Excellent debate this afternoon on the buying vs renting issue on this mornings post! Fraggle kicked off the main course with the poser:
"My question is, how do you determine when [the time when it is better to buy] are? What information do you need to gather (and some pointers on where to find it would be good) and what is the algorithm?
To which Blue Eyes replied:
"If the monthly interest payment is less than the rent you would pay on the same property then, assuming you aren't losing money on capital depreciation, you are surely better to buy?
Winding back to Lola's original point on 'opportunity cost' let's assume that you have £100k in cash and can either buy a £100k FTB property for cash or invest the £100k in blue chip dividend paying equities yielding 4% in year one. Rental yields are 5%. So (discounting stamp duty, fees, buildings insurance etc).
In year one, if you buy you are sacrificing £4k in dividends for £5k worth of rent, your are 25% up. But the question I'd pose is this. Over 25 years do you expect corporate earnings or UK house prices to grow more? Rental yields are about 5% in the south, yet there are plenty of blue chip megacaps trading on gross yields of 8% to 10%. Multinational companies are generally exposed to global GDP growth as opposed to UK housing which is in the main exposed to UK GDP growth. So will the UK economy outperform the world at large?
Of course, most people buy property with borrowed money. This changes the game entirely, as due to the lessons learned in 1929 no bank will lend you shed load of money at a shade over zero-risk rate to buy shares with. No provider of leveraged access to the stock markets will let you sit on negative equity either. So provided we have constant price/wage inflation, your mortgage will be eroded. The 'opportunity cost' matters less as there was no 'opportunity' to take out a £100k loan to buy Chevron Texaco stock with.
But with the ageing population will there be much inflation? The kind of inflation that erodes your debts relies on the next bloke taking out a bigger loan than you did. The baby boomers are net re payers of debt and there is only so much the government can do to fill in the gap (as we are witnessing with ZIRP, QE, SLS, CGS etc). The kind of inflation we are seeing now is just the world economy outperforming the UK economy. Folk in poor countries have been experiencing this kind of inflation for decades.
I don't have £100k, or anything like it. Yet where I live (on my salary) I would need a £100k deposit to buy anything worth owning. If I had a £100k deposit, would I buy a property or buy blue chip stocks and use the income towards rent? The latter, but that is just me. As for borrowing massive multiples of income to "get a foot on the ladder", well that's just bananas!
That's how I see it, what does anyone else think?
Forbidden Bible Verses — Genesis 42:18-28
8 hours ago
9 comments:
Makes sense to me, but hey what do I know?
The way I see it your option means that you have a roof over your head, you still have the original 100K and the interest gained cuts down the outlay......
Or am I talking bananas.......?
Whether or not you "still have the £100k" depends on the capital performance of your investments.
You have to remember that in a decade where stock market indices have gone sideways, blue chip dividend have done well.
In 2001 Johnson and Johnson paid 11c / quarter, now they pay 58c.
Lockheed Martin, 11c/Q to 75c/Q
Chevron 35c/Q to 78c/Q
Pepsi 15c/Q to 51.5c/Q
(and yes, I'd buy US listed corporations too!)
Plus the cost of buying/selling shares is much lower than the cost of buying/selling houses and you don't have unexpected roof repair bills on Pepsi!
People look ate the difference between buy and sell prices of real estate without taking into account the costs of ownership like maintenance, taxes and insurance which can be pretty high. Also you can sell shares in an hour if you need to whereas a house is going to take a lot longer to go from "I think I should sell" to sold.
The most important decision is do you need a "home" or are you worried about whether or not your
"investment" is going to make money.
If it's the latter you're probably on a hiding to nothing. if it's the former you could start with a caravan.
Anon - you can take a caravan with you when you move job in these changing times too! Trouble is everyone calls you a 'pikey'.
If you don't like being called a pikey, you could try living in a boat instead or make your caravan an Airstream (http://en.wikipedia.org/wiki/Airstream).
Or just find a £1 a night Megabus that drives around in circles?
Thanks for the answers peeps, much appreciated.
My next question is how does it play out over generations? If you inherit a house, can you still make an argument that you'd be better off selling to rent?
You certainly can, fraggle. The only cost that you really lose when you inherit is the mortgage and buying costs. The maintenance, property taxes, insurance, capital gains and opportunity costs are still there. And if they cost you more than you can save by living in the place, or make by letting it and renting/owning somewhere else, the house is basically saying "Sell me".
Think of inheriting a big old mansion which hasn't had much maintenance done on it. Such places can suck money out of your bank account faster than a twin turbo Hoover.
Of course that particular scenario isn't likely but it is a possibility. And even if you inherit an ordinary house -- well, not all "money pits" are mansions. So always worth doing the maths.
Post a Comment