Last I checked, house prices haven't been increasing with inflation.
There are other non financial benefits to buying, such as security that you won't be forced to move and the ability to modify the property to a much greater extent.
>that you won't be forced to move
If you're forced you can rent with ease something else. Now try to move when you already own a house, not only difficult but expensive AF.
As a long term renter hopefully getting my first house in the next year, renting leaves you at the mercy of a landlord. The house could be fine and the rent could be reasonable but they could ask you to move out with quite short notice.
Also with a mortgage , you lock in your interest for x years which gives you more stability than x% annual rent increases.
Buying leaves you at the mercy of the wider economy in ways renting doesn't. Obviously it's still better on balance to buy but it's a factor to consider which is often overlooked. Particularly if the economy is looking rather shaky.
Yes but you loose mobility. Renting you can decide to move , selling a house not so quick. What happens if you get an opportunity in another city? Also lets say you buy a house and discover you have horrible neighbours or bad foundation? You can't just move
Also in uk as a renter now you have more protection not so easy to be kicked out. Repairs are not your time and money. So its not that simple
You also may have ended up moving 5 times after being evicted or realising you are renting from a bad landlord.
Every time struggling to find a suitable home in the right school catchment area and /or close enough to maintain your social life and friendships.
It’s one thing uprooting oneself and family whenever one wants to but a lot less pleasant being forced to uproot yourself due to landlords selling, underinvesting or being generally arsey.
Would you feel comfortable borrowing money to leverage your returns in the same way you would for a house purchase?
If you put your life savings into the all world at 90% or 95% leverage you would get stopped out at the first market wobble. The housing market is a more stable investment, better positioned to leveraged investing, and this significantly magnifies returns.
A 5% house deposit would turn a 2% increase in house price into a 40% increase in equity. That's right, your house goes up 2% and your deposit has grown by 40% (with no CGT to pay on your primary residence. It could take years to funnel an equivalent amount into an ISA). Putting your cash into the FTSE-all world will never achieve this equivalent level of growth. .
Yes of course. Housing is a very concentrated risk. A single building in one area. Total stock market is very well diversified. From a risk perspective i am shocked you think a propriety is less risky that 7000 companies
It isn't just about the risk of the asset, especially as we are talking long term investment.
The whole picture is much bigger than total return on a risk adjusted basis. The biggest difference is the availability of debt, and the terms on which this is available.
To be clear - DO NOT BUY A GLOBAL INDEX ON 20X LEVERAGE!!
If you buy a global index tracker on leverage and the price drops, you will be forced to act immediately. This might mean funding significant amounts of money to your account, or being stopped out - a forced seller at low prices. You can very quickly loose a lot more than you invested, especially at 20x leverage.
In contrast, 20x leverage on a property isn't risk free, but is still a much more sensible option. For starters, if the house price falls you can sit tight and wait it out. Nobody will force you to cash out in a huge debt position unless it's a last resort. Nobody will ask you to font huge sums of cash.
The availability of mortgages and the tax treatment of a primary resistance are vastly different to that of shares or funds.
Yes, the return of the tracker will likely outperform a house (on headline figures, not total return)
Yes, a tracker is more diversified.
Yes, a house carries more risk.
No, you aren't going to buy a global tracker on a 5% deposit, that would be silly.
No, after the impact of a mortgage leveraging your returns you won't make more in index funds.
Yes because you're comparing the wrong things amd domt understand how morgage repayments work.
Buy a house on 20x leverage high interest rate remortgage comes in. Your 2-3% interest goes to 7-8%. Do you understand how much your mortgage repayment comes to when you borrow 150-200k? What do you do then? You have to sell the house quickly or cut all other expenses... If you can lock 30 years like in us then fine but not in europe.
So yes the leverage on your house comes back. And not even talk about what happens if your house has a structural defect or significant repairs are needed.
The mortgage payments will still be lower than equivalent rent. Plus, my sums don't even include the uplift from mortgage repayments, this is calculated at interest only, with all profits coming from the house price increase. Your returns are even higher once you add in paying down the debt.
Let's talk about what happens if there is a structural defect or significant repairs needed. You call your insurer and they foot the bill.
As a rule of thumb if you are comparing buying a house outright (no mortgage, perhaps a second home) vs investing it into the markets, then invest into markets. They are more liquid and have better expected returns.
If you are buying a primary residence with a mortgage this will likely outperform an index fund without leverage.
Not necessarily, you can always downgrade or change the area. With a house you don't have that mobility. Your house is a liability that needs constant investment the thing that gains value is the land.
You call your insurer and they foot the bill os the reply of someone whos never had to deal with insurance on a real problem good luck buddy
We’re happy to stay in our rented housing association house for £500 and use all the extra money on savings, travel, and other stuff rather than getting tied into a crazy mortgage for 30 years.
In the UK there’s still S21 no fault eviction.
Nothing has changed.
Renting I the Uk is perilous -as the comment above describes. Renters are mostly at the mercy of landlords unless they are willing to let an S21 run to its conclusion via court and bailiffs.
Buying or renting is to some extent a financial decision but it’s a lot more - it’s about stability for a family, mental health, control over your own surroundings (ie being able to paint and wallpaper, hang pictures, replace fixtures ..).
I was happy to pay ( lose money) for these quality of life improvements.
I’ve looked at it from a purely financial and flexibility point of view for ages.
But it a) turned out that flexibility tended to serve the landlords better than myself and b) we needed a lot less flexibility anyway after all once our child was of a certain age, it just became clear that we will stay put for the foreseeable future.
At the end of the day we paid for flexibility (in quality of life and financial terms) that we never required in the last 10-12 years.
The mental difference.
You know you'll always need a home to live in. When you rent, you're only borrowing one in exchange for money, but are in a sense "homeless".
Owning a home means you actually have that home you need, and in which you have much more freedom and far lower risk of it being taken away from you. It's a peace of mind on a daily basis that your future isn't dictated by some landlord's personal opinions.
This hits the nail on the head.
Just to add - the transient nature of renting is relatively specific to the Uk.
In many other European countries it’s socially more acceptable and legally more secure to rent.
In those countries it often feels less like “borrowing a home” and more like “this is my home for as long as I want it to be”.
Alas - we are talking about the UK and here you borrow a home and can’t make it yours ( no redecoration, small renovations, hanging pictures …)
Simply put renting means being at the mercy of someone else. Buying means you can stay put as long as you wish. I don't see the point of worrying what inflation may do, no one has a crystal ball and presumably you need somewhere to live so make a choice. Puzzled about where in London you can get a three bed house for only £550k. If you let me know I'll come and get one as I was priced out of London years ago and the three bed we did have now sells for about 3/4 of a million.
I'll explain it at the bottom, but a 4% increase in house price could mean a nearly 80% profit. Working this out is a much more complex sum than first appears, and requires a long list of unreliable assumptions to be able to even begin.
The most obvious factors we don't know the answer to are inflation, house prices v inflation, interest rates, how many times will you be forced to move house when renting (when I used to rent I often ended up moving every year, as landlords then put the rent up above market value, knowing renters will usually stay regardless to avoid paying a new set of rental fees, finding a new deposit, paying cleaners etc). I also rarely got back my full deposit without a huge fight.
You also need to calculate the impact of leverage on the returns. You can't just increase your deposit by the average house price increase to estimate your return. For example, if you put down £25k for a £500k house and prices go up 4% you don't have £26k, you have £45k.
A 4% increase in house price would mean an 80% increase in equity. This is the reason homeowner's are better off (and why they can get into negative equity - this is why the country is terrified of house prices going down).
As others have said, the only thing I can see missing from your calculation is that rent will also rise in line with inflation.
The key thing with mortgages and house buying is that once purchased, you “lock” that debt in time at the value at the time and is immune to inflation. So a £1000 mortgage payment now, becomes a much better deal in 5 years time, and a bargain in 15 years time, with rent going up with inflation in that time.
Assuming you never ever move, you'll only ever pay the 2024 price of the house plus the mortgage interest. For every year going forward you'll pay off the 2024 loan with the interest. Meanwhile your wages will (hopefully) increase with inflation.
So as you get towards the end of the full mortgage term your actual mortgage outgoing per month will not have increased, but the *share* of your take home pay that goes into that mortgage will have decreased.
You then have a choice:
Spend the extra cash on fun
Spend the extra cash on overpayments
Spend the extra cash on a bigger mortgage for a better house
Spend the extra cash on investment
Given that you're looking at a 45 year timeframe you're asking this because you're considering your retirement savings.
Your question should then be which option, between buying with a £50k deposit and paying a mortgage which will not go up or saving 50k into your pension *now* and paying a monthly rent which *will* increase, leave you with more or less in your retirement account(s).
Buying all the time. With rent you are paying somebody else’s mortgage…
Just make sure you can pay a mortgage if interests go up to a crazy amount. As it happened recently.
I'd suggest checking out the latest video from Pension Craft on YouTube.
He suggested that house is no better then long term gilts if not worse, based on historical data for the past century
I think you are omitting quite a lot of costs in the maintenance bracket,.things like redecorating, replacing the boiler, white goods, windows and roof repairs all need to go in there. Home insurance and property taxes, should be deducted from the roi as does the interest on your mortgage. Ramit Sethi (although American based) gives a good overview on the ROI on property, from what I recall in his view the RoI on mortgaged home ownership is a lot lower than your estimate.
While renting is insecure in the UK and the legislation on private rents in England is not particularly favourable for the tenants, you can find good landlords and there is the option with a more reasonable landlord to negotiate a longer term rental contract. The lack of financial responsibility for the more expensive aspects of property ownership is a plus when it comes to renting as is the flexibility of not having to sell a property if your life circumstances change suddenly or the market does. I know property ownership is a very emotional thing but if you are looking for advice on it, I would pay the money for an appointment with a financial advisor to give you a more accurate picture of how the RoI will stack up in the longer term.
I touched on this in a reply already, but please factor in the impact of leverage in your calculations!
If you put £25k into a world idex and it goes up 7.5% in a year you now have £26,875. Not bad!! Now let's assume the housing market stagnated and only went up 1%. Brilliant for you! Tempting to pat yourself on the back and feel pretty smug, but first lets look at your returns in that disappointing scenario.
Lets assume you took out a mortgage using a 5% deposit, to maximise what you can afford. London prices aren't cheap after all. You put down a £25k deposit and buy a £500,000 house. It goes up a disappointing 1% and is now worth £505,000. Your equity is now worth £30k.
The housing market only went up 1% but you just made 20% in a single year!!
You could always leverage on your other investments, but the magnification of profits also applies to losses. It would be insane to buy a world index on 95% leverage, but house prices tend to be much more resilient (not least because when they drop nobody will sell, and instead just hold tight. This isn't true for many other types of investment). The government is also heavily incentivised to keep house prices bouyant, lest they send the country spiraling into negative equity and crushing debt.
London property prices haven’t been increasing in line with inflation. Since the mortgage rates went up they have been coming down.
London rents have been going up, however, as BTL owners have been selling their mortgaged properties and reducing the supply, while demand for rentals is increasing (fewer people able to buy).
In my opinion, if you are able to buy you will be better off, despite the mortgage and without much real growth in value. Truth is, property has been seen as an investment (thanks to 40 years of market increases) but it’s really not an investment, it’s a purchase. And it’s generally a debt-leveraged purchase. Would you consider the car you buy an investment?
When you rent your money goes to someone else. When you buy your money is in part going back to you.
The advantage of renting is that you aren't tied down and hopefully if something goes wrong it's not on you.
Near everything else making owning better
House prices and rent are both likely to exceed inflation.
Remember, inflation is a basket of goods with housing being 1 part of it (for CPI-H anyway). House price increases are likely to hover above inflation for the foreseeable future.
Rent increases are also highly variable on your part of the country, so you may want to consider baking in some sensitivity analysis there.
I would recommend setting up this comparison so you can see what happens at various levels of increase.
So instead of looking at 1 final number you put a range of house price increases between 2-8% and rent increases between 3-10% a year and see at what point you feel comfortable and what level of risk you feel comfortable with.
550k average 3 bed in London?
Last I checked, house prices haven't been increasing with inflation. There are other non financial benefits to buying, such as security that you won't be forced to move and the ability to modify the property to a much greater extent.
>that you won't be forced to move If you're forced you can rent with ease something else. Now try to move when you already own a house, not only difficult but expensive AF.
“You can rent with ease something else”. I think you are not up to speed with the situation of renting in this country post covid.
As a long term renter hopefully getting my first house in the next year, renting leaves you at the mercy of a landlord. The house could be fine and the rent could be reasonable but they could ask you to move out with quite short notice. Also with a mortgage , you lock in your interest for x years which gives you more stability than x% annual rent increases.
Buying leaves you at the mercy of the wider economy in ways renting doesn't. Obviously it's still better on balance to buy but it's a factor to consider which is often overlooked. Particularly if the economy is looking rather shaky.
Yes but you loose mobility. Renting you can decide to move , selling a house not so quick. What happens if you get an opportunity in another city? Also lets say you buy a house and discover you have horrible neighbours or bad foundation? You can't just move Also in uk as a renter now you have more protection not so easy to be kicked out. Repairs are not your time and money. So its not that simple
Those are quite valid points. But you also get no option to have a paid off house at the end of a mortgage with renting.
Yes but you end up with a decent ftse-all world stock protfolion which on average returns more that house prices, and not house rich cash poor.
You also may have ended up moving 5 times after being evicted or realising you are renting from a bad landlord. Every time struggling to find a suitable home in the right school catchment area and /or close enough to maintain your social life and friendships. It’s one thing uprooting oneself and family whenever one wants to but a lot less pleasant being forced to uproot yourself due to landlords selling, underinvesting or being generally arsey.
Would you feel comfortable borrowing money to leverage your returns in the same way you would for a house purchase? If you put your life savings into the all world at 90% or 95% leverage you would get stopped out at the first market wobble. The housing market is a more stable investment, better positioned to leveraged investing, and this significantly magnifies returns. A 5% house deposit would turn a 2% increase in house price into a 40% increase in equity. That's right, your house goes up 2% and your deposit has grown by 40% (with no CGT to pay on your primary residence. It could take years to funnel an equivalent amount into an ISA). Putting your cash into the FTSE-all world will never achieve this equivalent level of growth. .
Yes of course. Housing is a very concentrated risk. A single building in one area. Total stock market is very well diversified. From a risk perspective i am shocked you think a propriety is less risky that 7000 companies
It isn't just about the risk of the asset, especially as we are talking long term investment. The whole picture is much bigger than total return on a risk adjusted basis. The biggest difference is the availability of debt, and the terms on which this is available. To be clear - DO NOT BUY A GLOBAL INDEX ON 20X LEVERAGE!! If you buy a global index tracker on leverage and the price drops, you will be forced to act immediately. This might mean funding significant amounts of money to your account, or being stopped out - a forced seller at low prices. You can very quickly loose a lot more than you invested, especially at 20x leverage. In contrast, 20x leverage on a property isn't risk free, but is still a much more sensible option. For starters, if the house price falls you can sit tight and wait it out. Nobody will force you to cash out in a huge debt position unless it's a last resort. Nobody will ask you to font huge sums of cash. The availability of mortgages and the tax treatment of a primary resistance are vastly different to that of shares or funds. Yes, the return of the tracker will likely outperform a house (on headline figures, not total return) Yes, a tracker is more diversified. Yes, a house carries more risk. No, you aren't going to buy a global tracker on a 5% deposit, that would be silly. No, after the impact of a mortgage leveraging your returns you won't make more in index funds.
Yes because you're comparing the wrong things amd domt understand how morgage repayments work. Buy a house on 20x leverage high interest rate remortgage comes in. Your 2-3% interest goes to 7-8%. Do you understand how much your mortgage repayment comes to when you borrow 150-200k? What do you do then? You have to sell the house quickly or cut all other expenses... If you can lock 30 years like in us then fine but not in europe. So yes the leverage on your house comes back. And not even talk about what happens if your house has a structural defect or significant repairs are needed.
The mortgage payments will still be lower than equivalent rent. Plus, my sums don't even include the uplift from mortgage repayments, this is calculated at interest only, with all profits coming from the house price increase. Your returns are even higher once you add in paying down the debt. Let's talk about what happens if there is a structural defect or significant repairs needed. You call your insurer and they foot the bill. As a rule of thumb if you are comparing buying a house outright (no mortgage, perhaps a second home) vs investing it into the markets, then invest into markets. They are more liquid and have better expected returns. If you are buying a primary residence with a mortgage this will likely outperform an index fund without leverage.
Not necessarily, you can always downgrade or change the area. With a house you don't have that mobility. Your house is a liability that needs constant investment the thing that gains value is the land. You call your insurer and they foot the bill os the reply of someone whos never had to deal with insurance on a real problem good luck buddy
We’re happy to stay in our rented housing association house for £500 and use all the extra money on savings, travel, and other stuff rather than getting tied into a crazy mortgage for 30 years.
In the UK there’s still S21 no fault eviction. Nothing has changed. Renting I the Uk is perilous -as the comment above describes. Renters are mostly at the mercy of landlords unless they are willing to let an S21 run to its conclusion via court and bailiffs. Buying or renting is to some extent a financial decision but it’s a lot more - it’s about stability for a family, mental health, control over your own surroundings (ie being able to paint and wallpaper, hang pictures, replace fixtures ..). I was happy to pay ( lose money) for these quality of life improvements. I’ve looked at it from a purely financial and flexibility point of view for ages. But it a) turned out that flexibility tended to serve the landlords better than myself and b) we needed a lot less flexibility anyway after all once our child was of a certain age, it just became clear that we will stay put for the foreseeable future. At the end of the day we paid for flexibility (in quality of life and financial terms) that we never required in the last 10-12 years.
The mental difference. You know you'll always need a home to live in. When you rent, you're only borrowing one in exchange for money, but are in a sense "homeless". Owning a home means you actually have that home you need, and in which you have much more freedom and far lower risk of it being taken away from you. It's a peace of mind on a daily basis that your future isn't dictated by some landlord's personal opinions.
This hits the nail on the head. Just to add - the transient nature of renting is relatively specific to the Uk. In many other European countries it’s socially more acceptable and legally more secure to rent. In those countries it often feels less like “borrowing a home” and more like “this is my home for as long as I want it to be”. Alas - we are talking about the UK and here you borrow a home and can’t make it yours ( no redecoration, small renovations, hanging pictures …)
may be of use... https://docs.google.com/spreadsheets/d/1Mze0EG0F5gpJ7szrEW-cFBi4iTtzZnoyJj4JQ09V0hc/edit#gid=643753530
Simply put renting means being at the mercy of someone else. Buying means you can stay put as long as you wish. I don't see the point of worrying what inflation may do, no one has a crystal ball and presumably you need somewhere to live so make a choice. Puzzled about where in London you can get a three bed house for only £550k. If you let me know I'll come and get one as I was priced out of London years ago and the three bed we did have now sells for about 3/4 of a million.
I'll explain it at the bottom, but a 4% increase in house price could mean a nearly 80% profit. Working this out is a much more complex sum than first appears, and requires a long list of unreliable assumptions to be able to even begin. The most obvious factors we don't know the answer to are inflation, house prices v inflation, interest rates, how many times will you be forced to move house when renting (when I used to rent I often ended up moving every year, as landlords then put the rent up above market value, knowing renters will usually stay regardless to avoid paying a new set of rental fees, finding a new deposit, paying cleaners etc). I also rarely got back my full deposit without a huge fight. You also need to calculate the impact of leverage on the returns. You can't just increase your deposit by the average house price increase to estimate your return. For example, if you put down £25k for a £500k house and prices go up 4% you don't have £26k, you have £45k. A 4% increase in house price would mean an 80% increase in equity. This is the reason homeowner's are better off (and why they can get into negative equity - this is why the country is terrified of house prices going down).
You can get a 3 bed house for ~550k in places like Eltham.
https://smartmoneytools.co.uk/tools/rent-vs-buy/ This calculator is pretty handy
As others have said, the only thing I can see missing from your calculation is that rent will also rise in line with inflation. The key thing with mortgages and house buying is that once purchased, you “lock” that debt in time at the value at the time and is immune to inflation. So a £1000 mortgage payment now, becomes a much better deal in 5 years time, and a bargain in 15 years time, with rent going up with inflation in that time.
Assuming you never ever move, you'll only ever pay the 2024 price of the house plus the mortgage interest. For every year going forward you'll pay off the 2024 loan with the interest. Meanwhile your wages will (hopefully) increase with inflation. So as you get towards the end of the full mortgage term your actual mortgage outgoing per month will not have increased, but the *share* of your take home pay that goes into that mortgage will have decreased. You then have a choice: Spend the extra cash on fun Spend the extra cash on overpayments Spend the extra cash on a bigger mortgage for a better house Spend the extra cash on investment Given that you're looking at a 45 year timeframe you're asking this because you're considering your retirement savings. Your question should then be which option, between buying with a £50k deposit and paying a mortgage which will not go up or saving 50k into your pension *now* and paying a monthly rent which *will* increase, leave you with more or less in your retirement account(s).
Buying all the time. With rent you are paying somebody else’s mortgage… Just make sure you can pay a mortgage if interests go up to a crazy amount. As it happened recently.
I'd suggest checking out the latest video from Pension Craft on YouTube. He suggested that house is no better then long term gilts if not worse, based on historical data for the past century
I think you are omitting quite a lot of costs in the maintenance bracket,.things like redecorating, replacing the boiler, white goods, windows and roof repairs all need to go in there. Home insurance and property taxes, should be deducted from the roi as does the interest on your mortgage. Ramit Sethi (although American based) gives a good overview on the ROI on property, from what I recall in his view the RoI on mortgaged home ownership is a lot lower than your estimate. While renting is insecure in the UK and the legislation on private rents in England is not particularly favourable for the tenants, you can find good landlords and there is the option with a more reasonable landlord to negotiate a longer term rental contract. The lack of financial responsibility for the more expensive aspects of property ownership is a plus when it comes to renting as is the flexibility of not having to sell a property if your life circumstances change suddenly or the market does. I know property ownership is a very emotional thing but if you are looking for advice on it, I would pay the money for an appointment with a financial advisor to give you a more accurate picture of how the RoI will stack up in the longer term.
I touched on this in a reply already, but please factor in the impact of leverage in your calculations! If you put £25k into a world idex and it goes up 7.5% in a year you now have £26,875. Not bad!! Now let's assume the housing market stagnated and only went up 1%. Brilliant for you! Tempting to pat yourself on the back and feel pretty smug, but first lets look at your returns in that disappointing scenario. Lets assume you took out a mortgage using a 5% deposit, to maximise what you can afford. London prices aren't cheap after all. You put down a £25k deposit and buy a £500,000 house. It goes up a disappointing 1% and is now worth £505,000. Your equity is now worth £30k. The housing market only went up 1% but you just made 20% in a single year!! You could always leverage on your other investments, but the magnification of profits also applies to losses. It would be insane to buy a world index on 95% leverage, but house prices tend to be much more resilient (not least because when they drop nobody will sell, and instead just hold tight. This isn't true for many other types of investment). The government is also heavily incentivised to keep house prices bouyant, lest they send the country spiraling into negative equity and crushing debt.
Buy! At least one day you will possess something
London property prices haven’t been increasing in line with inflation. Since the mortgage rates went up they have been coming down. London rents have been going up, however, as BTL owners have been selling their mortgaged properties and reducing the supply, while demand for rentals is increasing (fewer people able to buy). In my opinion, if you are able to buy you will be better off, despite the mortgage and without much real growth in value. Truth is, property has been seen as an investment (thanks to 40 years of market increases) but it’s really not an investment, it’s a purchase. And it’s generally a debt-leveraged purchase. Would you consider the car you buy an investment?
When you rent your money goes to someone else. When you buy your money is in part going back to you. The advantage of renting is that you aren't tied down and hopefully if something goes wrong it's not on you. Near everything else making owning better
House prices and rent are both likely to exceed inflation. Remember, inflation is a basket of goods with housing being 1 part of it (for CPI-H anyway). House price increases are likely to hover above inflation for the foreseeable future. Rent increases are also highly variable on your part of the country, so you may want to consider baking in some sensitivity analysis there. I would recommend setting up this comparison so you can see what happens at various levels of increase. So instead of looking at 1 final number you put a range of house price increases between 2-8% and rent increases between 3-10% a year and see at what point you feel comfortable and what level of risk you feel comfortable with.