Am I stoopid for not buying a house?

"bill" wrote

In a word, yes.

In general, on average in the longer term, house prices *do* rise. So you need to compare the interest payable, **less the house rise**, against the rent you pay now. Imagine that the house rises in value (on average) at the same rate as the interest rate. You pay X interest in the year, and have X more equity at the end of the year! So the effective cost is close to zero (altho' as an owner you now need to pay maintenance costs - but this will be much less than rent!).

The only time renting would be better, is when "interest payable less house value rise" (or "interest payable plus house value fall") exceeds the alternative rent. But this would *only* happen during a "price correction", and you said to consider the situation "House price correction asside"...

In reality he can't put "House price correction asside", it is a risk which is part of the equation.

As an aside :-)

The thought of living a substantial proportion of my life in a rented apartment or house, decorated and furnished as cheaply as possible, (my son rented one with spikey/ spindly "contemporary" furniture from the late 50's with a coffee table made to look like a flying saucer), and depending on a landlord to get repairs sorted, and replace worn out carpets etc. doesn't appeal somehow.

DG

"Derek ^" wrote

True - but only when you are looking at the "short-term"...

The trick is to make sure you save the difference between the rent and potential mortgage costs. Then you're not likely to fall behind in the long term should, despite current mad market conditions, house prices continue to rise.

Andrew McP

No, you are not stupid. Buying at the top of the market is stupid, whether it be stocks, real estate or any other investment. Any asset can be over-valued. Prices do go up and down. Would it have been a good idea to buy into the Naqdaq before the dot-com meltdown at the top of the market? No. Do stock generally go up over time. Yes.

To calculate whether it is worth it you need to take into account direct costs, lost opportunity costs, taxes and all other forms of risks, including having your money tied up in an illiquid asset.

Personally, I would not buy a house now. It would be like being at the bottom of a pyramid scheme.

bill wrote:

Makes no difference unless you are planning to sell the house and downshift.

The fact that the OP has presumably NOT considered in his calculations is that at some point in the future the mortgage will presumably be paid off; he will need to pay rent for life.

Yes, it does make a difference. Currently, in the US, prices are falling (and not just in the previously hot markets). You could buy now or in 6 months. In 6 months prices will be cheaper. So, why would you willingly pay more for a house now and take on a bigger mortgage by buying at near peak prices? Just because in 20 years from now it will average out? Ridiculous.

Steve Slatcher wrote:

wrote

Who cares about the US? - this is a UK group! ;-)

wrote

Maybe the "extra" you pay now is *less* than the rent you'd pay over the next 6 months?

Not when:

"every time I do the math I conclude that the interest would be more than my rent - that fact combined with the hassle and risk of a house price fall has kept me from buying. "

That means that you will be paying more in rent than even the cost of interest. Plus you need to consider taxes, repair and upkeep, buying costs (and possibly selling costs) and the inherent risk of being tied down to a fixed asset. Therefore, prices would need to rise significantly to make this worthwhile.

But, UK prices are even more inflated than in the US. They will fall or at best stagnate for the next decade. The fact that it is cheaper to rent than even the interest on a mortgage is a sure sign that the fundamentals are completely out of whack and a correction is necessary.

Tim wrote:

I agree with your sentiments that a correction is necessary, but I don't understand why you think being cheaper to rent than interest on a mortgage is a sign that the fundamentals are out of whack.

I have a property I let and I'm currently seriously considering selling.

Most years, my income on capital invested, after all expenses (fully managed so my expenses are quite high) have been about 2% before tax. This year, because of needing to do some substantial redecoration etc before reletting it's been about 1%

The capital gain on the house has been 9.4% p.a. compounded over the

If the rental income exceeds the interest on a mortgage then even in a stagnant housing market it would still make sense to borrow to buy to let. The only way you can lose is if house prices fall. And therefore everybody who has the ability to raise finance to buy to let would be piling in and house prices would go up

If we assume for a long term holding (25 years) that there will always be a capital gain then I would expect that a stable market would have house price inflation + rental return = high interest saving account rate. (probably slightly biased towards the left because of a higher risk)

This is, however, unstable. If returns on property fall then people will bail out of the market into savings causing a further fall. If propery prices increase then people will turn savings into property causing a further increase in house prices. (Of course, there are also factors operating in the other direction; if house prices are falling then people are more likely to want to rent rather than buy. If house prices are rising then they will probably want to buy)

At the moment I think it's swung far to far towards propery because the returns don't just exceed interest on savings but significantly exceed interest paid on borrowings.

The reason I'm looking to sell is that I'd like to move to a more expensive property which will require me taking out a mortgage. In theory at least, my capital gain/loss will be included in the new house so I'm now only interested in whether the income from a let propery covers the interest that I'll be paying on the larger mortgage on my home (and it won't, even if I borrow against the let propery and thus declare that as an expense and so tax deductable against the rental income).

(Of course, my perfect scenario is to sell my let property, then have a propery price crash before I buy. But given my usual luck and timing, the crash won't happen until after I buy)

Tim.

yawn. plenty of people were saying that 6 months, 12 months, 18 months, even

who would they rent from?

(Thanks to the posts so far - interesting.)

I guess the thing that gets me is where is the money coming from to sustain house prices rising at (guessing) 8% per year on average ad infinitum. Is the average take home pay increasing at 8% per year? I'm pretty sure it isn't. I guess it's possible that the buy to let phenominom is explains things partially. Maybe we're returning to a Lords and Serfs society where the comparatively well off own all the property?

A quick google just found some interesting graphs of earnings versus house prices. Wish I'd found these before, they show that we're clearly at a unique point in time regarding house prices and they simply can't continue to rise as they have in the past.

In short: I'm not feeling complete stoopid. I am of course putting away money in leui of mortage repayed - so its just the captial growth/loss that I'm missing out on. My rational is that any price rises in the coming year or two won't be much more than what I'm getting in a savings account.

I think this has always been the case. Can't remember the figures so making it up but it's something like 90% of the countries assets are owned by 10% of the population.

Remember though that capital gains on your home are tax free. So that 8% is more like 13% interest (10% for a basic rate taxpayer).

Tim.

It depends what stage of your life you are at. Owning an house isn't all roses, there can be lots of negatives for someone young. Generally though people at some stage of their life do buy an house so the earlier you do it the better financially you become. People who bought in the early 90's are ok today. Admittedly, someone who bought in 1993 are much better off but that just the luck of the draw.

Eventually it will be cheaper to buy an house than it is today, taking inflation, average wages, interest rates etc into consideration but I have no idea when it will be.

I have just purchased to move up another step of the house ladder. Basically I am at the stage of my life where the next 10-20 years are important and I don't want to wait like I have, hoping prices will fall. I did feel I was paying too much for the house and had to hedge the downside with a long term fixed rate.

FWIW I am a bear and have thought house prices would fall for the last 4 years. So it would be no surprise when I offer the advise to keep renting and ensure you keep saving that money each month. We will be right one day, just wish I could give you that day! Actual I now think that house prices will remain the same for a long time, increasing a little but not generally not keeping up with inflation, wages rises etc over the longer term, until they eventually become undervalued again. Interest rates are the key, I think the finance companies have probably gone as far as they can to lend us money.

In a word "no".

At half a percent per year in real terms (the 100-year trendline) which is but a fraction of the yeild on shares. I you have the cash, shares are a better way to invest it in the long erm.

Don't forget to factor in amortisation (over the time you expect to e there before moving) of the setup and tax costs of buying and then add in insurance and repair bills because you will now be the landlord who has to pay those.

FoFP

Credit. It's a credit bubble, not a house price bubble. It's just that housing somehow got nominated Magic Money Token for this bubble. That will in the end mean trouble because it's harder to live without a house than it is to live without a tulip.

Much more likely that the later entants to BtL will have bravely put their finances between harm and the general public. Odds are though that they'll be blamed rather than thanked for this service.

FoFP

Thing is that those arguing with us kept giving reasons why prices could never fall. What then has happened in the US? Did they start making more land after all?

FoFP

You'll have to explain that to me *very* carefully because that is not my real world experience. Shares may be a better way to invest, but managed funds simply seem to proceed at a snail's pace compared to property values.

I've seen my original stake in property climb from a few thousand into the millions, in the same time an equal amount placed into shares has climbed from the thousands into the errm thousands. In fact until recently the shares were steadily losing money year on year.

I may be atypical, but the experience of millions of individuals with pension funds, endowments and managed funds seems closer to mine than the picture you portray.

OTOH two of my neighbours have made multi-millions from shares. They are the fund managers, which seems the best way to make money from shares - take a commission from someone else.