2 year plan: Buy or Rent

[esupergoodh]

Maybe my question is typical of many folk at the moment but I just want to run through the figures to check that I've got the correct understanding of it all. Any feedback very much appreciated. Thanks

I've read enough stuff now to be pretty confident that house prices are going to drop by as much as 20% in the next 2 years. But we ideally need to move house to make room for babies and I'd like room for a piano too

TWO OPTIONS:
Buy now OR Rent now, buy later

For the sake of easy maths let's say that we want to buy a house that is currently worth £200,000 and let's say the same size house would cost about £700 p/m to rent.

If we rent now for 2 years that will be a total of £16,800 paid in rent money. It's gone down the drain and can never be got back.

If we buy now for £200,000 and prices do drop by 20% then that's £40,000 worth of lost house value and, crucially, even when the house prices recover in 2013 (as is expected) it won't really matter because we aren't planning to sell for 20-30 years BUT we will still have been stung with large monthly mortgage payments due to buying before prices had finished dropping.

I'm not looking for the house to make any sort of short/medium turn return on investment. We just want to buy a house without overpaying so that we don't have huge mortgage repayments once interest rates rise back to some sort of normal level.

Thanks in advance for any feedback.

[IFA]

If you are right about house prices dropping by 20% in 2 years then clearly in your circumstances as stated you would benefit financially by renting for that 2 year period and then buying once the market has bottomed out, but I think you already know all of that from the figures you have worked out for yourself in your post, so I wonder why you are asking the question?

My guess is that you are unsure about the theory of a 20% drop in housing values, even though you say that you are “pretty confident” about it, and I think you would be right to question the validity of that opinion.

As a precautionary tale - a friend of mine decided to sell his house in 2004, he believed what a number of “experts” were starting to predict and thought that the market had peaked and he could cash in on the inflated value. He then planned to rent for 2-3 years whilst the market crashed and then buy back in at a cheaper price thus reducing his mortgage.

Guess what? He's still renting and a lot of his equity that he took out of the house has been spent now. Maybe he'll never buy again.

If I was a cynical type (which I am) I might think that these so-called experts have something to gain from spreading rumours in the press about impending housing booms & crashes and subsequently causing the public to fulfil their predictions by changing their attitudes, habits and actions accordingly.

You also state “I'm not looking for the house to make any sort of short/medium [term] return on investment. We just want to buy a house without overpaying so that we don't have huge mortgage repayments once interest rates rise back to some sort of normal level.”

I can understand your concern here, having a smaller mortgage would in theory make your monthly repayments lower for any given interest rate, but remember that if you have rented for two years then to clear the mortgage debt by a particular age (before retirement for example) then you would have to reduce the term by 2 years and pay the mortgage back more quickly which will push the payments back up again. Without knowing the future (ie the differences in the amount of your mortgage debt the number of years repayment and the interest rate you would pay if you bought now or waited, then there's no way of knowing which is better).

Lastly keep in mind that house price indexes represent a national average and that if house prices do reduce by 20% in the next 2 years then that could mean a 30% drop in one part of the country and a 10% drop in another. If you’re in the 10% town then the advantages of waiting would be at best negligible, if you’re in the 30% town then you’ve had a result. A famous line from Dirty Harry asking “Do you feel lucky….” springs to mind!

My opinion: Trusting the "experts" can be dangerous when so much is at stake and successfully predicting the UK housing market is a foolish game that you will only win by luck rather than any kind of insight. Unless you're Nostradamus or Mystic Meg don't bother trying.

If you are buying a family home which is not intended to be a profit making venture and you can afford to buy now then don't play games with your future, you might get it horribly wrong.

Of course, all of the above is just my opinion, it may be right; it may be wrong, just like the speculation of house prices dropping 20%. Nobody knows for sure either way, go with your instinct but consider the consequences first.

I hope that’s helpful to some degree, sorry if it sounds harsh I don’t mean it to.

[Dan S]

Great post from IFA there. It's also worth considering that the newspapers go with the most sensational headline and not necessarily the sensible one. National house prices are very important to follow, but LOCAL house price trends are much more important.

[jodieB]

I am not an expert but the thing to consider are local price trend is important as all the areas are not the same. I would say buy. Why? Interest rates are low now and will have to increase at some point? As inflation it rising, interest rates will rise. So considering that you are renting and lose £16,800, you buy and you lose £40,000 in the short term, which if the sequences of events you predict happen is a real term loss of £23,200. This however is a long-term venture and therefore wont actually lost this money. House prices will peak again. I is a difficult situation. If it was me I would buy because the quicker you set up home the less head ache in the future.

[New Homes Expert]

RENT prices will fall over the next two years

[jodieB]

Do not know if I agree with New Home Expert that rent prices falling. This is my theory; it is a case of supply and demand. If people consider that they will have negative equity if they buy a home and decide to rent. Then the renting market will become over populated and as a result supply will be limited and demand high, thus thinking the rental market will not also fall.

[Jeannie D]

The Nationwide house prices report for July shows a modest increase, yet again, of 0.2% which helps to mitigate the gradual decline from 2010 prices. It's a national snapshot, of course, so there will be plenty of regional variations as Dan S pointed out elsewhere. However, the Nationwide's analysis is that the sluggish demand for houses has been almost exactly matched by the muted availability of properties on the market - in other words, straightforward supply and demand as Jodie B has pointed out. The UK also currently has the fastest growing population in the EU. The demand for housing has to go somewhere - so I cannot see why rents would necessarily fall.

[Jeannie D]

Originally Posted by Jeannie D

It's a national snapshot, of course, so there will be plenty of regional variations as Dan S pointed out elsewhere.

Sorry, I meant to say as IFA pointed out (in his very well reasoned post), and Dan S reinforced.

[Dan S]

I don't mind taking the credit!

[Moby Jones]

Originally Posted by jodieB

Do not know if I agree with New Home Expert that rent prices falling. This is my theory; it is a case of supply and demand. If people consider that they will have negative equity if they buy a home and decide to rent. Then the renting market will become over populated and as a result supply will be limited and demand high, thus thinking the rental market will not also fall.

I disagree with him. I believe they will increase over the next couple of years.