Maths of Renting vs Buying

wotsthat

Buying is cheaper than renting. The maths is simple and it's been shown time and time again.

The only people who think renting is cheaper are:

- those that have poor maths and analytical skills
- those that, for reasons known only to themselves, believe that a mortgage-free house doesn't 'count' as a capital asset

There are circumstances where renting will be cheaper i.e. frequent house moves but the majority will find buying cheaper*

* except in forumland where the renters are being paid by their landlords.

nickmason

wotsthat wrote: »

Buying is cheaper than renting. The maths is simple and it's been shown time and time again.

The only people who think renting is cheaper are:

- those that have poor maths and analytical skills

This has been a fascinating exercise - I rather wish I'd set this up as a way of identifying those on this board who are rational and those who are not. It is for example interesting to see Hamish engaging while others revert to dogma. This might be unfair - I know some people like to see things as black or white while others balance possibilities (Jung/Myers-Briggs and all that) - but it has been interesting to count the proofs by affirmation - "It's true because someone else said it".

The maths is clearly not simple.
In most cases buying is cheaper than renting.

- those that, for reasons known only to themselves, believe that a mortgage-free house doesn't 'count' as a capital asset

As opposed to those who don't think a pot of cash from accrued savings, in some cases worth even more than the house, doesn't 'count' as an asset?

There are circumstances where renting will be cheaper i.e. frequent house moves but the majority will find buying cheaper*

* except in forumland where the renters are being paid by their landlords.

nickmason

Really2 wrote: »

Why not use an online calculator
http://www.greengem.co.uk/Rent_V_Buy/rent_v_buy.php

The simple mistake in the calculations is ignoring an asset value at the end.

Interestingly this website doesn't allow house price inflation to be set to zero.... :rotfl:

Nor does it allow for the accrual of savings. I need to stress that - without it (and I know people don't always save the difference) this is a completely false dichotomy.

I'll say it again - almost anybody who is renting should be saving as well, if they want to keep financial track with the buying option.

wotsthat

nickmason wrote: »

This has been a fascinating exercise - I rather wish I'd set this up as a way of identifying those on this board who are rational and those who are not. It is for example interesting to see Hamish engaging while others revert to dogma. This might be unfair - I know some people like to see things as black or white while others balance possibilities (Jung/Myers-Briggs and all that) - but it has been interesting to count the proofs by affirmation - "It's true because someone else said it".

The maths is clearly not simple.
In most cases buying is cheaper than renting.


As opposed to those who don't think a pot of cash from accrued savings, in some cases worth even more than the house, doesn't 'count' as an asset?

It's nothing to do with dogma. I've done the calculations on here at least three times and ended up having to use all sorts of unlikely scenarios such as a 40 year interest only loan vs. non-increasing rent (buying still cheaper).

Yes I've done the calculations where our renter has saved the same deposit but chosen to continue renting and counted this as an asset and included the interest (buying still cheaper).

A cursory glance at the "renting is cheaper" threads shows how desperate you need to be to make renting cheaper (especially over extended periods)...

- maintenance for owners is £ (name a ridiculous sum)
- owners have massive costs when they move every six months
- houses don't have a value unless you sell them
- I can get a massive rate on my savings
- what if house prices crashed just after I purchased

What's the average rent? Who wants to be paying that when they retire?

Batchy

Think of it this way guys.

An annuity costs 17k per £1k of income if rent is say 8k per annum on average... £650pm
That means you need to have the equivalent of £135k inflated up in a pension fund upon retirement. Which will probably be say, circa 300k, this will singularly cover your RENT when you have no other income. (either single or as a couple)

Then you need the same again... ISH to have a life in retirement.

You need to save this up while you are probably paying £650pm in rent (either single or as a couple).

Or you can pay/ buy a £135k property now, with £10% deposit say £15k in total ... say around £600pm in a mortgage... which will stop you having to pay rent NOW, and pay a wasted amount into a pension NOW to cover rent in your retirement... The cash flow benefits are here NOW, and the cash flow benefits in the future will be plain to see when you retire, what you do pay in, you will be able to spend on living... its just opening your eyes to see them savings that you need to achieve before anything.

movilogo

So this thread is trying to prove buying is cheaper than renting over long run.

Well isn't that why people rent when staying somewhere temporarily and buy when they want to settle down somewhere?

Do you really need to create a spreadsheet and complex formulas to arrive to that conclusion??

nickmason

wotsthat wrote: »

It's nothing to do with dogma. I've done the calculations on here at least three times and ended up having to use all sorts of unlikely scenarios such as a 40 year interest only loan vs. non-increasing rent (buying still cheaper).

Yes I've done the calculations where our renter has saved the same deposit but chosen to continue renting and counted this as an asset and included the interest (buying still cheaper).

A cursory glance at the "renting is cheaper" threads shows how desperate you need to be to make renting cheaper (especially over extended periods)...

- maintenance for owners is £ (name a ridiculous sum)
- owners have massive costs when they move every six months
- houses don't have a value unless you sell them
- I can get a massive rate on my savings
- what if house prices crashed just after I purchased

What's the average rent? Who wants to be paying that when they retire?

Setting maintenance at 1%
Interest charged at 6%
Interest (on savings or foregone on deposit) at 3%
10% Deposit
Inflation at 4% (on rent and on repairs)
Assuming the difference between rent and buying is reinvested.
Ignoring moving costs
Ignoring changes in house prices (no crash, no HPI)
Valuing the property at 100% of current value (in real terms) at end of 25yrs
Then:
If the current yield is 3.46% then it is financially neutral at 25yrs.

Are you telling me that there are no properties in the UK on which the yield is less than 3.46%?
If not, then which of the assumptions above are wrong/inappropriate?

Critically, note that:
On those assumptions and that yield, in year one rent is about half the mortgage; and total cost of owning (including repairs and lost interest on the deposit, but not including stamp duty) is two and half times the equivalent rent. So renters should be putting 150% their rent into savings. I doubt that is happening.



*incidentally, I'm using yield as (annual rent)/(value). I assume that's correct.

nickmason

Batchy wrote: »

....
Or you can pay/ buy a £135k property now, with £10% deposit say £15k in total ... say around £600pm in a mortgage... (vs £650pm rent....)

Given that in that example the mortgage is less than the rent it is obviously cheaper to buy. But then the yield is at 4.8%, markedly higher than the breakeven of 3.46%.

I can't find a £135K property. And when I've paid £650 rent, it's been for property nearly twice that expensive. (I still nearly bought the owner out though - the heart is allowed to trump the brain sometimes).

which will stop you having to pay rent NOW, and pay a wasted amount into a pension NOW to cover rent in your retirement... The cash flow benefits are here NOW, and the cash flow benefits in the future will be plain to see when you retire, what you do pay in, you will be able to spend on living... its just opening your eyes to see them savings that you need to achieve before anything.

I genuinely don't know what this means, unless it's just describing the cash comparison in different terms, so is a different perspective, rather than an additional consideration.

wotsthat

nickmason wrote: »

Setting maintenance at 1%
Interest charged at 6%
Interest (on savings or foregone on deposit) at 3%
10% Deposit
Inflation at 4% (on rent and on repairs)
Assuming the difference between rent and buying is reinvested.
Ignoring moving costs
Ignoring changes in house prices (no crash, no HPI)
Valuing the property at 100% of current value (in real terms) at end of 25yrs
Then:
If the current yield is 3.46% then it is financially neutral at 25yrs.

Are you telling me that there are no properties in the UK on which the yield is less than 3.46%?
If not, then which of the assumptions above are wrong/inappropriate?

Critically, note that:
On those assumptions and that yield, in year one rent is about half the mortgage; and total cost of owning (including repairs and lost interest on the deposit, but not including stamp duty) is two and half times the equivalent rent. So renters should be putting 150% their rent into savings. I doubt that is happening.

*incidentally, I'm using yield as (annual rent)/(value). I assume that's correct.

What is the starting house value we're talking about?

There's a couple of problems with your assumptions. One, there's no way that year one rent is half of the comparable mortgage and two, the sums can't be based on year one alone - the buyer is increasing equity with each year that passes. So already we're pulling forward the neutral date significantly.

With a decent mortgage rate (who pays 6%?) the mortgage owner rapidly gets ahead. The danger for the owner is a crash shortly after buying which can make moving difficult and limits access to the best fixed rates in the future.

However, let's assume 25 years is financially neutral and you paid off your mortgage at age 55. There's potentially 30 years of living rent free to factor in.

Time is the enemy of the renter.

HAMISH_MCTAVISH

nickmason wrote: »

Are you telling me that there are no properties in the UK on which the yield is less than 3.46%?

I'm sure there must be some, but they are very, very few and far between.

Depending on what source you choose to believe, average yields range somewhere between 5.5% and 6.5%. I usually quote 5.5%, but every source notes that rents are rising rapidly.

In my area for example, rent for a decent 1 bedroom flat is around £600 a month, and that same flat can be bought for around 100K.

The full repayment mortgage on my 3 bed terrace bought in 2007 is currently around £600 a month LESS than my neighbour's identical 3 bed terrace is rented for.

If not, then which of the assumptions above are wrong/inappropriate?

I'd argue that 6% mortgage interest is way off the mark. I only paid that for 6 months in the last 10 years, and almost certainly won't pay that again in the next decade. You can get a 10 year fix today for 3.99%.

I'd also argue that 1% maintenance costs are on the high side.