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aussieboy

Decision To Buy?

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Following 18 months of househunting and countless attempts to haggle sellers down by anything more than 5%, it may now be time to wee or get off the pot. Here's the balance:

For the same amount of money I pay into the discretionary component of my pension, I can buy a nice house on a repayment mortgage over 25 years. Even if the thing stands empty for 25 years, it's less money per month than my current pension contributions. The forecast returns at the end this period, given house price inflation at current CPI, are the same for both. Any rental over the 25 year period would be a bonus. Given that market rent, or even 80% of the market rent, would cover the repayment mortgage, the thing should even wash its face.

Plus, I derive utility from the house that would not be provided by the ownership of a pension that expires when I do. Interest rate rises are a risk, but these can be hedged out.

This balance did not exist before the last bubble. Back then, I was in a nice non-contributory (well, 3.5% of salary) defined benefits package and was happy to potter along knowing that I could eat when I retired. This scheme, like many others in the UK, closed down years ago, and in the absence of a decent replacement pension I'm at a loss as to how to prepare for retirement.

I am not alone in this position and I suspect that this new dynamic is affecting prices significantly.

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I'm not clear on this. You say that with HPI equal to CPI (ie very conservative assumption that house prices stay flat in real terms, while wages rise faster) an investment property's value would still beat the projected return on your pension fund?

Which fund manager is predicting such dire investment returns? Why would anyone invest with them?

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Following 18 months of househunting and countless attempts to haggle sellers down by anything more than 5%, it may now be time to wee or get off the pot. Here's the balance:

For the same amount of money I pay into the discretionary component of my pension, I can buy a nice house on a repayment mortgage over 25 years. Even if the thing stands empty for 25 years, it's less money per month than my current pension contributions. The forecast returns at the end this period, given house price inflation at current CPI, are the same for both. Any rental over the 25 year period would be a bonus. Given that market rent, or even 80% of the market rent, would cover the repayment mortgage, the thing should even wash its face.

Plus, I derive utility from the house that would not be provided by the ownership of a pension that expires when I do. Interest rate rises are a risk, but these can be hedged out.

This balance did not exist before the last bubble. Back then, I was in a nice non-contributory (well, 3.5% of salary) defined benefits package and was happy to potter along knowing that I could eat when I retired. This scheme, like many others in the UK, closed down years ago, and in the absence of a decent replacement pension I'm at a loss as to how to prepare for retirement.

I am not alone in this position and I suspect that this new dynamic is affecting prices significantly.

Don't forget you've got to maintain/repair and update a house, in order to maintain its relative value.

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You would be better off backing Pfizer.

I have no idea how old you are by the way, but 25 years from now the pharmaceuticals market is likely to see a lot of growth as the populations of the vast emerging economies will be able to afford new drugs.

Westernisation = greater impotence.

So Viagra will probably do quite well, just remember patents run out.

This is not a miracle solution, but just an example of how you could do a lot better by thinking broader.

Investing in UK housing shows a lack of imagination/understanding.

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I'm not clear on this. You say that with HPI equal to CPI (ie very conservative assumption that house prices stay flat in real terms, while wages rise faster) an investment property's value would still beat the projected return on your pension fund?

Which fund manager is predicting such dire investment returns? Why would anyone invest with them?

The returns are the forecast returns for when I retire.

Secnario 1: Pay into the pesion. At retirement, the investment returns have grown the principle at a rate above CPI (otherwise the returns would be even worse) the pension begins. My forecast pension assumes that the fundie performs to the index.

Scenatio 2: Pay off the house. At retirement, I own and rent out the proprty.

Comparing the two, even with less than market rental yield, the cash is the same (ish). The sad truth is that even putting a significant amount of money into a pension over 25 years, and even with the assumption that past fund performance is an accurate predictor of future performance, the pension returns are terrible which is why those with (largely) non-contributory guaranteed benefits pensions (such as teachers) should include this money when moaning about their salaries (whole package should be considered). Those not fortunate enough to be in public sector jobs are being forced to find a new asset class other than pensions... hence the popularity of BTL.

Maintenance is an issue, that is correct, and it is factored into cash flows.

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Comparing the two, even with less than market rental yield, the cash is the same (ish). The sad truth is that even putting a significant amount of money into a pension over 25 years, and even with the assumption that past fund performance is an accurate predictor of future performance, the pension returns are terrible which is why those with (largely) non-contributory guaranteed benefits pensions (such as teachers) should include this money when moaning about their salaries (whole package should be considered). Those not fortunate enough to be in public sector jobs are being forced to find a new asset class other than pensions... hence the popularity of BTL.

Maintenance is an issue, that is correct, and it is factored into cash flows.

What makes anyone think that the house will be worth anywhere near as much, in real terms in 25 years, as it is today, and that it will be safer than a pension: does the past performance of the housing market provide a guarantee of the future?

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The sad truth is that even putting a significant amount of money into a pension over 25 years, and even with the assumption that past fund performance is an accurate predictor of future performance, the pension returns are terrible which is why those with (largely) non-contributory guaranteed benefits pensions (such as teachers) should include this money when moaning about their salaries (whole package should be considered). Those not fortunate enough to be in public sector jobs are being forced to find a new asset class other than pensions... hence the popularity of BTL.

Maintenance is an issue, that is correct, and it is factored into cash flows.

On recent TUPE analysis of pension costs from the public sector, I've been quoted employers contributions of between 20 and 27% of gross salary. :o I doubt that many public sector employees have factored the value of their pension schemes into their perception of overall remuneration. Its frightening to think how much a private sector employee has to save to achieve the same end result.

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A better bet is to open a SIPP account and get a full income tax rebate on all contributions.

Rather than stamp duty of up to 5% you'll only have to pay 0.5% on the shares you buy to put into the SIPP (or nothing with ETFs).

You'll still get rent but in the form of dividends from your productive assets - and since it's a SIPP, you'll only pay 10% withholding tax on the dividends, and not your income tax rate.

To be charitable, let's say house prices rise, as they historically have, with incomes. It it is most likely your equity based SIPP will rise even more over 25 years. Equities unlike houses are not historically overpriced so capital growth is likely to be much more. This would not have been true in say 1999.

Maintenance costs will be negligible, especially if you use an internet based service like e-trade and self-select stock or use ETFs thereby avoiding management fees.

Finally, like the house, there will be utility at the end, even when you expire, unless of course you draw done the capital for an annuity etc - just like the house.

It's a no-brainer.

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I am in much the same situation but a lot closer to retirement (12 years at most) I have a couple of investment properties which I paid off a few years ago. The rent represents only about a 4% gross return but on the other hand my admittedly illogical theory is that the income I receive now will in ten or even twenty years time always have the same purchasing power. If I were to take the business like approach I wouldn’t know what to do with the cash and would lose quite a bit in capital gains tax.

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I am in much the same situation but a lot closer to retirement (12 years at most) I have a couple of investment properties which I paid off a few years ago. The rent represents only about a 4% gross return but on the other hand my admittedly illogical theory is that the income I receive now will in ten or even twenty years time always have the same purchasing power. If I were to take the business like approach I wouldn’t know what to do with the cash and would lose quite a bit in capital gains tax.

If you paid them off a few years ago.

I think they should sustain an income with comparative purchasing power for several years to come. However you will incure repairs, maintenance and the like. Also your market base (tenants) may become more prudent as their energy bills and insurance suffer high inflation.

People may start living at home longer meaning you will have to price more competitively.

Any prediction involves if's and but's.

Of course bird flu may might turn up next week, mutate with influenza and wipe out a third of the UK population before the summer. Nobody knows what the future holds, all you can do is prepare.

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A better bet is to open a SIPP account and get a full income tax rebate on all contributions.

Rather than stamp duty of up to 5% you'll only have to pay 0.5% on the shares you buy to put into the SIPP (or nothing with ETFs).

You'll still get rent but in the form of dividends from your productive assets - and since it's a SIPP, you'll only pay 10% withholding tax on the dividends, and not your income tax rate.

To be charitable, let's say house prices rise, as they historically have, with incomes. It it is most likely your equity based SIPP will rise even more over 25 years. Equities unlike houses are not historically overpriced so capital growth is likely to be much more. This would not have been true in say 1999.

Maintenance costs will be negligible, especially if you use an internet based service like e-trade and self-select stock or use ETFs thereby avoiding management fees.

Finally, like the house, there will be utility at the end, even when you expire, unless of course you draw done the capital for an annuity etc - just like the house.

It's a no-brainer.

It would be if equities weren't so overpriced. S&P 500 is at 18 x 05 earnings c.f. long term 15x earnings. Also, there's never been a housing crash to match those experienced by equities.

Utility includes the non-financial benefits dervied from an asset which may I suppose cover making paper planes out of letter from the fund manager.

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It would be if equities weren't so overpriced. S&P 500 is at 18 x 05 earnings c.f. long term 15x earnings. Also, there's never been a housing crash to match those experienced by equities.

Utility includes the non-financial benefits dervied from an asset which may I suppose cover making paper planes out of letter from the fund manager.

I wouldn't advocate a fund manager. Many stock markets are not historicially overpriced.

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You're better off putting your money in savings if you can than buying a house over 25 years (unless you need a house). That way you don't pay the interest, but receive interest.

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You would be better off backing Pfizer.

I have no idea how old you are by the way, but 25 years from now the pharmaceuticals market is likely to see a lot of growth as the populations of the vast emerging economies will be able to afford new drugs.

Westernisation = greater impotence.

So Viagra will probably do quite well, just remember patents run out.

This is not a miracle solution, but just an example of how you could do a lot better by thinking broader.

Investing in UK housing shows a lack of imagination/understanding.

But many people are much less well informed than people like yourself who have an understanding perhaps of how to invest in and play the markets. It is NOT risk free. Many casual/amateur investors got very burnt in the dot.com crash and still remember their big losses. the bulk of the population IMO would not even think of STR or consider investing their deposit to "grow" on the markets. (just by looking at the demographic socio groups that make up the Uk population i think highlights this fact) Even posters on this informed forum, admit they have STR funds sitting in 5% interest bank accounts. For many investing in a home is not just about how much money they can make.

Edited by beenhearingthisforyears

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But many people are much less well informed than people like yourself who have an understanding perhaps of how to invest in and play the markets. It is NOT risk free. Many casual/amateur investors got very burnt in the dot.com crash and still remember their big losses. the bulk of the population IMO would not even think of STR or consider investing their deposit to "grow" on the markets. (just by looking at the demographic socio groups that make up the Uk population i think highlights this fact) Even posters on this informed forum, admit they have STR funds sitting in 5% interest bank accounts. For many investing in a home is not just about how much money they can make.

Sorry,

You’re right, I suppose we all show ignorance of some sort at some point.

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You would be better off backing Pfizer.

I have no idea how old you are by the way, but 25 years from now the pharmaceuticals market is likely to see a lot of growth as the populations of the vast emerging economies will be able to afford new drugs.

Westernisation = greater impotence.

So Viagra will probably do quite well, just remember patents run out.

This is not a miracle solution, but just an example of how you could do a lot better by thinking broader.

Investing in UK housing shows a lack of imagination/understanding.

I lack neither imagination nor understanding. If that were so, I'd keep on paying the bonuses of my non-performing fundies via my company's no-choice pension scheme. I also have other investments and FWIW am already geared to the success of the pharma market through experience and training. Interestingly. the big patent expiries should be finished in the next 5 years and so, ironicaly, it's the Dr Reddy's of this world who are more worried about the issue, the impact having been already priced into Pfizer.

Edited by aussieboy

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I lack neither imagination nor understanding. If that were so, I'd keep on paying the bonuses of my non-performing fundies via my company's no-choice pension scheme. I also have other investments and FWIW am already geared to the success of the pharma market through experience and training. Interestingly. the big patent expiries should be finished in the next 5 years and so, ironicaly, it's the Dr Reddy's of this world who are more worried about the issue, the impact having been already priced into Pfizer.

Sorry, wasn't trying to direct that at you personally aussieboy, just saying living in the UK and investing in UK housing shows a lack of understanding and imagination.

I had those who recently bought looking for fiscal gains, in mind, when writing the post.

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Sorry, wasn't trying to direct that at you personally aussieboy, just saying living in the UK and investing in UK housing shows a lack of understanding and imagination.

I had those who recently bought looking for fiscal gains, in mind, when writing the post.

No worries... and I've just realised how pompous my response reads. Sorry about that!

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A better bet is to open a SIPP account and get a full income tax rebate on all contributions.

Rather than stamp duty of up to 5% you'll only have to pay 0.5% on the shares you buy to put into the SIPP (or nothing with ETFs).

You'll still get rent but in the form of dividends from your productive assets - and since it's a SIPP, you'll only pay 10% withholding tax on the dividends, and not your income tax rate.

To be charitable, let's say house prices rise, as they historically have, with incomes. It it is most likely your equity based SIPP will rise even more over 25 years. Equities unlike houses are not historically overpriced so capital growth is likely to be much more. This would not have been true in say 1999.

Maintenance costs will be negligible, especially if you use an internet based service like e-trade and self-select stock or use ETFs thereby avoiding management fees.

Finally, like the house, there will be utility at the end, even when you expire, unless of course you draw done the capital for an annuity etc - just like the house.

It's a no-brainer.

I'm with BTB, despite the severe bashing they seem to get on this forum, I still think personal pensions are a good bet. I have a managed one in the UK where the charges are only 0.6%. You often get employer contributions of about 3% of salary and all contributions get grossed up. Plus I can switch funds online and "play the market" a little bit every few months. If at some point I really think property is the place to be, there is a property fund I can move my pension into.

frugalista

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Following 18 months of househunting and countless attempts to haggle sellers down by anything more than 5%, it may now be time to wee or get off the pot. Here's the balance:

For the same amount of money I pay into the discretionary component of my pension, I can buy a nice house on a repayment mortgage over 25 years. Even if the thing stands empty for 25 years, it's less money per month than my current pension contributions. The forecast returns at the end this period, given house price inflation at current CPI, are the same for both. Any rental over the 25 year period would be a bonus. Given that market rent, or even 80% of the market rent, would cover the repayment mortgage, the thing should even wash its face.

Plus, I derive utility from the house that would not be provided by the ownership of a pension that expires when I do. Interest rate rises are a risk, but these can be hedged out.

This balance did not exist before the last bubble. Back then, I was in a nice non-contributory (well, 3.5% of salary) defined benefits package and was happy to potter along knowing that I could eat when I retired. This scheme, like many others in the UK, closed down years ago, and in the absence of a decent replacement pension I'm at a loss as to how to prepare for retirement.

I am not alone in this position and I suspect that this new dynamic is affecting prices significantly.

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  • 331 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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