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dog

Buying A House?

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If you are about to buy a house it might be worth having a look at this article. If you have recently bought a property, then please don't read it.

Most bankers use a multiple of 3 as a "safe" price to income ratio. We are well beyond the danger zone, into the twilight zone. Another rule of thumb is that a fair house price is 125 times the monthly rent. If a house rents for $2000 per month, then a fair price is $250,000.

On this income ratio, UK houses are around 300% overvalued at the moment. On the renting multiple, the house I rent (but soon to leave) is 260% over valued. Because of lower rent, my next house will be over 300% overvalued.

"Rent can go up, but a 30-year fixed mortgage payment cannot."

TRUE, but irrelevant. House owners lose even with a fixed mortgage, because the price of a house falls as interest rates go up. Most people want to sell within 7 years of moving in, and many have to sell because of job loss, illness, or divorce. No one can afford what the owner paid for it, so the owner has to take a large loss. Renting it out will not come close to covering the mortgage. Bay Area rents have fallen 23% in the last 4 years.

"You have to live somewhere."

TRUE, but that doesn't mean you should waste your life savings on a bad investment. You can live in the same kind of house by renting during the crash. A renter could save hundreds of thousands of dollars, not only by paying less every month, but by avoiding the devastating loss of his downpayment.

"It's not a house, it's a home."

FALSE. It's a house. Wherever one lives is home, be it apartment, condo, or house. Calling a house a "home" is a manipulation of your emotions for profit.

"If you don't buy now, you'll never get another chance."

FALSE. This argument was also popular in 1989 in Los Angeles, just before a huge crash. There are always sellers and there are always buyers. Prices are always corrected when they get beyond what buyers can pay. In fact, they're being corrected right now.

Edited by dog

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I agree with a lot of the views in that article, but I'm still struggling to get my head around why the sentiment appears to be moving in the USA but not here in Blighty?

I'm fairly used to seeing trends in the US come over here very shortly (Dow overnight position always triggers the upwards or downwards start to the UK and European equity markets), but I read numerous articles about housing in the UK and US and it seems we are far removed from the issues that are occurring on the other side of the pond.

Is there any logical reason why our housing market isn't encountering the same woes as the US?

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I agree with a lot of the views in that article, but I'm still struggling to get my head around why the sentiment appears to be moving in the USA but not here in Blighty?

I'm fairly used to seeing trends in the US come over here very shortly (Dow overnight position always triggers the upwards or downwards start to the UK and European equity markets), but I read numerous articles about housing in the UK and US and it seems we are far removed from the issues that are occurring on the other side of the pond.

Is there any logical reason why our housing market isn't encountering the same woes as the US?

I agree with you. My suspicion is that this reflects the seriousness of our position.

Gordon Brown came to office saying he would not permit another house price boom. Despite this, he has won two elections on house prices. Not surprisingly, the UK property market has wildly overshot and the UK economy has become unhealthily dependant on buying and selling property. Things here have gone too far and Gordon Brown does not dare ***** the bubble.

In the US, the Fed have resolved to end the speculation while they still can. If the BOE had raised interest rates in a similar fashion, we would now be facing unemployment levels of biblical proportions.

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"Another rule of thumb is that a fair house price is 125 times the monthly rent."

I don't know whether you have thought about that statement. Why 125? Why not 88, or 122, or 135? Please enlighten me.

EDIT: I say 150 (assuming government turns against BTLers and we are not entering a new paradigm).

Edited by Father Fred

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"Another rule of thumb is that a fair house price is 125 times the monthly rent."

I don't know whether you have thought about that statement. Why 125? Why not 88, or 122, or 135? Please enlighten me.

EDIT: I say 150 (assuming government turns against BTLers and we are not entering a new paradigm).

I would happily pay 150 times the monthly rent for the place i am in - in fact I would pay 200 times the rent - that would make it £150k - it's current estimated 'value' is £325k

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125 times the monthly rent works out at rent is just under 10% a year - which is a good yield. In the UK, rents can be below 5%, and yield (once repairs, voids etc are factored in) around 3.5%. In the UK, the whole BTL market is premised on capital gain, not real returns.

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  • 302 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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