"The Fallacy of Home Ownership"
Discussion
Can someone play devil's advocate / explain any flawed arguments in this article?
http://www.therealistictrader.com/the-fallacy-of-h...
As someone who has recently sold a shared ownership property (never buying into a government scheme again) and looking to rent short term, i'm starting to wonder if now is really a good time to be buying or if sticking to renting may work out a better option if I'm able to invest the funds I would be using as a deposit instead.
http://www.therealistictrader.com/the-fallacy-of-h...
As someone who has recently sold a shared ownership property (never buying into a government scheme again) and looking to rent short term, i'm starting to wonder if now is really a good time to be buying or if sticking to renting may work out a better option if I'm able to invest the funds I would be using as a deposit instead.
In my case, my mortgage costs less than the rent I was paying for the year before I decided to buy. I'm not a million miles away from where I was renting so I feel the cost of living, property and whatnot are on a par.
When my mortgage is paid off, regardless of inflation, I'll still have a quantity of capital in that property. When it's paid off and I retire, I won't have any monthly costs to keep that roof over my head
If I was to rent a similar property for a similar length of time, and then retire, what exactly would I have? I'd have spent more money over the 30 years, and come out the other end with nothing, and a need to maintain an income in retirement to keep that roof over my head.
When my mortgage is paid off, regardless of inflation, I'll still have a quantity of capital in that property. When it's paid off and I retire, I won't have any monthly costs to keep that roof over my head
If I was to rent a similar property for a similar length of time, and then retire, what exactly would I have? I'd have spent more money over the 30 years, and come out the other end with nothing, and a need to maintain an income in retirement to keep that roof over my head.
Personally I would only rent if I wanted something short term. For me that's less than a few years.
Anything longer term, into 5+ years and the cost of mortgage interest, upkeep and taxes is likely to be less than the difference between purchase and selling price.
I intend to rent but when I am retired, because I plan to travel. So we hope to rent somewhere small near the sea for 6 months at a time and then travel for 6. Doing this for several years on and off.
Once we have been where we want to go we will buy something.
That said, if the market allows I may do the opposite and buy something near the sea at the start and rent it out myself for the 6 months we are not there. Perhaps air BNB styleee.
Anything longer term, into 5+ years and the cost of mortgage interest, upkeep and taxes is likely to be less than the difference between purchase and selling price.
I intend to rent but when I am retired, because I plan to travel. So we hope to rent somewhere small near the sea for 6 months at a time and then travel for 6. Doing this for several years on and off.
Once we have been where we want to go we will buy something.
That said, if the market allows I may do the opposite and buy something near the sea at the start and rent it out myself for the 6 months we are not there. Perhaps air BNB styleee.
The author's opening paragraph seems to demonstrate one of the biggest flaws - they are given two month's notice to vacate their home as a consequence of someone else's life goals.
Perhaps the cost of responsible home ownership is worth the security this brings.
Perhaps the cost of responsible home ownership is worth the security this brings.
Edited by essayer on Tuesday 24th January 14:10
With house prices where they are now compared to wages and the length of time that people have to take out huge mortgages for (until retirement) home ''ownership'' is little different to just renting it from the bank.
My dad had an unskilled job, yet without any help at all from inheritance he was able to support a stay at home wife and 2 kids, pay off the mortgage on a 4 bed detached house, have a £25k a year pension pot and a six figure sum in cash savings all by the age of 50... I'm willing to bet there's not a single person in the country able to emulate that now thanks to the wonders of rampant HPI.
My dad had an unskilled job, yet without any help at all from inheritance he was able to support a stay at home wife and 2 kids, pay off the mortgage on a 4 bed detached house, have a £25k a year pension pot and a six figure sum in cash savings all by the age of 50... I'm willing to bet there's not a single person in the country able to emulate that now thanks to the wonders of rampant HPI.
feef said:
In my case, my mortgage costs less than the rent I was paying for the year before I decided to buy. I'm not a million miles away from where I was renting so I feel the cost of living, property and whatnot are on a par.
When my mortgage is paid off, regardless of inflation, I'll still have a quantity of capital in that property. When it's paid off and I retire, I won't have any monthly costs to keep that roof over my head
If I was to rent a similar property for a similar length of time, and then retire, what exactly would I have? I'd have spent more money over the 30 years, and come out the other end with nothing, and a need to maintain an income in retirement to keep that roof over my head.
Pretty much this. Renting is fine in the short term, gives you flexibility.When my mortgage is paid off, regardless of inflation, I'll still have a quantity of capital in that property. When it's paid off and I retire, I won't have any monthly costs to keep that roof over my head
If I was to rent a similar property for a similar length of time, and then retire, what exactly would I have? I'd have spent more money over the 30 years, and come out the other end with nothing, and a need to maintain an income in retirement to keep that roof over my head.
It will be a few decades before housing supply can properly keep up with demand.
Dave buys a £240,000 house and in 30 years pays off the mortgage to give £240,000 equity
Sarah rents for 30 years and invests her deposit to give her £419k cash
So the conclusion is that Sarah can buy the £240,000 property and still have cash for retirement
Ignoring that
Sarah has paid rent far in excess of the mortgage interest
Sarah has paid for upkeep as part of her rent
Dave's house after 30 years will probably be worth £2,000,000
Sarah has to pay £2,000,000 for an equivalent house as £240,000 will be used car money by then
Sarah rents for 30 years and invests her deposit to give her £419k cash
So the conclusion is that Sarah can buy the £240,000 property and still have cash for retirement
Ignoring that
Sarah has paid rent far in excess of the mortgage interest
Sarah has paid for upkeep as part of her rent
Dave's house after 30 years will probably be worth £2,000,000
Sarah has to pay £2,000,000 for an equivalent house as £240,000 will be used car money by then
There is another group of buyers who PH find abhorrent in the main, people such as myself who purchased through right to buy. I wont give the exact amounts but it works out something like the below..
House worth £170,000
Less discount £72,000
Purchase price £98,000
Old monthly rent £395
New Mortgage per month £450 (interest is fixed at 4.5% from memory for the first 10 years)
So I am £55 a month worse off, plus buildings insurance and the other things such as boiler cover etc I am probably closer to £200 a month worse off, however I have a minimum of £72,000 worth of equity in the house, I have a low mortgage that I can overpay into and be mortgage free in my 40's if I so chose (early 30's now)
Now I am not the norm in house purchasing from that respect however I am far from a rarity. So the assertion that buying a house now no matter the situation is a bad investment seems flawed. My house is unlikely to be worth less than I purchased at even with a big crash to the market that people keep predicting will happen (I have no knowledge to say one way or the other) but I do no that with the social housing reforms being discussed and considered that I am likely to be in a much better position long term. There is also a big plus to home ownership which is that you get to chose where you live (mostly!) which is a BIG positive.
A question that maybe the more informed can help with here, why do they insist on comparing our housing market to those on the continent? Culturally it isn't relevant and with our markets set to separate surely the relevance of such a comparison is a very mute point?
House worth £170,000
Less discount £72,000
Purchase price £98,000
Old monthly rent £395
New Mortgage per month £450 (interest is fixed at 4.5% from memory for the first 10 years)
So I am £55 a month worse off, plus buildings insurance and the other things such as boiler cover etc I am probably closer to £200 a month worse off, however I have a minimum of £72,000 worth of equity in the house, I have a low mortgage that I can overpay into and be mortgage free in my 40's if I so chose (early 30's now)
Now I am not the norm in house purchasing from that respect however I am far from a rarity. So the assertion that buying a house now no matter the situation is a bad investment seems flawed. My house is unlikely to be worth less than I purchased at even with a big crash to the market that people keep predicting will happen (I have no knowledge to say one way or the other) but I do no that with the social housing reforms being discussed and considered that I am likely to be in a much better position long term. There is also a big plus to home ownership which is that you get to chose where you live (mostly!) which is a BIG positive.
A question that maybe the more informed can help with here, why do they insist on comparing our housing market to those on the continent? Culturally it isn't relevant and with our markets set to separate surely the relevance of such a comparison is a very mute point?
feef said:
If I was to rent a similar property for a similar length of time, and then retire, what exactly would I have? I'd have spent more money over the 30 years, and come out the other end with nothing, and a need to maintain an income in retirement to keep that roof over my head.
This is the key for me too; it just seem very unlikely that you could invest the difference between the cost of renting and buying (if there is one at all), and 25 years later end up with enough to buy a similar house. Even if it were within the bounds of possibility I still wouldn't be all that keen to try. For me not having to pay rent in retirement is very important, so if being certain of that means doing it the boring old-fashioned way and paying down a repayment mortgage over 20 years, that's what I'll do. I'm not going to risk my well-being in retirement by deluding myself that I can time the market/devise a whizz-bang investment strategy where so many others have failed.
essayer said:
Dave buys a £240,000 house and in 30 years pays off the mortgage to give £240,000 equity
Sarah rents for 30 years and invests her deposit to give her £419k cash
So the conclusion is that Sarah can buy the £240,000 property and still have cash for retirement
Ignoring that
Sarah has paid rent far in excess of the mortgage interest
Sarah has paid for upkeep as part of her rent
Dave's house after 30 years will probably be worth £2,000,000
Sarah has to pay £2,000,000 for an equivalent house as £240,000 will be used car money by then
Indeed. There was some good stuff in the article, but he really let himself down with that particular example.Sarah rents for 30 years and invests her deposit to give her £419k cash
So the conclusion is that Sarah can buy the £240,000 property and still have cash for retirement
Ignoring that
Sarah has paid rent far in excess of the mortgage interest
Sarah has paid for upkeep as part of her rent
Dave's house after 30 years will probably be worth £2,000,000
Sarah has to pay £2,000,000 for an equivalent house as £240,000 will be used car money by then
essayer said:
The author's opening paragraph seems to demonstrate one of the biggest flaws - they are given two month's notice to vacate their home as a consequence of someone else's life goals.
Perhaps the cost of responsible home ownership is worth the security this brings.
Indeed. I believe that in continental Europe (France and Germany at least), renters have proper long term lease agreements. The 6 or 12 month ASTs that we use in this country make the renting a very different prospect. It can only be a short term thing, with no medium/long term home security (the average tenancy in the UK is 18 months). Great for landlords though, means they can turf out a tenant with a couple of months notice, so it makes their housing stock almost liquid compared to a proper long term investment.Perhaps the cost of responsible home ownership is worth the security this brings.
Edited by essayer on Tuesday 24th January 14:10
His example is rather stacked his way/flawed as well. Firstly it's based on other stock, commodity and currency investments averaging a 10% return pa. Like that's almost a given (sounds optimistic to me), and risk free. Compared to bricks and mortar? A stock market crash is likely to be a lot worse than a house price crash.
Conversely, his example is overlooks house price inflation completely. At the 30 year point, when the buyer starts to live mortgage (and rent) free, the renter has to keep renting (or buy). How anyone can think it's reasonable to expect stocks & shares to appreciate at 10% per year, but house prices not to appreciate at all. And we're talking compound increases in house prices - if you take a very pessimistic house price inflation figure of 2% over those 30 years, the £240k house is now worth £434k.
Over the past 40 years, house price inflation has averaged 7%/yr. That may have been an exceptional 40 years, and may well not be sustain for the next 30-40, but if it did then the £240k house would be worth £1.8m in 30 years. Sounds ridiculous, but what was the £240k house worth 30 years ago? Probably about £30k, which sounds just as ludicrous as the forward projection, yet it's true.
Further, in the example given, he completely brushes off rent increases over the next 30 years as comparable to the cost of maintaining/furnishing (don't most tenants rent unfurnished anyway?) a house for 30 years. But if house prices do continue to rise, no doubt rents will proportionately.
Why does he even mention £2000 council tax, that'll be the same buying or renting. And the cost of maintaining the garden would be pretty much the same - if you rent a house with the benefit of a garden you're usually responsible for it's upkeep.
Hell, he might be right, but his example is clearly loaded to suit him trying to justify his own point. In 30 years the buyer will have paid off their mortgage, they will probably be close to retirement age, and have the comfort that they'll be able to live rent free (or even downsize and free up some equity). As long as they meet the mortgage repayments that should be guaranteed. On the other hand, the renter, may or may not have saved enough cash to finally buy a house of their own. Who knows what property prices, salaries and pensions will be doing by then?
A tenant will likely have moved house several times through no choice of their own during 30 years of renting. Ultimately a house (as a primary residence) is not just a business investment though, it's a home, and one that you're in control of.
Article said:
And they profit in a colossal manner. Not only is the bank earning an above inflation return on the money they lend to you, they also create the money they lend to you, right there on the spot, out of thin air. Poof! Hard to believe isn’t it. Put it this way, if I were a bank and you were a customer to whom I was granting a home loan, it would be pretty much the same as if I had a printing press in my attic, where I would quickly print up £500k in counterfeit currency to lend to you. You then sign a contract with dire consequences to yourself should you ever miss a loan payment and then, to make sure I get the best deal possible, charge you an above inflation interest rate currency which I just created out of thin air! It’s the perfect scam, yet the public are oblivious to this all. And yes, it is a scam which would be illegal if you or I did it! But when the banks behave like this, it is called fractional reserve lending and, whether you like it or not, it is perfectly legal
Quite simply, this is bolllocks!NickCQ said:
Quite simply, this is bolllocks!
Have a read of this BoE paper. Looks like the commercial banks can indeed just create new money out of nothing when the loan is made. It doesn't look like a fake article.http://www.bankofengland.co.uk/publications/Docume...
It's not really the same as "your mate in the attic" printing it though. They are supposed to have the capital to make good any non-performing loans.
As for the BoE claim that prudential regulation keep the commercial banks for doing anything silly, then we know how well that turns out.
OK so we all follow the article advice, and sell our houses so we can rent instead.............who buys the houses were all selling? (not to mention the very likely massive drop in prices from several million houses suddenly on the market)
1st time buyers now become 1st time renters, where are the houses they need to rent going to come from?
Who is going to buy these houses for other people to rent?
As houses are now worth next to nothing, who is going to build them at what is very likely going to be a loss?
Where are the landlords, if owning houses is a bad idea?
Even if our 1st time renters are able to find a house to rent, where does the extra money come from to invest for retirement?
For a stable housing market there needs to be a good mix of everything, social housing, 1st time buyers, up sizers, down sizers, renters, landlords and so on. To simple claim that all bar one group are making a mistake, is just nonsense and stinks of yet another person who will forever be waiting for the "big property crash" where magically they can suddenly afford to buy and its no longer a "mugs game".
What few good points he makes, is lost in the mire of bad/poor/incorrect advice/information/examples.
1st time buyers now become 1st time renters, where are the houses they need to rent going to come from?
Who is going to buy these houses for other people to rent?
As houses are now worth next to nothing, who is going to build them at what is very likely going to be a loss?
Where are the landlords, if owning houses is a bad idea?
Even if our 1st time renters are able to find a house to rent, where does the extra money come from to invest for retirement?
For a stable housing market there needs to be a good mix of everything, social housing, 1st time buyers, up sizers, down sizers, renters, landlords and so on. To simple claim that all bar one group are making a mistake, is just nonsense and stinks of yet another person who will forever be waiting for the "big property crash" where magically they can suddenly afford to buy and its no longer a "mugs game".
What few good points he makes, is lost in the mire of bad/poor/incorrect advice/information/examples.
mike74 said:
With house prices where they are now compared to wages and the length of time that people have to take out huge mortgages for (until retirement) home ''ownership'' is little different to just renting it from the bank.
My dad had an unskilled job, yet without any help at all from inheritance he was able to support a stay at home wife and 2 kids, pay off the mortgage on a 4 bed detached house, have a £25k a year pension pot and a six figure sum in cash savings all by the age of 50... I'm willing to bet there's not a single person in the country able to emulate that now thanks to the wonders of rampant HPI.
Yes but you father has probably had to make do without a beard, focaccia bread, a new iPhone every year, lavish holidays and a new car with Rrp larger than his salary every other year. My dad had an unskilled job, yet without any help at all from inheritance he was able to support a stay at home wife and 2 kids, pay off the mortgage on a 4 bed detached house, have a £25k a year pension pot and a six figure sum in cash savings all by the age of 50... I'm willing to bet there's not a single person in the country able to emulate that now thanks to the wonders of rampant HPI.
On a serious note the issue today is probably 50:50. Firstly, despite what Boomers argue they are the generation that never had it so easy to make money. Low asset values, huge tax incentives, huge salary inflation and pension contributions etc. Their children, conversely, face the exact opposite and will be much poorer but have been raised to think money is easy and for simply pissing away. And that is what most of them are doing.
Unfettered debt is the cause and issue. Excess debt simply transfers wealth from the poorer and/or feckless to the minority and the Boomers began deregulating the debt markets as quickly as they were allowed to create the economic miracle we have now where after 20 years of 'no one being poor any more' in reality everyone is poorer and your solid middle classes can't even buy cars without the nevernever or the type of family property traditionally commensurate with their career.
GregK2 said:
Can someone play devil's advocate / explain any flawed arguments in this article?
http://www.therealistictrader.com/the-fallacy-of-h...
As someone who has recently sold a shared ownership property (never buying into a government scheme again) and looking to rent short term, i'm starting to wonder if now is really a good time to be buying or if sticking to renting may work out a better option if I'm able to invest the funds I would be using as a deposit instead.
He is selling an FX trading system that he has publicly proven as he can't even afford a house. Nothing he says or writes is likely to be true or educated. He's a turd. http://www.therealistictrader.com/the-fallacy-of-h...
As someone who has recently sold a shared ownership property (never buying into a government scheme again) and looking to rent short term, i'm starting to wonder if now is really a good time to be buying or if sticking to renting may work out a better option if I'm able to invest the funds I would be using as a deposit instead.
Playing Devil's Advocate, everyone manages their money differently, and has a different attitude towards risk.
I'm crap at saving, but good at paying a mortgage. Having a mortgage, and scheduling in a regular overpayment in the SO is an effective way to make me save money. If I never see the money, I never spend it.
I, like others here, love the idea of not having to pay rent to have a roof over my head when I retire. But what I'll need to do then is adjust my attitude to saving to make sure I'm putting money aside for repairs.
I would rather rent a (diminishing) percentage of the house from a bank to own my home by paying a mortgage than pay (increasing) rent monthly to some other chap who will own the house I paid for.
When it's your home, and you are raising kids in a place that is (to them as well as you) a place of safety and security, it's difficult to put a price on that.
I'm crap at saving, but good at paying a mortgage. Having a mortgage, and scheduling in a regular overpayment in the SO is an effective way to make me save money. If I never see the money, I never spend it.
I, like others here, love the idea of not having to pay rent to have a roof over my head when I retire. But what I'll need to do then is adjust my attitude to saving to make sure I'm putting money aside for repairs.
I would rather rent a (diminishing) percentage of the house from a bank to own my home by paying a mortgage than pay (increasing) rent monthly to some other chap who will own the house I paid for.
When it's your home, and you are raising kids in a place that is (to them as well as you) a place of safety and security, it's difficult to put a price on that.
swerni said:
DonkeyApple said:
He is selling an FX trading system that he has publicly proven as he can't even afford a house. Nothing he says or writes is likely to be true or educated. He's a turd.
Awesome summary.You seem to have covered every major point
No, I think that DonkeyApple has said all that needs to be said.
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