Was talking to a friend this week.
He bought a 3 bed in Santry for £40,000 in 1990.
Monthly rent was £400
Interest rate was approx 15%
I’ve been working on the theory that when a house I like gets to RENT X 11 mths X 12 yrs, thats the time to buy (notwithstanding the inevitable overshoot)
But if you take the above eg, the “real value” of the Santry house “should theoretically” have been £52K. But it was much lower and he reckons because of the massive interest rate.
He’s good at bargaining but still… is it not possible that with interest rates very low, the above widely quoted yield formula will not hold true?
I haven’t a clue btw and am just looking for some direction re impact of interest rates. Can’t find info on this anywhere.
You have to consider whether interest rates will always be this low and to where they will go to. IIRC, 15% was top of the cycle and widely considered to be so at the time, with normal rates being 8 - 10%
So at the time 400x11x9 was okay.
In a lower interest rate environment, 5-7% being normal mortgage rates, 12x would be right. No? (But only on an equivalent basis). If you factor in property tax, you might want to take away 1x?
the whole rent11 months x number of years is just a rule of thumb but it has become elevated to the status of a definitive valuation metric by some people. If you want to think seriously about the value of any asset, including property, use a discounted cash flow approach. This explicitly takes account of rent, property tax, interest rates, risk, inflation etc. in the model - which the rule of thumb does not. And it’s easy to use.
As your friend says interests rates affect property prices and the relationship is inverse, when rates go up prices fall.