Author Topic: Buy or continue renting in a property boom?  (Read 4621 times)

Shandi76

  • 5 O'Clock Shadow
  • *
  • Posts: 90
  • Location: Sweden
Buy or continue renting in a property boom?
« on: April 17, 2014, 03:01:49 AM »
My partner and I recently moved from a high cost of living area to a very high cost of living area in relation to house prices. (Yeah, I know, but it was an important career move for him and gets us much closer to friends and relatives.) We are currently renting an expensive 2 bed apartment 15 miles from his work. The rental market here is such a bubble that we couldn't find anything closer: I had to take a week off work to come and find somewhere here, and things would be gone within hours of them being listed.

We've been looking at places to buy, and got massively outbid on a place recently. We're in Scotland and it has an Offers Over system of sealed bid auctions for buying houses. The house we bid on had 7 offers. We offered a five figure sum over the surveyors valuation for the property, but 4 of the other 6 bidders offered more than we did, some offering considerably more. I just got a call from another solicitor about another property we viewed, but it is also going to closing date and will go massively over valuation. It's definitely a buyers market.

In this situation, would you buy a property and swallow the cost of paying over valuation (about 15 - 20% over in most cases)? Or would you keep renting and wait for the crash (which may never come: property prices are local and this is the oil capital of Europe and has barely been touched by the global recession)? The trouble is that rent prices are higher than mortgage payments for equivalent properties so it makes little sense, but neither does spending 250K on a house that is smaller than one I bought in another area for half the cost (currently rented out for a 7% yield). We are likely to be here for at least 5 years, and possibly forever.

The other option we are looking at is buying a lovely cheap (for the area) house that is hard to get a mortgage for as it is next to and above a cafe and several lenders have refused to loan on it for that reason. This is why it is cheap - because even in a boom it is hard to sell as it might have to be a cash purchase or a some other form of loan with higher interest rates. We can't pay cash unless we 'sell all the things' i.e. my rental property and stocks and shares which I don't want to do, particularly for somewhere that will be hard to sell on and may be hard to rent out too.

What would you do in this situation? Please don't suggest we move to a cheaper area because my partner's career is very specialised which very much limits our options (he is committed to his career, not to FI, which is fine by me as long as he lets me handle our investments).

money_bunny

  • Stubble
  • **
  • Posts: 114
Re: Buy or continue renting in a property boom?
« Reply #1 on: April 17, 2014, 05:40:30 AM »
I don't know Scottish tax laws. But mortgage debt is not deductible in the UK right?

1. If you buy a house even at 20% over is it going to be cheaper than renting? Including the opportunity cost of having the money in the market since you are a FI orientated person.  So you will be saving which with a VAT makes saving even more powerful than in the USA. Also there is not the tax deductions we get for mortgage debt.
2. Eventually rates are going to rise putting people out of the market, causing supply and demand to shift, and there you are sitting with your pile of money where interest rates don't matter quite as much since you have this pile of money.


Shandi76

  • 5 O'Clock Shadow
  • *
  • Posts: 90
  • Location: Sweden
Re: Buy or continue renting in a property boom?
« Reply #2 on: April 17, 2014, 06:01:00 AM »
Thanks for the reply money_bunny.

Mortgage debt is not deductible in the UK. Well, it is for landlords so I can count mortgage interest as a business expense on my rental property, but I can't claim tax relief on the mortgage for my main property.

The size of mortgage we are looking at means that the mortgage payment would be cheaper than paying rent. But the problem is the amount over valuation doesn't count towards your deposit from the lenders point of view. So, say we bid for a house that was valued at 195K and the winning bid was 227K. The lender wants a 15% deposit on the 195K valuation and doesn't consider the money you have to pay over that. So the required deposit ends up being 69K rather than 37K, which means selling a lot more shares.

Assuming a 6% average yearly yield on the 69K (UK stock market is more slow and steady than US one and I have some foreign funds but the higher fees reduce the increased yields...) that means an opportunity cost of about 4K which would get us closer to break even point between buying and renting, or even enable us to rent in a slightly nicer neighbourhood than we would stretch ourselves to purchase a property in.

Rebecca Stapler

  • Pencil Stache
  • ****
  • Posts: 907
    • Stapler Confessions
Re: Buy or continue renting in a property boom?
« Reply #3 on: April 17, 2014, 06:56:29 AM »
Because you expect to be there 5 years, but possibly forever, I would wait on buying a home until you know you'll be there for forever, or at least 10 more years. I know it seems like the home value boom could last forever, but I have so many friends who bought a house that was good enough for 5 years, but were underwater after 5 years and couldn't sell because their home price plummeted. Of course, there is a difference in that they could finance the whole thing and you are paying cash on the difference between the "valuation" and what you're paying for it. But if the price of the home plummets then you will be underwater too.

I don't suppose you have any form of rent control there? (ie, your current LL can't raise your rent more than a certain amount each year) That would seal the renting deal for me.

Shandi76

  • 5 O'Clock Shadow
  • *
  • Posts: 90
  • Location: Sweden
Re: Buy or continue renting in a property boom?
« Reply #4 on: April 17, 2014, 07:29:12 AM »
Thanks for the reply Rebecca.

There is no rent control here, so landlords can increase the rent as much as they like and if the tenant doesn't like it their only option is to move out. Landlords tend to increase the rent only gradually (about 6% a year - still over inflation) even in boom areas if they have long term good tenants, then whack the rents up once those tenants move out. I personally have not raised the rent on my tenants in 2 years because they are great tenants and also my rental house is in a softer market.

I'd be happy to rent for a few years whilst squirreling money away, but we are worried by the lack of security of tenure. One is that this was our landlords primary residence and he may evict us in order to move back in once his secondment abroad ends (don't know how long it is for: property manager is evasive about it). Landlords can legally give you 2 months notice to leave even if you are the perfect tenant, if they wish to sell the property or move back in. I know someone this has happened to twice in the past year, and moving is a pain and expensive.

Rebecca Stapler

  • Pencil Stache
  • ****
  • Posts: 907
    • Stapler Confessions
Re: Buy or continue renting in a property boom?
« Reply #5 on: April 17, 2014, 07:47:28 AM »
I understand the uncertainty of it, because we rent now, but it's never been so uncertain that we would only have 2 months' notice. So, I see how that can be jarring. I have a hard time putting my "stamp" on an apartment if I think I'll only be there for a year, and then when we renew our lease I'm disappointed that I didn't hang pictures, etc., the year before ;)

That is definitely a downside to renting. When buying, it's uncertain whether you'll recoup your purchase price, and when renting, it's uncertain whether you'll have to move or your rent will go up. Strictly financially speaking, though, you know your moving costs would be capped at a certain amount; but with buying, you never know how much you could lose (if you do -- which is also an uncertainty; but in a booming market where the banks aren't putting a market value valuation on your property, I would be really nervous about the bubble bursting).

tryan

  • 5 O'Clock Shadow
  • *
  • Posts: 75
Re: Buy or continue renting in a property boom?
« Reply #6 on: April 17, 2014, 08:42:04 AM »
Keep renting.

Plenty of oil booms have gone BUST.  Then everyone scatters.  And if hubby works in the oil industry ... you'll scatter too.

thesinecure

  • 5 O'Clock Shadow
  • *
  • Posts: 54
Re: Buy or continue renting in a property boom?
« Reply #7 on: April 17, 2014, 09:39:30 AM »
tough decision

if you're going to be there 5 years, and can get a mortgage loan at a low rate, i'd probably look to buy if you can find the right place.  if you end up there longer, even better.

if you were to eventually move, would anything stop you from renting out the new place?  if not, that probably limits "down side" of any real estate market decline that could be out there.

i live in houston, obviously a big energy and oil location as well, we never went through the real estate reduction either so somewhat similar to what you're describing but different scale most likely - regardless, anyone who's been waiting for prices to drop has just seen houses continue to go further away from them in the areas they want to live - you can keep going further away from the city center to get cheaper, but then you've got the commute

good luck

Shandi76

  • 5 O'Clock Shadow
  • *
  • Posts: 90
  • Location: Sweden
Re: Buy or continue renting in a property boom?
« Reply #8 on: April 18, 2014, 04:37:33 AM »
Thanks for all the advice. Yes, we could easily rent out a property here: it is a ridiculously hot market. And there is definitely enough oil to keep the place booming for over 30 years, so no issues about needing to scatter soon.

But it looks like our only short term options are 'sell all the things' and buy what we can afford in cash, or else keep renting.

I had no idea how much lenders had tightened up their lending criteria since I last took out a mortgage. At that time (2006) they were happy with the fact I had a permanent job and didn't even ask about probationary periods. Now, even though we are a professional couple, because my partner has a 12 month probation period (which is pretty much a formality, but everyone has to go through it, and even if it wasn't then he could pick up another job really quickly here because the job market is really buoyant...), and I am self-employed, they won't consider us for a mortgage until he has passed his probation, and won't consider my earnings towards the amount we can borrow even though a core of it is very consistent. Gah!

Blindsquirrel

  • Pencil Stache
  • ****
  • Posts: 685
  • Age: 3
  • Location: Flyover country
Re: Buy or continue renting in a property boom?
« Reply #9 on: April 18, 2014, 05:32:35 AM »
   If you know it is a bubble, why would you want to buy? It sounds like the prices are growing at an unsustainable rate. If you think the prices are a bubble in that they will burst and crater, I would not buy anything, as being underwater on your house is horrible.

Shandi76

  • 5 O'Clock Shadow
  • *
  • Posts: 90
  • Location: Sweden
Re: Buy or continue renting in a property boom?
« Reply #10 on: April 18, 2014, 06:18:08 AM »
Blindsquirrel, it is a very strong market, but not a bubble I don't think. There are fundamental reasons as to why the strong growth rates in house prices will continue for at least a decade as the number of jobs in the city keeps increasing much faster than new houses and apartments can be built, and the surrounding towns and villages for 50 miles in all directions are seeing corresponding booms as people have to look further and further out for somewhere affordable or large enough for their needs, even to rent not just to buy.

Even if oil production declined (which is not expected for at least 30 years), all that would happen is the people in the surrounding areas would see their chance to move into the city so there may be a bit of a burst in the furthest out towns, but only a marginal deflation in the city.

Has the New York housing market ever burst? Serious question as I genuinely don't know. I do know some 'up and coming' parts of London suffered a burst in the late 1980s recession, but the affluent areas just levelled off if I recall correctly. Similarly, there are a couple of 'bad' areas here that I would be hesitant to buy in, but most of it seems like a rock solid investment.

waltworks

  • Magnum Stache
  • ******
  • Posts: 4888
Re: Buy or continue renting in a property boom?
« Reply #11 on: April 19, 2014, 03:10:48 PM »
I just thought I'd mention that if you can find a good mortgage broker, you would be surprised what you can get even with a self-employed person and SO new to a job. If you have good credit and a solid downpayment, you can often (I'm assuming you're in the US) make a mortgage happen. Some lenders do indeed refuse to lend to *anyone* who is self employed, or new to their job, etc. Others will lend (at slightly higher rates) to folks with more unconventional situations. One lender (or even a few) turning you down is not the end of the story.

Whether you *should* buy is a harder question but if you're not planning to move for 5 years plus, I'd lean towards yes.

-Walt

Thanks for all the advice. Yes, we could easily rent out a property here: it is a ridiculously hot market. And there is definitely enough oil to keep the place booming for over 30 years, so no issues about needing to scatter soon.

But it looks like our only short term options are 'sell all the things' and buy what we can afford in cash, or else keep renting.

I had no idea how much lenders had tightened up their lending criteria since I last took out a mortgage. At that time (2006) they were happy with the fact I had a permanent job and didn't even ask about probationary periods. Now, even though we are a professional couple, because my partner has a 12 month probation period (which is pretty much a formality, but everyone has to go through it, and even if it wasn't then he could pick up another job really quickly here because the job market is really buoyant...), and I am self-employed, they won't consider us for a mortgage until he has passed his probation, and won't consider my earnings towards the amount we can borrow even though a core of it is very consistent. Gah!

Shandi76

  • 5 O'Clock Shadow
  • *
  • Posts: 90
  • Location: Sweden
Re: Buy or continue renting in a property boom?
« Reply #12 on: April 20, 2014, 12:45:26 PM »
Thanks for the advice waltworks. I'm actually in the UK, not the USA. I do however now have recommendations for several financial advisors and mortgage brokers so I need to decide which one to go with and see if they can come up with a workable solution for us.

Rebecca Stapler

  • Pencil Stache
  • ****
  • Posts: 907
    • Stapler Confessions
Re: Buy or continue renting in a property boom?
« Reply #13 on: April 21, 2014, 12:49:21 PM »
I can't speak to NYC, but the bubble did burst in the Boston area, which has had a thriving housing market and Massachusetts didn't see the same kind of unemployment numbers as the national average. Some areas deflated instead of bursting, but I have a lot of friends who are still underwater on their homes. Those who own condos were hit the hardest, and have not yet recovered -- a friend of mine with a modest condo had $60k in depreciation.

Bearded Man

  • Handlebar Stache
  • *****
  • Posts: 1138
Re: Buy or continue renting in a property boom?
« Reply #14 on: April 23, 2014, 07:20:47 PM »
IMO, when people are paying 20% over valuation, it's a bubble that will eventually burst. That's good news for sellers who are selling high and will buy in again low, while buyers will get left buying high and selling low/paying more than you should be for the value of the house.

skunkfunk

  • Handlebar Stache
  • *****
  • Posts: 1057
  • Age: 35
  • Location: Oklahoma City
Re: Buy or continue renting in a property boom?
« Reply #15 on: April 24, 2014, 11:17:27 AM »
I know I wish that I had rented. I vote rent.