Tuesday, Jun 27, 2006

Future looks bright for renters

Daily Reckoning: Advantages of renting over buying property

But its not all bad news for tenants. You see, weirdly, in the future, you may be financially better off renting here in the UK. No - its true! In fact, mortgage lender Abbey says that in Wales, renters are ALREADY 27,000 better off over a typical 25 year mortgage period than buyers. In Greater London, they report that tenants are 8,188 BETTER OFF than homeowners over the same period!...

Posted by Webmaster @ 11:09 AM (1533 views)
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19 Comments

1. sebastian said...

haha, it doesn't suprise me. I have so many friends who say how much cheaper it is to rent forcing me to once again spell out how they are wrong.

Not sure I fully understand though, after 25 years this person owns a house hence no more payments, how does that come into it? This calculation may be better if they worked it out over the average time a person lives in a house until death then given the difference between renting and buying.

Another major gripe I have is with people working out how much profit they have made on a house, is it me or do people always forget how much interest they have paid on the mortgage of the house??..grr

Tuesday, June 27, 2006 11:50AM Report Comment
 

2. Sloth said...

An interest only mortgage can be seen as RENTING money off a bank.

Comparing the cost of renting money off the bank or renting a property off a landlord can tell you how irrational house prices are.

Tuesday, June 27, 2006 12:01PM Report Comment
 

3. sebastian said...

When I saw a financial advisor he said "You can always rent off yourself?"...

Tuesday, June 27, 2006 12:14PM Report Comment
 

4. inbreda said...

Evidence - if it was needed - about the level of financial advice dished out by IFAs. Not independent. Not Advice. Barely financial.

Tuesday, June 27, 2006 12:40PM Report Comment
 

5. denzil said...

>>Evidence - if it was needed - about the level of financial advice dished out by IFAs. Not independent. Not Advice. Barely financial.

Good ones are few and very far between. Most of them get away with it due to financial illiteracy of most people.

Tuesday, June 27, 2006 12:47PM Report Comment
 

6. uncle chris said...

You know this whole HPC debate has given me plenty of time to think about the benefits of renting. When I first came to this site, I was minded to buy again once prices had reduced. But now I actually think renting is by far the better option, and for the following reasons.

(1) My rent for 2-bed barn conversion is 500 fully furnished, including council tax and a gardener. An interest only mortgage on a similar 'sale' property in the area would set me back around 850 before council tax. (2) If anything breaks, I call the landlord and he pays to fix it. (3) I only need contents insurance.(4) If I need to move, I can do it in 6 weeks, no EA fees, no legal fees, no stress of having to sell.(5) If anything went wrong, say losing my job, the savings in the bank would see us through the next 25 years - it's wonderful having that safety net. If we bought, that safety net would disappear. (6) At the end of the day, the government will only take it back to pay for those nursing home fees, so why bother.

So cheaper, more convenient and stress-free ..... the joys of renting.

Tuesday, June 27, 2006 12:58PM Report Comment
 

7. D'oh said...

Sebastian - I'm under the impression that after 25 years one is better off by the marginal amount stated PLUS the value of the house. Based on my calculations, in the Oxfordshire area where I am at present, the advantage to renting is significant even factoring in capital appreciation on the asset, assuming reasonable figures, and not the unsustainable growth of the past 8 years. Moreover, these calculations were based on the current mortgage rates which are incredibly low.

The difference between our rent and the interest on a mortgage required to purchase the nice three bedroom house we live in amounts to about 3500 per year. We don't have to pay the insurance, nor for repairs and maintenance, which must add at least another 1000 to that figure. Add to this the risk of a HPC or zero capital growth in such an unrealistically priced market (we ARE in a bubble and it ISN'T different this time) then the decision to rent is a no brainer.

Of course, due to taxation and the asymmetry of the cost of borrowing versus interest earned on investments, this differential may look different to someone with a significant (say 50%) deposit. (e.g. To see this asymmetry, using simple but not necessarily realistic numbers, suppose you were considering whether we or not we should BTL and expected 8% returns on a property costing 100,000. If borrowing costs 6%, then a mortgaged BTL investor would have a marginal return of 2%. If one could earn 4% on 100,000 in investments, then for the same property a BTL owned outright would earn a premium of 4%. Clearly the cash buyer would be willing to pay more for the BTL than the mortgaged BTL or, equivalently, the risked value of their income stream is more resilient to fluctuations in underlying assest value. Hmmm, didn't my grandma always say something about the rich always getting richer...)

Of course, if we owned the property we could rip that ghastly Peter Rabbit (tm) wallpaper off the walls in my study...now that I put it that way...

Tuesday, June 27, 2006 01:10PM Report Comment
 

8. bidin'matime said...

Main disadvantages of renting:-
(1) You cant upgrade parts of the property (eg a better shower etc.) or redecorate a room to suit your taste. Of course, if we were to be in the habit of long-term rental, that could all change, but I dont feel inclined to spend money on my rental house if I might move out in 6 months. In any case, the landlord might be thinking of selling before the crash, so if I do it up for him I might hasten my own departure!
(2) The landlord might decide to sell anyway, so just as I get really comfy, I get notice to quit
(3) I pay tax on the money invested to meet the rent payments, so the same lump sum doesnt get you such a nice house. In effect Gordon gets 2 bites of the cherry tax on my interest and tax on the rent I pay the landlord. In the longer term, therefore, all other things being equal, I have the choice of buying a house for x or renting a house worth x less 20% (or whatever future rate Gordon chooses to apply).

Tuesday, June 27, 2006 01:41PM Report Comment
 

9. Grinu said...

You may be worse off over a 25yr period, but you are now the proud owner of your house and need make no further payments. Surely this is cheaper than renting throughout your retirement? You could also sell the house you've bought, which effectively only cost 27k over what it would have cost to rent, but could now be worth substantially more than the 27k you've saved. Absurd.

Tuesday, June 27, 2006 01:44PM Report Comment
 

10. Tensecs said...

its the uncertainty of 2 that really bites bidin'.

Tuesday, June 27, 2006 02:03PM Report Comment
 

11. Liberal said...

Sebastian, I think the point is that at the moment, the rent you pay is roughly the same (or cheaper than) JUST THE INTEREST on a loan. To pay off the loan over 25 years you have to make additional payments - and if you are renting you can put those additional payments into a savings account. At the end of the period, the buyer has a house, and the renter has a savings account. The argument is that if house prices stay at the same level in real terms, your savings will be roughly equivalent to the value of the house. In the event of an HPC, your savings will be worth a good deal more.

Tuesday, June 27, 2006 02:31PM Report Comment
 

12. inbreda said...

Terrible analysis Bidin.

(1) The landlord does it. You ask him to redecorate or to pay for materials. If he says no you move out and he can pay the mortgage on his own.
(2)Fair point, and made worse by speculation and a boom/bust market. Helps nobody and should be stopped at the outset. Too late for that though.
(3) As a renter you don't pay tax twice, as you imply, but once. The chancellor gets two bites of thecherry by taxing the renter AND the landlord. An important difference because it actually suggests that BTL is not sensible rather than renting. As for "...doesn't get you such a nice house..." that simply isn't true in todays market as many BTL idiots are not getting the revenue to cover the mortgage, but are actually holding out for hte capital gains alone.

Tuesday, June 27, 2006 03:47PM Report Comment
 

13. tyrellcorporation said...

A (typical) couple in there 60's who bought a 3 bed house off-plan and have had it empty for 3 years in my home town in Somerset have finally come down from Surrey and put it on the market. My brother has been watching this house (as he lives a couple of doors up the road) and said to me they visited it twice a year for a weekend at a time just to check it hadn't been burnt down or something.

Is it significan't that they have finally put it on the market after rumblings that Councils will be able to grab properties that are left empty for long periods and fill them with asylum seekers or drug addicts?

These sh*ts obviously had no intention of moving to Somerset and are part of the speculation disease which has swept the UK. I can only hope they get no interest in it...

...A very bitter Tyrell!!!

Tuesday, June 27, 2006 04:11PM Report Comment
 

14. Retiredbanker said...

uncle chris-

A very level-headed assessment of the benefits of renting. Nothing in this life can really be "owned", and even if you
buy a property, a few years down the road somebody else will "own" it and you will be just a name on the deeds.

I have observed that vicars and others employed by the C of E will often have a large house and garden, very
frequently idyllically situated, no maintenance bills , and all for a very nominal rent. (Yes I do have several family
connections with both the C of E and Methodist Church.)

Admittedly they lose this benefit once they retire, and will have to live in a more modest dwelling, but many people
who have bought properties choose to trade-down once they have stopped working.

Property ownership is all in the mind, and people in other countries such as Germany seem quite happy to rent.

Tuesday, June 27, 2006 05:08PM Report Comment
 

15. inbreda said...

Tyrell - I suggest you put an offer in on the house. Perhaps 60% of the asking price? Nothing wrong with putting the fear of the HPC God into them, just so they know their actions won't have made them any new friends!!

Tuesday, June 27, 2006 05:48PM Report Comment
 

16. bidin'matime said...

There is no doubt that home ownership has been better for me over the last 25+ years than renting, whether just financially or taking the other factors into consideration. But this is mainly due to the recent price bubble and the fact that, this time, I sold before prices could plummet again.

However, I have to pull rank on the tax point (I made most of the money to buy my house by giving, or should I say selling, tax advice ..). If the cost of renting is the same as the cost of borrowing the money to buy, then as someone else has pointed out, you have still got to put some by to build up the capital (or pay off the capital if you are buying) so that, when you retire, you no longer have anything to pay. The lifelong renter then has a pot of cash, whilst the purchaser has the equity in their house.

However, if all other factors are equal, the pot of cash does not match the value of the house because the government has taken 20% (40% for higher rate tax payers) of the annual increase in value of the cash (off the renter), but not of the house (off the owner).

Then both people retire and the renter pays his rent from the return on his remaining cash, but the chancellor still wants his cut. So if he rents a place where the landlord wants, say, a 4% return to beat what he could get in the building society, a house worth 100k (its late - lets keep the number easy..) will have a rent of 4k pa. So if he pays tax at 20%, he needs to earn 5k gross interest to be left with 4k after tax. So if the building society are offering only 4% gross, he needs to invest 125k to produce enough net income to pay the rent.

So even at this stage hed be better off buying the house off the landlord!

So why am I renting? Because I am content to live in a more modest house for the time being until prices fall, at which time I will be able to buy an even nicer house and / or improve my chances of a comfortable retirement.

Tuesday, June 27, 2006 10:58PM Report Comment
 

17. Ozz222 said...

I've done all the sums and I reckon I will but much better off renting than buying at the moment. My rent is approx 100 / month cheaper. This goes straight into an index tracker (savings accounts will not grow your money sufficiently to give you a decent lump after 25 years). This should be worth in the region of 250K in 25 years. Never forget, stock market returns annihilate property over the long term, thats where you can make proper money. I won't be touching property for a good few years.

Wednesday, June 28, 2006 01:36PM Report Comment
 

18. inbreda said...

Bidin - once again I have to disagree. You say that the renter pays tax on the money he saves. What you fail to realise is that an owner also pays tax on the money before using it to pay off some of the capital. The only real difference is that the renter has to pay tax on the INTEREST he earns on his cash. However, this interest will compound.

Arguably, after 25 years, the renter could have enough money to buy outright and therefore still own but without ever having been in debt.

Of course it all depends on the direction of prices. But I think we all agree that if you are going to gamble on house prices, now would seem to be a good time to STR.

Wednesday, June 28, 2006 03:13PM Report Comment
 

19. Sloth said...

inbreda,

I can't see a reason for the growth in housing prices to be greater than growth in the economy long term.

Wednesday, June 28, 2006 03:22PM Report Comment
 

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