There are currently 700,000 people renting in Ireland, with about 10,000 people per month extra being added to that figure. Some, or you might say all of these people may at some stage want to buy a home of their own. But why? And are they right to from a financial perspective.
I am back and forth to Berlin a lot. More than 80% of people who live in Berlin rent. The reasons for this could be embedded in their culture in the same way our desire to own is embedded in ours. But there are also more practical reasons why you would rent in Berlin instead of buying. The main reason is that the legislation is there to protect tenants.
I am not specifically talking about rent caps. I am talking about the fact that the legislative and cultural environment exists in Berlin and in the rest of Europe to allow the person renting to have confidence that they could live in their rented accommodation not just for ten or twenty years but for generations.
The reality is renting property in Berlin is a business not a second source of income for some individual as is the case for many of our 1 property landlords.
For example when the Berlin Wall fell the state owned all the housing in the city and the likes of Goldman Sachs came in and on one day bought almost 1,000,000 units. Goldman Sachs objective is very different to that of the one man second income landlord. They want consistency and the renting environment there supports that.
But what if you are renting and you have that awful feeling that each month’s rent is money down the drain, or that you are just paying to clear off somebody else’s mortgage. Is it that bad from a financial perspective?
Firstly let’s look at the benefits to renting. It means you don’t need to worry about repairs and renewals on the property like if the boiler goes bang, or the house needs painting. You don’t have to pay the land property tax or property management fee and if you are really lucky you may not have to pay for some of your utilities such as refuse or broadband. You can move if your circumstances change or if something better comes up, or if you are simply fed up with the neighbours.
But you can’t shake the feeling that you are wasting your money each month on rent and you want to own something.
Nationally rents are up 8.5% (daft Q2 2015 report) for the year. With rents rising so quickly and mortgage interest rates so low if you are going to buy the average house, it is likely the old adage “you can’t beat a bit of property” will prove true, but that isn’t always the case.
With the new central bank guidelines the more money you pay for the house the more of your own money you will have to put into the transaction, it is also true that as house prices go up gross yields tend to flatten out a little.
I found some examples of where this is the case. Remember, you probably have to go up the food chain for the figures to work. I found two houses on the same street in Dublin 6, one for sale one for rent.
The purchase price was €525,000 which means you need between deposit, furnishings and acquisition costs about €100,000 upfront. Assuming a 30 year mortgage at 4.5% plus all the usual costs such as Land property tax, water rates, repairs and renewals and the usual running costs you will spend about €31,000+ per annum on the property for the next 30 years and then you will revert to just the running costs.
But let’s imagine for a minute you decided to keep your €100,000 in savings, and rented the house up the road for the €2000 per month asking price. All of a sudden you are not responsible for running costs of the house, you aren’t worried about the boiler packing in and you don’t have to pay the LPT. You take the €7000 per annum and stick it into a pension as a net contribution.
Granted you don’t have the asset of the house when you retire, but you will be able to build a nice little pension pot of just over €900,000 (€350,000 in todays terms, i.e. inflation adjusted). You will benefit from the flexibility of not being a home owner and what is without doubt a major advantage is that your investment will be well diversified meaning you won’t be exposed to any future property price collapses.
More importantly however is the fact that interest rates are not going to stay as low as they are now forever, when rates start to go up we will see a shift in mortgage repayments. Adding 2% to a €450,000 mortgage will cost an extra €500 per month. Then the figures really start to become attractive. Add a little rent stabilisation and a reversion back to normal yields and again you will see improvement.
The reality is that when considering buying or renting it is a very individual decision, one that only you can decide on the emotional aspect of. But you can get help from a financial planner on the financial aspect of it. It may, in your circumstance make more sense to rent but when there is gearing (a mortgage) involved it proves difficult to make the figures work.
Something that is much clearer cut is when you are a cash buyer. For example let’s say you have ignored your pension for your entire working life, retirement is just around the corner and you are left with only one asset, your house.
People often come to me to discuss selling their house and getting something cheaper and then investing the balance to generate a retirement income. But imagine if we had a both a legislative and cultural environment that made simply investing all your cash and renting a feasible option.
You could then consider investing all your cash. You would be better diversified. Your assets would be much more liquid and when you are ready to head for the pearly gates it would be a much simpler process to divide up your estate.
You would miss out the fair deal scheme if you needed it, but the reality is when you ignore the noise of boom, bust, boom that is the Irish property market on average property returns at 4% per annum, Equities perform at 6%. Compound that over 20 years and €100,000 will turn into €320,000 at 6% or €219,000 at 4%.
If you are really obsessed with property you might consider investing in a commercial property fund where yields are higher and more secure.
The reality is we don’t have an environment here to support renting, we may not even have an appetite for it long term but if the legislative changes such as the need for a 20% deposit and the cap on rents continue in the same direction it may be something that becomes more and more of a reality. Yes when lending is considered it’s more likely in the long run if all works out in your favour that you will fare better buying. But, it isn’t the end of the world if you have to keep renting.
Consider this if you are stuck renting. The Irish National average house price in 1980 was €37822. The average today is €298,000.
€37822 invested in the MSCI world index in 1980 would be worth €1.71 million today! Property isn’t a great investment.