Rent is dead money

Coyote

billybigunz wrote: »

You can buy a 2 bed house in Cavan for 50K probably as well. How much do you think a nice 2 bed house on Ailesbury road with 3 offstreet parking spaces is worth?

I did mean for people to use common sense
I live in and know the area very well, the mew I listed was a 3 bed with 2/3 parking spaces on Waterloo Lane, Ballsbridge, Dublin 4. as you know it's closer to town but not as posh. picking the most expensive street in Ireland with a mew to rent but none for sale makes making a comparison too hard.
the point was I did not pick where, type of house, low interest rates or low saving growth. I used the figures/house type/area in the article posted at the start. and live date from daft.ie and myhome.ie using like for like (discounting places that did not have photos of the inside, so in general the standard was the same with the rent and sale houses)

AARRRRGH

A little story I heard from a guy i know a while ago.
He gave me an example that he bought an apartment as an investment 12 years ago. I might not have everything he told me in here, but you get the point of it.

He got a 25 year mortgage. he is paying €600 (fixed for 10 years since about 2 years ago, it has been roughly the same before that too) per month for the mortgage + mangmt fees + maintenance now.

He paid out the equivalent of €15,000 in deposit and solicitors etc.
He furnished it for €3000. So total €18000.

Now he gets €1000 a month (used to get €1400pm which gave him even more profit) which is €10,000 per year assuming 2 months empty.

€600 * 12 = 7200 per year are his costs.

Thats a profit of €2800 in a year if its empty for 2 months, which it hasnt been yet. Longest it was empty was 2 weeks so far, but he still assumes 2 empty months just in case.

He gets a couple of thousand euro extra each year after taxes, mortgage etc are paid, which he keeps in an account earning interest in case he needs to put it back into the apartment at some stage,which he hasnt yet. Currently in that account there sits over €30,000.

To cut a long story short, he was just pointing out that for an investment of €18000 he will have an apartment all paid off in another 13 years (minus CGT to be paid if he sells it then). And already over €30,000 sitting in his bank account and more to come.

A clever use of €18k i think. He hasnt had to add to that at all.

Could this be repeated today though?

It could be argued he could have invested that 18k in equities then, but given the disaster that is the wordwide economy now It would probably be worth the same now.

FTSE was about 6000 in 1998
It was 5703 on Friday.

shoegirl

What we really need is to move away from the binary yes/no choice on renting/buying - there are zero other options really for most working people as effectively social housing is closed off for people who pay their way.

I am surprised at whoever commented on "savings" that renters might make - in reality a lot of renters pay quite a lot more rent than they ideally would like to so don't have savings. The only things you do save on are decorating, appliances and repairs - but that assumes they are done.

I do think what we need are hybrid models which are common throughout Europe - co-operative housing schemes, part ownership models, and more secure long term tenancies. This is precisely why ownership is less of an ideal. The only reason it is such in Ireland is because historically renting has been both more expensive in the long term and is associated with substandardness right up to and including the present day.

jackal

AARRRRGH wrote: »

A little story I heard from a guy i know a while ago.<snip>

That to me looks like a prime example of simply doing the maths, covering costs, not relying on capital appreciation and investing prudently at a good time. In addition by the sounds of it he avoided the temptation to leverage the investment and invest in more and more properties.

If only our banks and amateur speculators/landlords had been a bit more like him instead of like this: http://www.independent.ie/national-news/courts/propertyobsessed-man-to-list-assets-2064756.html we would not be in the situation we are in.

As said above, its not a simple yes/no answer. There are numerous examples of people who have won and lost in the property investment game.

ronanlyons

So thanks for all the feedback and discussion. As I mentioned earlier in the thread, I've been working on a widget that will allow people to put in their own dream home and beliefs about future house prices, interest rates, etc.

The calculator is up and running now: http://www.ronanlyons.com/2010/04/20/your-very-own-rent-or-buy-calculator/
I've also worked in a few of the themes you've been discussing into a sort of FAQ at the bottom of the post.

So give it a shot, and any thoughts, comments or questions are as per usual welcome.

ZYX

ronanlyons wrote: »

So thanks for all the feedback and discussion. As I mentioned earlier in the thread, I've been working on a widget that will allow people to put in their own dream home and beliefs about future house prices, interest rates, etc.

The calculator is up and running now: http://www.ronanlyons.com/2010/04/20/your-very-own-rent-or-buy-calculator/
I've also worked in a few of the themes you've been discussing into a sort of FAQ at the bottom of the post.

So give it a shot, and any thoughts, comments or questions are as per usual welcome.

You are assuming a low average inflation rate of 2%. While this is, and has been the aim, history tells us this rate is unlikely to be the average.

You also assume equities will grow by 9% a year which seems excessive especially if one considers the value of equities at present, the bid/offer spread and management charges. A look at current investment funds shows the average growth rate over last 10 years is substantially less than 9% (even before charges)

An average interest rate on deposits of 3% also seems high when you have an inflation rate of 2% and a mortgage rate of 6%. Both figures also exclude DIRT/Capital Gains tax.

Teddy Daniels

I'm 189,000 better off renting which is what I assumed and I changed the rtn on inv to 3%

ronanlyons

ZYX wrote: »

You are assuming a low average inflation rate of 2%. While this is, and has been the aim, history tells us this rate is unlikely to be the average.

You also assume equities will grow by 9% a year which seems excessive especially if one considers the value of equities at present, the bid/offer spread and management charges. A look at current investment funds shows the average growth rate over last 10 years is substantially less than 9% (even before charges)

An average interest rate on deposits of 3% also seems high when you have an inflation rate of 2% and a mortgage rate of 6%. Both figures also exclude DIRT/Capital Gains tax.

Well, the calculator lets you put in your own assumptions, I just put in defaults because most people would look at that and not even know where to start!

All the baseline figures are explained below the calculator - including margin of error on ECB inflation targeting - while the average rates of return on savings and shares don't come from me, they come from an established literature on long-run returns to these things (the 'equity premium puzzle' literature). Safe to say, though, that looking at the 2000-2010 period is about as representative as looking at the 1996-2006 period - you can't tell anything from one data point, you need to look at a lot more.

But again, the advantage of the calculator is that if you don't like the defaults, you can change them!

You are right about the figures being net of taxes - which also includes stamp duty/future property taxes and capital gains tax on the house. The calculator also doesn't include maintenance costs of owning a property, such as insurance, mortgage protection and general maintenance, which a tenant avoids. (Perhaps things for version 2.0...)

ZYX

ronanlyons wrote: »

Well, the calculator lets you put in your own assumptions, I just put in defaults because most people would look at that and not even know where to start!

All the baseline figures are explained below the calculator - including margin of error on ECB inflation targeting - while the average rates of return on savings and shares don't come from me, they come from an established literature on long-run returns to these things (the 'equity premium puzzle' literature). Safe to say, though, that looking at the 2000-2010 period is about as representative as looking at the 1996-2006 period - you can't tell anything from one data point, you need to look at a lot more.

But again, the advantage of the calculator is that if you don't like the defaults, you can change them!

You are right about the figures being net of taxes - which also includes stamp duty/future property taxes and capital gains tax on the house. The calculator also doesn't include maintenance costs of owning a property, such as insurance, mortgage protection and general maintenance, which a tenant avoids. (Perhaps things for version 2.0...)

I accept what you are saying but to suggest equities will give a return of 9% a year over the next 25 years is optimistic. First of all we are starting from a very high level even if you take into account recent stock market crashes. PE ratios remain very high.
Secondly, even if the market did gain an average 9% a year, then the average fund would grow slightly less, add to that bid/offer spread and charges of at least 0.5% a year. So even at this optimistic level of 9% annual growth in the market it would be more reasonable to assume about 7% actual growth in the fund. Tax then reduces this to 5.5%.

On the other point, capital gains tax on sale of house obviously doesn't come into it and mortgage protection is less of an issue as most people should have life assurance in some form once in a long term relationship or when they have children.

drunk_monk

You have to look at the bigger picture not just the life of the mortgage.

My father & auntie were renting together in England in the late 60's.
In 1970 my father got a mortgage which he had paid off by 1983. Now after being mortgage free for 27 years and in retirement he is looking to down size and realease more money.

In 1970 my auntie went into rented accommodation, now aged 71 she & her husband are still renting (albeit the same house).The money they saved during their working years is now dwindling fast. They are unable to downsize or even to leave the house to their children when the time comes.

For those of you who rent and do manage to save hundreds of thousands of euro to pay for your rent in retirement well done. But for most of you I feel you will not have that in the bank and will live to regret not buying like my auntie.

punchdrunk

been renting for three years now,I'm 28
I was in a position then to buy if I had really wanted to,but I didn't want to try to live on 50 quid a week,never go out etc so I rented

fast forward to the end of Jan and I lost my job
currently out of work and there's not much on the Horizon TBH
thankfully i'll be getting rent allowance from thursday

It's a pretty rough time but i'll manage
I can't imagine how bad things would be if I had bought now...

rightwingdub

There does not to be a cultural change in attitudes in Ireland as regards renting, there still seems to be an element of snobbery attached to renting.

On the other hand the government needs to bring in better tenancy laws such as lenghtier tenacies like Germany and France have.

Graces7

drunk_monk wrote: »

You have to look at the bigger picture not just the life of the mortgage.

My father & auntie were renting together in England in the late 60's.
In 1970 my father got a mortgage which he had paid off by 1983. Now after being mortgage free for 27 years and in retirement he is looking to down size and realease more money.

In 1970 my auntie went into rented accommodation, now aged 71 she & her husband are still renting (albeit the same house).The money they saved during their working years is now dwindling fast. They are unable to downsize or even to leave the house to their children when the time comes.

For those of you who rent and do manage to save hundreds of thousands of euro to pay for your rent in retirement well done. But for most of you I feel you will not have that in the bank and will live to regret not buying like my auntie.

Assuming she could have afforded to buy?


I chose to sell my small house a few years ago. It was owned; no mortgage. And to move into rented accommodation.

Simply the upkeep problems and cost of them were too much as age advanced.

And replacing appliances etc also was a large consideration.

On the low income of a small pension I get rent allowance.

ricman

Say you are 25 you buy a house for 180k on a 25 year mortgage, you get tax relief.You are saving say 500x12 per year=6k.You have 2 parking spaces and a garden.You have a better quality of life.
When you reach say 67 you can downsize to a 1bed home and use the money for healthcare etc
Does everyone want to live in a flat or apartment for 40 years.Rents will rise if the economy improves.
When you live in a flat you have no control over who lives above you.
I can see service charges increasing dramatically in 2 years as some apartment blocks are half empty.
I know a woman who lives in an apartment ,kids are robbing the letters from every1 and the tv cable system is in chaos ,ie people making illegal connections for free.
Many flats,apartments are badly designed and do not have proper security systems.
SO i think for most people its worth buying a house ,if the price is fair.

billybigunz

ricman wrote: »

Say you are 25 you buy a house for 180k on a 25 year mortgage, you get tax relief.You are saving say 500x12 per year=6k.You have 2 parking spaces and a garden.You have a better quality of life.
When you reach say 67 you can downsize to a 1bed home and use the money for healthcare etc
Does everyone want to live in a flat or apartment for 40 years.Rents will rise if the economy improves.
When you live in a flat you have no control over who lives above you.
I can see service charges increasing dramatically in 2 years as some apartment blocks are half empty.
I know a woman who lives in an apartment ,kids are robbing the letters from every1 and the tv cable system is in chaos ,ie people making illegal connections for free.
Many flats,apartments are badly designed and do not have proper security systems.
SO i think for most people its worth buying a house ,if the price is fair.

Rubbish on top of more rubbish. Why would you be paying a management fee if you are renting. You can rent houses you know as well?

http://www.ronanlyons.com/

stepbar

billybigunz wrote: »

Rubbish on top of more rubbish. Why would you be paying a management fee if you are renting. You can rent houses you know as well?

http://www.ronanlyons.com/

So what part is rubbish?

ronanlyons

drunk_monk wrote: »

You have to look at the bigger picture not just the life of the mortgage.

My father & auntie were renting together in England in the late 60's...

For those of you who rent and do manage to save hundreds of thousands of euro to pay for your rent in retirement well done. But for most of you I feel you will not have that in the bank and will live to regret not buying like my auntie.

I'm all for people looking at even bigger pictures than a 30-year timespan! Particularly given that 5 years ago, people were looking at 3-year timespans...

On your anecdote, your father was helped by unprecedented and sustained inflation during the 1970s, which it would be silly to assume will happen again over the coming generation, given that it hasn't happened in the past generation and given that the dawn of independent central banks has more or less put the kibosh on double-digit inflation (cue fresh economic crisis to prove me wrong!).

It's important to remember that that's why people have been so fond of property - it's a fantastic hedge against inflation. In a small open economy with its own currency, property was a fantastic asset to hold. As part of the eurozone, our need to hedge against inflation is much smaller but our need to provide for our own retirement (which lasts much longer) is greater.

Re the squirreling away of hundreds of thousands of euro, this isn't as unrealistic as it seems. Pick a house whose mortgage you can afford now, rent one like it instead, but have the same standing order coming out. The surplus over your rent, you lock away in a 3/5/10-year savings account...

Again, the calculator isn't an argument against buying, it's an argument in favour of buying for the right reasons - and understanding the financial implications of your decision.

Re ricman's points, I'd have to agree with billybigunz - someone renting a five-bedroom detached house in Killiney would be quite puzzled as to your description of what life in rented accommodation is like.

fontanalis

ronanlyons wrote: »

I'm all for people looking at even bigger pictures than a 30-year timespan! Particularly given that 5 years ago, people were looking at 3-year timespans...

On your anecdote, your father was helped by unprecedented and sustained inflation during the 1970s, which it would be silly to assume will happen again over the coming generation, given that it hasn't happened in the past generation and given that the dawn of independent central banks has more or less put the kibosh on double-digit inflation (cue fresh economic crisis to prove me wrong!).

It's important to remember that that's why people have been so fond of property - it's a fantastic hedge against inflation. In a small open economy with its own currency, property was a fantastic asset to hold. As part of the eurozone, our need to hedge against inflation is much smaller but our need to provide for our own retirement (which lasts much longer) is greater.

Re the squirreling away of hundreds of thousands of euro, this isn't as unrealistic as it seems. Pick a house whose mortgage you can afford now, rent one like it instead, but have the same standing order coming out. The surplus over your rent, you lock away in a 3/5/10-year savings account...

Again, the calculator isn't an argument against buying, it's an argument in favour of buying for the right reasons - and understanding the financial implications of your decision.

Re ricman's points, I'd have to agree with billybigunz - someone renting a five-bedroom detached house in Killiney would be quite puzzled as to your description of what life in rented accommodation is like.

Ultimately this is what it comes down to.

bladebrew

ricman wrote: »

Say you are 25 you buy a house for 180k on a 25 year mortgage, you get tax relief.You are saving say 500x12 per year=6k.You have 2 parking spaces and a garden.You have a better quality of life.
When you reach say 67 you can downsize to a 1bed home and use the money for healthcare etc
Does everyone want to live in a flat or apartment for 40 years.Rents will rise if the economy improves.
When you live in a flat you have no control over who lives above you.
I can see service charges increasing dramatically in 2 years as some apartment blocks are half empty.
I know a woman who lives in an apartment ,kids are robbing the letters from every1 and the tv cable system is in chaos ,ie people making illegal connections for free.
Many flats,apartments are badly designed and do not have proper security systems.
SO i think for most people its worth buying a house ,if the price is fair.

i live in a rented apartment, and you have some good points above, the problem is there is not a chance i would get a mortgage,so im stuck renting,

johnnyjb

murphym7 wrote: »

The next thing - the house will never be yours - you can't build on an extension - replace windows. build a conservatory, you could move into a different property with all these things (your moving again though).

This is true, where will our builders go. And god bless the mortgage lenders we could hardly put those nice honest people out of a job :rolleyes:

ricman

IF you earn over x amount go to the council housing dept wood quay dublin, they will offer you a loan on any private home under 200k value.
GO on daft.ie ,look at houses under 150k.
Tell em you cant get a standard bank loan.
You need to be in full time employment .
This scheme is designed for people working on a low income.
I,M sure theres people who are rent 3 bed apartments who are very happy,but if you can afford to pay 1000 rent per month than you can afford to buy a house, even in dublin prices have fallen by
30-50 per cent.
SOME apartments have good security systems ,but theres no way i,d pay high rent on an apartment for 40 years .By the way shes happy to live there, but her rent is only 50euro per week, shes on welfare.
I,M not saving its awful to live in rental accomodation,but if you are working full time its
smarter to buy a house if you can afford a mortgage.IF you look at it over a span of 40 years ,
taking a 25 year mortgage on a 180k house .
Especially for two people buying together as a couple.

ronanlyons

ricman wrote: »

IF you earn over x amount go to the council housing dept wood quay dublin, they will offer you a loan on any private home under 200k value.
GO on daft.ie ,look at houses under 150k.
Tell em you cant get a standard bank loan.
You need to be in full time employment .
This scheme is designed for people working on a low income.
I,M sure theres people who are rent 3 bed apartments who are very happy,but if you can afford to pay 1000 rent per month than you can afford to buy a house, even in dublin prices have fallen by
30-50 per cent.
SOME apartments have good security systems ,but theres no way i,d pay high rent on an apartment for 40 years .By the way shes happy to live there, but her rent is only 50euro per week, shes on welfare.
I,M not saving its awful to live in rental accomodation,but if you are working full time its
smarter to buy a house if you can afford a mortgage.IF you look at it over a span of 40 years ,
taking a 25 year mortgage on a 180k house .
Especially for two people buying together as a couple.

I guess the point is: why do you think you have to live in an apartment if you're a renter? Why not live in a family home, two doors down from the home you would have bought?
The question then is whether your savings from renting, after being invested, would be worth more than the house if you bought it - for many types of properties (particularly larger properties), based on current asking prices and rents, the answer is yes.
This isn't stopping people in that situation from buying - just trying to make them aware of the financial implications of their decision.

drunk_monk

ronanlyons wrote: »

Pick a house whose mortgage you can afford now, rent one like it instead, but have the same standing order coming out. The surplus over your rent, you lock away in a 3/5/10-year savings account...

This advice is good although to me I'd rather the money go towards a mortgage rather than the surplus go into savings. Then after 25 years I'd have a house & no mortgage so all my money will be going into savings rather than still only saving the surplus.
Am I missing something here?

kennyb3

drunk_monk wrote: »

This advice is good although to me I'd rather the money go towards a mortgage rather than the surplus go into savings. Then after 25 years I'd have a house & no mortgage so all my money will be going into savings rather than still only saving the surplus.
Am I missing something here?

A basic sense of maths and economic understaning by the sounds of it

ZYX

Does the calculator take into account what happens if rent goes above mortgage repayments.

In other words while rent is below mortgage repayments the excess goes into savings. Say after 15 years the rent is now higher than the mortgage. Is the excess rent taken from the savings already made and does the extra money the mortgage payer have go into savings?

kennyb3

ZYX wrote: »

Say after 15 years the rent is now higher than the mortgage.

why would anyone pay rent that high?

ZYX

kennyb3 wrote: »

why would anyone pay rent that high?

Well if rent goes up with inflation it will eventually meet the mortgage. The mortgage won't go up with inflation.

Ronanlyons recommends buying when yearly rent is 5% of purchase price. At that level rent would overtake mortgage repayments after about 8 years.

ronanlyons

drunk_monk wrote:

This advice is good although to me I'd rather the money go towards a mortgage rather than the surplus go into savings. Then after 25 years I'd have a house & no mortgage so all my money will be going into savings rather than still only saving the surplus.
Am I missing something here?

What you're missing is the fact that you'd have a war-chest of savings invested for the lifetime of what would have been your mortgage.
There is another advantage which is liquidity - at 65 as an owner-occupier with no mortgage, you're wealthy but can't really get at your wealth if say a health emergency happens. At 65 as a renter with savings, let's say for sake of argument you're equally wealthy, but you've also access to your wealth if needs be.

ZYX wrote: »

Does the calculator take into account what happens if rent goes above mortgage repayments.

In other words while rent is below mortgage repayments the excess goes into savings. Say after 15 years the rent is now higher than the mortgage. Is the excess rent taken from the savings already made and does the extra money the mortgage payer have go into savings?

It does indeed take this into account - what you're suggesting above though is double-counting - you only need one of the two and given that this is taking buying as the benchmark, the calculator uses the first: excess rents are taken from savings made. If rent goes above mortgage repayments, the savings are run down. Put another way, the calculator attaches no special significance to the number zero.

Ronanlyons recommends buying when yearly rent is 5% of purchase price. At that level rent would overtake mortgage repayments after about 8 years.

Just a quick point on this. I'm personally not recommending anything - whatever the outcome is comes from:
your assumptions + basic maths (i.e. the calculator) = conclusion

drunk_monk

kennyb3 wrote: »

A basic sense of maths and economic understaning by the sounds of it

Great then we will agree to disagree. For me if you can get a mortgage that is no more than a third of your joint income for no more than 25 years (we did) & you want to have a family than buying is for you. All others need only rent.

ronanlyons

drunk_monk wrote: »

Great then we will agree to disagree. For me if you can get a mortgage that is no more than a third of your joint income for no more than 25 years (we did) & you want to have a family than buying is for you. All others need only rent.

OK, just suppose for a minute that we knew - for whatever reason, government law, clairvoyance, etc - that house prices and rents were not going to change *at all* over the next fifty years AND that you could open a 25-year savings account with a guaranteed interest rate per year of 3%.
Now let's take the household with €3,600 in net monthly income and absolute guaranteed jobs. Would that household be better off:
(a) spending €1,200 a month on a mortgage, or
(b) spending €700 a month on rent and putting €500 a month into savings?
Even without interest, you'd have €150,000 in savings at the end of 25 years. With interest and with a deposit hived away... well, that takes us back to the calculator.

Of course we don't know what's going to happen any of these variables for certain. But as long as you can see that there are circumstances under which it is entirely rational for someone who could afford to buy to not buy and rent instead, then we're going places!

halkar

I would rather have a roof over my head when I am 60 than 150k in my pocket. With the life expectancy increasing more and more people leaving till their 90s. 150k may pay for another 20 years of rent, assuming rents stay static and one doesn't dip in the money for other things. From 80 on rent will be paid from one's pocket. With many people have no pension arrangements other than government pension you can be on the streets at the age of 80. To me that is a risk so the rent is dead money

P.S. After one's dead house is left to kids. It is a nice bonus feeling that at least my kids may not have to worry about accommodations as much as I did . The savings from owning house can go for generations.

Graces7

halkar wrote: »

I would rather have a roof over my head when I am 60 than 150k in my pocket. With the life expectancy increasing more and more people leaving till their 90s. 150k may pay for another 20 years of rent, assuming rents stay static and one doesn't dip in the money for other things. From 80 on rent will be paid from one's pocket. With many people have no pension arrangements other than government pension you can be on the streets at the age of 80. To me that is a risk so the rent is dead money

P.S. After one's dead house is left to kids. It is a nice bonus feeling that at least my kids may not have to worry about accommodations as much as I did . The savings from owning house can go for generations.

On low income you can get rent allowance and other allowances. To avoid being on the streets at 80...

Believe me on that one;)

And not everyone has kids; and not everyone's kids want the house their parents lived in as by then most will have their own houses; by the time their old ones are 80 I mean.

In Donegal at least, there are so many houses that were family homes just left to rot into the ground in that situation. Unwanted and unsaleable.

drunk_monk

Graces7 wrote: »

On low income you can get rent allowance and other allowances. To avoid being on the streets at 80...

Believe me on that one;)

And not everyone has kids; and not everyone's kids want the house their parents lived in as by then most will have their own houses; by the time their old ones are 80 I mean.

In Donegal at least, there are so many houses that were family homes just left to rot into the ground in that situation. Unwanted and unsaleable.

Sorry but surely if you have this great wealth of savings from not buying how can you get rent allowance??

stephaniepink

does anyone no tallaght well want to buy but dont no where

Graces7

drunk_monk wrote: »

Sorry but surely if you have this great wealth of savings from not buying how can you get rent allowance??

Hmmmm. I missed that bit, not having been able to save anything.. ah but the situation he is outlining is for when his savings run out by the time he is 80?

Your move;)

drunk_monk

ronanlyons wrote: »

OK, just suppose for a minute that we knew - for whatever reason, government law, clairvoyance, etc - that house prices and rents were not going to change *at all* over the next fifty years AND that you could open a 25-year savings account with a guaranteed interest rate per year of 3%.
Now let's take the household with €3,600 in net monthly income and absolute guaranteed jobs. Would that household be better off:
(a) spending €1,200 a month on a mortgage, or
(b) spending €700 a month on rent and putting €500 a month into savings?
Even without interest, you'd have €150,000 in savings at the end of 25 years. With interest and with a deposit hived away... well, that takes us back to the calculator.

Of course we don't know what's going to happen any of these variables for certain. But as long as you can see that there are circumstances under which it is entirely rational for someone who could afford to buy to not buy and rent instead, then we're going places!

Ronan, as you have proberbly gathered my maths is bad Please can you take you scenerio forward another 10 and 20 years. Then how will A & B compare (full savings from A, surplus from ?

Thanks

drunk_monk

Graces7 wrote: »

Hmmmm. I missed that bit, not having been able to save anything.. ah but the situation he is outlining is for when his savings run out by the time he is 80?

Your move;)

My point exactly, if your renting you still have to keep on paying & paying. If you young then it's better imo to buy. Everyone keeps doing figures for 25 years but we live much much longer than that. How much rent does someone pay who rents for 50 years?

halkar

Graces7 wrote: »

On low income you can get rent allowance and other allowances. To avoid being on the streets at 80...

Believe me on that one;)

And not everyone has kids; and not everyone's kids want the house their parents lived in as by then most will have their own houses; by the time their old ones are 80 I mean.

In Donegal at least, there are so many houses that were family homes just left to rot into the ground in that situation. Unwanted and unsaleable.

And there are houses that are 2-300 years old and still lived in.
And there is no guarantees that one will save the 500€ surplus from renting for 25 years. People adopt their lifestyles to their disposable income and we all know that we Irish are not good at saving;).

It is all about assumptions, if - elses, ands and so on. No one can predict what will happen in 25 years.

ei.sdraob

ronanlyons wrote: »

At 65 as a renter with savings, let's say for sake of argument you're equally wealthy, but you've also access to your wealth if needs be.

assuming our respectable and trustable banking system haven't collapsed, no

ronanlyons

drunk_monk wrote: »

Ronan, as you have proberbly gathered my maths is bad Please can you take you scenerio forward another 10 and 20 years. Then how will A & B compare (full savings from A, surplus from ?

Sure, let's work with one example, a 30-year-old couple who could buy a €450,000 house on a 30-year mortgage with a 10% deposit. Or else they could rent it, at a current cost of €1,350 per month (think Castleknock 4-bed semi, that kind of family home).

Mortgage repayments would be €2,428 at a 6% interest rate, so in the first year of renting, your savings would be about €13,000. Invested for 30 years at an average return of 6%, your first year's savings would be worth just over €75,000.

Taking the calculator's defaults, 2% annual growth in rents and house prices, the house would be worth at the end of the 30 years €815,000 - all of it yours (albeit locked away in your house).

Meanwhile, your rent would have crept up slowly to €2,445 over the lifetime of the mortgage. This ever-smaller gap between your rent and what would have been your mortgage, coupled with a shorter time for your savings to mature, means that for example the 29th year's savings would be worth €1,000 at the end of 30 years.

However, the cumulative 30 years of savings - adding in the up to 30 years of maturing - would be worth over €750,000, such is the power of compound interest.

Not only that, by investing what would have been your deposit, rather than spending it on your house, that's turned from €45,000 into €260,000. So in total that's over €1,000,000 you have as your savings war-chest.

At that point, you essentially have a choice - stay in the same place or find somewhere more suited to a couple whose kids had grown up and moved on. Suppose they decide to stay in the same house.

For the buyer: They have no accommodation costs as long as they are happy to live in the same house and not have any need for their accumulated wealth. The opportunity cost is of course that they get no interest on their wealth.

For the renter: On one hand, the €200,000 advantage from renting not buying would be enough to pay for about another 9 years of rent. Alternatively, you could use the interest from the €1m - probably about €30k a year every year - to pay the rent on an ongoing basis and not have to touch the war-chest. More likely, the couple would downsize to somewhere that suits their needs better.

Does that make sense?

halkar wrote:

I would rather have a roof over my head when I am 60 than 150k in my pocket. With the life expectancy increasing more and more people leaving till their 90s. 150k may pay for another 20 years of rent, assuming rents stay static and one doesn't dip in the money for other things. From 80 on rent will be paid from one's pocket. With many people have no pension arrangements other than government pension you can be on the streets at the age of 80. To me that is a risk so the rent is dead money

P.S. After one's dead house is left to kids. It is a nice bonus feeling that at least my kids may not have to worry about accommodations as much as I did . The savings from owning house can go for generations.

Three quick points:
- What if it were a million in your pocket and you could pay your rent out of the interest (as per above)?
- Why would you have to tie your wealth into property? What if when you're 85 you've a medical emergency and can't access your wealth trapped in your property?
- Re leaving things for your kids, what you're referring to is what economists called Barro Bequests (it turns out that a mission to endlessly accumulate wealth without ever drawing it down - presumably your kids would do the same - changes economic models quite a bit!). However, hand in hand with the point about unwanted and unmaintained properties in Donegal, why not ask your children whether they would prefer a house worth €815,000 or €815,000 in cash?

Apologies for the length of the reply, hope it clears things up.

PS. The calculator as it stands does not take account of a number of factors on both sides - including tax liabilities, house maintenance, mortgage protection, insurance, etc. All going well, they'll be in version 2!

am i bovvered

One element to consider if you go down the rent and save route is the disipline of saving.

I believe that the cost most peoples lifestyle will increase as the savings do.
I bought our house when I was quite young at 23. I am now 37, friends who have been renting since all that time do not have tons of savings, they spent a much larger portion of their income on travelling, cars and partying than we did. Why ? because they had the cash, its human nature.

If you are paying a mortgage every month there are things you have to sacrifice, no choice.
So therefore I don't believe the average joe will end up with the amount of cash at the end of the rent and save route.

halkar

+1 . Totally agree. When we were buying back in year 2000 after 10 years of renting we had a lot of discussions like these with friends and family. After 10 years into our mortgage there is no way we can find a similiar place to rent for the same price as our mortgage. It will finish before We are 50, possibly 45 if we start paying more as payments are decreasing as the years past.
After all paid we can put the mortgage amount monthly into a savings account for the remaining 10,15,20 years and be rent free with a lil million in the bank (We hope ).

ronanlyons

Maybe I'm the only one seeing this, but is there not an inherent contradiction in the last two posts? Why is halkar able to save at will when their mortgage is finished, but according to am_i_bovvered (and a few others) halkar from 10 years ago not?

If you don't believe you have the discipline to save on your own, set up a fixed ongoing deposit account, where you have to deposit every month or else you pay a penalty/your account breaks. That way, you can still take advantage of the liquidity if you really need it.

Incidentally, halkar, you are one of the lucky ones - people who are buying now cannot expect to enjoy a boom that wipes out some of their debt for free. Hence the importance of at least understanding the range of investment alternatives, including buying and living in your only investment.

niallo27

ronanlyons wrote: »

Maybe I'm the only one seeing this, but is there not an inherent contradiction in the last two posts? Why is halkar able to save at will when their mortgage is finished, but according to am_i_bovvered (and a few others) halkar from 10 years ago not?

If you don't believe you have the discipline to save on your own, set up a fixed ongoing deposit account, where you have to deposit every month or else you pay a penalty/your account breaks. That way, you can still take advantage of the liquidity if you really need it.

Incidentally, halkar, you are one of the lucky ones - people who are buying now cannot expect to enjoy a boom that wipes out some of their debt for free. Hence the importance of at least understanding the range of investment alternatives, including buying and living in your only investment.

i think what they are trying to say is that it will be easier to save when your in your 50's or earlier, i have being renting for the last 10 years and have pissed all my money away enjoying myself, renting is ****e in this country, we are being screwed all the time, i want to buy a house now and im going to, i have a deposit from money i won a year ago and didnt touch.

There is more to life than money people, money cant buy everything so give people a break, i mean i spend about 7 or 8 grand a year supporting liverpool, probably 3 or 4 on drink so why are people so shocked when they want to spend a little more on a house that will make them happy.

Graces7

drunk_monk wrote: »

My point exactly, if your renting you still have to keep on paying & paying. If you young then it's better imo to buy. Everyone keeps doing figures for 25 years but we live much much longer than that. How much rent does someone pay who rents for 50 years?

OK, but you are still failing to take maintenance and rates etc into account in all your sums.

We sold the wee house we owned because it was needing more work than we could afford to get done.

And rent means a roof over your head; it is not a free gift to the landlord. And maintenance and appliances etc.

When we came here, he had to replace washing machine and fridge for example. Looking at several hundred E there.

ronanlyons

niallo27 wrote: »

i think what they are trying to say is that it will be easier to save when your in your 50's or earlier, i have being renting for the last 10 years and have pissed all my money away enjoying myself, renting is ****e in this country, we are being screwed all the time, i want to buy a house now and im going to, i have a deposit from money i won a year ago and didnt touch.

There is more to life than money people, money cant buy everything so give people a break, i mean i spend about 7 or 8 grand a year supporting liverpool, probably 3 or 4 on drink so why are people so shocked when they want to spend a little more on a house that will make them happy.

I agree with your general point - that's why if you were to do as the calculator suggests, it would have to be as big a decision as taking out a mortgage. Good personal finance takes discipline!

Although as an economist, "pissing away money" is not the same as spending it enjoying yourself now as opposed to later - you will always have your memories of supporting Liverpool, for example.

billybigunz

niallo27 wrote: »

i think what they are trying to say is that it will be easier to save when your in your 50's or earlier, i have being renting for the last 10 years and have pissed all my money away enjoying myself, renting is ****e in this country, we are being screwed all the time, i want to buy a house now and im going to, i have a deposit from money i won a year ago and didnt touch.

There is more to life than money people, money cant buy everything so give people a break, i mean i spend about 7 or 8 grand a year supporting liverpool, probably 3 or 4 on drink so why are people so shocked when they want to spend a little more on a house that will make them happy.

A depressingly common attitude in this country.

oflahero

Thanks to Ronan for all this work and patience. The 'rent is dead money' mantra is still prevalent, thanks primarily to the fact that we are still at the tail end of an era of cheap money, a period of the last 10 years during which everyone who took out a mortgage had no experience of anything else.

This has now changed, as evidenced by the 'shock'n'horror!' stories of people applying for mortgages now ('I'm on 35k? They'll only give me 150k? WTF? Why won't they give me 400 and let me be a debt slave??') and the desperate efforts of banks to ditch their tracker customers.

Fact: EXISTING MORTGAGES ARE CHEAP.

Until this 'phoney war' period finally fades, and people start realizing that 5-6% interest rates are in fact 'normal', we're still going to hear a lot more of the auld 'ya can't lose with bricks and mortar'.

Upside for jumbo mortgage holders: don't worry, there are so many of you out there that debt forgiveness will soon be a reality, whether the rest of us like it or not...

alb

Funny how often you hear that rent is dead money but never that mortgage interest is dead money.

Based on conversations I've had I think many people don't seem to realise how much the interest adds over the lifetime of a mortgage - that it's possible to pay the principle sum AGAIN in interest i.e. if you take a 250k mortgage you may (depending on term, rates etc) pay back something like 500k. Sure you have a house 'worth' 250k but you've also payed 250k 'dead money' in addition to the loan itself.

ei.sdraob

billybigunz wrote: »

A depressingly common attitude in this country.

7-8 grand supporting liverpool :eek:

im still trying to figure out which half of that sentence is worse