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Lou G

Renting V Buying

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Sorry! but still trying to get my head round the renting v buying figures.!!

My sister has a mortgage of £375K and is getting a rental income of £1400 a month.

Looking at IO (5%) of £375 thats £1500 a month so really my sister is only slightly down, less void periods and costs but we are at the height of a boom so I would have thought the difference would be more than this,

Anybody buying a "home" surely its worth the slight extra!!.

Sorry if this is a daft question!

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Sorry! but still trying to get my head round the renting v buying figures.!!

My sister has a mortgage of £375K and is getting a rental income of £1400 a month.

Looking at IO (5%) of £375 thats £1500 a month so really my sister is only slightly down, less void periods and costs but we are at the height of a boom so I would have thought the difference would be more than this,

Anybody buying a "home" surely its worth the slight extra!!.

Sorry if this is a daft question!

I’ve been through this with you before.

What happens if the economy generally slows?

It was reported today/last night America’s economy grew by 1.1% when everyone was expecting 2.8%.

This is very bad.

What happens to your sister’s mortgage if in 5-6 years the Bank of England sets interest rates to 8 %?

She’s screwed because she took on so much debt.

“She’s going out with the tide” is what I think I told you last time. Is a little patience a crime?

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Anybody buying a "home" surely its worth the slight extra!!.

Anyone with an interest-only mortgage is renting from the bank: but, unlike the rest of us, they not only have to pay to maintain the place they're renting, they get lumbered with the debts if the price drops.

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Firstly, why on earth is she in that situation? She has an asset which is not increasing much in value, and may well fall, she is losing money every month in any case, and she is taking all the risk for upkeep and voids. If it is a BTL it is a bad investment. If it came about by accident maybe she should consider selling now.

Secondly it is indeed worth paying more to buy a home than you would to rent - you have the sense of ownership, security etc. However an IO mortgage does not enable you to buy a property, only to rent it from the bank. Unless you put aside the full cost of the property by other means, after 25 years the property still belongs to the bank. It only makes sense to compare renting to buying on a repayment mortgage and on that basis there is often a pretty big gap.

I'm actually buying though I'm sure some of the renters here would make the same points. Buying can be a reasonable decision even if it costs more, but if you base the maths on an IO mortgage, then you're not really talking about buying, only about acting as an agent to sublet the bank's property, and why would you work as an agent for a monthly loss?

Edit - sorry for repeating points, others were typing faster than me.

Edited by Magpie

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Feel like I've been told off!! but I'm just trying to get my head around the figures!! Not the best at maths as you can guess!!.

My sister, well they took a 100% mortgage, released equity to buy another house and they only paid £345k in April 04, they might be in negative equity already!!!. The house was valued at £389k last spring hence they managed to remortgage.!!! What can you say...

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Sorry! but still trying to get my head round the renting v buying figures.!!

My sister has a mortgage of £375K and is getting a rental income of £1400 a month.

Looking at IO (5%) of £375 thats £1500 a month so really my sister is only slightly down, less void periods and costs but we are at the height of a boom so I would have thought the difference would be more than this,

Anybody buying a "home" surely its worth the slight extra!!.

Sorry if this is a daft question!

The discrepancy here is that you are comparing renting with an interest only mortgage. So in this case, your sister is not buying a house, but is instead renting it from the bank. As no capital is being repayed the extra £100pm repayment gets you nothing, but you do enjoy the liabilities associated with a £375k house.

A repayment mortgage for this amount is £2200 at 5%. If the rental cost was approaching this figure, it would be worth considering buying the property.

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Feel like I've been told off!!

Sorry, didn't mean to sound like that. But I think the whole thing of IO mortgages is quite dangerous and is supporting the bubble because people work out affordability and what they can buy based on IO, and that really stretches the limits of what people will go to. It's incredibly irresponsible of the banks, and so far as I know is a very recent phenomenon - a mortgage in the past was always a repayment mortgage - the endowments fad (look where that ended up) was the first time the interest and repayment was widely separated. These days they give out IO like sweets and don't even bother to check that people have a repayment vehicle, which is just inviting people to get into unsustainable debt.

I hope your sister comes out of it OK, but I do think it sounds a bit risky.

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Firstly, why on earth is she in that situation? She has an asset which is not increasing much in value, and may well fall, she is losing money every month in any case, and she is taking all the risk for upkeep and voids. If it is a BTL it is a bad investment. If it came about by accident maybe she should consider selling now.

Secondly it is indeed worth paying more to buy a home than you would to rent - you have the sense of ownership, security etc. However an IO mortgage does not enable you to buy a property, only to rent it from the bank. Unless you put aside the full cost of the property by other means, after 25 years the property still belongs to the bank. It only makes sense to compare renting to buying on a repayment mortgage and on that basis there is often a pretty big gap.

I'm actually buying though I'm sure some of the renters here would make the same points. Buying can be a reasonable decision even if it costs more, but if you base the maths on an IO mortgage, then you're not really talking about buying, only about acting as an agent to sublet the bank's property, and why would you work as an agent for a monthly loss?

Edit - sorry for repeating points, others were typing faster than me.

Magpie, Why are you buying, even if it costs more.? Do you feel the need for ownership is greater than renting? Just curious as we had an offer accepted on a property although may pull out!!

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Sorry! but still trying to get my head round the renting v buying figures.!!

My sister has a mortgage of £375K and is getting a rental income of £1400 a month.

Looking at IO (5%) of £375 thats £1500 a month so really my sister is only slightly down, less void periods and costs but we are at the height of a boom so I would have thought the difference would be more than this,

Anybody buying a "home" surely its worth the slight extra!!.

Sorry if this is a daft question!

Whats you sisters monthly income? Would she be able to cover the mortage for any unoccupied term? And a small increase in rates could well have your sister in deep water.

The mentality of people today. :wacko:

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Feel like I've been told off!! but I'm just trying to get my head around the figures!! Not the best at maths as you can guess!!.

My sister, well they took a 100% mortgage, released equity to buy another house and they only paid £345k in April 04, they might be in negative equity already!!!. The house was valued at £389k last spring hence they managed to remortgage.!!! What can you say...

Yea, I’d say she is in negative equity.

She has been left holding the proverbial baby

Bought in April 04 on a 100% mortgage, and remortgaged spring 05 to buy another house!

I cannot think of a single worse scenario case study I have read on this site. Oh yea I can, TTRTR.

There is not much you can do for her now. She will spend 15 - 20 years riding out the storm.

She will probably be stuck in that house for a very, very long time.

I hope the mortgage is not interest only, as then should wouldn't even own the place at the end of it all! ouch.

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She will probably be stuck in that house for a very, very long time.

Or go bankrupt in a few years when she realises she'll never be able to pay off the mortgage.

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Magpie, Why are you buying, even if it costs more.? Do you feel the need for ownership is greater than renting? Just curious as we had an offer accepted on a property although may pull out!!

Hi Lou, If you're interested, I explained it in my first post (near bottom of first page) on this thread - http://www.housepricecrash.co.uk/forum/ind...opic=20207&st=0

The need for owning my own place does matter a bit to me, but at this stage I might still wait if it weren't for a conjunction of several other factors that make me prefer to buy now. I fully respect the reasons a lot of people here have for not buying (those that have the choice, that is...) but I think you have to look closely at your own position and what you really think will happen and make a choice. I found this site an invaluable resource in doing that even though I'm not doing the same as many others here.

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Hi Lou, If you're interested, I explained it in my first post (near bottom of first page) on this thread - http://www.housepricecrash.co.uk/forum/ind...opic=20207&st=0

The need for owning my own place does matter a bit to me, but at this stage I might still wait if it weren't for a conjunction of several other factors that make me prefer to buy now. I fully respect the reasons a lot of people here have for not buying (those that have the choice, that is...) but I think you have to look closely at your own position and what you really think will happen and make a choice. I found this site an invaluable resource in doing that even though I'm not doing the same as many others here.

Its hard isn't it that we are put in this situation.! Very similar to ourselves, me at 39 and hubby at 42 with a 5 year old daughter. We have found somewhere in an area we have always wanted to be but my own angle is that, do we forgo the comforts of owning now for the future welfare of our child. Would it be best for my daughter if we waited say 8 years so hopefully we can then buy at the right time and at a lower price and then hopefully have a deposit for her so she gets on the ladder at the right time.!

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Its hard isn't it that we are put in this situation.! Very similar to ourselves, me at 39 and hubby at 42 with a 5 year old daughter. We have found somewhere in an area we have always wanted to be but my own angle is that, do we forgo the comforts of owning now for the future welfare of our child. Would it be best for my daughter if we waited say 8 years so hopefully we can then buy at the right time and at a lower price and then hopefully have a deposit for her so she gets on the ladder at the right time.!

Ah, interesting to know you're in a similar bind... It's different for everyone of course. One driving force for me is that I can't rent somewhere with enough space for much less than I can buy for, and I have to do something. Bear in mind that, if my experience is anything to go on, in 8 years you'll only be able to get a 14-15 year mortgage and that will make a huge difference to repayments. Fine if prices have dropped a long way by then, but not so good if they only drop say 10-15%. There's definitely at least an argument that you will be doing more for her long term by making sure that there is some property in the family. This is a relatively easy time to get a mortgage, and it might get harder if there is a crash, which won't help if there is any doubt about you getting the mortgage you need (no idea of your finances of course, hopefully a bit more stable than mine...)

I'm not sure about their future welfare. I suppose I believe that if I own I will be in a better position to help her out somehow than if I don't ever buy - I might be chucking away the deposit or more by buying now, but I may end up in a slightly better position in twenty years. But I really can't be sure which would be financially safer over that kind of timescale. I just want to do the best I can now for her and then keep working hard to make things as good as I can over the long term.

Good luck whatever you choose. If you do buy, make sure you'd be able to pay the mortgage if rates rise, try to buy something in a good area rather than something grander in a worse area (if you think local prices will fall that is), and make sure you'd be prepared to live there for 10-15 years in case you do have to ride out a fall in prices. Beyond that it's all luck and guesswork.

Edited by Magpie

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less void periods and costs

You just gloss over that a bit too easy, in my last year as a homeowner I spent £2k on repairs, new boiler, fence blown down, general decorating and that was on a fairly new house.

Now as a renter if I want a new kitchen I just move :)

Edited by gilf

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Sorry! but still trying to get my head round the renting v buying figures.!!

My sister has a mortgage of £375K and is getting a rental income of £1400 a month.

Looking at IO (5%) of £375 thats £1500 a month so really my sister is only slightly down, less void periods and costs but we are at the height of a boom so I would have thought the difference would be more than this,

Anybody buying a "home" surely its worth the slight extra!!.

Sorry if this is a daft question!

great.

£100 a month down.

a void month leaves her £1500 down that month.

2 months ..

Work it out.

this is an IO mortgage.

Prices drop as they have been promissed to do so by the head of the MPC..

and she is in serious trouble...

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the point is that the price of money is cheap. the prices of houses is expensive. you see they have an inverse pricing relationship. one goes up the other goes down.

5% lol youl be lucky try 6.7% now look at what the 375K of debt is making you every month.

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I have 2 points to make:

1. The rent your sister receives appears to be extraordinarily high, and I think this is why it appears that there isn't much difference between renting and buying I/O.

The house we are in for example, would have a guesstimate valuation of 275k to 325k in the current asking price environment.

Yet we rent for 875 per month, and there are plenty of other deals like this available. A quick browse of rightmove should show you something similar in your area.

For 1500 quid per month rent I would expect to be in a house "worth" 500k. Actually their isn't even much like this in the price range.

Look at this for example

Tell me that isn't "worth" a lot more than say 650k, its within 40 minutes train ride to the city, yet it rents for 1800 quid a month!

So I think your sisters 1500 quid rent for house worth 375k is doing very well.

2. Why oh why oh why are you thinking about trying to get a deposit together for your daughter? This is bubble thinking that you must be aware of. I have had this conversation with a friend who has a young family like you. His justification for buying a BTL is because he wants his sons to be able to have this place when they grow up. This is just unconsciously thinking that prices only ever go up out of the reach of young people. HOW CAN THAT HAPPEN?

If young people can't get on the ladder (I am beginning to hate that expression) then who will support the bottom rung? NO ONE

And what happens if no one buys at the bottom? COMPLETE COLLAPSE.

When this bubble has burst everyone will laugh at what people thought about property values, just as everyone laughs now at the historical valuations of internet dot.com shares in 1999.

You sound like a thoughtful parent, and by all means think about your childrens future but don't assume you have to help them by a house.

Your parents didn't help you and my parents didn't help me, not with thousands of pounds at any rate. Once normality occurs, the FTB will struggle to buy, but it will be a normal struggle, nothing more. The recent talk of parents guaranteeing and supplying money for their childrens houses is just an implication of a bubble.

Edited by Gavin

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Sorry! but still trying to get my head round the renting v buying figures.!!

Sorry Lou G what your actually looking for is confirmation that you are doing the right thing in buying at the cusp of a housing market correction.

The answer is staring you in the face, but it's your choice wither you take notice of it.

I note you set a time of eight years being the optimum time to buy, based on what ? I'll tell you what, based on that timing adds support for your desire to buy now for the sake of your child. You are not asking for advice, if your honest your attempting to sell a sack full of smelly fish to yourself.

I don't doubt the house will be very nice and suit your purpose, all I'm saying is you could not pick a worst time to commit to the market in North Yorkshire than right now.

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Those advising against buying, are you sure you are giving impartial advice, or are you just projecting your own situations on to someone else? The age factor is one factor here. Like me, Lou is at a stage where every year she waits will reduce the length of mortgage she can get, thus increasing the amount of money they need to pay off each month. That makes a significant difference to how we should calculate the risks of waiting.

I respect, and somewhat envy those of you who are in a position to wait. But I think there is sometimes a kneejerk reaction here to tell people not to buy regardless of their individual situation. I don't know enough about Lou's situation to know what her best path is, but bear in mind that even though most people shouldn't buy at this stage, for some people it might still be the least worst option.

Edited by Magpie

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I am sorry but that last statement is incorrect in my opinion.

It doesn't matter what stage of life you are in. Buying now is bad news because prices are too high.

I have an even clearer conscience because if you have less earning potential in terms of longevity it is even more important rhat you make your large purchases and sales wisely, as you have less time to pay for mistakes.

Actually the original poster was trying to understand the relationship between renting and buying. If the right choice is made now (and clearly renting is cheaper than buying at the moment) then it will make it easier to buy later on because you would have saved huge amounts in interest.

I think believing anything else is an illusion.

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Those advising against buying, are you sure you are giving impartial advice, or are you just projecting your own situations on to someone else? The age factor is one factor here. Like me, Lou is at a stage where every year she waits will reduce the length of mortgage she can get, thus increasing the amount of money they need to pay off each month. That makes a significant difference to how we should calculate the risks of waiting.

I respect, and somewhat envy those of you who are in a position to wait. But I think there is sometimes a kneejerk reaction here to tell people not to buy regardless of their individual situation. I don't know enough about Lou's situation to know what her best path is, but bear in mind that even though most people shouldn't buy at this stage, for some people it might still be the least worst option.

Buying if you are bearish seems insane to me, even with age coming into play.

I don't see why a "synthetic mortgage" shouldn't meet your needs. Rent a place reasonably cheaply for a couple of years (and the consensus seems to be that it is possible to save compared to an equivalent mortgage), and put the saving plus expected mortgage payment + house maintenance into a savings account.

Let's use the numbers from the start of the thread.

House price: 375k

IR: 5%

Rental payment: £1400 pcm

Interest payment: £1562.50 pcm (OP quoted 1500, and no-one seems to have checked this)

Payment on 25 year mortgage: 2192.21 pcm

Difference between mortgage payment and rent: 2192 - 1400 = 792 pcm

Payment on 20 year mortgage: 2474.83 pcm

Clearly the 20 year payment is rather more painful.

Expected maintenance costs: Lets use 1% pa: 3,750.

Let's assume first that interest rates, prices and rents remain constant for the next 5 years, and we rent:

I calculated the following using a spreadsheet, but you can check them at this calculator.

Annual rent: 1400 * 12 = 16,800 PA

Five years' rent: 16,800 * 5 = £84,000

Annual saved payment: 792 * 12 = 9504

Total saved payments: 47520

Total maintenance: 18,750

Total saving: 66270

Now, to buy the same house at 375000, you have a deposit of 66270, and borrow 375000 - 66270 = 308730

The payment on a 20 year mortgage on that is 2037 pcm, so you've saved 150 pcm on the mortgage payment.

We're renting a place that nearly matches this description:

Land registry prices for the road in the recent past are 370k-400k.

We're paying £1000 pcm to rent. I'm saving £1192 per month against buying.

I was slightly shocked when I ran this, and my gf, who was somewhat bullish, became extremely bearish when we calculated the numbers. I'm not sure that the £1400 pcm rent quoted earlier is the best deal in the market.

There are weaknesses to this analysis. I don't allow for savings earning interest, or insurance on the mortgage or anything like that. I don't allow for the cost of moving if the landlord doesn't renew, or tries to raise the rent significantly. On the other hand, I don't allow for a fall in house prices.

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< Buying if you are bearish seems insane to me, even with age coming into play. >

Hi SlowJoe

That's definitely the kind of analysis anyone considering buying vs renting should run, so it's a good answer to the original question.

I'm certainly not trying to persuade anyone to to do the same as me. Actually I think for 9 out of 10 it will be smarter not to buy now, and that may be the case for Lou, but I really don't know enough to be sure and neither does anyone else here. But I do think that refusing to consider that for some it could be better to buy is a bit blinkered. There are other factors than age for me: schools, a room for my child, the right kind of place, emotional factors etc etc. Here are some other ways in which my analysis of my own situation is different to the example you give:

1. I'd personally only be saving about £250 by renting max. I'll be paying £1100 mortgage, renting similar in the area would cost £850 a month minimum. I think London is slightly quirky in that rents are high for quite small spaces, so in this respect I may be in a different situation to you or Gavin. I'd probably be prepared to pay a bit extra for my own place anyway, though certainly not as much as the differences you give between renting and buying where you are.

2. Do you really save that £1192 every month or is that just what the spreadsheet says? Have you actually put £7000 into an account somewhere in the last 6 months? Human nature tends to be to spend more if we have more disposable income. I know I'll spend less when I have a mortgage because I'll bloody have to but I'm not sure I would be able to save every penny without the motivation of knowing it was paying for the place I was buying. Again, everyone can do their own sums on that, but I think sometimes the theoretical figures don't match the real world.

3. The age thing is about more than just sums, for me at least. I have for the most part of the last ten years not been in a situation where I could even consider buying. I happen to be at a point where my income will cover me for somewhere that I think it is OK to buy (eg not so vile it will be entirely worthless or a trap to live in). For me, I may not even be able to get a mortgage if I wait, because the shorter time span will make it harder.

So for me, it's a risk and a marginal decision, but even if, as I expect, prices fall a bit, I think it's the right risk for me. Waiting would be a different risk. But the factors for me are very specific and I suspect that for many people running your sums above they might find it better to risk waiting. Even more so if they think the local market will fall significantly (London will fall, but maybe by less than some places). My main point is just that everyone has to make the decision based on their own actual situation.

Edited by Magpie

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I have 2 points to make:

1. The rent your sister receives appears to be extraordinarily high, and I think this is why it appears that there isn't much difference between renting and buying I/O.

The house we are in for example, would have a guesstimate valuation of 275k to 325k in the current asking price environment.

Yet we rent for 875 per month, and there are plenty of other deals like this available. A quick browse of rightmove should show you something similar in your area.

For 1500 quid per month rent I would expect to be in a house "worth" 500k. Actually their isn't even much like this in the price range.

Look at this for example

Tell me that isn't "worth" a lot more than say 650k, its within 40 minutes train ride to the city, yet it rents for 1800 quid a month!

http://www.rightmove.co.uk/viewdetails-103...a_n=1&tr_t=rent

So I think your sisters 1500 quid rent for house worth 375k is doing very well.

2. Why oh why oh why are you thinking about trying to get a deposit together for your daughter? This is bubble thinking that you must be aware of. I have had this conversation with a friend who has a young family like you. His justification for buying a BTL is because he wants his sons to be able to have this place when they grow up. This is just unconsciously thinking that prices only ever go up out of the reach of young people. HOW CAN THAT HAPPEN?

If young people can't get on the ladder (I am beginning to hate that expression) then who will support the bottom rung? NO ONE

And what happens if no one buys at the bottom? COMPLETE COLLAPSE.

When this bubble has burst everyone will laugh at what people thought about property values, just as everyone laughs now at the historical valuations of internet dot.com shares in 1999.

You sound like a thoughtful parent, and by all means think about your childrens future but don't assume you have to help them by a house.

Your parents didn't help you and my parents didn't help me, not with thousands of pounds at any rate. Once normality occurs, the FTB will struggle to buy, but it will be a normal struggle, nothing more. The recent talk of parents guaranteeing and supplying money for their childrens houses is just an implication of a bubble.

For some reason rents are high here!. Look at this, a 2 bed executive apartment in Harrogate!!. I think some of the prices here are just more expensive than London and house prices certainly match Surrey etc.

Its most odd as the wages don't match London!!.

The house we are currently renting would have a value of around £300k and we are paying £1k a month.

Its a 4 bed detached. Some 3 bed semis are on for £850-950 which have a value of around £275k.

http://www.rightmove.co.uk/viewdetails-103...a_n=1&tr_t=rent

My sister is getting a good rent, I believe they were advised the rental value was around £1200 a month but we have an american base near and the americans get half their rent paid by the base! Americans are renting her house.

I have learnt alot about markets by reading this forum and I didn't realise that when I bought my first flat in 93 that it was a good time to buy!. When that graph shows its a good time to buy and if we had some spare cash I might just be tempted to put a deposit down on a flat for my daughter. I don't want her to be priced out if she ever needed to buy. I think its a parent thing, you just want to do the best for your children..

With regard to the house, we went round today and spent quite a bit of time there. Walked around the area with hubby and we jointly came to the conclusion that its the right area but the wrong house. We actually walked back into our rented house and prefer to stay here!!. We both feel very relieved that we are staying put for time being. At the end of the day you have to "love" the house you are buying, then you don't mind paying the mortgage because its "home" and you cannot put a value on the happiness it would bring living there. We will keep working hard, keep saving the pennies.!

I also think its difficult to recommend to buy or not to buy as no two areas are the same, this bubble is affecting different areas of the Uk at different times. We nearly bought 2 years ago and the house we viewed was on at £315k. House next door to it has just sold for £380k!!

Interesting talking to the agent today, he said he doesn't understand,! they are selling lots of properties around the £170/£180k mark but properties higher up the scale are sticking and doesn't know why!!.

Didn't understand why these people selling were not moving up the "ladder!" Maybe they are all going into rented!!!!.

Lou

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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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