About six weeks ago, I put up a rent-or-buy calculator on the site. It became, by this site’s standards at least, a bit of hit, passing 2,000 entries within a day or two. The other night, the 5,000th entry was made into the database. All in all, that’s quite a bit of information about the demand side of the property market, so I thought it might be time to have a look at what’s in there and see what’s of interest.

For example, what term-length and what LTV are people considering these days? And what did people enter, if they changed the defaults about how house prices, etc., are going to change over the next generation? Are people going for shorter terms? Are people very pessimistic about the future of house prices? What interest rates are they planning on? And on average, did it tell them to rent or buy?

All in all, about 1,700 people have made over 5,000 entries in the rent-or-buy calculator in the last six weeks, an average of three entries per person. As is to be expected with this kind of thing, about 10% were a little odd in one way or another (e.g. annual average change in house prices of 100% or -100%, monthly rent of €1, looking to buy a house for €220m, that sort of thing…). Clearing them out leaves about 4,400 “non-weird” entries that give us an insight into what over 1,600 would-be buyers are thinking.

Mortgage term and loan-to-value

So who’s looking for what? The median house price entered was €300,000, suggesting a slight Dublin bias in the respondents. Nonetheless, there were 50 entries for homes costing €100,000 or less (and another 200 for €150k or less), something I would say most people until recently thought they’d seen the last of. Are there many millionaires out there? Well, thirty different people put in homes worth more than €1m, the highest “non-weird” entry being a €3m home (currently renting for €5,000 a month).

The typical mortgage being sought was at 90% loan-to-value, over 25 years. In fact, almost half of all entries had a loan-to-value of between 90% and 95%. Over 5% of entries were for a 100% mortgage, while almost 10% were looking at a loan-to-value of less than 60%. A pie chart of the percentage loan-to-value that people put in is below.

Those who view mortgages of more than 90% as indicative of the wrong mindset about property ownership might regard those figures are worrying. If something might cheer them up, it is probably the fact that half of those looking mortgages of 90% or more are interested in mortgage terms of 25 years or less. At the very least, people are looking at shorter terms, even if they’re not looking at bigger deposits. In general, there was much greater spread in loan term than in loan-to-value. One in five was actually at 20 years or less, twice as many as looking at more than 30 years. Between 20 and 30 years, the balance was in favour of 25 years or less.

What do people think about the future?

In about 1,400 entries, people changed the defaults in relation to interest rates, house price and rent inflation, etc. Below are some of the findings based on what people put in. The quick version is that, on average, when people changed things, they went lower. If they changed the defaults, they typically opted (surprisingly?) for lower house price and rent inflation (i.e. lower than the default of 2% a year), and for lower interest rates and a lower return on investments.

Future house prices and rents

I had thought I was being quite conservative in relation to both, opting for no change in real terms – i.e. that house prices and rents would track inflation of 2% over the long run. Even as it was, 250 entries thought I was being too optimistic, with 100 of those opting for static nominal house prices in the long run. Only 150 thought I was being too pessimistic. Half of those nudged up the number from 2% a year to 3%. At one extreme, one person opted for 10% house price inflation, turning their €500,000 home into a €14m mansion at the end of 35 years. At the other extreme, an average fall in house prices over 30 years of 5% per year would turn one person’s €300k home into an asset worth €65,000.

In relation to rents, almost 400 entries thought I was being too optimistic, with about 50 people seeing rents falling every year over the next generation and another 140 seeing no change on average. Only 130 thought I was being too pessimistic, although there was a club of 7 who entered rents going up 10% a year every year for a generation. (One person’s €1,000 rent in that case would explode out to €28,000 a month by 2045 in that case.)

Interest rates and investments

Of those that changed interest rates, the vast majority thought I had gone for rates that are too high (6% on average). Four hundred people ticked it down a notch to 5%, while another 300 had rates of 4%-5%. About 80 people had average interest rates of 3% or less, products of the 2000s perhaps? Just 50 entries upped rates from the default 6%, although there were 2 arch-pessimists (I’m guessing) who plugged in 10% interest rates. (If you’re curious/under 50, at 10%, a 95% mortgage on a €250,000 home over 35 years would have monthly repayments of over €2,000.)

The biggest unknown is probably what happens an investment portfolio over the next 30 or so years. No-one in the final sample opted for negative returns on investments, although a substantial 650 were less optimistic than the 6% default (30 chose 0%). Only 60 were more optimistic than I was, including about a dozen envisaging double-digit returns. For the would-be lucky sod contemplating double-digit returns or a mortgage with a 57% LTV, the deposit earning that sort of return for 30 years would be worth €5.8m by the end of the mortgage.

So… rent or buy?

Hopefully, it’s a testament to the calculator’s strengths (and not its weaknesses) that it doesn’t seem to have churned out the same answer to all comers. Of the 4,400 entries so far, the balance has been slightly in favour of buying – 57% have put in numbers where the net cash flow would be positive from buying. At the risk of being a broken record, it’s worth pointing out, though, that only 1 in 7 entries had a yield of 5.0% or more, the very lowest an investor would consider and a useful benchmark for would-be owner occupiers. One in four had a yield of 3.0% or less, essentially Celtic-Tiger levels of disparity between house prices and rents.

The way the calculator works, there are a few funny results to note. For example, it is obvious that if you’ve a 100% mortgage (i.e. a deposit of €0), the stock market could double every year and it wouldn’t affect the value of your deposit. So, even with savings from rents, those with 100% mortgages were, everything else being equal, more likely to get a positive cash flow from buying than, say, someone with a 90% mortgage. That, of course, does not mean that a 100% mortgage is in anyway a good thing in the first place. (There are some things a calculator can do, and other things it can’t!)

Interestingly, though, for those on 25-30 year mortgages, averaged over all entries, there was practically nothing between buying and renting-and-saving. Nonetheless, there were about 10% of entries where the calculator worked out that the savings from renting would be worth more than the current house price – a significant saving by anyone’s calculation. (What would you do with a free house, essentially?!)

Particularly with the default settings, and with any sort of deposit, the more expensive the home, the more likely the calculator was to tell you to rent-and-save as opposed to buy. Of the 87 different €1m+ homes, adding up all the entries, the calculator was trying to save them a cumulative €42m!

The calculator was designed to help people overcome some of the confusion around thinking about long-term finances. Hopefully, it’s helped some people at least realise that numbers – however imprecise – can be put on these things. There was one entry, which was for a 100% mortgage over 40 years for a home worth €480,000. While the prospect of having a home worth €1m in 2050 might sound attractive, the alternative was the prospect of having savings worth €1.9m by the same time, through a combination of renting and disciplined saving. If the calculator has got that person thinking a little bit about their financial strategy, it’s done its job.

Tags: future house prices, loan to value, mortgage, rent or buy