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Buying - Not Renting - Is The New ‘dead Money’

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I don't know if this has been posted -- apologies if i missed it -- but it gladdened my heart to read this in this Times -- especially the jibes at Krusty! B)


Merryn On Money: Buying - not renting - is the new ‘dead money’

EVERYWHERE you find a property boom you will also find a nation that hates to rent — a nation that thinks renting is a waste of money, that rent money is “dead money”.

Look up the phrase “dead money” on the internet and you will find it in every discussion of a property purchase by a first-time buyer — “everywhere we wanted to buy was a bit too expensive … we had to really stretch ourselves, the house isn’t quite what we wanted … but it is better than renting. Rent is just dead money.”

I hear it all around me, too — from my sister who is buying a house in Battersea, south London, that we both know she can’t really afford because she can’t bring herself to “waste” money renting, to my friends who are moving further and further outside London to buy houses they don’t really want to live in because they just won’t rent further in, however much cheaper it may be to do so.

You see it all over the television, too. Last week property experts Kirsty and Phil on Location, Location, Location were trying to get a young couple out of (very nice) rented accommodation into a (quite nasty) “home of their own”, the monthly payments on which would be higher. The couple, we were told, had come to realise that renting was tantamount to “paying someone else’s mortgage”, and that was “madness”.

There is a downside to buying, Kirsty told the pair. It brings sacrifices. If you move from renting to buying you can find “a real drop in your standard of living” as it can be “impossible to replicate the space” for the money.

This seemed like a whopper of a downside to me, but as far as Kirsty was concerned it was a sacrifice worth making: like most of the UK, she clearly believes that being on the property ladder is desirable in itself.

But is rent really dead money? The answer is that sometimes it is, and sometimes it isn’t. Basically, if house prices are rising and it costs less to pay the interest on a mortgage and to maintain your house (insurance, repairs, etc) than it does to rent a similar property, then buying is a good idea.

If, on the other hand, house prices are flat or falling and it costs less to rent than to pay mortgage interest and maintain a property, renting is a good idea.

Obviously a few other factors are relevant — stamp duty, legal fees, etc when buying — but the equation basically comes down to house prices, rental prices and interest rates.

So which of these situations are we in at the moment? I think it’s pretty clear. Property prices have fallen for 14 months in a row, a total of 3.7% in the past year, according to Hometrack, the property-research company.

And, with the number of buyers falling and the number of sellers rising, that isn’t going to change soon.

At the same time rents are low and in many places falling, thanks to the massive oversupply of properties available to rent from the nation’s miserable gang of buy-to-let investors. Given the rising level of inflation, there is every chance that interest rates may soon rise, too (this increases the monthly cost of a mortgage, but has no effect on rental prices).

Add it all up and in almost every city in the UK it is now cheaper to rent than to buy.

In my building in Paddington, west London, I figure it is now about £5,000 a year cheaper to rent a two-bedroom apartment than to buy one (assuming you do so with a 90% interest-only mortgage) despite the fact that asking prices in the building are already down 20 odd per cent from their highs a year ago.

So why on earth would you buy one? It’s a very expensive way to put yourself “on the ladder”. If you rent instead, you can save your £5,000 a year and put it towards buying a flat when prices have fallen another 20% (which they will).

You will also keep yourself free from the hideous financial burden that comes with buying overpriced property, and the risk of negative equity. Look at it like that and it seems to me that right now it isn’t rent that is “dead money” for new buyers, it’s mortgages.

I’m pleased to say that Kirsty and Phil didn’t manage to find a house for the renting couple mentioned above. (Actually I’ve never seen them successfully find a house for anyone, although they’ve been on the air for so long now I’m sure they must have.) So hopefully they are still renting their charming cottage, and putting the savings that come with it aside for a time when buying does make sense.

I wish the first-time buyers among my friends and family would do the same.

Merryn Somerset Webb is a former stockbroker and now editor of Money Week. Her views are personal and investors should always seek professional advice

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  • 301 Brexit, House prices and Summer 2020

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