Buying vs Renting (warning long post)

Lord_Baltimore

jamesmorgan wrote: »

I think we need to help the next generation with as much support as we can to make informed decisions and in particular to understand the risks associated with whatever decisions they do make.

So downsize and buy her a house. Problem solved?

franklee

jamesmorgan wrote: »

She thinks it will take about 3 years to save the required deposit etc for her first house. This is only achievable if she makes sacrifices over those 3 years. She is currently living in relatively cheap accommodation which will enable her to save the required money.

It's a pity you missed this from the OP which read like she's buying right away whereas I suggested a house share and saving for a new graduate. If she's 21 now and takes three years to save she will be 25 which is more sensible than rushing into buying at 21. However you still haven't' answered what deposit she will be putting down and what salary multiple she will be borrowing so I'm going to have to make them up by assuming the standard 25% deposit and max 4 times salary. So for the starter home of 120K that's a deposit of 30K and a salary of 22.5K. She will be saving half her gross income per year (not sure what percentage that is after tax).

In the south where I am I'd expect typical graduate jobs to be paying about the same but house prices are almost double. I've just looked in rightmove and the cheapest property in my area is a one bed flat for 150K. I would not consider that a good investment. The buyer could be stuck there when they want to have children for example and one beds are volatile in price. The cheapest house is a two bed terrace for 210K. When I purchased a three bed semi three years after uni in the mid 90's it was 25% deposit and just under three times salary in this area.

So the problem isn't that buying is a bad idea, it's that house prices are currently too high compared to wages certainly in the south.

Soleil_lune

Far too many assumptions there, and frankly too many idealistic ideas, and the list of 'scenarios' is laughable... The phrase 'cloud cuckoo land' springs to mind ...

No way is buying better than renting. I could list at least 10 reasons why, off the top of my head, but I've got a birthday meal to go to in a few minutes.

I don't know how old the OP's daughter is, but trying to encourage someone young (ie under 25) to glue and massive ball and chain around their neck at such a young age is a terrible idea.

And people parp on about how buying is soooooooooooo much better, as rent increases every year and a mortgage doesn't (which is wrong anyway,) but they CONTINUALLY fail to mention the multiple tens of thousands you will spend on maintenance and repairs over the years. Convenient.

ukcarper

Soleil_lune wrote: »

Far too many assumptions there, and frankly too many idealistic ideas, and the list of 'scenarios' is laughable... The phrase 'cloud cuckoo land' springs to mind ...

No way is buying better than renting. I could list at least 10 reasons why, off the top of my head, but I've got a birthday meal to go to in a few minutes.

I don't know how old the OP's daughter is, but trying to encourage someone young (ie under 25) to glue and massive ball and chain around their neck at such a young age is a terrible idea.

And people parp on about how buying is soooooooooooo much better, as rent increases every year and a mortgage doesn't (which is wrong anyway,) but they CONTINUALLY fail to mention the multiple tens of thousands you will spend on maintenance and repairs over the years. Convenient.

Mortgage rates change and can go up as well as down rents normally track inflation.

What tens of thousands I've owned for 40 years and have might have spent £20k and most of than was not essential maintenance.

The real benefit of owning comes when you have finished paying. I am living rent free in a house that would cost £1200 a month to rent and have been for the last 5 years that's £72k a lot of maintenance.

Lord_Baltimore

ukcarper wrote: »

The real benefit of owning comes when you have finished paying. I am living rent free in a house that would cost £1200 a month to rent and have been for the last 5 years that's £72k a lot of maintenance.

Awww, don't tell him, let the penny drop in due course. That empty, clanging sound it will make when he realises that renting is a mugs game will feel like a rusty bolt releasing the guillotine .

Cornucopia

There are two benefits to buying that the model doesn't seem to address:

1. Inflation will erode the size of mortgage payments (especially with the use of fixed rates), but not of rent payments. I appreciate that the idea of trading-up every 7 years exposes the payments to a certain amount of "re-indexing", but the effect is still there.

2. At the end of a period of X years, the buyer has a property to live in, with only maintenance costs to pay. The renter never achieves that, and in the extreme may become reliant on affordable social housing later in life that is always going to be in short supply.

There's also a presumption from the pro-rental crowd that LLs will somehow swallow maintenance and other costs without passing them on to tenants. Okay, the local rental market might not sustain that, but in all likelihood it will - so the idea that renters are protected from things like mortgage rate fluctuations, maintenance costs, etc., is nonsense - all of this has to be paid for somehow, either that or the LL ceases to make money and closes down the tenancy, anyway.

jamesmorgan

franklee wrote: »

However you still haven't' answered what deposit she will be putting down and what salary multiple she will be borrowing

This was in assumption i) (sorry, I know it was a long post so easily missed). The assumption is that she will put down a 10% deposit. With other buying costs she is looking to save about 15K over 3 years - tough but doable. She will need a 4x salary mortgage.

She is young and flexible - can live anywhere in the country (or even other countries). She has ruled out living in London (and probably the SE) as she recognises that buying in that area is unlikely to be an option.

jamesmorgan

Cornucopia wrote: »

There are two benefits to buying that the model doesn't seem to address:

1. Inflation will erode the size of mortgage payments (especially with the use of fixed rates), but not of rent payments. I appreciate that the idea of trading-up every 7 years exposes the payments to a certain amount of "re-indexing", but the effect is still there.

2. At the end of a period of X years, the buyer has a property to live in, with only maintenance costs to pay. The renter never achieves that, and in the extreme may become reliant on affordable social housing later in life that is always going to be in short supply.

The whole model is driven by inflation (as measued by HPI). I agree this is the key reason why the buyer benefits over the renter. At the end of 20 years the buyer is paying £900/month on their mortgage (due to the points you mention) compared to the renter who is paying £1600/month.

As to completely owning their own house, the situation can be a little more complex that it first appears. Very few people buy a house and live in it for 25 years completely paying off the mortgage. More frequent moves of 5-7 years are more typical. In the early years of a mortgage, most of the payments are interest rather than capital. For a mover every 7 years, after 20 years they only own 60% of their house. Complete house ownership probably only comes when they decide to downsize later in life. The renter also has the possibility of complete home ownership, as long as they save the money they would have spent on buying whilst they are renting. Assuming 3% HPI, the renter would have saved £70K in their ISA account - not enough to buy a house. However, the range of possible HPI over 20 years is between -0.4% and 6.4%. At the low extreme the renter would have saved £147K in their ISA account - enough to buy a house worth £160K in today's money, whilst the buyer would only own 33% of their house.

Understanding financial models is about understanding probabilities. There is not one absolute answer, but a range of probabilities. It is unlikely, but statistically possible (at the 95% confidence level) that a renter could after 20 years buy a house for cash whereas the buyer still only owns a small fraction of their house.

ukcarper

jamesmorgan wrote: »

The whole model is driven by inflation (as measued by HPI). I agree this is the key reason why the buyer benefits over the renter. At the end of 20 years the buyer is paying £900/month on their mortgage (due to the points you mention) compared to the renter who is paying £1600/month.

As to completely owning their own house, the situation can be a little more complex that it first appears. Very few people buy a house and live in it for 25 years completely paying off the mortgage. More frequent moves of 5-7 years are more typical. In the early years of a mortgage, most of the payments are interest rather than capital. For a mover every 7 years, after 20 years they only own 60% of their house. Complete house ownership probably only comes when they decide to downsize later in life. The renter also has the possibility of complete home ownership, as long as they save the money they would have spent on buying whilst they are renting. Assuming 3% HPI, the renter would have saved £70K in their ISA account - not enough to buy a house. However, the range of possible HPI over 20 years is between -0.4% and 6.4%. At the low extreme the renter would have saved £147K in their ISA account - enough to buy a house worth £160K in today's money, whilst the buyer would only own 33% of their house.

Understanding financial models is about understanding probabilities. There is not one absolute answer, but a range of probabilities. It is unlikely, but statistically possible (at the 95% confidence level) that a renter could after 20 years buy a house for cash whereas the buyer still only owns a small fraction of their house.

I'm not sure that is true I finished paying well before retiring age and most but not all of the people I know were or are mortgage free without the need to downside.

Cornucopia

Me too.

I think another factor not considered in the model is the flexibility of payments when buying rather than renting.

A renter cannot "over-pay" to any advantage. However, because of the way compound interest works, ANY over-payment for a buyer is advantageous - ultimately leading to early complete ownership of a property.