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Help to Buy Caution - House Buying or Renting Scenarios

Housing-Market / UK Housing May 29, 2014 - 10:28 AM GMT

By: Nadeem_Walayat

Housing-Market

You may not be fully aware that the Help to Buy Scheme is an upto 20% EQUITY BACKED LOAN, which means that the government owns 20% of your property in exchange for the 5 year interest free loan. The loan is repaid when the property is sold or at the end of the mortgage term when you repay 20% of the SALE PRICE. So if house prices rise by 33% then so does the value of the loan at the time of repayment.


So you should think twice before contracting into the help to buy scheme which would be most useful if house prices FELL, as then 20% of a lower priced property would result in LESS amount to be repaid to the government.

Though off course rising house prices also mean that you still end up with a percentage share of a larger amount.

Another point to consider is that the help to buy scheme could be either completely pulled or revised at any time subject to political priorities i.e. who should the government bribe next for votes.

House Buying or Renting Scenarios

The following guide presents five scenarios that prospective home buyers can use to evaluate whether today is a good or bad time for them 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 incurred over the next 5 years.

Average House prices
200000
Mortgage
180000
Deposit - 10%
-20000
Stamp Duty - 1%
-2000
Purchase costs
-2500
Repairs and Building Insurance 1% per annum -2000
Capital Repayment @ £6950 per annum
-34750
Interest paid 5 years @ 5% average
-40719
Total costs over 5 years
-101969
Outstanding Mortgage Balance after 5 years
145250
Average Cost per year -20394

 

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

House price value 200000
Total Costs -101969
Equity less Mortgage balance 54750
Net Cost -67219
Rental cost @ 5% of property value -50000
Loss of interest on 20,000 deposit @ 2.5% (compound) 5256
Interest That would have been earned on annual £6.95k capital repayment 2520
Net cost of renting -42224
Net Cost of Buying Over Renting -24995
Average Extra cost per year -4995

 

If house prices remained flat over the next 5 years, you will be £25k 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 -101969
Equity less Mortgage balance 75566
Net Cost -46403
Rental cost @ 5% of property value -50000
Loss of interest on 20,000 deposit @ 2.5% (compound) 5256
Interest That would have been earned on annual £6.95k capital repayment 2520
Net cost of renting -42224
Net Cost of Buying Over Renting -4179
Average Extra cost per year -836

 

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%)

House price value 180784
Total Costs -101969
Equity less Mortgage balance 35534
Net Cost -86435
Rental cost @ 5% of property value -50000
Loss of interest on 20,000 deposit @ 2.5% (compound) 5256
Interest That would have been earned on annual £6.95k capital repayment 2520
Net cost of renting -42224
Net Cost of Buying Over Renting -44211
Average Extra cost per year -8842

 

If as a worst case scenario UK house prices decrease 9.7% over the next 5 years (2% per annum), you would be £44k worse off than renting.

4. House Prices rise by 27.6% (5% per annum)

House price value 154756
Total Costs -101969
Equity less Mortgage balance 110006
Net Cost -11963
Rental cost @ 5% of property value -50000
Loss of interest on 20,000 deposit @ 2.5% (compound) 5256
Interest That would have been earned on annual £6.95k capital repayment 2520
Net cost of renting -42224
Net Profit of Buying Over Renting 30261
Average Paper Profit per year 6052

 

If house prices rise by approx half the forecast rate of 5% per annum by then over the 5 years you would be £77k worse off as against renting

5. Market Oracle Forecast Scenario - House Prices rise by 55% of over the next 5 years (5% per annum)

House price value 310000
Total Costs -101969
Equity less Mortgage balance 164750
Net Cost 42781
Rental cost @ 5% of property value -50000
Loss of interest on 20,000 deposit @ 2.5% (compound) 5256
Interest That would have been earned on annual £6.95k capital repayment 2520
Net cost of renting -42224
Net Profit of Buying Over Renting 85005
Average Paper Profit per year 17001

 

If house prices rises as forecast by 55% over the next 5 years then a 200k home owner would be £85k better off over renting, and therein lies the economic feel good factor as house prices will be rising annually at the rate of approx 2/3rds of average home owners salary.

As an very approx guide for your own property, take the current value and divide by 200,000 and then multiply by the Net cost or profit. Though before you take the leap do read the sections on the dangers of debt.

House Buying Profit and Loss Forecast Calculator

A regularly updated online UK house prices forecast calculator will be available at the market oracle website that allows you to input your own individual data in terms of house purchase price, mortgage etc, which then calculates how much profit or loss you can expect to make over the coming years as compared against renting. This calculator will be regularly updated to take account of future trend expectations. http://www.marketoracle.co.uk/calculators.htm (ETA July 2014).

...... continues in the New UK Housing Market Ebook available for FREE DOWNLOAD (only requirement is a valid email address).

New Housing Market Ebook - FREE DOWNLOAD

The housing market ebook of over 300 pages comprises four main parts :

1. U.S. Housing Market Analysis and Trend Forecast 2013-2016 - 27 pages

The US housing market analysis and concluding trend forecast at the start of 2013 acted as a good lead exercise for the subsequent more in-depth analysis of the UK housing market.

2. U.K. Housing Market Analysis and House Prices Forecast 2014-2018 - 107 pages

The second part comprises the bulk of analysis that concludes in several detailed trend forecasts including that for UK house prices from 2014 to 2018 and their implications for the outcome of the next General Election (May 2015) as well as the Scottish Referendum.

3. Housing Market Guides - 138 Pages

Over 1/3rd of the ebook comprises of extensive guides that cover virtually every aspect of the process of buying, selling and owning properties, including many value increasing home improvements continuing on in how to save on running and repair costs with timely maintenance tasks and even guides on which value losing home improvements should be avoided.

  • What Can You Afford to Buy?
  • Home Buyers Guide
  • Home Sellers Guide
  • Top 15 Value Increasing Home Improvements
  • Home Improvements to Avoid
  • Home Winter Weather Proofing 22 Point Survey

These guides will further be supplemented from Mid 2014 onwards by a series of online videos and regularly updated calculators such as the Home Buying Profit and Loss Calculator, which will seek to give calculations on whether to buy or rent based on personal individual circumstances, that will be updated to include the latest expected trend trajectories for future house price inflation i.e. you will have your own personal house price forecast.

4. Historic Analysis 2007 to 2012 - 40 pages

A selection of 10 historic articles of analysis to illustrate the process of analysis during key stages of the housing markets trend from the euphoric bubble high, to a state of denial as house prices entered a literal free fall, to the depths of depression and then emergence of the embryonic bull market during 2012 that gave birth to the bull market proper of 2013.

FREE DOWNLOAD (Only requirement is a valid email address)

Source and comments: http://www.marketoracle.co.uk/Article45808.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2014 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.

Housing Markets Forecast 2014-2018The Stocks Stealth Bull Market 2013 and Beyond EbookThe Stocks Stealth Bull Market Update 2011 EbookThe Interest Rate Mega-Trend EbookThe Inflation Mega-trend Ebook

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 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.


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