House Owning vs Renting

the_ash_and_the_oak

HAMISH_MCTAVISH wrote: »

I used mortgage interest at 5%. Rent at 900, mortgage at 200K on a 250K house, savings rate (net, after tax) at 3.5% which is generous, 3% HPI which is the long term average and 2% rent inflation.

The buyer was still ahead by 25K at 4 years and 60K at 8 years, and 305K at 25 years.

Fair enough - its pretty useful for putting in figures you think likely - minor changes make pretty huge differences even in quite a short term.

I used mortgage interest at 5.5% rent at 1100, mortgage at 243k on a 270k house, savings rate i had at 2.5%, HPI at 0.5%, rent inflation at 2% and it didn't really work out for me. (all this basically hangs on your own future hpi and rent expectations imo - if you think theres going to be a good amount of both for the period you might own that particular place then obv buying is better! if not, then less so)

the_ash_and_the_oak

and future rates (to borrow and save!) of course

HAMISH_MCTAVISH

abaxas wrote: »

Previous property 3.33%, current 1.74% yeild. Worked out on the prices the properties were on 'sale' at.

Fair enough.

The national average is around 5%. Some hotspots are still, to this day, in excess of 12%. My local area seems to typically be between 6% and 8%.

1.74% is outrageously cheap, I'll grant you that. But it's also pretty rare on a national basis.

Mr_Matey

I agree that historically, over the long term, owning has been a better investment than renting. But I also believe the past 5-10 years have been extraordinary times when it comes to house prices and the world economy in general. With current rental yields being very low in my area, and high risk of stagnant/falling prices, I really can't see how owning is better. At current prices, the place we rent is only achieving about 3.5% yield.

High transaction costs have been mentioned, but I have another point which I've been thinking about a bit recently, and I've never seen discussed in any such buy vs rent analysis. Over-payments. If you have a mortgage, for arguments sake, say at 6%, any additional money you make can be invested as an over-payment. This effectively earns 6% p.a. NET, which is better than most savings products out there. Not bad at all.

HAMISH_MCTAVISH

the_ash_and_the_oak wrote: »

I used mortgage interest at 5.5% rent at 1100, mortgage at 243k on a 270k house, savings rate i had at 2.5%, HPI at 0.5%, rent inflation at 2% and it didn't really work out for me. (all this basically hangs on your own future hpi and rent expectations imo - if you think theres going to be a good amount of both for the period you might own that particular place then obv buying is better! if not, then less so)

The only thing worth pointing out when using short term comparisons, is that you still have to factor in that even if you don't make a lot over 4 years, you are still reducing your lifetime housing cost by 4 years worth of rent. It's still 4 years of rent/mortgage free living you lose out on if you don't buy.

Thrugelmir

HAMISH_MCTAVISH wrote: »

But then running the same calculation with Aberdeen rents and prices shows the buyer being over half a million quid ahead of the renter at 25 years..... And I would guess it's well over a million at 40 years. A number sufficiently large that bears have a hard time comprehending it.;)

An average saving of £1,667 per month over 25 years.

An average saving of £2,083 per month over 40 years.

Suggest that your figures are on the optimistic side.

If the trend had continued from 2007 on the same plane maybe your figures would be correct. :rolleyes:

JonnyBravo

HAMISH_MCTAVISH wrote: »

Also Jonny, when allowing for the 6 moves, you just gave an equivalent amount to the renter, is that right? Which came close to 100K extra for the renter?

So if a buyer only moved once, or twice, he'd be another 80K or so ahead?

IveSeenTheLight wrote: »

I'm wondering where the percentage was derived from then.
Arguably there may be properties for rent that are mortgage free or with very little mortgage left.
This obviously would raise the percentage.

To compare with a percentage of 70% as an average, your effectively saying that there will be some properties only taking in say 40% of the mortgage.

I think there is no definate answer to this that would show for the country the amount of mortgage debt (we could get that from the CML) against the amount of rent received (this is what I doubt we can get)

Yes that's right. I went from the figures Harry sourced. If you move less it favours the buyer again. If you move more then it arguably will favour the renter.

So some will move less? So what? These are figures for an average and no-one has supplied anything else.


As for the %age vs the mortgage for the rent, yes it's low...... I set out thinking the whole hypothesis was unlikely when it was proposed by Harry. So I've skewed the data in places towards the end which is more likely to favour the renter as I didn't want to be accused of using unrealistic figures that benefit the buyer.
We still end up with a buyer coming out better off all but a few extreme scenarios.

the_ash_and_the_oak

HAMISH_MCTAVISH wrote: »

The only thing worth pointing out when using short term comparisons, is that you still have to factor in that even if you don't make a lot over 4 years, you are still reducing your lifetime housing cost by 4 years worth of rent. It's still 4 years of rent/mortgage free living you lose out on if you don't buy.

Well here's the thing...if we're talking the first 4 years of a 25 year mortgage on one place then yes

But if we're talking buying an FTB flat and trading up at this point (or at whatever point we want to base our sale point on) then for me this is a no.

I think a short term comparison isn't so much use for a long-term situation but it is for a shorter term deal (which buying a flat is imo). Somebody renting a flat for 5 years and then selling to buy a house vs someone renting for 5 years and then buying that house - both are in effect newly starting at that point - the equity at that point is cashed in to become a deposit imo - is this larger or smaller than the renters deposit? well - thats what the question is all about!

Thrugelmir

Mr_Matey wrote: »

At current prices, the place we rent is only achieving about 3.5% yield.

High transaction costs have been mentioned, but I have another point which I've been thinking about a bit recently, and I've never seen discussed in any such buy vs rent analysis. Over-payments. If you have a mortgage, for arguments sake, say at 6%, any additional money you make can be invested as an over-payment. This effectively earns 6% p.a. NET, which is better than most savings products out there. Not bad at all.

Your first comment, raises the additional issue of people renting better property than they could otherwise afford to buy.

Your second is that it maybe cheaper to rent and save than incur a high rate of interest.

JonnyBravo

the_ash_and_the_oak wrote: »

Well here's the thing...if we're talking the first 4 years of a 25 year mortgage on one place then yes

But if we're talking buying an FTB flat and trading up at this point (or at whatever point we want to base our sale point on) then for me this is a no.

I think a short term comparison isn't so much use for a long-term situation but it is for a shorter term deal (which buying a flat is imo). Somebody renting a flat for 5 years and then selling to buy a house vs someone renting for 5 years and then buying that house - both are in effect newly starting at that point - the equity at that point is cashed in to become a deposit imo - is this larger or smaller than the renters deposit? well - thats what the question is all about!

Absolutely.

This was never designed to to show that renting is a bad idea full stop. The shorter the period the more swings you can get in the figures. eg House price deflation over a couple of years changes the figures vastly for that 2 year period etc.

This was simply done to show that all things being equal and going on past historical norms you really don't want to rent for 40 or 50 years as you will, in all likelihood, be worse off.
People need to read the other thread to see why this discussion came about.