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Thread: 221 Goods vs 117 No Goods

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London Property Prices -> Toilet

Economist
e328

Lets do the math:

In the areas that are booming in London, like Croydon, you can buy a 3-4 bed house for 500k. YOu need to put 50k down for a 90% LTV mortgage. YOu cant get that anymore. Lets say you have 65k saved. The extra 15k allows you get a 15% mortgage (plenty of those).

So the extra 15k does matter if you buy in the suburbs.

Agreed that it is way too soon for all of this.
However, this is what people are doing because of the Stamp duty cut. It allows a lot of people to put the additional 15k into leverage.

The falling prices are a central london only feature, which was already massively overpriced.
All the suburbs are booming. Even in Croydon all the houses are sold shortly after listing. This is because the Value for money proposition is infinetly better and people expect to WFH permanently going forward.

way too soon to say this (let alone buy a property counting on it). Maybe having to commute less (2/3 days a week).
But gov is making a strong push for companies to go back to the office. I think is unlikely they will allow the city to become a ghost town. Remember, the city has its rights protected in the magna carta. If a business centre is going to survive this, it'll be the City of London.

Yes but nobody is giving mortgages at 5% or 10% down payment anymore. It does not help to have a 15k cut when I need to put an extra 50k down

2 years ago # QUOTE 1 Volod 1 Vlad !
Economist
e328

Leverage is key to real estate returns.

My friend bought his 2 bed flat in zone 1 in 2010 for 400k. with 60 down. Sold for 625 in 2016. so he put down 60, he got back 225. this is an 270% return in 6 years. Could the S&P have provided that return in that time?

1Mln invested in real estate in 2009 would have turned into about 1.5Mln at the top just before Brexit. The same 1Mln would have turned into more than 2Mln if invested in the SP500.
1Mln invested in real estate in 2009 would have turned into about 1.3Mln today. The same 1Mln would have turned into 4.5Mln if invested in the SP500.

I think you are not generous enough with real estate returns. It is true that renting + investing in SP500 would have outperformed buying.

Also ignoring that it is easier to get leverage with a mortgage than borrowing to invest in the stock market. Do you have a spare $1 million to invest in the S&P today?

2 years ago # QUOTE 5 Volod 0 Vlad !
Economist
c204

1Mln invested in real estate in 2009 would have turned into about 1.5Mln at the top just before Brexit. The same 1Mln would have turned into more than 2Mln if invested in the SP500.
1Mln invested in real estate in 2009 would have turned into about 1.3Mln today. The same 1Mln would have turned into 4.5Mln if invested in the SP500.

I think you are not generous enough with real estate returns. It is true that renting + investing in SP500 would have outperformed buying.

Also ignoring that it is easier to get leverage with a mortgage than borrowing to invest in the stock market. Do you have a spare $1 million to invest in the S&P today?

Leverage is expensive, especially in the UK where you have to refinance every 5 years. On top of that, if you don't have 1Mln to spare, then would you risk 100% of your wealth in real estate?

2 years ago # QUOTE 0 Volod 1 Vlad !
Economist
f4c1

for a 270% return, yes

2 years ago # QUOTE 0 Volod 1 Vlad !
Economist
5bfd

FTSE100 is relevant here not just S&P500 - the UK stock market has been terrible over the last 20 years.

2 years ago # QUOTE 0 Volod 1 Vlad !
Economist
c204

Leverage is key to real estate returns.
My friend bought his 2 bed flat in zone 1 in 2010 for 400k. with 60 down. Sold for 625 in 2016. so he put down 60, he got back 225. this is an 270% return in 6 years. Could the S&P have provided that return in that time?

1Mln invested in real estate in 2009 would have turned into about 1.5Mln at the top just before Brexit. The same 1Mln would have turned into more than 2Mln if invested in the SP500.
1Mln invested in real estate in 2009 would have turned into about 1.3Mln today. The same 1Mln would have turned into 4.5Mln if invested in the SP500.

I think you are not generous enough with real estate returns. It is true that renting + investing in SP500 would have outperformed buying.

Also ignoring that it is easier to get leverage with a mortgage than borrowing to invest in the stock market. Do you have a spare $1 million to invest in the S&P today?

1-Your friend paid about 20k in stamp duty + other costs. Pretty sure he had to spend something more to fix things, but let's forget about this. Let's say he he made 180%
2- SP500 Jan 1 2010 $1,100 or GBP 687. Dec 31 2016 SP 500 $2,200 or GBP 1,538. + 124%
3- He literally bought at the bottom and sold at the top. So this is the best case scenario. Real estate outperforms the market only if prices appreciate like crazy. Good luck if you expect the same to happen looking forward

2 years ago # QUOTE 1 Volod 1 Vlad !
Economist
ce42

Real estate in London has barely outperformed the market when Price/Income ratio has moved from 5 to 12!

2 years ago # QUOTE 1 Volod 0 Vlad !
Economist
db85

Real estate in London has barely outperformed the market when Price/Income ratio has moved from 5 to 12!

Yes but SP500 PE ratio went from 14 to 23 in the same period.

2 years ago # QUOTE 0 Volod 0 Vlad !
Economist
e328

1. Good point on Stamp duty. He did not need to fix anything because his flat was brand new and covered by a 10 year warranty.

2. He did not sell at the top. He needed to sell December 2016. He had an offer for 715 pre Brexit which fell through. Then settled for 625. (Wise move in the end). So he did not sell at the top.

3. Finally, in the UK, there is no capital gains tax on our primary residence.

So his lets say 180% profit was his net profit. in your example of the S&P, he would need to have paid 20% cap gains tax on the 124%. So net profit is 99.2%.

Now, the above calculation ignores that interest only is much cheaper than renting. At 3.8% average interest (which would be high given this time period). He paid rouhgly 1k a month in interest for a flat that would cost at least 1.6-1.7k to rent. So he saved another 40k over 6 years, which is not included in the above calculation.

I maintain that even on a risk adjusted basis and a lot less diverisification, UK real estate beats S&P 500 significantly, esp once you look at favourable tax treatment.

2 years ago # QUOTE 2 Volod 1 Vlad !
Economist
262f

Had he bought on December 2016, how much money would have he made if he sold, say, on Jan 2020? What about Sep 2020?

1. Good point on Stamp duty. He did not need to fix anything because his flat was brand new and covered by a 10 year warranty.
2. He did not sell at the top. He needed to sell December 2016. He had an offer for 715 pre Brexit which fell through. Then settled for 625. (Wise move in the end). So he did not sell at the top.
3. Finally, in the UK, there is no capital gains tax on our primary residence.
So his lets say 180% profit was his net profit. in your example of the S&P, he would need to have paid 20% cap gains tax on the 124%. So net profit is 99.2%.
Now, the above calculation ignores that interest only is much cheaper than renting. At 3.8% average interest (which would be high given this time period). He paid rouhgly 1k a month in interest for a flat that would cost at least 1.6-1.7k to rent. So he saved another 40k over 6 years, which is not included in the above calculation.
I maintain that even on a risk adjusted basis and a lot less diverisification, UK real estate beats S&P 500 significantly, esp once you look at favourable tax treatment.

2 years ago # QUOTE 0 Volod 0 Vlad !
Economist
5bfd

My feeling is that we are in a new post covid world and London real estate is going to decline for many years to come.

2 years ago # QUOTE 1 Volod 0 Vlad !
Economist
e328

If would bought at 625k December 2016 and sold Jan 2020, numbers work as follows:

I checked and similar flats sold between 700-750k in that Riverside development for a 2 bed in Jan 2020.

So lets say he bought for 625 and sold for 715. Costs of buying at 625 are around 25k + you need to put down 15% to get a good mortgage rate of 1.75% at that time.

So cost of aquisition ==> 95k+25k = 120k.

When you sell the flat, you get 185k back on a 120 outlay. No cap gains tax, so net profit is 65k.

If you were to put 120k in the S&P500 in Dec 16 and sell Jan 2020, you get 1.71 or 51k gross profit. But you have to pay cap gains tax, so 41 net profit.

So the flat still outperformed S&P500 due to leverage.

Also note that the interest you are paying works out at 775 pounds per month and this flat would cost 2k to rent. So you saved an additional 43k over three years.

Again, due to the tax treatment in the UK (no cap gains tax on property regardless of price), housing often beats the Stock market if it is your own house.

Had he bought on December 2016, how much money would have he made if he sold, say, on Jan 2020? What about Sep 2020?

1. Good point on Stamp duty. He did not need to fix anything because his flat was brand new and covered by a 10 year warranty.
2. He did not sell at the top. He needed to sell December 2016. He had an offer for 715 pre Brexit which fell through. Then settled for 625. (Wise move in the end). So he did not sell at the top.
3. Finally, in the UK, there is no capital gains tax on our primary residence.
So his lets say 180% profit was his net profit. in your example of the S&P, he would need to have paid 20% cap gains tax on the 124%. So net profit is 99.2%.
Now, the above calculation ignores that interest only is much cheaper than renting. At 3.8% average interest (which would be high given this time period). He paid rouhgly 1k a month in interest for a flat that would cost at least 1.6-1.7k to rent. So he saved another 40k over 6 years, which is not included in the above calculation.
I maintain that even on a risk adjusted basis and a lot less diverisification, UK real estate beats S&P 500 significantly, esp once you look at favourable tax treatment.

2 years ago # QUOTE 1 Volod 2 Vlad !
Economist
5587

Amazing how people seem to not understand the concept of leverage on this forum.

London is also very big- some parts are suffering, other areas next to parks, good schools etc are not.

2 years ago # QUOTE 1 Volod 0 Vlad !
Economist
5bfd

Amazing how people seem to think leverage is always a good thing. What if prices go down?

2 years ago # QUOTE 3 Volod 0 Vlad !
Economist
1bdc

If would bought at 625k December 2016 and sold Jan 2020, numbers work as follows:
I checked and similar flats sold between 700-750k in that Riverside development for a 2 bed in Jan 2020.
So lets say he bought for 625 and sold for 715. Costs of buying at 625 are around 25k + you need to put down 15% to get a good mortgage rate of 1.75% at that time.
So cost of aquisition ==> 95k+25k = 120k.
When you sell the flat, you get 185k back on a 120 outlay. No cap gains tax, so net profit is 65k.
If you were to put 120k in the S&P500 in Dec 16 and sell Jan 2020, you get 1.71 or 51k gross profit. But you have to pay cap gains tax, so 41 net profit.
So the flat still outperformed S&P500 due to leverage.
Also note that the interest you are paying works out at 775 pounds per month and this flat would cost 2k to rent. So you saved an additional 43k over three years.
Again, due to the tax treatment in the UK (no cap gains tax on property regardless of price), housing often beats the Stock market if it is your own house.

Had he bought on December 2016, how much money would have he made if he sold, say, on Jan 2020? What about Sep 2020?

1. Good point on Stamp duty. He did not need to fix anything because his flat was brand new and covered by a 10 year warranty.
2. He did not sell at the top. He needed to sell December 2016. He had an offer for 715 pre Brexit which fell through. Then settled for 625. (Wise move in the end). So he did not sell at the top.
3. Finally, in the UK, there is no capital gains tax on our primary residence.
So his lets say 180% profit was his net profit. in your example of the S&P, he would need to have paid 20% cap gains tax on the 124%. So net profit is 99.2%.
Now, the above calculation ignores that interest only is much cheaper than renting. At 3.8% average interest (which would be high given this time period). He paid rouhgly 1k a month in interest for a flat that would cost at least 1.6-1.7k to rent. So he saved another 40k over 6 years, which is not included in the above calculation.
I maintain that even on a risk adjusted basis and a lot less diverisification, UK real estate beats S&P 500 significantly, esp once you look at favourable tax treatment.

Great. Real Estate is perfect and that's why we have never seen a real estate induced crisis

2 years ago # QUOTE 1 Volod 0 Vlad !
Economist
dbfb

Leverage is expensive, especially in the UK where you have to refinance every 5 years. On top of that, if you don't have 1Mln to spare, then would you risk 100% of your wealth in real estate?

uh refinancing isn't expensive (it costs nothing), you seem pretty confused

also 100% of wealth in real estate is fine because leveraged real estate purchases are largely risk-free in the long term since you aren't liquidity constrained (i.e even if you end up in negative equity you don't need to sell and realise the loss, although admittedly this does make your refinancing tricky).

2 years ago # QUOTE 0 Volod 3 Vlad !
Economist
dbfb

1-Your friend paid about 20k in stamp duty + other costs. Pretty sure he had to spend something more to fix things, but let's forget about this. Let's say he he made 180%
2- SP500 Jan 1 2010 $1,100 or GBP 687. Dec 31 2016 SP 500 $2,200 or GBP 1,538. + 124%
3- He literally bought at the bottom and sold at the top. So this is the best case scenario. Real estate outperforms the market only if prices appreciate like crazy. Good luck if you expect the same to happen looking forward

1) 90% LTV mortgage means you have 10x leverage. S&P returns do not outperform real estate by 1000% over any historical period. Realistically its more like 200-300%. Levereaged real estate purchases on your primary residence is a far better investment than S&P.

2) Gains on real estate are tax free when its your primary residence, whereas S&P returns/dividends are taxed outside an ISA, and only £20k can be fed into an ISA each year so its less practical for investing large sums of money

3) Your S&P returns period is literally an example of 'buying at the bottom and selling at the top'. 2010-2020 has been a ridiculously good market of course, but it isn't the standard case and there is no reason to expect those returns to keep occurring in the futures. Whereas with real estate, 2-3% returns a year are the historical norm, and 10x leverage gets this up to 20-30%.

2 years ago # QUOTE 1 Volod 3 Vlad !
Economist
ce42

If would bought at 625k December 2016 and sold Jan 2020, numbers work as follows:
I checked and similar flats sold between 700-750k in that Riverside development for a 2 bed in Jan 2020.
So lets say he bought for 625 and sold for 715. Costs of buying at 625 are around 25k + you need to put down 15% to get a good mortgage rate of 1.75% at that time.
So cost of aquisition ==> 95k+25k = 120k.
When you sell the flat, you get 185k back on a 120 outlay. No cap gains tax, so net profit is 65k.
If you were to put 120k in the S&P500 in Dec 16 and sell Jan 2020, you get 1.71 or 51k gross profit. But you have to pay cap gains tax, so 41 net profit.
So the flat still outperformed S&P500 due to leverage.
Also note that the interest you are paying works out at 775 pounds per month and this flat would cost 2k to rent. So you saved an additional 43k over three years.
Again, due to the tax treatment in the UK (no cap gains tax on property regardless of price), housing often beats the Stock market if it is your own house.

Had he bought on December 2016, how much money would have he made if he sold, say, on Jan 2020? What about Sep 2020?

1. Good point on Stamp duty. He did not need to fix anything because his flat was brand new and covered by a 10 year warranty.
2. He did not sell at the top. He needed to sell December 2016. He had an offer for 715 pre Brexit which fell through. Then settled for 625. (Wise move in the end). So he did not sell at the top.
3. Finally, in the UK, there is no capital gains tax on our primary residence.
So his lets say 180% profit was his net profit. in your example of the S&P, he would need to have paid 20% cap gains tax on the 124%. So net profit is 99.2%.
Now, the above calculation ignores that interest only is much cheaper than renting. At 3.8% average interest (which would be high given this time period). He paid rouhgly 1k a month in interest for a flat that would cost at least 1.6-1.7k to rent. So he saved another 40k over 6 years, which is not included in the above calculation.
I maintain that even on a risk adjusted basis and a lot less diverisification, UK real estate beats S&P 500 significantly, esp once you look at favourable tax treatment.

Lol, you are forgetting agency fees, which are about 15k-20k for that property. So you are down already to 40k in profit. Then you have conveyancing fees, which is another 2k. So down to 38k. You need to close or port the mortgage, so another 1k. Down to 37k. Then you have another 1k for final cleaning fees. So down to 36k. So let's say with all the accessory fees that you had to pay for (paying for the plumber, fixing some appliances etc..) you are down to 35k. So your return is 35k/120k = 29%.

Now you are lucky because you sold at 715k. If, God forbid, you had to sell at 700k then you go down to 20k, or 16.6%. To breakeven you need to sell at aproximately 680k, which is an appreciation of about 2.8% per year. Imagine you got caught in Covid...

2 years ago # QUOTE 2 Volod 0 Vlad !
Economist
ce42

1-Your friend paid about 20k in stamp duty + other costs. Pretty sure he had to spend something more to fix things, but let's forget about this. Let's say he he made 180%
2- SP500 Jan 1 2010 $1,100 or GBP 687. Dec 31 2016 SP 500 $2,200 or GBP 1,538. + 124%
3- He literally bought at the bottom and sold at the top. So this is the best case scenario. Real estate outperforms the market only if prices appreciate like crazy. Good luck if you expect the same to happen looking forward

1) 90% LTV mortgage means you have 10x leverage. S&P returns do not outperform real estate by 1000% over any historical period. Realistically its more like 200-300%. Levereaged real estate purchases on your primary residence is a far better investment than S&P.
2) Gains on real estate are tax free when its your primary residence, whereas S&P returns/dividends are taxed outside an ISA, and only £20k can be fed into an ISA each year so its less practical for investing large sums of money
3) Your S&P returns period is literally an example of 'buying at the bottom and selling at the top'. 2010-2020 has been a ridiculously good market of course, but it isn't the standard case and there is no reason to expect those returns to keep occurring in the futures. Whereas with real estate, 2-3% returns a year are the historical norm, and 10x leverage gets this up to 20-30%.

Can you even do math? You pay for that leverage! The cost of borrowing is, say, 2-3%, so unless the return on housing is greater than 2-3% you are simply scaling up losses!

2 years ago # QUOTE 2 Volod 0 Vlad !
Economist
4cdd

Leverage is expensive, especially in the UK where you have to refinance every 5 years. On top of that, if you don't have 1Mln to spare, then would you risk 100% of your wealth in real estate?

uh refinancing isn't expensive (it costs nothing), you seem pretty confused
also 100% of wealth in real estate is fine because leveraged real estate purchases are largely risk-free in the long term since you aren't liquidity constrained (i.e even if you end up in negative equity you don't need to sell and realise the loss, although admittedly this does make your refinancing tricky).

Refinancing is not expensive but you have to pay some fees. First you have the deeds release fee (2-300), then you need to pay the arrangement fee to the new lender (2k), then you have another valuation fee (3-500), conveyancing fee (2-300), then you might have a broker which wants to be paid. So you usually end up paying 2-4k when you refinance.

2 years ago # QUOTE 1 Volod 0 Vlad !

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