Stall The Ball

I was reading a report from Morgan Kelly about housing prices.

http://www.ucd.ie/economics/staff/mkelly/papers/housing1.pdf

Suppose that house prices really were expected to level off. Then the owners
of the tens of thousands of empty houses and apartments can expect no further
capital gains, and should cash in their investments. Why pay a mortgage on an
empty apartment that has stopped rising in value? As speculators rush for the exit,
prices will crash.
Secondly, if prices stop rising, it makes no sense to buy a house. Compared
with mortgages, rents are ridiculously low. For e2,000 a month you can pay a
mortgage on something in a muddy field on the wrong side of Celbridge, without
nearby shops or schools, and a 2 hour commute to Dublin. For the same amount
you can rent a million Euro house in southeast Dublin, close to the Dart line and surrounded by good schools. Once people put off buying in favour of renting,
prices will not stabilize, they will crash.
Just as rising prices generate self-fulfilling expectations—you have to buy now
before prices rise further, causing prices to rise—so falling prices generate their
own momentum.
Buying in a falling market is a guaranteed way to lose a fortune. Even if
prices fall by only five per cent, a e500,000 house on which you paid 10% in
stamp duties and fees will leave you e75,000 poorer.
It is a lot less nerve wracking to sit things out and rent for a year or two. And
when everyone does that, prices fall further.

In and of itself that makes a kind of sense but what about the e2,000 x 36 months of rent while you wait for house prices to stabilise? You've just thrown e72,000 out the window.

Statistically house prices have grown on average since records began. There are ups and downs, bubbles and crashes but in the long term property appreciates. Rent is money out the window.

Take this to an extreme. Person A rents from day 1 for their lifetime say 50 years from age 20. Making a simple assumption that rents rise in line with inflation as do wages we can assume that the net effect is that rent remains static versus income and cost of living.

And we'll give him or her cheap rent as well, a 3 bed house that they live in for their life and it costs e1,000 per month.

Simple enough 50 years x 12 months x e1,000 is e600,000 of rent paid out over their lifetime. Nothing to show on the assets side.

Person B buys a house at 20, lives for 50 years and again for simplicity we'll assume their mortgage remains relative to their income and the net appreciation of the house is offset by inflation.

Typically at the moment mortgages are running at 140 – 160 % of rent so let's take the high figure. e1,600 per month. But the mortgage is only for 25 years.

25 years x 12 months x e1,600 is e480,000 So person B is ahead of the game already but they also have an asset, the house.

This is the fundamental issue with renting. If rents were drastically cheaper, and by that I mean 20% to 30% of current rates then possibly there is an argument for renting. Person A above now pays 200 x 50 x 12 = e120,000. Compared to the mortgage payer they have paid out e360,000 less over their respective lifetimes. That's a lot of spendable cash or investment cash.

Renting is, was and always will be dead money. Only if the savings of renting versus a mortgage are large enough to allow investing or saving the difference does it start to make sense and in our current climate the odds of rents collapsing by up to 80% are slim to non-existent.

However it can be seen on the continent that renting can work. In Germany approximately 60% of the adult population live in private rented property. So why do they rent so much in Germany. Partially it's down to the lack of a hang up about actually owning your own home. It also comes down to some advantages of renting, flexibility to move, convenience, proximity to schools shops etc.

But the German tax system favours renting as there is no tax relief on a mortgage for your own home but there is for a rented property.

Obtaining a mortgage as a first time buyer in Germany is very difficult and things like 100% mortgages are unheard of.

But most importantly if you crunch the numbers of renting versus a mortgage in Germany the amount of money you save renting means if you invested the money you would actually come out at the end of your life with more assets (in cash) than someone who had a mortgage.

As an example a e180,000 apartment in Munich costs approximately e1,400 per month over 20 years. The same apartment could be rented for e600 per month.

e1400 – e600 = e800 saved per month

e800 x 12 x 20 years = e192,000

However 800 Euro per month invested over 20 years is 300,000 (as per Rabo Direct's calculator) http://www.rabodirect.ie/savings-ireland/savings-tools/moneygrow.aspx

Again all the above assumes rents and mortgages stay static and is a bit basic but you get my drift.

In Germany there are some good reasons to rent not least it make economic sense. But in Ireland? Not a hope.