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

2. 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

3. 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

4. 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

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

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

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

8. 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

9. 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

10. 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

11. 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

12. 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

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

14. 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

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

16. 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

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

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

19. 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

20. 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

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

22. 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

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

24. 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

25. 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