Maths of Renting vs Buying

nickmason

I was struck by this post on another thread, which has since ended up a spat about something or other.

Actually, the figures are quite scary. I've never really worked it out since instinctively, buying is far cheaper than renting in the long run. But I thought I'd establish by how much!

Very easy to work out on a spreadsheet. Here's what I did:

1. Take a 28 year old, who I have assumed has been earning long enough to have put down £25K deposit on a £175K house. Hence a mortgage of (say) 6% - OK, high, but I'm trying to get an average. Monthly repayments would be £977.84 a month for 25 years.

2. I assumed a cautious life expectance of around 85. I also assumed annual 'ownership' cost of £1,750 a year, inflated by 4% a year, right up to age 85. I also took into account loss of interest (3%) on the original deposit of 3% on £25K (that's £750 a year).

3. Adding this up over the 58 years of ownership, you get - in £ notes - a total cost of £718,614. But deflate it all by 4% per annum and in 'today's' values, that's £309,640). After 25 years, of course, this person owns a house valued (in today's terms) £175K, so in today's money, it has cost £135K in mortgage interest, loss of deposit interest, and ownership costs.

4. Renting is easy, except I haven't (personally) got a clue about rental costs for a £175K home. I assumed £1,000 a month, despite an 'all property' average of £1241 a month. But assuming rents go up with inflation, then it's still £12K a year in today's terms. For 58 years, then, it's £696K

Phew! What a difference! In today's money, shelling out nearly £700K instead of £135K is no comparison is it? In actual £ notes, the buyer shells out £718,614, while the renter shells out £2,617,796.

I re-did the thing with much 'stronger' costs of buying. I put average mortgage rate up to 8%, assuming a 4% loss of interest on the deposit, and I increased the annual costs of ownership (for 58 years) to £2,500. Then I calculated what the starting rent (today's values) would have to be to equalise the total costs to age 85. This came out at a totally unrealistic £318 a month. In my more realistic first example, the renter would have to start paying rent of only £193 a month to be 'equal'.

It strikes me that this is an extraordinary additional price to pay for 'freedom from ownership', more mobility, or whatever other 'benefits' people see in house ownership.

I constructed a spreadsheet to do the same maths, and found very different results; that for two of the last four flats I have rented the cost of buying is still greater than the cost of renting after 50 years.

(All figures in today's terms, after 58 years)
House 1 (SW): Rent £625pm, Value £280K. Renting £435K, Buying £499K
Flat 2 (SW): Rent £600pm, Value £180K. Renting £418K, Buying £320K - buying becomes cheaper after 39 years.
Flat 3 (London): Rent £900pm, Value £280K. Renting £626K, Buying £499K - buying necomes cheaper after 41 years.
Flat 4 (London): Rent £1300pm, Value £500K. Renting £905K, Buying £890K - buying becomes cheaper after 56 years.

In that last example, after 25years buying has been £325K (in today's money) more expensive, but this obviously is then reduced as there are no further mortgage payments, and over the next 31 years that extra £325K is eroded by the need to continue to pay rent.

So this reinforced that the obvious difference; that buying is paying up front, while renting is pay later. But then I thought that the correct comparison should assume the same payment (ie assuming rational behaviour that an individual would put the same money aside for housing, knowing that if they intend to rent for life, then they need to save for later). And at that point, the difference becomes £543K in favour of renting at 25years... a little bit more than the value of the house!

So yes, there are all sorts of other considerations - and frankly, like others, I hate the fact that I can't redecorate, the uncertainty of tenure, etc, etc.

And of course there's a leveraged gamble on house prices, which has paid handsome dividends to owners in the past, but is not guaranteed to repeat.

But the financials are not as clear cut as Loughton Monkey suggests. It seems that there's a huge disparity on yields between Loughton's figures and mine (which might be regional?).

I'm interested if anyone has further thoughts to add - there were a couple of comments about Loughton's analysis missing lots of stuff, but I couldn't find any specifics.

But to me, the key point is the discipline of saving - which buying "forces" upon people. If you're not saving what you would be paying in mortgage/maintenance then you're storing up problems for later.

PS - one thought that did occur to me is the much maligned pension - certainly for anyone paying higher rate tax, for every £1 not spent on a mortgage, but put into a pension, the pension grows by £1.67 - and is likely (assuming basic tax at 25%) to be worth £1.25 in today's money. So there are tax advantages against putting everything into the mortgage.

jonjamie1970

Interesting post and something that has been forced upon me recently. My GF and I are in a position where we have sold a house and now aim to rent using just the interest on the savings. At the moment we dont want to buy for a year or two so we should yield £600 per month. If we also put funds into those savings then I dont feel we are losing out, we are also goign to rent a nice apartment where we wont have to worry about the maintenance of the property y the see.

I like your point about the savings being moved into pension funds rather than the taxable mortgage pot which leaves us open.

robmatic

It's certainly important to do the maths. One thing I would point out is that the maximum gross rental yield of your examples is 4% per year whereas the national average is about 5% per year... being a tenant can be a pretty good deal if the yield is low for the landlord.

I would also factor in an inflation assumption when calculating over these timescales.

chucknorris

nickmason wrote: »

I was struck by this post on another thread, which has since ended up a spat about something or other.



I constructed a spreadsheet to do the same maths, and found very different results; that for two of the last four flats I have rented the cost of buying is still greater than the cost of renting after 50 years.

(All figures in today's terms, after 58 years)
House 1 (SW): Rent £625pm, Value £280K. Renting £435K, Buying £499K
Flat 2 (SW): Rent £600pm, Value £180K. Renting £418K, Buying £320K - buying becomes cheaper after 39 years.
Flat 3 (London): Rent £900pm, Value £280K. Renting £626K, Buying £499K - buying necomes cheaper after 41 years.
Flat 4 (London): Rent £1300pm, Value £500K. Renting £905K, Buying £890K - buying becomes cheaper after 56 years.

The property that I rent out in London is as follows:

Flat 1: Rent £1,700/m, value £350k
Flat 2: Rent £1,200/m, value £280k
Flat 3: Rent £1,195/m, value £280k
Flat 4: Rent £1,395/m, value £290k
House 5: Rent £1,190/m, value £250k

The yields are much better than the ones used in your example.

Percy1983

Do these sums account for greed?

FTBFun

Percy1983 wrote: »

Do these sums account for greed?

No but I think they factor in chippiness.

nickmason

chucknorris wrote: »

The property that I rent out in London is as follows:

Flat 1: Rent £1,700/m, value £350k
Flat 2: Rent £1,200/m, value £280k
Flat 3: Rent £1,195/m, value £280k
Flat 4: Rent £1,395/m, value £290k
House 5: Rent £1,190/m, value £250k

The yields are much better than the ones used in your example.

Ouch!! :eek:

michaels

What value did you put on the house after 58 years - the original purchase price or an inflation adjusted value?

Transaction costs also need to be borne in mind as I believe the average house is owned for a lot shorter than 58 years but obviously renters are likely to move even more often.

Next the tax/benefits system needs to be considered, pensions are already mentioned (tax advantages but loss of flexibility) but other benefits/costs may also impact (eg those who are retired without assets will be housed by the state, those with assets will have to pay for residential care).

Finally there is the question of how to value any assets held on death, not just with respect to inheritance tax but also a personal judgement of what anything passed on to one's estate is worth to oneself.

ukcarper

I took simple view inflation and rent increase 3% mortgage rate 5% with an initial running cost of £2000 and a yield 4%. At the end of 25 years buyer has spent £430k renter has spent £300k allowing for house prices increasing at half inflation the buyer will have a asset values at £285k.

Simplistic I know. Where I live £200k would get you a 3 bed house but rent would be £12000 a year not the £8000 I allowed for.

CLAPTON

where I live a 4 bed decent sized house costs a modest 2k per month to rent

so that's 24,000 per year
which means at 20% tax rate you need income of about 28,000 pa just to pay the rent

against this, as owner you may spend say £1,000 per year on maintenance

I would guess that most retired people , even on very reasonable pension would see the matter as a no brainer


a family member, has just bought a modest one bed flat in london
the mortgage (repayment ) is about 850 pm
directly comparable rents in similar blocks charge 1,000 - 1,200 pm
they paid about 25,000 as deposit .. so say at 3% interest thats £62.5pm in lost interest
seems a better bet too

HAMISH_MCTAVISH

nickmason wrote: »

I constructed a spreadsheet to do the same maths, and found very different results; .

Without seeing the formula it's difficult to see what you've done wrong, but that you've done something wrong is almost certain.

An obvious point is that the national average rental yield is currently around 5.5%. So for every area using the 4% yield you've calculated, there is another up around 7%.