House Owning vs Renting

the_ash_and_the_oak

JonnyBravo wrote: »

Absolutely. But this is just an extension of what I've said..... what was the figure for the highest and lowest 3 years in the 80's? Obviously more "extreme" than the average......

So yes of course it is more than possible we get 10 years of 2.5%.... or 10 years of 11% but it more likely we won't and it also very likely you won't get 25 years of that. History tells us that.

taking around 1978 to 1992 the average was around 11% (lowest was 7.5% highest 17.5) so there were some real extremes as you say. I think my point isn't that we will or won't have 11% every month for a decade its more that we might or might not have a period of averaging 11% with extremes between 7.5 and 17%

the low point of that 14 year period (7.5%) hasn't been seen since!

who would have predicted in 1992 that the lowest point of the previous 14 years would be higher than the highest point of the next 17+?

Harry_Powell

JonnyBravo wrote: »

Hi all, this is a carry over of the discussion on Mr Matey's "Psychology of Home Owning" thread.
The discussion kind of got sidetracked into its possibly/actually more expensive to buy than rent over a long period as you can invest extra money as a renter etc.

I'm creating a new thread to avoid moving off topic on Mr Matey's.

So when I left on Wednesday I said I'd run some figures through a spreadsheet cos Harry got me thinking and I'd post them when back on Friday. Here are my results!

Oh and sorry for the long post......



First of all my assumptions. There are many…..

I’ve run with an example of buying a house for £150,000 (a nice round number close to the average)

I’ve assumed a mortgage rate of 6% and a return on investments of 8%. (The rates here don’t matter too much except the difference between them, I think they’re fairly representative but am happy to run things with other rates if people are curious!)

The payments on a 25yr mortgage @ 6% are £977 and it is this figure that I’ve used as our monthly base. I’ve assumed rental payments to be 80% of that going with a more lenient figure than the 90% Hamish suggests. (Again I’m happy to run other figures)

I’ve assumed inflation to run at 2.5% and have applied that both to the house price and to the rental prices.

I’ve run the model for 40 years assuming the house owner invests for 15 years after paying off his house (applying the same terms as the renter.)

I’ve factored in 6 moves, at years 4,8,12,16,20 and 24. I’ve done this by adding the cash equivalent to the renters investments, “giving” them £10230, £11293, £12465, £13579, £15187 and £16764 at those years (this is from £9500 base cost from Harry’s figures with inflation added)

I’ve not taken into account ongoing maintenance of a house nor moving costs for the renter….. there is a limit!!!


Now the results……


At 25 years we have the owner with no investments but with an illiquid house worth £271,309
We have a renter with (presumably) liquid investments worth £200,713

At 40 years the home owner has a house worth £392,936 and investments worth £332,338 and a renter with investments worth £400,043.


Seems like a no brainer for the owner?

Well may but maybe not.

The two biggest factors in the sum seem to be inflation and the difference I apply to the rental sum vs the mortgage and therefore the amount available to invest.

Eg (Inflation still = 2.5%) If the rent is only 75% of the mortgage (£732.75 in yr 1) we end up with a renter sitting on £611,897 of investments (at 40 yrs) vs the owner still having a house worth £392,936 and investments worth £332,338 (total £725,274)

Change the rent to 70% of the mortgage (£683.90 in yr 1) and the renter has £832,753 and is “winning”!

But when we change inflation to 3% and keep rent low at the intial £683.90 then the renter ends up with £659,197 whilst the owner ends up with a house of £475,054 and investments of £332,338 (total £807,392)



My conclusion?

It requires less figures on the edge of probability to end up with the owner appearing to be the wiser investment, but that’s the thing with probability……. Who knows what the future will hold.

Hi Jonny, thanks for putting this amount of effort in. My posts in the other thread were in response to someone saing it was a "no brainer" that home ownership is better than renting. I gave some examples to show that it's not always a no brainer, especially if they move the average number of times (6) and move up the ladder in that time.

The model above doesn't provide important financial information such as what deposit the OO puts down on his first purchase and what prices he's paying for his next houses (and therefore how much more in debt he's getting with his mortgage as he moves up the ladder).

I'd also take issue with the timescale, I doubt that someone who makes 6 moves in his lifetime would still stick within the same 25 year mortgage period. From what I have seen, most people are coming up to retirement age when they finally pay off their mortgages. I could easily see someone living in their FTB home for 3 to 4 years and moving to their second home and getting another 25 year mortgage, despite their original one being down to a 22 or 21 year term.

If you agree that most people only pay their mortgages off when they near retirement, then your figures will be much closer between the renter and the home owner.

Other factors that we have not included are the fact that a more geographically flexible renter could have better career opportunities than someone tied to an area due to his house. This is especially true if the person lives in a rural area that is dependant on a single large employer that goes belly up.

Harry_Powell

I'd also point out the amount of buidling & decorating work that goes into a house. We've just bought ours and slapped a load of magnolia on the walls, satin white on the ceilings and glossed the skirtings and doors (we haven't finished yet, it's a work in progress and to be honest I'm glad to be back in work today for a break!!). We're doing this to freshen up the house prior to doing some major renovation work, and must've spent a couple of hundred on paint, brushes, rollers and all that jass.

We also have to fit central heating, new windows, a new kitchen and a new bathroom and re-wire the house. Many of these improvements will pay for themselves but other won't. Houses are amazing money pits.

Over a 30 or 40 year period of living in a house, I'd imagine that most people would fit a few new kitchens, a few new bathrooms, at least a couple of new boilers (or buy a house with one already fitted/replaced), fit new fireplaces, etc.

JonnyBravo

Harry_Powell wrote: »

Hi Jonny, thanks for putting this amount of effort in. My posts in the other thread were in response to someone saing it was a "no brainer" that home ownership is better than renting. I gave some examples to show that it's not always a no brainer, especially if they move the average number of times (6) and move up the ladder in that time.

No worries. I'd agree it isn't a no-brainer, but I would still stick to my point of view that the longer the time period you consider the more sense it makes to be a buyer than a renter. Clearly in short time periods you can run the simulation with all kinds of differing figures eg house value deflation but with investment inflation etc etc etc

Harry_Powell wrote: »

The model above doesn't provide important financial information such as what deposit the OO puts down on his first purchase and what prices he's paying for his next houses (and therefore how much more in debt he's getting with his mortgage as he moves up the ladder).

Of course not. We trying to keep the comparison valid by looking at similar investments. For that to be valid it is hardly fair to the renter if the owner can move to more expensive houses and therefore allow appreciation on larger values. That would skew the sum in favour of the buyer.

Harry_Powell wrote: »

I'd also take issue with the timescale, I doubt that someone who makes 6 moves in his lifetime would still stick within the same 25 year mortgage period. From what I have seen, most people are coming up to retirement age when they finally pay off their mortgages. I could easily see someone living in their FTB home for 3 to 4 years and moving to their second home and getting another 25 year mortgage, despite their original one being down to a 22 or 21 year term.

Of course but this is simply a result of upsizing which as I stated I discounted in the sum as it favours the owner. I realise it is not real life.... but then nor is private renting for 40 or 50 years in all but the tiny minority of cases.

Harry_Powell wrote: »

If you agree that most people only pay their mortgages off when they near retirement, then your figures will be much closer between the renter and the home owner.

I disagree, as I said, they may well be further apart due to an increase on the leverage the home owner has.

Harry_Powell wrote: »

Other factors that we have not included are the fact that a more geographically flexible renter could have better career opportunities than someone tied to an area due to his house. This is especially true if the person lives in a rural area that is dependant on a single large employer that goes belly up.

Quite true.

Harry_Powell wrote: »

I'd also point out the amount of buidling & decorating work that goes into a house. We've just bought ours and slapped a load of magnolia on the walls, satin white on the ceilings and glossed the skirtings and doors (we haven't finished yet, it's a work in progress and to be honest I'm glad to be back in work today for a break!!). We're doing this to freshen up the house prior to doing some major renovation work, and must've spent a couple of hundred on paint, brushes, rollers and all that jass.

We also have to fit central heating, new windows, a new kitchen and a new bathroom and re-wire the house. Many of these improvements will pay for themselves but other won't. Houses are amazing money pits.

Over a 30 or 40 year period of living in a house, I'd imagine that most people would fit a few new kitchens, a few new bathrooms, at least a couple of new boilers (or buy a house with one already fitted/replaced), fit new fireplaces, etc.

I know. I've done up both the houses I own.
I agree some add value, some don't. Some simply stop it from falling down.
There were limits to the spreadsheet cos of its practicality but of course I also discounted all the moving and contract costs for the tenant (not that I think these are equal but then the gain for the owner is hardly chicken feed in most circumstances etc etc)


All in all I stand by what I said, long term, it's very hard to make the renting option a better choice in simple financial terms. Quite what "long term" is depends entirely on ones view of what is likely for the variables going into the sum.

Harry_Powell

JonnyBravo wrote: »

All in all I stand by what I said, long term, it's very hard to make the renting option a better choice in simple financial terms. Quite what "long term" is depends entirely on ones view of what is likely for the variables going into the sum.

It's nigh on impossible to build a spreadsheet that would be 'real world', but I do appreciate you put in the effort in your op. TBH, I doubt that many, if any home owners even keep a track of what they're spending on their homes throughout their lifetime, so there is no way we could do this in a theoritical situation.

As I said in my original posts, it is impossible in this country to rent a property for a lifetime (except LA houses) because we don't have similar legislation as other countries where this is more prevalent (such as Germany). If we did have more security of tenure and were able to decorate houses as we pleased, then I think this would give people greater choice and would act as a break on the mad boom/bust swings of the housing market. Without the crazy 'doubling of house prices every 7 years' paradygm, the figures between the finances of the renter and the home owner would look very similar and the huge pressure for people to 'get on the housing ladder before it's too late' mentality would not exist.

bernard_shaw

How does one account for opportunity cost in a spreadsheet?

Thrugelmir

bernard_shaw wrote: »

How does one account for opportunity cost in a spreadsheet?

Apply a value to it on a reasoned basis.

JonnyBravo

bernard_shaw wrote: »

How does one account for opportunity cost in a spreadsheet?

One didn't.