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Without_a_Paddle

A Bear A Bull And Three Wishes

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Here are some more figures on future house buying costs. No more comparisons with the past, this time it's the future.

All the options are with the bear. The bull just buys today at full price. I'd appreciate any corrections if I've got the figures wrong.

FairyTale Version of the Future:

Bear finds a magic lantern and gets three wishes...

Bear Wish 1: I want my daft mate bull to buy a house today at full price.

Genie: Your wish has been granted. Bull paid the UK average at £160k with a repayment loan at 4.7% fixed for 10 years.

Bear Wish 2: I want higher interest rates. I want 7% rates NOW. TOMORROW!

Genie: Your wish has been granted.

Bear Wish 3: This is fun. I want house prices to fall 30%! But I don't want to wait. I want it NOW. TOMORROW!

Genie: Your wish has been granted, prices have fallen 30%. All prices in EA windows have been adjusted. UK average house was £160k, now £112k.

The next day...

Bear: Whoopee! I'm going to buy a house!

Bear: How much is it gonna cost me a month?

IFA: Yesterday it would have cost you the same as bull. That is, £907pm if you went fixed rate repayment for 10years at 4.7% on £160k

Today it will cost you £792pm on a variable rate repayment loan 7% on £112k.

If you go long term fixed it will be 7.8% which is £850pm on a repayment loan.

Bear stops and thinks. Thinks of peak oil, long term average rates, globalisation and the economy going down the pan (well, he's a bear!)

"I'll go long term fixed repayment" says the bear.

So the bear is about £60 a month up on the deal and can hope for higher wage inflation to help 'shrink' the debt.

We all know it's nicer to have a 'smaller debt with higher rates' than the other way round so the bear sleeps soundly in his new house (next door to the silly bull who bought the day before for £160k at 4.7%)

However, Mrs Bear is still not happy. She wants to give up work and 'make little bears' for a few years. An extra £60 a month isn't helping... It's still no cheaper than renting she wails!

But think of the wage inflation we can hope for says bear! Higher rates, higher wage inflation!

"count me in too! says bull! I get high wage inflation too and I'm protected against the higher rates by my long term fixed rate loan.

Everyone is happy.(apart fom Mrs Bear and Mrs Bull) The bear 'WINS' because he is nearly £60 a month up wrt the bull. At the end of 10yrs he wins some more because he has a smaller debt to pay off at the end of the 10 years.

Bear now owes £90k

Bull now owes £116k

Same house.

After 10yrs the bear wins by £26k. (plus maybe another £8k total in saved monthly payments/interest)

Which just goes to prove, Good Things come to those that Wish!

***

What about those bears that wait instead of wishing? i.e. the real world where you can hope for that big? dip in 5 years' time.

Non FairyTale Version of the Future:

Year 1 Bull buys at 4.7% fixed repayment loan for 10years in 2006 at £160k.

Bear waits 5 years for prices to dip and rates to hit 7% and buys the house. Only it hasn't fallen 30% it's only fallen 20% because of wage inflation creeping up with the higher rates. (prices only fell 18% nominally in the last crash UK average) Bears' old rent is now higher than the bulls mortgage BTW.

House prices have fallen by 20% nominally with the bonus of 20% wage inflation = a big 'real' fall compared to today. Whoopee!

Bear decides to buy at £128k 7.8% 5 year fixed (10yr fixed too expensive). monthly cost £972.

So bear is LOSING to bull by nearly £70pm. Mrs Bear doesn't seem happy at this at all! No little bears on the horizon. But they did save some cash during the 5 years spent renting. Maybe £6k. If they blew this on a deposit it would bring the monthly mortgage down to £927pm.

another 5 years pass.

Bull's 10yr fixed rate ends. He now owes about the same as bear does at £117k.

But he has the £6k (now worth £7k) of savings over bear to help with paying for a baby bull.

So who wins?

TBH there's not much in it. Bear has to hope for 7% rates and over 20% nominal (38% real?) falls in prices after 5yrs to catch up with bull.

However, if prices fall 30% in nominal terms in 5 years' time with 7% rates bear will edge it over bull by waiting the 5 years.

Note this requires a HUGE 'real' fall in real prices if you include 5 years of wage inflation with the 30% nominal price fall.

i.e. there is 5 years of wage inflation at 4% yoy to mellow out any downward pressure on nominal prices.

Scary Version of the Future:

Year 1 Bull buys at 4.7% fixed repayment loan for 10years in 2006 at £160k.

IRs hit 5.5% in 5 years and prices end up the same as today in £££ (actual fall is >20% when inflation adjusted)

Bear then buys at £160k 5yr fixed rate. =£980pm = £80pm MORE than bull.

In another 5 years bear's debt only shrinks to £142k

Bull will owe £117k at the same time (i.e. 10 years from today). But bull has saved £80pm for 5 years = over £5k with interest

Bear is screwed by at least £30k and has wasted 5 years in rented accommodation.

Not happy with the above?

NotSoScary Version of the Future:

Year 1 Bull buys at 4.7% fixed repayment loan for 10years in 2006 at £160k.

IRs hit 5.5% in 5 years and prices actually fall 15% nominally (real fall is much bigger when 4% per year wage inflation adjusted)

Bear saves £6k in rent and buys at £130k 5yr fixed rate at 6%. =£838pm = £62pm less than bull.

In another 5 years bear's debt shrinks to £117k and he has saved maybe £5k in lower mortgage payments.

Bull will also owe £117k at the same time (i.e. 10 years from today) on the same house.

It takes bear 10 years to be £5k up on bull. is it worth the wait?

Finally here is something nicer for bears:

Fantasy Version of the Future:

Year 1 Bull buys at 4.7% fixed repayment loan for 10years in 2006 at £160k.

IRs hit 10% in 5 years and prices nominally fall 45% (a >60% fall in real terms with the raised inflation)

Bear then buys at £88k 10% variable rate. =£800pm (and his wages have probably gone up 30% with rampant inflation as well...) Is this likely to be realistic?

Bear has lived in rented for 5 years and now gets his payback. He is saving £100pm over bull.

(but his recent rent had gone up so this cancels some of this out...)

in another 5 years his debt shrinks to £83k

bull will owe £117k at the same time. (A £34k difference. More if you include the bear's monthly savings)

Which of the above scenarios is the most likely?

(I reckon Fantasy Version is less likely than the one that requires a magic lantern...)

Please note that ALL of the above versions involve at least 20% falls in house prices in 'real' terms over the next 5 years.

(Just in case anyone accuses me of saying "prices always go up"...)

I'd be interested to see if anyone has a more accurate 'version' of the next 10 years if it isn't contained here...

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at least you've realised this market is one long pantomime !

this one will have a happy ending for the bears :D

(ps you're wasting your time peddling your mortgage broker figures on here - it's not our fault (entirely) business is so quiet for you !)

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I prefer a different scenario.

Using the same examples as above how would it be if both Mr Bear and Mr Bull both have a 50k deposit to put down. I think in this case Mr Bears monthly payments will be half of Mr bulls and he will have his mortgage paid off much faster.

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Guest muttley

I think if you gave most bears a magic lantern they would simply wish for a house.Then they would have two wishes left.

Did you make this up,WaP, or is their a link?

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There was once an evil estate agent who was exposed to the property market in a dodgy area of the Uk where prices were falling. He was scared. Not only might he loose his job, he had BTL (Bankruptcy Through Loan) illness.

He went out into the forest - He had heard that men in africa believed they could cure their HIV through sleeping with virgins. He believed that if he could infect others with BTL illness, everyone would be in the same position and a miracle cure would be found.

Unfortunately, his BTL sickness was evident. His lack of basic tracking skills in the forest (posting personal email addresses to forums) meant that all the other forest animals dicovered he was that most despised of creatures, an estate monkey.

As one of the few things lower than an estate monkey is an estate monkey who pretends he is something else, none of the other animals in the forest believed anthing he said again.

Moral of this fairytale: Trying to drag others down with you generally doesn't work.

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I prefer a different scenario.

Using the same examples as above how would it be if both Mr Bear and Mr Bull both have a 50k deposit to put down. I think in this case Mr Bears monthly payments will be half of Mr bulls and he will have his mortgage paid off much faster.

Good point. And here is a good answer:

Maybe they DID have deposits. But lets leep it realistic. A £10k deposit. Maybe they both were looking at £170k houses. So the figures still stack up.

Otherwise, if the bear had £50k today how much did he have in deposit two years ago? When prices were lower?

Bull would have bought two years ago if he was sat on cash.

But have it your way...

Bull puts down £50k and buys for £110k today 4.7% fixed 10yrs.

repayment £624pm

But bear can save £10k (after tax) by banking the £50k cash for 5 yrs.

Bear waits 5 yrs and buys at £128k with a 60k deposit = £68k fixed at 7.8%

Monthly payment £516

After 5yrs bear owes £62k.

This is actually in 10yrs from today when bull will owe £80k. (cos he's been paying off the debt for 10years not 5)

So 10 years on, bear still owes £62k. Bull owes £80k. Same house

But Bull has been in the nice house TWICE AS LONG.

I think in this case Mr Bears monthly payments will be half of Mr bulls and he will have his mortgage paid off much faster.

Are you sure about that?

How many of today's FTBers have £50k deposits?

Edited by Without_a_Paddle

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Here are some more figures on future house buying costs. No more comparisons with the past, this time it's the future.

You cheated. :P

You went 2 years into the past and said a bull would have bought 2 years ago. We are talking present and future here.

Better still, lets leave bears and bulls out of it and just compare 2 persons buying with a 50k deposit. One buys now at full price and the other waits 3 years and buys at a 33.33% discount. Assuming todays purchase price is 150k then person 1 will have a mortgage of 100k and person 2 will have a mortgage of only 50k. Therefore the monthly cost of person 2 servicing their mortgage will be half that of person 1.

Its true though. Person 1 will have been able to live in their lovely house for 3 years longer.

Point taken about most ftb's not having 50k but many on here have a pretty decent deposit. Its only percentage differences that are effected by deposits so any ftb will will save the same amount if they make a cheaper purchase by waiting to buy .

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Here are some more figures on future house buying costs. No more comparisons with the past, this time it's the future.

All the options are with the bear. The bull just buys today at full price. I'd appreciate any corrections if I've got the figures wrong.

Which just goes to prove, Good Things come to those that Wish!

***

What about those bears that wait instead of wishing? i.e. the real world where you can hope for that big? dip in 5 years' time.

So who wins?

TBH there's not much in it. Bear has to hope for 7% rates and over 20% nominal (38% real?) falls in prices after 5yrs to catch up with bull.

However, if prices fall 30% in nominal terms in 5 years' time with 7% rates bear will edge it over bull by waiting the 5 years.

Note this requires a HUGE 'real' fall in real prices if you include 5 years of wage inflation with the 30% nominal price fall.

i.e. there is 5 years of wage inflation at 4% yoy to mellow out any downward pressure on nominal prices.

Not happy with the above?

Finally here is something nicer for bears:

Which of the above scenarios is the most likely?

(I reckon Fantasy Version is less likely than the one that requires a magic lantern...)

Please note that ALL of the above versions involve at least 20% falls in house prices in 'real' terms over the next 5 years.

(Just in case anyone accuses me of saying "prices always go up"...)

I'd be interested to see if anyone has a more accurate 'version' of the next 10 years if it isn't contained here...

An excellent attempt at some "what if" scenarios (I’m not sure if this has been done before on this forum).

Essentially you are attempting to provide real figures for the various possible economic outcomes over the next ten years to highlight the actual impact in £££ terms on a person undertaking one of the various strategies. Personally I’d like to see a lot more of this type of analysis on this forum.

It is not just a question of what might happen but more importantly what the impact of a particular economic scenario will be (i.e if a 20% Crash in residential property prices in the UK means you will be worse off by £2,000.00 in 10 years time then it really does not matter that much at all).

Unfortunately in pointing out the possible scenarios and their impact in your “case studies” you have fallen foul of the HPC mantra that a major HPC is inevitable and the impact on everyone will be catastrophic and so you may well be branded a heretic/troll and ridiculed (some of the replies have already ridiculed you and/or attacked your motives and character – not sure how this type of response to what is a perfectly reasonable post adds to the debate or furthers the HPC cause).

BB

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You cheated. :P

You went 2 years into the past and said a bull would have bought 2 years ago. We are talking present and future here.

Better still, lets leave bears and bulls out of it and just compare 2 persons buying with a 50k deposit. One buys now at full price and the other waits 3 years and buys at a 33.33% discount. Assuming todays purchase price is 150k then person 1 will have a mortgage of 100k and person 2 will have a mortgage of only 50k. Therefore the monthly cost of person 2 servicing their mortgage will be half that of person 1.

Its true though. Person 1 will have been able to live in their lovely house for 3 years longer.

Point taken about most ftb's not having 50k but many on here have a pretty decent deposit. Its only percentage differences that are effected by deposits so any ftb will will save the same amount if they make a cheaper purchase by waiting to buy .

I didn't cheat with the figures I gave though :) . I worked out the figures from 'today' with the 50k deposit. They are listed in my last post. I only 'suggested' that a bull would have not sat on the cash.

If I did cheat and turn the clock back for the bull then the figures would not make good viewing for some people. probably best not to display them...

I don't see a problem with using bear and bull BTW. neither term is derogatory.

Your £150k solution above is way too simplistic. it doesn't allow for interest rate rises which are needed to create the 33% price fall. I tried to account for this in my examples above.

For your scenario to come true in 3 years you are going to have to see nominal falls falling faster than last time and deeper. (18% in 5 yrs vs 33% in 3 yrs) Some parts of the UK will see bigger corrections than the average I know.

Rates would have to double PDQ IMO to get those kinds of nominal falls in that timeframe.

The economy would be destroyed.

If there was the merest hint of that scenario being possible then why aren't the tories beating GB with a stick over the economy? Cameron's post budget response was a damp squib full of useless sound bites and no substance. Every word probably rehearsed in advance.

Why are normally bearish economists predicting long term rates to be around 5% or lower?

Even Roger Bootle is only saying 2.7% nominal falls in house prices this year. That leaves you 2 years to find another 30%.

Also, the Treasury will prop up the economy this year and probably another two after that. There is an election on the way in maybe 4 years and Gordon Brown wants to win it...

Edited by Without_a_Paddle

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I didn't cheat with the figures I gave though :) . I worked out the figures from 'today' with the 50k deposit. They are listed in my last post. I only 'suggested' that a bull would have not sat on the cash.

If I did cheat and turn the clock back for the bull then the figures would not make good viewing for some people. probably best not to display them...

I don't see a problem with using bear and bull BTW. neither term is derogatory.

Your £150k solution above is way too simplistic. it doesn't allow for interest rate rises which are needed to create the 33% price fall. I tried to account for this in my examples above.

For your scenario to come true in 3 years you are going to have to see nominal falls falling faster than last time and deeper. (18% in 5 yrs vs 33% in 3 yrs) Some parts of the UK will see bigger corrections than the average I know.

Rates would have to double PDQ IMO to get those kinds of nominal falls in that timeframe.

The economy would be destroyed.

If there was the merest hint of that scenario being possible then why aren't the tories beating GB with a stick over the economy? Cameron's post budget response was a damp squib full of useless sound bites and no substance.

Why are normally bearish economists predicting long term rates to be around 5% or lower?

Even Roger Bootle is only saying 2.7% nominal falls in house prices this year. That leaves you 2 years to find another 30%.

Also, the Treasury will prop up the economy this year and probably another two after that. There is an election on the way in maybe 4 years and Gordon Brown wants to win it...

Fair enough. No one knows what will happen and I agree that the failing economy will be propped up as long as possible before it falls. I'm just willing to make this gamble thats all. Buying is not such a big deal for me and as I have a fairly large deposit I'm not at the stage (nor ever will be) that I'm willing to give in and say "i give up and HPI has beaten me". By buying a place now I would be giving up and losing my chance to get back what I already lost.

There is another thing too. Certain precious metals are doing rather well at the moment and if this continues I wont need a HPC to recoup my losses. If I bought now I wouldnt be able to do that.

As for interest rates, well who knows. I dont know why economists are predicting <5% long term as it sounds a bit optomistic, mind you they were talking about rate cuts until very recently so I think their less than 5% might soon be less than 6%.

Who knows, inflation/deflation. TTRTR seems to think hyperinflation (wages) but low interest rates. What do you think WAP?

And agreed, neither bear or bull is derogatory but I just dont think your average person is thinking about whether they are one or the other.

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This reminds me of an old story that I'll change a little bit.

A man speaks to his personal financial adviser. He asks the adviser what he should do to invest money.

The advisor says "property always goes up, buy property."

So the man buys property, paying 150K for a house. 20K of this is investment, and the other 130K is a mortgage. The man then says "But I have to pay interest on the loan, where does this money come from?"

The financial advisor says. "Get thee to an estate agent who manages rental property. They will find a tenant for you and the tenant will pay all your bills."

The man goes to an estate agent. Several suitable tenants are found, and the man chooses a reliable looking character to rent the house to. The rent starts flowing in, but after costs it only just covers the interest on the loan.

A year later he goes to the financial advisor and asks "I don't seem to be making money on my investment."

The financial advisor says "But, you have. Capital appreciation means that the house is now worth £170, meaning that you have made the tidy sum of £20K, doubling your investment, for sitting on your posterior.

"Wow" says the man. And away he goes. Then he receives a phone call from the estate agents. He is told that the tenants have complained that the central heating has broken down and could it be fixed. The cost is £500. But still the man consoles himself that he has made a large sum of money over one year, and that the £500 is small in comparison.

A few months later the estate agent calls and says that tenant is moving to a different city and they will need to find a new one. The man asks for details of tenants to be sent to him. "The market is a bit slow" says the estate agent, "it could be tricky. I can definitely get you a tenant if you ask for a cheaper rent than last time. And we've also put our charges up to 12% of the rent."

The man says "but the rent I get only just covers my expenses." But he trusts the estate agents, and waits. His tenant moves out. He waits to hear from the estate agents. After a month, he phones the estate agent again.

"The market is very slow" says the estate agent. "We haven't even had a single viewing for the property." Two more months pass. The man dutifully pays his mortgage, but finds that he must also pay council tax on the property. Then there is a call from the estate agent. "We have prospective tenants, but they are only offering £50 a month less than asking." The man agrees. His cashflow is now negative month on month. The estate agent then phones to say that the stove does not work properly and needs to be replaced. The landlord pays for a new stove.

Finally the man goes to his financial advisor. "I bought the house as you advised. I borrowed money to buy it and pay a mortgage each month. I have tenants, but I've paid out thousands of my own money and have not seen any benefit myself. How is this a good investment."

"Ahhhh" says the financial advisor. "But you know that there is a house price boom. The house that you bought for £150k is now worth £170K. That's a 20K profit just for sitting on your posterior."

"But" says the man, "that's the same that it was worth last year. I've been through all these problems, spent all this money, and I haven't even made a profit. How do I get this profit into my hands so that I can spend it?"

"Simple" says the financial advisor "you sell the house."

"Well then", says the man, "sell the house."

The financial advisor shifts uncomfortably in his seat, pauses a bit, then says sheepishly "to whom?"

Billy Shears

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like many storytellers, you left alot out!

what about the cheaper cost of renting?

what about the income that the Bear makes on his invested funds?

what about the bears who are smart investors and can outperform bank interest?

Here'm my quick Counter example:

Bear pays 2% less in rent than the Bull pays in mortgage payments.

£150K x 2% = £3000 pa. saved x 5 years = £15,000

price falls 30%:

£105K, and Bear buys:

£ 15K saved

====

£ 90K ... so the actual savings is; 40%

Now way the Bull will EVER catch up, and he is stuck,

trapped in negative equity for years, and maybe a lifetime

To me, this is likely Reality, not some Bull's fantasy

OK Bubb, you're the man. Let's go with your figures for falls but lets make the price £160k to save me some maths.

We know the routine for the bull.

Buy today £160k at £907pm 4.7% fixed 10yrs. owe £117k after 10 yrs.

For prices to nominally fall 30% in 5 years I think it is safe to assume rates will go well over 7%.

There will be 5 years of wage inflation too so your 30% fall could be more like 45% in real terms)

Quite a fall in prices! Not sure how you justify this but let's stick with it.

A long fixed rate loan will be 8.5% at an estimate.

I dispute your claim on the rent saving as the rent will go up with inflation (just like rents went up during the last crash)

However I'll allow £10k saved in rent (not £15k)

So the bear rents and waits 5 years and goes 8.5% fixed for 5 years.

Monthly repayment on £102k (after the extra £10k deposit)

will be £821pm (not that much diferent to bull! and this is after 5 years' wage inflation!)

After the bear mortgage is 5 years through, the bear owes £95k

The bull owes £117k on the same date.

But this difference is MEANINGLESS as bear can't touch this £20k difference without selling up.

I assume prices creep back up during the second 5 years. Perhaps you will allow them to be back to today's price? I don't think that is an unrealistic assumption.

SO WHERE IS THE LIFETIME OF NEGATIVE EQUITY? (your words, not mine)

After 10yrs the bear has won by £90pm for those last 5 years. i.e. £5.5k total.

Is £5.5k (IN TEN YEARS TIME) going to be equivalent to a lifetime of bear vs bull 'Negative Equity'?

Lets keep looking...

rates are still around 8% bears mortgage is unchanged at £821pm

Bull remortgages for 25yrs and gets a monthly payment exactly the same as before i.e. £907pm

So actually bear is still only £90pm better off from then on.

Bull has to pay mortgage for 5 more years than bear but if rates fall then this will fade away to an insignificance if you consider wage inflation over the full term.

So Bubb, your plan to wait for 30% falls in 5 years will save money every month. Maybe not as much as you might initially think in terms of monthly repayments

(don't forget bull gets to move in 5 years sooner)

WHERE IS THE LIFETIME OF NEGATIVE EQUITY?

It still looks a 'fairly' even contest to me in monthly repayments.

better get the prayer mat out for those 30% nominal falls in 5 years...

(I've drunk two (small!) bottles of beer so please correct any mistakes or oversights on my part)

.....burp....

Edited by Without_a_Paddle

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For prices to nominally fall 30% in 5 years I think it is safe to assume rates will go well over 7%.

Big assumption. An increase of 1% might well cook a lot if indebted home owners.

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OK Bubb, you're the man. Let's go with your figures for falls but lets make the price £160k to save me some maths.

We know the routine for the bull.

Buy today £160k at £907pm 4.7% fixed 10yrs. owe £117k after 10 yrs...

I think there's a slight swindle going on here in the original assumption that the bull goes for 10 years fixed (plenty of bulls seem to think rates are on the way down, but I suppose on the other hand if a bear bought now they would go for fixed...), and the degree you put rates up by for the bear. But I do find this a really interesting way of making the comparison, and there's one more thing that may be worth thinking about...

I did some very similar sums last year. For simplicity I assumed fixed rates throughout. Secondly, and importantly, I was at the point when I could only just get a 25 year mortgage, so I had to assume that waiting five years would reduce my term to 20 years.

So I was comparing 5 years rent then 20 years mortgage to a 25 year mortgage. I found that if prices remained stable I'd end up paying over £100 more a month on the 20 year mortgage, and £30K more overall by waiting. If prices dropped by 10% the two came out about the same. If prices dropped 20% I ended up saving about £100 a month on the mortgage, and saving about £30K overall.

For me the difference in term was a forced assumption. but really shouldn't anyone doing these sums make that assumption? Because otherwise the bear who waits is ignoring the fact that the bear who buys now will have paid off the mortgage five years earlier - it's not just a comparison between where you will be in 5 years or 10, but where you will end up at the end of the period as well.

Now the sums will come out different for everyone - I happen to be in an area where I wouldn't save much by renting over buying, so that shifts things towards buying for me. Some will save more than others (or earn more from investment, which is unlikely for me) and that also is a big factor for many I know.

But I do think that if you're looking at waiting five years you need make the comparison with a mortgage that is paid off at the same end point, ie a 20 year loan instead of a 25 year one. Otherwise the sums are being distorted.

Edited by Magpie

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ok, how about you rerun with some sensible numbers, £160 round my way would be a very cheap property. Lets rerun the numbers at say, £340k for a small house, compared to renting at £800 for a fairly grotty 2 bed flat.

How does it look for me then? :huh:

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ok, how about you rerun with some sensible numbers, £160 round my way would be a very cheap property. Lets rerun the numbers at say, £340k for a small house, compared to renting at £800 for a fairly grotty 2 bed flat.

How does it look for me then? :huh:

Well two things I'd say there - firstly the figures come out very differently depending on what you compare with what - if it is like for like (ie renting the small house) you will save less than if you are prepared to go for something a bit grottier while you wait. (not a great option for me as a parent, but perfectly good option for many) - then even smaller falls might be worth waiting for over the long term.

Secondly there's only a choice at all if the property you can consider buying is somewhere you could bear to live/own, and for many that choice doesn't exist at current prices.

Oh, and one more thing - the difference on total payments is also much bigger if you can genuinely save a lot by renting now because if you put that into a deposit you pay much less overall. So the comparison can definitely work in favour of waiting if you don't assume the interest rate goes up too heavily - it only didn't work out that way for me personally because of the narrow gap between rent and mortgage in the first place.

Edited by Magpie

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A Bear A Bull And Three Wishes

The one I heard was about a greedy bear and a cunning rabbit

The Bear and the Rabbit

Once upon a time there was a frog who lived in a lake all by himself.

He had been given special powers by a local witch. One day he finally

ventured out of the lake to get his first glimpse of the world outside.

The first thing he saw was a bear chasing a rabbit and so he called out

to them and asked them to stop.

Then he said to them: "I am a magical frog and since you are the first

two animals I have ever seen, I am going to grant you both three wishes.

You will each take turns using them and you have to use them now."

The bear (being greedy) went first. I would like for every bear in this

forest to be female except for me." A magical sound and it was done.

Then the rabbit. "I would like a helmet." This confused both the frog

and the bear, but after a magical sound there was a helmet.

It was the bear's turn again. "I would like for every bear in the

neighbouring forest to be female." A magical sound and it was done.

The rabbit went again. "I would like a motorcycle."

Both the frog and the bear wondered why the rabbit didn't just ask for

a lot of money with which he could buy himself a motorcycle, but after

a magical sound there was a motorcycle. The bear took his last wish. "I

would like for all the bears in the world to be female except for me."

A magical sound and it was done.

The rabbit then put on his helmet, started up the motorcycle, and said

"I wish the bear was gay" and took off like a bat out of hell.

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"Buy today £160k at £907pm 4.7% fixed 10yrs. owe £117k after 10 yrs."

What?

If it is a REPAYMENT mortgage, rather that interest only, the Bear's monthly savings will be FAR Higher.

My landlady is making a 3.2% grosss yield on the House I rent,

If you allow 5.5% for mortgage interest & assumed opportunity loss on the equity she has tied up, and 1.5% per annum for maintenance...

And assume a £200K property, to make maths easier

Monthly Pmts . -Bull- : -Bear- : Difference

Property Value £200K : £200K : Same property

Interest Only.. £ 917. : -------- : at 5.5%pa, interest only

Maintenance .. £ 250. : -------- : at 1.5%pa of value of property

....................... ==== : ====

Totals........... £ 1,167 : £ 533 : £634 monthly (vs.Rent, at 3.2%)

The Bear saves £634 per month: £7,608 annually, £38,000 over five years

and that is BEFORE any interest return.

If you can't do the maths properly, how are you going to make money??

Are you SPINNING, or do you really believe your (flawed?) assumptions?

I know it's not the done thing to question you, Dr Bubb, but where can you rent a 200k apartment for £533 a month? Let's be honest, 750 to 800 pcm would be more realistic. <_<

EDIT: spelling

Edited by Europa

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There was once an evil estate agent who was exposed to the property market in a dodgy area of the Uk where prices were falling. He was scared. Not only might he loose his job, he had BTL (Bankruptcy Through Loan) illness.

He went out into the forest - He had heard that men in africa believed they could cure their HIV through sleeping with virgins. He believed that if he could infect others with BTL illness, everyone would be in the same position and a miracle cure would be found.

Unfortunately, his BTL sickness was evident. His lack of basic tracking skills in the forest (posting personal email addresses to forums) meant that all the other forest animals dicovered he was that most despised of creatures, an estate monkey.

As one of the few things lower than an estate monkey is an estate monkey who pretends he is something else, none of the other animals in the forest believed anthing he said again.

Moral of this fairytale: Trying to drag others down with you generally doesn't work.

HAHHAHHAHA!

Brilliant.

So perish all evil estate agent scum...

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I know it's not the done thing to question you, Dr Bubb, but where can you rent a 200k apartment for £533 a month? Let's be honest, 750 to 800 pcm would be more realistic. <_<

Yes, I thought that loaded it way too far the other way - round my bit of North London, 2-bed flats can be bought for about £180K upwards, and you can't rent a similar one for much under £900 a month.

I know the differential is much wider in some areas out of London and maybe it is wider on properties at a higher price point (if Dr Bubb is renting a house that might explain his not knowing the rental value of lower priced properties) - but at this particular price point you'd certainly struggle to find like for like in London with that wide a gap. Personally I would save a bit by renting over mortgaging, and certainly a bit more on maintenance etc. But not £600 a month by a long chalk.

I note Dr Bubb has also nudged up the interest rates from the original example - and assumed no rental increase over the 5 years. I think there have been some exaggerations on both sides so far which are affecting the results of the equations.

I think this is an interesting way of looking at the comparison between buying now or waiting, but people would have to do their own sums based on the true figures in their particular situation.

Edited by Magpie

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"Buy today £160k at £907pm 4.7% fixed 10yrs. owe £117k after 10 yrs."

What?

If it is a REPAYMENT mortgage, rather that interest only, the Bear's monthly savings will be FAR Higher.

My landlady is making a 3.2% grosss yield on the House I rent,

If you allow 5.5% for mortgage interest & assumed opportunity loss on the equity she has tied up, and 1.5% per annum for maintenance...

And assume a £200K property, to make maths easier

Monthly Pmts . -Bull- : -Bear- : Difference

Property Value £200K : £200K : Same property

Interest Only.. £ 917. : -------- : at 5.5%pa, interest only

Maintenance .. £ 250. : -------- : at 1.5%pa of value of property

....................... ==== : ====

Totals........... £ 1,167 : £ 533 : £634 monthly (vs.Rent, at 3.2%)

The Bear saves £634 per month: £7,608 annually, £38,000 over five years

and that is BEFORE any interest return.

Note that: £38K is 19% of the value of the property.

So a 30% fall, plus the 19% savings means the Bear starts with a property

costing HALF as much. What the Bull does with his rates is his business.

But if he fails to fix for 5 years and rates rise, he is WORSE off in the deal.

If you can't do the maths properly, how are you going to make money??

Are you SPINNING, or do you really believe your (flawed?) assumptions?

I'm a little surprised at your reply here, Bubb.

First. A £160k property would cost around £700pm to rent. (in my area = fairly typical)

This would get you a very tidy 1970s 3 bed end terrace or a small semi and is typical of the UK.

The bull mortgage is £907pm repayment. The difference is £207pm.

207*12*5 = £12500 over 5yrs.

BUT. Rates shoot up and so do rents over the 5 yrs.

This eats into the figure above. Yes you get interest on this but it gets taxed too. I think £10k 'real' saving over 5 years is quite realistic. If you want to argue over an extra £2k then argue away.

You've 'suddenly' made the bull pay 5.5% today. (where my example showed 4.7% fixed 10yrs)

You've 'suddenly' made him pay an interest only mortgage. (to make the deal look worse for the bull)

In other words, you have gone for a very untypical case. Most mortgages are repayment.

Why have you denied the bull the fixed rate repayment deal?

Why am I spinning? Do you think my projection for rates is too high (for your 30% nominal falls)?

Well let's see.

House falls from £160k to £112k = 30% fall in 5 years (your data).

So we go from the situation today (where there has NOT been a HPC trigger yet and people are BUYING houses)

To one in 5 years where income in £££ has gone UP.

House Prices have gone DOWN. (by 30%, or £48k)

I simply did a little sum on this to see what IR gave the SAME monthly bill as today.

This is 8.5% interest rate at £112k loan (compared to 4.7% rate £160k loan) = £907pm

Don't forget the small fact of 5 years of wage inflation reduces the size of the monthly repayment wrt take home pay. So I am making this monthly mortgage bill more affordable after 5 years because of all the wage inflation. To allow for some crash overshoot.

So why am I being accused of bad maths or distorting the figures?

If you can't do the maths properly, how are you going to make money??

That's a little unfair IMO.

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I'm a little surprised at your reply here, Bubb....

WAP,

Do you think it would also be fairer to make the "bear"'s mortgage a 20 year repayment one instead of 25 years for the sake of a fairer comparison? Otherwise over a thirty year period the "bull" has five years at the end with a mortgage paid off, while the "bear" is still paying mortgage. Or are you already making this assumption?

It would have a mixed effect - might mean that the bear has a bit more equity after ten years, but would increase the monthly payments.

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WAP,

Do you think it would also be fairer to make the "bear"'s mortgage a 20 year repayment one instead of 25 years for the sake of a fairer comparison? Otherwise over a thirty year period the "bull" has five years at the end with a mortgage paid off, while the "bear" is still paying mortgage. Or are you already making this assumption?

It would have a mixed effect - might mean that the bear has a bit more equity after ten years, but would increase the monthly payments.

But I would get told off. 'everyone' goes for 25year loans.

In the later comparison for Dr Bubb I tried to make the comparison as two independent events that only get compared by an onlooker.

In my example the bull ends up paying for 5 more years as he wishes to keep down repayments.

I tried to focus on monthly affordability (how much comes out of your pocket every month)

Lots of people get blinkered by looking only at the size of the debt when judging things.

This only becomes significant if things go wrong... If bull loses his job in year 5 (and can't find another) then he has trouble!

Depends if you are a glass half full or glass half empty person when thinking about buying today. Most people will stay in employment during a recession. They will even get pay rises.

It is quite clear that the bull loses in this 30% HPC scenario. I say that in terms of affordability on a monthly basis he doesn't need to worry about it too much. (and he gets to move in to the new house on day 1)

The person who has the most worry is the bear who waits. Waiting 5 years for a huge HPC to save £90pm doesn't sound like fun to me.

We have a chancellor who wants to be PM in a few years and he will want to win the next election.

I really see the future as this:

Two more years of lowish rates and more govt borrowing and public spending to help prop up the economy.

Possibly an injection into the money supply ahead of the election (to have more money sloshing around between voters) This will lead to inflation and higher rates and higher taxes after the election (assuming GB wins)

I'm sure GB doen't see a HPC as a votewinner.

After the election will come the bill.

I'm afraid I don't see that there will be many 'winners' from this scenario. Which is partly why I posted this thread.

The ScaryVersion of the future outlined in the first post could really happen IMO. However I think it will be somewhere closer to the NotSoScary Version. Prhaps with slightly higher rates. In this one, less people get burnt during the correction which is what the politicians would want. (assuming they care about the voters)

But nobody really knows for sure... which is why we are here debating it.

Edited by Without_a_Paddle

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Maybe someone can run an example on a cheaper flat, and come up with figures that others here

will find more believable for £200K flats.

I think that's interesting - I was thinking last night that if you ran these sums for expensive property the possible gains might be better - firstly because a 10-20% price fall on more expensive property will be worth rather more. And secondly because you may be able to save much more on rent by renting a £600K property compared to paying a mortgage on it (or by renting something less grand) - so therefore the real gains of renting accrue much more quickly in that situation. Also the larger deposit or STR fund you have the more chance there is to make significant gains from investment.

I think the amount you save by waiting makes a big difference to how these sums come out. If someone were living with their parents or renting much more cheaply, then waiting even a few years could make a huge difference, regardless of the size of falls.

In my case I decided that waiting might not be the right choice, so I bought - for comparison here's some sums for my situation (or a slightly simplified version of it) - buying a 2-bed flat with a £165K mortgage, £20K deposit. I'm assuming constant interest (5.09%) for simplicity.

1) Buy now (25 year mortgage) - monthly payment £973, total payments £305K (plus maintenance but see adjustment below - all these sums ignore the maintenance from year 6 onwards as it will be the same in all cases)

Rent for five years £900 x 12 x 5 = £54,000

Renting saves £73 a month plus say £200 a month maintenance. Personally I believe I might be less motivated to save without the responsibility of a mortgage, but I'll leave that out of the sums and assume I save £273 a month into the deposit = £16380 (I'll round down to £16K).

I'm ignoring interest on the deposit, but also ignoring possible rent increases so that kind of balances.

2) Buy in five years (20 year mortgage) prices rise 10%

Mortgage £183.5K - £16K = £167.5K, Monthly payment £1110, total cost £276K + £54K + £16K = £346K

worse monthly payment, worse total repayment

3) Buy in five years (20 year mortgage) prices remain level (ie fall in real terms)

Mortgage £165K-£16K = £149K. Monthly payment £991, total cost £246K + £54K + £16K = £316K

worse monthly payment, worse total repayment

4) Buy in five years (20 year mortgage) prices fall 10%

Mortgage £146.5K - £16K = £130.5K Monthly payment £868, total cost £215K + £54K + £16K - total £285K -better monthly payment, better total

5) Buy in five years (20 year mortgage) prices fall 20%

Mortgage £128K - £16K = £112K Monthly £745, total cost £185K + £54K + £16K = £255K - better monthly payment, better total

When I first ran these sums I probably allowed a bit less for maintenance/saving, so on these figures the 10% fall does help a bit. But not by a huge amount, and the gap would close even if you allowed for a small interest rate rise - as little as a 1% increase in that 5 year period would add £80 a month to the monthly payments, bringing it close to the buy now figure (and would anyone here fancy betting against a 1% rise in IRs over 5 years?). A 1.5% rise would make the monthly payments worse.

So it really needs a 15-20% fall to make a big difference in my situation. And again the risk of IRs increasing narrows the gap, so it's an additional factor to consider.

How you view these figures also depends on other factors and your judgment of the risk over all and the risk in your area. I can easily believe that in some areas prices will fall by more than 20%. And I think plenty of people would see reason to wait if they ran these sums based on their own situation.

Personally I was quite concerned to see that if prices remained level I would end paying more (and significantly more if rates rise) and as I've mentioned elsewhere I was concerned that at a later date I might simply be unable to get a mortgage as credit may be harder to obtain and the affordability may deteriorate for me. So that all also affects my view of the possible gains and losses of waiting.

Also the 25 year / 20 year thing does make a difference - if you're younger than me or have a bigger deposit that needn't affect your monthly payments (although it seems to me to be the most honest way of comparing the costs of waiting or buying now in any case, because otherwise you ignore the extra mortgage costs that will paid beyond 25 years if you wait)

Edited by Magpie

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  • 301 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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