Help to Buy Caution - House Buying or Renting Scenarios
Housing-Market / UK Housing May 29, 2014 - 10:28 AM GMTBy: Nadeem_Walayat
You may not be fully aware that the Help to Buy Scheme is an upto 20% EQUITY BACKED LOAN, which means that the government owns 20% of your property in exchange for the 5 year interest free loan. The loan is repaid when the property is sold or at the end of the mortgage term when you repay 20% of the SALE PRICE. So if house prices rise by 33% then so does the value of the loan at the time of repayment.
So you should think twice before contracting into the help to buy scheme which would be most useful if house prices FELL, as then 20% of a lower priced property would result in LESS amount to be repaid to the government.
Though off course rising house prices also mean that you still end up with a percentage share of a larger amount.
Another point to consider is that the help to buy scheme could be either completely pulled or revised at any time subject to political priorities i.e. who should the government bribe next for votes.
House Buying or Renting Scenarios
The following guide presents five scenarios that prospective home buyers can use to evaluate whether today is a good or bad time for them 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 incurred over the next 5 years.
| Average House prices | 200000 |
| Mortgage | 180000 |
| Deposit - 10% | -20000 |
| Stamp Duty - 1% | -2000 |
| Purchase costs | -2500 |
| Repairs and Building Insurance 1% per annum | -2000 |
| Capital Repayment @ £6950 per annum | -34750 |
| Interest paid 5 years @ 5% average | -40719 |
| Total costs over 5 years | -101969 |
| Outstanding Mortgage Balance after 5 years | 145250 |
| Average Cost per year | -20394 |
1. No Change in House Prices Over the Next 5 Years
| House price value | 200000 |
| Total Costs | -101969 |
| Equity less Mortgage balance | 54750 |
| Net Cost | -67219 |
| Rental cost @ 5% of property value | -50000 |
| Loss of interest on 20,000 deposit @ 2.5% (compound) | 5256 |
| Interest That would have been earned on annual £6.95k capital repayment | 2520 |
| Net cost of renting | -42224 |
| Net Cost of Buying Over Renting | -24995 |
| Average Extra cost per year | -4995 |
If house prices remained flat over the next 5 years, you will be £25k 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 | -101969 |
| Equity less Mortgage balance | 75566 |
| Net Cost | -46403 |
| Rental cost @ 5% of property value | -50000 |
| Loss of interest on 20,000 deposit @ 2.5% (compound) | 5256 |
| Interest That would have been earned on annual £6.95k capital repayment | 2520 |
| Net cost of renting | -42224 |
| Net Cost of Buying Over Renting | -4179 |
| Average Extra cost per year | -836 |
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%)
| House price value | 180784 |
| Total Costs | -101969 |
| Equity less Mortgage balance | 35534 |
| Net Cost | -86435 |
| Rental cost @ 5% of property value | -50000 |
| Loss of interest on 20,000 deposit @ 2.5% (compound) | 5256 |
| Interest That would have been earned on annual £6.95k capital repayment | 2520 |
| Net cost of renting | -42224 |
| Net Cost of Buying Over Renting | -44211 |
| Average Extra cost per year | -8842 |
If as a worst case scenario UK house prices decrease 9.7% over the next 5 years (2% per annum), you would be £44k worse off than renting.
4. House Prices rise by 27.6% (5% per annum)
| House price value | 154756 |
| Total Costs | -101969 |
| Equity less Mortgage balance | 110006 |
| Net Cost | -11963 |
| Rental cost @ 5% of property value | -50000 |
| Loss of interest on 20,000 deposit @ 2.5% (compound) | 5256 |
| Interest That would have been earned on annual £6.95k capital repayment | 2520 |
| Net cost of renting | -42224 |
| Net Profit of Buying Over Renting | 30261 |
| Average Paper Profit per year | 6052 |
If house prices rise by approx half the forecast rate of 5% per annum by then over the 5 years you would be £77k worse off as against renting
5. Market Oracle Forecast Scenario - House Prices rise by 55% of over the next 5 years (5% per annum)
| House price value | 310000 |
| Total Costs | -101969 |
| Equity less Mortgage balance | 164750 |
| Net Cost | 42781 |
| Rental cost @ 5% of property value | -50000 |
| Loss of interest on 20,000 deposit @ 2.5% (compound) | 5256 |
| Interest That would have been earned on annual £6.95k capital repayment | 2520 |
| Net cost of renting | -42224 |
| Net Profit of Buying Over Renting | 85005 |
| Average Paper Profit per year | 17001 |
If house prices rises as forecast by 55% over the next 5 years then a 200k home owner would be £85k better off over renting, and therein lies the economic feel good factor as house prices will be rising annually at the rate of approx 2/3rds of average home owners salary.
As an very approx guide for your own property, take the current value and divide by 200,000 and then multiply by the Net cost or profit. Though before you take the leap do read the sections on the dangers of debt.
House Buying Profit and Loss Forecast Calculator
A regularly updated online UK house prices forecast calculator will be available at the market oracle website that allows you to input your own individual data in terms of house purchase price, mortgage etc, which then calculates how much profit or loss you can expect to make over the coming years as compared against renting. This calculator will be regularly updated to take account of future trend expectations. http://www.marketoracle.co.uk/calculators.htm (ETA July 2014).
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1. U.S. Housing Market Analysis and Trend Forecast 2013-2016 - 27 pages
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2. U.K. Housing Market Analysis and House Prices Forecast 2014-2018 - 107 pages
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- What Can You Afford to Buy?
- Home Buyers Guide
- Home Sellers Guide
- Top 15 Value Increasing Home Improvements
- Home Improvements to Avoid
- Home Winter Weather Proofing 22 Point Survey
These guides will further be supplemented from Mid 2014 onwards by a series of online videos and regularly updated calculators such as the Home Buying Profit and Loss Calculator, which will seek to give calculations on whether to buy or rent based on personal individual circumstances, that will be updated to include the latest expected trend trajectories for future house price inflation i.e. you will have your own personal house price forecast.
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Source and comments: http://www.marketoracle.co.uk/Article45808.html
By Nadeem Walayat
Copyright © 2005-2014 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.
Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.
Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 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
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