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Lambie

Renting Cheaper Than Buying

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Continuing the theme of sources going bearish,  I thought this article was interesting, from a site I occasionally peruse to gauge sentiment. It's generally very pro-BTL and shilling mortgages.

http://news.houseladder.co.uk/news/renting-becomes-cheaper-than-buying-particularly-in-the-south-east/

Lots of our well worn tropes there, but interesting to see that doubt is starting to creep in.  The DABDA cycle is playing out..

For more light relief, the previous article is about John Fashanu being chucked in a Nigeria slammer for a land scam.

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1 hour ago, Lambie said:

Continuing the theme of sources going bearish,  I thought this article was interesting, from a site I occasionally peruse to gauge sentiment. It's generally very pro-BTL and shilling mortgages.

http://news.houseladder.co.uk/news/renting-becomes-cheaper-than-buying-particularly-in-the-south-east/

Lots of our well worn tropes there, but interesting to see that doubt is starting to creep in.  The DABDA cycle is playing out..

For more light relief, the previous article is about John Fashanu being chucked in a Nigeria slammer for a land scam.

It's been that way for a while now.  There was a small window in 2012 when it was cheaper to buy and boy did the MSM make a lot of it.

 

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I'm not sure this is a clean comparison. 

I was renting a flat for £900 a month, which was £11k a year (I'm rounding to nearest £100) .

New house mortgage is £1,300, but is detached in a much nicer location with a garden and none of this shared parking nonsense. Interest only I would be paying £400/month.

It is correct to say that from a cash flow perspective the mortgage is more per month than renting. The true comparison would be renting from the bank though, and that's only £400 on an IO. 

The other way to look at this is today's present value of my future mortgage payments, v the present value of my future rental payments .

Present value of mortgage = £367K easy since that's just what I owe but if I go interest only for 50 years (until I die lets say) then the present value is £183k

Present value of renting at £11k/year until I die (50 years) at 1.13% discount rate (10 year gilt) £419K

Assumptions are that interest rates stay as they are today, but also that the rental doesn't increase and I've not factored in moving costs (buying or renting) nor property maintenance/insurance etc.

Also bear in mind that the properties are not comparable. the house we're buying is a three bed detached walking distance of a market town and mainline station. The flat is a rental on a main road opposite a few takeaways .

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8 minutes ago, adarmo said:

I'm not sure this is a clean comparison. 

The only way to do a clean comparison is to run the numbers for comparable rental/buyable properties in your local market. And, really, what you need to do is simulate projected returns on your capital if you rent vs if you buy, otherwise you really aren't comparing the same thing. Doing this is a right pain, though - I started doing it and then realised that it was a massive time sink and that I should just enjoy life instead. :rolleyes:

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13 minutes ago, adarmo said:

I'm not sure this is a clean comparison. 

I was renting a flat for £900 a month, which was £11k a year (I'm rounding to nearest £100) .

New house mortgage is £1,300, but is detached in a much nicer location with a garden and none of this shared parking nonsense. Interest only I would be paying £400/month.

It is correct to say that from a cash flow perspective the mortgage is more per month than renting. The true comparison would be renting from the bank though, and that's only £400 on an IO. 

The other way to look at this is today's present value of my future mortgage payments, v the present value of my future rental payments .

Present value of mortgage = £367K easy since that's just what I owe but if I go interest only for 50 years (until I die lets say) then the present value is £183k

Present value of renting at £11k/year until I die (50 years) at 1.13% discount rate (10 year gilt) £419K

Assumptions are that interest rates stay as they are today, but also that the rental doesn't increase and I've not factored in moving costs (buying or renting) nor property maintenance/insurance etc.

Also bear in mind that the properties are not comparable. the house we're buying is a three bed detached walking distance of a market town and mainline station. The flat is a rental on a main road opposite a few takeaways .

It's a trade off in terms of maintenance costs,buying/selling costs versus moving rentals.

In my experience the best value is the higher end of the market where you're renting sub 3% gross yield.

Once you're renting on a 10% gross yield the value in renting is less compelling,particularly if you can get a ten year fix mortgage and overpay.

The other unknown you have with buying is the path of future interest rates.We're a currency crisis away from 10%.If your maths is based on the current generous offering from the UK taxpayer continuing,then some risk needs to be apportioned over a 25 year timeline.

Your latter point is also important particularly with reference to kids schooling.

Edited by Sancho Panza

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1 hour ago, Darby Ram said:

The only way to do a clean comparison is to run the numbers for comparable rental/buyable properties in your local market. And, really, what you need to do is simulate projected returns on your capital if you rent vs if you buy, otherwise you really aren't comparing the same thing. Doing this is a right pain, though - I started doing it and then realised that it was a massive time sink and that I should just enjoy life instead. :rolleyes:

I regularly did the maths and was better of renting until 2012 when the numbers said buy.

The main thing that swung the balance in favour of buying was the relentless fall in savings rate (from about 5 - 6% in 2007 to less than 2% in 2012)

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1 minute ago, Broken biscuit said:

I regularly did the maths and was better of renting until 2012 when the numbers said buy.

The main thing that swung the balance in favour of buying was the relentless fall in savings rate (from about 5 - 6% in 2007 to less than 2% in 2012)

I think this method is also problematic because, over the long term, cash always loses value. The comparator needs to be an asset portfolio. 100% cash is an asset portfolio, just one that will underperform over medium- to long timescales, ie the length of a mortgage term.

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5 minutes ago, Broken biscuit said:

I regularly did the maths and was better of renting until 2012 when the numbers said buy.

The main thing that swung the balance in favour of buying was the relentless fall in savings rate (from about 5 - 6% in 2007 to less than 2% in 2012)

They don't want or need your savings, they want and need your debt.;)

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1 hour ago, Darby Ram said:

The only way to do a clean comparison is to run the numbers for comparable rental/buyable properties in your local market. And, really, what you need to do is simulate projected returns on your capital if you rent vs if you buy, otherwise you really aren't comparing the same thing. Doing this is a right pain, though - I started doing it and then realised that it was a massive time sink and that I should just enjoy life instead. :rolleyes:

Haha, yes quite.

I think from what I'd done I was happy that buying is short term cashflow negative, but long term very very very cashflow positive!

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Renting Cheaper Than Buying

It bloody will be if we start to see any big price falls!

Even price stagnation with inflation at ~3%.
eg. Ballpark numbers on £250k house = a £7.5k loss in the first year + initial moving costs + maintenance + insurance + mortgage interest costs.

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A little bit of me inside dies when I hear these bad comparisons between buying, and renting badly whilst keeping your wealth in cash.

And you wouldn't even compare like for like necessarily - if you buy a house you should try to consider what your needs will be in the medium term - sufficient space, convenience for work and alternatives etc. When you rent a house you only need to consider the next year or so since if you need more space or different location after this you can rent a bigger place quite easily typically.

Edited by Si1

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6 hours ago, Darby Ram said:

I think this method is also problematic because, over the long term, cash always loses value. The comparator needs to be an asset portfolio. 100% cash is an asset portfolio, just one that will underperform over medium- to long timescales, ie the length of a mortgage term.

I've used the discount here to be the 10 year gilt (which is not cash but which is considered risk free since the government has not defaulted for a while) which is used for annuity and perpetuity pricing. We could make the model more complicated, add in inflation (which nobody can really predict) and the returns in other investment classes (which nobody can really predict). Instead of a nice bit of simple maths we'd end up with scenario analysis with varying probabilities of likelihood. 

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