Stagnation

[London-loser]

I've heard several people recently (here, in my office etc) who say they'll "take stagnation" as a reasonable outcome for the property market for the next X years while the fundamentals re-establish themselves (in terms of house prices to income for the old-fashioned FTB market or in terms of rental yields for BTLs).

So, I played around a bit with the numbers on my flat - based on the current ASKING PRICE of a more-or-less identical place currently on the market here in North London. Although the numbers are obviously different this might strike a chord with a few people.

My rent currently equates to a 5% rental yield based on the asking price (this asking price is £20k lower today than it was last summer - roughly 9%). Now, based on a 5.5% fixed 25Y repayment mortgage with a 5% deposit, and adding in ground rent and service charges for the flat I am saving about £5.5k by renting rather than buying at present.

Assuming my rent rises at 4.5% each year (in line with the income growth level the BOE says is consistent with its 2% CPI target and at, or slightly above, recent rates) then it will take almost ten years of stagnant house prices for the rental yield to rise to 7.5%... I'm no BTL expert but this sounds like a reasonable minimum yield based on a 5.5% cost of borrowing. I've also assumed the ground rent/service costs rise in line with incomes too (at 4.5% annually).

Then I calculated how much the rent would cost me over ten years and how much the mortgage would cost (roughly £150k and £187k respectively).

With a 5% deposit and a repayment mortgage the equity grows to about £75k over the ten year period (starting at 5% of the property value and ending at about 35%). Compared against this I calculated what the deposit plus annual savings would be worth after ten years, assuming I managed a 3% NET return (for example on the ING 5% account - without even considering doing anything more interesting with the money), which was £60k.

Overall, to buy the place costs me £187k - £75 = £112k over the next ten years. To rent costs me £150k - £60k = £90k. So, net net, I'm roughly £20k better off renting through ten years of stagnation than I am by buying (obviously this ignores any inconvenience of moving etc but it also ignores the risk of the roof needing re-doing or whatever for a homeowner).

Obviously if house prices race away again things will start to look painful for me.

And you could argue with the assumptions (you could apply a decent discount to the current asking price, apply a lower mortgage rate than 5.5% or faster rental growth than 4.5% etc), although I've tried to err on the side of the homeowner rather than the renter.

I think this gives a pretty good picture of why people who hope for stagnation are perhaps missing a point or two (for example that stagnation means the equity in the property effectively earns a 0% return each year while the deposit and savings make 3%).

[laurejon]

Some very good points.

But there is one overiding factor.

There is nothing like having the independence of owning your own home.

Something no stats or figures can detail, the feel good factor of home ownership and Britains love affair with Bricks and Mortar is something no amount of money can replace.

[London-loser]

Some very good points.

But there is one overiding factor.

There is nothing like having the independence of owning your own home.

Something no stats or figures can detail, the feel good factor of home ownership and Britains love affair with Bricks and Mortar is something no amount of money can replace.

<{POST_SNAPBACK}>

Laurejon,

This is an entirely fair point.

I tried to look on a purely unemotional level but obviously property buying is rarely unemotional.

The question then is just whether it is worth the extra £2k a year or so to own rather than rent. To some people it will be, to others it will not.

It's hard to say how much the factor is "worth" but I think much of the love affair is also to do with the place "making money" rather than losing it.

[Bluelady]

Laurejon,

This is an entirely fair point.

I tried to look on a purely unemotional level but obviously property buying is rarely unemotional.

The question then is just whether it is worth the extra £2k a year or so to own rather than rent. To some people it will be, to others it will not.

It's hard to say how much the factor is "worth" but I think much of the love affair is also to do with the place "making money" rather than losing it.

<{POST_SNAPBACK}>

Much of the love affair may currently be to do with the place making money. I think we're heading back to the love affair being about having a home of your own which nobody can make you leave as long as you keep up the payments on the mortgage, which you can decorate as tastelessly as you want (goodbye magnolia) and where it's worthwhile cultivating a garden because you know you'll be there in five years' time to see the results of your labour. That's priceless and certainly worth the extra £2k a year.

[laurejon]

In a falling market there is of course a cost V rental.

However I think most people know full well that house prices will peg inflation over the long term. It is impossible for them to outstrip inflation else we would have a position whereby nobody at all could buy a property.

I have done the figures on my property V renting and to be honest renting would indeed be cheaper in the short term.

However the prohibitative costs of sales fees, legal fees, then the purchase fees and Stamp Duty make it a less than attractive affair.

If I want to make more money, then I think I would invest in some further training and change my job. For me my house is not up for grabs and given the news this weekend that the Labour Party now want a further cut in house prices (Stamp Duty is not enough for them) I will sit tight and just try to enjoy what I have.

There is a great argument for maintaining ones quality of life these days, over and above money. We all put far too much emphasis on our work lives and completely forget that we have a home to go to.

[London-loser]

Interesting,

Perhaps we should ask the question of HPC users: "How much are YOU willing to pay per year over the top, relative to the cost of renting, for the privilege of ownership?"

For me, I have to say the amount is pretty low. This may be because I have no kids, catchment areas etc to worry about but at present I prefer to have my landlord effectively pay me to rent from him.

[London-loser]

In a falling market there is of course a cost V rental.

However I think most people know full well that house prices will peg inflation over the long term. It is impossible for them to outstrip inflation else we would have a position whereby nobody at all could buy a property.

I have done the figures on my property V renting and to be honest renting would indeed be cheaper in the short term.

However the prohibitative costs of sales fees, legal fees, then the purchase fees and Stamp Duty make it a less than attractive affair.

If I want to make more money, then I think I would invest in some further training and change my job. For me my house is not up for grabs and given the news this weekend that the Labour Party now want a further cut in house prices (Stamp Duty is not enough for them) I will sit tight and just try to enjoy what I have.

There is a great argument for maintaining ones quality of life these days, over and above money. We all put far too much emphasis on our work lives and completely forget that we have a home to go to.

<{POST_SNAPBACK}>

Hmm, but I'm talking about a STAGNANT market. If we want to factor in a FALLING market (as I foresee) then the numbers quickly become MUCH worse (as a result of gearing etc).

Property generally does outstrip inflation - by about the real growth of the economy (in recent years things have gone nuts but this is the long-term picture).

I agree about the tax implications etc - this complicates things quite a lot - which is why I focused on a pure FTB decision TODAY (I'm selfish, I looked at my own situation, it will be different for everyone but I wanted to put this general idea into people's heads).

I also agree about quality of life etc... which is why I've chosen not to saddle myself with a fat mortgage unnecessarily.

[Ignorant Steve]

London Loser - take your original figures and extrapolate them out to 25 years. Is it still worth it to rent in a stagnant market? I'd guess not.

[laurejon]

I have many friends who have STR.

Instead of a big mortgage, they now have big 4WD cars and petrol expenses to match, nice clothes and a nice weekend breaks.

Unless you are very prudent, it is very easy to spend the balance saved on those little extras. I had a couple of Beers Saturday night, 4 Buds 2 G&T' for the missus and a chicken kebab shared, Taxi home set me back 65 quid now thats not the high life but everything here costs us a packet.

[FenceDancer]

Britains love affair with Bricks and Mortar is something no amount of money can replace.

<{POST_SNAPBACK}>

I would not say no amount of money but it is a strong motivator. I would say I would be prepared to pay up to about 25% more in order to own (or buy slowly off a mortgage company) then to rent.

It also depends on the rental experience. I have rented from two landlords since selling up about 15 months ago and despite both being very good landlords there are still issues of freedom and responsibility to them that makes 'ownership' more appealing.

It would be interesting to quantify the % and it is a personal thing but my factors are probably something like this:-

1. Security of Tenure +2%

(No need to renew rent agreements, only you can kick yourself out provided you pay the mortgage etc)

2. Ability to re-engineer environment +6%

(Decorate, fix things etc)

3. Privacy +3%

(You alone have access to your home and can control what goes on inside it)

4. Lack of Responsibility to third party +10%

(Don’t have to report to anybody if something breaks, can take up Cat breeding, nuclear physics, install satellite TV or whatever etc)

5. Social kudos +4%

(Despite whatever you say being a home owner rather then rental is more highly regarded in society and not just by those who lend you money).

Odd though it may be but Personal Freedom is to me the main factor in owning rather then renting, others may think you have more freedom renting but having done both, recently you have more freedom within the confines of a ‘average normal’ life owning then you do renting.

[London-loser]

London Loser - take your original figures and extrapolate them out to 25 years. Is it still worth it to rent in a stagnant market? I'd guess not.

<{POST_SNAPBACK}>

Steve,

You are of course right.

Anyone who believes the UK housing market will stagnate for 25 years (but rents will rise every year by 4.5% etc) should not rent once the yield gets back up to 7.5-8% or so (after 10 or 11 years).

However, I'm not sure ANYONE is suggesting this. I believe stagnation theorists see the market starting to rise again once we corrected the current overvaluation (in a less painful way than might actually happen).

[London-loser]

I have many friends who have STR.

Instead of a big mortgage, they now have big 4WD cars and petrol expenses to match, nice clothes and a nice weekend breaks.

Unless you are very prudent, it is very easy to spend the balance saved on those little extras. I had a couple of Beers Saturday night, 4 Buds 2 G&T' for the missus and a chicken kebab shared, Taxi home set me back 65 quid now thats not the high life but everything here costs us a packet.

<{POST_SNAPBACK}>

This is true. But many people are profligate and I offer no defence for them, they deserve what they get (and I'm sure they will spend their old age moaning about how their poverty is all someone else's fault).

[London-loser]

Bluelady/FenceDancer,

These are all entirely fair points.

I wonder (and offer no answer) how people's opinions would change if prices fell for 10% a year each year for the next five years. I wonder how much of a premium people would put on these apparent freedoms/benefits provided by home ownership when negative equity (and potentially very large NE) becomes a painful reality.

[MarkG]

There is nothing like having the independence of owning your own home.

Indeed not. However, only a tiny minority of people in the UK actually _own_ their own homes: most are either paying rent to landlords, or rent to their mortgage lenders, either of whom can kick them out. And even those who do actually 'own' their houses still have to pay rent to the government (aka 'council tax').

[laurejon]

I have a mortgage.

But in 15 years that will no longer be the case. What I will have is an asset worth at least 500K.

Now I cant see that being the case if I were to be renting.

[red]

Hmm, but I'm talking about a STAGNANT market. If we want to factor in a FALLING market (as I foresee) then the numbers quickly become MUCH worse (as a result of gearing etc).

...

<{POST_SNAPBACK}>

But will we ever see a stagnant market? There hasn't been one to date, has there? It's peaks & troughs. I like the wee graph posted on here a while ago... (attached)

The @rse has fallen out of the market; it can't stagnate. It will fall until the FTBs and possibly investors return and then the whole crazy cycle starts again.

[Mr Tickle]

Instead of a big mortgage, they now have big 4WD cars and petrol expenses to match, nice clothes and a nice weekend breaks.

Not me!!!

. I had a couple of Beers Saturday night, 4 Buds 2 G&T' for the missus and a chicken kebab shared, Taxi home set me back 65 quid now thats not the high life but everything here costs us a packet.

<{POST_SNAPBACK}>

You've been robbed.

[Bluelady]

Indeed not. However, only a tiny minority of people in the UK actually _own_ their own homes: most are either paying rent to landlords, or rent to their mortgage lenders, either of whom can kick them out. And even those who do actually 'own' their houses still have to pay rent to the government (aka 'council tax').

<{POST_SNAPBACK}>

Your mortgage lender can only kick you out if you don't pay your mortgage, whereas a landlord can refuse to sign a new tenancy agreement with you on a whim - hardly the same, is it?

So if council tax is rent to the government, presumably gas, electricity and water payments are rent to the utilities, are they? And why the 'own'? If you've paid for it lock, stock and barrel, there's no question about who owns it.

[laurejon]

Owning a property provides a person with both security and peace of mind, and a tidy lump at the end of it Tax Free to spend as you wish.

It is because of these benefits that housing has become the most sought after asset a person can buy when they are old enough and wise enough to earn a good living wage.

If houses were not a good investment, then FTB'ers would not complain they cannot buy one. They would be happy to continue losing money to the rental market as it would be of no odds to them.

I think it is very easy to see the logic in renting.........Renting = less responsibility and less outlay.

However Renting also means limited opportunities for the future. Most startup businesses are lent money on the security of their house.

I dont see banks flocking to lend to startup businesses with the money secured on the rent book.

[London-loser]

Owning a property provides a person with both security and peace of mind, and a tidy lump at the end of it Tax Free to spend as you wish.

It is because of these benefits that housing has become the most sought after asset a person can buy when they are old enough and wise enough to earn a good living wage.

If houses were not a good investment, then FTB'ers would not complain they cannot buy one. They would be happy to continue losing money to the rental market as it would be of no odds to them.

I think it is very easy to see the logic in renting.........Renting = less responsibility and less outlay.

However Renting also means limited opportunities for the future. Most startup businesses are lent money on the security of their house.

I dont see banks flocking to lend to startup businesses with the money secured on the rent book.

<{POST_SNAPBACK}>

Generally speaking this is true.

However, I would contend that in the current state of the housing market much of this value is an illusion (especially for recent buyers).

For example, one of my work colleagues has just bought his first property, with a friend, and is happy to "take stagnation" for the next ten years.

I'd say he is happy to do this because, at the back of his mind, he actually fears there is a possibility that the 5% deposit put on the flat will disappear this year and then in two years' time he will find himself with 20% negative equity (for which he will be jointly and severally responsible).

I would suggest that if this scenario comes true he will have neither security nor peace of mind (or indeed any hope of securing a business loan on the back of his house).

If he didn't buy he would have a bigger deposit/savings balance, no debt and much more chance of getting that loan.

[fdk]

I think that London-Loser is to a certain degree talking at cross purposes with the other posters who disagree with him.

He's coming at this from a FTB view-point, whereas Laurejon, Bluelady etc. are arguing as established property owners who would never ever consider going back to renting, and will never suffer negative equity because they bought X years ago.

In the current housing market, I feel both sides are correct in terms of their respective status.

[the_duke_of_hazzard]

I fail to understand why everyone's so hung up on buying as opposed to renting. I've lived in numerous places renting, and have rarely had any problem at all. In fact, I've had very good relationships with my landlords, simply because I pay up on time every month without fail. They tend to want to *keep you in the place* if you do that!

While it's true you don't get to "do what you like" with a place, the fact that one doesn't have to worry about the boiler packing up, etc., more than counteracts any feeling of impermanence associated with renting. The oodles of spare cash going towards a deposit counts as some compensation also.

Other countries rent as a matter of course (and - granted - are more protected on price etc.), but this obsession with buying is not entirely rational.

[London-loser]

I think that London-Loser is to a certain degree talking at cross purposes with the other posters who disagree with him.

He's coming at this from a FTB view-point, whereas Laurejon, Bluelady etc. are arguing as established property owners who would never ever consider going back to renting, and will never suffer negative equity because they bought X years ago.

In the current housing market, I feel both sides are correct in terms of their respective status.

<{POST_SNAPBACK}>

Indeed.

I'm talking from an FTB position partly (selfishly) because that's me... but also because it seems to me this is where the market is most troubled - on the first rung of the ladder. It seems to me the numbers don't really stack up for an FTB or a BTL and the market can't run purely on love (FTBs knowingly paying over the top for properties and accepting that, financially, it is a negative thing to do).

And all of this is based on stagnation. Throw in the possibility of geared falls and things really are quite ugly.

[Bluelady]

I fail to understand why everyone's so hung up on buying as opposed to renting. I've lived in numerous places renting, and have rarely had any problem at all. In fact, I've had very good relationships with my landlords, simply because I pay up on time every month without fail. They tend to want to *keep you in the place* if you do that!

While it's true you don't get to "do what you like" with a place, the fact that one doesn't have to worry about the boiler packing up, etc., more than counteracts any feeling of impermanence associated with renting. The oodles of spare cash going towards a deposit counts as some compensation also.

Other countries rent as a matter of course (and - granted - are more protected on price etc.), but this obsession with buying is not entirely rational.

<{POST_SNAPBACK}>

I don't really follow the logic of this. if you've always rented, you probably don't appreciate why owning is so desirable - in which case, why save a deposit?

[the_duke_of_hazzard]

I don't really follow the logic of this.  if you've always rented, you probably don't appreciate why owning is so desirable - in which case, why save a deposit?

<{POST_SNAPBACK}>

Good point. Owning is definitely what I want, all other things being equal. However, owning by stretching myself to the limit just doesn't seem worth it to me. My point (possibly overstated here) really is that renting has psychological advantages too, just as owning does, and for me it's really a financial calculation based on mortgage repayments, risk of asset appreciation/depreciation/unemployment etc..