We have had no takers on this yet. Just in case it got lost in that particular thread, I have moved it out.
It could be broader than just house price speculation.
1) The buy vs. rent decision
2) interest rates
3) the future direction of house prices
4) personal circumstances
Anyone?
Brendan
There are a range of scenarios here:
1) Is it a buy vs rent decision or an investment decision
2) Do you need to borrow or do you have savings
Let's assume the following realistic scenario:
A house costs €250k
Rent is €12k p.a.
Deposit Savings rate net of dirt is 2%
Mortgage interest on residential is 4.5%
Mortgage interest on buy to let is 5.5%
Individual's marginal tax rate is the higher level (52%)
For simplicity I'll initially ignore a couple of factors which probably should be taken into account in more detailed decision making e.g. costs of owning (repairs, etc), rent inflation, etc.
We'll also assume that this is a buy to hold decision rather than a short term speculative play.
1. Buy vs rent for someone with savings
If it's a straight choice between (a) using savings to buy or (b) holding onto the savings and paying rent, the key factor is how rents compare to net of tax interest on savings.
In this case buying property is the clear winner as €12k saved in rent trumps €5k interest.
2. Buy vs rent for someone needing to borrow
If it's a straight choice between (a) using borrowings to buy or (b) paying rent, the key factor is how rents compare to cost of borrowing
In this case buying property is marginal winner as €12k saved in rent trumps €11.25k in interest repayments.
3. Property investment versus savings
The key factor is how net of tax rents compare to net of tax interest on savings
In this case buying property is a marginal winner as €5.76k* collected net of tax rent exceeds €5k in savings interest forgone.
4. Is it worth borrowing for property investment
The key factor is how net of tax rents compare to cost of borrowing
In this case buying property is a clear loser as €11.1k** collected net of tax rent falls short of €13.75k in interest repayments.
*€12k rent after 52% tax
**€12k rent after 52% tax, allowing for 75% interest offset
If we build in a couple of more realistic assumptions e.g. rents increase @1.5% p.a. and owner has €2500 p.a. in costs, we get the following:
Scenario 1: Buying is still the clear winner
Scenario 2: Buying is costlier initially but more cost effective in the long run (9 years+, still a marginal decision to buy overall)
Scenario 3: Buying reduces net income initially but provides a greater income in the long run (6 years+, decision to buy)
Scenario 4: Rent falls well short of interest repayments and will take over 25 years to exceed them (decision is don't buy)
Obviously there are many other factors / risks to consider, but this method provides an initial framework to make a decision.
As can be seen, it is very dependent on whether you are a borrower or saver and whether the property is for investment or is used as a primary place of residence for the owner.
It is also hugely sensitive to deposit savings rates, mortgage interest rates, taxes on savings, taxes on rents, marginal tax rates and long term expected growth in rents. In each circumstance we are effectively targetting a ratio of rent to market value that is the tipping point for the decision to buy.
All this before even getting into the emotional value / drag of owning a home!
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