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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.

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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.

[Deleted User]

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.