Renting is NOT Dead Money

Procrastinator333

Cleaver wrote: »

But as we've just discussed on the other thread, this is too simplistic a measure to say, overall, that renting is cheaper than owning.

Bascially, paying your monthly rent might be cheaper than paying your mortgage interest, but that doesn't mean that over a given timeframe renting is cheaper than owning.

As simplistic example:

Laptop number one is £300.
Laptop number two is £500.

Which is the cheapest laptop? Well, laptop one, obviously.

Which is the best value? Over the short term, still laptop one.

You need a laptop for ten years, which will provide the best value? That's where it gets complicated, like rent vs mortgage. There's no way of telling as a number of scenarios could play out.

That is not an accurate analogy, because you are comparing purchasing 2 differnt quality laptops.

The comparison is leasing a laptop for 12 months vs buying.

If the only option is lease for 10 years or buy and use it for 10 years, then buying will no doubt make sense, but they are not the only option.

It may be that there is a big technological step coming out in 6-12 months. You may be better off renting and then buying once you can access that new tech.

Delaying the purchase is not the same as never purchasing.

1984ReturnsForReal_2

HAMISH_MCTAVISH wrote: »

O has been saying exactly the same thing on here since early 2009.

And as we all know, prices now are around £20,000 higher since then.

I don't know that & I dispute that figure.

I dispute it for reasons you are just about to find about but a huge number of intelligent British people already knew.

Happing viewing Hamish.

Generali

michaels wrote: »

but (generally) the interest rate will reflect the inflation rate hence for the rent/interest comparison the interest will factor in the real reduction in the value of the mortgage. (although of course this assumes that house and general prices move together)

But it won't reflect the impact of gearing on returns.

As most people buy a house with a mortgage the effects of gearing are important to consider.

Procrastinator333

HAMISH_MCTAVISH wrote: »

Or to put it another way, Procrastinator333 has been saying exactly the same thing on here since early 2009.

I may be wrong, but I think I started posting on here later than that. But irrespective of when I started posting I would have made the same point since I had to make a choice on buying in early to mid 2007. That was the first time my OH and I both had jobs post uni and could have in theory purchased a property.

Yes we missed that bottom in Feb 09. But by renting all this time, our deposit and wages have grown significantly. We could only have got a flat back then, 4 years of saving and wage growth and we are going to jump straigh on at a detached house.

In that time the halifax has gone from £194,362 to £162,096, the nationwide has gone from £179,110 to £166,757. And prices are again now pointing in the downward direction. We have therefore skipped the costs of several house purchases at the same time as prices have dropped. On the flipside we have missed out on the low tracker rates, but then we would likely have had to give them up when we moved up the ladder anyway.

So to date, our choices have been spot on.

HAMISH_MCTAVISH wrote: »

And as we all know, prices now are around £20,000 higher since then.

Oh look, you pick the low point in the cycle to try and argue against my point. It is also irrelevant, all FTB should consider the market today and where they think it will go tomorrow. Where is the hpi going to come from over the next 6-12 months?

HAMISH_MCTAVISH wrote: »

The thing is, there is a risk involved in purchase, and indeed in not purchasing, at any given time. But that risk can be measured.

When measuring risk, you need to quantify both the probablility of something happening, and the impact it has on you if it does.

For example, if prices fall, the impact of them falling is likely no more than you'll be mildly annoyed that you could have bought something cheaper if you delayed purchase. An annoyance isn't, objectively speaking, a significant impact so perhaps scores 2/10. However if prices rise, you could be priced out completely or be forced to buy something smaller. By anyones standards, this is a huge impact, so scores 8/10.

If the chances of prices rising or falling are 50/50, and the impact of falling prices is 2, and of rising prices is 8, then your risk score for falling prices is 100 (2*50) and for rising prices is 400 (8*50). In this example the risk of rising prices is far worse for you, and you should buy, even though the probablility of prices rising or falling is the same. You can add as many factors as you like to the equation, and it's a good objective way to measure the risk of action or inaction on any particular decision.

Good point that people should consider the relative risks of buying and not buying. Agree. If they really are at the absolute limit of being priced out, it may be too much of a gamble not to buy. We all need to consider it on an individual basis.

Generali

GHOULES_ARE_BACK_IN_TOWN wrote: »

FTBer A buys a property and so pays off a mortgage over a 25 year term they then own the asset and can now live for free.

FTBer B rents a property and so pays off the landlords mortgage over a 25 year term they then own nothing and have to continue paying rent to live.

Clearly FTBer A is the smart one.

That's simplistic.

Another view would be that FTB B owns and runs a business and prefers to put his/her capital into that knowing that he gets a return on capital greater than he can hope for from rising house prices.

Procrastinator333

GHOULES_ARE_BACK_IN_TOWN wrote: »

FTBer A buys a property and so pays off a mortgage over a 25 year term they then own the asset and can now live for free.

FTBer B rents a property and so pays off the landlords mortgage over a 25 year term they then own nothing and have to continue paying rent to live.

Clearly FTBer A is the smart one.

You seem to suggest that the only 2 choices are buying for 25 years or renting for 25 years. You are quite stupid if you think that.

FTBer C saves hard while saving on the cheaper rent, prices drop a little, they then have access to the cheaper mortgage rates and when they buy in a couple of years they end up with significantly more equity than FTBer A who is still stuck on the higher interest rates as their LTV is not as low.

End result, despite delaying for a while, FTBer C will own their home outright long before B or A.

Procrastinator333

GHOULES_ARE_BACK_IN_TOWN wrote: »

It might be simplistic but it's true and that you CANNOT dispute. Buying property pays off so it's disingenuous to try to over complicate the theory with your fancy mathematics.

I can't dispute that if the only 2 options were to buy for 25 years or rent for 25 years, you would be better off buying. But they are not the only options. A delay in the purchase can be VERY profitable.

Googlewhacker

Procrastinator333 wrote: »

I can't dispute that if the only 2 options were to buy for 25 years or rent for 25 years, you would be better off buying. But they are not the only options. A delay in the purchase can be VERY profitable.

It can also be very unprofitable, it all comes down to luck at the end of the day.

Procrastinator333

Googlewhacker wrote: »

It can also be very unprofitable, it all comes down to luck at the end of the day.

Yes of course, that is why I used the word can. And the comment was in reply to the assertion from Ghouly that the only options are buying or renting for 25 years.

I disagree it is down to luck as it is not a matter of chance whether prices rise or fall.

Cleaver

Procrastinator333 wrote: »

That is not an accurate analogy, because you are comparing purchasing 2 differnt quality laptops.

The comparison is leasing a laptop for 12 months vs buying.

If the only option is lease for 10 years or buy and use it for 10 years, then buying will no doubt make sense, but they are not the only option.

It may be that there is a big technological step coming out in 6-12 months. You may be better off renting and then buying once you can access that new tech.

Delaying the purchase is not the same as never purchasing.

I wasn't using it as an accurate analogy, I was just saying that you can't tell me which is the better value purchase. You can't also tell me whether renting or buying a laptop is better value. Therefore, you can't tell me whether renting or buying is better value, because you don't know the future.