are rented and they were sold when completed at the £350,000...

why would you want this investment?

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Dr Bubb has an excellent formula for valuing a property.

Take the weekly rent and add three noughts; in the case of the above property that's roughly £250 per week. Add three noughts and you arive at £250,000.

On that basis it's over-valued by £100,000.

Apparently in the early 90's property investors worked out yields on a 10% basis.

Therefore if a house produced £1000 per month rental income, which is £12,000 per annum, they would pay approximately £120,000 for such a property.

Therefore on this basis this house is worth £120,000 or 65% less than its current "value"...!

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do my figures not demonstrate that the capital loss is having an impact monthly as he has to "subsidise" the rent anyway.??

the house in question is a development which is less then a year old.

30 town houses all bar threee are rented and they were sold when completed at the £350,000...

why would you want this investment?

Think of the mindset of a BTLer.

Assume house prices increase on average by 5%. After 25 years your £35,000 deposit is worth £1.1 million. Assuming you never have to sell (and why would any BTL assume different) then even though you subsidise rent each month you're still quids in.

Looks attractive on the face of it and I don't think new investors are much more savvy than to look at it in more detail.

Edited by Ignorant Steve

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I’m slightly intrigued by this new paradigm thing – obviously I should dismiss it from my mind instantly, but there is something suspiciously like it in the published data … :unsure:

For most people the “real” cost of buying a house is simply the mortgage payment as a fraction of take home salary, so a ‘cost’ of something like 18-20% of gross income except when stretching to buy at a peak.

This can be translated using historic average wages and interest rates into a ‘steady state’ price model (it needs scaling by about 1.6 to sit in the Nationwide data) - it diverges hugely as expected at the peaks (i.e marks them) and the ratio actual:model looks like a reasonable bubble index.

As this measures houses in terms of borrowing costs, and there is evidence that this is how many people decide their spending on houses, then the shift in the interest rate environment from, let’s say, 10% pre-1992 to half that post 1992 has shifted the costs *down* and the steady state price model *up* by very roughly a factor of 1.5-2.

On this basis, houses might seem only slightly overpriced and is why the lenders are continually banging on about affordability. The obvious problem with this way of thinking is that it ignores actual ‘value’ and just looks at borrowing costs as a sort of ‘rental’, but if everyone borrowing expects IRs to stay in single digits then this must account for a sizeable chunk of the current peak – in other words there has to be a step shift up in what could be considered a sustainable price:earning ratio post 1992. This has implications for how much it might be expected unwind …

Of course, if IRs go back to pre-1992 levels ...

Edited by spline

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Think of the mindset of a BTLer.

Assume house prices increase on average by 5%. After 25 years your £35,000 deposit is worth £1.1 million. Assuming you never have to sell (and why would any BTL assume different) then even though you subsidise rent each month you're still quids in.

Looks attractive on the face of it and I don't think new investors are much more savvy than to look at it in more detail.

They were told that.. as the experienced short term speculators frantically unloaded everything to them over the last year..

Leaving.. the muppet brigade..

a specualtive market always leaves someone holding the baby..

with a big grin and pockets lined with imaginary free money as their world unravells slowly around them.

there is no such thing as free money.

but one of the properties mentioned here will cost you £500 a month for no profit.

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Assume house prices increase on average by 5%. After 25 years your £35,000 deposit is worth £1.1 million.

That's the brilliant thing about BTL ! If prices always go up at least 5% a year (8% is the historical average!) then it doesn't matter if the flat is £100,000 or even £1m. In fact the more it costs, the more that 5% is going to be worth to you, so actually, overall, the expensive ones are a better investment!

(hmm, i think I have a good sales career in front of me! - bar any mis-selling lawsuits...)

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Dr Bubb has an excellent formula for valuing a property.

Take the weekly rent and add three noughts; in the case of the above property that's roughly £250 per week. Add three noughts and you arive at £250,000.

On that basis it's over-valued by £100,000.

that is interesting - rent for a similar flat to my own would be £450/month. That works out at £104,000 - at the moment flats like mine are selling for £105,000 to £110,000 so that sounds about right.

I think they are overpriced, but maybe rents are quite high at the moment in the area I live as they do seem have increased over the last year or so.

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Rents in Devon are not huge.

Property Prices rival London.

The revenues is not there.

also new devlopments are trying very hard to draw in buyers..

The " one weekend only offers" are appearing.. £20,000 of..

looks like some devlopents might have outstripped demand as the building sites are looking a little abandoned.

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Rents in Devon are not huge.

Property Prices rival London.

The revenues is not there.

also new devlopments are trying very hard to draw in buyers..

The " one weekend only offers" are appearing.. £20,000 of..

looks like some devlopents might have outstripped demand as the building sites are looking a little abandoned.

apom of course you are right...even with the generous assumptions of the calculations you show that the BTLer is losing money hand over fist.

To those with the 5% argument, I would say that this seems to be the fixation of the dummies who now consider themselves to be 'investors'. Everybody is fixated by capital growth, rather than investment income. I reckon this is a product of the dotcom boom where shares that had never issued a dividend were trading at stupid levels. People thought entirely in terms of capital growth of the share price...dividends were completely forgotten.

The investment analogy between houses and shares is simple:

house price = share price

rental yield = dividend yield.

Of course a BTL can tolerate low rental yield if capital growth is there. But in a market of falling prices, he cannot. Shares (and houses as investments) should be valued by considering their yield - it is ignorance of this simple fact that I believe has helped stoke the fires of both the dotcom and housing bubbles.

That and bare-faced greed. Oh, and utter stupidity.

p.s. make sure you use a yield argument if your landlord tries to maintain high rents despite a big reduction in the value of the property.

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apom of course you are right...even with the generous assumptions of the calculations you show that the BTLer is losing money hand over fist.

To those with the 5% argument, I would say that this seems to be the fixation of the dummies who now consider themselves to be 'investors'. Everybody is fixated by capital growth, rather than investment income. I reckon this is a product of the dotcom boom where shares that had never issued a dividend were trading at stupid levels. People thought entirely in terms of capital growth of the share price...dividends were completely forgotten.

Won't that just make it ever more painful on the downside? If capital growth is out of the equation these people will just bail out of the market, which seems to be set against all the spin of "in it for the longterm", in what exactly? :(

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  • 301 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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