Is buying really better than renting?

magicman_4

Hi
Can anyone see my error in my thinking below.

Consider this basic model ( no inflation, no rental rises, savings rate fixed 5%, morgage interest fixed 5.5% ). Also consider a flat property price is 145000, huge deposit of 85000 for max profit, so repayment mortgage of 60000, purchase costs ( solicitors etc) 2000, monthly mortgage 400, monthly insurances 50, monthly service charge 130, monthly major works approx 130 (budgeted) --> so monthly ougoings 710. So over 25 years this is 213000 total cost to buyer. House price increase of 4% per year gives flat value at 384546 at 25 years. So appears a profit of 384546-213000=173546. But minus the original purchase costs of 2000 gives 171546 as profit. Lost bank account interest on original 85000 deposit is approx 100000 over 25 years ( at 4/5%). So profit is now 173546-100000 giving 73546. Rental saved over 25 years due to purchase of flat at rental of 382 per month comes to 114600 and this added to above profit of 73546 gives 186146 as new profit. Additionally bank interest gained on the rental money saved is approx 71625. However the flat purchasing 710 monthly outgoings ( as detailed above )would also have been gaining interest as well over 25 years had I not bought the flat and this interest is approximately 133125. so new profit on buying is only 186146+71625-133125=124646 over 25 years! Which over 25 years is not a brilliant return for such a simple but purchase biased model(as continued good house price growth has been factored in as well as big deposit to minimise overall costs). Surely I am overlooking something and the return should be much better than this. Can anyone help??

Thanks.
Magicman

talksalot81

I have done the calculations too. There are a lot of unknowns within: Interest rates - will they stay about where they are or will they revert to the nominal 'long term average'? Rental costs - are we going to stay about where we are or are we going to tend to the euo model (so lower rents) or otherwise? Taxation - I havent owned a house so I do not know exactly how it works, but interest on the money in your bank account is taxed. House prices - is inflationary growth safe? There are alot of area which have been way above it for the last 25 years.

For a pure investment the question is thus difficult to answer. You factor in your variables and hope that they are wisely chosen. It is indeed possible to end up financially better off after 25 years with rent. On the other hand, if you need a family home, the scales will tip away towards buying simply on the basis that it then offers a home of your own and the relative security afforded.

bloomsberg78

magicman wrote:

Hi
Can anyone see my error in my thinking below.

Consider this basic model ( no inflation, no rental rises, savings rate fixed 5%, morgage interest fixed 5.5% ). Also consider a flat property price is 145000, huge deposit of 85000 for max profit, so repayment mortgage of 60000, purchase costs ( solicitors etc) 2000, monthly mortgage 400, monthly insurances 50, monthly service charge 130, monthly major works approx 130 (budgeted) --> so monthly ougoings 710. So over 25 years this is 213000 total cost to buyer. House price increase of 4% per year gives flat value at 384546 at 25 years. So appears a profit of 384546-213000=173546. But minus the original purchase costs of 2000 gives 171546 as profit. Lost bank account interest on original 85000 deposit is approx 100000 over 25 years ( at 4/5%). So profit is now 173546-100000 giving 73546. Rental saved over 25 years due to purchase of flat at rental of 382 per month comes to 114600 and this added to above profit of 73546 gives 186146 as new profit. Additionally bank interest gained on the rental money saved is approx 71625. However the flat purchasing 710 monthly outgoings ( as detailed above )would also have been gaining interest as well over 25 years had I not bought the flat and this interest is approximately 133125. so new profit on buying is only 186146+71625-133125=124646 over 25 years! Which over 25 years is not a brilliant return for such a simple but purchase biased model(as continued good house price growth has been factored in as well as big deposit to minimise overall costs). Surely I am overlooking something and the return should be much better than this. Can anyone help??

Thanks.
Magicman

Over 25 years, it's a difficult thing to weight up. When the market has increased has it has done over the last 10 years, you clearly would have been out of pocket renting over buying.

Having said that I recently sold up my 2 properties and am now renting. However, the projections in my calculations have been done with the short-medium term in mind (5-10 years). And for me, the housing market has to go up by 50% in the next 5 years or double within the next 10 years for me to be substantially out of pocket. The conclusion I have come to is that those sorts of increases are unlikely. So quite simply the sums don't add up.

My aim is increase my wealth to the point where I can afford a good sized 4 bedroomed family home in a nice area in cash without a Mortgage and I know I can do that within 5-10 years even with modest HPI of 5% a year and without a house price crash. And the best point is that I don't have to give the banks a penny!

Back to your main point, you've only included 2 scenario's (of Renting or buying with a mortgage), but actually there are 3 (to my mind anyway!). There is the option of buying a property outright without a mortgage(not an option to most people I guess, but the point should be made!). If you can afford to buy a property outright, or at least develop a strategy where you feel you can accumalate enough £ within a given timeframe so you can buy then you're onto an absolutely winner (which is what i'm aiming to do)

In summary, the calculations you have made and the conclusions you have drawn are pretty much the same as my own.

MJMum

I think that for most people a house is not purely an investment, and they place a huge premium on "having control" over their property. I know I do (can't wait to move out of my leaky, damp, mouldy rented house that the LL refuses to fix and into my, errrr, damp old cottage but at least * I * have control over fixing that).

bloomsberg78

MJMum wrote:

I think that for most people a house is not purely an investment, and they place a huge premium on "having control" over their property. I know I do (can't wait to move out of my leaky, damp, mouldy rented house that the LL refuses to fix and into my, errrr, damp old cottage but at least * I * have control over fixing that).

I agree you that you have the control, but you also have the cost. This is the first time I've rented and have been really happy with the LL. They Have replaced the Fridge and Washing Machine with new ones within the first 6months of me being here. But maybe i'm just lucky, I do appreciate that some landlords are not interested.

I think another point against renting (and assuming you are saving money by renting over a mortgage) is that you need good financial discipline, to make sure that any additional gains are saved and not frittered away (assuming that you are intending on saving up for a house)

I don't believe there is a definitive right or wrong answer to this question. It depends on the wants, needs and aspirations of each individual. Economically speaking I think its pretty well recogonized that now is not the best time to load yourself up with a huge mortgage, but there are so many more factors to consider.

Doozergirl

magicman wrote:

Hi
Can anyone see my error in my thinking below.

Consider this basic model ( no inflation, no rental rises, savings rate fixed 5%, morgage interest fixed 5.5% ). Also consider a flat property price is 145000, huge deposit of 85000 for max profit, so repayment mortgage of 60000, purchase costs ( solicitors etc) 2000, monthly mortgage 400, monthly insurances 50, monthly service charge 130, monthly major works approx 130 (budgeted) --> so monthly ougoings 710. So over 25 years this is 213000 total cost to buyer. House price increase of 4% per year gives flat value at 384546 at 25 years. So appears a profit of 384546-213000=173546. But minus the original purchase costs of 2000 gives 171546 as profit. Lost bank account interest on original 85000 deposit is approx 100000 over 25 years ( at 4/5%). So profit is now 173546-100000 giving 73546. Rental saved over 25 years due to purchase of flat at rental of 382 per month comes to 114600 and this added to above profit of 73546 gives 186146 as new profit. Additionally bank interest gained on the rental money saved is approx 71625. However the flat purchasing 710 monthly outgoings ( as detailed above )would also have been gaining interest as well over 25 years had I not bought the flat and this interest is approximately 133125. so new profit on buying is only 186146+71625-133125=124646 over 25 years! Which over 25 years is not a brilliant return for such a simple but purchase biased model(as continued good house price growth has been factored in as well as big deposit to minimise overall costs). Surely I am overlooking something and the return should be much better than this. Can anyone help??

Thanks.
Magicman

Could you try breaking that down into more than one paragraph for me?

I'm interested to read. Call me thick (I don't mind!) but I swear I can't decipher which figures belong to buying and which to selling.

Voyager2002

Basic error in the OP: ignoring inflation.

There will be at least some inflation for the foreseeable future, and over the next 25 years the effect will be significant. If you buy now, then your main costs will be based on today's prices. In 24 years time, you will be paying interest on a loan reflecting today's house purchase price. Whereas, if you are tenant you will be paying a rent based on prices then.

Another factor: landlords can and do change their plans and ask their tenants to leave, generally at a time that is inconvenient for the tenant. Over the long term, these repeated forced moves are terribly disruptive.

franklee

Why oh why do so many people run these figures over 25 years?

Like bloomsberg78, I've looked at a much shorter timescale to be renting.

I'm giving this cycle a chance to turn downwards.

If it does then I'll buy at a lower price.

If it stagnates then renting is cheaper than buying for now so the wait isn't costing anything.

Renting for 25 years would be silly. I've changed from owning to renting recently and when the market looks right I'll change back!

If prices dropped who on earth would refrain from buying just because is wasn't in some arbitrary 25 year plan?

Hopefully most of us will still need housing after 25 years anyway.

If you want to look at these figures then at least look at a sensible timescale and be prepared to switch between owning and renting to take advantage of what you think the market is doing.

Besides it's not as if everyone has the choice. You haven't considered how stretched the buyer would be, maintenance costs and how long you wish to stay in the property. (At least I don't think you have, I couldn't read it properly without paragraph breaks either).

magicman_4

i conclude buying is by far more profitable than renting at any time. All agreed?

lynzpower

How can it ever be more "profitable" if in buying you pay X amount to the bank over 25 years in interest? I would have paid more in interest over 25 years than the flats asking price. So I sold ( income from savings & investments in the pipeline b) savings on buildings cover, life cover , maintainence costs, c) saving of rent vs mortgage. we conclude we are almost 6k better off a year, pre tax- minimum. And thats without increasing interest rates.

talksalot81

magicman wrote:

i conclude buying is by far more profitable than renting at any time. All agreed?

You have come to this conclusion based on a definite knowledge of the future? If you do not have this, then you cannot come to such a conclusion.

At best you can say probably. Unfortunately, to say that, you are still making the assumption that prices always rise in both long AND short term. This is an incorrect assumption.

The correct conclusion you can come to is that, in the long term, buying is very probably more profitable. As you decrease the term, this probability decreases. In the short term there is a good chance that renting would be more profitable. This is not rocket science, just simple statistics.