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RushRoad

Low Rates = House Price Crash Insurance?

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Looking at a mortgage comparison website I see there are now 5 year fix deals available eg from Barclays for 2.09%

If you take a rental with a 5.5% yield that means over a period of 5 years the owner pays 10.45% while the renter pays 27.50% or a difference of 17.05%

Then that is roughly the break even point

If a renter had the choice to rent or buy for 5 years then the renter needs a more than 17% house price crash to break even with the person who purchases today.

Will prices really crash a good deal more than 17% over 5 years to make renting less risky than buying?

I feel Low Rates = Some House Price Crash Insurance 

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Barclays 10 year fixed 2.69%

Rental property of 5.5%

Owner will pay 26.9% to buy, Renter will pay 55% to rent which is an additional 28.1%

Comparing over a 10 year period, the renter needs a 28% house price crash just to be even with the buyer. Low rates = house price crash insurance

Who actually believes there will be a nominal house price crash in excess of 28% to make renting a 5.5% yield property better than buying the same property on a 10 year fix?

This also assumes 10 years of no rent increases which is unlikely

It is no wonder FTB numbers are increasing

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If you keep needing to find confirmation of your financial genius I feel you have come to the wrong place.

I have posted my analysis of renting v buying elsewhere on this forum. I am happy with my position. You are seeking confirmation of yours. 

 

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13 hours ago, RushRoad said:

Looking at a mortgage comparison website I see there are now 5 year fix deals available eg from Barclays for 2.09%

If you take a rental with a 5.5% yield that means over a period of 5 years the owner pays 10.45% while the renter pays 27.50% or a difference of 17.05%

Then that is roughly the break even point

If a renter had the choice to rent or buy for 5 years then the renter needs a more than 17% house price crash to break even with the person who purchases today.

Will prices really crash a good deal more than 17% over 5 years to make renting less risky than buying?

I feel Low Rates = Some House Price Crash Insurance 

Actual figures to debunk your maths.

I have calculated what Owning versus Buying the London property I currently rent compares over 5 years.

Current value (according to Zooppla) = £730K

Annual Rent = £2166x12 = £25992 of which 2400 is service charge approx

Net Yield = 23592/730000 = 3.2%

HSBC offer a 1.94% 5 year fixed rate @75% LTV

Assuming I bought the flat at current price:

5 Year Costs = COSTS = -£30K SDLT+Fees, -£50K Mortgage Interest +£70K Principal Repayment = -£10K

Opportunity Costs of loss interest on Deposit, SDLT and Fees required = -£40K in interest assuming annual compounded 3.5% Return (eg Stocks and Shares ISA)

Net cost of Buying over 5 Years = -£50K

To rent my flat for the same 5 year period based on current rents with a 3.5% drop in the next 18 months = -£116K

With NO Change in property prices I am -£66K Buy versus Rent.

It only takes a 10% fall in prices over 5 years for renting to be COST NEUTRAL to buying. I can see that happening in Prime London (Zone 1) where I live.

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1 minute ago, Quicksilver said:

Actual figures to debunk your maths.

I have calculated what Owning versus Buying the London property I currently rent compares over 5 years.

Current value (according to Zooppla) = £730K

Annual Rent = £2166x12 = £25992 of which 2400 is service charge approx

Net Yield = 23592/730000 = 3.2%

HSBC offer a 1.94% 5 year fixed rate @75% LTV

Assuming I bought the flat at current price:

5 Year Costs = COSTS = -£30K SDLT+Fees, -£50K Mortgage Interest +£70K Principal Repayment = -£10K

Opportunity Costs of loss interest on Deposit, SDLT and Fees required = -£40K in interest assuming annual compounded 3.5% Return (eg Stocks and Shares ISA)

Net cost of Buying over 5 Years = -£50K

To rent my flat for the same 5 year period based on current rents with a 3.5% drop in the next 18 months = -£116K

With NO Change in property prices I am -£66K Buy versus Rent.

It only takes a 10% fall in prices over 5 years for renting to be COST NEUTRAL to buying. I can see that happening in Prime London (Zone 1) where I live.

 

Thanks it is good to see how it plays differently in different markets

However I would say your situation is rare, 85% of the country is not London and in most the country I would say 5.5% is more realistic than 3.2%

On the other side of the extreme we could speculate about a property in the north with 9% yield but I dont think there is a need as not many properties are like that just like not many are at 3% hence why I used an example of 5.5%

 

But anyway, in your case your calculations show that you need at least a 10% crash to break even over the next 5 years? I agree a 10% price fall is possible in London but it is also a risk because anything less than a 10% fall and you are down? Of course falls are not guaranteed and if they went up or stayed the same you would be at a loss.

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4 minutes ago, RushRoad said:

But anyway, in your case your calculations show that you need at least a 10% crash to break even over the next 5 years? I agree a 10% price fall is possible in London but it is also a risk because anything less than a 10% fall and you are down? Of course falls are not guaranteed and if they went up or stayed the same you would be at a loss.

Thank f**k you've got a calculator. Until you showed up we had no way of working any of this out for ourselves. I gave it a go with an abacus, then with a book of log tables and finally a slide rule, but I was way too stupid to work it out.

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6 minutes ago, RushRoad said:

 

Thanks it is good to see how it plays differently in different markets

However I would say your situation is rare, 85% of the country is not London and in most the country I would say 5.5% is more realistic than 3.2%

On the other side of the extreme we could speculate about a property in the north with 9% yield but I dont think there is a need as not many properties are like that just like not many are at 3% hence why I used an example of 5.5%

 

But anyway, in your case your calculations show that you need at least a 10% crash to break even over the next 5 years? I agree a 10% price fall is possible in London but it is also a risk because anything less than a 10% fall and you are down? Of course falls are not guaranteed and if they went up or stayed the same you would be at a loss.

Don't guess - prove it with data.

 

Your post has no validity otherwise.

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2 minutes ago, CunningPlan said:

I can make the maths much easier. If you can get 4% net yield, and borrow the funding at 2%, 

 

but 5.5% yield is more likely, and we know there are 5 year fixes for 2% so for those who have the ability to buy but instead choose to rent they need at least an annual 3.5% fall. If the choice is to rent for 5 years or buy now then house prices need to be almost 20% lower in 5 years for it to be worthwhile. So the low rates in some way are acting as house price crash insurance

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1 hour ago, RushRoad said:

Barclays 10 year fixed 2.69%

Rental property of 5.5%

Owner will pay 26.9% to buy, Renter will pay 55% to rent which is an additional 28.1%

Comparing over a 10 year period, the renter needs a 28% house price crash just to be even with the buyer. Low rates = house price crash insurance

Who actually believes there will be a nominal house price crash in excess of 28% to make renting a 5.5% yield property better than buying the same property on a 10 year fix?

This also assumes 10 years of no rent increases which is unlikely

It is no wonder FTB numbers are increasing

Whats the LTV on Barclays 10 year @2.69%

And the analogy you make is about as much use as an ashtray on a motorbike 

Try adding in the BTL owners liabilities that the renter dose not have 

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1 minute ago, RushRoad said:

 

but 5.5% yield is more likely, and we know there are 5 year fixes for 2% so for those who have the ability to buy but instead choose to rent they need at least an annual 3.5% fall. If the choice is to rent for 5 years or buy now then house prices need to be almost 20% lower in 5 years for it to be worthwhile. So the low rates in some way are acting as house price crash insurance

My landlord's yield is less than 3%. Before costs.

That is a fact. Talking about 9% yields in Oldham or where ever is of no interest to me.

I repeat I am happy in my position. I talk for no one else.

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8 minutes ago, RushRoad said:

but 5.5% yield is more likely, and we know there are 5 year fixes for 2% so for those who have the ability to buy but instead choose to rent they need at least an annual 3.5% fall. If the choice is to rent for 5 years or buy now then house prices need to be almost 20% lower in 5 years for it to be worthwhile. So the low rates in some way are acting as house price crash insurance

We have two pressure groups, Generation Rent and Priced Out. They reflect collapsing levels of home-ownership amongst younger cohorts:

The idea that the most interesting perspective on this is 'should I rent or buy' calculations is laughable. These people want to buy, but they can't, because prices are too high.

Edited by Bland Unsight

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1 minute ago, Exiled Canadian said:

Don't guess - prove it with data.

 

Your post has no validity otherwise.

 

People can do it for their own situation that will be more accurate than looking at national or London stats but none the less here you go

Zoopla shows stats for homes for sale and rent broken down by number of bedrooms

So for example here is Greater Manchester which shows a 6.5% yield for 2 bedroom properties and and 5.6% for 3 bedroom properties

http://www.zoopla.co.uk/market/greater-manchester/?q=Greater Manchester

Likewise for Birmginham it shows 2 beds = 6% yield and 3 beds = 5.1%

http://www.zoopla.co.uk/market/birmingham/?q=Birmingham%2C West Midlands

It even shows London as 4.15% for 2 beds and 4.9% for 3 beds and that chimes with what I know of the 3 bed market in London which is that it yields ~5%

http://www.zoopla.co.uk/market/london/?q=London

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22 minutes ago, long time lurking said:

Whats the LTV on Barclays 10 year @2.69%

And the analogy you make is about as much use as an ashtray on a motorbike 

Try adding in the BTL owners liabilities that the renter dose not have 

 

Barclats 10 year fix at 2.69% is a 80% LTV product

I am happy for you to refine the model to include the costs saved as a renter.

Using Birmingham as our example and 2 bedroom property its 6% yield, vs 2.69% mortgage or 33% house price crash insurance

How much are the costs saved as a renter? 5% of rent maybe? If so then the renter needs a 30% crash over 10 years to be even with the owner on the 10 year fix mortgage (assuming no rent increases)

Would that be a more fair analysis?

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5 minutes ago, RushRoad said:

 

Barclats 10 year fix at 2.69% is a 80% LTV product

I am happy for you to refine the model to include the costs saved as a renter.

Using Birmingham as our example and 2 bedroom property its 6% yield, vs 2.69% mortgage or 33% house price crash insurance

How much are the costs saved as a renter? 5% of rent maybe? If so then the renter needs a 30% crash over 10 years to be even with the owner on the 10 year fix mortgage (assuming no rent increases)

Would that be a more fair analysis?

Your post is full of pure assumptions with no hard data on the opportunity costs side of calculations, we cannot take you seriously.

Do ONE example fully worked out with sound workings and evidence and we may take you seriously. Your calculations are BEYOND simplistic and ignore so many factors.

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Just now, Quicksilver said:

Your post is full of pure assumptions with no hard data on the opportunity costs side of calculations, we cannot take you seriously.

Do ONE example fully worked out with sound workings and evidence and we may take you seriously. Your calculations are BEYOND simplistic and ignore so many factors.

 

That is fine we are here to talk listen and learn, if you have improvements to the idea please post them

Lets use a 2 bedroom property in Birmingham as an example, we could do one for other areas later

Zoopla shows a 6% yield for 2 bedroom properties

So taking a theoretical £100,000 property it has £6,000 annual rent

Let us assume it is funded £80,000 via the Barclays mortgage at 2.69% and also £20,000 of deposit is given at a lost bank account interest of 1%

 

The renter pays £6,000 in the first year and then that + inflation of 2% thereafter

At the end of year 10 the renter pays £65,700

The owner pays £21,520 in interest and loses £2,000 on their interest to give £23,520

Lets assume the owner also needs to pay £5,000 over that period in upkeep that the renter does not so it is £65.7k vs £28.5k

Therefore the renter needs a £37,000 crash in house prices 37% crash to be no worse off than the buyer so in this example low rates = 37% house price crash insurance

 

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17 minutes ago, RushRoad said:

 

Barclats 10 year fix at 2.69% is a 80% LTV product

I am happy for you to refine the model to include the costs saved as a renter.

Using Birmingham as our example and 2 bedroom property its 6% yield, vs 2.69% mortgage or 33% house price crash insurance

How much are the costs saved as a renter? 5% of rent maybe? If so then the renter needs a 30% crash over 10 years to be even with the owner on the 10 year fix mortgage (assuming no rent increases)

Would that be a more fair analysis?

How much capital is tied up in the 20% ....3% tax free interest is easily doable on that (and IR`s are only going to go one way from here or stay the same) compound that over the 10 years  then remove any maintenance /insurance

What dose it tell you when you are rellying on zirp base rates just to keep your head above water even with a 6% yeild

 This^^^^^^ has been the case around my way for ten years and house prices are now lower than they were 10 years ago and look like they are only going to go lower ,,,sorry but the games up around my way .....HPI has not happend (other than re-inflating from the 2009/10 lows to the 2006/7 highs from 20011/12 to 2015 ) and they are just  below the 2009 lows which are around 2004 prices 

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It's a free market.  If your comfortable, liquid enough to obtain 20% deposit, and able to get that certain mortgae fix, great.   Infact i've wondered this myself, but utlimately one has to feel comfortable with what may happen after the 10 year fix.  With a huge amount of uncertainty ahead of all of us, it would be interesting to bet on this?  

Also from recent mortgage uptake figgures, and the ones I know who have recently jumped in, there appears to be a strong bias towards short mortgages.

Edited by blackhole
I cannot read it seems

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6 minutes ago, long time lurking said:

How much capital is tied up in the 20% ....3% tax free interest is easily doable on that (and IR`s are only going to go one way from here or stay the same) compound that over the 10 years  then remove any maintenance /insurance

 

where can you get 3% return on bank deposits?

Even if you assume 3%, I assumed 1%, it does not come close to covering much of the need for a 37% crash to break even over a 10 year period. That is for the 2 bed Birmingham example

Edited by RushRoad

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3 minutes ago, blackhole said:

It's a free market.  If your comfortable, liquid enough to obtain 20% deposit, and able to get that certain mortgae fix, great.  However some of the models painted in here are painfully simplistic, especially when you factor in a small percentage of your rent income having voids, as well as maintainance time to time.  

 

This is not about BTL this is a discussion about renting vs buying an an owner

The 5 year and 10 year mortgages quoted are for owners not landlords

Please read the posts rather than imagining something up that was not posted and disagreeing with that

The idea I put forward was that low rates = house price crash insurance. It seems to be true so I wanted to debate that.

Edited by RushRoad

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3 minutes ago, blackhole said:

It's a free market.  If your comfortable, liquid enough to obtain 20% deposit, and able to get that certain mortgae fix, great.  However some of the models painted in here are painfully simplistic, especially when you factor in a small percentage of your rent income having voids, as well as maintainance time to time.  

What are you on about voids for?

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2 minutes ago, RushRoad said:

 

where can you get 3% return on bank deposits interest free?

Even if you assume 3%, I assumed 1%, it does not come close to covering much of the need for a 37% crash to break even over a 10 year period

 

Edited by blackhole
.

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1 minute ago, RushRoad said:

 

This is not about BTL this is a discussion about renting vs buying an an owner

The 5 year and 10 year mortgages quoted are for owners not landlords

Please read the posts rather than imagining something up that was not posted and disagreeing with that

You're quite correct.  I'll adjust that.

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4 minutes ago, RushRoad said:

 

This is not about BTL this is a discussion about renting vs buying an an owner

The 5 year and 10 year mortgages quoted are for owners not landlords

Please read the posts rather than imagining something up that was not posted and disagreeing with that

The idea I put forward was that low rates = house price crash insurance. It seems to be true so I wanted to debate that.

I have updated post above, but in essence, its one's personal choice whether they really think they're comfortable with a 10yr fixed, with the huge amount of uncertainty the UK has to face in the upcoming years.  

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