Mathematics of house buying

Cantab.

Ok, there are lots of topics on property prices, but I thought I'd get a slightly different angle with some calculations!

Buying vs. Renting

Buying
3 bed semi-D in Swords: €420,000
-35 year mortgage @ 5%: 35 years x 12 months x €2,119 per month = €889,980
-Legal fees: €10,000
-Stamp duty: €31,500 @ 7.5%
__________________________________
Total money paid out = €889,980 + €10,000 + €31,500 = €931,480

Of course one must adjust the €420,000 cost of the house upwards for inflation (say an ambitously generous 3% over the 35 years). Assuming this level of inflation, this house will cost €1.181m in 2041.

Therefore, net profit from house purchase (assuming 5% interest rate and 3% inflation) is: 1.181m - 931,480 = €250k.

Renting
3 bed semi-D in Swords
- 35 years of renting @ 1,300 per month = €546,000
- adjust the above for 3% rent increase per annum due to inflation = €971,504.73 paid out in rent over 35 years in actuality.

Results
Money paid out from buying = €931,480
Money paid out from renting = €971,504.73

Money made from buying = €250,000 + a house worth €1.181m
Money made from renting = €0

Conclusion
One could say that you'll save a fortune in the long run by buying.

Addendum
Of course if interest rates are twiddled upwards and inflation is twiddled downwards, the differential between renting and buying is changed considerably.

Or maybe the above calculations are flawed??? I'd like to know what people think? It's all very back-of-an-envelope stuff and I'm not claiming to be a financial analyst.

kittenkiller

Of course if inflation decreases it's very likely that unemployment'll increase so the chances of anyone buying a house and being able to afford mortgage repayments are slim.

Better off buying down in bogland for €300k, somewhere that'll probably be considered practically Dublin by the time you've paid for half of your house & thus the value will have increased in real terms by probably 30-40% at least.
(3 bedroomed semi-d in trim with garden, €210k)

utopian

Cantab. wrote:

-35 year mortgage @ 5%: 35 years x 12 months x €2,119 per month = €889,980
....
- 35 years of renting @ 1,300 per month = €546,000

And what do they do with the additional 819 yoyos in their pocket? Stuff it in a mattress?

ronbyrne2005

theres several flaws in your calculations. i prefer to look at a monthly saving basis for the 35 year period.
if you can save 900 euro a month (remember owning a house costs more in terms of insurance and maintence of a few thousand a year) and invest this after 35 years you will have an investment worth as much or more than the house but more diversified,plus if you invest it in apension for those 35 years you get massive tax benefits.

Cantab.

utopian wrote:

And what do they do with the additional 819 yoyos in their pocket? Stuff it in a mattress?

Whoops! Major blunder...

Ok well it'll be more than $819 per month when you consider wage inflation at ~3% + 3% from the bank.

I calculate that you would have about 100k after 35 years...

Andrew Duffy

Cantab. wrote:

Whoops! Major blunder...

Ok well it'll be more than $819 per month when you consider wage inflation at ~3% + 3% from the bank.

I calculate that you would have about 100k after 35 years...

Huh? At 0% (i.e., mattress) it's abut 330K after 35 years.

utopian

Also, have you included mortgage interest relief?

stepbar

Your calculations maybe correct but the concept is totally flawed. We are probably one of the more indebted nations in the world. The property market is dependant on access to cheap borrowed money and Interest rates are rising Its a fallacy to think that people are going to be able to continue borrowing at the rate they are doing so at the minute. Once the interest rates rise the amount of potential new homeowners with the ability to borrow a sufficent amount of money dries up and so what happens is market contraction i.e the bubble bursts!

Irresponcible lending and the greed of banks and people in general in the past few years has us in the suitation we are faced with now. If any one seen the Sunday Business Post this week you would have seen that the banks are tightening up on lending, with most banks only going as far as 6 times earnings on mortgage lending. And the good thing for the banks is that if the property market goes belly up, these borrowers will still be able to meet their morgage repayments because of the lower morgage to earnings ratio. Very smart..... Banks win again.

Even the banks are getting out of the "property" market, they know the market is at its peak and theyve seen the opportunity to cash their chips. Finally, dont bet on your house in swords being worth a mil in 35 yrs time, cause it aint goin to happen. Simple supply and demand economics would tell you that.

Cantab.

Andrew Duffy wrote:

Huh? At 0% (i.e., mattress) it's abut 330K after 35 years.

Sorry, majar blunder - you're dead right - €819 a month over 35 years is about €1,160,891.88 when you consider wage inflation (at the same rate as above) and bank interest of 3%.

p.s. I've edited original post to reflect this...

Victor

You need to factor in quite a few things. Maintainence, insurance, decoration, etc. Taxation. And I suspect you need to convert all the money to nett present value. #100 in 35 years time will only be worth fraction of #100 now.

JimmySmith

Also dont forget to factor in that you can rent 2 rooms in that house for as long as you want. Also adjust the rental income for inflation and any tax you may have to pay on the profit (if any).

Also, when you own property you can avail of loans at significantly lower interest rates (mortgage style rates) should you need them. When renting you must pay a much higher interest rate on any loans you get in future (cars, holidays, getting married and all that stuff).

fintan

What condition will that house be in 35 years time? It could need a lot of money spent on it.

Also you are comparing a risk-free return on the money saved by the renter compared to the non risk free return on the property price appreciation.

JimmySmith

fintan wrote:

What condition will that house be in 35 years time? It could need a lot of money spent on it.

Also you are comparing a risk-free return on the money saved by the renter compared to the non risk free return on the property price appreciation.

The condition is up to how the owner looks after their house. This can be expensive or inexpensive mainenance. Its up to the owner to do it correctly to save money.

Renting is not risk free either.

I'm not saying one is better than the other, just trying to cover all the bases between us for the OPs calculations.

I personally like where i live. I may be worse or better off than when i was renting but i much prefer living in my own house. Its important for me that the sprogs grow up in their own home and not have to move away from their friends accross the road etc at the whim of a landlord. You cant put a price on that for me. At the end of the day, whichever works out more expensive its a lifestyle choice, which people forget. I loved renting 5 years ago when i could just up and move to another apartment, but i have different priorities now.

fintan

Hi Jimmy

the OP linked to a house in swords that looks about 10 to 15 years old, plus another 35 years gives a realistic assumption that work will need to be done to the house of some sort.

Renting is not risk free (but it is less riskier than buying, but renting does have other draw backs), what I was saying that the cash the renter has sitting in the bank is earning the "risk free rate of return" or interest. Where as the eprson who has bought a house is earning "a risk adjusted rate of return", as house prices can go up as well down.

You are right however that buying a property is as much a lifestyle choice and for the majority of people, the economics of buying a family is irrelevant as we all want somewhere to raise a family.