Good reads from around the Web.
According to the PricedOut campaign as quoted in The Guardian, it’s better for a first-time buyer to forgo Help To Buy, and instead rent and save for a larger deposit and a cheaper mortgage down the line:
The organisation compared the average monthly cost of renting with the cost of repaying an average mortgage around England and Wales and found that the interest rates on Help to Buy loans meant it was cheaper everywhere to rent than to buy.
In London, repaying a 95% loan at a rate of 4.99% cost £1,437 a month based on the price of a typical first home of £256,000, compared with average rents of £1,141.
The gap was smaller elsewhere, but even in the north-east where average rents were £533 a month, according to the latest LSL index figures, PricedOut said it was more expensive to service a 95% mortgage. It said to repay a loan on a property costing £104,000 would cost a first-time buyer £584 a month.
London has gone absolutely bananas. Again. I was chuckling at some investing literature the other day suggesting that a landlord look for properties that can be rented out for 1% of the purchase price. By that measure, my two and a half bed terrace in West London should rent for at least £5,000 a month!
In reality it costs me £1,600.
Who is the nutter here, me or my landlord? Property in the UK inflames passions and opinions, and there will be no shortage of people who’ll say he’s an idiot speculator at the top of the biggest bubble / Ponzi scheme in history.
I used to confidently say such stuff 9-10 years ago. Then prices doubled again.
Others, particularly the old, the traditional, and the closely acquainted with me, will point out renting gives you no asset at the end of 25 years. I’ve now been renting in London for over two decades, counting my student years 1. This is no longer a purely theoretical matter.
A once in a thirty generation opportunity
The reality is that at today’s interest rates – the lowest for at least 300 years in the UK – my landlord is doing okay. In fact after the crazy price rises of the past two years in London, he’s doing far better than okay in capital terms.
As someone who prides himself on his investing nous, I can’t dismiss lightly the fact that my landlord has made at least £100,000 over the period, and I helped fund his bet.
On the other hand, if/when interest rates rise, the economics fall apart. As one Guardian columnist notes elsewhere in response to the PricedOut maths:
A £200,000 mortgage may, just, be affordable at around £1,200 a month on today’s rates. But it only needs the base rate to rise from 0.5% to 2.5% to push up repayments by £250 a month.
If rates were to rise to 4.5%, the homebuyer would be forking out £500 more a month, assuming he or she is on a mortgage that moves with the base rate.
The elephant lurking in the room in London and the South East is house price appreciation. That’s what stands ready to shit on sit on those who’d try to be too clever and sensible about what has long seemed a blatantly bonkers price boom.
It’s not always like this, nor everywhere. We have a PricedOut campaign in the UK because our house prices never properly fell. As things stand, our young people need either rich parents or extraordinarily lucky career paths (statistically speaking – it’s irrelevant that your nephew Barry got an internship at Goldman Sachs, there aren’t ten million of those to go around) in order to buy a decent family house fit for 25 years where the jobs are.
Or they need to emigrate. In the US, where property was at the epicentre of the 2008 crash, it’s a different story. Few people there now expect much more from their houses than that they keep up with inflation. If anything they’re too pessimistic, in my view.
He’s a mug, I’m a mug
My late 2011 bet to buy housebuilders instead of a new house here in London has paid off in pure return terms. The shares doubled and tripled in value in just two years. If I was a hedge fund manager, I’d be being interviewed for the Sunday supplements. Go me!
No so fast. It’s virtually impossible to keep up with the gearing benefit of a mortgage when prices are rising. The house I sit in – and rent – has gone up £100,000 in 18 months. It’s forecast to do so again over the next three years.
Making six-figures with the help of a bank is easy money of the highest order. I’ve known people who can trace six-figure returns from London property back to one decision in the late 1990s to get onto the ladder by sneakily amassing a deposit via some credit cards. They hadn’t saved much before and – bar the forced saving of a mortgage – they haven’t since.
It’s hard not to feel like dumb money in the face of that, whether you’re a 23-year old who is priced out, or a 40-year old who missed his chance because he thought he was smart enough to know better.
Prices in London are insanely high, and those who buy despite that keep making money.
- In the mid-to-late 1990s London property was very cheap. My problem was I had no Bank of Mum and Dad, and also that I was a freelance. But no excuses, I could have bought somewhere cheap. I missed my chance[↩]
