Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Is it cheaper to buy or rent?

Introducing the daft report earlier this year, Gerard O’Neill discussed the possibility that we might become a nation of renters. On the other hand, there is a lot of talk at the moment, particularly from those selling homes such as these guys in Palmerstown, about how it is significantly cheaper to buy than to rent. I thought it would be worth investigating this a little more, because at the end of the day, despite all the crazy economic goings-on of the past three years, people still have to make a decision about where and how to live. Is it cheaper to buy than rent, and if so by how much? How do things look now compared to the boom years and how will things look if house prices and rents continue to fall?

To do this, I had a look at average prices and rents for three-bedroom properties around the country from the start of 2006 on. I wanted to calculate the annual premium for owning your accommodation as opposed to just renting it, bearing in mind mortgage interest relief, prevailing interest rates and changing property values and rents. After all, economic theory would suggest that if you get to own the asset at the end of thirty years of living there, you should pay more than if you don’t.

The graph below shows the difference between renting and buying in annual terms for four regions – south County Dublin, Limerick, Dublin’s commuter counties and Connacht/Ulster outside of Galway. It’s calculated for a first-time buyer couple, with mortgage interest relief based on the first year of repayments. I’ve taken ECB+1% as the benchmark interest rate – something which of course may only hold for the first year.

Annual savings for owning rather than renting, 2006-2009
Annual savings for owning rather than renting, 2006-2009

Even with property prices the way they were, it was cheaper to buy your house in 2006 than it was to rent it in everywhere around the country except South County Dublin. Generally, first-time buyers in Dublin could expect to save at least €2,000 over the course of their first year, while elsewhere they could expect to save about €1,000. Only in South County Dublin were first-time buyers actually paying any premium on ownership – in the order of €4,000 over the year for their three-bedroom home.

Sometimes I look back at 2005 and 2006 and wonder what we were all up to. Given those maths, it’s a bit easier to understand again. Of course, things didn’t stay that way. ECB rates started increasing and by mid-2007, potential first-time buyers were faced with the prospect of a premium on ownership in order of €1,000 over the first year – this at a time of uncertainty over capital values. In South County Dublin, the premium on home ownership for the first year was almost €10,000. It should be noted that in a couple of areas, South Dublin city (i.e. all areas with even postcodes), West Dublin and Limerick, it was cheaper to buy than rent – even when interest rates were at their highest. These areas have repeatedly exhibited the highest yields on residential property (about 4% over the past couple of years – high is relative).

Since late 2008, though, as lower interest rates have kicked in, there has been a dramatic swing in the maths back in favour of home-ownership. In late 2008, if you paid the asking price and got ECB+1% for your mortgage, you could expect to save €1,000 in most parts of the country – and more than €3,000 in Limerick or West Dublin. What’s worth noting is that this is at a time of rapidly falling rents as well as house prices. Looking at Q1 figures, that trend is growing with first-time buyers able to save in the region of €3,000 in their first year of ownership. Even in South County Dublin, a household will save money if they buy rather than rent.

How will these figures look in a year’s time? I’ve put in figures marked 2009 Q2 and Q3 to give an indication of how the buy-or-rent decision might look. I’ve assumed another 20% fall in house prices – that’s about a 40% fall from peak to trough. (If that sounds drastic, probably best not to read David McWilliams’ latest comparison of Ireland and Japan.) For rents, I’ve gone for 33% peak-to-trough fall (again, there are those who argue it could be more). In that scenario, buyers would continue be better off than renters in every part of the country. First-time buyers of three-bedroom properties would expect to save anywhere between €1,800 (West Leinster) and €7,000 (Dublin city centre).

To some extent, this is being driven by mortgage interest relief, which is greatest in Year 1. However, Q1 figures indicate that even if there were no mortgage interest relief, there are areas of the country where it is cheaper to buy than rent. And if house prices fall 40% from peak to trough, and rents fall 33%, it will be cheaper to buy than rent, even with no mortgage interest relief, in all areas of the country apart from South County Dublin.

What about the downside? If there are indeed significant swathes of vacant properties around the country that will continue to put pressure on rents for the next 3-5 years, could both rents and house prices halve from their peak values? If that were the case – meaning the typical three-bedroom home in south Dublin city would cost about €900 a month to rent or cost about €275,000 – the maths in favour of buying still look convincing in Dublin but elsewhere it’s a much tougher call. Without mortgage interest relief, homeowners would have to pay around €1,000 a year over what they’d pay to rent.

The tax system as it currently stands certainly strongly favours home ownership. If the government decides that the balance of emphasis when correcting its fiscal black hole should be on raising taxes rather than cutting expenditure, it may abolish mortgage interest relief and bring in a universal residential property tax. This could significantly alter the maths of buying versus renting and bring about the ‘nation of renters’. As it stands, though, even if rents were to halve over the coming year, the premium people pay to actually own their home appears too small for that to happen.

  • Bob ,

    “After all, economic theory would suggest that if you get to own the asset at the end of thirty years of living there, you should pay more than if you don’t.”

    Does it? I would have thought renting would always be more expensive. Renting other assets works that way, cars/tvs etc. Could you expand on that point with regards property if you have time?

    • John O'Shea ,

      • Con ,

        Interesting stuff. But it looks to me like a third strategy – rent then buy – will dominate the buy immediately strategy under almost any plausible scenario for the market, and will probably turn out to dominate rent only. It’s hard for a strategy based on buying before the market bottoms to be the dominant strategy.

        • ronanlyons ,

          Hi Con,

          True – I didn’t want to natter on for too long, but one of the obvious implications of the figures is that if it’s as affordable in opportunity cost terms to buy property now as it was when people were hoovering up properties three or four years ago and they’re not doing so, clearly there’s another factor at play – and that factor has to be confidence.

          My own belief is that the more expensive the property is, the more confidence rather than affordability determines purchasing decisions (compare a €10m house on Palmerston Road with €300k home in Palmerstown). The logical conclusion of these two beliefs is that purchasing will resume at the lower end of the market first.

          Thanks for the comment as per usual,

          Ronan.

          • ronanlyons ,

            Hi John,

            Thanks for the comment. Not included in the post, but important as you suggest, is why things are the way they are, i.e. why if things are more affordable now than ever is sales activity so low. I would be very interested in hearing any thoughts you have on how to calculate the perceived assessment of capital value change, i.e. what assumption the typical first-time buyer might have made about the % change in house prices box on your link. I would guess that up until 2007, the assumption was something along the lines of 5% per annum over any given period. Now, I would imagine that people are expecting -10% per annum for another year or two and then 0-3% thereafter.

            It would nice to ‘reveal’ this figure and how it’s changed from some other figures, but I’m not sure off the top of my head how. Will give it a think,

            R

            • ronanlyons ,

              Hi Bob,

              Let me give it some more thought. I think the question is whether the benefits of renting (e.g. mobility, lack of threat of negative equity) outweigh the benefits of owning (e.g. being able to sell the asset or borrow against it). Intuitively, though, everything else being equal, it would make sense that renting is cheaper, otherwise the choice would be to own the asset for less than not owning the asset.

              Thanks for the comment,

              R

              • caelenking ,

                What about the costs of maintaining the property, something that a renter does not need to concern themselves with. In my experience this is a seizable cost over a 30 year mortgage.

                • ronanlyons ,

                  • John O'Shea ,

                    Hi Ronan,
                    The ongoing absence of demand even as property market becomes more affordable is caused by the absence of confidence in the property market/economy. I don’t buy that it is all a banking system/liquidity problem – people simply don’t want to catch knives that still have a long way to fall.

                    Is there such thing as a “Consumer Confidence Index”, something like the CPI, with confidence in various sectors normalized to relative figures? Now that would be interesting (though no doubt it would morph into a derivatives market instantly and then be manipulated/distorted.)

                    Re your other question about % change in house prices, most FTBs in the past 5-10 years just assumed that their asset would only ever appreciate (because everyone they dealt with told them they would). I have no idea how you measure the % they were assuming but I suspect you’d get different figures for different areas due to the premiums placed on certain locations. 5% would be, I imagine, a minimum for nearly anywhere during the 2002-late 2008 timeframe.

                    John.

                    • Paul ,

                      Daft’s asking prices are very useful for identifying trends, but can’t provide a snapshot of transaction prices, especially with the market in disequilibrium, and the PTSB Index is generally believed to be significantly underestimating the rate of decline.

                      Ordinary buyers (and sellers) are having difficulty determining current FMVs, never mind pricing the risk of negative equity.

                      Are disequilibrium and information problems in a positive feedback loop in the Irish housing market?

                      • Mack ,

                        There seems to be much less deviation in rents than in asking prices. I get the impression renters at the lower end of the scale overpay but this situation is reversed further up. E.g.. The differential in the rent (in Dublin) between a 3-bed house in a good area and a 1-bed apartment in a not so-good area, is much less than the purchase price differential between the same. This complicates matters, because purchasing is much more permanent. Just because you could buy the lower quality property for less than you can rent it, doesn’t mean you should, especially in a falling market.

                        For ourselves, it is much cheaper to rent the house we live in than it would be to pay the mortgage on it.

                        • ronanlyons ,

                          Hi Paul,

                          Thanks for the comment – I agree, hence the use of asking-10% as a somewhat blanket solution to the issue you raised.
                          I think disequilibrium and information problems are indeed reinforcing each other. As a example in the opposite direction, asking prices rose in the UK recently, presumably as sellers saw closing prices rise for two months in a row earlier in the year. If the market were to fall again later in the year, that may seem to prove that sellers took the information they liked and reacted to it, rather than actually proving a dead-cat bounce/pause.

                          R

                          • ronanlyons ,

                            Very good point and it’s worth my saying here that at caveat to the yield series calculated is that they are not taking full account of quality, they are merely looking at average price per segment. Also, to preserve clarity of message/sanity, I only worked on three-bedroom houses – particularly because I wanted to avoid being accused of recommending people by one-bedroom properties. I may have a look at other bedroom segments in due course.

                            Thanks for the comment,

                            R

                            • Colm Fahey ,

                              Hi Ronan

                              Hope all is well

                              I created a similar graph from Jan 02 to Jan 09 for national data, using ESRI/TSB for house prices and daft for rents. I used ECB + 1.69% as the interest rate. There may be more accurate data available from Central Bank.

                              The graph is very volatile because changes in interest rates have such an affect on the interest portion of the loan. The interesting periods are when interest rates are stable for a long period of time.

                              ECB rates were 3.25% from January 02 until Nov 02. The “premium” associated with renting reduced month on month from €375 in January to €175 in November.

                              ECB rates were 2% from June 03 to Nov 05. The “premium” associated with renting reduced month on month from €310 in Jun 03 to €175 in Sept 05 and it stayed constant at €175 until December when the ECB rate changed.

                              Finally, from July 07 to July 08, ECB rates were at 4%. It was the premium associated with buying that reduced in this time period. It reduced month on month from €275 in July 07 to €175 in April 07 where it stayed constant until the next ECB rate change in August.

                              On further examination, the “premium” appears to be moving towards an equilibrium after every ECB rate change, and is only thrown off course by another ECB rate change.

                              As for the causes of a reduction in the price of rents – No doubt increased supply is a factor. But this has been slow to affect rents. Newspapers have been reporting developers dumping properties on the rental market since the slowdown since early 2007. The drastic falls in rent are more recent. Perhaps because of reduced demand due to net outward migration. if 78,106 people left the country between Nov 07 and Oct 08, God only knows how many have left so far in 2009

                              • Evert Bopp ,

                                While the figures used might show one result there are certain factors that have not been considered.
                                What about the maintenance costs? What about the occupants elligibility for a mortgage? What about the wider choice of domiciles that renting would allow over buying?
                                Ireland as a nation is still too much focused on the “rent is dead money” philosophy.
                                Rent is payment for a service, the service is the use of the premises under a rent/lease agreement. Buying is a whole different kettle of fish.
                                Having owned a house before I now rent (with an option to buy). I could not afford to purchase the property that I currently live in as it was valued at 2 mln last year. yet I now enjoy all benefits that living here give.
                                Friends that live nearby own houses half the value of the one I live in, pay double my rent in mortgage payments AND have to pay for the maintenance of the property. They also do not own it until they finish paying up the mortgage.
                                Again, this is my situation but it illustrates that there is more than figures to measure the cost of renting over living…

                                • ronanlyons ,

                                  Hi Evert,

                                  Thanks for the comment. Of course you’re right, these figures only show the tip of the iceberg, so to speak. While they include a significant amount of countable factors, such as prevailing house prices, rents, mortgage interest relief schemes, mortgage terms, interest rates, etc., they can’t include everything countable, not least uncountable things which count, such as perceptions of risk, prevailing attitudes towards home ownership, and so on.

                                  I find it interesting, though, that while you do practice what you preach – you rent now, having once bought – you know exactly what your mortgage payments would have to be to buy it. This suggests that if the graph above applied to you, you’d buy! Or am I doing you a disservice? Presumably, if your house is valued at 2mn, the blue line above is most similar to your own rent-buy line, which presumably is interesting to you?

                                  • darag ,

                                    I’ve looked at this question myself but came to different conclusions. I found a few cases where it was cheaper to buy but mostly it seems there is a huge premium (in asking prices at least) being demanded to own.

                                    First of all, there is no such thing as an ECB+1% mortgage now and it is unlikely that you’ll ever be able to get one again. This was a historical blip and offering them was a business error by the retail banking sector which has resulted in all the Irish banks losing money on these mortgages and banks like Northern Rock going bust as a result. The question you’ve answered is “if you could get an unreasonably cheap mortgage – the kind available during the frenzied heights of the credit boom, is it cheaper to buy?” which is not as useful as asking whether it is actually cheaper to buy.

                                    The discrepancy between the cost to rent and buy varies widely depending on the type of property so assuming you took a straight average, I suspect your graph is overly weighted by the lower end. I suspect there are far more 1 and 2 bed apartments for sale and rent than houses. The former attract management charges which will generally add at least 10% (sometimes 20%) to the cost for owners.

                                    In contrast, as Evert Bopp says, with most decent houses, the purchase price is far in excess of the cost to rent.

                                    Also, it isn’t a huge cost but unlike Europe, most rental properties come fully furnished.

                                    What is significant is that landlords bear the maintenance costs; this varies widely but I used a rough estimate of between 10 and 20 euro per square meter for maintenance per annum depending on the type of property. Apartments are cheaper to maintain (only at the moment – most apartments in Ireland are less than 15 years old – it’s usually every 30 years or so a major job like a roof replacement comes up and invariably the sink fund is empty), houses more expensive.

                                    Yes there are properties which seemingly should be attractive to professional landlords looking naively at simplified yields but usually when you include all the above costs the business case disappears. At the other end of the scale, I doubt you could find a single house in the country for sale for more than 1 million which would come close to washing it’s face for a landlord.

                                    In other words, I’m saying your calculations are incorrect. If they were correct, any idiot landlord could make money buying “average” properties since 2006. We know that every intelligent landlord has withdrawn from the market over the last couple of years and that is because the cost to buy exceeds the cost to rent. We know that any landlord who got into the business in the last few years is losing money. Your graph doesn’t change this reality and your method needs refining before the results can be taken seriously.

                                    • Ronan Lyons ,

                                      Hi darag,

                                      Thanks for visiting and thanks for the comment. I’d be interested in seeing you walk through the maths of your calculations. You seem to have made your mind up that it’s expensive to buy compared with renting and list only those reasons that support your argument. That’s not to say that I don’t think you have valid points – on your first point, ECB+1% is hard to get these days, things seem to be settling at +1.3% at the moment, so maybe +1.5% would be an interesting ‘sustainable’ figure to supplement the maths.

                                      However, on your second point, as explained in the post, this analysis is looking particularly at 3-beds (as I didn’t want to be potentially encouraging people to buy, say, 1-beds in a climate of falling house prices). Again, if you think 3-bed in Limerick is too general, I can re-do the maths and look at 3-bed semi-detached houses in Castletroy only (and likewise in other areas). Overall, though, your mentality does signify a 1990s mindset which I’m not sure is still valid, namely all rental properties are of an inferior quality to all properties for sale. It’s certainly the case that some people may be happy to live as tenants in conditions they would never accept as home-owners, but the stock of properties to rent has quadrupled in the last 2 years and that is likely to have lasting effects on the quality of supply for rent.

                                      On your point about landlords, as I explained clearly in the post, I’m looking at first-time buyers, not landlords. Landlords don’t have access to the same interest rates or the same tax reliefs as first-time buyers, so I’m sure the maths is very different for them (perhaps not the trend, but certainly the level). Landlords also have to pay a lot more attention to rents as their income stream, whereas for first-time buyers it represents just one comparator in their expenditure. Even on the landlords point, by highlighting ‘properties above 1 million’, you’re making two classic errors, firstly picking an incredibly small sample (how many landlords bail in and buy properties worth over a million?) and secondly picking the sample that will best prove your answer (due to the cost). Incidentally, the evidence from the top top end of the market is that rents have collapsed by anything up to 40% or 50%. Where I did refer to yields in passing, I used the typical heuristic of 11 months rent, rather than twelve, to cover maintenance costs, etc.

                                      I would be interested in learning more about your calculations: e.g. 10-20 euro p/sq/m – where did you get this figure? where did you get square meterage, etc.? I’d be interested in seeing the full detail of your figures – perhaps you have them on a blog somewhere? I’m also happy for you to send on suggestions about how to refine the method (rather than simply calling for it to be refined but not saying how), as this is put out there in a collaboratory spirit. Again, thanks for the comment, but do pay attention to the detail of the post rather than just attacking the conclusion because you didn’t like it.

                                      • Rent or buy revisited - what’s most important? | Ronan Lyons ,

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                                        • darag ,

                                          Hi Ronan. Thanks for taking the time to respond.

                                          I am not a professional economist but I have some background in finance and have an amateur interest in this area. I was drawn to your original article during a discussion on askaboutmoney where I’ve been trying to argue against the prudence of the idea that people should put the vast majority of their wealth and excess income into Irish residential property from as young an age as possible. It is not directly relevant but if you’re interested, I use darag as a username there also so you can have a look at how your study got dragged into the discussion.

                                          Hands up, yes I shot from the hip there and didn’t fully read your introduction. I looked at the conclusion, didn’t like it and blasted away. In particular, I missed the fact that the study was restricted to 3 bedroom houses. In fact I’d be happy enough if you simply ignored the points I made in my earlier message.

                                          I’d like to back up and start again.

                                          First of all, yes – as you correctly guessed – I had made up my mind before reading your report. However my position on this this is not based purely on whimsy. I have a number of grounds to suspect your findings.

                                          First of all, in a personal capacity, during a period of about 6 months in 2008 I tried kicking tires on houses for sale as I considered purchasing (for the second time – I was an owner up to about 3/4 years ago). Don’t laugh yet. Every house I looked at, I made a deliberate effort try to find a comparable neighbour for rent. I had built a spreadsheet to attempt to capture all the costs of the two modes of living. In addition I had 2 direct examples of a landlord offering to sell to a tenant (late 2008 to a friend of mine and early 2007 to me) as data points. I didn’t find a single case where the cost of renting exceeded that of ownership. I found the opposite in fact; in every single case (bar one where owning was only slightly more expensive) ownership would cost significantly more. This samples include: four 2 or 3 bed houses (two in Phibsboro, one in Ranelagh and one near Island bridge) and three 2 bed apartments (one in D2 and two in D6). All were secondhand.

                                          Obviously my set of data points is completely biased and unrepresentative and is tiny. It would be completely unreasonable to draw any general conclusions from such a sample. Despite this, I believe this sample to represent a challenge for your results. The chances are minuscule that of a sample size of 6 or 7, I just happened to get outliers for all accept one.

                                          Next, the fact that landlords have deserted the market is also telling me that there is something wrong with your findings. Yes, your calculations are based on a model for first time buyers but the differences in terms of costs are not big enough by my calculations to dismiss this point as being completely irrelevant. Landlords have lots of ways to save costs also and can offset all interest from a tax point of view. The simple fact is that rational landlords are out of the market simply because rents are too low. Rents in Dublin have fallen in real terms between 1997 and 2007 while house prices have multiplied in the same period. If it was cheaper in 2007 to buy, then extrapolating back to 1997, you should have been able to afford to buy at least two properties for what it would cost to rent a single equivalent. I never remember such yields being available on Irish property but I could be wrong.

                                          So where does that bring us? I cannot say where exactly the problem is with your analysis is but I am 99% certain that there is something wrong given the above.

                                          My initial knee-jerk reaction was that you hadn’t included all the costs which the landlord bears when you rent thus underestimating the cost to own. I’m talking about things like bin charges, furnishing and maintenance. I still think there may be millage in this line of attack but I’m not sure. I might come back to it if I need to but for now it’s not what interests me.

                                          Another cost I modelled which you seem to ignore (correct me if I’m wrong) is the cost of the deposit. Most buyers simply cannot access money for a deposit at mortgage rates. 10% down at the start is a big cost – many first time buyer spend a few years saving for a deposit but your model doesn’t include this cash-flow. OK we know that people fiddle the system by using undeclared credit union loans or some get money from parents but I suspect most scrimp and save for a few years. But again, I don’t feel this point has much chance of delivering the killer blow.

                                          Currently, what screams out at me is that I have compared INDIVIDUAL houses for sale with equivalents (or in two cases the exact same property) for rent. You have used the AVERAGE price of a 3-bed house for sale in an area against the AVERAGE rent for a 3-bed in the same area. It is not at all evident to me that the average property available for rent is equivalent or comparable to the average house available for sale. An extreme example will illustrate the danger of what you’ve done here. Imagine a semi-feudal country called Absurdistan; on http://www.daft.astn there are 20 labourers cottages for rent and two landlord’s mansions with swimming pools. A straight comparison of average rents against average house prices is going to be completely misleading here.

                                          When this first stuck me I thought bingo but to be honest I still need a plausible explanation for a bias of this nature (if this is the reason why we reached different results); i.e why would more of the superior class of house be available for rent while inferior properties were being offered for sale? One idea was that, perhaps most of the houses being sold during the period in question are newly builds in the outer suburbs while most people rent in the city centre or close to it where property is more expensive.

                                          A more promising observation is that every property I looked at was secondhand and every single one required some investment to bring them up to the standard of an equivalent rental. In 3 cases it was negligible – maybe a couple of grand for a lick of paint and some flat-pack furniture; but at a rough estimate two required over 60k of work (installing central heating, roof replacement, rewiring, replumbing, kitchens or bathrooms installation, that sort of thing) and one required about 120k. Properties in this state can be put on the market for sale but are rarely rented.

                                          As I was thinking about this I was wondering whether you’d be interested in looking at this discrepancy further? The most interesting insights often occur when reality contradicts a conclusion reached by deduction which I believe is happening here.

                                          I don’t have access to the data you have and this data has great value as it is extensive and representative. The value of my couple of samples is that I’ve compared directly comparable properties not averages across regions and this gives a truer picture of the real choice facing a purchaser between buying and renting (albeit only if the purchaser is interested in living close to the centre of Dublin in decent 2 bed apartment or a small 2/3 bed house). I’m not sure how rich the data is that you have but one idea I had was that perhaps you could repeat your comparison but use as small a geographical divisions as possible. If you could get down to a granularity of say housing estate size, then I’d have much more confidence that your averages were in fact comparable but I don’t know whether you have the data to do something like this. Another line would be to add a general adjustment to the price of secondhand houses for sale to account for my observation that it cost anything up to 150k to bring a house for sale up to the average standard of houses to rent. This weight could be calibrated with a few manual comparisons. Alternatively, maybe try only considering NEW properties for sale as at least you know they won’t require roof replacement or rewiring to be habitable. There are lots of interesting approaches here.

                                          Unfortunately I am scheduled to do a lot of travelling over the next 3 weeks so it may be difficult to dedicate big blocks of time to this but I’m certainly interested in exploring this further.

                                          • Ronan Lyons ,

                                            Hi darag,

                                            Thanks for coming back, and excellent comment, easy winner of the ‘Most Thorough Comment’ award in my book… and don’t worry, I know exactly what you mean about time constraints!

                                            Thanks for going through things step by step. Your overall point is well-made, namely the one about individual properties vs. averages. I may not be able to get down to housing estate level, but I can hopefully get down to a set of characteristics (e.g. certain area, certain house type, certain bathroom number, etc.) that makes it reasonable to assume the properties are equivalent. I’ll see what I can do about the new properties too.

                                            On the deposit issue, you’re right, I’ve been a classic economist and just assumed away that problem. Which makes the couple I’m looking at one that thought about buying in early 2007, having saved up their deposit, but one that’s held off since then.

                                            I’m less convinced by the quality argument – again, just anecdotally, one could easily make the opposite argument that people are prepared to live as tenants in conditions they wouldn’t put up with if it were their own home. Or maybe I’m just stuck in student mentality! Perhaps the Census might have some proxies for this, e.g. presence of TV, broadband, etc., occupancy status. Something for me to think about anyway. Thanks again.

                                            • Bernard Mannings ,

                                              I really don’t get it. The whole premise that its cheaper to buy than rent seems to be based on the first year only, which has the highest TRS. Why is this one year the basis of the conclusion? Why don’t you project out to 10 years or 20 years?

                                              • Richard Dalton ,

                                                Three problems.

                                                1. The assumption that it should be cheaper to rent than buy. I don’t know whether it should or not, but my intuition seems to be opposite to yours. To me unless buying was cheaper there would be no such thing as property investors, and everyone would want to rent because you get flexibility and less hassle for a lower price.

                                                But who would they rent from if there were no landlords?

                                                Renting should be more expensive.

                                                2. Are people really willing to live as tenants in conditions they wouldn’t put up with if it were their own home?

                                                People who were willing to buy in Carlow and commute to and from Dublin on a daily basis were clearly willing to suffer more to be an owner than I would be willing to put up with as a renter.

                                                If billboards in Carlow aimed at people sick of commuting is anything to go by, we’re hitting reality on that plan right about now.

                                                Leave students out of it, they have very little to teach you since they are rarely making the buy vs rent choice.

                                                3. You point out that the benefits of ownership include the ability to sell and/or borrow against the property.

                                                Hardly benefits that apply at the moment.
                                                It would be fairer to say that a downside of owning at the moment is the inability to sell.

                                                -Rd

                                                • Ronan Lyons ,

                                                  Hi Bernard,

                                                  Fair question. Simple answer is that this is the safest year of budgeting for anyone (an FTB couple themselves or an economist looking at them) to do. A few grand cash in hand after year 1 is a lot more tangible than a potentially larger but much less tangible amount after 20 years. After that, assumptions become a lot more important and therefore open to criticism or counter-assumption. Given the wealth of discussion about these calculations on thepropertypin, I will be speeding up my next round of calculations – which will be a lot more assumptions-led – and will look at a 10 year-cash flow also.

                                                  Thanks for stopping by and taking the time to comment,

                                                  Ronan.

                                                  • Ronan Lyons ,

                                                    Hi Richard,

                                                    Thanks for your comment. On (1), I take your point and perhaps a distinction between different segments of the market is appropriate, e.g. between the couple with kids and (presumed) secure employment planning to live in an area for a generation, who one would expect to place a premium on security and who would eveything else equal prefer to own their accomodation for the same amount as not owning it, and the young, single, mobile worker, who presumably places a premium on mobility. By focusing on three-bedroom homes, I was trying to isolate the former, but am happy to concede this line of thought may need more empirical foundations.

                                                    Points (2) and (3) likewise taken – on (3), you’re getting to the nub of things now, IMO. What this post was trying to do is start a discussion which might end in an estimation of the relative importance of the various factors leading to property purchase decisions. This post clearly shows, again IMO, that affordability is not the primary – or perhaps even a major – factor. It’s unfortunate that the discussion on thepropertypin has gone down an entirely different route.

                                                    R

                                                    • darag ,

                                                      Hi Ronan.

                                                      I’m a bit pressed for time so this may appear to be direct and blunt which is not my intention.

                                                      I will categorically state that your conclusions are simply invalid.

                                                      Your argument you use to draw your conclusion is simply invalid. You’ve taken two disjoint populations and calculated an aggregate for each (a mean). The problem is you’ve drawn a conclusion about equivalent individuals in each population from these aggregate figures.

                                                      This is as scientifically valid as concluding that drinking tea causes cancer from the observation that 98% of cancer patients had consumed tea in the year before being diagnosed.

                                                      In other words, it is not valid at all. It would not pass any sort of critical analysis. In academia, this would be laughed at if used even in a working paper.

                                                      There is simply NO SCIENTIFIC basis on which you can draw the conclusion you did from the evidence you have.

                                                      As a result, I am mildly suggesting that perhaps you are interpreting evidence to support something you believe in rather than presenting objective findings from the data you have.

                                                      Economics is supposed to be a science (albeit often a soft one)! The very least you should do is look at testing your conclusion empirically. Turn off Excel for a minute and go out and arrange a couple fo viewings of secondhand properies for sale and rent in Dublin.

                                                      It should be easy for you to pick out lets say equivalent (in terms of utility) properties for sale and rent in each of the 4 geographical areas. I’d suggest picking 3 equivalent pairs in each area (low, medium and high end) AND ONLY AFTER MATCHING THEM in terms of quality and utility, compare the corresponding costs of renting versus buying.

                                                      If you can do this in any sort of fashion, I will concede you may have a point.

                                                      I dunno how to say this subtly but you are just wrong here. Your reasoning is faulty and unscientific, you’ve presented no examples to provide any sort of empirical verification of your conclusions and in fact I have a small selection of empirical examples which flatly contradict your findings.

                                                      The problem, as with all “popular” science is that the general public do not have the background to spot logical flaws like this. Even separating correlation from causation is frustratingly difficult to do when attempting to discuss things in an accessible manner. In fact, in my experience, some people never full understand that correlation does not imply a causal relationship. The logical flaw in your argument is more subtle than this classic but is just as invalid.

                                                      • Ronan Lyons ,

                                                        Dara,

                                                        I totally disagree with your frankly wild assertions. Here’s why. In Limerick, for example, I estimated that a three-bed home should cost about €200,000, based on closing prices being 10% below asking prices. When I look at real-world examples here – http://bit.ly/2ymft7 or in particular here http://www.daft.ie/1447740 (if it’s still live) – I see that’s about right. A 92% mortgage on a €200k home translates into a repayment of €612 per month. On the rental side, look again at real world examples here – http://bit.ly/oqL3J – which suggest that €700 to €850 is the range for the exact same type of house, same quality etc. The estimated rent I used was €787.

                                                        Unfortunately for your argument, the rent and the house price are for similar types of property. This is because all property prices are calculated through hedonic price econometric regressions, which control for all measurable attributes, including specific area, bedroom/bathroom number, house type, etc. The method in question was reviewed and described in this paper, http://bit.ly/DioOJ, by the ESRI.

                                                        While you certainly talk a good game, you’ll have to concede that you do not have a monopoly either on scientific methods or on real-world examples. In fact, so far, you’ve failed to give any rebuttal on either, other than some vague talk about correlation not being equal to causation. I have no prior beliefs on this: as explained elsewhere, I had no idea what the answer was going to be when I started out my analysis and I’ve no incentives at all to produce biased research one way or the other. Frankly, that would undermine all the rest of my work.

                                                        This post isn’t an apology or encouragement for buying a house – it’s showing how the maths has changed and changed back so dramatically. It’s not taking account of everything by a long stretch; a follow-up post will extend the cashflow well past the myopic viewpoint of just one year. I thought the post was interesting precisely because some features of the 2006 market have returned, but sales haven’t reverted to anywhere near their previous levels (and nobody’s arguing that they should).

                                                        R

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                                                            • Eunan King ,

                                                              Ronan
                                                              Have you updated this?
                                                              Best
                                                              Eunan

                                                              • Ronan Lyons ,

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