Renters who buy – even at elevated prices – will see their housing costs plunge

It’s one thing paying far more for a house than you would like to due to rising house prices; it’s quite another, however, not even being able to do this, despite the fact you’re paying so much on rent, you could potentially make the mortgage repayments twice over.

Yes, as a report from the Residential Tenancies Board published on Wednesday shows, rent continues to eat up a substantial chunk of tenants’ take-home pay.

On average, tenants who responded to the report were spending 36 per cent of their net income on rent, which is not too far off the level recommended by financial advisers that about 30-35 per cent of after-tax income should go on housing costs.

Some, however, are paying significantly more. In Dublin, for example, two-thirds said they were spending more than 30 per cent of their net income on rent. Further recent figures from Threshold show that about 12 per cent of renters give up between 40 and 50 per cent of their pay on rent each month.

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It’s not just Ireland where the rent burden is an issue. Housing charity Trust for London, for example, says an average earner in London will give up 46.4 per cent of their take-home pay on the average one-bedroom home in the city.

But, while renters are entering “stressed” levels of repayments, homeowners are facing a lower burden.

Widening divide

Much of the focus of late has been on rising house prices, as a combination of extra savings, increased desire for homeownership and continued high rents has led to a rapid rise in demand. Indeed figures from the Central Statistics Office show that prices rose at an annual rate of 5.5 per cent in May, the fastest rate of growth since December 2018, pushing prices that bit closer to peak-era levels.

However, while there is no doubt that rapidly rising prices are of concern, a combination of mortgage rules and lenders’ internal rules around repayment capacity means it is almost impossible to give up more than about 30 per cent of your after-tax income on your home when you own it.

No such rules apply to those in the rental sector.

Yes, rent inflation has slowed of late. However, this comes on the back of years of significant growth. Figures from the European Commission show that between 2010 and 2019, rents in the European Union rose by 13 per cent. In Ireland, however, rents rose by a staggering 63 per cent – the third-largest increase reported across the area, behind only Estonia (+156 per cent) and Lithuania (+101 per cent).

At the same time upwards growth in earnings has been weaker; current average earnings still lag the high reached in 2009 of €51,488, for example.

This means that renters are bearing more of a burden on their income than homeowners.

A recent report from the European Commission found that while the housing price-to-income ratio, the affordability index for buyers, remained 27 per cent below its pre-crisis peak, the affordability index for tenants, measured by the rental price-to-income ratio, was 22 per cent above its pre-crisis level by mid-2019, and has been above its long-term average since 2014.

But those who are fortunate enough to be able to buy – even as many would argue, they are doing so at elevated prices – will likely experience a sharp plunge in their housing costs.

Cheaper to buy

It’s not true of every location in Ireland, but as the latest Daft rental report shows, buying a home, thanks to a down-payment of at least 10 per cent, as well as low interest rates, can be considerably cheaper than renting.

Take west Dublin as an example; a two-bed home in the area will cost about €1,572 a month to rent. But mortgage repayments on such a home will be just €841, or almost half as much. And this is likely an overestimate, given a mortgage rate of 3.25 per cent was used in the calculation, with 30-year rates now available from 2.85 per cent.

Or how about in the docklands in Dublin 2 where a one-bed apartment will cost about €1,665 a month to rent, but more than a quarter less, at €1,218, to buy. Or Galway city, where a three-bed home will be about €1,288 a month to rent, but €906 to buy.

If you consider this as a percentage of the average income, which is about €45,111, according to the CSO, this means that someone earning the average income will have €2,857 in take-home pay. Renting that home in Blanchardstown would take more than 50 per cent of their after-tax income; but if they owned it, it would account for about 30 per cent. Similarly, in Galway, renting accounts for 45 per cent of income, but owning accounts for just 32 per cent.

With a typical affordability metric of keeping housing costs to about 30-35 per cent of take-home pay, we can see how home ownership is still more affordable when compared with renting, depending on the area.

Why not buy?

Tough luck for renters then, you might argue, as surely they could swap that rent for a mortgage if they wanted to.

But it’s not so simple. While someone may be giving up more than 50 per cent of their income on rent – and thus obviously could service a mortgage that is substantially less than this – they will often find themselves precluded from doing so due to the Central Bank’s mortgage rules.

This is because the rules, as they stand, mean that how much someone can borrow is linked to their gross income (typically 3.5 times, with exceptions available, typically for higher earners), rather than how much they can afford to repay each month.

So is it time for a change?

Kevin Johnson, chief executive of the Credit Union Development Association, thinks so. He notes that some applicants' mortgage repayments account for just 20-25 per cent of their net income under the 3.5 times income rules, but they are unable to borrow more. Instead, he suggests the regulator move to a different metric, used in some other European countries, which allows people borrow up to a maximum of 50 per cent of net income being spent on all debt repayments, including mortgage. This would allow a cohort of people, including those stuck paying big rents, the ability to buy.

While 50 per cent may seem a bit steep, there may be an argument to loosen the rules somewhat for those whose housing costs are so significant.

As the regulator embarks on a review of its mortgage rules (you can respond here), at the very least, narrowing the growing divide between renters and homeowners should be a consideration.