Renting vs Buying - Tell me my maths is wrong!?!?

[walm]

GrizzlyBear said:

Just to be clear here generally inflation doesn’t erode debt, inflation is usually an enemy. Salary increases above inflation are just about the only thing that are going to erode debt (or actually paying it off), as it means you are more able to service the debt – just don’t forget salary increases are usually taxed, so that 5% salary raise when the costs increase by 5% could mean you are worse off as your rise is taxed. Inflation above salary increases (like now for almost everyone) is very bad as it means necessities like food & fuel take up an increasing proportion of salaries and there is less surplus for debt repayment – what would be really bad for the over-borrowed minority is if this was happening at the lowest base rate for over 300 years and at the end of a huge credit bubble …. Oh dear...

I agree with much of what you wrote however, as this thread ably demonstrates, people are simply incapable of distinguishing between repayment and interest payments.

So if they can afford to "pay" their mortgage they will buy their property.
"Pay" in this instance means pay the interest AND principal.
Unless you are making regular overpayments or REALLY close to the line - even below inflation wage rises won't stop buying making sense.

Therefore inflation becomes a VERY good thing since you have at least one MAJOR element of your costs which is FIXED: your mortgage (assuming you have a 25 year fix which no one does but everybody uses in their flawed maths).
While at the same time your house is becoming more valuable.

In fact, you could even take a little equity out if you are in a pinch or if you want a holiday or a newer poverty spec 3-series with a '14 reg like Jones next door who clearly has a far smaller willy than you...
That would never go wrong.

I digress.
A little inflation is a good thing mostly, IMHO.

[Mr Whippy]

GrizzlyBear said:

Will generation Y learn from your parents that you need to vote in elections if you want politicians to listen.

What other ludicrous schemes the next few governments are going to cook up (at taxpayers expense of course) to stop the market correcting back to where people can actually afford housing again.

How long it will take before lettings are properly regulated.

When will interest rates increase.

How long before the rapidly increasing national debt and ageing population force tax increases.

They are some good unknown variables.

There is clearly a mess to come and it's on the horizon right now. When it arrives is just a matter of time.

My biggest worry is what ludicrous schemes the government will cook up to try perpetuate the past like it's something we need to preserve, rather than learning to adapt to the future and how things may have to be, even if that is relatively painful.

By all means soften the transition (proper correction), but to think that the late 90's economic boom into the mid 00's was anything but a credit driven frenzy is bonkers. It seems everyone thinks that is what we should go back to but it's clear it was just an anomaly best forgotten and never repeated!

[fido]

Mr Whippy said:

By all means soften the transition (proper correction), but to think that the late 90's economic boom into the mid 00's was anything but a credit driven frenzy is bonkers. It seems everyone thinks that is what we should go back to but it's clear it was just an anomaly best forgotten and never repeated!

There are too many vested interests (some on here) for those in power to change their ways. We'll just have ride this out with the rising tide inflation pricing out those at the bottom. At a personal level i'm trying to be as debt-neutral as possible but the herd will continue to pile in until it's too late.

[Mr Whippy]

fido said:

Mr Whippy said:

By all means soften the transition (proper correction), but to think that the late 90's economic boom into the mid 00's was anything but a credit driven frenzy is bonkers. It seems everyone thinks that is what we should go back to but it's clear it was just an anomaly best forgotten and never repeated!

There are too many vested interests (some on here) for those in power to change their ways. We'll just have ride this out with the rising tide inflation pricing out those at the bottom. At a personal level i'm trying to be as debt-neutral as possible but the herd will continue to pile in until it's too late.

Well hopefully the next time greed overheats the market there won't be anywhere to hide. QE and interest rate drops worked the first time, but there is nothing to fall back on now.

If values rise too hard now it's just gonna be another bubble. They need to stay still for years against the backdrop of inflation and salary rises to actually get more affordable. I can't see that happening any time soon either.

So boom/bust again it is imo at least

[98elise]

GrizzlyBear said:

jonny70 said:

OP its very simple . Over the long term buying makes most sense due to inflation

Just to be clear here generally inflation doesn’t erode debt, inflation is usually an enemy. Salary increases above inflation are just about the only thing that are going to erode debt (or actually paying it off), as it means you are more able to service the debt – just don’t forget salary increases are usually taxed, so that 5% salary raise when the costs increase by 5% could mean you are worse off as your rise is taxed. Inflation above salary increases (like now for almost everyone) is very bad as it means necessities like food & fuel take up an increasing proportion of salaries and there is less surplus for debt repayment – what would be really bad for the over-borrowed minority is if this was happening at the lowest base rate for over 300 years and at the end of a huge credit bubble …. Oh dear...

The big unknowns for me:

Will generation Y learn from your parents that you need to vote in elections if you want politicians to listen.

What other ludicrous schemes the next few governments are going to cook up (at taxpayers expense of course) to stop the market correcting back to where people can actually afford housing again.

How long it will take before lettings are properly regulated.

When will interest rates increase.

How long before the rapidly increasing national debt and ageing population force tax increases.

If inflation doesn't erode debt, then why can't buy a house with a 3k loan like my parents did in 1966?

They took a 3k mortgage, and borrowed the deposit. It was a real struggle. 15 years later my Dad was able to pay the oustanding debt with his savings.

The mortgage on my first house was 30k, and it was a huge debt at the time. 30k can be saved in a few years these days.

The real terms value of debts is eroded by inflation. By buying you are locking you costs to a point in time. 20-25 years later your housing costs are far less in real terms, and likely to be zero very soon.

Edited by 98elise on Friday 11th April 09:49

[Mr Whippy]

The value of debt is eroded by inflation if salaries generally rise at the same rate.

But if salaries don't rise then the same proportion of your earnings are required to service the debt.


We haven't seen salary rises much at all, never mind ones that out-pace inflation since 2009 or so when things went awry.

So even if we start to get salary rises outpacing inflation, they'll have to be that way for half a decade before we even have a situation where earning vs debt ratio is similar to a 2009 level, before we can start feeling wealthier vs our debts that we took around that period!




But we are assuming that history will dictate the future outcome. We always think bouncing back and high growth occur between slumps but that may not be the case this or any other time.

This might be the best there is for a generation or so now.

Dave

[walm]

Mr Whippy said:

The value of debt is eroded by inflation if salaries generally rise at the same rate.

But if salaries don't rise then the same proportion of your earnings are required to service the debt.

That is only one part of the equation though.
If house prices also rise (inflation) while the debt service remains fixed then on a relative basis you are better off (your equity has risen).

This is because your other option was to rent and assuming a relatively rational buy-to-let market (a big assumption I grant you) you will have rents set relative to the value of the house - i.e. rising.
So again better off.

So whether salaries rise above of below inflation - if inflation is positive it is usually better to buy and "fix" your housing cost.


You might argue that if wages are rising below inflation then houses are becoming LESS AFFORDABLE - which is true. And you would think the result would be a RTTM situation where house prices adjust downward to compensate.
But that hasn't seemed to stop the inexorable rise of house prices over the last 5 years!!!

[Mr Whippy]

But if your equity improves then it's irrelevant unless you bought as an investment, as everything else rises in value too.

This means higher duty to move house, higher fees, and the houses you might want to move to cost more proportionally too, so you need to borrow more again.


So rising prices is great for those doing BTL, or buying houses as assets/incomes.


I agree wrt rent going up. That is always a risk, but only in an environment where house prices go up beyond inflation and salaries which is what they have done for the last 15-20yrs... I'm unsure what it was like before that.

I even remember discussing with a friend that interest only mortgages made sense because you could get a bigger house for the same price, then when it became affordable in 10-20yrs the actual cost to you would seem tiny in comparison due to all the factors like rising values, rising wages etc... however that was in 2004 and look what has happened since then!

Wages have gone nowhere, nor have house prices in absolute terms, never mind against inflation. You'd have waited a decade and feel just as unable to afford to start repayments of the capital by now... quite different to cases a decade earlier where the values had doubled, salaries were well up etc.


It's all changing all the time but I can't see the current situation as being sustainable. It's just like the ~ 100% growth in my pension fund over the last 4-5 yrs. ~ 18% annum average growth despite the projected for the entire accumulation phase being more like 5%... so when will this growth spurt stop, or level out, or even reverse? Or will it?


Lots of variables but I'm hoping that forces serve to push values down to half what they are today. It'll only do good things for everyone involved, except those who buy them as investments... but hey, investment stocks can go up and down!

Dave