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peter_2008

Does interest rate really matter?

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This is a genuine question.

I was responding to another thread, and was thinking whether the house price is dictated not by what "typical people" earn, but by what "typical buyers" earn. Therefore, if only  20% - 30% people can buy houses, then what the remaining 70 - 80 % are earning (or average earning for that matter) could be irrelevant to house price.

Most third world countries with significant inequality are like that. For example, below is comparison of India vs UK. Note that despite India mortgage rate being close to 10%, its house price, relative to the income, is actually higher than UK.

So......What stops the UK turning itself into a third world country, with house price out of reach for the majority of the people AND just stay that way?

Buy Apartment Price India UK  
Price per Square Meter to Buy Apartment in City Centre (1,023.56 £)        (3,856.24 £)      
Price per Square Meter to Buy Apartment Outside of Centre (519.85 £) (2,767.49 £)      
Salaries And Financing [ Edit ] [ Edit ]  
Average Monthly Net Salary (After Tax) (345.56 £)

(1,777.62 £)

Mortgage Interest Rate in Percentages (%)                                            9.39%                3.23%

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If interest rates didnt matter Carney would not be so terrified to raise them. If only 20 percent of working age people are able to buy a house then that is not enough to keep the uk ponzi scheme going. Those using help to buy cant really cant afford to buy a house at current prices, hence the government assistance to get round this. If people had to pay the real price for debt, then current prices become unattainable to even more prospective buyers, which again is why rates are ultra low. 

 

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2 hours ago, peter_2008 said:

I was responding to another thread, and was thinking whether the house price is dictated not by what "typical people" earn, but by what "typical buyers" earn. Therefore, if only  20% - 30% people can buy houses, then what the remaining 70 - 80 % are earning (or average earning for that matter) could be irrelevant to house price.

I think you've missed that a "typical buyer" would be a very different person if interest rates were different. 

One of the key reasons house prices are beyond the reach of so many people is that low interest rates and lax borrowing requirements have let them balloon, and let those who borrowed massively be able to continue to pay their mortgages.

If UK interest rates suddenly went up to 9% a great swathe of those who currently own houses would be forced to panic and sell as they couldn't pay the interest, dropping house prices dramatically and meaning those currently on the sidelines would become able to buy.  Interest rates are critical to that dynamic.

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9 hours ago, peter_2008 said:

This is a genuine question.

I was responding to another thread, and was thinking whether the house price is dictated not by what "typical people" earn, but by what "typical buyers" earn. Therefore, if only  20% - 30% people can buy houses, then what the remaining 70 - 80 % are earning (or average earning for that matter) could be irrelevant to house price.

Most third world countries with significant inequality are like that. For example, below is comparison of India vs UK. Note that despite India mortgage rate being close to 10%, its house price, relative to the income, is actually higher than UK.

So......What stops the UK turning itself into a third world country, with house price out of reach for the majority of the people AND just stay that way?

Buy Apartment Price India UK  
Price per Square Meter to Buy Apartment in City Centre (1,023.56 £)        (3,856.24 £)      
Price per Square Meter to Buy Apartment Outside of Centre (519.85 £) (2,767.49 £)      
Salaries And Financing [ Edit ] [ Edit ]  
Average Monthly Net Salary (After Tax) (345.56 £)

(1,777.62 £)

Mortgage Interest Rate in Percentages (%)                                            9.39%                3.23%

I think you miss a few details.

One - Indians only invest in gold or property. Indians are blindly crowding into the same assets

Two, theres a lto of shenigans going on India. I dont think your figures are the Indian median. These will be for space in one of those mega sh1tholes like Mumbai. Go out in the sticks, where ~80% of Indians live and youll find the cost to be a lot less.

 

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Who sets the price in an auction?

Is it just the winner?  No, it’s all the other people who bid. More generally, it’s the people who would have bid, but didn’t because they knew from the start their bid wouldn’t be high enough. 

So you have to take into account all the people wanting to buy, and the amount they can pay. 

For housing, there’s a set of people always willing to buy at a certain price - landlords. 

For these people, the calculation is pretty simple - is this house a good investment at this price?

You can estimate the landlords price. Imagine someone with 100k to spend. If rates are 1%, they can get 1k/year at low risk by lending it. So they need rents to be 1k/year to pay 100k assuming rents are risk free and ignoring capital gains.

If rents are £500/year, or rates are 2%, they’ll only pay £50k.

All in all, you’d expect the price to be the rent divided by the interest rate.

Rents aren’t fixed, and house price inflation is a factor, so the calculation isn’t exact.  The risk of voids will decrease prices, the promise of HPI might increase them. 

Also interest rates are different in reality from the BOE base rate, so a maybe more accurate calculation is the rent divided by a mortgage rate, or something like that. Another way of looking at it is that anyone can borrow money and buy a house as long as the interest payments are less than the rent.  So rents should be roughly equal to mortgage payments.  It’s essentially the same calculation.

Whilst the numbers may not be so precise, this argument gives a rough idea of how prices work, and why rates do matter.

Basically the rent on a house divided by the cost, the yield, should be the same as a similarly risky investment, interest rates - particularly mortgage rates - give the yield on a similar but slightly less risky investment.

Edited by BorrowToLeech

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37 minutes ago, BorrowToLeech said:

Basically the rent on a house divided by the cost, the yield, should be the same as a similarly risky investment, interest rates - particularly mortgage rates - give the yield on a similar but slightly less risky investment.

Agreed. And the propaganda, manipulation and social habit interact with this too. Similar to/in the same way you implied that prices are affected by expected "mad gainz" ... 

So the interest rate is important - as you identify - in terms of setting the vurrent mechanics of the market.

But they also affect the more-ethereal - social expectations ... if everyone expects prices to fall then everyone "needs" greater capital gains to justify a purchase (esp. BTL) or even holds off on purchase (even if it is the right thing to do for non-financial reasons) ... and quite reasonably too!

So interest rates are a significant part of the infrastructure of the stage upon which this game is played out.

But in the short term and even in some medium term, expectations drive the price fluctuations  that, in turn, drive price changes.

So the government (or pseudo-government lackies like King and Carney) can set the interest-portion of the stage but they can't change what happens when society gets a "wake up call" (like 07/08) ... so they reset the interest-rate infrastructure tile now ... what will they do when the next "wake up call" goes out and society actually listens?

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23 hours ago, BorrowToLeech said:

Who sets the price in an auction?

Is it just the winner?  No, it’s all the other people who bid. More generally, it’s the people who would have bid, but didn’t because they knew from the start their bid wouldn’t be high enough. 

So you have to take into account all the people wanting to buy, and the amount they can pay. 

For housing, there’s a set of people always willing to buy at a certain price - landlords. 

For these people, the calculation is pretty simple - is this house a good investment at this price?

You can estimate the landlords price. Imagine someone with 100k to spend. If rates are 1%, they can get 1k/year at low risk by lending it. So they need rents to be 1k/year to pay 100k assuming rents are risk free and ignoring capital gains.

If rents are £500/year, or rates are 2%, they’ll only pay £50k.

All in all, you’d expect the price to be the rent divided by the interest rate.

Rents aren’t fixed, and house price inflation is a factor, so the calculation isn’t exact.  The risk of voids will decrease prices, the promise of HPI might increase them. 

Also interest rates are different in reality from the BOE base rate, so a maybe more accurate calculation is the rent divided by a mortgage rate, or something like that. Another way of looking at it is that anyone can borrow money and buy a house as long as the interest payments are less than the rent.  So rents should be roughly equal to mortgage payments.  It’s essentially the same calculation.

Whilst the numbers may not be so precise, this argument gives a rough idea of how prices work, and why rates do matter.

Basically the rent on a house divided by the cost, the yield, should be the same as a similarly risky investment, interest rates - particularly mortgage rates - give the yield on a similar but slightly less risky investment.

True, I was talking to someone who owns a flat and suggested he sell it in cases prices drop.  He took the view he couldn't get the same return on the cash if he sold it.

I would say rents should be a bit more than mortgage payments because rent also includes the cost of maintenance.  After I bought my house , the boiler stopped working and need replacing. 

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2 hours ago, iamnumerate said:

I would say rents should be a bit more than mortgage payments because rent also includes the cost of maintenance.  After I bought my house , the boiler stopped working and need replacing. 

Indeed, there is government guidance on the landlord's norms for replacing carpets (etc).

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3 hours ago, iamnumerate said:

True, I was talking to someone who owns a flat and suggested he sell it in cases prices drop.  He took the view he couldn't get the same return on the cash if he sold it.

I would say rents should be a bit more than mortgage payments because rent also includes the cost of maintenance.  After I bought my house , the boiler stopped working and need replacing. 

Boiler insurance is less than £10 per month. Full landlord insurance is around £200/year. 

Landlords are people who charge for access to land, and gamble on the value of that access.

Any service provided is just a front, and the costs involved are pretty close to negligible, in most cases. 

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32 minutes ago, BorrowToLeech said:

Boiler insurance is less than £10 per month. Full landlord insurance is around £200/year. 

Landlords are people who charge for access to land, and gamble on the value of that access.

Any service provided is just a front, and the costs involved are pretty close to negligible, in most cases. 

Boiler insurance is only valid for boilers which are less than 7 years old (so that is £2k). 

I don't want to defend landlords but there are costs involved in running a house, I wouldn't say negligible - although it depends on the value of the house and the house. 

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5 hours ago, iamnumerate said:

Boiler insurance is only valid for boilers which are less than 7 years old (so that is £2k). 

I don't want to defend landlords but there are costs involved in running a house, I wouldn't say negligible - although it depends on the value of the house and the house. 

You certainly can get insurance for older boilers, it just probably isn’t worth it.  

Point is that £10/month is the market price of the service that’s being provided.  It’s not about whether landlords can provide that service at this cost, because someone clearly can.

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On 03/02/2019 at 21:25, peter_2008 said:

... What stops the UK turning itself into a third world country,...

Add 'time' and for 90% of the population, I think you've nailed it!

 

 

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7 hours ago, BorrowToLeech said:

Any service provided is just a front, and the costs involved are pretty close to negligible, in most cases. 

From my own experience, I would say the maintenance cost of a house is close to about £50 a month, around £6,000 over 10 years. Roof, fence, boiler etc etc while do not need frequent repair, when they do, it's a few thousands £££.

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44 minutes ago, peter_2008 said:

From my own experience, I would say the maintenance cost of a house is close to about £50 a month, around £6,000 over 10 years. Roof, fence, boiler etc etc while do not need frequent repair, when they do, it's a few thousands £££.

My parents used the old rule of thumb - 1% of the house's value per year, so they would set aside that much to cover the inevitable repairs. It usually worked out about right.

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7 minutes ago, Habeas Domus said:

My parents used the old rule of thumb - 1% of the house's value per year, so they would set aside that much to cover the inevitable repairs. It usually worked out about right.

No disrespect to your parents, but they probably bought their house for £60k...

If we use average house price today, that would be £3k a year...

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23 hours ago, BorrowToLeech said:

You certainly can get insurance for older boilers, it just probably isn’t worth it.  

Point is that £10/month is the market price of the service that’s being provided.  It’s not about whether landlords can provide that service at this cost, because someone clearly can.

£10 pcm is not market price of the service it is £10pcm plus replacing the boiler every 7 years - which is £200-300 pa.

Saying that I really don't want to defend landlords but if someone rents can afford e.g £1,000 pcm rent they can only afford £850 -950 pcm mortgage because they need save £600 to £1800 pa to maintain the house (depending on their standards, I read that landlords should replace carpets every 5 years, in my private home, I don't do that, if I can help it), pay building insurance etc (depending on if they are near a drop of water or  not).  Also they need to replace washing machines etc which is not a massive expense but something they should not have to pay before hand.

I hope this makes sense I think we are talking about slightly different things, I am talking about why mortgage payments are less than you can pay in rent, not defending landlords.

 

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21 hours ago, peter_2008 said:

No disrespect to your parents, but they probably bought their house for £60k...

If we use average house price today, that would be £3k a year...

I think I spend more than £600 on average, it depends on what breaks etc, including buildings insurance definetly more than £600. 

Saying that I have not kept detailed records

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Never known landlords to fix fences? A lot of them don't fix heaters or extraction fans or dripping radiators. And they don't replace carpets except rarely, especially in flats that won't rent to anybody other than HB tenants. I agree with the poster who said LLs charge for access to land and then tell themselves they're providing a service.

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14 hours ago, iamnumerate said:

£10 pcm is not market price of the service it is £10pcm plus replacing the boiler every 7 years - which is £200-300 pa.

Saying that I really don't want to defend landlords but if someone rents can afford e.g £1,000 pcm rent they can only afford £850 -950 pcm mortgage because they need save £600 to £1800 pa to maintain the house (depending on their standards, I read that landlords should replace carpets every 5 years, in my private home, I don't do that, if I can help it), pay building insurance etc (depending on if they are near a drop of water or  not).  Also they need to replace washing machines etc which is not a massive expense but something they should not have to pay before hand.

I hope this makes sense I think we are talking about slightly different things, I am talking about why mortgage payments are less than you can pay in rent, not defending landlords.

 

Yes, I’d broadly agree with that. Costs of maybe 10% on average, more in some cases (much more in some), less in others. 

I think the difference of opinion is over what counts as negligible. 

To a leveraged landlord who is paying out most of the rent as a mortgage, this is not negligible at all. It’s significant, although maybe not as significant as voids. 

To me, trying to estimate the relationship between rent, interest and up-front cost, it’s negligible because the calculation itself isn’t precise enough to worry about those details. 

It remains a fact that the landlord business model isn’t to earn a profit on these services, and that very little of the rent goes towards paying for them, except in cases which we probably wouldn’t call landlords at all - hotels, for example.

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On 05/02/2019 at 13:04, BorrowToLeech said:

Boiler insurance is less than £10 per month. Full landlord insurance is around £200/year. 

Landlords are people who charge for access to land, and gamble on the value of that access.

Any service provided is just a front, and the costs involved are pretty close to negligible, in most cases. 

come claim time it wont be worth the paper it is written on. 

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30 minutes ago, longgone said:

come claim time it wont be worth the paper it is written on. 

I don't bother with boiler insurance, it is cheaper to just save the money and buy a new one although it can be worth having a general emergency plumber cover.

Saying that I don't want to turn this into what is the best way to look a home.

Edited by iamnumerate

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3 minutes ago, iamnumerate said:

I don't bother with boiler insurance, it is cheaper to just save the money and buy a new one although it can be worth having a general emergency plumber cover.

i set a policy up with Worcester bosch as that is the manufacturer. the boiler cost £1500 11 years ago  condensate pump has gone twice replaced with a redesigned part and the flue fan went also.  costs have been around £650 over two years which covers the policy and two services.  first year was expensive as an out of policy repair was needed once you are in the policy it is cheaper.  i don`t think £25 a month is too bad considering it includes a yearly service, and the engineer only does WB, And they do actually service it  properly standard plumbers seem to just pull the cover off and make some noise then run off. 

i had a policy with these scammers https://www.reviews.co.uk/company-reviews/store/247-home-rescue 

They wanted £130 just to look at the boiler, the policy never stated  that so i threatened to take them to court, all policy fees refunded and a nice £50 cheque for the trouble 😄 quidco even paid me the £32 cashback after the policy was cancelled.

 

2 minutes ago, BorrowToLeech said:

So exactly the same as a landlord then. 

you will freeze to death before they bother to fix it. 

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On 04/02/2019 at 10:16, BorrowToLeech said:

Who sets the price in an auction?

Is it just the winner?  No, it’s all the other people who bid. More generally, it’s the people who would have bid, but didn’t because they knew from the start their bid wouldn’t be high enough. 

So you have to take into account all the people wanting to buy, and the amount they can pay. 

For housing, there’s a set of people always willing to buy at a certain price - landlords. 

For these people, the calculation is pretty simple - is this house a good investment at this price?

You can estimate the landlords price. Imagine someone with 100k to spend. If rates are 1%, they can get 1k/year at low risk by lending it. So they need rents to be 1k/year to pay 100k assuming rents are risk free and ignoring capital gains.

If rents are £500/year, or rates are 2%, they’ll only pay £50k.

 

That's a gross yield of 12% (assuming no voids, other costs and before tax)

Tell me where you can buy a house for 100k and where rents are £1000 a month? In places where houses are 100k, the rents are usually £600 a month at very best and that's being optimistic. 

You can get 1.5% now in the bank by the way.

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  • 295 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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