London Is Cheap...

[qejunkie]

I've seen a lot of posts on this website implying that property prices are expensive but it is rather clear this is not the case....

Lets look at a working couple in an average London 1-bed flat. This now costs £350k with the average rental yield at about 5.5% (click here). This means that a couple is typically paying on average £1600 a month for that standard 1-bed; this seems a bit high so lets call it £1500 per month.

Now lets look at the economics of buying post Jan 1st 2014.

Buyers will need a 5% deposit so £17.5k and the stamp duty of £10.5k. Then they can get a 95% LTV mortgage at around 4% on a 5 year fix or at around 2.5% on a tracker. For these mortgage rates I am using current 80% LTV mortgages, once help to buy comes in the 95% LTVs will have same risk-weighting as 80% LTVs today so rates should move down to those levels.

Using the conservative 4% fixed rate, this couple would be paying £1108 a month in interest and the capital re-payment mortgage would be £1587 so only £87 a month worse off on a cash flow basis and paying £479 of house equity every month.

So after 5 years the mortgage equity paid down of c. £29k is much more than the £10.5k of stamp duty flushed down the tubes and most importantly the payments are fixed whereas that £1500 of rent will be nearer £1700 after 5 years.

So a couple will be better off on a cash flow basis and stop having to pay an inflation linked perpetuity to a greedy landlord who is over protected by the law.

On the basis that you need somewhere to live, buying London property is cheap when you compare it to the only sensible alternative.

[GloomMonger]

Gidiot? Is that you?

[renting til I die]

You haven't factored in any repairs needed to the property over that 5 year peroid or the fact that rates could well be a lot higher in 5 years time and you have to remortage!

Oh, and don't forget the backhander to the EA you get yourself to the top of the list to see this bargin place!

[Dorkins]

Yes, it will definitely cost £1700pm to rent the average 1 bedroom flat in London in 5 years' time. That is a totally plausible figure.

[zugzwang]

You haven't factored in any repairs needed to the property over that 5 year peroid or the fact that rates could well be a lot higher in 5 years time and you have to remortage!

Oh, and don't forget the backhander to the EA you get yourself to the top of the list to see this bargin place!

And if rates are a lot higher that prices will have fallen sharply!

[Wurzel Of Highbridge]

Yes, it will definitely cost £1700pm to rent the average 1 bedroom flat in London in 5 years' time. That is a totally plausible figure.

So you are saying that the wages in London will be higher enabling landlords to collect more rent from tenants?

Edited August 7, 2013 by Gone to Ireland.

[Dorkins]

So you are saying that the wages in London will be higher enabling landlords to collect more rent from tenants?

Haha no, I should have put [sarcasm] tags I guess. The idea that the average rent for a 1 bedroom flat in London will be over £20k per year in 5 years time is well into fantasy land.

[qejunkie]

OK so still £20k of mortgage debt paid down so that should cover 5 years of maintenace easily. Not sure what sort of backhander do you have to pay these days? Is it material?

What is the scenario for higher insterest rates rates?

Anyway as long as you can re-fi at 6-7% then you are still quids in (solving for interest rate so the interest paid = rent).

[Wurzel Of Highbridge]

It is all a matter of risk:

Renting = low risk.

Buying = high risk.

I like to think that renting whilst interest rates are so low and prices so high is like paying insurance against price falls. If you are happy to gamble that interest rates will not rise and prices will not fall over the course of your mortgage then go for it.

[renting til I die]

OK so still £20k of mortgage debt paid down so that should cover 5 years of maintenace easily. Not sure what sort of backhander do you have to pay these days? Is it material?

What is the scenario for higher insterest rates rates?

Anyway as long as you can re-fi at 6-7% then you are still quids in (solving for interest rate so the interest paid = rent).

The back hander comment was a joke....... although nothing would supprise me with EA's.

Another fee/expense you forgot was the £10500 stamp duty that would have to be paid.

The main reason I haven't bought anywhere is the interest rate risk. I could afford something (not my dream home!) at current rates but if rates were at 7-8% I would be looking at something like 80% of my wages going on the mortage. I don't believe that Mark Carney has any long term control of interest rates!

[19 year mortgage 8itch]

OK so still £20k of mortgage debt paid down so that should cover 5 years of maintenace easily. Not sure what sort of backhander do you have to pay these days? Is it material?

What is the scenario for higher insterest rates rates?

Anyway as long as you can re-fi at 6-7% then you are still quids in (solving for interest rate so the interest paid = rent).

And what happens when they want a 2 bed?

[qejunkie]

The back hander comment was a joke....... although nothing would supprise me with EA's.

Another fee/expense you forgot was the £10500 stamp duty that would have to be paid.

The main reason I haven't bought anywhere is the interest rate risk. I could afford something (not my dream home!) at current rates but if rates were at 7-8% I would be looking at something like 80% of my wages going on the mortage. I don't believe that Mark Carney has any long term control of interest rates!

No I included the £10.5k stamp duty - it's easily compensated in 2 years of mortgage capital repayment.

[qejunkie]

And what happens when they want a 2 bed?

Well average price of a 2 bed is 490k and rental prices are >2k a month so same maths hold. But if they can't afford to rent it then they can't afford to buy it. If they are priced out then they'll have to move to the sticks - Hertfordshire is nice.....

[worried1]

On the basis that you need somewhere to live, buying London property is cheap when you compare it to the only sensible alternative.

I see what you are saying, but we have got to a stage where both renting and buying is going to be too expensive for most people meaning that the only sensible alternatives are to leave London or to live with parents or in a houseshare.

Buying is definitely being made more attractive than renting with the current schemes, but £1,500 per month is £18,000 per year which means you realistically need to be earning £50,000 a year to afford to pay for this, the bills and have a little left over for food, travel etc.

My definition of reasonable (not cheap) would be when a single person on the average London wage (£35k?) can comfortably afford an average 1 bed flat and a couple both on the same wage each can comfoatably afford an average 2 bed flat.

[Dorkins]

But if they can't afford to rent it then they can't afford to buy it.

You're on the right track now, keep going. If they can't afford to buy it, and nobody else can either, then what happens to the price?

[qejunkie]

You're on the right track now, keep going. If they can't afford to buy it, and nobody else can either, then what happens to the price?

Hilarious comment; markets are still clearing so somebody can, it's clear that there is supply issue in London with a constant inflow of people and capital.

Trainee accountants used to live in Fulham, now they live in Tooting, in 10 years they'll be in Carshalton.

[renting til I die]

Hilarious comment; markets are still clearing so somebody can, it's clear that there is supply issue in London with a constant inflow of people and capital.

Trainee accountants used to live in Fulham, now they live in Tooting, in 10 years they'll be in Carshalton.

So who is buying? International investors? Will the entire UK population be priced out of London? I wonder what will happen to the macro economy of London town if noone can afford to buy or rent, apart from a few international jetseters who spend a couple of months a year in UK to enjoy the summer?

[gimble]

I've seen a lot of posts on this website implying that property prices are expensive but it is rather clear this is not the case....

Lets look at a working couple in an average London 1-bed flat. This now costs £350k with the average rental yield at about 5.5% (click here). This means that a couple is typically paying on average £1600 a month for that standard 1-bed; this seems a bit high so lets call it £1500 per month.

Now lets look at the economics of buying post Jan 1st 2014.

Buyers will need a 5% deposit so £17.5k and the stamp duty of £10.5k. Then they can get a 95% LTV mortgage at around 4% on a 5 year fix or at around 2.5% on a tracker. For these mortgage rates I am using current 80% LTV mortgages, once help to buy comes in the 95% LTVs will have same risk-weighting as 80% LTVs today so rates should move down to those levels.

Using the conservative 4% fixed rate, this couple would be paying £1108 a month in interest and the capital re-payment mortgage would be £1587 so only £87 a month worse off on a cash flow basis and paying £479 of house equity every month.

So after 5 years the mortgage equity paid down of c. £29k is much more than the £10.5k of stamp duty flushed down the tubes and most importantly the payments are fixed whereas that £1500 of rent will be nearer £1700 after 5 years.

So a couple will be better off on a cash flow basis and stop having to pay an inflation linked perpetuity to a greedy landlord who is over protected by the law.

On the basis that you need somewhere to live, buying London property is cheap when you compare it to the only sensible alternative.

You've ignored maintenance. Could easily take out your narrow gains. Average home will need a new boiler every 15 years roughly, a new kitchen and bathroom every 15 years, a new roof every 30 years, new windows every 30 years, new carpets every 10 years etc. etc. Add it up, it's a lot of money. One of those big ones falls in your 5 year calculation and the buyer is sitting on a theoretical loss vs. renting. Not that I don't agree with your general point, if mortgage rate is lower than the rental yield, and assuming rents are rising then buying is still probably better but I think the difference needs to be more than 1%.

Take a look at where mortgage rates have headed in the USA in the last couple of months, though, current 4% rates might not last long in the UK.

[Dorkins]

Trainee accountants used to live in Fulham, now they live in Tooting, in 10 years they'll be in Carshalton.

So Tooting will be full of...?

I guess not bankers seeing as the City is reducing headcount now.

[Dorkins]

markets are still clearing

The Northern Ireland property market was clearing in 2006, but that didn't make those prices sustainable. As soon as the loose lending disappeared down came the prices.

By the way, if repayment mortgages in London property are so cheap, why are over half of outstanding mortgages in London interest-only?

[qejunkie]

So Tooting will be full of...?

I guess not bankers seeing as the City is reducing headcount now.

Headcount has gone from 350k to 250k over the last 5 years and that hasn't had too much negative impact - don't get too excited....

[Dorkins]

Headcount has gone from 350k to 250k over the last 5 years and that hasn't had too much negative impact - don't get too excited....

The impact will be felt once the loose lending disappears and the bubble bursts.

[qejunkie]

The Northern Ireland property market was clearing in 2006, but that didn't make those prices sustainable. As soon as the loose lending disappeared down came the prices.

By the way, if repayment mortgages in London property are so cheap, why are over half of outstanding mortgages in London interest-only?

Imagine the up-start broker who took out 120% LTV to buy a flat and a porche back at the peak, he's now got c.5-10% equity instead of the -20% he started with after that 30% nominal move. And why on earth would he pay back any capital on the debt when he's paying <1.5%?

Do the same analysis in Burnley or your dearest Northern Ireland and you might have a problem.

[Venger]

The impact will be felt once the loose lending disappears and the bubble bursts.

Two sides to the lending equation. Requires there to be borrowers, no matter how eager the lenders are to lend..

So it could come when there's too few people feeling secure enough in their financial position to borrow to buy or upsize at anywhere near today's asking prices. China/Asia is beginning to have their own problems as well.

[the flying pig]

...On the basis that you need somewhere to live, buying London property is cheap when you compare it to the only sensible alternative.

i think what you mean is at least partly something more like 'interest rates are very, very low'.