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How Do You Calculate How Overpriced A Particular Property Is?


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Hello all

I have decided to take the plunge and am in the process of buying a small house in London.

I know that most of you must think I'm mad buying at this time, but I am buying because I really like the property in question, and its also in a regeneration area (Elephant & Castle) so hope that I'm at least protected from any downturn in prices.

Currently prices are going crazy in this area and most properties are not hanging around, so I decided to go for it even though I will be stretching myself a bit.

I read somewhere on this forum that a good way to compare how much a price is overvalued is to compare the rental you could get versus the interest you would be paying on an interest only mortgage. If the mortgage (I am assuming an 85% normal BTL one) would be covered by the rental, doesnt this show that the price is fair? (I think in my case the mortgage paytments on this basis would just about equal any rental I could get).

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Hello all

I have decided to take the plunge and am in the process of buying a small house in London.

I know that most of you must think I'm mad buying at this time, but I am buying because I really like the property in question, and its also in a regeneration area (Elephant & Castle) so hope that I'm at least protected from any downturn in prices.

Currently prices are going crazy in this area and most properties are not hanging around, so I decided to go for it even though I will be stretching myself a bit.

I read somewhere on this forum that a good way to compare how much a price is overvalued is to compare the rental you could get versus the interest you would be paying on an interest only mortgage. If the mortgage (I am assuming an 85% normal BTL one) would be covered by the rental, doesnt this show that the price is fair? (I think in my case the mortgage paytments on this basis would just about equal any rental I could get).

A traditional house currently cost somewhere in the region of £90-100 per foot to build ( and thats at todays rip off rates). That should give you a good idea of the extent to which you are being ripped off. How much for that tiny patch of land in a shitty part of London - a mere £500k - worth every penny.

This is what really gets my goat - houses aren't marvels of technology - they dont cost a fortune to build and yet people willing put themselves in debt for life just to own one - utter utter madness.

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A traditional house currently cost somewhere in the region of £90-100 per foot to build ( and thats at todays rip off rates). That should give you a good idea of the extent to which you are being ripped off. How much for that tiny patch of land in a shitty part of London - a mere £500k - worth every penny.

This is what really gets my goat - houses aren't marvels of technology - they dont cost a fortune to build and yet people willing put themselves in debt for life just to own one - utter utter madness.

But doesn't that assume that you can hover the house in mid-air so you don't have to pay for the land?

... and besides the cost to build can vary too. I notice you said "traditional".

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Guest wrongmove

A traditional house currently cost somewhere in the region of £90-100 per foot to build

So a house in NW Scotland is "worth" the same as a house in Chelsea then?

In fact a house in NW Scotland would be "worth" more by your reckoning, becasue of the extra expense of transporting materials and finding labour.

It's the land, not the bricks - we can make as many bricks as we like.

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So a house in NW Scotland is "worth" the same as a house in Chelsea then?

In fact a house in NW Scotland would be "worth" more by your reckoning, becasue of the extra expense of transporting materials and finding labour.

It's the land, not the bricks - we can make as many bricks as we like.

So how does that equate to hi rise flats? Does air space cost money as well? I suppose it does in a way.

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Guest wrongmove

So how does that equate to hi rise flats? Does air space cost money as well? I suppose it does in a way.

:P

Usually, the ground floor is built on land. It is usually illegal to build an extra storey on someone elses property without their permission.

EASY...

compare :

+ The rental value per annum, with

+ The sales price x say 6-7%

(a sensible buyer in a sensible market would want rent- after maintenance costs-

to cover his loan interest at a notional 100% financing)

Maybe, but very few are going to rent at 6-7% when IRs are at 5%, finance is easy to obtain and capital values are rising.

Would you pay 6-7% rent, or would you buy if that were the case?

Edited by wrongmove
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Hello all

I have decided to take the plunge and am in the process of buying a small house in London.

I know that most of you must think I'm mad buying at this time, but I am buying because I really like the property in question, and its also in a regeneration area (Elephant & Castle) so hope that I'm at least protected from any downturn in prices.

Currently prices are going crazy in this area and most properties are not hanging around, so I decided to go for it even though I will be stretching myself a bit.

I hope you like the area , cos as you have written your overstreching yourself and IF the downturn comes your be in negative equity for many years , and probably stuck there .

Elephant and Castle is a p1sshole imo traffic gridlock , dangerous streets at night no place to bring up kids and as for re generation thats always a waste of time in areas like this , because after thev'e done it all up it's the same people still living there so it's only a matter of time before it needs regenerating again :o

Very crudely house prices imo are currently 30-40% over valued for the area , but i'm sure some bull will come along with a differant figure and put some bull spin on it .

Good luck if you go ahead with it as your gonna need some luck what with the price your paying and the area concernend .

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Cost is what you pay, value is what you get.

Houses only cost so much right now because of easy money and hard planning/land availability - The inherent value hasn’t changed all that much. If it makes you feel better by all means compare the cost of somewhere to live to rental value.

So a house in NW Scotland is "worth" the same as a house in Chelsea then?
As far as comparing NW Scotland to Chelsea, I would calculate it more based on how close you are to work and how much you earn. This of course depends on personal circumstances, i.e. some people in Chelsea can buy easily on 3xsalary for example, while a Telecommuter might see the house in Scotland as cheap.

If your paying high salary multiples you could be stretching yourself too thin. If lots of people in the area are buying on high salary multiples, expect trouble in the future. :ph34r:

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:P

Usually, the ground floor is built on land. It is usually illegal to build an extra storey on someone elses property without their permission.

I know that silly. If you have a block of say 40 flats then you are by your own calculation working the value of the land into all 40 adding minimal build costs it would make £200k+ flats massively overpriced. The value must come from something else and in this case that must be the marketing and the brand. It adds another dimension to housing which is "style" , much like buying a pair of Diesel Jeans for £100 or George jeans for £5 even though they are made in the same Malaysian sweatshop.

As we all know fashion changes like the wind and labels become dated. With this in mind could the value of flats decrease regardless of market forces by simply becoming untrendy?

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Investors are pushing this market so you should be thinking along the same lines as the experienced ones. The idiot newbies who currently believe they have discovered a money tree are willing to buy at almost any rental yield, suggesting that it makes sense to subsidise finance costs as long as capital values are rising. This is how people invest in equities, because companies have (potentially) unlimited markets. This is not how property investing traditionally works. Property is more akin to old fashioned quasi-monopolistic utility companies: there can be no market growth per se as your rental property will only house a limited number of tenants, and you can't move it to other areas to take advantage of new markets. Because of this rental yield should be the price determinant. People suggest formulae (6-7 times rent etc) but rather than take a rote approach, you'd be better off understanding what this means so you can make your own judgement.

Investement returns are generally expressed as an annual return on investment. Stick 100k in the bank at the moment and you'll have about 105k at year end b4 tax. You stuck in 100k (your investment) and you got 5k (your return). That's a 5/100 or 5% return on your "investment", risk free.

To compare property as an investment, simply add up a years rent for any property and divide by the cost of the property. That will give you the gross rental yield, or gross income. That is analogous to the return on investment (disregarding any capital loss or gain).

Whilst some may argue that the price of thge property is likely to go up, thus inreasing the total return on investment, remember that you will have to fork out of your own pocket:

capital cost of any one-off renovations or conversions

yearly maintenance (depreciation)

letting agent's fees

council tax

insurance

void cost (because of months you can't let the place for in a year)

coneyancing costs (important if you are flipping)

HIPs (important if flipping)

statutory survey fees (for houses of multiple occupation)

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Investors are pushing this market so you should be thinking along the same lines as the experienced ones. The idiot newbies who currently believe they have discovered a money tree are willing to buy at almost any rental yield, suggesting that it makes sense to subsidise finance costs as long as capital values are rising. This is how people invest in equities, because companies have (potentially) unlimited markets. This is not how property investing traditionally works. Property is more akin to old fashioned quasi-monopolistic utility companies: there can be no market growth per se as your rental property will only house a limited number of tenants, and you can't move it to other areas to take advantage of new markets. Because of this rental yield should be the price determinant. People suggest formulae (6-7 times rent etc) but rather than take a rote approach, you'd be better off understanding what this means so you can make your own judgement.

Investement returns are generally expressed as an annual return on investment. Stick 100k in the bank at the moment and you'll have about 105k at year end b4 tax. You stuck in 100k (your investment) and you got 5k (your return). That's a 5/100 or 5% return on your "investment", risk free.

To compare property as an investment, simply add up a years rent for any property and divide by the cost of the property. That will give you the gross rental yield, or gross income. That is analogous to the return on investment (disregarding any capital loss or gain).

Whilst some may argue that the price of thge property is likely to go up, thus inreasing the total return on investment, remember that you will have to fork out of your own pocket:

capital cost of any one-off renovations or conversions

yearly maintenance (depreciation)

letting agent's fees

council tax

insurance

void cost (because of months you can't let the place for in a year)

coneyancing costs (important if you are flipping)

HIPs (important if flipping)

statutory survey fees (for houses of multiple occupation)

I think the poor bugger just likes the house, he's not renting it out, strange as this may seem he wants to live in it !

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I think the poor bugger just likes the house, he's not renting it out, strange as this may seem he wants to live in it !

Yep , i think sledgehead got the wrong end of the stick or he's responded to the wrong thread :rolleyes: .

Smilie never came back to his thread maybe he's having second thoughs of overstreching himself for his dream house .

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Hello

Thanks for all your reponses....its been interesting reading what you had to say.

I merely wanted to compare rental value to purchase price to get some indictation as to how much I may be overpaying. I think that the gross yield only comes in at about 4% which isnt very high I know. But maybe comparing rental isnt always the best comparison you can make. What I am buying is a quality 2 bed period property. I know for the same money I could buy an ex council 4 bed - this would give a much better yield, but that doesnt mean that the period property has further to fall does it?

Or my question in another way - isnt it always better to buy quality in the best possible location (nowithstanding the fact that this is elephant & castle!)

I am starting to get stressed out by it all. I think I will pay for the valuation and a full structural survey and see what that comes back with....if this says that it is overvalued, I may try and negogiate a lower price - although I know that is a forlorn hope....I was one of 3 buyers who offered the full asking price within a week of it going on the market - I was the stronger of the 3 so I got it.

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Guest X-QUORK

IMO house prices were about 'right' in 2001. Add on 2-3% for every year of inflation since then and voila, you have a reasonable price for the property.

Of course, it's not always possible to get a 2001 price so the theory has it's faults I must admit!

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IMO house prices were about 'right' in 2001. Add on 2-3% for every year of inflation since then and voila, you have a reasonable price for the property.

Of course, it's not always possible to get a 2001 price so the theory has it's faults I must admit!

Well actually I have some data from nethouseprices.com

An identical house 2 doors along sold for 25% less than the price I am paying now about 5 years ago (or in other words, the price of that property 2 doors along has increased by 33% within the same time frame if its now the same value of the price I am now paying).

Which means that I am overpaying by about 20% then!

Only thing in my favour is that the house I'm buying has been refurbished to a reasonable standard which the other house may not have been.

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Hello

Thanks for all your reponses....its been interesting reading what you had to say.

I am starting to get stressed out by it all. I think I will pay for the valuation and a full structural survey and see what that comes back with....if this says that it is overvalued, I may try and negogiate a lower price - although I know that is a forlorn hope....I was one of 3 buyers who offered the full asking price within a week of it going on the market - I was the stronger of the 3 so I got it.

So your gonna pay for the valuation and survey , sounds like your desperatly looking for reassurance and confirmation that your doing the right thing as your heart is probably ruling your head , so your stronger of the 3 buyers once you've paid for the survey and valuation you would of weakend your posistion and your sellers will know this , they will be in more control than yourself with you having paid out and 2 other parties ALLEGDLY waiting in the wings .

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I think it is important to consider gearing. A 90% geared property moves up 10% in value and your equity jumps by 100%. Say you buy for £200k with £20k equity and 90% loan. The property rises 10% and your equity jumps from £20k to £40K. BUT if your property falls by 20% to £160k you have lost all your equity and will have to stand in front of the debt recovery unit to expalin how you are going to find the £20K shortfall!. What this means is that as you gear up your investment the rate of return needs to rise to reflect the risk that gearing imposes. Not to simply cover the interest.

For all the joy and pain that property ownership gives I would think a rate of return of say 7.5% would be appropriate if the investment is not to highly geared. Of this house price inflation would probably grow by the long term estimate in the growth of GDP say 2.5%. Thereofre the rental income needs to deliver 5% AFTER maintenance expenses but ignoring financing costs.

to invest in flats in SE London you would expect on a two bedroom flat to get £10,000 per annum in rent and after expenses be left with £8,000. Assuming 5% is the target then a price of circa £160k is reasonable. Above that is in my simplistic view difficult to justify. If like many BTL investors who are borrowing at 80% then the return as noted above needs to rise and therefore the price they should consider will have to be lower.

My gut feeling is that flat prices in London are probably 20% over priced.

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You have paid exactly market price for it.

A property is only worth what somebody is prepared to pay for it.

QED :rolleyes:

Cute, you are so smart. <rolleyes patronisingly>

Actually you can do better than that, by going to only £1 more than the next best offer: winners curse means you will always leave something on the table - how much have you left with your highest bid? Is this winner's premium justified in your opinion?

The home buying decision process is a blend of qualitative and quantitative factors. Only you know the value of the former and you should aim to pay the bare minimum to satisfy these factors (they are usually difficult to sell on later). The seller may have reasons to prefer you as a buyer over the others - if so, make sure you get value for this.

Quantitative: just yield. (Don't forget your equity also needs a return, usually higher than the debt.)

You should also realise that at least one person in the transaction believes the property is not worth even £1 more than your bid. That tells you something as well.

Would more time make the decision easier? If so why? Buy in haste, repent at leisure.

This is my 1,000th post. I hope someone appreciates it.

Rain's stopped, time for an afternoon jog.

B)

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Guest wrongmove

This is my 1,000th post. I hope someone appreciates it.

Congratulations veteran ! :)

I'm certainly glad you still post from time to time. Here's to the next 1000. Hopefully by then, HPs will have actually dropped a bit!

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  • 441 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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