Up and down the property ladder
A generation of people now have very different views from their parents about property. In recent years they have chosen – or been forced – to rent for longer. It is usually a more expensive choice
THIS WEEK the Economic and Social Research Institute found that nearly half of us who rent accommodation could afford to buy somewhere to live. On that evidence, renting, once viewed as the preserve of students and those seeking stopgap accommodation, is now a proactive choice for people who are cautious about buying given uncertain job prospects and the potential for negative equity.
But in the UK this week Barclays calculated that owning a property is £200,000 cheaper than a lifetime – 50 years – of renting, on average.
So how does the reality of renting live up to the image, and is it better to buy?
Angela Keegan, the managing director of MyHome.ie, is seeing a shift in behaviour. “Over the last few years we’ve seen people renting for longer. The other thing we’ve noticed is people making a lifestyle choice to rent. Lots of young professionals would have seen older siblings get burned at the top end of the market, so they’re renting property instead.”
For Keegan the whole notion of the property ladder has changed. “A few years ago we were talking about the rush to get on to the property ladder. Right now that doesn’t necessarily mean owning a house. It means living in an area where they want to live in, living a lifestyle they want.”
Ronan Lyons, an economist at Daft.ie, has a calculator on his website for working out the cost of renting a property versus buying it. Using an average house price, an average rent, an average mortgage interest rate and normal fluctuations in the rental market, he calculates that renting a property in Ireland over 30 years would at present cost an average of €90,000 more than buying it would.
“Let’s take an average house price of €160,000,” he says. “The rent on that is probably going to be about €800 a month. If you’re talking about someone who had a 10 per cent deposit and we go for a 30-year mortgage, I’m expecting the average interest rate of a mortgage to be 6 per cent, so the mortgage repayment is going to be €865 a month.”
As rent and house prices typically rise by 2 per cent each year – outside of bubbles and busts – 12 annual mortgage repayments over 30 years will cost €300,000 on a €160,000 property, and the property might then be worth about €290,000.
Paying €800 in rent 12 times a year on that property for 30 years, allowing for 2 per cent rent inflation, would mean the renter would have paid €390,000.
“If you were going further up the scale, looking at south Co Dublin, something that was €800,000 and the rent €2,000 a month, you’d find the mortgage repayment was €4,000 a month and the rent was €2,000 a month,” Lyons says.
“It that case it makes more sense to rent than to buy. But for the average house there’s only a small gap between paying rent and paying a mortgage.
Lyons says that in order to make smart decisions, buyers need to pay attention not to house prices but to rents. “The fire sales that Allsop do in the Shelbourne, they’ll look at the rent ratio,” he says. “So if something’s getting €10,000 a year in rent, then they’d say, ‘I’ll give you a €100,000 for it.’ Trying to get first-time buyers to think on the same terms is important, because then they’re much less likely to make mistakes buying.”
Keegan says a new group of renters, particularly young professionals, are making lifestyle decisions based on location and services over owning property. “There has certainly been a change in one pattern, which was buying and commuting. People are appreciating amenities and local communities, and the affordability of renting property in cities has brought people back in.”