Buy or rent (cost comparison)

[Deleted User]

mostlycheerful wrote: »

renters are going to end up with nothing

Someone with capital for a deposit who chooses to rent still has their deposit as an asset. They can invest that money elsewhere such as the stockmarket. Depending on how the property market and stockmarket perform this could leave the renter better off than if they had bought.

HAMISH_MCTAVISH

[Deleted User] wrote:

Someone with capital for a deposit who chooses to rent still has their deposit as an asset. They can invest that money elsewhere such as the stockmarket. Depending on how the property market and stockmarket perform this could leave the renter better off than if they had bought.

The stock market has yet to return to the peak it reached almost a decade ago.

House prices have increased by over 50% in that time, even after the recent correction.

After the financial crisis, UK property fell by 20% or so.

The stock market fell by closer to 50%.

But lets take a "safer" investment option for the deposit, say..... a bank account. Real savings returns are now negative for all categories of taxpayer, so that deposit is shrinking against both real world purchasing power and the price of houses. (up 6% in the last year, up more like 12% in the last 18 months). In the meantime, a renters landlord is having his mortgage paid for him and getting wealthy in the process.

Housing has consistently outperformed the stock market as a safe store of wealth in the UK. And given our massive housing shortage, growing population, and the basic economic laws of supply and demand, that situation is unlikely to change.

tomgarvie

I am renting 1 bed house now. My rent hasn't changed for last 4 years being £690. If I wanted to buy it the mortgage cost would be about £1100 (fees, insurance etc). Funny thing is that exactly same houses are for sale in the area but no one is really interested. The built quality of many houses in UK is not the greatest and thanks to that repairs cost to landlord was almost £4000 since I moved in (1985 house). Buying house is definatelly not an option for me. Why?
- prices are completely mad. People are selling dump holes with re-painted walls for insane money.
- due to my living situation i value my freedom of relocation at any time
- I don't want to be Bank slave for another 25 years and pay off interest on mortgage, repair loans. I know rates are very low now but they will go up eventually.
I would rather save/invest the £400 difference and enjoy my life. I am 30 years old, married with savings on my account. While I am on Caribbean holiday my mates are taking another loan for Blackpool holiday and worried about their jobs and repossessions. As for investment people only tend to remember the asking price and not the total cost of ownership. £200 mortgage in 20 years takes 60k interest (3%) not including costs like re-mortgage, repair loans, interest hikes.

Jannetje

Hi

After much pondering I came across this site and thought I'd see if I can get some advice with regards to renting/buying!

I am 28, single and looking to move into my own place (although I also wouldn't be against sharing with someone, but do like my home comforts, and know this can be problematic if you don't have the right person). I earn approx £1250 per month after tax (with approx £100 going out on contacts, HSA direct debits etc). I've been at home saving, and will have 10k saved soon. I also managed to buy my car outright, so there have been some benefits.

Whilst I love my family, I'd like my own place now, but am pretty much clueless about what to look for, where to look, and whether renting or buying is a good option. I'd also like to find out more about part ownership deals, as I can't afford (or won't be given) a mortgage just on my salary alone. It would be alot easier, and nicer to be looking with a partner, but I don't have that option at the moment!

I'd like advice on what outgoing costs might be like, as I am pretty much clueless, as Uni was a different way of living and budgeting!

Thanks

alexjohnson

mostlycheerful wrote: »

The issue is about long term, not short term. Whether or not short term renting can sometimes be more viable than a mortgage over the short term is a false comparison as you generally don’t do a mortgage short term, it’s generally for 25 years or thereabouts, not just 5 years, so your comparison is misleading and inappropriate.

Yes, but the average person moves every seven years or so.

whereas renting is money down the drain and you end up with nothing except paying yet more rent indefinitely.

I'm not sure I agree. You are paying for different things. As a renter, you have zero maintenance costs. If the boiler breaks, it's not your problem. And perhaps most importantly, if the major employer in your area packs up, you can move to find work rather than having the millstone of a house around your neck. (Probably less of a problem in the South East but this is a real issue in some Northern towns.) This flexibility is valuable to plenty of people and it's not inherently uneconomic to want it. In fact for youinger people being nimble is probably amongst the smartest thing you can do, financially.

Which is the point of this thread and the OP’s original question. Those people you know who are currently in negative equity are nevertheless going to end up owning a valuable asset if they see their mortgages through to the end, aren’t they

Yes, but they may have paid much more for it than they needed to, to the tune of hundreds of thousands for even an average home by the time you compound the interest.

Your suggestion that renting can be the same cost or cheaper than paying a mortgage is an unusual scenario and not the norm. Normally rents cost more than mortgages which, of course, is why renting is so lucrative and landlords often get rich for little or no effort and get their mortgages paid for them by renters. It’s also why you can get buy to let mortgages.

I think you have this upside down. Rental yields vary but they are typically around 4%. (A lot depends; being a slum landlord can yield much more but it's not free money. Separate issue.) You quote very high figures but these are not achievable by most people most of the time - and obviously not; if they were no one would ever do anything else. The bubble was bad enough! Mortgage rates have rarely been that low and until recently we used to think the neutral Bank of England rate was 5%, which would imply a mortgage rate of around 6.5% (based on many other arbitrary assumptions, FWIW). The idea that renters would pay a premium sufficient to cover the cost of borrowing the money is quite recent, and as the failur of Bradford & Bingley et al showed, wholly unsustainable. At the end of the boom don't forget that for many BTL investors, rental yields were negative, as they all hoped capital gain would rescue them.

Look, I don't completely disagree with you. All things being equal I would buy - as indeed I have. But I have rented too and would again in the right circumstances. What I do believe is that to regard renting as a waste of money is misguided and I don't think we will see returns from capital growth in property outpacing other assets like stocks for years to come in most areas. As such if rent is less I really don't know what you're missing out on except the enforced savings plan of a repayment mortgage. So, save, buy shares. The idea that you "have" to buy is one of the things that drove property values so high and if you are a first-time buyer with a city-centre flat in a second-tier town I wouldn't be thanking anyone who gave me the advice to buy back in 2005, 2006.

alixandrea

milan_ns wrote: »

Particular property (1 bed flat) can be rented for £800 pcm.

Mortgage interest + service charge, for the same property, work out the same as rent (so £800 pcm).

Considering the initial cost of purchasing a property, maintenance costs, risk (house price slump, interest rate hike) & lack of flexibility (more difficult to downsize or move), renting is the optimal choice.

Would you agree?

Nope. Where I live (Cambridge) the cost of a mortgage is cheaper per month than rent on the same property. If you're renting a property, you have massive fees to pay the rental agency up front before you even set foot in the door. You have a deposit which you'll be very lucky to get back in this day and age. One rental agency here (Russell Residential) specifically states that they will take something in the region of £250 out of your deposit for cleaning/making good the property when you leave, no matter how little damage and how much cleaning you may have done yourself.

Buy a property and you have that property as your own home. You can do what you like with it and the only person you are beholden to is yourself. You can improve it however you want. You can stay in it for as long as you want without the likelihood of being chucked out by your landlord on a whim when the property market goes up, or of having your monthly payments hiked unsustainably for no good reason.

I've lived in my own home and had to go back to renting (marriage breakdown). I can tell you now I'd much rather own my own place again than have to continue renting for the rest of my life.

Alixandrea

alexjohnson

HAMISH_MCTAVISH wrote: »

The stock market has yet to return to the peak it reached almost a decade ago.

House prices have increased by over 50% in that time, even after the recent correction.

After the financial crisis, UK property fell by 20% or so.

The stock market fell by closer to 50%.

But lets take a "safer" investment option for the deposit, say..... a bank account. Real savings returns are now negative for all categories of taxpayer, so that deposit is shrinking against both real world purchasing power and the price of houses. (up 6% in the last year, up more like 12% in the last 18 months). In the meantime, a renters landlord is having his mortgage paid for him and getting wealthy in the process.

Housing has consistently outperformed the stock market as a safe store of wealth in the UK. And given our massive housing shortage, growing population, and the basic economic laws of supply and demand, that situation is unlikely to change.

Stocks have the best long term return of any asset class, including property. Property is also not "safe" - it is a very illiquid asset with high price volatility. Comparing it to a bank account is inappropriate.

The main advantage property has to the man in the street is that the mortgage allows leveraged returns and in an asset which over time has a positive return which is tax-free. That's great. The leverage gain is particularly strong early in the mortgage. If you buy a £100,000 house with a 10% deposit and sell it a year later for £110,000, you have basically doubled your money. The effect of that leverage is necessarily wound down over the life of the mortgage though as you pay it off, so if you do hold for the full mortgage, your return will be much more modest (if you remember to factor compound interest).

You still win versus renting over the long term because although at the start of the term rents and interest should be somewhat comparable, interest costs fall over the life of the mortgage whereas rents stay the same and indeed rise. So, if you were going to pick a house to live in for 25 years, you would generally be better buying it with a mortgage than renting.

But that doesn't mean everyone should do so. If you anticipate moving in a few years - classically, because of children - then the costs of transacting are huge in the short term, to say nothing of the risk of a price decline. The OP is quite right to factor these in.

Itisallrelative

The sums are a waste of time.

Its not about renting or buying its about where you choose to invest your money. Those who buy with a mortgage are paying interest to the bank and are investing in property. Those who rent are paying money to the landlord and if when compared to buying they have some spare cash they can invest in something else.
If the buyers house falls down he looses, if it turns out its on top of an oil well he wins.
If the renter spends his spare cash on beer he will be happy but he will loose, if he buys the right work of art he may become very rich.

Just choose where to invest your cash and get on with it.

neverdespairgirl

I think the fact this is a 1 bed makes a difference.

People often don't want to live in a 1 bed for long. They want more space, meet someone, have a child, etc. And 1 beds can be harder to sell than 2+, also.

Mary_Hartnell

mostlycheerful wrote: »

“Either way I end up with £235 (saved or invested).”

No, with renting you end up with £235 saved, with buying you end up with £235 invested AND ALSO THE £800 ALSO INVESTED.

And even if property prices drop a bit you’re not likely to lose any more than a maximum of 10% or 20% or 30% so you’ll still be massively quids in whereas with renting you lose all of the £800.

Interest is just the cost of renting someone else's money.

In the short term that money is just as dead as renting someone else's bricks and mortar (and perhaps also some of their furniture and fittings).

Bricks & mortar and especially furniture and fittings wear out - it is the value of the site you are gambling on.

The value of the site is based on Location, Location, Location.
The value of money is based on decisions of politicians and their tax policies, coupled with the wealth per head that can be generated by the people of Britain.

So I think my advice is:

1. Don't buy in the next 18 months as the cuts due on 20th October bite into buyers' budgets.

2. Money will devalue in the longer term as Britain tries to devalue its way out of its debts AND as stronger currencies buy up the world's resources. [Interestingly there is already a shortage of prescription drugs - the NHS set UK price means that good profits are to be made by "parallel" exporting. These low weight high value supplies are going to countries with strong currencies and rising demand]
http://en.wikipedia.org/wiki/Fiat_money

3. In the long term "desirable" sites will definitely be worth more than now in £ terms. However there are already parts of the country, where property prices are falling for structural reasons. No job = no mortgage = unsellable houses. The property market is now more like the share market, you have to be able to pick a winning site.

4. The sensible advice is probably emigrate, while you still can.

Mary.

PS
If there is another downturn, owned 1 bed flats are not "desirable" - if they ever were.
There owners will be stuck in negative equity; possibly desperately trying to rent out the flat because they have been offered a job in another town.