Your calculator was certainly an original and very helpful contribution to the rent-v-buy dilemma, and the results above are indeed very interesting.
At the higher end I’d agree that renting from an economic viewpoint is unchallengeable but I think the behaviour of sellers is driven by not wishing to take large hits on capital values and hope that there will be a rebound to “long term economic value” in a few years which would reduce their “losses” – meantime any rent is better than nothing. If the State amended tenant legislation to stop sales being a reason for temninating a rental agreement (like Germany for example) then I think the rental supply at the top end of the market would dry up.
Interesting also at the bottom that more calculations indicate there is value buying. However your calculator, whilst being very good, does not account for any profile of future price inflation and many sources (S&P, Moodys, DKM, Brian Lucey, David McWilliams, Morgan Kelly, Paddy Power!) appear to predict prices dropping from current levels in a given set of circumstances. So even at the low end where it might make financial sense to buy today, short term price falls of 10-50% may deter potential buyers. Whilst 2500 mortgage drawdowns for First Time Buyers in Q1 would seem to disagree, I think most people are put off by the prospect of losing €3k a month on an average home, at least in the short term. And with your calculator, even if you expressed a profile as an average inflation over the mortgage term, and that showed you were better off buying, you might be EVEN better off if you waited for prices to reach a bottom.
I think the key problem is that there are different types of properties available, and over a time of 25-30 years people might go through numerous life phases – marriage, having children, separation, unemployment, sickness.
A few points.
1. After 30 years the tenant is still paying rent – and probably at the highest rate. I see around me a particularly high level of impoverishment of older/retired tenants. Most of these would have been unable to afford a home in the first place so would never have been able to “save” and would not benefit much from lower rents since they still might be disproportionately high for their income level.
2. Many people might not have the flexibility to save the difference between rents and a mortgage, especially if they are lower income, which I think accounts for a large chunk of the private rented sector, on top of the 33-50% who are entirely welfare dependent.
3. The situation RE investing a deposit and taking a 100% mortgage is an interesting point.
4. The point RE the value of the house impacting the savings level is true, but one issue that is critical is that that tenants tend to pay more for property size. For example in Cork at the moment its not hard to find a 2 bed apartment in commuter towns for about 145k. A mortgage on this 686pm for 100% over 30 years @ 4%. But locally, a 2 bed apartment is 600pm to rent. This isn’t a saving however, as the rent relief afford to the owner occupier is still likely to dip his mortgage lower than the renter.
Plus in my experience, a landlord on the 600 bracked will tend to increase the rent in increments of 50 euros a month rather than a percentage. In recent years many landlords didn’t rise rents but instead most tend to increase “charges” for services to tenants or charge them for things that were previously included (waste removal, even the PRTB fee itself).
Secondly, in much of Ireland, while rents may “appear” to be level, in fact like-for-like rents tend to be higher for units of similar size. Average rents are distorted by the fact that unit size is different. What is interesting is that rents are considerably lower than mortgages for very high end properties, but disprotionately higher for 1 and 2 bedroom units.
Hi Laura,
Thanks for those comments. Just to be clear, I wasn’t trying to compare people who rent currently and people who take out mortgages currently. You may some good points about the structural differences between those two groups.
What I was doing instead was taking a couple thinking of spending, say €1,500 a month on their mortgage and, taking that monthly expenditure of €1,500 as given, seeing whether they’d be better off buying and paying that in a mortgage each month, or renting and saving the difference.
Jagdip Singh ,
Hi Ronan,
Your calculator was certainly an original and very helpful contribution to the rent-v-buy dilemma, and the results above are indeed very interesting.
At the higher end I’d agree that renting from an economic viewpoint is unchallengeable but I think the behaviour of sellers is driven by not wishing to take large hits on capital values and hope that there will be a rebound to “long term economic value” in a few years which would reduce their “losses” – meantime any rent is better than nothing. If the State amended tenant legislation to stop sales being a reason for temninating a rental agreement (like Germany for example) then I think the rental supply at the top end of the market would dry up.
Interesting also at the bottom that more calculations indicate there is value buying. However your calculator, whilst being very good, does not account for any profile of future price inflation and many sources (S&P, Moodys, DKM, Brian Lucey, David McWilliams, Morgan Kelly, Paddy Power!) appear to predict prices dropping from current levels in a given set of circumstances. So even at the low end where it might make financial sense to buy today, short term price falls of 10-50% may deter potential buyers. Whilst 2500 mortgage drawdowns for First Time Buyers in Q1 would seem to disagree, I think most people are put off by the prospect of losing €3k a month on an average home, at least in the short term. And with your calculator, even if you expressed a profile as an average inflation over the mortgage term, and that showed you were better off buying, you might be EVEN better off if you waited for prices to reach a bottom.
Laura ,
I think the key problem is that there are different types of properties available, and over a time of 25-30 years people might go through numerous life phases – marriage, having children, separation, unemployment, sickness.
A few points.
1. After 30 years the tenant is still paying rent – and probably at the highest rate. I see around me a particularly high level of impoverishment of older/retired tenants. Most of these would have been unable to afford a home in the first place so would never have been able to “save” and would not benefit much from lower rents since they still might be disproportionately high for their income level.
2. Many people might not have the flexibility to save the difference between rents and a mortgage, especially if they are lower income, which I think accounts for a large chunk of the private rented sector, on top of the 33-50% who are entirely welfare dependent.
3. The situation RE investing a deposit and taking a 100% mortgage is an interesting point.
4. The point RE the value of the house impacting the savings level is true, but one issue that is critical is that that tenants tend to pay more for property size. For example in Cork at the moment its not hard to find a 2 bed apartment in commuter towns for about 145k. A mortgage on this 686pm for 100% over 30 years @ 4%. But locally, a 2 bed apartment is 600pm to rent. This isn’t a saving however, as the rent relief afford to the owner occupier is still likely to dip his mortgage lower than the renter.
Plus in my experience, a landlord on the 600 bracked will tend to increase the rent in increments of 50 euros a month rather than a percentage. In recent years many landlords didn’t rise rents but instead most tend to increase “charges” for services to tenants or charge them for things that were previously included (waste removal, even the PRTB fee itself).
Secondly, in much of Ireland, while rents may “appear” to be level, in fact like-for-like rents tend to be higher for units of similar size. Average rents are distorted by the fact that unit size is different. What is interesting is that rents are considerably lower than mortgages for very high end properties, but disprotionately higher for 1 and 2 bedroom units.
Ronan Lyons ,
Hi Laura,
Thanks for those comments. Just to be clear, I wasn’t trying to compare people who rent currently and people who take out mortgages currently. You may some good points about the structural differences between those two groups.
What I was doing instead was taking a couple thinking of spending, say €1,500 a month on their mortgage and, taking that monthly expenditure of €1,500 as given, seeing whether they’d be better off buying and paying that in a mortgage each month, or renting and saving the difference.
Thanks again for taking the time to comment,
R