housing as an investment

[HawkHybrid]

 

housing is probably one of the best investments if you are doing

it for the right reasons. it's hard to go wrong if you own your own

home. peter schiff makes good points on investors in housing

being associated with rent value and interest rates. those who

choose to invest in housing that is not their own home should

have a watch. will interest rates stay at near zero? who decides

what the interest rate is set at, lenders or borrowers?

 

HH

[KDave]

As far as I am concerned I need somewhere to live, so its not so much an investment as a choice of how much money I want to put into that need. A bit like choosing how much I spend on food lol.

I think owning a house outright to live in is a great idea for the right reasons. Currently it is far cheaper for me to rent where I work (thanks to discounted rent) and save the difference but ultimately I will need to buy a house. Most importantly owning offers security of tenure. Second it reduces the cost of living in retirement, in theory at least.

*Started typing this before I watched the video - having now watched it I noticed that peter stole my first two sentences at the end of his speech. 

[Roy]

Yes. Regular readers will know I am keen on owning property. But I realise that everything has changed and this is linked to the post that I made about the youth of today. In the '90s, first houses could be bought for 22k and I was earning 10K a year then. 

[Bumble]

Owning your own home is a good idea, but in the UK the government is waging war against buy-to-let owners, and this is likely to get worse. BTL owners will no longer be able to set their mortgage interest payments off against rental income, and there will be an extra 3% stamp duty on purchases of second properties. For better or worse, a lot of people in the UK think that BTL is why house prices are so high, and so these are just populist measures.

Many investors have pointed out that farmland is one of the best-performing investments over the last 100 years, and over the last 15 years. Some hedge funds have been loading up on farmland, but I don't know how the small investor can gain exposure.

[ChrisSilver]

The guy in the video seems to be very negative towards property. I know the laws for property tax etc are different in the US, so can't comment exactly on that market. But in the UK I personally think it's always better to buy than to rent, if possible.

For most people paying rent for a nice property when they have a high salary isn't a problem, but what about when you retire and have a lower income? You will have to move to a cheaper area, or make substantial changes to your lifestyle.

If you pay the same amount as would cost you in rent towards a mortgage then In 25 years time once the mortgage is paid off you will have an asset. It doesn't even matter if house prices fall and this property becomes a fraction of the price, or even worthless as you would have somewhere free to live.

For me if there was a choice of paying X amount for renting a nice place or paying the same amount towards mortgage on a smaller place, it makes more financial sense to buy as sometime in the future you will have an asset. 

[4Nines7Hills]

If I rented i'd be very worried what would happen after i have retired  as rent would still need to be paid but the mortgage probably would d have been paid off -id rather own a smaller house than worry about rent 

 

Unless of course you can rent then buy your council/ housing assosiation   house for about a tenner  - I had to pay full going rate for my house GGGRRRR

[HawkHybrid]

if you can rent for the same price as buying then long term

it's obviously better to buy. the problem peter schiff is

saying is that it's cheaper to rent than to buy even with

low interest rates. this makes houses overpriced against

it's two main indicators renting and interest rates. he is

not against buying as he says buying can be a good

investment long term.

I remember reading that during that last housing price

rise when first time buyers were priced out btl took their

place and kept up the buying. first time buyers are investors

in housing, btl are traders in housing.(on average btl will

need to rent out to those same ftb who were priced out)

the government are merely reducing the subsidies to btl

owners that they put in place following the crisis. one big

subsidy record low interest rates is still in place. savers

are effectively subsidising borrowers including btl borrowers.

for everyone who wants to own their own home and saving

for a deposit, how nice is it to know that the rightful interest

on those very savings is used to prop up the property market.

many btl owners would need to sell if interest rates went up

to historic averages. this is why people are angry with btl

owners in general.

 

HH

[vand]

I'm well in the bear camp on property simply because ZIRP and the political effort put into pumping up the housing market means prices are well into bubble territory, especially here in London. 

However, here is the thing to consider: from a pure Austrian/free-market perspective, Schiff is dead right. Debt is grossly underpriced and housing is grossly overpriced which is the very definition of a bubble. All bubbles eventually pop, I believe. However, we don't live in a free-market world, and so every effort will be given to maintain the current prices.

There is no way to guess how long it will go on for or how much higher the market might go, because there is simply no true price discovery in operation. Treasuries have been in a 40 year bull market. I dare anyone to have forecast that trend back in 1981. Bubbles can go on for years.. there is no telling when things will eventually revert back to true value.

 

 

[4Nines7Hills]

When i was looking to buy a house I was out bid by Buy to rent people who had deeper pockets than I  time and time again - 

[vand]

I'm well in the bear camp on property simply because ZIRP and the political effort put into pumping up the housing market means prices are well into bubble territory, especially here in London. 

However, here is the thing to consider: from a pure Austrian/free-market perspective, Schiff is dead right. Debt is grossly underpriced and housing is grossly overpriced which is the very definition of a bubble. All bubbles eventually pop, I believe. However, we don't live in a free-market world, and so every effort will be given to maintain the current prices.

There is no way to guess how long it will go on for or how much higher the market might go, because there is simply no true price discovery in operation. Treasuries have been in a 40 year bull market. I dare anyone to have forecast that trend back in 1981. Bubbles can go on for years.. there is no telling when things will eventually revert back to true value.

 

 

[KDave]

Personally the interest on a mortgage for a similar house would cost about the same to service as what I pay in rent and I don't want to retire where I am currently working. Instead I pay the rent and view this as what I would be paying a bank as the interest portion of a mortgage, then I save the difference on what I would be paying back on a capital repayment mortgage and put it into HTB ISA's so that in a few years I can buy where I want to live.  

Speculation as ever causes the volatility in prices, and as others have said overseas buyers and BTL demand has been responsible for much of the volume in sales recently and as a result the prices have risen to levels where people who want a house as somewhere to live are priced out in many areas (not all, seems to be mostly the south of England). These speculative market participants appear to be under somewhat of a squeeze by the government (directly and indirectly via the threat of Brexit) which is likely to continue. In theory if the number of speculators is reduced without demand from elsewhere taking their place, then naturally that is the point at which houses are likely to correct until they reach a level where new market participants can enter.

There are many factors, my favourite is the landlord benefit (housing benefit) which is a likely area that could easily be reduced by a government wishing to enact further austerity. Without this many new entrants into the BTL market will find their positions unviable. Interest rates have a part to play. Sentiment has a part to play. It is common knowledge that houses only ever go up. Except when they don't. There is a lot more downside than up when it comes to housing as an investment.

That said, I agree that bought for the right reasons (to live in, not to speculate), a house is invaluable especially in retirement. As an example - If I told you I was taking out a 25 year loan to invest in stocks most people would think I was crazy. The same logic should apply to housing in my opinion. Borrowing or spending money to service a need (shelter) and borrowing or spending money to invest are two separate things and should be treated as such. All imo.  

[KDave]

5 minutes ago, vand said:

I'm well in the bear camp on property simply because ZIRP and the political effort put into pumping up the housing market means prices are well into bubble territory, especially here in London. 

However, here is the thing to consider: from a pure Austrian/free-market perspective, Schiff is dead right. Debt is grossly underpriced and housing is grossly overpriced which is the very definition of a bubble. All bubbles eventually pop, I believe. However, we don't live in a free-market world, and so every effort will be given to maintain the current prices.

There is no way to guess how long it will go on for or how much higher the market might go, because there is simply no true price discovery in operation. Treasuries have been in a 40 year bull market. I dare anyone to have forecast that trend back in 1981. Bubbles can go on for years.. there is no telling when things will eventually revert back to true value.

 

 

If something is worth saying its worth saying twice

[vand]

There is no doubt at all that inflationary fiat money has made owning real assets such as housing a better choice than renting in the last 40 years. 

2% inflation a year works in the favour of asset owners and debtors.

If we had 2% DEFLATION as could easily happen if we went to sound money there is every possibility that that could work in reverse. Savings would be worth more every year, debt could not be inflated away and would have to be paid off.

 

[vand]

3 hours ago, ChrisSilver said:

The guy in the video seems to be very negative towards property. I know the laws for property tax etc are different in the US, so can't comment exactly on that market. But in the UK I personally think it's always better to buy than to rent, if possible.

For most people paying rent for a nice property when they have a high salary isn't a problem, but what about when you retire and have a lower income? You will have to move to a cheaper area, or make substantial changes to your lifestyle.

If you pay the same amount as would cost you in rent towards a mortgage then In 25 years time once the mortgage is paid off you will have an asset. It doesn't even matter if house prices fall and this property becomes a fraction of the price, or even worthless as you would have somewhere free to live.

For me if there was a choice of paying X amount for renting a nice place or paying the same amount towards mortgage on a smaller place, it makes more financial sense to buy as sometime in the future you will have an asset. 

 

This is true but only upto a point, as ALL depends on the price to earnings and how you think future income will be discounted to the present.

What if prices went so high that the average price of a house went up to £1m, but rents stayed the same (let's say £100/week)?

Would it make sense to pay £2500/month in interest only to service a mortgage on a £1m house when you could rent it for £400/month. With ZIRP in theory you could service an infinite amount of debt, but then you would never be able to pay the capital off so you would be forever in debt to the bank anyway. And, I would argue, that is exactly what we are seeing even in today's Gen-Xers who were fortunate enough to buy in the last decade. The housing ladder does not function anymore, as real debt is still high, and rungs of the housing ladder have simply been stretched further apart.

 

[Paul]

It goes against the grain of most here but I have preferred renting thus far.  But as most know i'm always usually the blacksheep

You can chop and change where you base yourself renting 

Having my main income stream as web based a job hasn't tied my to one location, I have lived in the super quiet countryside in a converted hall, I have shared one of the best x3 bed penthouses in my local city centre when partying was order of the day , lived out on the coast and could get fresh fish landed daily, I enjoy a year living in northern Ireland, had a three month stint in Vegas when the dollar was great exchange rate, a few 4-6 week working breaks to canary islands has been good also

Get the neighbours from hell you can just upsticks and move.

Currently co-lodging a place 112 footsteps away from a pub where i can get a pint for £1.75, and costs me around £250-£300 a month all in without the worry of the boiler breaking or the roof blowing off in a storm

The idea of a mortgage in my 20s always felt like an invisible milestone around my neck for 30 years just seemed crazy

Now in my mid 30s it is a good option to consider, i supppose, far better chance of getting the best deal possible if you can stump up a 30-50% deposit towards it

Money rather invested in mortgage has gone into business which has paid me back well and if push comes to shove i could buy could buy a house outright now as property aint so crazy here up t'north.  

If a big property crash comes hopefully therell be bargains to be had in years to come, i will follow Mr M. Maloneys advice and use my x500 oz of silver to buy a median family home, will be laughing{sigh, if only !} - hopefully 

[HawkHybrid]

57 minutes ago, KDave said:

Interest rates have a part to play

 

I think interest rates have a significant part to play.

lets say a btl has an interest only mortgage at 4%. if interest rates

were to rise to an average of 4% maybe two decades ago. using

the then rate of 7-8% on mortgages would mean a rise of 75% on

this particular btl payments. capital and interest mortgage will have

a lower % rise but they are already bigger monthly payments. how

long can interest rates stay low for? borrowing and lending requires

an agreement from both lenders and borrowers. how long are

lenders willing to lend at record low rates of near zero? I think the

fed rate rise may have increased confidence in lenders to ask for

more interest.

 

HH

[Pete]

With 100% mortgages returning and mortgages repayable well into the age of the eighties it seems to me that you will spend your entire life repaying the loan on your house.
Middle aged higher earners or wealthier retirees already owning their property, probably mortgage free, can buy second and third properties to rent as they see a steady income of about 6% on their investment compared to nil in the bank. However there is no guarantee that property prices will rise and could overnight plummet so it's not risk free.

[Bumble]

In the UK, house prices are unlikely to crash, because the government of the day will pump them up again to restore confidence. People in the UK feel warm and fuzzy when their house is rising in value; from what I understand this is not the case in the US - there people feel warm and fuzzy when their stock portfolios are rising. London certainly might fall somewhat, because it is hugely overvalued, but I doubt there will be a general decline unless it is caused by a major financial catastrophe.

Comparing the cost of renting and owning is more involved than just looking at interest and rent. Owners have repair and maintenance costs and insurance to worry about. I did a back of the envelope calculation to see whether investing in BTL makes sense, and I couldn't get the numbers to work: it just doesn't look like a good prospect unless you are buying in a part of the country where properties are still cheap, or are taking a punt on buying repossessed homes at auction.

 

[4Nines7Hills]

how Can the figures not add up.

For a £100,000 property that could rent for £500 per month, you would need a £25k deposit and roughly £2,000 in buying costs.

 

£75k interest only mortgage at 5% interest rate = £312.50

 

£500 rental income x 12 = £6,000

 

Difference = £2,250

 

Deposit + buying costs = £27k

 

Annual return = 8.3%

 

that doesn't include maintenance  and insurance costs

[Bumble]

Your assumptions are pretty optimistic. £100k doesn't buy you anything where I live, so you are talking about a part of the country where prices are low. Even then, a full 12 months of rental income isn't going to happen: on average you probably have to plan on 10.5 to 11 months per year of occupancy. Your buying costs will be more than £2k - even for a £100k property the new stamp duty for a second property will be 3%. Maintenance costs can be high - I usually budget to spend on average about £1k a year on my house - there is always something that needs doing, roof, fencing, brickwork repointing, windows, plumbing, central heating boiler, painting, electrics, the list goes on. And insurance is much more expensive for BTL than for ordinary home insurance: probably have to allow another £500 per year for that. Result is annual return 0%, assuming nothing big goes wrong and you don't get a tenant from hell, otherwise negative. The only reason to do it is if you speculating on the capital value increasing.

Edit: actually it's worse than that, because your rental income is subject to income tax, and you cannot offset it against the interest.

[vand]

I do agree that housing is a very good investment for the common person, and the best one a person can make for themself, provided that the price isn't in pure bubble territory (market price should be no more than x250 monthly rent) and you are sensible and only buy the property according to your needs, as property is a consumption good as well as an investment. A spare bedroom is nice, but if you can do without it and it adds £60k onto your lifetime cost of purchase then the investment turns into consumption.

It is like buying £200,000's worth of shares, which pay out a 4% dividend, ie £8000/year (£666/month) with a £30k downpayment + £170k 25 year loan.

Nobody does that, (and rightly so) because stocks are more volatile than housing, but supposed you were to do so and could find someone to lend you the money... why wouldn't you? Or would you rather just pay to borrow the shares for a year, collect the dividend, and then hand them back after 12 months? If you buy them, at the end of the loan you would have the same number of shares which would hopefully have a higher price than today simply because the market should have gone up in that time.

 

[Daniel]

Our writer Jennie did a piece titled 'Moving from property to precious metals' just yesterday, you might be interested to have a look.

https://www.bleyerbullion.co.uk/moving-from-property-to-precious-metals

[Bumble]

I think people see ownership of housing as desirable because over the last 50 years prices have risen, so it looks like a sure thing. But ultimately, house prices are driven by the ability to afford them: since most people buy using a mortgage, it is interest rates that matter. We have seen a steady fall in interest rates from the 1980s onwards, which has made high house prices more affordable, but there isn't much further to go. And when you see 100% morgages back on offer, you know we are back in bubble territory once again. I'm glad I own my own home, but I wouldn't invest in property at current prices.