Best of the Week
Most Popular
1. Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - Nadeem_Walayat
2.Gold Price Focusing on May Cycle Bottom - Jim_Curry
3.Silver, silver, and silver! There’s More Than Silver, People! - P_Radomski_CFA
4.Is the Malaysian Economy a Potemkin Village - Sam_Chee_Kong
5.Stock Market Study Shows Why You Shouldn’t “Sell in May and Go Away” - Troy_Bombardia
6.A Big Stock Market Shock is About to Start - Martin C
7.A Long Term Gold Very Unpopular View - Rambus_Chartology
8.Stock Market “Sell in May and go away” Study When Stocks Are Down YTD - Troy_Bombardia
9.Global Currency RESET Challenge: Ultimate Twist - Jim_Willie_CB
10.The Coming Silver Supply Crunch Is Worse Than You Know - Jeff Clark
Last 7 days
Short-term Turnaround in Bitcoin Might Not Be What You Think - 19th Jun 18
Stock Market’s Short Term Downside Will be Limited - 19th Jun 18
Natural Gas Setup for 32% Move in UGAZ Fund - 19th Jun 18
Magnus Collective To Empower Automation And Artificial Intelligence - 19th Jun 18
Trump A Bull in a China Shop - 19th Jun 18
Minor Car Accident! What Happens After You Report Your Accident to Your Insurer - 19th Jun 18
US Majors Flush Out A Major Pivot Low and What’s Next - 18th Jun 18
Cocoa Commodities Trading Analysis - 18th Jun 18
Stock Market Consolidating in an Uptrend - 18th Jun 18
Russell Has Gone Up 7 Weeks in a Row. EXTREMELY Bullish for Stocks - 18th Jun 18
What Happens Next to Stocks when Tech Massively Outperforms Utilities and Consumer Staples - 18th Jun 18
The Trillion Dollar Market You’ve Never Heard Of - 18th Jun 18
The Corruption of Capitalism - 17th Jun 18
North Korea, Trade Wars, Precious Metals and Bitcoin - 17th Jun 18
Climate Change and Fish Stocks – Burning Oxygen! - 17th Jun 18
A $1,180 Ticket to NEW Trading Opportunities, FREE! - 16th Jun 18
Gold Bullish on Fed Interest Rate Hike - 16th Jun 18
Respite for Bitcoin Traders Might Be Deceptive - 16th Jun 18
The Euro Crashed Yesterday. Bearish for Euro and Bullish for USD - 15th Jun 18
Inflation Trade, in Progress Since Gold Kicked it Off - 15th Jun 18
Can Saudi Arabia Prevent The Next Oil Shock? - 15th Jun 18
The Biggest Online Gambling Companies - 15th Jun 18
Powell's Excess Reserve Change and Gold - 15th Jun 18
Is This a Big Sign of a Big Stock Market Turn? - 15th Jun 18
Will Italy Sink the EU and Boost Gold? - 15th Jun 18
Bumper Crash! Land Rover Discovery Sport vs Audi - 15th Jun 18
Stock Market Topping Pattern or Just Pause Before Going Higher? - 14th Jun 18
Is the ECB Ending QE a Good Thing? Markets Think So - 14th Jun 18
Yield Curve Continues to Flatten. A Bullish Sign for the Stock Market - 14th Jun 18
How Online Gambling has Impacted the Economy - 14th Jun 18
Crude Oil Price Targeting $58 ppb Before Finding Support - 14th Jun 18
Stock Market Near Another Top? - 14th Jun 18
Thorpe Park REAL Walking Dead Living Nightmare Zombie Car Park Ride Experience! - 14th Jun 18
More on that Gold and Silver Ratio 'Deviant Conundrum' - 13th Jun 18
Silver Shares? Nobody Cares - 13th Jun 18
What Happens to Stocks, Forex, Commodities, and Bonds When the Fed Hikes Rates - 13th Jun 18
Gold and Silver Price Setting Up for A Sleeper Breakout - 13th Jun 18
Tesla Stock Analysis - 12th Jun 18
What Happens Next to Stocks when Russell Goes up 6 Weeks in a Row - 12th Jun 18
Gold vs. Stocks: Ratios Do Not Imply Correlation - 12th Jun 18
Silver’s Not-so-subtle Outperformance - 12th Jun 18

Market Oracle FREE Newsletter

5 "Tells" that the Stock Markets Are About to Reverse

Buy Or Rent A House in the UK - Five Scenarios of Gains or Losses's over the Next Five Years

Housing-Market / UK Housing Nov 03, 2007 - 02:06 AM GMT

By: Nadeem_Walayat

Housing-Market Best Financial Markets Analysis ArticleThe following analysis presents five scenarios that prospective home buyers can use to evaluate whether today is a good or bad time to buy depending on the scenario's that they deem to be the most probable. The analysis is especially geared towards first time buyers seeking to buy an average priced property of £200,000.


Costs of Buying a £200,000 House

The following represent the baseline costs associated with purchasing an average priced house of £200,000, including mortgage servicing costs likely to be occurred over the next 5 years.

Average House prices
200000
Mortgage
160000
Deposit
-40000
Stamp Duty
-2000
Purchase costs
-2500
Repairs and Building Insurance 1% per annum -10000
Repayment @ £6500 per annum
-32500
Interest paid 5 years @ 6.25%
-46250
Total costs over 5 years
-133250
Outstanding Mortgage Balance after 5 years
127500

 

1. No Change in House Prices Over the Next 5 Years

House price value 200000
Total Costs -133250
Equity less Mortgage balance 72500
Net Cost -60750
Rental cost @ 5% of property value -50000
Loss of interest on 40,000 deposit @ 5% (compound) 11051
Interest That would have been earned on annual £6.5k capital repayment 5212
Net cost of renting -33737
Net Cost of Buying Property -27013

 

If house prices remained flat over the next 5 years, you will be £27k worse off than renting.

2. House Prices Rise by 10.4% over the next 5 years (2% per annum)

House price value 220816
Total Costs -133250
Equity less Mortgage balance 93316
Net Cost -39934
Rental cost @ 5% of property value (rising by 2% per annum) -52040
Loss of interest on 40,000 deposit @ 5% (compound) 11051
Interest That would have been earned on annual £6.5k capital repayment 5212
Net cost of renting -35777
Net Benefit of Buying Property -4157

 

If house prices increase by a 2% per annum over the next 5 years, you will be £4k worse off than renting.

3. House Prices Fall by 2% per annum over the next 5 years (9.7%) - (Closest to Market Oracle expectation)

House price value 180784
Total Costs -133250
Equity less Mortgage balance 53284
Net Cost -79966
Rental cost @ 5% of property value (falling by 2% per annum) -48039
Loss of interest on 40,000 deposit @ 5% (compound) 11051
Interest That would have been earned on annual £6.5k capital repayment 5212
Net cost of renting -31776
Net Cost of Buying Property -48190

 

If house prices decrease 10.4% over the next 5 years (2% per annum), you would be £48k worse off than renting.

4. Worse Case Scenario - House Prices crash by 23% (5% per annum)

House price value 154756
Total Costs -133250
Equity less Mortgage balance 27256
Net Cost -105994
Rental cost @ 5% of property value (falling by 5% per annum) -45243
Loss of interest on 40,000 deposit @ 5% (compound) 11051
Interest That would have been earned on annual £6.5k capital repayment 5212
Net cost of renting -28980
Net Cost of Buying Property -77014

 

If house prices crashed by 23% over the next 5 years you would be £77k worse off as against renting

5. Best Case Scenario - House Prices rise by 25% of over the next 5 years (5% per annum)

House price value 250000
Total Costs -133250
Equity less Mortgage balance 122500
Net Cost -10750
Rental cost @ 5% of property value (rising by 5% per annum) -54707
Loss of interest on 40,000 deposit @ 5% (compound) 11051
Interest That would have been earned on annual £6.5k capital repayment 5212
Net cost of renting -38444
Net Benefit of Buying Property 27694

 

If house prices rise by 25% over the next 5 years you would be £28k better off as against renting

I hope the above analysis is of help to first time buyers contemplating taking out large mortgages that are at increased risk of reposessions.

UK Housing Market Forecast for 2008-09 - As of 22nd August 2007
UK House Prices to fall by 15% over two years, falling prices to be accompanied by cuts in UK interest rates. (22nd Aug 07),
1st May 07 - UK Housing Market Heading for a Property Crash
25th Sep 07 - UK Housing Market on Brink of Price Crash - Media Lessons from 1989!
28th Oct 07 - UK House Prices - Primary Reasons For a Sharp Fall

 

By Nadeem Walayat
Copyright (c) 2005-07
Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of analysing and trading the financial markets and is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 100 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Mark Williams
05 Nov 07, 02:46
Buy or Rent UK Housing

You have used a rental return of 5% per anum in your figures, where do you achieve this kind of return in the Uk? I would suggest a figure of 3.5% is much closer to the mark. Then there are other costs involved, buildings insurance, agents fees, repairs and renewals, possible ground rents etc. It is also unusal to have a property rented 100% of the time, why do you not consider this in your figures? I think the scenario for buying a property in the UK is much worse than these examples show!


Nadeem_Walayat
05 Nov 07, 13:01
Buy or Rent - Housing

Thank you for your comments which have been duely noted.

The rental yield varies in the UK from between 6.5% to as low as 3.5%, therefore 5% is the middle of the range.

As for where ? Many areas in the North of England and Scotland. For instance in the city of Sheffield, many properties are yielding between 5% and 6%.

Also this article is not geared towards Buy to let, but rather whether one should buy or rent a property. Therefore agent fees and periods when the building is empty or not applicable.


Beryl Moulson
16 May 08, 07:56
Bond for rented house

I have just found a property to rent. The wonthly rent beoing £625. per month. The Bond the Landlord is asking for is £925. one months rent, plus £100 for each adult, me and my husband and another £100 for the dog. Is this legal and correct. ? thank you


AB
20 Nov 08, 05:26
UK housing renting or buying - Very useful thanks

Thanks for this very useful analysis, I've been wondering how to compare the costs of buying vs. renting for a long time.

I have another scenario that might be useful to assess: Say I was a buy-to-let landlord. Under what scenario would I be better off putting my money in a bank vs. going into a BTL investment. Assuming I would receive monthly rent to cover my mortgage payments exactly and I only had a 20% deposit available to me? Some would say I'd be better off in any situation as a BTL investor because I basically get a free house at the end of the mortgage but this doesn't account for the opportunity cost of not putting any money in a bank to gather interest.

This is what I can't really figure out: assuming my net cash flow is zero for the duration of the mortgage, then is there indeed an opportunity cost at all? Why then do BTL investors rely on property prices going up over time (again assuming rents will always cover mortgage costs)?


David Johnston
16 Apr 09, 02:37
Updated calculations

I would love to see an update estimate for 2009 - repayments of 6.5k per annum on a mortgage of 160k....yeah right!


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules