Low Rates = House Price Crash Insurance?

[long time lurking]

15 minutes ago, RushRoad said:

 

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

 

The most important point is how much of that £65.7k  dose the landlord get to keep after tax and costs ,you have established they will pay 21.520 k interest  that leaves 44.180k

then add in costs lets just say £1k pa x 10 years =10k  so that leaves 34k over ten years £3.4 k pa before tax 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Did you ever think about getting a paper round 

[RushRoad]

1 minute ago, blackhole said:

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.  

 

people have to live somewhere so I do not see why buying with a 5 or 10 year fix is a bigger risk than renting at twice the cost

[blackhole]

4 minutes ago, RushRoad said:

 

people have to live somewhere so I do not see why buying with a 5 or 10 year fix is a bigger risk than renting at twice the cost

Risk is your taking on a huge 80% LTV on current asset prices.  It's almost a gamble at current prices, and quite an ask for many.  

And as mentioned, with the uncertainty of the UK's direction, is it a great idea to lock yourself into a long mortgage?  Just as an example, the nervousness in the financial sectors direction in the UK is enough to give FS workers pause for thought.

In some areas of the SE, its still cheaper by quite a sum to rent, than to mortgage (!!).  

Edited April 16, 2017 by blackhole

[RushRoad]

2 minutes ago, long time lurking said:

The most important point is how much of that £65.7k  dose the landlord get to keep after tax and costs ,you have established they will pay 21.520 k interest  that leaves 44.180k

then add in costs lets just say £1k pa x 10 years =10k  so that leaves 34k over ten years £3.4 k pa before tax 

Did you ever think about getting a paper round 

 

Why are you talking about landlords this is a discussion about buying or renting not about landlords I dont care about their position for this discussion

or rather its how much cover/insurance low rates provide from a house price crash

[long time lurking]

10 minutes ago, RushRoad said:

 

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

You don`t have to put the money into a bank account....  stocks and shares isa`s 

[Quicksilver]

8 minutes ago, RushRoad said:

 

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 - QS: Any actual example of a £100K property you can link to and evidence of market 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% - QS: Why 1% and this is ridiculously low absolute return over 10 years, Mixing up NS&I bonds, H2B/LISA products you can average 2.5% AER which compounds to £5674 over 10 years TAX FREE

The renter pays £6,000 in the first year and then that + inflation of 2% thereafter - QS: Any evidence of rents going up 21% a decade in Birmingham? I ask as I dont know but you haven't evidenced your assumption. You also failed to deduct the Service Charge paid by the Renter that the Owner Occupier would also have to pay, lets call it £50 (VERY LOW BALL) a month from the rent? that's another £6K

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. - QS: My calcs put it at £5.6K Opp Cost + £3K costs (Morg fee, legal, conv etc) + £6K Service Charges. £14.6K total. Add your maintenance and its a round £19.5K Plus the Interest on the Mortgage = £41K

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

QS: My sums say 23% - A Larger buffer due to your choice of a non SDLT qualifying cheap property. Deffo not my world as a Londoner.

 

 

[RushRoad]

Just now, blackhole said:

Risk is your taking on a huge 80% LTV on current asset prices.  It's almost a gamble at current prices, and quite an ask for many.  

And as mentioned, with the uncertainty of the UK's direction, is it a great idea to lock yourself into a long mortgage?  Just as an example, the nervousness in the financial sectors direction in the UK is enough to give FS workers pause for thought.

 

People have to live somewhere risk or not recession or not.

Right now the only choice is to buy or to rent.

Using the Birmingham data of 6% yield for 2 bedroom properties and say the 5 year HSBC mortgage of 75% LTV and 1.94% fixed

 

Renting is going to cost £31,200 (£6000 first year +2% inflation over the five year)

The mortgage interest over 5 years is going to cost £7,275 plus maybe £3,000 in maintinance you will have to pay as an owner that you do not pay as a renter plus you lose about £1,250 in lost interest on your deposit . So at the end of year 5 house prices have bette0 haver fallen 20% for the two to be even. So even with a 20% house price crash over 5 years its no worse buying right now

 

4 minutes ago, long time lurking said:

You don`t have to put the money into a bank account....  stocks and shares isa`s 

 

Which stocks and shares ISA offers a risk free 3% or more?

[long time lurking]

Just now, RushRoad said:

 

Why are you talking about landlords this is a discussion about buying or renting not about landlords I dont care about their position for this discussion

or rather its how much cover/insurance low rates provide from a house price crash

Well i`m concerned about renters renting off over stretched landlords the tenants might be getting into something thats not exactly in their best interests i always check here 

https://www.landregistrydocuments.co.uk/?gclid=CISjjtqJqdMCFUeZGwod2XkEXQ to see how much leverage the landlord has before even considering signing an agreement 

I`m more interested in how much of an HPC is required before my LL is a busted flush

BTW most of your analogies are based on nothing more than assumptions ,that`s not something i would consider a business / investment plan

[interestrateripoff]

If you rent zero maintenance costs. If you own all the liability for repairs is yours.

My own quick estimate is I've spent around 15k on property maintenance in 10 years, many of which the previous mortgage owners didn't  do. Some of the jobs I hope last for 50+ years but in this context what happens with your maths.

There are still jobs to do probably at least another 7k worth excluding regular maintenance like a new boiler.

Although to compound the maths I own having paid off a 30 year mortgage in 10. So much of the interest I'd give the bankers I can spend maintaining the property.

I look forward to the calculations.

[blackhole]

4 minutes ago, RushRoad said:

 

People have to live somewhere risk or not recession or not.

Right now the only choice is to buy or to rent.

Using the Birmingham data of 6% yield for 2 bedroom properties and say the 5 year HSBC mortgage of 75% LTV and 1.94% fixed

 

Renting is going to cost £31,200 (£6000 first year +2% inflation over the five year)

The mortgage interest over 5 years is going to cost £7,275 plus maybe £3,000 in maintinance you will have to pay as an owner that you do not pay as a renter plus you lose about £1,250 in lost interest on your deposit . So at the end of year 5 house prices have bette0 haver fallen 20% for the two to be even. So even with a 20% house price crash over 5 years its no worse buying right now

 

 

Which stocks and shares ISA offers a risk free 3% or more?

6% yields in Birmingham won't be all that sustainable.  Its cheaper in the Midlands to rent in many cases, than it is to mortgage at 1.94% fixed.  Interesting you pick HSBC there; they're definately one of the more conservative lenders out there.

Ultimately what happens after 5 years?  That's the issue at play here.  The amount to purchase a 'average' home in the UK has got so out of hand, that its taken low rates as you've pointed out to be able to afford an 80% mortgage.  It's only a matter of time before rates return to some normality, and there in lies the danger of buying now at low rates.  

Property isn't risk free.... 

Edited April 16, 2017 by blackhole

[monkey100]

Prices and sales pretty stagnant in Brighton But reductions are picking up and are at least 8/9% already so 10 is very conservative and 12-20 by next spring could easily happen. BTL dying here I work in maintenance side of it and our most experienced long term landlords are selling up at am alarming rate. Those who aren;t so clued up are waiting for it to pick up lol

[long time lurking]

8 minutes ago, RushRoad said:

 

 

 

 

Which stocks and shares ISA offers a risk free 3% or more?

Who said risk free ...and it`s far more liquid than a £80k debt on a pile of bricks and far less work

Edited April 16, 2017 by long time lurking

[Quicksilver]

6 minutes ago, RushRoad said:

 

People have to live somewhere risk or not recession or not.

Right now the only choice is to buy or to rent.

Using the Birmingham data of 6% yield for 2 bedroom properties and say the 5 year HSBC mortgage of 75% LTV and 1.94% fixed

 

Renting is going to cost £31,200 (£6000 first year +2% inflation over the five year)

The mortgage interest over 5 years is going to cost £7,275 plus maybe £3,000 in maintinance you will have to pay as an owner that you do not pay as a renter plus you lose about £1,250 in lost interest on your deposit . So at the end of year 5 house prices have bette0 haver fallen 20% for the two to be even. So even with a 20% house price crash over 5 years its no worse buying right now

 

 

Which stocks and shares ISA offers a risk free 3% or more?

Your workings are NONSENSE! try again. You have picked such ridiculously favorable parameters to suit your world view. If you had used an AVERAGe of what a FTB pays for a home instead of your pie in the sky 100K example your figures change massively. And if you put proper costs and opportunity losses in they change even further.

https://www.theguardian.com/business/2016/may/16/average-asking-price-first-time-buyer-home-buy-to-let-stamp-duty

" The average for properties coming on to the market in England and Wales with two bedrooms or fewer was £11,298 higher in May than in April, at £194,224, according to data from the property website Rightmove. "

[RushRoad]

7 minutes ago, blackhole said:

6% yields in Birmingham won't be all that sustainable.  Its cheaper in the Midlands to rent in many cases, than it is to mortgage at 1.94% fixed.  Interesting you pick HSBC there; they're definately one of the more conservative lenders out there.

Ultimately what happens after 5 years?  That's the issue at play here.  The amount to purchase a 'average' home in the UK has got so out of hand, that its taken low rates as you've pointed out to be able to afford an 80% mortgage.  It's only a matter of time before rates return to some normality, and there in lies the danger of buying now at low rates.  

Property isn't risk free.... 

 

Where did I say property is risk free?

I said it looks like low rates act as some form of house price crash insurance which is true for anywhere where the yield is higher than the 5 or 10 year fixed rates

[frozen_out]

There's more to this - This is comparing right at the peak of a bubble (which I believe we're at, all we're arguing about now is the speed of the crash) and therefore the possibility of capital appreciation in the OP scenario is set to zero.

Compare this scenario with buying just 3 or 4 years ago, compare it with buying in 2007. It's an awfully unpalatable fact that most OO (absolutely not talking about BTL) are home and hosed. And to labour a point I've made before: because government intervention is so unpredictable, sitting out the market and continuing to stick cash in the bank hoping to one day swoop in a pick up a property for a song is just as risky as buying now.

One more point: Where can you get a 3% risk free return on savings these days? Serious question, if I'm missing something I'd like to know.

[Patient London FTB]

Low rates aren't looking like house price crash insurance in the London secondhand market. 

Land Registry figures. 

Negative next month? 

[frozen_out]

13 minutes ago, long time lurking said:

Who said risk free ...and it`s far more liquid than a £80k debt on a pile of bricks and far less work

Just seen this - if you're using it to calculate opportunity cost you should be using a risk free rate. The alternative is to use some kind of NPV calculation to discount future cashflow.

[blackhole]

22 minutes ago, RushRoad said:

 

Where did I say property is risk free?

I said it looks like low rates act as some form of house price crash insurance which is true for anywhere where the yield is higher than the 5 or 10 year fixed rates

I didn't say you said, it was more of a reminder for others... ;-)

If you are able to find a such a place where the yield is higher then yes, its possible it could work.  The problem is many often want to live in a house beyond the 5 or 10 year fix, so what happens after that is anyone's guess at this point, especially with a large amount of capital outstanding to pay.  

Also finding these properties you discuss about could be tough these days, with recent HPI powered by low rates.   

Edited April 16, 2017 by blackhole

[RushRoad]

I am going to try this again with more detail and showing each step. Firstly lets not look at the whole of the UK as each region is different so lets pick a specific region or city. I am going to use Birmingham but we can do somehting similar for a few other areas too

Looking on rightmove at 2 bedroom houses for sale, there are 360 listed. I then hit list by cheapest first and look at the 180th property (so the property right in the middle, half are cheaper half are more expensive). That happens to be a property for £130,000 asking price with plenty on at £130,000 here is an example

http://www.rightmove.co.uk/property-for-sale/property-65557238.html

Ok so now we have the median price lets do the same for the median rental for a 2 bed house in birmingham.

Rightmove shows 180 such properties, so again list by cheapest and look at the 90th property which shows up as £650 per month eg

http://www.rightmove.co.uk/property-to-rent/property-58454767.html

 

So we have the median Birmingham 2 bedroom house costing £130,000 or £650 per month to rent or exactly 6% yield.

So if the option is to buy today, or wait 5 years and buy in 5 years time what does the math say?

 

The owner buys using a 75% mortgage from Barclays for 1.99% fixed for 5 years and they lose interest on their 25% at 2% in a good savings account
The cost is thus £13,000 in interest paid/lost for the buyer plus £1000 mortgage fee = £14,000. If we assume £1000 per year in maintinance costs for a house that adds £5000 so the total cost is ~£19,000

The cost for the renter is at least £39,000 assuming no rent increase over 5 years and no tenant fees on the way in.

 

So it is £19,000 to buy or £39,000 to rent

If house prices stay the same over the next 5 years the buyer is £20,000 better off

 

In this example, if house prices fall 15% its still better to have bought today. If house prices stay the same its much better to have bought today and if house prices are 15% higher in five years then choosing to rent would have been a £40,000 mistake.

 

Low interest rates provide some degree of house price crash insurance

[frozen_out]

2 minutes ago, RushRoad said:

I am going to try this again with more detail and showing each step. Firstly lets not look at the whole of the UK as each region is different so lets pick a specific region or city. I am going to use Birmingham but we can do somehting similar for a few other areas too

Looking on rightmove at 2 bedroom houses for sale, there are 360 listed. I then hit list by cheapest first and look at the 180th property (so the property right in the middle, half are cheaper half are more expensive). That happens to be a property for £130,000 asking price with plenty on at £130,000 here is an example

http://www.rightmove.co.uk/property-for-sale/property-65557238.html

Ok so now we have the median price lets do the same for the median rental for a 2 bed house in birmingham.

Rightmove shows 180 such properties, so again list by cheapest and look at the 90th property which shows up as £650 per month eg

http://www.rightmove.co.uk/property-to-rent/property-58454767.html

 

So we have the median Birmingham 2 bedroom house costing £130,000 or £650 per month to rent or exactly 6% yield.

So if the option is to buy today, or wait 5 years and buy in 5 years time what does the math say?

 

The owner buys using a 75% mortgage from Barclays for 1.99% fixed for 5 years and they lose interest on their 25% at 2% in a good savings account
The cost is thus £13,000 in interest paid/lost for the buyer plus £1000 mortgage fee = £14,000. If we assume £1000 per year in maintinance costs for a house that adds £5000 so the total cost is ~£19,000

The cost for the renter is at least £39,000 assuming no rent increase over 5 years and no tenant fees on the way in.

 

So it is £19,000 to buy or £39,000 to rent

If house prices stay the same over the next 5 years the buyer is £20,000 better off

 

In this example, if house prices fall 15% its still better to have bought today. If house prices stay the same its much better to have bought today and if house prices are 15% higher in five years then choosing to rent would have been a £40,000 mistake.

 

Low interest rates provide some degree of house price crash insurance

You might aswell shout at the moon.

I've been through this reasoning and kicked myself many times for not going through it when I was much younger. Basically, from right now - you need a short, sharp crash to stand any chance of coming out ahead. If you started saving 5 years ago in the hope of some rationalisation, you need it to be even shorter and sharper. 10 years and your chances of coming out ahead are pretty much zero.

[RushRoad]

9 minutes ago, blackhole said:

I didn't say you said, it was more of a reminder for others... ;-)

If you are able to find a such a place where the yield is higher then yes, its possible it could work.  The problem is many often want to live in a house beyond the 5 or 10 year fix, so what happens after that is anyone's guess at this point, especially with a large amount of capital outstanding to pay.  

Also finding these properties you discuss about could be tough these days, with recent HPI powered by low rates.   

 

I have just posted an example for Birmingham, median 2 bed houses are £130,000 plenty of them, median rents for 2 bed houses are £650pm and plenty of them.

It seems potentially risky to speculate on a house price crash when people can lock in 2% five year fixes or 2.7% ten year fixes

 

Quote

so what happens after that is anyone's guess at this point, especially with a large amount of capital outstanding to pay.

 

 

But paying the same as the renter you pay off a lot of capital over a 5 year period

 

[RushRoad]

11 minutes ago, frozen_out said:

You might aswell shout at the moon.

Yes sometimes it does feel like that here

 

11 minutes ago, frozen_out said:

I've been through this reasoning and kicked myself many times for not going through it when I was much younger. Basically, from right now - you need a short, sharp crash to stand any chance of coming out ahead. If you started saving 5 years ago in the hope of some rationalisation, you need it to be even shorter and sharper. 10 years and your chances of coming out ahead are pretty much zero.

 

Its a risky game to play because as we can see with mortgage rates so low, you not only need house prices to fall to make renting a winning bet you need them to fall a good amount nominally.

Again going back to the Birmingham example, someone buying today at £130,000 is no worse than someone buying in five years time for £110,000 So speculating on buying vs renting needs a 15.4% house price crash just to break even.

There must also be some value in owning sooner, I mean who would choose to buy in 5 years for £110,000 and pay £20,000 more in renting than owning rather than paying £130,000 toady?

 

Will we see a nominal 15.4% house price crash? Add in 2.5% annual inflation and it becomes a 25.2% real term house price crash. How likely is a 25.2% real term house price crash?

Before anyone shouts LONDON yes things may be different there but 85% of the country is not London

Edited April 16, 2017 by RushRoad

[blackhole]

7 minutes ago, RushRoad said:

 

There are in my views two types of renters, those who can not buy  and then those who could buy but choose to speculatively short property.

Its a risky game to play because as we can see with mortgage rates so low, you not only need house prices to fall to make renting a winning bet you need them to fall a good amount nominally.

Again going back to the Birmingham example, someone buying today at £130,000 is no worse than someone buying in five years time for £110,000

So speculating on buying vs renting needs a 15.4% house price crash just to break even.

There must also be some value in owning sooner, I mean who would choose to buy in 5 years for £110,000 and pay £20,000 more in renting than owning rather than paying £130,000 toady?

 

Will we see a nominal 15.4% house price crash? Add in 2.5% annual inflation and it becomes a 25.2% real term house price crash.

How likely is a 25.2% real term house price crash?

The issue with your model is simply what happens after the fixed?  What happens if you don't want to live in Birmingham, where the capital you'll be left with is a lot more?

At this point its very difficult to say with huge amounts of uncertainty out there.  Sure the homeowners have won so far.... but for how long is anyone's guess now.

Even £130k for a 2 bed in Birmingham is a stretch - they'll still need to find £26k deposit.  Sure the living costs aren't as insane in the Midlands, but its still an ask.  I think you are correct though, many who could afford to buy would have simply brought via BOMAD upto this point.  That's what I'm seeing.

Edited April 16, 2017 by blackhole

[blackhole]

6 minutes ago, RushRoad said:

Before anyone shouts LONDON yes things may be different there but 85% of the country is not London

Outside of London has been seriously impacted too.  Other parts of Leicester for example are well into the £250k+ bracket for modest family homes.  Insane.

[frozen_out]

1 minute ago, blackhole said:

The issue with your model is simply what happens after the fixed?  What happens if you don't want to live in Birmingham, where the capital you'll be left with is a lot more?

At this point its very difficult to say with huge amounts of uncertainty out there.  Sure the homeowners have won so far.... but for how long is anyone's guess now.

OK, RushRoad has jumped through some hoops and posted a fully worked example. It seems a little uneven to let you off the hook with mere speculation and 'anyone's guess guv innit?'

So your numbers are what exactly...