Maths of Renting vs Buying

nickmason

Cleaver wrote: »

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.

Agreed. I wasn't sure whether there was a point to it - now I'm convinced that the financials can go either way, although typically they favour buying, and so that you're right that people should make the decision on life circumstances. And that if anyone says "buying will always be cheaper than renting in the long run, so buy, you fools" we can know how much salt to take with it.

What is good advice is that those who don't buy should at least be saving. But then we knew that anyhow....

robmatic

nickmason wrote: »

Agreed. I wasn't sure whether there was a point to it - now I'm convinced that the financials can go either way, although typically they favour buying, and so that you're right that people should make the decision on life circumstances. And that if anyone says "buying will always be cheaper than renting in the long run, so buy, you fools" we can know how much salt to take with it.

What is good advice is that those who don't buy should at least be saving. But then we knew that anyhow....

I would be minded to really simplify this and say that if the cost of renting is less than the cost of borrowing the amount of money that would buy the equivalent home, then rent. Investing the net saving will build up capital, as a repayment mortgage would. I guess the challenge would be ensuring that the real return on your investment pot continues to beat the increments to your rent?

lostinrates

Something that I always think is relevant, but not accountable for with maths I don't think, is renting, we rented what we needed then....where as buying we bought all we could need. Now that's partly because we are in a lucky position to do so. If we had stayed renting what we need now, we'd still be saving more than we are paying in our mortgage for a house that has ''more'' than we need IYSWIM.


Stamp duty alone could have paid our rent for a couple of years.

HAMISH_MCTAVISH

nickmason wrote: »

the financials can go either way, although typically they favour buying

I would (mostly) agree with this.

For a very few folks, living in areas where yields are exceptionally low, and where their personal circumstances mean they'd pay a well above average interest rate, then renting can (just about) stack up as a sensible financial option.

But for most people, in most areas, renting for anything other than the very short term is a pretty poor option financially. It does offer flexibility, etc, but at a fairly steep price.

geneer

HAMISH_MCTAVISH wrote: »

I would (mostly) agree with this.

For a very few folks, living in areas where yields are exceptionally low, and where their personal circumstances mean they'd pay a well above average interest rate, then renting can (just about) stack up as a sensible financial option.

But for most people, in most areas, renting for anything other than the very short term is a pretty poor option financially. It does offer flexibility, etc, but at a fairly steep price.

Though you've also repeatedly suggested that for most people in most areas house prices have not fallen.

Which does rather suggest your opinions on what most people in most areas are up to are somewhat flawed.

ash28

Graham_Devon wrote: »

Only Hamish could have a (in his words) large house that requires under £1000 of maintenance over 4 years. Suppose it's another thing that happens in Aberdeen only.

Cost me more than that this year just to do up a couple of rooms, which includes carpets.

Can imagine Hamish though in his Grand house, with threadbare carpets and none matching handles on the cupboards of his 30 year old kitchen. Lovely.

We have a large house and have spent in the last 18 years -
£4k double glazing - fitted by Anglian
£2.5k kitchen - the original one was absolutely gross - a nice shaker style wooden kitchen was fitted by daughter's boyfriend (at the time) for free - it's what he did for a living. It will only need painting.
£1.7k new bathrooms and toilet - they were 40 year old originals - friend fits bathrooms and does tiling for a living...- he has done a number of friends' places at "mates rates" including ours.
£1.3k fascias and guttering - needed doing as we didn't look after the fascias -
£1k replace felt on flat roof extension.- looked tatty but functional with no leaks.
£200 new radiator
£300 new back door - fitted by son
repair to patio door - done by son
New pump for boiler - free - guy who fitted the kitchen fitted the pump.
walls plastered - free - plasterer friend -
guttering - OH does it - the back is accessible from the flat roof - the front he borrows long ladders.
no electrical issues
no gas issues - servicing done by a friend - but just had a gas safe check done - £65 for boiler, oven, hob and gas fire.
no boiler issues - except the pump
We have decorated a number of times and had a couple of sets of carpets in the bedrooms (is that maintenance) - our hall stairs and landing carpet is 17 years old - a modern colour and still in very good condition - I hired a Rug Doctor and cleaned it. We have wooden floors in the living room and dining room and the study and tiles in the kitchen, bathroom and toliets -

Had someone in to fix a hall light at the weekend - £30

I'm sure there's more - but nothing has ever fallen off or fallen down - and a survey was done on it about 4 weeks ago and there were no issues and no concerns - yippeee!

HAMISH_MCTAVISH

So poster after poster has come on and confirmed it's perfectly possible to maintain a decent sized house for around £1K a year.

Which does make Graham's premature gloating look more than a little silly.:)

Loughton_Monkey

nickmason wrote: »

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.

Since I was the culprit who did the original post you quoted, I thought I should reply. I have been busy and not looked at MSE for a day or two.

I think you must have a different understanding of mathematics than I. Clearly my Grade A in A level (plus distinction at 'S' level) plus Engineering Degree cannot hope to emulate your figures.

I think you might have made two errors in your own attempt.

1. You have assumed 100% mortgage (at 6%?). This is unrealistic. My own calculation, as explained, assumed a 15% (roughly) deposit and I calculated mortgage interest at 6% and loss of interest at 3% on the deposit.

2. I think, also, you have 'conveniently' forgotten, that the buying scenario ends up with a paid-for asset (in your very first example) valued in today's terms of £280K!

Hence if I am to trust your quoted figures (other than point 2 above) it would mean renting =£425K, and buying = £499K less £280K = £219K, roughly half the cost of renting. How often would you throw £206K (at today's values) in a sack with a brick in the river?

nickmason

Loughton_Monkey wrote: »

Since I was the culprit who did the original post you quoted, I thought I should reply. I have been busy and not looked at MSE for a day or two.

I think you must have a different understanding of mathematics than I. Clearly my Grade A in A level (plus distinction at 'S' level) plus Engineering Degree cannot hope to emulate your figures.

Do we really have to do this? I have Grade A's in both A-Level Maths and Further Maths, as well as distinction at 'S' level. Although I'll admit that my economics degree probably lets me down. Maybe we should worry about grade inflation and compare ages?

I think you might have made two errors in your own attempt.

What I'm surprised by - given that I actually checked my spreadsheet against your results - is that you think I made a mistake. I deliberately copied yours, as I didn't want to get caught into a debate as to the validity of the model; rather to discuss the impact of the inputs to it.

1. You have assumed 100% mortgage (at 6%?). This is unrealistic. My own calculation, as explained, assumed a 15% (roughly) deposit and I calculated mortgage interest at 6% and loss of interest at 3% on the deposit.

actually, once I had checked the model worked with your figures, I must admit I then replaced your deposit and loan levels with an assumption of 90% mortgage, and 10% deposit. But that doesn't make much difference.
I used 6% mortgage interest, and 3% loss of interest - just as you did.
If you put my figures into your model, I suggest you will find very similar outcomes.

2. I think, also, you have 'conveniently' forgotten, that the buying scenario ends up with a paid-for asset (in your very first example) valued in today's terms of £280K!

not forgotten, although you're right - I didn't include it initially in those four examples. If you read through the various comments on here, you'll see why. Maybe I was wrong not to do so, but as you will see, once saving the reduced outgoings, renting ends up with more cash than the asset value.

Hence if I am to trust your quoted figures (other than point 2 above) it would mean renting =£425K, and buying = £499K less £280K = £219K, roughly half the cost of renting. How often would you throw £206K (at today's values) in a sack with a brick in the river?

See above.

Loughton_Monkey

nickmason wrote: »

Do we really have to do this? I have Grade A's in both A-Level Maths and Further Maths, as well as distinction at 'S' level. Although I'll admit that my economics degree probably lets me down. Maybe we should worry about grade inflation and compare ages?

Well if you like!

My A levels were in 1968, and therefore in "Real Money". But I think this is beside the point.

I'm afraid nothing will change me from my view that economically, buying will be better overall in the longer run. I admit that 'cash flow' in the first few years can often be negative (for buying).

Rather perversely, with today's artificially low interest rates, coupled with artificially high rental rates, there must be lots of instances where buying is even 'cash flow' better.....

All I know is that the amount of interest I have paid in 38 years of house ownership is absolutely peanuts in comparison to the rent I would have paid. I still have a mortgage of £214K* which is costing a massive £3,210 a year. When I rented the property (years 2000 to 2005) it commanded annual rent of £25,200 a year!

[*It was paid off in 2003, but being an offset mortgage, it remained 'alive'. With interest rate at 1½%, I would have been a fool not to have withrawn it all out - and it currently resides in 4% fixed rates.]