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Realistbear

When Rent Is N O T Dead Money

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http://firstrung.co.uk/articles.asp?pageid...articlekey=1238

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Firstrung often receives enquiries in our post bag, or through the inter-active Ask the Expert feature in the Toolbox section, regarding specific issues relating to the plight of first time buyers. This query is raised time and time again.
Rent is not dead money, it is the single biggest urban myth other than "Property is always a good long term investment".
The reason that these two myths have come to prominence over recent times is fairly obvious. The average person has scant knowledge regarding investments.
Rather by accident than design, the unimaginative and uninspired have enjoyed healthy returns on what they perceive, retrospectively to be an investment, which is more likely to be quite simply their home.
Undoubtedly over a 20 year measurement period, property has gone up in value. In the same time the stock markets of every developed economy have shattered the returns available in property. How many would cite the equities market for their investment?
Safe as houses? Discuss that with first time buyers who bought 18 months ago who now potentially see their equitable value simply evaporate.
Perhaps they came under pressure from those that are fond of spouting such urban myths and believed they would lose out if they did not make a hasty decision.
No is the short answer. Take a look at this recent discussion in the Firstrung first time buyer forum to gauge other views on the same subject.
The calculation is fairly straightforward, if you can rent in your area cheaper than buying a similar property in what is now recognised as at best a static market, then why not save your cash and use it is a deposit for when you feel comfortable in buying.

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Rather by accident than design, the unimaginative and uninspired have enjoyed healthy returns on what they perceive, retrospectively to be an investment, which is more likely to be quite simply their home. Undoubtedly over a 20 year measurement period, property has gone up in value. In the same time the stock markets of every developed economy have shattered the returns available in property. How many would cite the equities market for their investment?

That's true, but how many share investors are prepared to heavily gear their investments and service the gearing through the income from the shares?

That's effectively what you are doing when taking out a residential mortgage. So, to beat property returns you'd have to gear your SM investments to the same level.

frugalista

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Guest muttley

That's true, but how many share investors are prepared to heavily gear their investments and service the gearing through the income from the shares?

That's effectively what you are doing when taking out a residential mortgage. So, to beat property returns you'd have to gear your SM investments to the same level.

frugalista

True.But when did a share holder ever find himself with negative equity?

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True.But when did a share holder ever find himself with negative equity?

...erm in the last stock market crash!!!!!...that's right!!

loads of folks went and borrowed from the bank to invest,in the belief that stocks only go up.

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Undoubtedly over a 20 year measurement period, property has gone up in value. In the same time the stock markets of every developed economy have shattered the returns available in property.

But you can't 'live' in a share certificate.

For the average Joe on the street you could only invest the amount saved between renting and a repayment mortgage each month on an equivalent property.

After a few years the tables turn and you cannot invest any more as the mortgage is less than the rent.

Rents go up with wage inflation you see... It will be the HOMEOWNER doing the investing.

If you had bought a house in 1985 you would be better off than if you had rented/invested for the last 20 years. You would now own the house if it was a 20yr repayment mortgage.

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Guest muttley

in 1929 just before he jumped out of a skyscraper.

frugalista

So you CAN gear your SM investments!

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But you can't 'live' in a share certificate.

For the average Joe on the street you could only invest the amount saved between renting and a repayment mortgage each month on an equivalent property.

After a few years the tables turn and you cannot invest any more as the mortgage is less than the rent.

Rents go up with wage inflation you see... It will be the HOMEOWNER doing the investing.

If you had bought a house in 1985 you would be better off than if you had rented/invested for the last 20 years. You would now own the house if it was a 20yr repayment mortgage.

This is true and average (sometimes smug) Joe now retrospectively imagines he was clever to invest in property when simply he chose to get a 20-25 year mortgage and the house has gone up in value. Not generally by his own efforts, but through a combination of lots of factors, increased liquidity of the money supply and regularly unhealthy bouts of inflation being just two. <_< I`m noticing a pattern appearing between each dose of HPI, the next one (bearing in mind we are a long way of reaching the bottom of the market, some even putting reaching the bottom 8-10 years away) could be 20 years +away. With some analysts predicting the footsie 100 to reach 7500 in Sept 2007 property may never be a good investment for average Joe in his lifetime. Particularly if he then has to sell the home, or re-finance it to eek out a painful and meagre retirement.

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But you can't 'live' in a share certificate.

So, like I said, the way you service the gearing is with the income from the asset.

In the case of a residential mortgage, the "income" from the asset is the fact that you can live in it, or alternatively rent it out. You are typically using this income to both service your mortgage debt and repay it. The repayment part is really equivalent to savings.

In the case of stocks, the income is in the form of dividends. Perhaps the dividends could cover both your gearing interest and repayment of your gearing loan, so that at the end of the 20 years you would own the geared shares outright as well.

For the average Joe on the street you could only invest the amount saved between renting and a repayment mortgage each month on an equivalent property.

After a few years the tables turn and you cannot invest any more as the mortgage is less than the rent.

Rents go up with wage inflation you see... It will be the HOMEOWNER doing the investing.

What you are effectively saying is that your own wage inflation turns your liability (a heavily indebted house) into an asset (a largely debt free house which you can enjoy).

Just as rents (i.e. the income from property) go up with inflation so that your mortgage debt melts away, so dividends also go up with inflation (stock market inflation) so your stock gearing debt also melts. Perhaps after a while your stock gearing repayments are so insignificant that the income from your stocks exceeds what it would be worth from month to month to own a house? If so, it would be the same process, inflation turning a liability into an asset.

If you had bought a house in 1985 you would be better off than if you had rented/invested for the last 20 years. You would now own the house if it was a 20yr repayment mortgage.

And of course, if you were repaying your stock gearing debt, you would also own the stocks after 20 years. The amount of stock that you would own would equal the amount of stock bought at 1985 prices with the cash originally invested times the gearing multiple (say x20 gearing to be equivalent to a 95% mortgage) times 20 years of stock market appreciation, which is presumably a massive amount of stock.

Obviously, it may well be advisable for Joe / Joanne Public to be a homeowner, because obviously there is beneficial tax treatment etc. and I intend to do exactly that. But it is important to remember that, aside from the tax treatment if you are an owner occupier, there is nothing special about property. It is just an income-generating asset, the purchase of which can be geared with a load secured on that asset.

People tend to put their pensions, for example, into stocks rather than property as the gains are better over the long term. I think it makes sense that shares beat property over the long term, because all a house can ever do is house someone, whereas a company is able to (and indeed in the aggregate sense does) grow, invent new products, find new markets etc.

frugalista

So you CAN gear your SM investments!

Yes, it is called a margin loan. It is a loan secured on some shares you already own, which you use to buy more shares. That's how Dr. Bubb and all other investment bankers make their money!

frugalista

Edited by frugalista

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Guest Charlie The Tramp

Yes, it is called a margin loan. It is a loan secured on some shares you already own, which you use to buy more shares. That's how Dr. Bubb and all other investment bankers make their money!

What would happen in this case if we had another 1987 style crash.

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Sorry guys, what other urban myths are there?

Rent is dead money

Property is always a good investment

You can`t lose with property

Safe as houses

Property always goes up in the long term

It`s always the right time to buy if you can buy

Buy land they`re not making it anymore

Any others?

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This is true and average (sometimes smug) Joe now retrospectively imagines he was clever to invest in property when simply he chose to get a 20-25 year mortgage and the house has gone up in value. Not generally by his own efforts, but through a combination of lots of factors, increased liquidity of the money supply and regularly unhealthy bouts of inflation being just two. <_< I`m noticing a pattern appearing between each dose of HPI, the next one (bearing in mind we are a long way of reaching the bottom of the market, some even putting reaching the bottom 8-10 years away) could be 20 years +away. With some analysts predicting the footsie 100 to reach 7500 in Sept 2007 property may never be a good investment for average Joe in his lifetime. Particularly if he then has to sell the home, or re-finance it to eek out a painful and meagre retirement.

Didn't 'respected' economist Roger Bootle say the same thing in the early 1990s? i.e. no one would ever make money on property for a very long time (a generation I think) after the crash.

He was a bit wide of the mark on that one!

Particularly if he then has to sell the home, or re-finance it to eek out a painful and meagre retirement.

...and I suppose private renters will never have this problem? They will have nothing to sell when they retire and no ability to afford market rents on a pension. Yup, some will end up in tiny and grotty LA flats with piss stained lifts and soaring crime. Nice.

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So, like I said, the way you service the gearing is with the income from the asset.

In the case of a residential mortgage, the "income" from the asset is the fact that you can live in it, or alternatively rent it out. You are typically using this income to both service your mortgage debt and repay it. The repayment part is really equivalent to savings.

In the case of stocks, the income is in the form of dividends. Perhaps the dividends could cover both your gearing interest and repayment of your gearing loan, so that at the end of the 20 years you would own the geared shares outright as well.

What you are effectively saying is that your own wage inflation turns your liability (a heavily indebted house) into an asset (a largely debt free house which you can enjoy).

Just as rents (i.e. the income from property) go up with inflation so that your mortgage debt melts away, so dividends also go up with inflation (stock market inflation) so your stock gearing debt also melts. Perhaps after a while your stock gearing repayments are so insignificant that the income from your stocks exceeds what it would be worth from month to month to own a house? If so, it would be the same process, inflation turning a liability into an asset.

And of course, if you were repaying your stock gearing debt, you would also own the stocks after 20 years. The amount of stock that you would own would equal the amount of stock bought at 1985 prices with the cash originally invested times the gearing multiple (say x20 gearing to be equivalent to a 95% mortgage) times 20 years of stock market appreciation, which is presumably a massive amount of stock.

Obviously, it may well be advisable for Joe / Joanne Public to be a homeowner, because obviously there is beneficial tax treatment etc. and I intend to do exactly that. But it is important to remember that, aside from the tax treatment if you are an owner occupier, there is nothing special about property. It is just an income-generating asset, the purchase of which can be geared with a load secured on that asset.

People tend to put their pensions, for example, into stocks rather than property as the gains are better over the long term. I think it makes sense that shares beat property over the long term, because all a house can ever do is house someone, whereas a company is able to (and indeed in the aggregate sense does) grow, invent new products, find new markets etc.

frugalista

Yes, it is called a margin loan. It is a loan secured on some shares you already own, which you use to buy more shares. That's how Dr. Bubb and all other investment bankers make their money!

frugalista

Are you seriously suggesting that average Joe (aged twentysomething) should have taken out a huge debt (secured on what, exactly?) to go and play on the stock market in 1985?

Presumably with the intention to make enough dosh each month to pay the rent AND pay the interest on the huge debt? (and a little bit more to pay towards a future house?)

So he lives in grotty rental land for 20 years with sleepless nights (esp in 1987 and 1999?) worrying about the FSTE in the hope he can pay off the loan AND the rent AND buy a house? (and raise a family?)

I think it makes sense that shares beat property over the long term, because all a house can ever do is house someone, whereas a company is able to (and indeed in the aggregate sense does) grow, invent new products, find new markets etc.

Companies also have a nasty habit of going BUST and also stock markets tend to CRASH.

Explain that to 'Frugalista Joe' who went up to his neck in debt to 'play shares' just before the 1987 stock market crash.

You have been reading too many books on investing on stocks IMO.

Edited by Without_a_Paddle

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But you can't 'live' in a share certificate.

For the average Joe on the street you could only invest the amount saved between renting and a repayment mortgage each month on an equivalent property.

After a few years the tables turn and you cannot invest any more as the mortgage is less than the rent.

Rents go up with wage inflation you see... It will be the HOMEOWNER doing the investing.

If you had bought a house in 1985 you would be better off than if you had rented/invested for the last 20 years. You would now own the house if it was a 20yr repayment mortgage.

It's an important point, well made.

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Safe as Houses.... Well houses need a constant financial input to maintain their current

standard of build other wise they do fall down so are they safe? No.

I feel pretty safe in my house. I've put less into it than I would have if I'd rented it for the last 11 years

No houses have fallen down near me during this time.

A house is like a drain you are always pouring money in to and not see anything come out of it.

Bit like renting then...

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What is this firstrung websites purpose ?

`Firstrung concentrates on finding mortgage solutions for the first time buyer`

and yet

`Safe as houses? Discuss that with first time buyers who bought 18 months ago who now potentially see their equitable value simply evaporate. Perhaps they came under pressure from those that are fond of spouting such urban myths and believed they would lose out if they did not make a hasty decision.`

Surely this kind of shooting of ones own foot is simply breathtaking, possibly on a par with Gerald Ratner calling his own jewelry crap, or the boss of Barclays Bank admitting credit cards are a rip-off. How can such a business strategy of putting off ones own potential customers possibly succeed ? Is the firstrung website for real ?

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Guest muttley

What is this firstrung websites purpose ?

Maybe their purpose is to give sound advice to first time buyers.

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The gearing issue is a good point of discussion. It has what has made property such a huge money-spinner for home-owners and property investors.

I can accept that, even while the stock market has returned 90% in the last 3 years and property about 30%, with the natural gearing in property, many who wouldn't have used gearing in equities have nonetheless used it well in property and got out ahead of where they would have been ungeared in stocks.

BUT in a static market the effect of gearing is neutralised. And, in a falling market, the gearing will destroy those caught on the wrong side.

You always hear property investors sprouting the line "You can't live in a share" or "the value of a property can never fall to zero", but here's the thing - it doesn't need to fall to zero for you to lose you entire investment! If you have a 10% deposit, the market only needs to fall 10% (or less, if you add in transaction costs) to completely wipe out your "investment". And you'll have a whopping loan to service each month. But at least you'll have a roof over your head.. and a "very long term" investment.

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http://firstrung.co.uk/articles.asp?pageid...articlekey=1238

Ask the Expert:
Firstrung often receives enquiries in our post bag, or through the inter-active Ask the Expert feature in the Toolbox section, regarding specific issues relating to the plight of first time buyers. This query is raised time and time again.
Rent is not dead money, it is the single biggest urban myth other than "Property is always a good long term investment".
The reason that these two myths have come to prominence over recent times is fairly obvious. The average person has scant knowledge regarding investments.
Rather by accident than design, the unimaginative and uninspired have enjoyed healthy returns on what they perceive, retrospectively to be an investment, which is more likely to be quite simply their home.
Undoubtedly over a 20 year measurement period, property has gone up in value. In the same time the stock markets of every developed economy have shattered the returns available in property. How many would cite the equities market for their investment?
Safe as houses? Discuss that with first time buyers who bought 18 months ago who now potentially see their equitable value simply evaporate.
Perhaps they came under pressure from those that are fond of spouting such urban myths and believed they would lose out if they did not make a hasty decision.
No is the short answer. Take a look at this recent discussion in the Firstrung first time buyer forum to gauge other views on the same subject.
The calculation is fairly straightforward, if you can rent in your area cheaper than buying a similar property in what is now recognised as at best a static market, then why not save your cash and use it is a deposit for when you feel comfortable in buying.

i dont know situation in UK but in ireland you get a big tax advantage to investing income in a pension,for 100euro invest the government effectively adds 42 euro, pensions have yielded 10% aveage over last ten years so such an investment over 30 years would vastly outperform property ,so renting and investing savings over mortgage payments in a pension is a good investment.

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The gearing issue is a good point of discussion. It has what has made property such a huge money-spinner for home-owners and property investors.

I can accept that, even while the stock market has returned 90% in the last 3 years and property about 30%, with the natural gearing in property, many who wouldn't have used gearing in equities have nonetheless used it well in property and got out ahead of where they would have been ungeared in stocks.

BUT in a static market the effect of gearing is neutralised. And, in a falling market, the gearing will destroy those caught on the wrong side.

You always hear property investors sprouting the line "You can't live in a share" or "the value of a property can never fall to zero", but here's the thing - it doesn't need to fall to zero for you to lose you entire investment! If you have a 10% deposit, the market only needs to fall 10% (or less, if you add in transaction costs) to completely wipe out your "investment". And you'll have a whopping loan to service each month. But at least you'll have a roof over your head.. and a "very long term" investment.

Van remember for the average man in the street he will only be able to invest what he has left after paying rent, food, travel, entertainment etc. I agree that in a static market that gearing is neutralized, but as I say I dont know that many people will be able to invest the equivalent amount they pay in rent+living expenses (and probably even rent alone) into the stock market every month.

Edited by Milkshock

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Without-a-paddle/frugalista.. interesting debate going on between you two.

Frugalista says "stocks should continue to outperform property because all a house can ever do is house someone, whereas a company can grow, invent new products and find new markets". This is true, and it is exactly the reasons why nothing else can match stocks over the long run.. companies are the engine of the economy and what produce real GDP growth (some may argue GDP is no measure of quality, but that is for another debate).

But W-A-P also says that the SM can be very volatile, and companies can go bust. This is true also. But the SM itself will never fall to zero. If it does, that would mean 50% unemployment and another great depression. So where would the money come from for housing demand?

Canny investors actually see the SM volatility as a GOOD thing. If you've got a pension or have held another SM-related investment over time, you have actually (unknowningly) BENEFITTED from the 2000-2003 bear market, the 1987 crash, the 1973 crash, the cuban missile crisis, and all other periods of volatility because they allowed you to buy stocks cheaper before the market recovered.

Many people say "stocks are a long term investment". I agree, but I don't agree with WHY they say it. People who use this phrase inevitably mean that if they went out and stuck all their wealth on the stock market tomorrow, it might go up, it might go down, but "in the long run" it will be worth more at some point. True, but that is NOT how the stock market should be used for sensible investing. For passive investors, the stock market is best played by setting aside fixed amount of your income each month to just buy the market at it's current price. This defensive approach is what will ensure safety in the short term, and superior returns in the long run.

Edited by Van

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You always hear property investors sprouting the line "You can't live in a share" or "the value of a property can never fall to zero", but here's the thing - it doesn't need to fall to zero for you to lose you entire investment! If you have a 10% deposit, the market only needs to fall 10% (or less, if you add in transaction costs) to completely wipe out your "investment". And you'll have a whopping loan to service each month. But at least you'll have a roof over your head.. and a "very long term" investment.

But what do you do when geared up in the stock market and your shares fall >20% (and are still falling...)

That's a pretty big investment 'WIPEOUT' in my book. (you still have a whopping loan to service each month)

Do you borrow/invest more money to try and make more money? What if you lose your job or get sick at the same time? i.e. no income, rent money to find each month AND a huge (stock market) loan to pay off. Not a nice place to be IMO.

Which sounds worse to you?

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But what do you do when geared up in the stock market and your shares fall >20% (and are still falling...)

That's a pretty big investment 'WIPEOUT' in my book. (you still have a whopping loan to service each month)

Do you borrow/invest more money to try and make more money? What if you lose your job or get sick at the same time? i.e. no income, rent money to find each month AND a huge (stock market) loan to pay off. Not a nice place to be IMO.

Which sounds worse to you?

I don't consider that investing - I consider it speculating, which borders on gambling, and the odds are stacked 9:1 AGAINST you when speculating. I consider any sort of trading on margin as having some element of speculation. People often fail to distinguish between the two, but it is a VERY important difference!

To answer your question "What do you do when geared up and the your shares fall 20%?" I would say:

1. You cut your losses and pay up. Always cut your losses so that you live to fight another day. If you took a position on margin, you were speculating as opposed to investing, and you have to be prepared to take losses. You want someone to wave a magic wand and make it all better? Sorry, but you made a bad call, and are going to have to pay for it. Sure, you could double down on your losses in the hope that they will rise again, but this is like the gambler who doubles his stake after every loss.

2. Consider covered warrants rather than naked long/short positions which limit your risk should the market go against you.

3. Don't put yourself in that position in the first place by investing sensibly! That means don't use gearing (or use it defensively, eg to hedge your long positions), consider downside risk, don't buy your shares all in one go (average out the buys over a few months), and ask yourself would you still be comfortable holding shares in this company if the market fell 25% tomorrow because you believe in the underlying fundamentals of the company are sound?

Edited by Van

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you have actually (unknowningly) BENEFITTED from the 2000-2003 bear market, the 1987 crash, the 1973 crash, the cuban missile crisis, and all other periods of volatility because they allowed you to buy stocks cheaper before the market recovered.

Exactly, but the crucial point is most people do not do this. I felt very lonely piling into technology / WEB related investments just after the dotcom bust.

Its the same right now. Ive been critiscised for buying in Germany as there is a lot of negative sentiment due to the long term recession. To me this has to be worth a punt. Others however cant see beyond the negativity.

Those who are generally bearish always claim they will buy once any market crashes, but in my experience they dont put thier money where thier mouth is when the crashes actually materialise as they are so caught up in all the gloom.

Another arena I am currently into is Eastern European shares. The usual response from most people is a negative one - they just cant get thier heads around the idea that Eastern European backwaters just might bloom. Again they let thier negative impulses rule all thier decisions.

I invest in property and equities, which I think is the most sensible position long - term.

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  • 335 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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