Plenty Of Places For Ftbs In London

[Magpie]

Except of course the savings (and the annual amount saved) will be growing on the stock market at the same rate at which prices and rents are increasing. I ignored inflation etc for simplicity.

My point was that owning the asset in the end does not justify paying a premium over renting. Mortgages can be split into two parts, savings and cost of housing. It is the cost of housing part that matters, not the savings part.

Fair enough, it is all a bit more complicated if you allow for inflation on wages and interest on savings. But personally I would pay a bit extra simply to own and not to have to answer to a LL for the place I live. Maybe not a huge amount extra, but enough to tip the balance slightly in that direction. And unless you want to spend time studying and understanding the stock market, having a chunk of your savings in a house is at least a simple thing to comprehend. Basically I don't think most people here really want to rent for the next twenty five years - most people honestly would prefer to own their own home if conditions were right, and the real decision is how to work out when conditions are right (and if they will get better if you wait).

[Given Up]

Except of course the savings (and the annual amount saved) will be growing on the stock market at the same rate at which prices and rents are increasing. I ignored inflation etc for simplicity.

My point was that owning the asset in the end does not justify paying a premium over renting. Mortgages can be split into two parts, savings and cost of housing. It is the cost of housing part that matters, not the savings part.

The savings you put on the stock market are only a small proportion of the house value.

If you rent, that is rquivalent of paying an IO mortgage except at the end of 25 years you do not have the capital gains.

Rents in 25 years will be how much? who knows?

[Zaranna]

I think we need to agree the rel;evance of average wage versus average FTB property.

IMO, an average FTB salary gets you a house towards the bottom end of the market, not an averagely priced house - always has done. Average priced houses are usually occupied by people on average salaries who are halfway up their own potential property ladder.

Apart from a few periods of low prices, the averagely paid person bought a FTB type property, not one 3 rungs up the ladder.

BUT (and I don't want you to think I'm hounding you), as was discussed on several threads yesterday, many FTBs today are not only in their thirties, but already earn above, and in some cases much above, the average UK wage as a whole. In which case it doesn't matter that an IT exec aged 34 and earning 45k is a FTB - he/she is still paid well above the average UK wage, and thus not an average worker. So why should this person have to buy a below-average property? What if they have or want to start a family? Should they buy a 1-bed flat and cram 2 babies in it because they have to lower their expectations and work their way up the property ladder? Madness IMO. It might have worked in the 70s and 80s when FTBs were in their early 20s, but how does it work for FTBs in their thirties now? The entire paradigm is very different. The "property ladder" existed on the basis that people would buy young and trade up every so often as they experienced significant wage inflation. But that's not realistic for someone in their thirties who is 1. already on a wage much higher than the average UK wage and 2. will not necessarily be able to expect their earnings to rise significantly more - and if they do they may have family costs to bear at the same time.

And, more importantly, if you're a person in their thirties who earns an above-average wage, educated and hard-working, the real powerhouse of the UK economy, and yet you're told that you should "lower your expectations" because you shouldn't be able to afford decent housing - well, what does that do to our economy's skills base and the productivity of the UK as a whole?

It all comes down the the same issue. If we want a healthy economy for the next 20, 50, 100 years, we have to invest in the younger generations - people have to be able to see that hard work has rewards, and that if they study and save and put in work and effort they will be able to live well and have a stake in society.

"Lower your expectations" is not a way to motivate younger generations whose productivity levels will be funding this economy and its welfare state for years to come.

Edited March 24, 2006 by Zaranna

[Goat]

I can only speak from a London perspective as it's the market I know.

Looking at those numbers, £550pcm is either a flatshare or a very, very small flat in zone 4+, neither of which would be much fun over 25 years.

In a reasonable area in SW london, rents in a reasonable one bed flat are approx £950pcm (11,400pa), and a repayment mortgage on a similar property would be in the region of £1,100 to £1,200 (14,400) a month.

(EDIT: I've used these numbers because £10,800 sounds like a big mortgage to be paying for a property that rents for £550pcm)

So renting is still a notional saving over time, but it's a lot more marginal that your worked example.

Before people start shouting EA or whatever, I know these figures because it's an area and size of flat I know from the personal decisions I have to make.

The figures are based on my existing house (small 1 bed in home counties). Rent of £6,600 is given, I know that it cost £137,000 in November 2004, the BBC mortgage calculator shows monthly repayments at 6% of just under £900.

[ʎqɐqɹǝʞɐɥs]

[Magpie]

I can only speak from a London perspective as it's the market I know.

Looking at those numbers, £550pcm is either a flatshare or a very, very small flat in zone 4+, neither of which would be much fun over 25 years.

In a reasonable area in SW london, rents in a reasonable one bed flat are approx £950pcm (11,400pa), and a repayment mortgage on a similar property would be in the region of £1,100 to £1,200 (14,400) a month.

(EDIT: I've used these numbers because £10,800 sounds like a big mortgage to be paying for a property that rents for £550pcm)

I've been over this with a few people here - the figures for me are about the same as you - it would cost £900-£1000 to rent but I can buy on a repayment for £1050 (= extra OO costs of course).

I think outside London rents are lower in proportion to price so people from out of London find it hard to believe this is the comparison for us - and in turn we think they are exaggerating about their rents...

To me it means that London is less overpriced than elsewhere (though still a bit overpriced)

[Given Up]

The value of a property is usually calculated as 20 x gross rent. That is a 5% yield.

[the_duke_of_hazzard]

In which case it doesn't matter that an IT exec aged 34 and earning 45k is a FTB - he/she is still paid well above the average UK wage, and thus not an average worker. So why should this person have to buy a below-average property? What if they have or want to start a family? Should they buy a 1-bed flat and cram 2 babies in it because they have to lower their expectations and work their way up the property ladder?

I am in EXACTLY this position now. We're moving to a two-bed flat in a rougher area to save money. Even then I would have to stretch to just over 4X income to buy, and then I'd be paying far more than renting.

I've got c. 100K in the bank, but I'm not going to pile that hard-earned money into an overpriced asset. I'd rather have the comfort and security of knowing it's there, and not having to worry about work needing to be done on a property, negative equity, or tying myself into a stressful job I might want to leave because of a mortgage I don't need. Especially when I'm trying to cope with being a parent for the first time.

[Magpie]

BUT (and I don't want you to think I'm hounding you), as was discussed on several threads yesterday, many FTBs today are not only in their thirties, but already earn above, and in some cases much above, the average UK wage as a whole....It might have worked in the 70s and 80s when FTBs were in their early 20s, but how does it work for FTBs in their thirties now? The entire paradigm is very different. The "property ladder" existed on the basis that people would buy young and trade up every so often... /quote)

I've been thinking about this and I think your point is right. The only thing I would say is that some people here tend to assert that the natural state of the market is for an average wage to buy an average house on 3.5x (I've seen that somewhere here again today). IN that case I think Casual Observer's point is valid.

So it's a relevant point when you try to work out what would be a natural place for prices to fall to. If you assume average wage x3.5 = average house price then we are much more out of sync than if you assume that FTBs will generally be buying below the average price.

but that's not to say that today's above average 30-something FTBs should be content with a hovel either...

[LivingTheDream-JustLikeLeedsUtd]

I've been over this with a few people here - the figures for me are about the same as you - it would cost £900-£1000 to rent but I can buy on a repayment for £1050 (= extra OO costs of course).

I think outside London rents are lower in proportion to price so people from out of London find it hard to believe this is the comparison for us - and in turn we think they are exaggerating about their rents...

To me it means that London is less overpriced than elsewhere (though still a bit overpriced)

Thanks for the clarification.

As I said, the market I know and understand is London, and as this thread was about FTB in London, I mistakenly assumed that was what others were talking about.

Young Goat, my apologies, I don't know the economics outside London, and didn't realise this is what your post related to so again apologies if I caused offence.

[Magpie]

I am in EXACTLY this position now. We're moving to a two-bed flat in a rougher area to save money. Even then I would have to stretch to just over 4X income to buy, and then I'd be paying far more than renting.

I've got c. 100K in the bank, but I'm not going to pile that hard-earned money into an overpriced asset. I'd rather have the comfort and security of knowing it's there, and not having to worry about work needing to be done on a property, negative equity, or tying myself into a stressful job I might want to leave because of a mortgage I don't need. Especially when I'm trying to cope with being a parent for the first time.

Ah, good luck with the parenting - that always complicates things...

I'm just at the school application stage which only throws another spanner in the works just as you're getting use to being a parent at all. One reason I'm buying is for the stability and a slightly less rough area for schools (though since we were in Hackney before almost anywhere would be less rough...)

[Goat]

The value of a property is usually calculated as 20 x gross rent. That is a 5% yield.

Rubbish, should be 12 times gross rent. If your getting less than 8% your loosing money, less than 5.5% and you are not even covering the mortgage.

[Magpie]

Rubbish, should be 12 times gross rent. If your getting less than 8% your loosing money, less than 5.5% and you are not even covering the mortgage.

But whether you go for 12 or 20, that's a rule for landlords (buy at 12, sell at 20). Not sure what the relevance of it is to people who want a place to live?

I've said this before too, but I think that we only started talking about that rule here because it is relevant when looking at BTL yields, and it is indeed interesting to see how many newbie landlords are failing to observe the basic rules. But if I live somewhere nice and could get 25 times gross rent, I don't see why I should allow a landlord's rule to govern whether, as an OO, I decide to sell up and rent. nor do I see why it is relevant to the buying decision except as one of a wide range of ways of deciding whether or not the price is right for the property.