The great debate: Buy Vs Rent

Stop dithering, and wasting money on rent, and pick up a cheap home while you can, says CONOR POPE. No, replies EDEL MORGAN, keep your hands in your pockets and wait until the market hits bottom

CONOR POPE

There are a lot of very scared people out there now. No one knows where the economy is going or where we are going to be in 12 months’ time, never mind 12 years. Whenever a chink of light appears on the horizon, the ratings agencies, bond markets and prophets of doom extinguish it.

When it comes to property, the future is even more uncertain and the gloom more oppressive. Anyone who tells you they know for sure which way the market is going is lying. People with money to spend on property are terrified of taking the plunge in case the mythical “bottom of the market” has yet to be reached. So they rent, struggle to put down roots and line the pockets of landlords who are, admittedly, most likely on their uppers. But the fear and the gloom is not helping anyone and people need to get on with the rest of their lives and to stop trying to second guess the market. It is very easy to get hung up on house prices – look how many of us did during the boom years. When you strip aside everything else, however, the value of a property to you as a homeowner is more important than the price placed on it by the market.

That is not to say the problem of negative equity is not grave. It is very, very serious but those who are really suffering are those who bought at the height of the market with 100 per cent mortgages. They have now seen the value of their properties fall by 60 per cent and more. This is not going to happen to the buyers of today and tomorrow.

Someone who buys a property today, a house they can see themselves living in for the long term, does not need to be overly concerned about whether the value of their house will fall by a further 10 or 15 per cent over the next two years. As long as they can afford the mortgage and want to live in the house they are all set. The new house will cost them less than half the amount it would have at the height of the boom, interest rates are still low and unlikely to rise much more over the next year and the old line still holds true: rent paid is dead money.

Each year a person rents an average three-bedroom house in Dublin costs them about €14,400. Spread that over 30 years and a perennial renter will spend €432,000. You could buy a pretty fine house these days for that, now couldn’t you?

If you have a deposit and the means to pay a mortgage and you find a house you want to live in you would be foolish not to just do it.

EDEL MORGAN

It strikes me as a little flippant to say people should get on with their lives and stop waiting for the mythical bottom of the market. The fact is prices are still falling and anyone who takes the plunge now risks landing in negative equity. The people who bought at the height of the market with 100 per cent mortgages are not the only ones who are really suffering. They are in the most serious trouble, but as prices continue to fall, there are plenty of others who bought before the peak with decent deposits but who are now in enough negative equity for it to seriously affect their lives.

Renting is the safest option until the market settles and while it might be “dead money”, there’s nothing so moribund as a good portion of the money pumped into a mortgage that’s in negative equity. You might have that warm, cosy feeling that the property is yours, but unless you are a cash buyer, that property will ultimately cost you far more than the purchase price. A €250,000 house bought now with an 92 per cent mortgage over 25 years at 4.5 per cent interest will ultimately cost €416,874.

It’s true that those who buy today are unlikely to see the value of their property plummet to the same degree but the market became so inflated during the boom that now the bubble has burst there’s no way of knowing how far prices will fall. Prices are back at pre-2002 levels. What if they drop to 1999 prices when the average house in Dublin was £130,000 (€165,000)? What seems like a great bargain now might not in a year’s time.

You might start with the view that value of a property is more important than the price placed on it by the market and it doesn’t matter if the value falls as long as you intend to stay there, but a person’s circumstances can change. Seeing the value of a property fall by 10-15 per in two years might not sound much if you say it quickly but it could be enough to have an effect on your life choices if you outgrow a property.

I know a family who didn’t succumb to pressure to get on the ladder during the boom and are now in prime position to buy. They lived abroad for a number of years and had a different attitude to renting than most Irish people, feeling it gave them a certain freedom. They’ve watched their savings grow while also watching house prices fall and have been lucky enough to live in a property and a location they wouldn’t have been able to afford to buy in – until now. They are not immune to the urge to put down roots and always intended to buy. When they do, they won’t spend hours stressing over all the money they’ve lost on rent.

When they decide to get on the ladder, it will be for a bigger house in their ideal location at a price that won’t affect their quality of life. No compromises. Who wouldn’t love to be in their position now?

CONOR POPE

I have been at both the Allsop Space fire sales of distressed property this year and will most likely go to the next one next month. All told nearly 300 houses and apartments will have gone under the hammer at these three auctions. Along with many other people, I stood slack-jawed as penthouse apartments in nice parts of Dublin went for 70 per cent less than they would have at the peak of the property boom. Large family homes in leafy south Dublin suburbs were sold for less than €300,000. Are you seriously telling me that the buyers did not snag bargains? Areas that were out of the reach of all but the very affluent just five years ago, in such places as Ranelagh and Donnybrook, are now within the grasp of many young professionals. They should not be scared out of making purchases because of ongoing volatility in the market.

You talk of this family that watched their savings grow. How did they do this? Very few people have been able to work out how to make the spare money they have work for them. Let’s say a renter has built up savings, enough to cover a 25 per cent deposit on a house in an area they would like to live. Would they not be better off taking the plunge rather than investing in the stock market or leaving the money in a low-interest bank account where it will be chipped away by inflation?

Whatever you say about a house or a piece of land, it is tangible and is not going to disappear in a couple of weeks of frenzied trading like many of the country’s bank’s shares. If you have cash put aside or are a blue-chip buyer in the eyes of our broken banks, you can get excellent deals.

EDEL MORGAN

True, there are bargains out there but are they only bargains when compared to peak prices? We need to stop measuring everything against the peak of the market because we are in a very different place now. The first Allsop Space auctions proved there are people out there with money, but we knew that already. They are not necessarily the people who will be having a “Will I rent or buy” dilemma. A high percentage of the buyers were investors with cash. As for places in Ranelagh and Donnybrook being in the reach of young professionals, that is true, but unless they have fantastic savings or rich parents, buying will depend on their ability to get a mortgage in a climate where banks are turning people away in their droves.

As for the family – I didn’t pry into their saving habits – except that I know that they are lucky enough to have savings. They are not alone, anecdotally there are a lot of families playing the wait-and-see game. While rents are strong at the moment, you can pay €1,500 to €2,000 or more for a four-bedroom semi-detached house and the demand means it’s not easy to find good houses to rent in locations with good transport links near schools. These families are taking a breather from the market and the upside is that, as long as they are renting, they don’t have to worry about improving the property and, if the boiler breaks down, it’s someone else’s problem.

Would they be better off taking the plunge? It’s a difficult one to answer as none of us really know how much further prices have to fall. If we’re still comparing current prices to what they were at the peak of the market, we’re in the wrong mindset and it’s probably a good idea to take a step back and assess how the market is developing.

It’s true that a house or a piece of land is a more tangible investment than stocks and shares but property can be a huge drain on time and resources. Quality of life is also important and if renting buys a person time while they make the most important decision of their life, then isn’t it a good option?