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The Mcglashan Answers Hamish Mctavish


The McGlashan
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"Just rent it out"

Hamish - that is one thing I hear so many people saying.

I have same opinion to the McGlashan - a few years back on thinking of buying a place I was also told in a similar vein "Just sell it and take the profit"

Many people assume there are two big buttons in your house:

1) Press here to rent out.

2) Press here to sell.

It is not always quite so easy.

What if your rent does not cover your martgage ?

What if your tenant is a nightmare ?

What if you cant sell your house to cover the outstanding mortgage ?

Etc..

Buying a house DOES constrain you Hamish. To deny that is to deny reality. Fair enough you got away with it. Fair enough it can work in your favour over time. However for many people today (or in the last year) buying a house WILL constrain them and prevent them from following their dreams in the future. I can GUARANTEE you of that.

Just because it worked out for you does not mean it will for everyone else.

I worked in New Zealand for a year. Bird who was there had to go home and cut her TRIP OF A LIFETIME short by 6 months due to the hassles she had with renting her place out. Try telling her that her plan did not constrain her future plans. It did. She got unlucky. You got lucky. People need to understand this before diving into a purchase. It is a gamble that may come off. It is also a gamble that may ****** up a few years of your life.

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How is renting in the private sector any different to a mortgage?

Renting in the private sector does not involve the cost (monetary and otherwise) of debt.

Do you think a private sector landlord is any more sympathetic to your desire to jack in the job and write a symphony as a bank is?

This is a world with which you are unfamiliar, fair enough - I appreciate that. For those with the commitment to undertake the likes of writing a symphony, there exists a network of grace and favour patronage which can provide accommodation for the artist, mostly for a peppercorn consideration - perhaps even just a dedication, thus freeing the artist from commercial pressure which might inhibit their creativity. These sort of arrangements are fairly common, particularly in classical music but also in fine art and literature. The only implication of these arrangements tends to be that, should one become successful (in monetary terms) it is expected that one 'pays it forward' to the next generation of upcoming talent. Without arrangements like these, a great deal of the art, music and literature which forms the wallpaper of society would simply not exist. Social capital, d'you see?

You're right - it's not for everyone, but had you asked me 10 years ago, I would have said the same. Had I taken a mortgage 10 years ago, I would never have known...

Again, I ask you, now over several posts and in several threads, how is paying a monthly rental payment any different to a mortgage payment in terms of work required to achieve it?

Your mooted 15% drop in house prices over 18 months in Aberdeen:

Taking an average-ish house price of £200,000 and a long-term average interest rate of 6% (conservative) over a 20 year interest-only mortgage. Monthly repayment = £1000.

Same property, 18 months later £170,000, all other things equal. Monthly repayment = £850.

Total interest saving = £36,000

Plus capital saving £30,000

Total saving £66,000. - or around 2 years work, at a very rough, but high, average Aberdeen wage.

What security does a lease in the private sector, which is the only viable option for most people today, offer that a mortgage does not?

The security is the freedom of not having a multi-decade damoclesian debt obligation hanging over one's head.

Non payment of either will result in eviction and impaired credit. How is renting advantageous in terms of not being a wage slave?

See above re. personal and monetary costs of debt.

Voltaire also said "a witty saying proves nothing"....... :P

Very good. :lol:

Edited by The McGlashan
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Social capital, d'you see?

You're right - it's not for everyone, but had you asked me 10 years ago, I would have said the same. Had I taken a mortgage 10 years ago, I would never have known...

Indeed, however, without the financially productive work of the many to support the financially non-productive work of the few, most of the patrons of the arts would be unable to patronise a childrens tea party, let alone keep an artist or two as a hobby. ;)

I do get it, and I do think it is a worthwhile and perhaps even noble thing for a small minority to do. However it is never going to be a viable option for the vast majority.

So in terms of viable options, for the vast majority of people, the choices remain that one can either pay a monthly rent, or a monthly mortgage payment.

In Aberdeen, this is now, and has been for the last few decades at least, fairly comparable for most people in terms of monthly outlay.

You still need a job to survive and pay either rent or mortgage, living with family or finding a rich patron to support you is simply not a viable choice for most people. And failing to pay either rent or mortgage has the same end result. Eviction and impairment of creditworthyness.

There is no security that rental provides that a mortgage does not, other than possibly the ability to move to London in search of work, but even then, potentially 6 months too late....

Your mooted 15% drop in house prices over 18 months in Aberdeen:

Thats not exactly what I said. I expect a peak to trough fall of 15% or so between 2007 and 2010.

Taking an average-ish house price of £200,000 and a long-term average interest rate of 6% (conservative) over a 20 year interest-only mortgage. Monthly repayment = £1000.

Same property, 18 months later £170,000, all other things equal. Monthly repayment = £850.

Total interest saving = £36,000

Plus capital saving £30,000

Total saving £66,000. - or around 2 years work, at a very rough, but high, average Aberdeen wage.

There are an infinite number of variables, and an infinite number of results from these hypothetical scenarios. I could sit here and show you dozens of examples showing a loss of tens of thousands to date by delaying or STR-ing...

As I said, it's complicated, but just a few points....

You've used an Interest Only mortgage, a repayment mortgage would have a far lower lifetime cost as interest calculates on a reducing balance.

Trackers available up to and including much of 2008 were at BOEBR + 0.5%, the interest paid to date is laughable, and the interest in the future may now average well below 6%.

Furthermore you have not included rental costs, which from 2007 to 2010 (the length of the crash in all likelyhood) would be at least £36,000 for that property.

Not everyone finances 100% of a house, very few do in fact. A deposit of 10%, 30%, 50%, 70% vastly changes interest payments, and is easily achieved for the type of buyer likely to buy a house at that price level, as it's a second and not a starter house for most, so they'll have a lot of equity in the first, etc etc etc.

Cash buyers have no interest payments at all.

I maintain that for most people, buying has made more sense than renting in Aberdeen so far, and will likely continue to do so. I am always willing to accept there is an exception to every rule however.

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Thats not exactly what I said. I expect a peak to trough fall of 15% or so between 2007 and 2010.

According to ASPC stats, peak was Q2 08. You expect recovery early 2010. That's a horizon of 18 months. But, fair enough, there was a similar peak (within the bounds of statistical error) in Q2 07. Let's allow that wriggle-room and run numbers with both 18 and 30 month horizons - see below.

There are an infinite number of variables, and an infinite number of results from these hypothetical scenarios. I could sit here and show you dozens of examples showing a loss of tens of thousands to date by delaying or STR-ing...

As I said, it's complicated, but just a few points....

You've used an Interest Only mortgage, a repayment mortgage would have a far lower lifetime cost as interest calculates on a reducing balance.

Trackers available up to and including much of 2008 were at BOEBR + 0.5%, the interest paid to date is laughable, and the interest in the future may now average well below 6%.

Furthermore you have not included rental costs, which from 2007 to 2010 (the length of the crash in all likelyhood) would be at least £36,000 for that property.

Whoops! Silly me, forgetting to pay the rent! :( .

But I think your rental costs are significantly out. Let's compare:

http://www-n.aspc.co.uk/cgi-bin/public/Liv...GKAPDIF#picture

O/o £198.5k

and

http://www-n.aspc.co.uk/cgi-bin/public/Liv...GIIDHEB#picture

A better level of accm. Better area. Rent £800 pcm

= £14.4k over 18 months

or £24k over 30 months.

Not everyone finances 100% of a house, very few do in fact. A deposit of 10%, 30%, 50%, 70% vastly changes interest payments, and is easily achieved for the type of buyer likely to buy a house at that price level, as it's a second and not a starter house for most, so they'll have a lot of equity in the first, etc etc etc.

Allright, fair enough. Let's take another hypothetical which offers less wriggle-room and makes some very conservative assumptions, while looking at real-world accommodation.

FTB, £100k city centre tenement flat. 90% LTV repayment mortgage over 20 years @ 4% average interest (v. conservative IMHO: Brittania BS offer 10 year fix at 5.9% for 85% LTV).

Monthly Payment = £545.38

Total mortgage payments = £130,982

Plus deposit £10,000

Total paid = £140,982

15% drop ceteris paribus.

Monthly Payment = £463.57

Total mortgage payments = £111,259

Plus deposit £8,500

Total paid = £119,759

Saving = £21,223.

Let's compare:

http://www-p.aspc.co.uk/cgi-bin/public/Liv...GKFFJCK#picture

O/o £99k

and practically identical accommodation on the same side of the street:

http://www-r.aspc.co.uk/cgi-bin/public/Liv...GKFFJCK#picture

Rent £525 pcm.

Total saving to rent over 18 months = £11,773

Total saving to rent over 30 months = £5,473

If we expect conservative peak to trough falls of 15% over a period of between 18 to 30 months, and if we expect mortgage interest rates to average just 4% over the next 20 years, it will pay a FTB between £5.5k and £12k to delay and rent similar accommodation in the meantime.

QED.

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Hmmm, I think it's closer than that, but I'm out inspecting businesses today and currently at lunch and on my 3G dongle, so don't have time to calculate a response scenario. But will do so later when back at home.

Very good - looking forward to it. I've made a rough and ready xls with the scenario above already plugged in (the final figures come out just a few quid different, cos of rounding no doubt). It'll play tunes on different interest rates, terms, LTV's, rent amounts, price drop percentages and time horizons. You can download it here (this board does not allow upload of .xls):

http://www.savefile.com/files/2034444

{edit: arg! the cheapo hosting service seems to ad a dot-html extension to the file - just remove it manually and open with MS Excel.}

Edited by The McGlashan
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ASPC stats.

Q4 2008, quarterly fall of 1%.

Annual fall of 3.6%.

Well done HM! But you forgot to mention figures for ASPC Quarter 3 2008.

The average property price in the Aberdeen Housing Market Area for the third quarter

of 2008 is £192,909, a decrease of 8% on the previous quarter figure

:lol::lol::lol::lol::lol:

That will be a 9% fall from peak then. Ouch.

Wonder what Q1 09's going to bring to the table. ;)

Edited by geneer
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Well done HM! But you forgot to mention figures for ASPC Quarter 3 2008.

:lol::lol::lol::lol::lol:

That will be a 9% fall from peak then. Ouch.

Wonder what Q1 09's going to bring to the table. ;)

Which peak?

The 2007 peak was almost identical to the 2008 peak. Then the 2007 falls were also within a couple of percent of the 2008 falls.

Were you also gloating then when the falls were roughly the same to what they are now? :rolleyes: That must have been devestating for you when prices recovered in the summer......

I have no doubt that Q1 will fall again, and then Q2 or Q3 will see a strengthening of the market again.

Annualised falls eliminate the inbuilt and perfectly normal seasonal variances.

I don't dispute for a moment Aberdeen prices are declining. I just state repeatedly it is one of the best performing markets in the country, which it is.

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According to ASPC stats, peak was Q2 08. You expect recovery early 2010. That's a horizon of 18 months. But, fair enough, there was a similar peak (within the bounds of statistical error) in Q2 07. Let's allow that wriggle-room and run numbers with both 18 and 30 month horizons - see below.

Whoops! Silly me, forgetting to pay the rent! :( .

But I think your rental costs are significantly out. Let's compare:

http://www-n.aspc.co.uk/cgi-bin/public/Liv...GKAPDIF#picture

O/o £198.5k

and

http://www-n.aspc.co.uk/cgi-bin/public/Liv...GIIDHEB#picture

A better level of accm. Better area. Rent £800 pcm

= £14.4k over 18 months

or £24k over 30 months.

Allright, fair enough. Let's take another hypothetical which offers less wriggle-room and makes some very conservative assumptions, while looking at real-world accommodation.

FTB, £100k city centre tenement flat. 90% LTV repayment mortgage over 20 years @ 4% average interest (v. conservative IMHO: Brittania BS offer 10 year fix at 5.9% for 85% LTV).

Monthly Payment = £545.38

Total mortgage payments = £130,982

Plus deposit £10,000

Total paid = £140,982

15% drop ceteris paribus.

Monthly Payment = £463.57

Total mortgage payments = £111,259

Plus deposit £8,500

Total paid = £119,759

Saving = £21,223.

Let's compare:

http://www-p.aspc.co.uk/cgi-bin/public/Liv...GKFFJCK#picture

O/o £99k

and practically identical accommodation on the same side of the street:

http://www-r.aspc.co.uk/cgi-bin/public/Liv...GKFFJCK#picture

Rent £525 pcm.

Total saving to rent over 18 months = £11,773

Total saving to rent over 30 months = £5,473

If we expect conservative peak to trough falls of 15% over a period of between 18 to 30 months, and if we expect mortgage interest rates to average just 4% over the next 20 years, it will pay a FTB between £5.5k and £12k to delay and rent similar accommodation in the meantime.

QED.

Fair enough, I can't really argue with some of the scenario you've given.

Except of course for the obvious failing in it. Which is that you assume people could pick the absolute peak of the market.

I think you will agree that if anyone had that superhuman talent, they would be exceedingly rich by now, and I have already stated that there may be a few hundred people that bought at peak for whom my argument does not apply.

However, for most of everyone else, it holds true.

Lets start by examining a typical house purchase, based on the market averages.

In the case of timing, I will use my own example, where I was in a position of needing to either buy or rent a house in Jan 07.

Now, from the ROS Aberdeen average prices, we can see that the average house price in Jan 07 was £158,328, and the average Jan 2009 price was £165,028. So, to date, I have, if I had bought an average price house, in theory gained £6,700 from capital appreciation alone.

In addition to that, I have also gained in terms of lifetime housing costs by not paying for rental in that same time frame. If we assume that the average Aberdeen rental yield is around 6%, then that would be two years at £9499 per year, for a total of £18,999.

Therefore my gains to date are £25,699, by purchasing an average Aberdeen property in Jan 07 up until Jan 09. Now, if I am a cash purchaser, prices in the next year will need to fall by £25,699, PLUS an additional £9499 for one more years rental, for a total of £35,198, just for me to break even from renting versus buying during the crash.

So for a cash purchaser, such as STR, a price fall of 22.3% is required over the mentioned timescale just to break even on rent versus buy, however, this does not include the costs of selling, buying, stamp duty, and moving twice. For a STR person in Aberdeen, based on the average price, and including all the other costs, it's probably more like 28% in those years just to break even. Obviously, the longer the crash takes, the more rent is required, and the higher that percentage becomes. In year 4, it's a 34% fall, by year 5 it becomes 40%, and in year 6 it becomes 46%.

The relevance of this becomes more clear when you consider the length of time people claim to have spotted this bubble coming for, and delayed purchase accordingly.

In your own case, you mention that you were in a position to buy from 2006 onwards, but chose not to as you thought something was wrong with the market.

For most people this would have been utterly disastrous, at least so far.

In Jan 06, the average price in Aberdeen was £119,000. So take our above scenario with a delayed purchase loss of £35,000 or so, but now add an additional capital loss of £30,000 plus another year in rental at approx £9,000, for a total loss of around £74,000. Just for delaying purchase by a few years, and that during the biggest crash the country has seen in a century!!!!!!!

Now, admittedly, the above examples are for a cash purchaser such as a STR speculator or long term saver....... But I'll calculate some additional mortgage driven scenarios shortly and add them when they're done.

Edited by HAMISH_MCTAVISH
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In Jan 06, the average price in Aberdeen was £119,000. So take our above scenario with a delayed purchase loss of £35,000 or so from Jan 07, but now add an additional capital loss of £30,000 plus another year in rental at approx £9,000, for a total loss to date of around £74,000. Just for delaying purchase by 3 years, and that during the biggest crash the country has seen in a century!!!!!!!

Now, admittedly, the above examples are for a cash purchaser such as a STR speculator....... But I'll calculate some additional mortgage driven scenarios shortly and add them when they're done.

Honestly you must be an EA Hamish. Your assumptions are incredible. How does '2006 onwards' equal 'Jan 2006' ?

Maybe it was in Nov 2006 that the MsGlashan could have bought ? You know what the average price in Q4 2006 was ?

Yes, 168k. A MASSIVE difference from the 119k figure you use above. In fact such a massive difference that it changes the calculation entirely.

You also class Jan 06 to today as "the biggest crash the country has seen in a century". I don't think so. It is clear prices were still rising at a crazy pace in 2006. In fact, correct me if I am wrong, but the first YOY fall in Aberdeen according to the ASPC was in Q1 2008.

That means for a WHOLE 2 YEARS of this 'crash' you are basing your figures on prices had not even started to drop in Aberdeed.

Honestly, sometimes you come up with reasonable arguments, but the above just shows your true colours.

Also how can you say McGlashan has made a 74k loss on something he has not even bought ?!! He has been living/renting elsewhere during that time. This rent did not come anywhere near close to 74k. So where is this 74k loss ?

Oh yes against something that is currently falling in value and is unclear when it will stop dropping in value, that he has not bought yet !!

How can you class a loss against something you have not even bought !!??

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Honestly you must be an EA Hamish. Your assumptions are incredible. How does '2006 onwards' equal 'Jan 2006' ?

Maybe it was in Nov 2006 that the MsGlashan could have bought ? You know what the average price in Q4 2006 was ?

Yes, 168k. A MASSIVE difference from the 119k figure you use above. In fact such a massive difference that it changes the calculation entirely.

Ummmmm, NO.

The exact figure for Nov 2006 was £136,598 as per the ROS data which is what I am using for these calculations.

You also class Jan 06 to today as "the biggest crash the country has seen in a century". I don't think so. It is clear prices were still rising at a crazy pace in 2006. In fact, correct me if I am wrong, but the first YOY fall in Aberdeen according to the ASPC was in Q1 2008.

That means for a WHOLE 2 YEARS of this 'crash' you are basing your figures on prices had not even started to drop in Aberdeed.

The average price for 2007 was slightly higher than the average price for 2008, although the peak in 2008 was slightly higher than the peak in 2007.

Honestly, sometimes you come up with reasonable arguments, but the above just shows your true colours.

Yes, those pesky facts sure are disturbing when they get in the way of your erroneous assumptions. :rolleyes:

Also how can you say McGlashan has made a 74k loss on something he has not even bought ?!! He has been living/renting elsewhere during that time. This rent did not come anywhere near close to 74k. So where is this 74k loss ?

Isn't it you that frequently lectures about opportunity cost? How else would you describe this?

Oh yes against something that is currently falling in value and is unclear when it will stop dropping in value, that he has not bought yet !!

How can you class a loss against something you have not even bought !!??

We are discussing comparitive gains and losses in purchase versus rental at different points in time. If you don't understand that, then perhaps best not to interupt someone elses discussion...... :rolleyes:

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Oh you are using the ROS data for these calculations. Funny that. :rolleyes:

You always seem to quote the ASPC data in every other number you bring up.

Hamish you are desperately trying to prove in some way that someone chooing to rent in 2006 has in some way made a 'loss' and a 'disastrous decision'.

I say that is nonsense.

The only people who are going to make a 'loss' or a 'disastrous decision' are those who bought after 2006.

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Oh you are using the ROS data for these calculations. Funny that. :rolleyes:

You always seem to quote the ASPC data in every other number you bring up.

Hamish you are desperately trying to prove in some way that someone chooing to rent in 2006 has in some way made a 'loss' and a 'disastrous decision'.

I say that is nonsense.

The only people who are going to make a 'loss' or a 'disastrous decision' are those who bought after 2006.

I use the Ros data because Aspc doesnt give monthly sales data, only quarterly data.

ROS data also shows a bigger loss to date than ASPC, so I have no idea why on earth you'd complain about me doing so. :rolleyes:

And theres no desperation about it. The facts don't lie. Use the same data over the same time scales and prove me wrong if you can. I've given you the links to it already.

If it's nonsense, prove it.

Edited by HAMISH_MCTAVISH
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I use the Ros data because Aspc doesnt give monthly sales data, only quarterly data.

ROS data also shows a bigger loss to date than ASPC, so I have no idea why on earth you'd complain about me doing so. :rolleyes:

And theres no desperation about it. The facts don't lie. Use the same data over the same time scales and prove me wrong if you can. I've given you the links to it already.

If it's nonsense, prove it.

Renting in Aberdeen from 2006 until today, instead of buying is "DISASTROUS".

That is NONSENSE. 100%. You will only know it is disastrous in about 3-5 years from now. Unless of course you are psychic. Until we find out the future it may turn out to be an incredible good plan. It may not.

Taking today as a point to make such a claim, when you yourself agree the housing market goes in 15-20 years cycles is ridiculous.

My examples of people I know who HAVE lost hundreds of thousands in REAL money in the last year can be claimed. They could have waited, if they had they would have saved 100k plus. That is a fact. That will not change whether house prices increase or decrease from this point forward.

Your entire premise that renting from 2006 is disastrous uses one massive assumption. This being you know what the future holds. You do not. So until that time please refer to the decision as 'A Choice that may or may not pay off'.

Because that is exactly what it is.

Thanks

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Fair enough, I can't really argue with some of the scenario you've given.

Except of course for the obvious failing in it. Which is that you assume people could pick the absolute peak of the market.

Hehe, right enough. I'm always quick to accuse you of using a 'time machine'! :0

Same FTB properties, same mortgage, but starting today. Assuming, per your prediction of only a further 7% drop in Abdn prices to Q1 2010.

The FTB still comes out £5,039 ahead over the next 9 months.

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Renting in Aberdeen from 2006 until today, instead of buying is "DISASTROUS".

Yes it is.

That is NONSENSE. 100%. You will only know it is disastrous in about 3-5 years from now. Unless of course you are psychic. Until we find out the future it may turn out to be an incredible good plan. It may not.

Now you are being inconsistent.

Either it is nonsense, 100%....

OR

It may turn out to be a good plan.

Can't have both you know......

My examples of people I know who HAVE lost hundreds of thousands in REAL money in the last year can be claimed. They could have waited, if they had they would have saved 100k plus. That is a fact. That will not change whether house prices increase or decrease from this point forward.

Not in Aberdeen. Irrelevant to this thread.

Your entire premise that renting from 2006 is disastrous uses one massive assumption. This being you know what the future holds. You do not. So until that time please refer to the decision as 'A Choice that may or may not pay off'.

Because that is exactly what it is.

Thanks

Based on the 2006 scenario, we would have to see price falls of 50%+ from peak for you to be correct.

Your chances of that happening in Aberdeen are almost zero.

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Yes it is.

No it is not. Please explainj how somoene renting a house for 2 years is in any way disastrous. It isn't. They have payed for a service and have received it.

Now you are being inconsistent.

Either it is nonsense, 100%....

OR

It may turn out to be a good plan.

Can't have both you know......

It is nonsense that you are DECLARING today that someone choosing to rent in 2006 has made a DISASTROUS decision. That will only be confirmed one way or another in a good few years. Either way it is unlikely to be disastrous.

You cannot declare today if it is a disastrous plan or not. That is why your statement is nonsense.

Not in Aberdeen. Irrelevant to this thread.

Perth is not that far from Aberdeen you know. ;)

Based on the 2006 scenario, we would have to see price falls of 50%+ from peak for you to be correct.

Your chances of that happening in Aberdeen are almost zero.

We will see. Anyway - I like how you have recently changed your views from buying anytime is a good idea in the long term to admitting there may be good times to sit out of the market. It is a start. ;)

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Allright, fair enough. Let's take another hypothetical which offers less wriggle-room and makes some very conservative assumptions, while looking at real-world accommodation.

FTB, £100k city centre tenement flat. 90% LTV repayment mortgage over 20 years @ 4% average interest (v. conservative IMHO: Brittania BS offer 10 year fix at 5.9% for 85% LTV).

Monthly Payment = £545.38

Total mortgage payments = £130,982

Plus deposit £10,000

Total paid = £140,982

15% drop ceteris paribus.

Monthly Payment = £463.57

Total mortgage payments = £111,259

Plus deposit £8,500

Total paid = £119,759

Saving = £21,223.

Total saving to rent over 18 months = £11,773

Total saving to rent over 30 months = £5,473

If we expect conservative peak to trough falls of 15% over a period of between 18 to 30 months, and if we expect mortgage interest rates to average just 4% over the next 20 years, it will pay a FTB between £5.5k and £12k to delay and rent similar accommodation in the meantime.

QED.

OK, if we take a similar example......

£100K FTB flat, purchased in Jan 07, with a 10% deposit.

IF rates stay constant and average 5% over the course of the 25 year repayment mortgage, the costs are as follows.

Interest only mortgage, £112,500 in interest over 25 years.

Repayment mortgage £67,840 in interest over 25 years, (plus the 100K capital which of course you will then have back plus inflation when you sell, or continue to own the asset at no further lifetime rent/mortgage cost.)

Rent at 500 per month (5% yield) is £150,000 at todays money, plus inflation.

So far, the cheapest option by far in terms of "throwaway cost", ie, money you will never get back, is a repayment mortgage.

Same flat, purchased January 2010 at a 15% discount for £85K, with a 10% deposit

Interest only mortgage £95,625

Repayment mortgage £57,664

Rent £150,000

So far so good, looks cheaper, and it is....... Until you add back in the 3 additional years of rent at £6,000 per year for a total of £18,000.

Now you have the following totals.

Interest only mortgage £95,625 + £18,000 = £113,625

Repayment mortgage £57,664 + £18,000 = £75,664

Rent £150,000 + 18,000 = £168,000

Showing that it would have been cheaper to buy in 2007 than 3 years later at a 15% discount for both repayment and interest only mortgages. By a whopping 7K or so on a repayment mortgage. Provided you do in fact have to pay a normal market rent in the meantime, as most people would.

And that is before you include the record low, and probably once in a lifetime, interest rates that we have seen lately, and which anyone on a tracker or SVR has taken advantage of, and which those that buy later will in all probability not be able to do so.

And also before you include the fact that mortgages issued before 2008 were typically set at a much lower bank margin above base than mortgages today are, ie, 1% above BOEBR versus more typically 3% to 5% above BOEBR today.

By the time you factor in those two things, lower base rates plus lower bank margin rates, the actual savings from buying in 2007 to buying in 2010 would probably require closer to a 25% fall in prices just to break even for delayed purchase, and this would rise by around 5% per year the longer the crash takes to play out.

And of course, in reality, that same 100K flat purchased in Jan 2007 is still today worth more than 100K, as the market has not yet even fallen to Jan 2007 levels...... So as of today, losses through not purchasing would be around 3K in capital appreciation, plus 12K in rent for the two years, for a total loss of 15K as of today through delaying purchase and renting for two years in the Aberdeen market.

Edited by HAMISH_MCTAVISH
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OK, if we take a similar example......

£100K FTB flat, purchased in Jan 07, with a 10% deposit.

....

.... Showing that it would have been cheaper to buy in 2007 than 3 years later at a 15% discount for both repayment and interest only mortgages. By a whopping 7K or so on a repayment mortgage. Provided you do in fact have to pay a normal market rent in the meantime, as most people would.

....

Hi Hamish,

Your examples are impeccable and prove perfectly that a mortgage borrower who bought in Jan 07 is ahead of the game compared to borrowing in Jan 10, assuming a 15% price drop. This is clearly uncontroversial.

However, you criticised me for using hindsight in my earlier calculations (starting at peak), and then you have gone on to use it yourself, by picking Jan 07 as your pre-peak starting point.

Let's agree to discard the time machine altogether and work from the same song-sheet.

Assumptions:

No hindsight - just today's market and actual real-world property, all from ASPC.

7% property price falls between now and start of recovery early 2010 - as you have predicted. Let's say 7% drop over the next 9 months.

5% long term average mortgage interest rate. You have pointed out that a repayment mortgage is cheaper than interest only, so let's stick with that.

Example 1. FTB.

90% LTV mortgage. 25 year term.

http://www-p.aspc.co.uk/cgi-bin/public/Liv...GJEBNII#picture

City centre tenement flat in 'ever popular' Rosemount.

O/o £99k

Monthly Payment = £521

Total to pay mortgage provider = £156,262

Plus deposit = £9,990

Total to pay to own outright = £166,162

However, if the FTB instead chooses to rent until the 7% price drop you predict has happened by early 2010.

http://www-p.aspc.co.uk/cgi-bin/public/Liv...GJEBNII#picture

City centre tenement flat in 'ever popular' Rosemount.

Rent £525 pcm

If he then buys in early 2010

Monthly Payment = £484

Total to pay mortgage provider = £154,324

Plus deposit = £9,207

Total to pay to own outright = £154, 531

Saving on mortgage = £11,631

Less rent = £4,725

therefore

TOTAL SAVING TO THE FTB BY RENTING WHILE PROPERTY PRICES FALL = £6,906

Example 2. Trading up.

Let's say he's the guy selling this same Rosemount flat.

http://www-p.aspc.co.uk/cgi-bin/public/Liv...GJEBNII#picture

O/o £99k

Let's be generous - our buyer who wants to trade up has done well. His income is greater now than when he bought the flat, it's increased hugely in value, and he's totally paid his mortgage - so he realises the whole £99k as a deposit for his next purchase. He's making good money now, so he can afford much greater monthly payments on a new mortgage, and so have a short term on the loan.

This is the sort of property he might be interested in:

http://www-p.aspc.co.uk/cgi-bin/public/Liv...GJEBNII#picture

West-end granite built 2 bed.

O/o £195k

With his realised equity from the sale of his FTB flat, he only needs a 50% mortgage, over 10 years. Same 5% average interest.

Monthly Payment = £1,034

Total to pay mortgage provider = £124,097

Plus deposit = £97,500

Total to pay to own outright = £221,597

However, if the trader-up instead chooses to rent until the 7% price drop you predict has happened by early 2010.

http://www-p.aspc.co.uk/cgi-bin/public/Liv...GJEBNII#picture

West-end granite-built 3-bed - lovely.

Rent £800 pcm

If he then buys in early 2010

Monthly Payment = £962

Total to pay mortgage provider = £115,410

Plus deposit = £90,675

Total to pay to own outright = £206,085

Saving on mortgage = £15,512

Less rent = £7,200

therefore

TOTAL SAVING TO THE TRADER-UP BY RENTING WHILE PROPERTY PRICES FALL = £8,312

Example 3. STR.

The STR thinks, like you, that property will fall 7% over the next 9 months. He's got 100% equity in a 3-bed semi-suburban semi-detatched like this one:

http://www-p.aspc.co.uk/cgi-bin/public/Liv...GJEBNII#picture

Fixed price £295k

He rents this while he waits out the 7% price drop you predict will have happened by early 2010:

http://www-p.aspc.co.uk/cgi-bin/public/Liv...GJEBNII#picture

Just around the corner.

Rent £1000 pcm

Then gets back into the market for the same type of property in early 2010. 19% LTV mortgage over 5 years. Same 5% average interest.

Monthly Payment = £982 (which he can fund over the full 5 years from the equity he's realised)

Total to pay mortgage provider = £58,946

Plus deposit = £221,940

Total to pay to own outright = £280,886

Plus the rent he's paid = £9,000

Total = £289,886

therefore

TOTAL SAVING TO THE STR BY RENTING WHILE PROPERTY PRICES FALL = £5,114

Summary

So, to summarise. If we take your projection of just 7% further property price falls in Aberdeen between now and early 2010, it pays the FTB, the trader-up and the STR to delay and rent while they wait out the drop. Needless to say, the downsizer would do better than all of them.

There is, therefore, at present, a disincentive to purchase houses for all these classes of potential buyer. The most worrying aspect of all this for EA's and other vested interests is the disincentive to FTB's. FTB's are the 'fresh fish' which form the (metaphor-mixing) bottom layer of the pyramid which props up house prices. Without FTB's there is no HPI.

Therefore, IMHO, property prices have a good chance of falling at a steeper rate than your projection of 7% over the next 9 months, and for longer. I reckon that the 5% average mortgage interest rate for the next 25 years is similarly optimistic.

WRT my own personal situation (and with thanks to ccc for the support - cheers!), as you have pointed out, my circumstances are unusual, and not easily replicated. Yes, it's true that I considered purchasing in (late-ish) 2006, but I didn't think there was "something was wrong with the market", there was, rather, something wrong with me - I just didn't fancy taking on long term debt (at that time, I would have needed an 85% mortgage to buy an average house). I, instead, realised that I could shift some stuff around in my business and save enough money to be a cash purchaser within a horizon of 3-4 years.

ASPC tells us that average Aberdeen house price in Q4 2006 was £168k and that the most recent measured average is £192.5k. There can be no argument about the fact that prices now are higher than they were then.

However, were I to enter the market today as a cash buyer, based on the cost of long term average 5% mortgage interest (which comes to some £108k over the life of the hypothetical mortgage which I won't be paying), and subtracting my (peppercorn) alternative accommodation costs, and even subtracting the income tax hit I've taken by upping the drawings from my business, I'm many tens of thousands of pounds ahead, without any further drop in house prices. You expect Aberdeen house prices to drop a further 7% this year. In common with the FTB, the trader-up, the downsizer and the STR, why the devil would I buy now?

Edited by The McGlashan
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Hi Hamish,

Your examples are impeccable and prove perfectly that a mortgage borrower who bought in Jan 07 is ahead of the game compared to borrowing in Jan 10, assuming a 15% price drop. This is clearly uncontroversial.

In fairness, many if not most would probably also still be ahead if prices drop by 25%........

However, you criticised me for using hindsight in my earlier calculations (starting at peak), and then you have gone on to use it yourself, by picking Jan 07 as your pre-peak starting point.

Let's agree to discard the time machine altogether and work from the same song-sheet.

Example 3. STR.

The STR thinks, like you, that property will fall 7% over the next 9 months. He's got 75% equity in a 3-bed semi-suburban semi-detatched like this one:

http://www-p.aspc.co.uk/cgi-bin/public/Liv...GJEBNII#picture

Fixed price £295k

So he realises £221k

He rents this while he waits out the 7% price drop you predict will have happened by early 2010:

http://www-p.aspc.co.uk/cgi-bin/public/Liv...GJEBNII#picture

Just around the corner.

Rent £1000 pcm

Then gets back into the market for the same type of property in early 2010. 19% LTV mortgage over 5 years. Same 5% average interest.

Monthly Payment = £982

Total to pay mortgage provider = £58,946

Plus deposit = £221,940

Total to pay to own outright = £280,886

Plus the rent he's paid = £9,000

Total = £289,886

therefore

TOTAL SAVING TO THE STR BY RENTING WHILE PROPERTY PRICES FALL = £5,114

I won't argue with cases 1 and 2 because I have already stated quite clearly that there are an almost infinite number of possible scenarios regarding LTV and interest rates, and also because I would agree that if you are in the middle of a crash, and you can clearly see prices falling by more than 7% a year, then it would be prudent to wait in most cases.

But of course this has NOT been the case in Aberdeen for the last 2 years, and therefore my point remains for all purchases up until now, except as mentioned for the few hundred that bought at the precise peak.

HOWEVER, I will argue with the STR case. :lol: (You knew I'd have to find something in there)

That £5,114 saving would be more than eaten up by buying costs, selling costs, two sets of moving costs and stamp duty.

Other than that, it is correct, but chances are the STR would still lose money through those costs you didn't include.

why the devil would I buy now?

In fairness, I've never advised anyone to buy now, and in fact have specifically advised against it in numerous threads.

Mortgage rates are still too high, for one thing, but they'll come down over the next 6-8 months or so.

IMO the sweet spot for buying, when the lowest rates meet a point that is as close as makes no difference to the bottom of the market, will be between Q4 09 and Q1 2010.

I've repeatedly said this in numerous threads.

I've also repeatedly said that for most people, buying in all but the peak month of the last 2 years in the Aberdeen market will have proved cheaper than renting and waiting when all is said and done. For most (although not all) people, that is indeed the case.

Particularly when you look at actual interest rates achieved during the crash, and the much better terms that were available for mortgages then compared to now, both of which will impact lifetime ownership costs considerably.

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In fairness, I've never advised anyone to buy now, and in fact have specifically advised against it in numerous threads.

Aha, but you also said:

However, if this financial downturn lasts 4 or 5 years, then cumulative losses of at least 25-28% are required just to break even on a rent versus purchase equasion in Aberdeen.

Therefore even if the losses continue until 2012, at the current rate of decline this will not prove advantageous for delayed purchase.

Which isn't right...

All other things being equal on the examples we've agreed upon above:

Just a 15% fall over 48 months is required for the FTB to break even on a rent versus purchase equation.

Just a 19% fall over 60 months is required for the FTB to break even.

Just a 17% fall over 48 months is required for the trader-up to break even.

Just a 21% fall over 60 months is required for the trader-up to break even.

You also said:

But in general terms, buying has been less costly than renting for almost everybody so far.

.....

And still is.......

Which is quite demonstrably incorrect.

Edited by The McGlashan
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Just a 15% fall over 48 months is required for the FTB to break even on a rent versus purchase equation.

Just a 19% fall over 60 months is required for the FTB to break even.

Just a 11% fall over 48 months is required for the trader-up to break even.

Just a 14% fall over 60 months is required for the trader-up to break even.

From today, possibly, when you exclude all the other factors that applied in the past 2 years re mortgage margins, base rates, etc etc etc. And I take it you are assuming a 90% mortgage with the correspondingly high interest loading that implies. What rental yield are you using? And is that I/O or repayment?

However previous point still holds true, it has been cheaper to buy than rent for most purchasers in the last 2 years, with the exception of the few hundred who bought at the absolute peak month.

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From today, possibly, when you exclude all the other factors that applied in the past 2 years re mortgage margins, base rates, etc etc etc. And I take it you are assuming a 90% mortgage with the correspondingly high interest loading that implies. What rental yield are you using? And is that I/O or repayment?

I just edited the post in question to make it clear that all other things are equal on the examples we've agreed on. That is 90% LTV for the FTB, 25 year term. 50% LTV for the trader-up, 10 year term. Both repayment mortgage. Both long term 5% average mortgage interest. It does not matter when the starting flag was - the calculation works from point of purchase.

Even with the factors in the last 2 years re mortgage margins, base rates etc etc etc. 5% long term average is undoubtedly conservative over the next 23 years or even 8 years! It was you who suggested it.

However previous point still holds true, it has been cheaper to buy than rent for most purchasers in the last 2 years, with the exception of the few hundred who bought at the absolute peak month.

Has been, yes. Now is not.

edit:

BTW, I appreciate that you pointed out my omission of transactional costs for the STR on the examples I gave. So I can improve my model, what do you estimate these to be? Can you provide a breakdown?

Cheers

Edited by The McGlashan
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Which peak?

The 2007 peak was almost identical to the 2008 peak. Then the 2007 falls were also within a couple of percent of the 2008 falls.

Were you also gloating then when the falls were roughly the same to what they are now? :rolleyes: That must have been devestating for you when prices recovered in the summer......

I have no doubt that Q1 will fall again, and then Q2 or Q3 will see a strengthening of the market again.

Annualised falls eliminate the inbuilt and perfectly normal seasonal variances.

I don't dispute for a moment Aberdeen prices are declining. I just state repeatedly it is one of the best performing markets in the country, which it is.

:lol::lol::lol: Now that you mention it, there doesn't appear to be any occurence if this "pattern" in 2006 Hamish.

Oh man. You're goose is truly cooked.

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