Essential Personal Finance Chapter 8 A place to live © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Contents Introduction Rent or buy? Home as an investment Buying a home Leverage Taxation of property Buying a home Costs of buying Mortgages Housing affordability The housing market The economics of the market The politics of the market Conclusions © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Source of wealth Place to live Introduction Recall Maslow, Chapter 1 Housing serves varied needs Tension Source of wealth Place to live © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Tenure in different countries Figure 8.1 Housing tenure for selected European countries in 2014 Source: Data from Eurostat (2016a). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Rent or buy? © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Rent or buy? Table 8.1 Main advantages and disadvantages of renting and buying © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Leverage Buy outright 100% profit £100,000 £200,000 © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Leverage Borrow to buy 1000% profit £100,000 -£90,000 = Invest £10,000 Repay loan £90,000 Loan £90,000 £100,000 -£90,000 = Invest £10,000 £200,000 -£90,000 = Get back £110,000 © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Leverage: your turn Borrow to buy ?% profit £100,000 -£90,000 Repay loan £90,000 Loan £90,000 £100,000 -£90,000 = Invest £10,000 £120,000 -£90,000 = Get back £? © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Leverage: your turn Borrow to buy 200% profit £100,000 -£90,000 Repay loan £90,000 Loan £90,000 £100,000 -£90,000 = Invest £10,000 £120,000 -£90,000 = Get back £30,000 © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Leverage: another example Borrow to buy ?% profit Repay loan £90,000 Loan £90,000 £100,000 -£90,000 = Invest £10,000 £85,000 -£90,000 = Get back £? © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Leverage: another example Borrow to buy loss 150% profit Repay loan £90,000 Loan £90,000 £100,000 -£90,000 = Invest £10,000 £85,000 -£90,000 = Get back -£5,000 © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Leverage Magnifies gains … … Magnifies losses © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Taxation of property Recurrent taxes Tax on gains when property changes hands Tax on estates Transaction taxes when property acquired Examples? Exemptions? © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Buying a home: costs ? ? ? ? ? ? © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Legal and valuation fees Buying a home: costs Transaction tax Deposit Moving costs Insurance Legal and valuation fees Mortgage © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Mortgages Repayment mortgage Interest-only mortgage © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Reducing balance loan: example Table 8.3 Example of a reducing-balance loan © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Types of mortgage Standard variable rate mortgage Tracker rate mortgage Discounted rate mortgage Fixed rate mortgage Capped and/or collared rate mortgage Offset mortgage Pros and cons? Example of who might choose each type? © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Affordability Price-to-earnings ratio Loan-to-value ratio Property valuation Deposit Affordability check Income Committed spending Expected changes Stress test Credit check © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Housing market: economics Supply factors Examples? Demand factors House prices © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Housing market: economics Supply factors Build new homes More existing owners willing to sell Demand factors Ability to pay deposit Ability to get mortgage Cost security and quality of renting House prices © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Housing market: politics Supply factors Examples? Demand factors House prices © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Housing market: politics Supply factors Relax planning laws Government build homes Incentives for private and social housebuilding Incentives to buyers for new homes only Encourage more efficient use of housing Demand factors Incentives to encourage saving for deposit Help accessing mortgages Subsidies to reduce cost of home House prices © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Conclusions Housing Rent vs buy Home as investment Buying Basic need (shelter) Source of wealth Rent vs buy Many aspire to buy Some drawbacks, e.g. job mobility Ownership less important if rentals are good quality and secure tenure Home as investment Leverage magnifies gains but also losses; should be high risk but see below Tax treatment of own home often favourable Buying Repayment mortgages less risky; interest-only cheaper monthly outlay but need repayment plan Affordability – various measures, e.g. price-to-earnings, LTV, affordability check Economics and politics Shortage of supply and policies that increase demand tend to raise prices – means housing less risky than leverage would suggest it should be © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne