Maths of Renting vs Buying

Joe_Bloggs

There is room for sentiment in all economic decisions. If you are flitting from place to place then renting makes sense, perhaps even a hotel room.

If you have settled circumstances then aspiring to a mortgage makes sense given the hassle of selling and buying.

In the end towards retirement, a home-owner may consider selling up and downsizing to a more manageable place by the sea.

If you have the money, as a deposit/equity, you can choose. If you don't then you will have to get creative.

J_B.

Pimperne1

Lets forget the Maths thing. Whatever it costs to own a property after 25 years its well worth it. To even consider whether you will have to pay for your own care costs at the end is just stupid. Get in there.

molerat

CLAPTON wrote: »

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

Not if the council are paying it for you ........... but that is for a different thread

My house would cost around £550 pcm to rent. I paid £65K for it and the mortgage cost me about £20K before I paid it off. Total £85K over the 22 years I have owned it = £321pcm. Maybe £500 pa max in maintenance but i now do not have any rent / mortgage to pay which means I do not have to earn the £9k (including tax and NI) to service this. Retired at 55 so have the time to do the maint myself thus saving on costs. If it all gets too much I can sell up and the £200K it is now worth will buy a smaller place, around here a small bungalow costs around £120K, or pay the rent for a good few years so buying is a no brainer in my case.

dtsazza

nickmason wrote: »

As others have mentioned, it's not obvious how best to account for that property, as you can't sell it without needing another home!

I would have thought it's quite easy to account for, since you're comparing against the rental situation whereby the renter owns zero homes too.

So the buyer is £325k worse off after 25 years, but then can sell the £500k home to be £175k better off (minus a bit for stamp duty/transaction costs, but we all recognise that the model is simplified in both cases). Neither the buyer nor the renter own a home at this point - the buyer could now decide to keep renting for the rest of his/her life and stay £175k up compared to the lifelong renter.

(Or in other words, even if you want to rent in the long run it's still financially beneficial to get to that point via buying a house. And obviously once you've fully paid off the house and it's rent free there's little incentive to sell it quickly.)

In reality of course the home wouldn't be sold for the sake of cashing in, but overlooking its value in an economic comparison is fundamentally wrong.

chewmylegoff

abaxas wrote: »

Monthly rental costs do not rise in a linear fashion with price and there is a huge regional variation.

No-one would pay £1,300 pm for a 500k house in the NE.

of course, but i'd still like to see you try to rent a property with a market value of £500k for £1,300pcm in london at the moment. whilst i'm sure it is technically possible, the average rent for anything with a market value of £500k is far higher than that.

£1,300pm won't even get you a decent 1 bed flat in clapham at the moment. it's a useful example, look on rightmove, 1 bed flats (if you ignore the stupid ones) go up to about £370pw or £1,600. the most expensive 1 bed flat on the market is currently £350,000.

in the same area you're looking down the barrel of £2,000 a month for something with a market value of £500,000. makes a pretty fundamental difference to the calculations if your calculation is predecated on paying only 2/3 of the market rate in rent.

all this may mean is that it's no use having a "standard" calculation as every individual needs to work it out on their own circumstances factoring in stuff like - where they will live, when will they trade up. etc.

the calculation gets so boringly laborious that you probably can't do it to any sort of reasonable standard and it's probably far more sensible to make any long term decisions on the basis of whether you want to own a house, or not, rather than whether it will cost you more or less.

nickmason

HAMISH_MCTAVISH wrote: »

Nick, did you adjust for inflation on rent but locking in a house price at today's level?

Yup. Rates used were:
6% mortgage
3% return on savings
4% inflation of rent and ownership costs, and also for adjusting into today's money.

Or did you just assume constant rent and house prices at today's levels to simplify the calculation?

As rent will increase with inflation whereas the value of a mortgage will be eroded by inflation.

Agreed - this is why a mortgage is "front-loaded" - as mentioned earlier, if a mortage and rent are the same monthly outlay now, then over time the mortgage route is much cheaper.

What's tilting the dials in favour of renting (apart from the relatively low yields on my examples, which I'm happy to accept aren't perfectly representative) is the assumption that the savings from renting over buying (which are enjoyed early on, but then fade away as rent inflates but the mortgage doesn't) are saved rather than spent. I'm fairly certain lots of people aren't doing that, unless of course they're saving for a deposit!!:D

I'm coming round to thinking that forcing saving is a very strong but hidden financial argument for buying. When that saving simply can't be afforded, then there's a different problem.

nickmason

wastedtalent wrote: »

Another couple of thoughts, buying means building up equity, which means you can move up the ladder with a bigger deposit and then a mortgage payments well below rental value, which will then work out cheaper than renting a house of similar size.

Also, when you want to downsize, later in life, you will release some of that equity in cash, and still have enough to buy a house outright.

I'm pretty certain that those considerations already counted in the analysis. Again - if the renter saves, then he/she can build up as much equity (actually more in the early years). And from all that saving, the renter has the cash without needing to release equity. If they downsize, then they simply pay less rent.

nickmason

dtsazza wrote: »

I would have thought it's quite easy to account for, since you're comparing against the rental situation whereby the renter owns zero homes too.

At the time I was thinking that there was a difference in valuing the non-cash asset - I was specifically thinking about IHT burdens, but as others have pointed out there is also stamp duty.

In any event, the calculus does include it - see below.

So the buyer is £325k worse off after 25 years, but then can sell the £500k home to be £175k better off (minus a bit for stamp duty/transaction costs, but we all recognise that the model is simplified in both cases).

Neither the buyer nor the renter own a home at this point - the buyer could now decide to keep renting for the rest of his/her life and stay £175k up compared to the lifelong renter.

But this was the point of the second part of the calculation - the bit that went beyond Loughton Monkey's original - and looked to see the effect of saving the difference. Doing that, at the 25yr point the £325K has grown to £534K; and so the renter has more cash than the buyer has value in his home.

(Or in other words, even if you want to rent in the long run it's still financially beneficial to get to that point via buying a house. And obviously once you've fully paid off the house and it's rent free there's little incentive to sell it quickly.)

In reality of course the home wouldn't be sold for the sake of cashing in, but overlooking its value in an economic comparison is fundamentally wrong.

Which is why I didn't overlook it.

nickmason

chewmylegoff wrote: »

of course, but i'd still like to see you try to rent a property with a market value of £500k for £1,300pcm in london at the moment. whilst i'm sure it is technically possible, the average rent for anything with a market value of £500k is far higher than that.

£1,300pm won't even get you a decent 1 bed flat in clapham at the moment. it's a useful example, look on rightmove, 1 bed flats (if you ignore the stupid ones) go up to about £370pw or £1,600. the most expensive 1 bed flat on the market is currently £350,000.

in the same area you're looking down the barrel of £2,000 a month for something with a market value of £500,000. makes a pretty fundamental difference to the calculations if your calculation is predecated on paying only 2/3 of the market rate in rent.

Maybe I'll be buying in Clapham, then....

all this may mean is that it's no use having a "standard" calculation as every individual needs to work it out on their own circumstances factoring in stuff like - where they will live, when will they trade up. etc.

I agree entirely.

the calculation gets so boringly laborious that you probably can't do it to any sort of reasonable standard and it's probably far more sensible to make any long term decisions on the basis of whether you want to own a house, or not, rather than whether it will cost you more or less.

Utterly right - and for my part, I suspect I will buy fairly soon for domestic reasons.

I just wanted to investigate the received wisdom that buying was always vastly cheaper than renting. Most of the time, it probably is cheaper, and renting obviates the saving that is implicit within buying. And the HPI gamble, up until now at least, has been a good one.

Cleaver

There's a lot of interesting and complex looking maths in this thread which I'm sure is all very well meaning. Is there any point to it though? In the real world (i.e. not on a forum) people don't really decide to buy or rent based on complicated mathmatical forumulae. You normally rent or buy based on your life circumstances - relationships, stage of life, work, future plans and the like.