I was going to unpick the Affordability Index for you this week, but I cant get all the information into a suitable format to fit the blog size. If you want to know how it works, you’ll have to but my book, which explains it in detail: https://www.amazon.co.uk/dp/B07D3ZW8D2
Instead I will go back to the basic problem with all real estate matters, and that is finance. And that means a lesson in using maths (the nation’s unfavourite subject).
I have also written a book simply about being rich. It’s called Being Rich is Easy, and it is. Here’s a link to that book: https://www.amazon.co.uk/dp/B0CLS37VX1
The trouble for most people is that they dont want to learn useful mathematical basics (which you dont get taught at school, naturally).
The particular problem I shall be addressing is what used to be called being asset rich and cash poor. It is something that is particularly pertinent to those who have already paid for their homes but it also highlights the fundamental matter of real estate valuations.
I have mentioned before that most valuations are based on emotion whereas the smart person sticks to intrinsic values.
Let’s do some maths.
I am going to take a current example to show what a proper understanding of maths can do to your way of life. These figures are true as of spring 2025. However, the methodology is always true.
I have been asked to advise someone with a financial problem. He lives in a very nice house, but feels he could do with a bigger income and is having trouble looking after a property that is really too big for him. The problem is that local property prices are rising at 13% p.a. Would it be foolish to sell?
What’s the first thing you do?
You do the maths!
Let’s line up the figures and create a couple of formulas. The crucial figures are: Sale price of house; current annual increase in sale prices; alternative cost of renting; alternative cost of investing the sale funds.
Let’s look at two alternative approaches to the problem. The basic question is: How do I keep a similar lifestyle but increase my annual income?
Our client is living in a house which is worth €750,000. The property is unmortgaged, so the only outgoings are the rates, repairs and insurance. So we need to convert those items to numbers. In this instance the rates are €1,200 p.a. There is no insurance on the house, only on the contents. The house is made of non-combustible materials and it is not on a public highway, so is unlikely to sustain serious damage from anything but fire, and the basic structure contains non combustible materials. We will enter a figure for this because most people like paying for insurance. Repairs tend to cost somewhere in the region of €2000 p.a.
The property is mortgage-free so the figure there is zero.
This is formula 1. If my client decided to sell, he could rent somewhere similar for about €1,500 a month, or €18,000 p.a. With rental there would be no rates, insurance and repair bills.
This is formula 2. If my client sells, he has no home, so would have to rent, but he would now have a substantial cash sum to invest. Let’s do that sum. Keeping his money in the same type of investment my client would be investing in rental property. I have two such deals on my table at the moment. One concerns development finance which is paid out upon sale. The other is for development finance which is paid out upon rental. Since my client wants to increase his income, we will choose the latter, which brings in 11% p.a.
We are now in a position to do two sums, subtracting the smaller result from the larger to see if there is anything to be gained by selling.
Sum number one gives a minus figure totalling €3,200. But our client has a nice house to live in.
Sum number two gives us a surprisingly different sum. Our client has sold up, and moved into a similar rental property. In reality he will have downsized, but let’s keep things the same for the moment. I want to make a point by comparing apples with apples if you see what I mean.
Sum number two gives our client €750,000 to invest at 11%, which will give him an annual income of €82,500, or €6,875 a month, but he wont be getting a 13% price hike in the future, so we ought to factor in that potential loss. But he will also not be paying out €3,200 a year in charges.
Let’s now do a resolution.
Our client now has a similar house which he is renting. He now has an extra €6,875 a month going into his bank account, but €1,500 a month is going out in rent, but €3,200/12 (€267) is no longer going out in annual costs.
Gosh, our client’s living conditions haven’t changed but he is now €5,108 a month better off.
That should tell us three things.
1 Renting is much better than buying.
2 House prices here are way too high, and there is a strong likelihood they will either fall or stagnate in the very near future.
3 Even the dimmest of buyers is bound to catch on that there is something wrong with buying, and that will ultimately bring on a house price crash.
Unfortunately that doesn’t tell us when. But who cares, if you are €5,108 a month better off? After all, you can compensate for any possible loss related to future increases in house prices by investing an extra €4,000 a month.
Finally, does the following little parable tell you something about house prices, and how to value a house? I hope it does.
The Ultimate Real Estate Guide
UK site: https://www.amazon.co.uk/dp/B07D3ZW8D2
US site: https://www.amazon.com/dp/B07D3ZW8D2
Being Rich is Easy
UK site: https://www.amazon.co.uk/dp/B0CLS37VX1
US site: https://www.amazon.com/dp/B0CLS37VX1
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