Buy Or Rent A House in the UK - Five Scenarios of Gains or Losses's over the Next Five Years
Housing-Market / UK Housing Nov 03, 2007 - 02:06 AM GMTBy: Nadeem_Walayat
The following analysis presents five scenarios that prospective home buyers can use to evaluate whether today is a good or bad time 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 occurred over the next 5 years.
| Average House prices | 200000 |
| Mortgage | 160000 |
| Deposit | -40000 |
| Stamp Duty | -2000 |
| Purchase costs | -2500 |
| Repairs and Building Insurance 1% per annum | -10000 |
| Repayment @ £6500 per annum | -32500 |
| Interest paid 5 years @ 6.25% | -46250 |
| Total costs over 5 years | -133250 |
| Outstanding Mortgage Balance after 5 years | 127500 |
1. No Change in House Prices Over the Next 5 Years
| House price value | 200000 |
| Total Costs | -133250 |
| Equity less Mortgage balance | 72500 |
| Net Cost | -60750 |
| Rental cost @ 5% of property value | -50000 |
| Loss of interest on 40,000 deposit @ 5% (compound) | 11051 |
| Interest That would have been earned on annual £6.5k capital repayment | 5212 |
| Net cost of renting | -33737 |
| Net Cost of Buying Property | -27013 |
If house prices remained flat over the next 5 years, you will be £27k 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 | -133250 |
| Equity less Mortgage balance | 93316 |
| Net Cost | -39934 |
| Rental cost @ 5% of property value (rising by 2% per annum) | -52040 |
| Loss of interest on 40,000 deposit @ 5% (compound) | 11051 |
| Interest That would have been earned on annual £6.5k capital repayment | 5212 |
| Net cost of renting | -35777 |
| Net Benefit of Buying Property | -4157 |
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%) - (Closest to Market Oracle expectation)
| House price value | 180784 |
| Total Costs | -133250 |
| Equity less Mortgage balance | 53284 |
| Net Cost | -79966 |
| Rental cost @ 5% of property value (falling by 2% per annum) | -48039 |
| Loss of interest on 40,000 deposit @ 5% (compound) | 11051 |
| Interest That would have been earned on annual £6.5k capital repayment | 5212 |
| Net cost of renting | -31776 |
| Net Cost of Buying Property | -48190 |
If house prices decrease 10.4% over the next 5 years (2% per annum), you would be £48k worse off than renting.
4. Worse Case Scenario - House Prices crash by 23% (5% per annum)
| House price value | 154756 |
| Total Costs | -133250 |
| Equity less Mortgage balance | 27256 |
| Net Cost | -105994 |
| Rental cost @ 5% of property value (falling by 5% per annum) | -45243 |
| Loss of interest on 40,000 deposit @ 5% (compound) | 11051 |
| Interest That would have been earned on annual £6.5k capital repayment | 5212 |
| Net cost of renting | -28980 |
| Net Cost of Buying Property | -77014 |
If house prices crashed by 23% over the next 5 years you would be £77k worse off as against renting
5. Best Case Scenario - House Prices rise by 25% of over the next 5 years (5% per annum)
| House price value | 250000 |
| Total Costs | -133250 |
| Equity less Mortgage balance | 122500 |
| Net Cost | -10750 |
| Rental cost @ 5% of property value (rising by 5% per annum) | -54707 |
| Loss of interest on 40,000 deposit @ 5% (compound) | 11051 |
| Interest That would have been earned on annual £6.5k capital repayment | 5212 |
| Net cost of renting | -38444 |
| Net Benefit of Buying Property | 27694 |
If house prices rise by 25% over the next 5 years you would be £28k better off as against renting
I hope the above analysis is of help to first time buyers contemplating taking out large mortgages that are at increased risk of reposessions.
UK Housing Market Forecast for 2008-09 - As of 22nd August 2007 |
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UK House Prices to fall by 15% over two years, falling prices to be accompanied by cuts in UK interest rates. (22nd Aug 07), |
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By Nadeem Walayat
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Nadeem Walayat has over 20 years experience of analysing and trading the financial markets and is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 100 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.
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