House price correction and rent correction

[Freki]

On this forum we mainly focus on how much a property fetches, but rarely do we mention (even if everyone agrees and knows) that

Right now I am doing my cost analysis on buying a place in London.And even if I know that the market can crash 50% or more to reverse it to the mean, what about rent?

Can rent crash the same way? Isn't rent pricing much stickier?

Renting the equivalent would be 35% more expensive than my mortgage. 

I hardly see a downside risk when:

• I can lock myself for 5 years
• Save about £500 extra compared to renting
• Build equity and offset partially loss in property value

Can someone throw some sense into me? 

Can the rent reverse to the mean as well?

Edited January 17, 2019 by Freki

[Wayward]

Open market rents..variables to watch...

Ability to pay

Supply 

Demand

...how are each of these moving,? Employment seems strong at mo. Supply may dry as BTLers exit but what about Build to Let new supply? Demand...question is whether EEs go home.  Some thoughts for you.

[thewig]

Have you considered buying one up, renting it out to some unsuspecting aspirational young professional scum bags, just banging the rents up on them toot sweet, use your rent money income and the increase in your equity to bang down a deposit on another prop to buy, fill it with another hard working scumbag, just bang em up, etc etc?

 

if not you’re a facking mug mate

Edited January 17, 2019 by thewig

[Wayward]

As for whether to  buy...one thing you can be sure of is now is the worse ever time to buy. Whether next year or year after will be even worse who knows but the UKGOV are working on it for you.

[24gray24]

Rent equals all your spare income, ie just the hoover price on all your disposable.  That's why if wages go up, rent goes up; landlords costs haven't gone up so why does the rent? The answer is its got nothing to do with landlords costs. It's only got to do with your disposable money. Rent takes all you've got, on average. 

Plus... in a recession, housing benefit used to subsidise landlord, so rents never went down. I think there's a ratchet down now, so now the rents could go down for first time. 

Wages however do go down. You go from min wage, crawl up ladder, get made redundant.  Rinse repeat. 

Now we have house prices going down. So you buy , build up some negative equity and owe that on top of your mortgage costs. That's the hidden extra cost of buying a house.

£500 is wrong for rental premium? you've probably forgotten some of your costs: insurance, maintenance, bubble effect etc. Usually comes to much the same as renting. 

It's simply a question of how much house prices fall: that's the penalty you'll pay for owning. 

[bushblairandbrown]

5 minutes ago, 24gray24 said:

£500 is wrong for rental premium? you've probably forgotten some of your costs: insurance, maintenance, bubble effect etc. Usually comes to much the same as renting. 

Yes it isn't widely recognised that landlords make very little profit from rental income. Almost all their profit is from capital gains which shows you what a mental ponzi has been running since the mid 90s.

Also highlights how much mortgage equity withdrawal has been going on for landlords to prance around in their big houses and fancy cars. 

Edited January 17, 2019 by bushblairandbrown
Missed mew point

[BorrowToLeech]

12 hours ago, bushblairandbrown said:

Yes it isn't widely recognised that landlords make very little profit from rental income. Almost all their profit is from capital gains which shows you what a mental ponzi has been running since the mid 90s.

Also highlights how much mortgage equity withdrawal has been going on for landlords to prance around in their big houses and fancy cars. 

That’s because rents are capitalised into the price, so landlords have basically paid all future rent up front when they buy. 

To profit, they need either future rents to be higher than was expected when they bought, or for the up-front cost of a future income stream (the house price) to rise. 

The upfront cost of a future income stream is basically the inverse of the interest rate (for a rent stream of 1k/year at a 1% rate, you have to pay £100k. For a rent stream of 1k/year at 2% you need to pay 50k). 

So either rents have to rise, or rates fall. 

Rents will more or less track incomes.  Prices will fluctuate with credit availability.  State subsidies can push up the costs of both or either.

 

[Dorkins]

On 17/01/2019 at 09:46, Freki said:

I hardly see a downside risk when:

• Save about £500 extra compared to renting

Average London house price is what now, about £600k? So that drops by 50% over 10 years and you have a £300k capital loss. £6k pa less outgoings over those 10 years (assuming no change in interest rates despite your now huge negative equity) = £60k. £60k - £300k = -£240k. For most Londoners a loss of a quarter of a million represents a decade of pitching up to work and coughing up PAYE for nothing.

Property shows chuck 100s of k around like they were nothing but they represent many years of working life.

Edited January 18, 2019 by Dorkins

[iamnumerate]

6 minutes ago, Dorkins said:

 

Property shows chuck 100s of k around like they were nothing but they represent many years of working life.

Very true - when people say a house costs £300k - or £500 k I think - that is so much money - very few people realize how much that is in terms of years of earnings.

Obviously if you already own a property worth £500k moving to another one is not too difficult (harder than it was 20 years ago) but if you care about the have nots you should worry.

[Wayward]

2 hours ago, BorrowToLeech said:

Rents will more or less track incomes.  Prices will fluctuate with credit availability.

Rents - if you think they will track incomes you may be in for a shock if scarcity intensifies...more people will be crammed in the existing stock and rents may double or treble with no wage growth as folk share.

Prices - yes whilst we have scarcity and competitive bidding prices are as high as the credit folk can raise, they need to win the bidding.  No scarcity scenario and no competitive bidding and the link to credit availability is broken.

[happyguy]

17 hours ago, thewig said:

Have you considered buying one up, renting it out to some unsuspecting aspirational young professional scum bags, just banging the rents up on them toot sweet, use your rent money income and the increase in your equity to bang down a deposit on another prop to buy, fill it with another hard working scumbag, just bang em up, etc etc?

 

if not you’re a facking mug mate

interesting rant

16 hours ago, Wayward said:

As for whether to  buy...one thing you can be sure of is now is the worse ever time to buy. Whether next year or year after will be even worse who knows but the UKGOV are working on it for you.

we have been hearing that on here for many years

no one has a crystal ball 

1 hour ago, Dorkins said:

So that drops by 50% over 10 years

dream on

1 hour ago, iamnumerate said:

if you care about the have nots you should worry.

but what realistically can a person who owns  a home do to help someone who does not own a home

- not trolling - serious question 

All the best

[iamnumerate]

49 minutes ago, happyguy said:

but what realistically can a person who owns  a home do to help someone who does not own a home

- not trolling - serious question 

All the best

Vote for a decent politician who will make things fairer - sadly that is not an option.

However you can be concerned about things you can't solve - shows compassion, even if you are powerless.

[Freki]

2 hours ago, Dorkins said:

Average London house price is what now, about £600k? So that drops by 50% over 10 years and you have a £300k capital loss. £6k pa less outgoings over those 10 years (assuming no change in interest rates despite your now huge negative equity) = £60k. £60k - £300k = -£240k. For most Londoners a loss of a quarter of a million represents a decade of pitching up to work and coughing up PAYE for nothing.

Property shows chuck 100s of k around like they were nothing but they represent many years of working life.

So the math is actually a bit more complex than that.

When you repay a mortgage you pay back the capital as well. 

Anyway I have made a mortgage viability simulator. And here is an example of the net position after anticipating a drop of 25% of HP in 5 years

I think I will play around this a bit more and it will help me have a clearer mind with my next step.

[Captain Kirk]

The only reason renting is cheaper than buying is because interest rates are heavily suppressed meaning taxpayers and savers are subsidising your low mortgage costs. Buying would probably be more expensive otherwise.

Buying is a financial risk since you are leveraging to buy something you otherwise could not afford. Renting is not. I assume you will need to fork out a bigger deposit on the purchase than on the rental? Also, you have to pay for all maintenance costs. You could lose your job and be forced to sell at a loss. I'm not sure how you would fair mentally if prices did drop 50% and you were still able to pay the mortgage. Most people fret and have sleepless nights if a stock they bought is down 5%, and really start panicking when down 10%.

I think TPTB have made buying a really high risk that could financially ruin you. On the other hand, you could be fine and even make a fortune if speculative, laundered or funny money starts piling into London again.

Forgot to say that rents tend to be much more stable than prices. There are probably a lot of reasons for this. However, it's most likely prices are unstable due to all the distortions and manipulations of central banks and governments.

Edited January 18, 2019 by Captain Kirk

[Freki]

13 minutes ago, Captain Kirk said:

 

I am looking at numbers, and arguments about rent stickiness being higher than house price.

Rent is not risk free. Rent can be dead money. And chucking 120k to a scumbag over 5 years is not a risk free position in my mind. So whatever you do, you are adopting a speculative position. If you buy you speculate you'll be fine, if you keep renting, you speculate you won't be worse off.

Edited January 18, 2019 by Freki

[Captain Kirk]

5 minutes ago, Freki said:

Rent is not risk free.

Yes it is. 

Edited January 18, 2019 by Captain Kirk

[Freki]

If some Excel users want to have a go at it

Mortgage_viability v5 - Cl.xlsx

Notes:

• I used the 5Y fixed rates for the different LTV
• The stamp duty assumes you are a FTB
• Highlighted in green are the parameter you can play with

Edited January 18, 2019 by Freki

[winkie]

1 hour ago, happyguy said:

interesting rant

we have been hearing that on here for many years

no one has a crystal ball 

dream on

but what realistically can a person who owns  a home do to help someone who does not own a home

- not trolling - serious question 

All the best

 

[Aidan Ap Word]

44 minutes ago, Captain Kirk said:

Yes it is. 

Renting is not risk free. The risk you get moved on because of some random reason (or whim) by the landlord is - by definition - risk ... because it is an event of variable probability.

Neither is buying, of course.

[luvadealme]

1 hour ago, Freki said:

So the math is actually a bit more complex than that.

When you repay a mortgage you pay back the capital as well. 

Anyway I have made a mortgage viability simulator. And here is an example of the net position after anticipating a drop of 25% of HP in 5 years

I think I will play around this a bit more and it will help me have a clearer mind with my next step.

Rental cost seems way too high, we live in a house that would easily sell for 500k and our rent is 1350....

[Unmoderated]

1 hour ago, Freki said:

If some Excel users want to have a go at it

Mortgage_viability v5 - Cl.xlsx

Notes:

• I used the 5Y fixed rates for the different LTV
• The stamp duty assumes you are a FTB
• Highlighted in green are the parameter you can play with

You can do numbers so go for it. 

We bought in 2017 after much deliberation and nonsense on here about the end is nigh etc etc. 

This is likely a good time to buy, none of the confidence of the pre-referendum, plenty of uncertainty and plenty of upside since all business really needs is certainty so it can get planning. 

Buy now, drive a hard bargain (we knocked the guy down 12% from his original asking price which didn't look unreasonable tbh but house needed work and he needed a care home!) In five years time you'll have cleared a chunk of the mortgage and made the place your own. Just do not for the love of God buy a new build. 

Alternative is renting from a spiv for 5 years and being no closer to buying a place than you are today. 

There is one prediction I would make about house price falls and tat's we will have a recession if that happens. Every house price fall in the UK has correlated with a recession so while a modest correction might look like a blessing there's a chance you're not able to get a mortgage as you're on probation having just switched jobs etc. 

[LondonBound]

3 hours ago, Freki said:

So the math is actually a bit more complex than that.

When you repay a mortgage you pay back the capital as well. 

Anyway I have made a mortgage viability simulator. And here is an example of the net position after anticipating a drop of 25% of HP in 5 years

I think I will play around this a bit more and it will help me have a clearer mind with my next step.

I would budget 1% of the house for annual maintenance per year. Day to day costs may be low but a new kitchen/bathroom or total repaint or new carpets comes along more often than you might think. Especially if you’re married!

Also look at how much of the loan principal you will have paid off after five years. At the beginning of the loan almost everything you pay is interest.

 

 

[Freki]

Well the annual maintenance cost are "low" since the only maintenance costs are the non structural ones. The leasehold costs are supposed to cover part of those costs.

The gain/loss is basically what you describe. How much equity is there left in the house+ how much extra you have saved thanks to reduced payments vs placing the cash needed to buy the house at a risk free rate on the market. 

[Dorkins]

2 hours ago, Unmoderated said:

There is one prediction I would make about house price falls and tat's we will have a recession if that happens. Every house price fall in the UK has correlated with a recession so while a modest correction might look like a blessing there's a chance you're not able to get a mortgage as you're on probation having just switched jobs etc. 

It's not a great idea to have a big mortgage when a major recession comes. That's the position my parents were in when the 89-early 90s recession came. House prices fell, their household income dropped and they couldn't make the mortgage payments. In the end the house was repossessed and all of the equity they had built up in a couple of decades of full time work and mortgage payments was wiped out. They ended up becoming FTBs again in their mid 40s.

[Captain Kirk]

5 hours ago, Aidan Ap Word said:

Renting is not risk free. The risk you get moved on because of some random reason (or whim) by the landlord is - by definition - risk ... because it is an event of variable probability.

Neither is buying, of course.

Renting is risk free. The 'risk' that you may get moved on is not a financial risk. You don't continue to pay rent if you get moved on. By renting, you are purchasing accommodation and know exactly how much you will pay and how much you will make out of it (the latter being nothing financially).

Borrowing has risk because you do not know how much you are paying for the house because you don't know what the interest rates will be in the future.