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Letters to Housing Market Policymakers

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A series of five articles published in Mortgage Introducer during July and August 2014 discussing the housing problem and how to fix it.
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    brian.hall@themodelworks.com 1  download from: http://bit.ly/1p4oj9n Letters to Housing Market Policymakers Published in Mortgage Introducer 28 July to 1 August 2014  1. Benefits of Homebuying brian.hall@themodelworks.com 2  download from: http://bit.ly/1p4oj9n Most would agree we have a housing problem, but few really understand the nature of this problem and fewer still what corrective action should be taken. As a result there is little fact-based, public discussion on the problem or its long-term consequences. There is a debate about the pros and cons of homebuying and whether the trend towards a larger private rental sector is a positive one. I would like to begin this letter by explaining why renting is such a bad idea for the individual, the taxpayer and the economy. 1.1 The Customer Perspective The majority of young people want to buy their own homes and it is in their financial interests to do so. Even more would want to buy if they were aware of the benefits. They are loaded with student loans, paying rents that are high by international standards, while saving a deposit on an overvalued and rapidly inflating property, with future tax increases to service the previous generation's legacy of transgenerational debt. Fixing the housing problem would be an effective way of eliminating avoidable costs for young people. Economically, socially and politically this would be a positive goal. 1.2 Buying Young The graph below details the lifetime savings from buying a home, with a mortgage, compared with renting. The buyer is aged 25 (the average in the 1960s). Buying at 25 Based on a Nationwide Building Society's average first time buyer property price with conservative projected variables (for example property prices tracking background inflation), the model calculates a homeowner is £374,242 better off at today's value, in terms of savings and equity, compared with a lifetime tenant in the private rental sector. -100,000-50,000 - 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000     2   0   1   4    2   0   1   7    2   0   2   0    2   0   2   3    2   0   2   6    2   0   2   9    2   0   3   2    2   0   3   5    2   0   3   8    2   0   4   1    2   0   4   4    2   0   4   7    2   0   5   0    2   0   5   3    2   0   5   6    2   0   5   9    2   0   6   2    2   0   6   5    2   0   6   8    2   0   7   1    2   0   7   4 Discounted CashflowDiscounted EquityCombined  1. Benefits of Homebuying brian.hall@themodelworks.com 3  download from: http://bit.ly/1p4oj9n The key points in the analysis are:    Initially the homeowner cashflow is negative because of the need to pay a deposit, lender and legal fees, stamp duty, etc. The model treats this as an opportunity cost and applies interest, so long as it remains negative.    However, this negative cashflow is mostly compensated for by the acquisition of equity in the property and this accumulates over 25 years until the mortgage is paid off and the homeowner owns the property outright.    Repaying a mortgage may be slightly more expensive than renting initially, but the repayments discount over time, as they relate to the srcinal purchase price, while rents rise with (in this analysis, background) inflation.    After 25 years the homeowner can live rent free for several decades. Their costs reduce to insurances and maintenance only. This repays any negative cashflow that remains and then provides a substantial surplus. The resulting benefits are broadly similar with a series of purchases and sales over time, rather than  just the simplified, single purchase, modelled in this example. Through their lifetime the homeowner will have more cash to spend and save. They will be able to accumulate greater wealth and should have a much larger pension. Homeowners will be less dependent on the state (in terms of housing benefit, social services support and long term care costs). Therefore, the individual returns from homeownership aggregate into a reduced burden on the taxpayer and improvements to the economy. 1.3 Buying Older The graph below details the savings, at today's value, of becoming a homeowner, via a mortgage, at age 37, compared with renting. (the average age of an unassisted first time buyer before the Help to Buy scheme was introduced). Buying at 37 -100,000-50,000 - 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000     2   0   1   4    2   0   1   7    2   0   2   0    2   0   2   3    2   0   2   6    2   0   2   9    2   0   3   2    2   0   3   5    2   0   3   8    2   0   4   1    2   0   4   4    2   0   4   7    2   0   5   0    2   0   5   3    2   0   5   6    2   0   5   9    2   0   6   2    2   0   6   5    2   0   6   8    2   0   7   1    2   0   7   4 Discounted CashflowDiscounted EquityCombined  1. Benefits of Homebuying brian.hall@themodelworks.com 4  download from: http://bit.ly/1p4oj9n Buying a property later in life reduces the returns at today's value because:    The homeowner has spent an additional 12 years paying rent.    The period of maximum saving, during which the homeowner is living rent free, having paid off their mortgage, is 12 years shorter.    Buying later means that compound interest on their savings is reduced. A homeowner buying at 37 is £228,939 better off. So buying at 37, rather than 25, will results in a loss of £145,303 at today’s value.   1.4 Conclusions There are clear benefits, to the individual, the taxpayer and the economy from homebuying rather than renting and these benefits are maximised by buying young. Given the facts, policymakers should be promoting initiatives to encourage early homeownership. With millions adversely affected, the cost of not fixing our housing problem is likely to exceed £1 trillion. But this is the tip of an iceberg, when one considers the likely increased demand in state benefits. To resolve the problem we must recognise its root causes. Policymakers and stakeholders need to understand the problem better and there must be more fact-based, public discussion on the problem and its long-term consequences.
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