The Rent or Buy Debate

Samuel T. Cogley

Trumpet22 wrote: »

I've been reading about how the mortgage lending rules are stopping the prices from going up.

I then looked at Wicklow in Q3 2015. Average house price - 277,000.

Q4 2018. Average house - 334,000.

That's an increase of 20% in 3 years.


In my opinion the rules have only pushed up rents, which in turn pushes up house prices because investors get a high yield.

The mortgage rules are not your friend. They are forcing house prices up while you get ripped to shreds paying massive rents.

If one were to project house prices based on rents then a one bed apartment in the City would currently cost about €500K. The mortgage rules are preventing the prices rising at an even more rapid pace. They are causing more people to have to rent, which coupled with an anti-small LL environment and investment at the top end only by large REITs is driving up rents.


If 100% mortgages or the LTI rules were relaxed you'd simply see house prices increase.

Trumpet22

Samuel T. Cogley wrote: »

If one were to project house prices based on rents then a one bed apartment in the City would currently cost about €500K. The mortgage rules are preventing the prices rising at an even more rapid pace. They are causing more people to have to rent, which coupled with an anti-small LL environment and investment at the top end only by large REITs is driving up rents.


If 100% mortgages or the LTI rules were relaxed you'd simply see house prices increase.

I don't see how that helps anyone. The only ones it helps are banks who get risk free money because they know those who have loans are guaranteed to pay it back and they still get to charge the highest mortgage rates in Europe.

The central bank is assisting in transferring wealth from the poor (35k earners) to the rich (institutional investors).

People shouldn't see the 3.5 limit as something to be praised.

Take an example of a person paying 1k rent a month for the last 5 years. That's 60k equity in a house. Instead, that 60k is now into the pocket of wealthy investment funds.

In any case, if someone wants to take out 100% mortgage they should be allowed. But if they default they should lose it. They're harming the majority and protecting themselves.

JJJackal

Trumpet22 wrote: »

I don't see how that helps anyone. The only ones it helps are banks who get risk free money because they know those who have loans are guaranteed to pay it back and they still get to charge the highest mortgage rates in Europe.

The central bank is assisting in transferring wealth from the poor (35k earners) to the rich (institutional investors).

People shouldn't see the 3.5 limit as something to be praised.

Take an example of a person paying 1k rent a month for the last 5 years. That's 60k equity in a house. Instead, that 60k is now into the pocket of wealthy investment funds.

In any case, if someone wants to take out 100% mortgage they should be allowed. But if they default they should lose it. They're harming the majority and protecting themselves.

It’s hardly 60k equity - if you owned the property at least 50% would be gone on interest and other costs

Samuel T. Cogley

They absolutely should see the 3.5 limit (which has a certain % of exceptions as it is) as something to be praised. It's prevented things going absolutely nuts as it did during the last boom. As for deposit rules, while I have sympathy for people stuck in the rental trap there are oprions such as starting to save sooner, staying at home or renting a room rather than an apartment. Also there is the option of buying an apartment rather than going directly to the forever home - something that is less risky than it was ten or so years ago thanks to a more stable property market.

Also 1K per month isn't 60K in equity when you take into consideration interest and maintenance. If you're not in a position to save at a given rent you're not in a position to take a mortgage at that same level, although I do have some sympathy for people who are willing to go for a property within their means.

I and many others like me with properties left over from the boom would like nothing more than to see the central bank feck the rules out the window. We'd see boom era prices inside of six months.

cameramonkey

Taking away central bank guidelines and rules around mortgages would be a big mistake. Prices would go up quickly and we would be at risk from another shock to the banking system and the economy. The problem is not the central bank rules it is the governments inability or more likely disinterest in doing anything to alleviate people's suffering.

beauf

Trumpet22 wrote: »

...
In any case, if someone wants to ...

Worked out well the last time....

IAmTheReign

Trumpet22 wrote: »

I don't see how that helps anyone. The only ones it helps are banks who get risk free money because they know those who have loans are guaranteed to pay it back and they still get to charge the highest mortgage rates in Europe.

The central bank is assisting in transferring wealth from the poor (35k earners) to the rich (institutional investors).

People shouldn't see the 3.5 limit as something to be praised.

Take an example of a person paying 1k rent a month for the last 5 years. That's 60k equity in a house. Instead, that 60k is now into the pocket of wealthy investment funds.

In any case, if someone wants to take out 100% mortgage they should be allowed. But if they default they should lose it. They're harming the majority and protecting themselves.

You wouldn't expect to buy a TV on credit without putting down a deposit, but you think banks should offer people a few hundred thousand euro to buy a house without one? 100% mortgages put banks and the borrower at an enormous risk in the event of a downturn. It doesn't matter if the bank can repossess easily if the house is worth 100 grand less than the money owned on the mortgage. It's not like you can just hand the keys back, you still owe the outstanding debt on the property.

Wanderer78

IAmTheReign wrote:

You wouldn't expect to buy a TV on credit without putting down a deposit, but you think banks should offer people a few hundred thousand euro to buy a house without one? 100% mortgages put banks and the borrower at an enormous risk in the event of a downturn. It doesn't matter if the bank can repossess easily if the house is worth 100 grand less than the money owned on the mortgage. It's not like you can just hand the keys back, you still owe the outstanding debt on the property.

Banks have been given too much power in creating the money in the first place, the general public truly takes on most of the risk in these situations, as the bank can gain ownership of the asset if the debtor fails to repay

Twenty Grand

Wanderer78 wrote: »

Banks have been given too much power in creating the money in the first place, the general public truly takes on most of the risk in these situations, as the bank can gain ownership of the asset if the debtor fails to repay

What's your solution?

IAmTheReign

Wanderer78 wrote: »

Banks have been given too much power in creating the money in the first place, the general public truly takes on most of the risk in these situations, as the bank can gain ownership of the asset if the debtor fails to repay

Of course the general public ultimately take on most of the risk, which is exactly the reason why it's in everyone's interest that there's controls in place to limit the amount of risk. Things like ensuring the amount of debt people can take is affordable by limiting it based on how much they earn. Or reducing the risk of negative equity by requiring people to pay some of the purchase price up front.

The_Conductor

Wanderer78 wrote: »

the bank can gain ownership of the asset if the debtor fails to repay

Thats a critical problem in Ireland- they can't easily foreclose on delinquent loans.

Wanderer78

Twenty Grand wrote:

What's your solution?

I'm not actually sure I have one, but more awareness of how our modern banking systems work is urgently needed, its very dangerous to continue like this, we urgently require a more democratic solution to banking and money creation, I'm a major fan of public banking, but I'd imagine they have limitations to. The world is awash with credit, which in turn is turning into our debts, its an unsustainable model, this in turn is driving up asset prices, particularly housing. I'm also convinced a land value tax is the way to go, as the true gainers in this are financial institutions and the land owning classes

beaz2018

The CBI rules are no doubt saving us from ourselves in certain circumstances but they are unfair in many ways. For example, a single person who may never have kids and thus will never have child/childcare expenses can only borrow 3.5 times their income despite most likely being far more capable of meeting higher repayments than a couple with kids. They are also a major deterrent for builders to get back building as despite what the media says about a housing crises and high prices there are still many parts of the country where property is simply too cheap for builders to make a viable profit. They may be keeping prices in check, but they are also keep many people in a renting situation. My view is the net result of an increase to 4-4.5 (as per the UK) would be a positive on the market in general. It wont happen though.

IAmTheReign

Wanderer78 wrote: »

I'm not actually sure I have one, but more awareness of how our modern banking systems work is urgently needed, its very dangerous to continue like this, we urgently require a more democratic solution to banking and money creation, I'm a major fan of public banking, but I'd imagine they have limitations to. The world is awash with credit, which in turn is turning into our debts, its an unsustainable model, this in turn is driving up asset prices, particularly housing. I'm also convinced a land value tax is the way to go, as the true gainers in this are financial institutions and the land owning classes

Genuinely curious, what is it about our banking system is it you think people need to be made aware of and what do you mean by a more democratic solution?

And when you talk about being a fan of public banking, are you talking about publicly owned cooperative banking, like credit unions, or about a nationalised banking system?

voluntary

Trumpet22 wrote: »

Take an example of a person paying 1k rent a month for the last 5 years. That's 60k equity in a house. Instead, that 60k is now into the pocket of wealthy investment funds.

1k per month - you're talking about basically ZERO equity in the house purchased with mortgage.

300k loan @2.9% interest means 725 EUR per month interest only.
Add 100/150 management fee monthly, add 40 property tax, 150 maintenance.

so 1065 is a minimum cost. You're basically going into loss on such ownership vs rent.

Now, add 6000 solicitor/register etc purchase costs, divide by your sample 5 years, makes 100 extra cost per month.
So the monthly cost goes up to approx 1200 eur.

So basically, the first 1200 EUR spent each month is burnt, it's only whatever you spend on top of these 1200 goes towards your equity.

And then this assumes you invest 10% or 20% own funds at the start.

Wanderer78

Wanderer78 wrote: »

Banks have been given too much power in creating the money in the first place, the general public truly takes on most of the risk in these situations, as the bank can gain ownership of the asset if the debtor fails to repay

By general public do you mean the taxpayer in the sense we paid god knows what to bail out the banks or do you mean I the individual borrower take on the risk when I take a mortgage? If its the former then I tend to agree, if its the latter then I don't. If I want a mortgage it's up to me to repay it.

Samuel T. Cogley

beaz2018 wrote: »

My view is the net result of an increase to 4-4.5 (as per the UK) would be a positive on the market in general. It wont happen though.

It won't stop anyone renting, in fact it will trap more people in renting as the net effect will be an increase in house prices and thus an increase in the required deposit.

cruizer101

voluntary wrote: »

1k per month - you're talking about basically ZERO equity in the house purchased with mortgage.

300k loan @2.9% interest means 725 EUR per month interest only.
Add 100/150 management fee monthly, add 40 property tax, 150 maintenance.

.....

And then this assumes you invest 10% or 20% own funds at the start.

Not really a fair comparison though given if you are paying 1k a month in rent if you were to but a similar house you would probably be looking at a property value of 120-150k ish so you would only be getting a mortgage of 100k ish

voluntary

cruizer101 wrote: »

Not really a fair comparison though given if you are paying 1k a month in rent if you were to but a similar house you would probably be looking at a property value of 120-150k ish so you would only be getting a mortgage of 100k ish

Fair point, but not if you're locked into an rent control zone. Many tenants still pay way under the market rates.


The point is, some people don't realize ownership/mortgage comes with large costs. If you rent for 1k or 2k and decide to buy, the 1k or 2k WILL NOT go towards your equity. A part of it or NONE will go towards the equity. In some scenarios a negative amount will go towards the equity, basically pushing you towards a loss.

awec

voluntary wrote: »

Fair point, but not if you're locked into an rent control zone. Many tenants still pay way under the market rates.


The point is, some people don't realize ownership/mortgage comes with large costs. If you rent for 1k or 2k and decide to buy, the 1k or 2k WILL NOT go towards your equity. A part of it or NONE will go towards the equity. In some scenarios a negative amount will go towards the equity, basically pushing you towards a loss.

You are still comparing apples and oranges. Mortgage is paying for an asset, rent is paying for a service.

voluntary

awec wrote: »

You are still comparing apples and oranges. Mortgage is paying for an asset, rent is paying for a service.

Mortgage is a loan. Loan is a service. Mortgage interest is paying for a service. Only the capital repayment part of the mortgage is paying for an asset.

awec

voluntary wrote: »

Mortgage is a loan. Loan is a service. Mortgage interest is paying for a service. Only the capital repayment part of the mortgage is paying for an asset.

This doesn't make any sense now. What exactly is the point you are trying to make? That a mortgage also includes "dead money"?

If so, yes, I suppose you could spin it to say interest is dead money. But again, you are comparing apples and oranges.

The_Conductor

awec wrote: »

This doesn't make any sense now. What exactly is the point you are trying to make? That a mortgage also includes "dead money"?

If so, yes, I suppose you could spin it to say interest is dead money. But again, you are comparing apples and oranges.

Lots of people will tell you that paying for *any* service (including the service of borrowing money) is dead money.
Sigh.

cruizer101

Ownership/mortgage does come with large costs but is still generally cheaper than renting in the long run.

Take a property worth 300k, rent on that is probably in the region of 2k per month (8% of value per year).

If you want to buy that property you will have mortgage of 270k.
At 3.5% (fair bit higher than you can get today) over 30 years your repayment would be 1200 a month. (Even 5% would be 1450).
Thats 800 of a difference per month, yes there are extra expenses (property tax, maintenace, refurbishment, etc.) but no where near that much, and significantly that amount may fluctuate with interest rates but rent will over the 30 years increase far more significantly.

Lets say you have 40k to start so renting you can invest that and if you got 5% retrun over 30 years you have ~100k at the end.
If you buy that is your deposit and some initial expenses covered.

If renting in 30 years you will still be renting now at a much higher rate and will have 100k in savings. (Assuming we exclude ongoing savings as they should be the same anyway).
If you buy you now own an asset worth 300k + inflation. You no longer have to pay any mortgage/rent.

Yes with a mortgage you have paid 250k to that bank in interest (base on 5% over life of mortgage).
But renting if rent stayed at 2k a month (which it won't it will rise over 30 years even if temporary dips) you would have paid 720k for a service, and have what to show at the end?

I'm not saying everyone should rush to buy at first opportunity but long term it makes far more sense.

voluntary

The_Conductor wrote: »

Lots of people will tell you that paying for *any* service (including the service of borrowing money) is dead money.
Sigh.

How is paying for the service of borrowing money any better than paying for the service or renting? The money is gone either way.

My original response was to a person claiming you could have 60k equity built up if you spent 1k paying mortgage over the last 5 years instead of spending it on rent.

So often people have this false perception, that the money they spend on rent could be building their equity instead. It wouldn't be. It could, in a small part, but this is also not given. In many cases people have built more equity by renting than by buying, look at thousands paying mortgages for years and ending up with more debt than equity. Nothing is certain in this world.

lawred2

voluntary wrote: »

How is paying for the service of borrowing money any better than paying for the service or renting? The money is gone either way.

My original response was to a person claiming you could have 60k equity built up if you spent 1k paying mortgage over the last 5 years instead of spending it on rent.

So often people have this false perception, that the money they spend on rent could be building their equity instead. It wouldn't be. It could, in a small part, but this is also not given. In many cases people have built more equity by renting than by buying, look at thousands paying mortgages for years and ending up with more debt than equity. Nothing is certain in this world.

You can be sure of it..

We've spent 80k in the last four years on mortgage repayments... Reduced our principal by 30k

awec

voluntary wrote: »

How is paying for the service of borrowing money any better than paying for the service or renting? The money is gone either way.

My original response was to a person claiming you could have 60k equity built up if you spent 1k paying mortgage over the last 5 years instead of spending it on rent.

So often people have this false perception, that the money they spend on rent could be building their equity instead. It wouldn't be. It could, in a small part, but this is also not given. In many cases people have built more equity by renting than by buying, look at thousands paying mortgages for years and ending up with more debt than equity. Nothing is certain in this world.

You have no idea if this is true. You've just made it up.

As for your first point, do you really not see the difference between interest payments in the process of purchasing an asset, and money spent on a service?

But again, this comparison you are trying to make does not make any sense. You are still comparing apples and oranges.

aloooof

lawred2 wrote: »

You can be sure of it..

We've spent 80k in the last four years on mortgage repayments... Reduced our principal by 30k

So you now owe X-30k on an asset that's likely appreciated significantly, and is now worth X+ 20%, 30%, 40%? You've likely made the 50k up (or more) in capital appreciation.

voluntary

awec wrote: »

You have no idea if this is true. You've just made it up.

As for your first point, do you really not see the difference between interest payments in the process of purchasing an asset, and money spent on a service?

But again, this comparison you are trying to make does not make any sense. You are still comparing apples and oranges.

No difference. If your rent is 1000 and your mortgage interest with all the maintenance cost is 1000 then there's no difference.

Whatever over the 1000 you put into a pot is your equity.

awec

voluntary wrote: »

No difference. If your rent is 1000 and your mortgage interest with all the maintenance cost is 1000 then there's no difference.

Whatever over the 1000 you put into a pot is your equity.

There's a fairly huge difference.

What's your ultimate point here? That most people are better of waiting to buy? That might be true. Might not be. Will probably vary from person to person. There are too many factors, some financial, some non-financial, for it to be dumbed down to this extent.

aloooof

voluntary wrote: »

No difference. If your rent is 1000 and your mortgage interest with all the maintenance cost is 1000 then there's no difference.

Whatever over the 1000 you put into a pot is your equity.

How comparable do you think the properties are that you would rent for 1k vs buy for 1k of interest + the principal? The answer is, not at all comparable.

voluntary

lawred2 wrote: »

You can be sure of it..

We've spent 80k in the last four years on mortgage repayments... Reduced our principal by 30k

It's a good example. So you effectively paid 50k for debt servicing, so 12.5k per year, 1040 each month. Add other costs associated with the ownership and you end up with costs nearing 1500 per month. If you could rent instead for below 1500 over the last 4 years then you'd be better of renting than buying.

The good thing for you is that you bought near the bottom of the bull market, so your asset likely appreciated in price. It would be completely different for you if the market would have gone the other way round.

awec

aloooof wrote: »

How comparable do you think the properties are that you would rent for 1k vs buy for 1k of interest + the principal? The answer is, not at all comparable.

Yes, we seem to be massaging figures here by comparing renting a 1 bed apartment vs buying a 4 bed house.

As I've said, this whole thing is apples and oranges.

voluntary

awec wrote: »

There's a fairly huge difference.

What's your ultimate point here? That most people are better of waiting to buy? That might be true. Might not be. Will probably vary from person to person. There are too many factors, some financial, some non-financial, for it to be dumbed down to this extent.

I have no 'ultimate point' here. Just pointing to things which buyers often tend to ignore in their calculations. Everyone should make his own decision, but surely it's better to make it based on accurate data and not on wrong or incomplete assumptions.

awec

voluntary wrote: »

I have no 'ultimate point' here. Just pointing to things which buyers often tend to ignore in their calculations. Everyone should make his own decision, but surely it's better to make it based on accurate data and not on wrong or incomplete assumptions.

People don't ignore them.

The process just isn't as basic as you are trying to make out. There are way too many other factors.

aloooof

voluntary wrote: »

It's a good example. So you effectively paid 50k for debt servicing, so 12.5k per year, 1040 each month. Add other costs associated with the ownership and you end up with costs nearing 1500 per month. If you could rent instead for below 1500 over the last 4 years then you'd be better of renting than buying. .

You're overlooking the 30k equity acquired in this.

voluntary wrote: »

The good thing for you is that you bought near the bottom of the bull market, so your asset likely appreciated in price. It would be completely different for you if the market would have gone the other way round.

Which is precisely the thing that nobody can predict.

Ultimately, nobody is going to disagree with you that it's financially-optimal to buy at the bottom of the market.

What I, and plenty others. would argue is that it's a reasonable trade-off to buy at a financially-sub-optimal time for the security it brings i.e., once you're buying a place you can afford, and suits your needs for the medium-to-long term.

voluntary

aloooof wrote: »

You're overlooking the 30k equity acquired in this.

No, I'm not. The 30k equity has been built using funds outside the 1500 spent monthly. 1500 was the money 'burnt'. If rented for 1500 in the same period, similarly 30k would be saved.

lawred2

While it's hard to stomach 50k of 80k going nowhere but the bank's own account, putting it towards our own place is a lot better that into a landlord's account so he can buy another investment property for his kids..

aloooof

awec wrote: »

so for lawred2's example, by my working (please correct if I'm wrong):

80k in payments over 4 years means a rough mortage payment of ~€1650 a month. Let's round it up to €2000 to account for the extra costs like insurance etc.

That means, ownership cost in 4 years has been €96,000. In that time, lawred has built 30k equity.

To rent in the same period, for 1500 a month, could cost €72,000. That's a difference of €24,000.

But he has built €30k equity. He's quids in. He spent €24,000 to make €30,000.

I'd also add:
1) this doesn't include the capital appreciation and
2) you are very, very likely to be getting more house-for-you-buck for ~2k in monthly mortgage+costs payments vs 1500 per month in rent.

EDIT - adding a 3rd:
3) Between the capital appreciation and the reduced principal, OP is very like entitled to a reduced interest rate, falling into a lower LTV range. If you had been renting, you would still likely be buying at the higher LTV interest rate.

awec

Woops deleted by mistake.

so for lawred2's example, by my working (please correct if I'm wrong):

80k in payments over 4 years means a rough mortage payment of ~€1650 a month. Let's round it up to €2000 to account for the extra costs like insurance, mortgage protection, life assurance etc.

That means, ownership cost in 4 years has been €96,000. In that time, lawred has built 30k equity.

To rent in the same period, for €1500 a month, would cost €72,000. In this example, we just go with pure rent, and ignore things like savings for deposits and future house buying costs. That's a difference of €24,000.

But he has built €30k equity. He's quids in. He spent €24,000 to make €30,000.

voluntary

voluntary wrote: »

No, I'm not. The 30k equity has been built using funds outside the 1500 spent monthly. 1500 was the money 'burnt'. If rented for 1500 in the same period, similarly 30k would be saved.

If you pick an arbitrary amount of time and an unrealistic rent level in Dublin at least I'm sure you can make any point you like. You pay less and less interest over time, that 1500 'burnt money' is declining every month. This is obviously not the case when renting.

Mickiemcfist

Mickiemcfist wrote: »

Great that's sorted. Anyone any thoughts on this 2019 property market?

There is a worthwhile and interesting debate to be had about renting or buying, mortgage interest versus rent, the "time value of money" and the effects from the highly risky nature of the irish property market etc.

Perhaps its worth splitting from this thread to one on its own?

Graham

Good idea T o D

Mod Note

Thread split.

What can you even get in Dublin for 1500 a month rent these days, is that enough for a family home? I was paying that for an apartment 5 years ago. Who knows what that place would go for today.

Amirani

Thatcher Dazzling Bulb wrote: »

What can you even get in Dublin for 1500 a month rent these days, is that enough for a family home? I was paying that for an apartment 5 years ago. Who knows what that place would go for today.

You'd be looking at a pretty basic 1 bed for €1500 if you want to be anywhere close to Dublin City these days.

Tar.Aldarion

Yeah i was looking at them recently, it's gone up so much.

Samuel T. Cogley

Amirani wrote: »

You'd be looking at a pretty basic 1 bed for €1500 if you want to be anywhere close to Dublin City these days.

Thanks to the RPZ I've just rented out my place at just over €1150 near Guinness'.

I must be the only mug in Dublin following the rules.

Assetbacked

Amirani wrote: »

You'd be looking at a pretty basic 1 bed for €1500 if you want to be anywhere close to Dublin City these days.

Would get a bed in a co-living tenement with €100/200 to spare!

voluntary

voluntary wrote: »

It's a good example. So you effectively paid 50k for debt servicing, so 12.5k per year, 1040 each month. Add other costs associated with the ownership and you end up with costs nearing 1500 per month. If you could rent instead for below 1500 over the last 4 years then you'd be better of renting than buying.

The good thing for you is that you bought near the bottom of the bull market, so your asset likely appreciated in price. It would be completely different for you if the market would have gone the other way round.

You are really massaging numbers though to suit your argument. If the poster in question is paying 1600 a month in a mortgage it’s very likely the rent level would be in excess of 2k per month for rent in an equivalent property so that throws your argeumet out the window.