Should we call off the house hunt and rent?
ON THE MOVE:The figures don’t always add up, even when the indicators suggest you should rent
I was recently discussing with a friend how difficult it has been to find and buy a house. Not a “dream” home – because we can’t afford it – but one that might, in time, and with a bit of work, come close to that ideal. The obvious solution to our search might be that annoying word compromise, but she had another idea.
“Why don’t you rent?” she said. And it made me think. After all, renting is the new buying, or so it seems.
Friends, who overbought during the boom on apartments no longer suitable for the pitter patter of tiny feet, are now letting out their properties and renting a more family-friendly house. Other friends are embracing the flexibility that renting offers, as well as the knowledge that if the heating breaks it’s not their problem.
So should we call off the house search and switch to the lettings pages instead?
Well it’s certainly something to think about. If we did, we could get a property in our target area close to schools. We could leave it with a month’s notice if another location turned out to be more convenient, if the neighbours were too noisy or if we just got fed up with the wallpaper. Property tax, bin charges and home insurance wouldn’t be a burden and the fear of negative equity wouldn’t keep us awake at night.
It’s not cheap to rent and demand for rental properties is high. But with interest rates rapidly approaching 5 per cent, nor is it particularly cheap to buy. And as I’ve said on previous occasions, supply is also constrained in the sales market.
But what is the best financial decision to make?
Well economists often come up with a figure called a “rent ratio”, which is the sale price of a house divided by the annual cost of renting an equivalent house. The higher the ratio, the more financial sense it makes to rent, rather than buy. A ratio of below 15 usually indicates that it’s a good time to buy.
So what does this statistic tell us about today’s market? We’ll look at apartments first. In Hanover Wharf, Dublin 2, near the Bord Gáis theatre, a two-bed duplex apartment sold for €280,000 in November last. Today, you can rent a two-bed apartment on nearby Hanover Dock for the princely sum of €2,000 a month. This points to a rent ratio of less than 12, indicating that provided the advertised rent is the real market rate, it may make financial sense to buy an apartment in this area. Servicing a €252,000 mortgage will cost about €1,300 a month (based on 30 years at a rate of 4.6 per cent) and even with the added costs of property tax, home insurance etc, the buy versus rent argument holds up. If you can get a mortgage of course! And provided that property prices don’t continue falling.
Now to family homes. In Malahide, north Dublin, a three-bedroom house in the Lissadel Wood development sold for €300,000 in December. You can rent a similar property now for about €1,500 a month, indicating a rent ratio of closer to 17, so the jury might be out on that one.
In the southside suburb of Blackrock, where demand is always strong, the rent ratio appears less attractive.
Last summer for example, a four-bedroom house in the Carysfort Woods development sold for €570,000 (asking price was €595,000). Today, you can rent a very similar property for €2,000 a month. So should you buy or rent? Well, this time the pendulum swings back in favour of renting, as the rent ratio is in excess of 20 at almost 24. Indeed servicing a €523,000 mortgage will set you back about €2,681 a month. And on top of this you must find money for the property tax (€1,035 a year) plus all the other costs that go along with homeownership.
Of course what the ratio doesn’t consider is that at the end of your mortgage, when, according to actuarial predictions you might still have another 20 years to live, you will own a potentially valuable asset. This is the argument that rent is “dead money”. If, for example, you had stayed renting all this time, you will still need funds to cover your monthly rent when you’re in your sixties; even though in retirement your income might have fallen dramatically. The way around this of course, would be to rent that four-bed in Blackrock for €2,000 a month, enjoy the flexibility that renting brings while at the same time saving the difference each month. If you do, then €600 a month earning 3 per cent in interest will give you a nest-egg of more than €350,000 after 30 years, thanks to the joys of compound interest. Enough to buy you a decent place in today’s market, but what about the impact of inflation? And realistically, if money isn’t going towards a mortgage, who would commit to saving that much every month over such a long-period of time?
So for now, for us, buying still makes more sense, even if the figures don’t always point in that direction.