Is rent dead money?

mikemac

Calina wrote: »

You can choose who you live with if you rent too. If you have to share when you buy then realistically you've lost one of the key advantages of buying ie not having to share.

Buying a house and then taking in a lodger to help with the mortgage is kinda pointless imo.
I've spent years renting with strangers and if I ever buy a house on my own I hope I don't need a lodger.

I didn't come up with this quote but it's relevent.
If Bus Eireann bring you to work every day for 30 years you don't get a bus after 30 years. You paid a price for a service and rent is the very same.

I agree with others who posted that the OP paying €500 a month for rent isn't dead money and they should be saving some money every month.
However, someone paying €1500 for a swanky apartment when they are older or the mortgage payments are less will need to do some investigating and look at their options

dumbyearbook

starky wrote: »

Average hose price is what 350 400? In Dublin? Work out how much that would cost you over the space of 40 years! Way more then 500 in rent.

Average house prices in Dublin are around 400K, a 100% mortage for 420K over 25 years is about 2,400 per month.

total payable is about 720K.

(I havent checked these numbers by the way but they are near enough)

Colonel Sanders

dumbyearbook wrote: »

Average house prices in Dublin are around 400K, a 100% mortage for 420K over 30 years is about 2,400 per month.

total payable is about 640K which seems alot but your banking as is said above that in 15 years maybe the place will be worth 500K or whatever and could be sold, would'nt be too bad? Its all a chance too I suppose.

(I havent checked these numbers by the way but they are near enough)

I make 420k over 30 years to be €2,226 a month (using 5% APR, possibly a little on the low side for a 1st time buyer taking out a 100% mortgage). You pay back just over 800k over the course of the 30 year term assuming the APR remains constant

fricatus

Rent is dead money. Only the deposit isn't.

I've been reading this thread, with all the arguments about lost opportunity costs of not having the marginal amount a mortgage costs you, and negative equity, and choice, and an old-fashioned generational mindset and so on and so forth.

The fact is that when you take a mortgage out, you are crippled in the early stages, and it's generally more expensive than renting. However, that's only relevant if you're in the market for a quick buck, and I for one am not. I intend to live in my house for the rest of my days (I may move, but I'll be taking any accumulated equity with me).

You can give me all the arguments in the world about the short term, and fine, they trump mine. However, the only thing that matters in the short term is that you can afford the payments.

As time goes on, an individual will typically earn more each year, since most jobs award pay increases at or above the rate of inflation. However, assuming you stay in the same house, your mortgage will never go up. Granted it will fluctuate within a certain band along with interest-rate movements, but it will fall year-on-year as a percentage of your income, until it's almost negligible.

Take as an example, the parents of a friend of mine. In 1972 they took out a mortgage of about £3,000. The monthly repayments were about £17, which had the two of them saving every penny. By the time the term of the mortgage ended in 2002, the repayments would still have been about €22 or so per month (this on an asset worth €400,000 or so). However, my friend's father walked into the bank one day in early 2000 and asked if he could just pay off the rest of the mortgage. I don't recall the figure, but he could almost do so out of what he had in his ATM account.

Imagine if they were still renting...

punchestown

fricatus wrote: »

Rent is dead money. Only the deposit isn't.

I've been reading this thread, with all the arguments about lost opportunity costs of not having the marginal amount a mortgage costs you, and negative equity, and choice, and an old-fashioned generational mindset and so on and so forth.

The fact is that when you take a mortgage out, you are crippled in the early stages, and it's generally more expensive than renting. However, that's only relevant if you're in the market for a quick buck, and I for one am not. I intend to live in my house for the rest of my days (I may move, but I'll be taking any accumulated equity with me).

You can give me all the arguments in the world about the short term, and fine, they trump mine. However, the only thing that matters in the short term is that you can afford the payments.

As time goes on, an individual will typically earn more each year, since most jobs award pay increases at or above the rate of inflation. However, assuming you stay in the same house, your mortgage will never go up. Granted it will fluctuate within a certain band along with interest-rate movements, but it will fall year-on-year as a percentage of your income, until it's almost negligible.

Take as an example, the parents of a friend of mine. In 1972 they took out a mortgage of about £3,000. The monthly repayments were about £17, which had the two of them saving every penny. By the time the term of the mortgage ended in 2002, the repayments would still have been about €22 or so per month (this on an asset worth €400,000 or so). However, my friend's father walked into the bank one day in early 2000 and asked if he could just pay off the rest of the mortgage. I don't recall the figure, but he could almost do so out of what he had in his ATM account.

Imagine if they were still renting...

If I bought shares in Paddy Power plc. on 03rd Jan 2001, I would have paid €2.98 a share. If I held onto them until 13th November 2007 (aside from div. payments) I could have sold them for €27.25. That would have been a near ten fold increase on my investment. (like your friends parents original investment on their home) Is the person buying those shares on the 13th Nov 2007 going to see the same return on their investment as I did on my original purchase? Your logic dictates that they will because in an open market, prices will rise. At close of trading today, they were quoted at €18.80. That would be loss of about 33% (similiar to current housing market)
Imagine if the buyer had kept his capital in a high interest yield account, he would see about a 6% return on his investment as opposed to such a loss with the share buy. The housing market is flooded with geniuses following the same principles of investing in property because their own home saw such a return on the original price all those years ago. they are under the illusion that house prices must rise, rise, rise but there can be no givens in any such market.

antoinolachtnai

Saving in a bank account is just not tax-efficient. If you get 6 percent tax, 1.5 points of that is retained as tax. So your compound growth is much lower.

There is also no tax when you sell your house.

There are tax benefits to owning your own home and these are not insignificant.

revan23

didnt really read the full thread and this may be a bit simplistic, but if you go on holiday you don't buy a hotel... so if you want to live somewhere you don't have to buy a house. especially as house prices here are the wrong side of ridiculous. it's not dead money by any means.

DublinWriter

revan23 wrote: »

didnt really read the full thread and this may be a bit simplistic, but if you go on holiday you don't buy a hotel... so if you want to live somewhere you don't have to buy a house.

You're not comparing like with like.

The short-termism I see in people's thinking here astounds me.

For example, the whole argument about buying last year and losing shed loads of money while notable, is largely bogus when you look at the potential worth of your house in 25/30 years time.

All markets go through troughs and spikes and the residential property market is no different. However, graph the residential property market and you'll see that over the long term, or at least in any given 10 year time window, it always appreciates in value.

DublinWriter

Pa ElGrande wrote: »

For argument's sake you pay €500 in rent today, if you were to buy the place with a mortgage how much would it cost you - let's say €1200 a month for argument sake.

Just €500 in rent today? Where exactly are you talking about?

blah

DublinWriter wrote: »

Just €500 in rent today? Where exactly are you talking about?

Realistically I think the €500 gets you a room in a shared house, while the €1200 gets you full ownership of a property. (How big or where I don't know, any suggestions?)

I'm happy to live in London here for a few years, renting a room and saving a nice chunk. And in a while I may move out and live in a small apartment with my girlfriend. And then a while after that I might travel, or spend a year in Europe or Australia or where ever. And for the price I'm paying to put a roof over my head in each of those instances, I think I'm getting a pretty good deal. I can live in a nice enough place, meet some interesting people and see some interesting places. And when I'm done, I will have a nice chunk saved up to buy a house in Ireland for a possibly reasonable price. Hopefully I won't consider the rent I've paid over the previous years to be dead money.

Someone might suggest that I could have bought a place and rented it before leaving Ireland. But I'd probably be using my own money to make up the shortfall between rent and mortgage, and I'd be relying on friends or family to look after the place and handle the tenants for me. Not worth the hassle.

And I still think that the arguments that "renting is not dead money" still apply for someone who isn't moving around outside of Ireland like me, especially in the next few years.

Colonel Sanders

DublinWriter wrote: »

You're not comparing like with like.

The short-termism I see in people's thinking here astounds me.

For example, the whole argument about buying last year and losing shed loads of money while notable, is largely bogus when you look at the potential worth of your house in 25/30 years time.

All markets go through troughs and spikes and the residential property market is no different. However, graph the residential property market and you'll see that over the long term, or at least in any given 10 year time window, it always appreciates in value.

the long term is simply a series of short terms.

Over 30 years its unlikely a property will decrease in value but in a shaky market (such as ours is now) timing can be crucial (actually ignore that, timing is crucial in any market whether its a bull or bear market). The Paddy Power share price example was very appropriate. Over 30 years you will surely see an increase in the value of your home, no argument there. However if you time you're entry into the market correctly the returns will be higher and monthly mortgage payments lower.

Look at the development in Wicklow where prices dropped by 100k (can't remember the name of it). People who bought before the drop will surely be sitting on an asset worth more than they paid for it in 30 years time. However if anyone bought after the price drop they'll be sitting on an extra 100k profit and will have saved a substancial amount over the term of their mortgage (about 150k between interest and capital repayments would be a very conservative guess off the top of my head).

Btw I pay 400 a month for a room in a shared house in Dublin. Very happy here, close to work/city center/most major public transport links etc

Afuera

DublinWriter wrote: »

All markets go through troughs and spikes and the residential property market is no different. However, graph the residential property market and you'll see that over the long term, or at least in any given 10 year time window, it always appreciates in value.

The problem with property DublinWriter is that it typically has very long cycles. It could be in a trough for 20 odd years. It could spike for 10-15 years. It doesn't really make much difference to a person if the property is worth more over a hundred year period. It's not much fun being a property owner if you've been underwater for most of your working life just for that pleasure. It certainly limits your options anyway.

Afuera

DublinWriter, a quick question for you...

If someone was willing to offer you a permanent lease, until the day you die, to rent a property for EUR 2 per month, would you consider that dead money?

How about if they offered you the same offer for EUR 200 per month?

At what stage does it become dead money to you, or do you think it is always dead money to rent?

Calina

DublinWriter wrote: »

You're not comparing like with like.

The short-termism I see in people's thinking here astounds me.

For example, the whole argument about buying last year and losing shed loads of money while notable, is largely bogus when you look at the potential worth of your house in 25/30 years time.

All markets go through troughs and spikes and the residential property market is no different. However, graph the residential property market and you'll see that over the long term, or at least in any given 10 year time window, it always appreciates in value.

Historically, property has tracked inflation. The only long term study on the subject covered 300 years and it concluded that property tracked inflation. In the event of housing bubbles incidentally, property value downturns can last well over ten years. Japan, if I am not mistake, is still in the doldrums. Ten years, in property terms, is not the long term, it's the short term.

The problem is that you are missing a key feature of the property market in Ireland at the moment. Many FTBs are not buying property for the long term; they have been buying with a requirement to trade up in a number of years time, very often two or three max. As a result, short term movements in the market are critically important to them. If they were buying with a thirty year vision, then yes, you are right, the long term is worth looking at. Starter homes in the Dublin area, the one and two bedroomed apartments, are not viable long term homes because they are too small.

Values on starter homes in my estate are down 15% in the past twelve months.

That 15% means that unless the mortgagee had a substantial deposit and agressively paid off their mortgage principle, they will have difficulty in trading up unless they have additional funds to put into a trade up. As mortgage repayments have risen considerably over the past few years because of a disproportionate rise in interest rates (the difference between3% and 4% rates is disproportionately greater than the difference between 7% and 8%, for example, and the mortgage principles are at an historical high), people's capacity to save is somewhat more limited. Salary inflation, particularly in the private sector, is rumoured to be less than stellar.

It is important when buying a home for the long term that it is for the long term. In Dublin - in particular - this has not been the case because of the ladder mentality. Before yammering on about the long term and the short termism, you might pay attention to the kind of property concerned. In many cases, the property concerned is not a long term proposition and therefore common sense would dictate that short term factors such as the comparison of rent and mortgage interest would have a role to play also.

gurramok

fricatus wrote: »

Take as an example, the parents of a friend of mine. In 1972 they took out a mortgage of about £3,000. The monthly repayments were about £17, which had the two of them saving every penny. By the time the term of the mortgage ended in 2002, the repayments would still have been about €22 or so per month (this on an asset worth €400,000 or so). However, my friend's father walked into the bank one day in early 2000 and asked if he could just pay off the rest of the mortgage. I don't recall the figure, but he could almost do so out of what he had in his ATM account.

Imagine if they were still renting...

You've forgotten somehting. Inflation from 1972 to late 80's was at times hitting 20% hence that mortgage payment fixed at 17euro was a good idea.

However, inflation is mandated to be 2% p.a. in the eurozone we are part of so a mortgage payment of €1000+ will still be a chunk of a mortgage in 30 yrs time, just deflate it by 2%pa to get your figure of worth.

Of course if inflation hit upward to 20% again in next 30 yrs(who knows!), you can be right in that scenario

OTK

DublinWriter wrote: »

However, graph the residential property market and you'll see that over the long term, or at least in any given 10 year time window, it always appreciates in value.

Have you done this? From 1980-1989 Irish house prices declined 1.5% pa in real terms. As Calina has pointed out, long term analysis of house prices plotted against inflation show that prices approximately track inflation in the long term

The idea that high inflation will erode a mortgage is lovely so long as you can forget the 18%+ central bank interest rates in Ireland in the 1980s that went hand in hand wigth inflation.

Irish house prices since 1970 available from the DoEHLG
Inflation data from the CSO

fasty

Rent isn't dead money to me. I'm a few years away from buying a house of my own in an area I want and can afford. I'm saving away for it at the moment.

In the meantime, renting is fine, it's not dead money, it's the price of independance from mammy and daddy who deserve time to themselves!

dumbyearbook

Colonel Sanders wrote: »

I make 420k over 30 years to be €2,226 a month (using 5% APR, possibly a little on the low side for a 1st time buyer taking out a 100% mortgage). You pay back just over 800k over the course of the 30 year term assuming the APR remains constant

its over 25 years you managed to quote me in the two minutes it took me to edit it!

Its not a first time buyer mortage as i said the numbers are'nt exact they'lll change with interest rates anyway but over the 25 yrs its around 720 or so

Blisterman

If you're to buy a 400k house today, and it loses 10% of its value over the next 2 years, as conservative predictions say.
That's more or less 40k, you've lost. Much less than the cost of rent.
It's madness to buy a house now. Wait until the markets are more stable.

Rent isn't dead money if:
* You cannot afford to buy a property in an area in which you want to live.
* You don't intend to stay in a property you buy for very long, and are buying with the intent of making a quick buck.

Personally, my mortgage is around 100 euro more a month than rent on this house would be. So in my case, I'd rather pay interest on what will eventually be mine than rent.

However that's not the case with every buyer, every situation is different.

johnnyskeleton

OTK wrote: »

Interest on a house loan is not dead money. It is a fee you pay to take a bet on the movement of your leveraged investment. You can win or lose big.

For investors perhaps, but for homebuyers, interest is the cost of living in a place. If you can't afford that price, and /or you have no provision for things going wrong, the amount of debt you can get into is not funny, and when you look at the total cost of buying a house and selling below the cost of arrears, lost equity and legal fees, that's the real dead money, rent looks a lot sprightlier from that position.

Thats assuming you were referring to my post. Sorry if I got the wrong end of the stick.

johnnyskeleton

fricatus wrote: »

You can give me all the arguments in the world about the short term, and fine, they trump mine. However, the only thing that matters in the short term is that you can afford the payments.

DublinWriter wrote: »

The short-termism I see in people's thinking here astounds me.

For example, the whole argument about buying last year and losing shed loads of money while notable, is largely bogus when you look at the potential worth of your house in 25/30 years time.

The argument about the short term is not about the price of the house, it's about what happens if there is a change in your circumstances or if you decide to up stakes and move on. Renting is ideal if you can't/don't want to shoulder the enormous risk of taking on a loan for several hundred thousand euro. People have always said this, but never really believed it until the end of the good times.

SimpleSam06

A lot depends on the environment home buyers find themselves in. For example, right now, mortgage payments and interest payments may be good money well spent, but if you wait a year you might be paying 50k-100k less over the lifetime of the mortgage. Wait three years, and you might save twice as much.

The question isn't one of "is rent dead money", the question is how much can you save and how much of a better quality of life you can enjoy by holding on a few years.

Renting long term in Ireland isn't an option for most people, but I would definetely advise anyone thinking of buying at the moment to hold off on it for maybe 3 to 5 years. Regardless of your attitude to renting, you will save six figures for the price of a little patience. And you'll have less to pay off because you've saved more in the meantime.