Economist House Price Overvalue 60%

[Tricky]

Sorry dont know how th attach thread , but

www.newsnow.co.uk/newsfeed/?name=Housing+Market

"According to calculations by The Economist ( with help pf Julian Callow of Barclays Capital), House prices are at record levels in relation to rents ( ie , yields are at a record lows) in America , Britain ,Australia, New Zealand, France Spain, the Netherlands Ireland and Belgium. America ,s ratio of prices to rents is 32% above its average level durring 1975- 2000. By the same guage , property in OVERVALUED 60% OR MORE in Britain , Australia and Spain , and by 46% in France.

Any thoughts ????

Surely this must get picked up by popular press???

[doogie]

Here's the link.

[Tricky]

Thanks doogie,,

[Guest consa]

It seems to be about 3 months out of date (I mean behind)

[Gtr London FTB]

Fantastic Article!

Take a two-bedroom flat in London, which you could buy for £450,000 ($865,000). To rent the same flat would currently cost £1,700 a month. In addition to a 6% mortgage rate, a buyer would face annual maintenance and insurance costs of, say, 1.25%. In the first year, the rent of £20,400 compares with total mortgage interest and maintenance payments of £33,000, a saving of £12,600. Interest payments would be less if a large deposit were paid, but in that case the income lost from not investing that money elsewhere has to be taken into account.

Assume that rents rise by 3% a year, in line with wages, while house prices from now on rise in line with inflation of 2%. At the end of seven years (the average time before the typical homeowner moves), you would be almost £35,000 better off renting, taking account of the capital appreciation and buying and selling costs. In other words, even without a fall in real house prices—which many believe to be likely—buying a house in Britain today seems a poor investment.

[schadenfreude]

It's slow, but the HPC heresy is becoming the orthodoxy

[Biriani]

It's slow, but the HPC heresy is becoming the orthodoxy

<{POST_SNAPBACK}>

The economist has been bearish on property for quite a while now - It just doesn't bang on about it every week otherwise it would lose credibility in the short run.

[Tricky]

Gtr hadnt picked up on that quote "buying in Britain today seems a poor investment"

No sh*t

[Dicky]

It seems to be about 3 months out of date (I mean behind)

<{POST_SNAPBACK}>

The way the market's going that would mean their now 55% over valued.

[JustYield]

Gtr hadnt picked up on that quote "buying in Britain today seems a poor investment"

No sh*t 

<{POST_SNAPBACK}>

I'd love to see the working drafts for that article - it's been caveated and toned down to the point where it can conclude, "Yes prices are 60% above trend on a yield basis and this seems a poor investment."

An earlier draft may have concluded, "Run away! Run away!"

I know they have to be sober and able to backtrack if necessary, but when will they take the next step and analyse what a major correction means for the UK? We could help them.

[Guest consa]

The way the market's going that would mean their now 55% over valued.

<{POST_SNAPBACK}>

55% , 60% whats the difference, in reality it won't matter, a crash on this scale would be catastrophic !! It's a real possibility now

[Tricky]

It certainly seems that The Economist is also trying to provoke a debate with the title

Still want to buy ?

Unfortunately unless the rest of the press pick up on this I dont know how widely their viewpoint will be heard?

Does anyone know if they have a forum that we can look at??

[JustYield]

Hang on there's more:

To buy or not to buy? That is the question

Mar 3rd 2005

From The Economist print edition

Today it is often much cheaper to rent than to buy a house

“IT IS always better to buy a house; paying rent is like pouring money down the drain.†For years, such advice has encouraged people to borrow heavily to get on the property ladder as soon as possible. But is it still sound advice? House prices are currently at record levels in relation to rents in many parts of the world and it now often makes more financial sense—especially for first-time buyers—to rent instead.

Homebuyers tend to underestimate their costs. Once maintenance costs, insurance and property taxes are added to mortgage payments, total annual outgoings now easily exceed the cost of renting an equivalent property, even after taking account of tax breaks. Ah, but capital gains will more than make up for that, it is popularly argued. Over the past seven years, average house prices in America have risen by 65%, those in Britain, Spain, Australia and Ireland have more than doubled. But it is unrealistic to expect such gains to continue. Making the (optimistic) assumption that house prices instead rise in line with inflation, and including buying and selling costs, then over a period of seven years—the average time American owners stay in one house—our calculations show that you would generally be better off renting (see article).

Be warned, if you make such a bold claim at a dinner party, you will immediately be set upon. Paying rent is throwing money away, it will be argued. Much better to spend the money on a mortgage, and by so doing build up equity. The snag is that the typical first-time buyer keeps a house for less than five years, and during that time most mortgage payments go on interest, not on repaying the loan. And if prices fall, it could wipe out your equity. In any case, a renter can accumulate wealth by putting the money saved each year from the lower cost of renting into shares. These have, historically, yielded a higher return than housing. Putting all your money into a house also breaks the basic rule of prudent investing: diversify. And yes, it is true that a mortgage leverages the gains on your initial deposit on a house, but it also amplifies your losses if house prices fall.

“I want to have a place to call home,†is a popular retort. Renting provides less long-term security and you cannot paint all the walls orange if you want to. Home ownership is an excellent personal goal, but it may not always make financial sense. The pride of “owning†your own home may quickly fade if you are saddled with a mortgage that costs much more than renting. Also, renting does have some advantages. Renters find it easier to move for job or family reasons.

“If I don't buy now, I'll never get on the property ladder†is a common cry from first-time buyers. If house prices continue to outpace wages, that is true. But it now looks unlikely. When prices get out of line with what first-timers can afford, as they are today, they always eventually fall in real terms. The myth that buying is always better than renting grew out of the high inflation era of the 1970s and 1980s. First-time buyers then always ended up better off than renters, because inflation eroded the real value of mortgages even while it pushed up rents. Mortgage-interest tax relief was also worth more when inflation, and hence nominal interest rates, was high. With inflation now tamed, home ownership is far less attractive.

The divergence between rents and house prices is, of course, evidence of a housing bubble. Someday prices will fall relative to rents and wages. After they do, it will make sense to buy a home. Until they do, the smart money is on renting.

[Tricky]

Hang on there's more:

To buy or not to buy? That is the question

Mar 3rd 2005

. .

The divergence between rents and house prices is, of course, evidence of a housing bubble. Someday prices will fall relative to rents and wages. After they do, it will make sense to buy a home. Until they do, the smart money is on renting.

<{POST_SNAPBACK}>

And that just about sums it up, in black and white,,and if aqnyone should know it surely should be them?

[Fencesitter]

I hope landlords don't put rents up 60% to bring them in line with house prices.

[Guest consa]

I hope landlords don't put rents up 60% to bring them in line with house prices.

<{POST_SNAPBACK}>

Ever heard of VOIDS!!

[Starcrossed]

The above article is up there with the best written posts on this board - and reaching x100 more people.

Great for morale and I will show it to Mrs Starcrossed when she gets jittery about renting rather than buying (which happens every few weeks or so)

[JustYield]

The above article is up there with the best written posts on this board - and reaching x100 more people.

Great for morale and I will show it to Mrs Starcrossed when she gets jittery about renting rather than buying (which happens every few weeks or so)

<{POST_SNAPBACK}>

Well written pieces like this should help greatly in debates with the HPC-deniers.

[paranoidmick]

Mar 3rd 2005

From The Economist print edition

Today it is often much cheaper to rent than to buy a house

The myth that buying is always better than renting grew out of the high inflation era of the 1970s and 1980s.

With inflation now tamed, home ownership is far less attractive.

The divergence between rents and house prices is, of course, evidence of a housing bubble.

Someday prices will fall relative to rents and wages.

After they do, it will make sense to buy a home.

Until they do, the smart money is on renting.

Top post, i have taken the liberty of extracting the bits that should be hitting everyone right between the eyes and should be front page national media, local media and main TV news items.

The effect that this HPC (the one we are in, not the one some think we are still waiting for) is going to have on the economy as a whole doesnt 'bear' thinking about (perhaps that's why the 'bulls' cant bring themselves to contemplate it).

I have'nt read the Ecxonomiost for years, but am off to pick up a copy. subscription

[NJP]

Can we get permission to put a permanent copy of "To buy or not to buy? That is the question" on the website, or at least pin this thread?

It's very compelling evidence, that even without a crash, people who rent will probably have more savings in five years' time than a FTB will have equity.

[NJP]

Out of interest, I've done the sums myself, based on the flat I'm currently renting. I wondered if anyone has any comments on the assumptions I've made?

Property currently valued at £100,000

Buying:

Assuming average mortgage rate of 7% over the next five years, 100% 25 year repayment mortgage, house price inflation of 3% pa.

Monthly repayments of £715.00 plus insurance of £50 per month.

After five years:

Total spent: £45,900, Loan balance: £91,100, Value of Property: £115,900, Equity owned: £21,800

Renting:

Assuming rent is average of £450 per month and savings interest of 5% per annum

Monthly payments: £765.00, of which rent is £450 per month, savings £315 per month

After five years:

Total spent: £45,900, Savings owned: £21,400

No difference between the two, based on these figures, so IMHO it's not worth risking negative equity for no additional return at the moment.

[London-loser]

I hope landlords don't put rents up 60% to bring them in line with house prices.

<{POST_SNAPBACK}>

My landlord TRIED to increase my rent by 50% about two years ago. I suggested 0% was a better figure... or I'd find myself a new BTLer to rent from. We agreed 0% was a far better figure than 50%... and my landlord now wants me to agree to 0% again for the next 12 months (I'm a nice guy so I think I'll agree to it).

I seriously doubt BTLs have anything like the pricing power they might believe they do.

The bit I like the most from that article was this:

"In Britain, where tax relief on interest payments has been scrapped, real after-tax [interest] rates are close to their average over the past 30 years, and so do not justify a higher price/rent ratio."

It sort of shoots down KOTC's view that real interest rates in the UK are currently spectacularly low and justify the high prices.

[eek]

"In Britain, where tax relief on interest payments has been scrapped, real after-tax [interest] rates are close to their average over the past 30 years, and so do not justify a higher price/rent ratio."

Worse than that. If interests rates are 10% the real size of the loan was decreasing at 5% a year making it year on year more affordable as a percentage of income,

Now with inflation supposedly at 2% that loan is decreasing (in real size) far slower so that big loan is remaining big far, far longer.

[The Masked Tulip]

Yet another article which confirms to me that the majority of the bubble has been driven by BTLs.

In my local property paper the letting section seems to take up more and more pages every week. Most are houses that, 3 or 4 years ago, would have been family homes and never rentals. I have no doubt that house prices are going to crash but, hopefully, it will be only a core minority of greedy BTL landlords who suffer.

Roll on the 60% crash.!

[JustYield]

Out of interest, I've done the sums myself, based on the flat I'm currently renting. I wondered if anyone has any comments on the assumptions I've made?

<{POST_SNAPBACK}>

I only quickly scanned your post, so apologies if it is included, but for a true comparison I think you have to include the entry and exit costs (stamp duty, solicitors, estate agent). I think that swings it considerably even when you put in some HPI.