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House price correction and rent correction


Freki
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4 hours ago, Unmoderated said:

Nonsense! What is the provability of going bankrupt as a homeowner and as a tenant? The same? more or less? 

If house prices go down, owners have to pay the whole drop amount when they sell. Or go bust. They can kiss goodbye to any deposit they put in just for starters. 

5 hours ago, Unmoderated said:

Which is more risky (where risk is defined as the likelihood of having to move house); owning a home, or renting a home? 

Risky is not defined as moving house.

Risky means financially risky.  And in a falling market, owning a house isn't just more risky. It's a dead certain loss. 

5 hours ago, Unmoderated said:

Bankruptcy doesn't always = loss of owned home (see link). The point everyone else is talking about is which is less risky from a moving house perspective? 

That advice assumes equity and a whole host of other things to work. . In a falling market, the equity disappears. 

So a lender loses more money every day he does not foreclose. Result: lender will foreclose. 

Much better option: avoid owing the loss by not buying in a falling market. 

6 hours ago, Unmoderated said:

 This doesn't result in bankruptcy provided the house is worth what it's sold for, or you agree to pay the shortfall.

That's the problem : when it sells for less than you paid for it,  " you agree to pay the shortfall" or your life is ruined. 

Unmoderated is very blasé about that. 

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15 minutes ago, iamnumerate said:

That doesn't disprove my point

No, I was questioning whether having to move is actually a risk. It's just something everyone has to do occasionally regardless of whether they rent or not.

To know for sure whether you are more likely to move if you rent than if you buy we'd need to check statistics rather than just assume I recon.

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20 hours ago, Captain Kirk said:

I've read the posts. I'm not to sure moving house is risky. Unless you balance all your possessions on your head and walk to your new house on a tightrope, rooftop to rooftop, with a child on each arm.

None of my moves have ever been risky.

And I've browsed that link. Good luck keeping your home without paying your mortgage. I think you'll have zero chance.

What do you understand the definition of 'risk' to be?

The question is not about the risk of moving house. It is about how likely it is you HAVE to move. Is it more likely you have to move if you rent, or if you own? If you stop paying your mortgage and you have dependants living at home you can't be repossessed for at least a year. If you are in negative equity the house has no value to a liquidator anyway (actually if you have less than £1,000 equity in there it is disregarded initially and then revisited later in the process). It's all there on the link Captain. 

I'm not suggesting you can or even should keep your house if you stop paying the mortgage but if you did you'd stay there longer than if you stopped paying rent. Ergo, first point is correct and you can let go of the wrong end of the stick. 

Everything carries a risk. Even moving house without balancing things on your head. 

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17 hours ago, Captain Kirk said:

The only times I've had to move is due to work. Isn't that also a risk if moving is a risk?

That's great for you. Not necessarily the experience for everyone. I know at least 1 person who has had to move - four times in the last 15 years - and in 3 of those cases it was because the landlord in each case wanted to capture the "mad gainz" from bubble economics.

To suggest that the majority of people have your positive experiences of renting is naive. I hope you don't need links to endless records of rogue landlords, "no fault" evictions, and more?

13 hours ago, Captain Kirk said:

No, I was questioning whether having to move is actually a risk. It's just something everyone has to do occasionally regardless of whether they rent or not.

To know for sure whether you are more likely to move if you rent than if you buy we'd need to check statistics rather than just assume I recon.

The move itself is not risky (except in that it may just be a move to another landlord who is about to pop the rent up unreasonably or issue an S21 because they want to cash out (or one of the Ds occurring in the landlords life)).

And risk comes in many forms.

I have already mentioned that - from a purely financial point of view - buying a house involves significantly more risk (especially at bubble prices).

Social risk, relational risk, organisational risk, environmental risk, medical risk, and many more.

Buying a house (as I mentioned before "renting from a bank") involves financial risk , and risk for limited (if long period) of time - and risk that involves specifically understood exposure which - in some cases - can be managed and mitigation put it place.

In terms of the (non financial) risks of renting - you have just been lucky that you have never lived at the sharp end of others' greed. Good for you.

 

Edited by Aidan Ap Word
Punctuation fix.
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17 hours ago, Captain Kirk said:

The only times I've had to move is due to work. Isn't that also a risk if moving is a risk?

Excellent.

If you want to talk about risk, please bear in mind that you are still exposed to your current landlord issuing an S21 (for whatever reason, if any) at any time within the constraints of the contract signed (at best 1 year of piece of mind at a time).

Just because you have never had an accident doesn't mean you are guaranteed never to have an accident in the future. Just because the hazard has not surfaced doesn't mean that the risk of an accident is magically 0.

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8 minutes ago, Unmoderated said:

What do you understand the definition of risk to be?

When I said that renting is risk free and buying is not, I was referring to financial risk.

10 minutes ago, Unmoderated said:

Are you being stupid on purpose?

No, I was making the point that you can't just redefine the risk that I was talking about to claim that I am wrong.

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15 hours ago, 24gray24 said:

 

  1. If house prices go down, owners have to pay the whole drop amount when they sell. Or go bust. They can kiss goodbye to any deposit they put in just for starters. 
  2. Risky is not defined as moving house.
  3. Risky means financially risky.  And in a falling market, owning a house isn't just more risky. It's a dead certain loss. 
  4. That advice assumes equity and a whole host of other things to work. . In a falling market, the equity disappears. 
  5. So a lender loses more money every day he does not foreclose. Result: lender will foreclose. 
  6. Much better option: avoid owing the loss by not buying in a falling market. 
  7. That's the problem : when it sells for less than you paid for it,  " you agree to pay the shortfall" or your life is ruined. 
  8. Unmoderated is very blasé about that. 
  1. Incorrect. Most mortgage companies will allow you to port a mortgage with negative equity. Mortgagees could potentially declare bankruptcy and leave the bill with the bank. Worth doing if you're significantly underwater. The banks do not care as much about the asset = loan as they do about having non-performing loans on their books. 
  2. We're not talking about how risky moving house is, we're talking about the risk (or probability) of moving house. Difference.
  3. Yes, in a falling market you would be right where a falling market is defined as prices falling. I must reach out to you for more financial insights ;). Issue there is when does a market stop falling? Do you know in advance it's going to and vice versa? Property is not a very liquid asset class. When do you think the best time to buy is going to be?
  4. Yes, which when contrasted with someone renting makes moving in that otherwise identical scenario more or less likely?
  5. Interesting. You suggested the mortgage would be bankrupt and then would have to move house. If the house is in negative equity then it is disregarded from assets. If my lender you mean mortgagor then that's another issue but again we're talking about the risk of having to move house and if you stop paying rent you will have to move. If you stop paying your mortgage there are provision to delay or stop this therefore it is more likely you have to move house if you're renting. In the land of the mortgagor in 2008 'delay and pray' and 'extend and pretend' were king. 
  6. A market is falling until it's not. you crystallise your cost at the time of purchase and actually the mechanics of the market price are a personal balance sheet one. You don't suddenly 'lose' £100k from your annual budget if prices fall by that amount. 
  7. No - you can sell a house for less than you paid for it and crack on. If you're in negative equity you can port the mortgage and lenders would sooner do this than force a full repayment since it is easier for you to delay repayment or even avoid altogether. https://www.moneyadviceservice.org.uk/en/articles/negative-equity-what-it-means-and-what-you-can-do-about-it
  8. I guess everyone who bought in 2007 has ruined their lives? That's a lot of people. 

If you're talking about houses as an investment I might suggest you're on the wrong site although I'm always grateful for a counter view and debate. In investing though W. Buffett once quipped the rear view mirror is much clearer than the windscreen. 

I view a house as a home and provided we can service the mortgage (as we would have to pay rent anyway) I give actually zero poops about what the value does. TBH I'd probably even welcome a real great big price crash of 90% (ain't never gonna happen) because I'd default and buy cash at a later date. 

I originally joined the site because I didn't own a property and wanted to buy one. I've since bought one (imho it's down to the referendum outcome allowing a much cooler market and price reductions). 

 

 

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19 minutes ago, Captain Kirk said:

When I said that renting is risk free and buying is not, I was referring to financial risk.

No, I was making the point that you can't just redefine the risk that I was talking about to claim that I am wrong.

Renting is financially risk free? Signing up to a commitment to pay a landlord for at 6 months from day one, and thereafter 2 months rolling notice, plus the risk of losing a deposit is risk free? Increases in rent are not a financial risk? The landlord defaults and the rental property is repossessed and you suddenly have to move is financially risk free? 

Then we look at bigger picture and longer term finances. So you put your life savings into a stocks and shares ISA or pension instead of a house. Is that financially risk free?

Aiden and I were talking about the risk (defined as chances of having to/probability) of moving house. You're still wrong though. Renting and buying financial risks (and rewards) but they differ from one to the other.

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23 minutes ago, Captain Kirk said:

When I said that renting is risk free and buying is not, I was referring to financial risk.

So the difference between the interest you are paying to the bank on the mortgage and the rent you are paying to the LL is the premium for this "risk free" financial risk

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25 minutes ago, Captain Kirk said:

When I said that renting is risk free and buying is not, I was referring to financial risk

The obvious financial risk of renting is costs incurred when your landlord kicks you out, so fees, removals, new furniture and deposit deductions. However, if you can afford to buy (and intend to) your main financial risk is the market moving against you and needing to find more money when you buy. 

The main financial risks of buying is being forced to crystallise a loss of you're forced to sell in a falling market, and the enormous cost of an unforseen move (stamp duty, estate agents fees, legal fees, etc). 

From a security perspective though you're way more likely to get kicked out of a rental than a owned /mortgaged home - in the latter you'd really need to stop paying your mortgage for a year, whilst in the former you can get thrown out just because your landlord doesn't like you. This is why prospective parents will crawl over glass to buy a place, as forced moves with kids and a houseful of furniture is not a happy prospect. That may not be something that people in the happy 'everything I own fits in the boot of a car' stage of life appreciate, or those who've only had positive experiences of renting. 

 

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

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

Returning to the OP.

Freki was asking about financial risk.

I wished to point out that there is a lot of other types of risk (that is: buying a property is not just about financial risk - it is about managing risk more generally). Example: I have a family so my risk profile is different from that of a single person.

Additionally: I am older so my risk profile is different from a younger person (that is: they might be able to afford - in terms of time- to wait out for the crash for longer). Renting when you are retired carries the increased hazard in getting moved on (largely non-financial!) ... because it is either going to be harder emotionally - ah yes ... and more expensive because you *have to* hire a removal firm because physical strength in moving furniture is ... well, OK, you get the picture.

NOTE: I have no idea of Freki's life situation/demographics and i am not about to stalk to find out :).

It is a secondary point that the financial risk of buying a house can be actively managed (specifically assuming the mortgagee is not daft about what affordability really means).

Freki already mentioned that the financial risk of buying a house varies over the lifetime of the mortgage (unless you are nuts enough to go IO) and an idea on how he could manage it (eg: don't be an IO nutter).

So in responding to the OP:

  • in my case it was the other types of risk that underlined why buying a house was the right thing to do
  • regardless of the financial risk of this in the context of a crash in prices
  • but I am not in London where some might say the crash is already "in play"

Can anyone else think of other ways to mitigate the financial risk? More active stuff ...?

Edited by Aidan Ap Word
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59 minutes ago, Unmoderated said:

Renting is financially risk free? Signing up to a commitment to pay a landlord for at 6 months from day one, and thereafter 2 months rolling notice, plus the risk of losing a deposit is risk free? Increases in rent are not a financial risk? The landlord defaults and the rental property is repossessed and you suddenly have to move is financially risk free? 

There is no financial risk because you know the amount you are paying and it doesn't change. You can't get a bill for something other than the amount you agreed up front. Think if it in terms of signing a 6 month rental on a place as part of a contract job you are doing away from home. You know the cost of accommodation and so you can price the job confidently based on this. It is not the same if you buy a place. You really have no idea of what the accommodation costs would be.

 

1 hour ago, Freki said:

So the difference between the interest you are paying to the bank on the mortgage and the rent you are paying to the LL is the premium for this "risk free" financial risk

Well renting is not a financial risk, as I've just demonstrated.

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6 minutes ago, Freki said:

Okay that will be it with your thickness. If you try to talk in terms of financial risk but can't follow on with the concept of payment premium. Nothing much I can do 

You seem to be confusing the concept of risk with cost. It sounds like you are willing to expose yourself to risk in order to reduce cost, but that doesn't mean they are the same thing. Financial risk can be described as "willing to lose 200k in order to save 20k". The numbers may depend on location and everyone has their own point where they're willing to risk it, but let's not confuse the two concepts.

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No I don't confuse anything.

The pb: you have to have a roof over your head.

Two ways of doing so: 

  • Buy and pay mortgage + maintenance cost
  • Rent

The financial risk is how willing are you to expose yourself to the price of the asset.

  • Rent and you marginally exposes yourself to it. (rents are still a function of house prices)
  • Buy and you exposes yourself fully. 

When you buy you get capital (at risk) + cost of mortgage( IR) + cost of maintenance

When you rent you have cost of rent. Hence the difference between your cost of mortgage and maintenance is a premium you pay.

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16 minutes ago, Freki said:

When you rent you have cost of rent. Hence the difference between your cost of mortgage and maintenance is a premium you pay.

Not if mortgage cost + maintenance cost is higher than rental cost.

Plus there is no risk of losing your rental deposit these days (nor in the past if you were willing to go to court).

Edited by Captain Kirk
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54 minutes ago, Captain Kirk said:

There is no financial risk because you know the amount you are paying and it doesn't change.

Until the end of the 1 year rental agreement. The price is only set for 1 year.

A 5 year fixed rate mortgage and I know what I am paying (in nominal terms at least) what I am paying for 5 times longer than in the rental case.

Anyone who thinks they can predict what rents will look like in 5 years is pretending to have a crystal ball.

Checkmate.

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48 minutes ago, Captain Kirk said:

There is no financial risk because you know the amount you are paying and it doesn't change. You can't get a bill for something other than the amount you agreed up front. Think if it in terms of signing a 6 month rental on a place as part of a contract job you are doing away from home. You know the cost of accommodation and so you can price the job confidently based on this. It is not the same if you buy a place. You really have no idea of what the accommodation costs would be.

 

Well renting is not a financial risk, as I've just demonstrated.

OK - please define what you mean by financial risk in this context.

You might well agree to pay £X for 6 months but then it can change. Homeowner agrees to pay £xper month until the fixed rate terms ends. He can't be evicted or no fault an then face the additional and unexpected costs of relocating. 

When renting you can get a bill for something other than the amount you agreed upfront and furthermore your liability is not limited to the deposit. Explain how a homeowner would get a bill for something they didn't agree to up front? If you're thinking maintenance they agreed to this when they bought the house......If by interest rate increases they've fixed the mortgage so that doesn't impact until remortgaging meanwhile rents continue to rise each year. 

To make a direct comparison you need to look at directly comparable timelines. 

So you're saying that renting, indefinitely, is without any financial risk? You know exactly what the rent will be for the next (how long have you got left) years?

 

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11 minutes ago, Captain Kirk said:

Not if mortgage cost + maintenance cost is higher than rental cost.

Plus there is no risk of losing your rental deposit these days (nor in the past if you were willing to go to court).

Have you ever actually rented a place? I have had fair deductions in half the places I've rented. 

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1 minute ago, Aidan Ap Word said:

Until the end of the 1 year rental agreement. The price is only set for 1 year.

A 5 year fixed rate mortgage and I know what I am paying (in nominal terms at least) what I am paying for 5 times longer than in the rental case.

Anyone who thinks they can predict what rents will look like in 5 years is pretending to have a crystal ball.

Checkmate.

And after the 5 years you can give the house back and walk away without incurring any further costs?

So, no, not checkmate.

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3 minutes ago, Aidan Ap Word said:

Until the end of the 1 year rental agreement. The price is only set for 1 year.

A 5 year fixed rate mortgage and I know what I am paying (in nominal terms at least) what I am paying for 5 times longer than in the rental case.

Anyone who thinks they can predict what rents will look like in 5 years is pretending to have a crystal ball.

Checkmate.

:D

Nobody is this stupid by accident surely?

Let's see what the renting is risk free definition of financial risk looks like. 

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