Rent Forever Losers

[Bloo Loo]

The big "BUT" is the availability of credit. Not many other asset classes allow you to leverage up to 12 times your cash. Well, at the level of the average person, anyway.

People are still buying BTL properties now at dismal yields of about 5% gross. Really not different from a cash ISA , with the exception of leverage.

Edit: I've been renting my house at 4.8% gross yield (based on other sold prices on the street) for nearly 5 years with no rent increases, and absolutely no cost to fix all the stuff that goes wrong. Well, I pay for the light bulbs. This is still my first "grown-up" rental where I've not had to share with house mates, and if anything it has taught me just how much cash houses eat up. Everything costs money with houses, from transaction fees to light fittings to pests to damp. At a gross yield of 4.8% and leverage of up to , say, 10x at current interest rates, it is an appalling investment. But, if people described their house purchase as a "home" and not an "investment" or "pension", then I'd have more sympathy.

12 times leverage?....Help to buy is encouraging 20 times leverage. 5% deposits. with a guaranteed increase in repayments @5 years.

[bomberbrown]

@Brian Hall

"But the mortgage repayments remain fixed over 25 years while rents increase"

As another poster highlighted this claim, I can't see you addressed it in any of your replies. On what evidence do you base this assertion?

Edited April 27, 2013 by bomberbrown

[HarpoBoy]

I was responsible for the figures quoted by Julia Rampen in Mortgage Solutions and would like to cover some of the issues raised.

First of all there is no conspiracy. If you look at The Model Works website you will see I am in the camp of helping young people, whether this means buying or not.

Regarding the analysis. It represents weeks of work and builds on a number of other models which have been tested and verified. The press release was one page long and it is difficult to convey all this in a short document. But I have worked in the industry for over 30 years and I am not new to this sort of work. I approached the analysis with an open mind and the methodology was robust. It includes an allowance for maintenance etc of circa 1.25% of the property value per annum.

Regarding the data, I used house price inflation, background inflation, mortgage rates and savings rates averaged over the last 30 years, which includes booms and busts.

I felt this was better than using the current ultra low rates. The model tracks the options for a prospective homeowner buying at any age from 18 to 60 and expiring at 80 and over such a long period I needed sensible data. Yes, house price inflation was 6.5%, but properties were inflating on average at less than 1% over background inflation. As everything is based on discounted cashflow methods, this introduces some sanity back into the results. Over the same period the average savings rate was 6.4%, so house price inflation was only 1/10% higher than a deposit account. This equates to property price inflation now of circa 2.2% per annum.

With respect to the results. Well someone who buys at 24 is saving 13 years worth of renting over someone who buys at 37. With the data I used, buying was slightly more expensive than renting initially. But the mortgage repayments remain fixed over 25 years while rents increase (see attached graph) and I assumed the savings could be invested in a tax efficient scheme. Someone who buys at 24 will be mortgage free by the time they are 49 and they can spend the next 31 years living rent free. Again the savings could be paid into a tax efficient scheme. Factor in the magic of compound interest and the fact they will own a property at the end of the day and this is why buying still makes sense.

The average first time property price I used was £139,224. Now the IMF say that property prices are overvalued by around 15%. So let's say prices fall by circa £21,000. But this loss would be made good by the enormous benefits of buying over renting.

it might have been better if the government allowed property prices to go into free fall, as they did in Northern Ireland where first time buyers are reentering the market. But then again this might have taken the UK banking system down with it. Regardless, we find ourselves with the situation that now exists and first time buyers have to make a decision about whether to buy into an overinflated market or not. My numbers suggest they should consider doing so.

I see a lot of articles about how prices are going to boom over the coming years. Personally I don't think so, because, ultimately, they have to be pegged to affordability. Alternatively one could opt for the view that the system will still crash massively. Personally I don't see this either because of the shortage of properties.

Have a look at www.propertytribes.com to find out what the landlords make of their tenants. Better to buy I think.

Thanks for this Brian.

While I would not necessarily agree with all you have said, it is refreshing to see such a comprehensive articulate response on here rather than the usual knee jerk reaction that we see on here, as evidenced by the "contribution" directly below yours.

[Bloo Loo]

Thanks for this Brian.

While I would not necessarily agree with all you have said, it is refreshing to see such a comprehensive articulate response on here rather than the usual knee jerk reaction that we see on here, as evidenced by the "contribution" directly below yours.

yes it was knee jerk.

I have apologised up thread.

And in my defence, I read the artlcle and half read the Brian Hall response as a defence.

Sorry Im not perfect....but 99 times out of 100 we get the message followed up by the strange justification.

My fault..my bad.

Cant apologise enough.

[Als]

What horrible people this country is filled with.

Folk are crying on another thread about the complexities of Ryanair websites....

You've got completely shallow self serving kunts in politics and media actually threatening the population with financial horror stories in order to further their own positions.

This is what it's been like for years. For me the UK is the perfect study ground for lies, propaganda and the deliberate exploitation of people for money. One of the things the British are best at is lying.

[Venger]

Thanks for this Brian.

While I would not necessarily agree with all you have said, it is refreshing to see such a comprehensive articulate response on here rather than the usual knee jerk reaction that we see on here, as evidenced by the "contribution" directly below yours.

Refreshing for such a new member? You still sore from Bloo's questions about that Harpenden house? Your turf. You knowing what was in the sealed bid. I see it's gone to Guide Price the other day. Even if it does sell for a high price, doesn't mean the market can't change quickly from here. I'm tracking a house down that way that the buyers bought around 2007ish for around £450Kish (got the full details on my pc) that was in the Daily Mail, with them concerned how they'd ever upsize. I see the air-conditioning company he works for has made many people redundant since that time, something like half the workforce.

Brian's call to buy now because of we should be worried about the landlord types at PropertyTribes, their grip on the market, was enough for me to feel high annoyance. Such landlords may have the position for now, but more of them will get caught out. You only have to read a few threads over there to be confident some of them will be taken down by a market turn. Plenty of landlords now have their portfolios in control of UKAR.

[dances with sheeple]

http://www.mortgages...gbp270-000-hall

Yay I'm a rent-for-ever loser, but if I buy now I could stop myself being priced out fully as HPI continues at a pace into the future.

These calcs possible thanks to mortgage rescue, forbearance, SMI eased, 0.5% base rates, QE hundreds of billions, FLS pushing, and soon Help-To-Buy, preventing what would have been a crash. Only home-owners matter. When prices slide it's no end of hearing how those with big mortgages were tricked into it, only knew house prices going up, couldn't have expected it, 'only wanted a home', with such claims suiting older owners who have stacks of equity or even own outright for intervention.

Julia Rampen ? Shouldn`t that be - eM Utter desperate nonsense from start to finish, those who have not paid down principle, and/or MEW`ed are dead in the water.

[dances with sheeple]

What horrible people this country is filled with.

Folk are crying on another thread about the complexities of Ryanair websites....

You've got completely shallow self serving kunts in politics and media actually threatening the population with financial horror stories in order to further their own positions.

And most dim-witted Brits eat it up. Horrible.

The saving grace of the continuing crash is the noted lack of braggarts ruining dinner with stories of their property riches.

Yes, many feeling too sick now to eat much dinner. Under the surface many thousands know that getting on the debt ladder was the worst thing they ever did.

[R K]

According to the analysis, a homeowner who bought at 24 could accumulate wealth of £773,915 by the age of 67. By contrast, one who bought at 35 would accumulate £565,525

Using their calc they need to adjust the 35 yr old buyer's terminal age to 78 then there's no difference.

Obviously if you have a permanently real rate of return on house price then the longer you own one the better off you would be.

And?

[Dorkins]

This calculation boils down to:

"If you assume that what happened over the last 30 years is going to happen again in the next 30 years, you should buy a house."

If, on the other hand, you think that the next 30 years are going to be very different (e.g. "an immense and unstoppable mean reversion is going to happen across the developed world in the next decades"), a different investment strategy may be better.

[porca misèria]

This calculation boils down to:

"If you assume that what happened over the last 30 years is going to happen again in the next 30 years, you should buy a house."

If, on the other hand, you think that the next 30 years are going to be very different (e.g. "an immense and unstoppable mean reversion is going to happen across the developed world in the next decades"), a different investment strategy may be better.

Not quite. I expect that anyone who is going to live in one place for the next 30 years is better off buying than renting it. For real people it's of course more of a mixed picture.

And you could argue the last 30 years have been the start of a reversion to mean. Though we have a long way to go before only the elite can own homes.

[cybernoid]

Not quite. I expect that anyone who is going to live in one place for the next 30 years is better off buying than renting it. For real people it's of course more of a mixed picture.

I see no reflection of reality in it at all,which doesn't make it of much use. It's based on a reality I don't recognise (that of good yields for landlords and rising rents for tenants) and advice is offered for a subset of the population so small I would argue for all practical purposes doesn't exist.

So apart from having an inaccurate basis and no application, spot on.

[Bloo Loo]

I see no reflection of reality in it at all,which doesn't make it of much use. It's based on a reality I don't recognise (that of good yields for landlords and rising rents for tenants) and advice is offered for a subset of the population so small I would argue for all practical purposes doesn't exist.

So apart from having an inaccurate basis and no application, spot on.

It actually has the same basis as many endowment policy returns had in the past.

[liminalien]

What horrible people this country is filled with.

Folk are crying on another thread about the complexities of Ryanair websites....

You've got completely shallow self serving kunts in politics and media actually threatening the population with financial horror stories in order to further their own positions.

And most dim-witted Brits eat it up. Horrible.

The saving grace of the continuing crash is the noted lack of braggarts ruining dinner with stories of their property riches.*

* except in Aberdeen

[LiveinHope]

This weekend, the propert section in my local paper has a column called "Top of the Drops"

Probably pay to hold off buying.

[scepticus]

If, on the other hand, you think that the next 30 years are going to be very different (e.g. "an immense and unstoppable mean reversion is going to happen across the developed world in the next decades"), a different investment strategy may be better.

Yes, but what is that alternative strategy?

Thats what all the housing bulls have a modicum of trouble with.

[hurricane]

Brian, thanks for posting.

2 questions;

1. What is your personal view on interest rates over the next 10 years and;

2. How does your model account for the fact that the current environment of high prices and low rates is unmatched historically and therefore likely to change in the near future? Does it still make more sense to buy early if rates revert to their historical mean or higher in the near future?

Thanks

[Brian Hall]

12 times leverage?....Help to buy is encouraging 20 times leverage. 5% deposits. with a guaranteed increase in repayments @5 years.

Enormous profits are possible with geared investing but so are enormous losses. Please see the attached extract which looks at profits and losses for both cash buyer and gear investor buy to let speculators before and after the credit crunch. By my reckoning geared investors are currently making losses (the rental income in the example just about covers the mortgage repayments and other costs).

BRH Extract.pdf

BRH Extract.pdf

[Brian Hall]

@Brian Hall

As another poster highlighted this claim, I can't see you addressed it in any of your replies. On what evidence do you base this assertion?

Sorry I missed it. During the 30 years over which I calculated my average seed data, house prices rose by 6.5% per annum. Incidentally, the average savings rate was 6.4% per annum, which puts this figure into perspective. As various points through this period there were times when prices rose, times when they were static and times when they fell, but generally the trend was upwards.

The model tracks a period of 62 years from 18 years old (the earliest one can buy) to 80 (which I took to be an average age of death) and calculated the results of buying at those ages (actually to age 60 with a maximum loan of 10 years, after which the individual was destined to rent for life) and all points between. because the period was so long, using an average over 30 years seemed fair as one is likely to experience several property booms and busts through a lifetime, averaging everything out.

So property prices rise over time and rents are normally linked to property prices. That is why the private rental sector is so preoccupied with rental yields. If property prices fall and rents rise, tenants start buying, reducing demand and causing rents to fall again. This didn't happen immediately after the credit crunch, but in recent quarters rents have stabilised or even fallen a little, bringing things back into kilter. So, in principle, property prices will increase through a lifetime

But once you buy your opening balance frozen. The model used a repayment calculator from www.mortgagesexposed.com. The cost of buying and the cost of renting may be similar at the outset but unlike rents which increase, your repayments, which are based on your opening balance, will not. So if you stay in the same house over 25 years your repayments at the end of the term will be a fraction of what your rent will be on the same property and after 25 years you can live mortgage and rent free.

Now we can argue about buying at above or below the average market value, because of booms and busts, but I would counter these are cyclic and average out and the impact of losing say 20% from the value of your property is peanuts in relation to the enormous scale of savings one can make from buying, even in the bad times. We can also argue that interest rates go up and down (if you don't take out a long term fixed rate mortgage), but again these are cyclic and average out.

Hope this explains the thinking behind the model.

[Brian Hall]

yes it was knee jerk.

I have apologised up thread.

And in my defence, I read the artlcle and half read the Brian Hall response as a defence.

Sorry Im not perfect....but 99 times out of 100 we get the message followed up by the strange justification.

My fault..my bad.

Cant apologise enough.

No apology is required. One of the reasons I embarked on this initiative was because I got so tired of all the inaccurate, incomplete and biased data and all the self-serving, subjective opinion coming from the industry. Do you know you have to pay the Council of Mortgage Lenders over £10,000 to get access to their data. Otherwise you get given what they want you to hear. So I am not surprised you took my work to be part of all the background propaganda.

[Brian Hall]

Brian, thanks for posting.

2 questions;

1. What is your personal view on interest rates over the next 10 years and;

2. How does your model account for the fact that the current environment of high prices and low rates is unmatched historically and therefore likely to change in the near future? Does it still make more sense to buy early if rates revert to their historical mean or higher in the near future?

Thanks

I think rates must rise because we need to get people saving and reward those that have done so in the past. The prospective homeowner only has so much disposable income and so this may require that property prices fall so increasing mortgage repayments don't price them out of the market. But I am not an economist.

With respect to the model I worked with 30 year averages to even everything out. But I have had so much interest in this specific point that I think I will go away and build a model that allows anyone to come onto the website, plug in their own data and read off a result.

This model could answer all the issues you raise regarding buying with low rates in an uncertain, overpriced market versus buying with higher rates in a falling market.

If you think this is a good idea, receiving your encouragement will cause me to push this up my list of jobs and priorities.

[Brian Hall]

Using their calc they need to adjust the 35 yr old buyer's terminal age to 78 then there's no difference.

Obviously if you have a permanently real rate of return on house price then the longer you own one the better off you would be.

And?

Exactly - so the earlier you buy the sooner your mortgage will be paid off and the sooner you live mortgage and rent free. Also mortgage repayments remain static while rents typically rise, which means that you will increasingly have a surplus to save in a tax-efficient savings scheme or pension (free money anyone). Finally, the earlier you do this, the longer compound interest has to work its magic. I never said the model was rocket science. One can change the variables but the logic is sound.

[Brian Hall]

I see no reflection of reality in it at all,which doesn't make it of much use. It's based on a reality I don't recognise (that of good yields for landlords and rising rents for tenants) and advice is offered for a subset of the population so small I would argue for all practical purposes doesn't exist.

So apart from having an inaccurate basis and no application, spot on.

In my experience the simplest models can be the most inciteful, particularly if they stimulate debate.

Moving a few times introduces new variables: the frequency of moving and the cost of selling/buying/moving. Typically people move up and so the benefits from owning a more expensive property will be greater than a smaller one (and the costs of renting will be proportionally higher too). I suspect these returns would be greater than the costs although I haven't modelled this. So one gains very little in terms of insights by adding to the complexity. KISS is better.

A more important issue, raised elsewhere, is the impact of buying at different stages in the boom and bust cycle (assuming we will continue to have such cycles) and I have concluded that maybe I should go away and build a model that anyone can play with, rather than simply plugging long term average data.

[Dorkins]

rents are normally linked to property prices.

Do you have any data to support this? My impression is that rents are much lower now than they were in the early 1980s.

[The Knimbies who say No]

There has been little discussion of wage inflation in this thread. There is no way prices are rising at nominal 6.5% per annum, from an already elevated position, without it.