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I have been researching investing in real estate in London.

I have gathered historical official data regarding returns and historical mortgage rates.

To my great surprise, when deducting the mortgage rate from the yearly return, it turns out that the net return is close to null most years! Except for 3 good years at around 10% (2013-2015) and 2 around 5% (2006-2007) - and the post brexit years are especially squalid.

real_estate_returns (Y) mortage rates difference
2004 5.2% 5.4% -0.2%
2005 2.6% 5.6% -3.1%
2006 10.3% 5.6% 4.7%
2007 11.3% 6.3% 5.0%
2008 -15.0% 5.8% -20.8%
2009 6.7% 2.5% 4.2%
2010 2.0% 2.7% -0.7%
2011 1.5% 2.7% -1.2%
2012 6.6% 2.9% 3.7%
2013 13.1% 2.9% 10.1%
2014 13.2% 3.0% 10.3%
2015 11.7% 2.9% 8.8%
2016 3.3% 2.8% 0.5%
2017 0.3% 2.6% -2.3%
2018 -1.4% 2.9% -4.2%
2019 1.9% 3.0% -1.0%
2020 3.8% 2.5% 1.4%
2021 2.0% 2.3% -0.3%
2022 3.5% 3.3% 0.2%
average 4.3% 3.6% 0.8%

Am i missing anything?

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    Yes, you still bought it a lot cheaper in 2004 and you get all the price appreciation "for free" because your mortgage (nominal debt) doesn't increase.
    – AKdemy
    Aug 12 at 14:49
  • What about rental income?
    – Solarflare
    Aug 12 at 15:19
  • @Solarflare That would be my first property i.e. I would either have to live there or rent somewhere else
    – Vincent
    Aug 12 at 15:25
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    A house can be something you live in OR an investment. It can rarely be both at once (unless you put a lot of sweat equity into it) since by the time you sell it everything else has also appreciated in value and the on-paper profit goes right into the increased cost of your next residence. Unless you really want to renovate a wreck while living in it and have the skills to do so, pick one or the other.
    – keshlam
    Aug 12 at 20:14

2 Answers 2

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The main flaw with this comparison is that with a mortgage you're only paying interest on the remaining balance of your loan, not the appreciated value of the property.

Even if you had a variable rate interest-only loan for the full purchase price that was adjusted annually comparing interest rate to property appreciation by year would fall apart after the first year due to compounding house price vs static loan principal.

More likely though you'd put money down, and have maybe a 25-year fixed rate mortgage. I don't know anything about re-financing in the UK, but I assume you could lock in a rate near the lowest at some point in your ownership.

Some people don't consider a primary residence an investment, but I do. You have to live somewhere so either you invest in a place to live or you pay rent. In some markets renting is the better option. Real estate is not guaranteed to be a good investment, but for many people owning a home is a significant component of their net worth/retirement plan.

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  • Even with a variable rate, you cannot compare it by simply comparing the mortgage rate with the real estate return. According to the table, house values increased 16 out of 18 years. Your variable mortgage will always have the same original amount, plus retail investors usually pay parts back instead of a lump sum at the end.
    – AKdemy
    Aug 14 at 13:05
  • Yes, its the compound growth that makes such a huge difference over time. The UK has a high percentage of fixed rate loans, but most do not last for the entire mortage period. Some data can be found here.
    – AKdemy
    Aug 14 at 14:15
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Assume you bought a house in 2004 for 350.000. Using your real estate returns will give you a house price of ~757.288 by the end of 2022. Had you got a mortgage for all of the 350.000, at the maximum mortgage rate in the entire period (6.3%), that you pay back within the 18 year period, you would end up paying a total of ~586.003 (or 2712.98 monthly), according to mortgagecalculator.org.

enter image description here

Now, that is somewhat simplified, because you would not take a loan for the entire sum, but also may need insurance and so forth. Using the highest mortgage rate in the entire period, and taking out 100% of the house costs will almost surely result in higher mortgage costs than you would actually face, had you financed this with a more realistic example.

Nonetheless, that leaves you with a substantial "profit" of 171.285. This is not too bad, given your house was only worth 350k at the beginning, and you financed everything with an overly expensive mortgage in this simplified example.

Python code to demonstrate this:

enter image description here

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  • True. But it is difficult to tap that value before end of life, since anything else you move into has gone up in price the same way. You can use it for a home equity loan, you can get some of that if you downsize, or move somewhere with cheaper housing, or if you are at end of life and consider a reverse mortgage reasonable. Or you can leave that value to your heirs. But in spendable terms, I honestly don't think your calculation is meaningful, with one major exception: if it comes to lawsuits/bankruptcy, the house can often be protected in a way other assets aren't
    – keshlam
    Aug 14 at 14:39
  • @keshlam. What you do with the property is a secondary consideration that is not asked here. The question is only concerned about appreciation relative mortgage interests. Had you opted to rent, you would have paid a substantial amount and not have any money.
    – AKdemy
    Aug 14 at 16:32
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    Had you opted to rent, you would almost certainly have paid LESS and (assuming you're clueful) been investing the difference. Buying is not always financially better than renting; renting and investing is what gave me enough savings that, when I was ready to buy, I could have done so for cash. So it's possible to build wealth either way. (On the flip side, I could sell the house now, go back to renting, and cash out that way, I suppose.)
    – keshlam
    Aug 14 at 17:44

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