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Trading Lessons

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!


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