Key Post Is rent "dead money"?

[z106]

The chances of increases of anything above inflation in the next ten years are slim to none IMO.

So what !

Property is normally a highhly leveraged investment.

Getting on average a 5%-ish return on a highly leveraged investment is fine by me thank you very much.

If you bought a 500k property now and if it rose 5% a year for the next 10 years then it would be worth 815k.
Lets say you put in 50k originally.

That means you get back 315k profit.
i.e. On average,a non-compounded return of c. 60% on your investment each year.

 

[MrMan]

I would disagree with this 120% !!
It's nonsense talk.

There is the world of substance behind this 'tired cliche'.

And I'm particularly shocked that an auctioneer can't see that. (that's right MrMan - I'm referring to you !)

And the reason is as follows: (Listen closely people)

On average, over the long term,property has risen double-digits in Ireland per annum.
FACT !!

As a result,anyone who chooses to rent, misses out on this capital gain.

Its a tired cliche for one reason only, most people put zero thought into why they are calling it dead money or 'money down the drain'. Of course my job would be in trouble if most people decided that they were going to rent instead of buy but thats very unlikely to happen. Renting suits alot of people because of its simplicity e.g can't afford the rent, hand in 1 months notice move on to somewhere smaller, farther out etc, electrical appliance, shower, anything breaks its replaced at no cost to you. Your ceiling falls in from a burst pipe leak - no cost. The trade off is less secure tenure, never having the end of monthly repayments in sight, and basically having someoe else as the boss of your own home. I would buy instead of rent, but renting does make sense in differnet circumstances so while one is benefitting from the flexibility of using rental accommodation they are simply availing of a service and therefore their money is not dead. It cannot be looked at in purely financial terms.

 

[MichaelDes]

That means you get back 315k profit.
i.e. On average,a non-compounded return of c. 60% on your investment each year.

Equally the risks can inversely work against you. Short term rent is fine, long term by comparison it's ultimately dead money.

 

[z106]

Its a tired cliche for one reason only, most people put zero thought into why they are calling it dead money or 'money down the drain'. Of course my job would be in trouble if most people decided that they were going to rent instead of buy but thats very unlikely to happen. Renting suits alot of people because of its simplicity e.g can't afford the rent, hand in 1 months notice move on to somewhere smaller, farther out etc, electrical appliance, shower, anything breaks its replaced at no cost to you. Your ceiling falls in from a burst pipe leak - no cost. The trade off is less secure tenure, never having the end of monthly repayments in sight, and basically having someoe else as the boss of your own home. I would buy instead of rent, but renting does make sense in differnet circumstances so while one is benefitting from the flexibility of using rental accommodation they are simply availing of a service and therefore their money is not dead. It cannot be looked at in purely financial terms.

Ok - fair enough - I'd go along with a lot of that.

Basically what I am saying is that if you were to look at it in purely financial terms then buying is definitely the way forward for the reason I said earlier.

If someone feels the advantages of renting as outlined above outweigh the potential advantages of buying then they should rent I guess.

In my opinion - the advantages of renting don't outweigh the advantages of buying.
But that's just my opinion I guess.

 

[Welfarite]

I would agrue that paying a 40-year mortgage is dead money....when you have paid off, you die and leave your house to somebody else!

 

[z106]

Equally the risks can inversely work against you. Short term rent is fine, long term by comparison it's ultimately dead money.

Agreed.

 

[MrMan]

In my opinion - the advantages of renting don't outweigh the advantages of buying.
But that's just my opinion I guess.

And I agree with you, I was initially just arguing against the term 'dead money'.

 

[Thomas22]

So what !

Property is normally a highhly leveraged investment.

Getting on average a 5%-ish return on a highly leveraged investment is fine by me thank you very much.

If you bought a 500k property now and if it rose 5% a year for the next 10 years then it would be worth 815k.
Lets say you put in 50k originally.

That means you get back 315k profit.
i.e. On average,a non-compounded return of c. 60% on your investment each year.

But that argument works both ways. If prices fall by 20% over the next ten years that means your 50k investment has turned into a 100k paper loss plus the 200k in interest paid to the bank. Means an overall payment of 300k in "dead money". It's just as likely as your scenario but shows a completely different outcome.

 

[z106]

But that argument works both ways. If prices fall by 20% over the next ten years that means your 50k investment has turned into a 100k paper loss plus the 200k in interest paid to the bank. Means an overall payment of 300k in "dead money". It's just as likely as your scenario but shows a completely different outcome.

Incorrect.
It is by no means as likely that property will drop 20% rather than gain over the next 10 years.

The reality is that historically over the long term property does increase.

And with that in mind - while there is risk(yes - values may drop) - it is highly unlikely.

 

[casiopea]

If it's true that rent is "dead money", then why do millions of Germans, Swiss, Dutch and Danish people all rent for many years?

Are they all mad?

I havent read the whole thead so apologies if I retrashing something that has been raised and argued.

Here in Switzerland its only the delta between what the rent is and what the interest on the principal of the mortgage is - that is regarded as "dead" money. So if you wish to live in zurich and interest rates are high (they are quite low right now) you may pay 6000chf a year in interest on a mortgage. Rent in the same area maybe 1000chf a year. Its only 4000chf that is regarded as "dead" money. Also for quite a while apparently rent was cheaper than interest rates on mortgage so it did not make financial sense to buy.

Interest rates are currently quite low and correspondingly more and more swiss are buying. (I read this recently in their national newspaper but have forgotten statistics quoted I think its roughly 40% of the population buy, up from 30%)

What also needs to be considered is that deposits are strictly high here. Approximately 20% which is a lot to have saved - if this were implemented in Ireland there wouldnt be as many buyers.

Also renting is very safe here, both the landlord and tenant are well protected. Families cant be evicted because a landlord wants to sell (or at least its complicated) and likewise tenants cant fleece a landlord by wrecking their home or not paying rent (or at least they cant if they ever want to live in CH again).

Finally, there is personal taste - the swiss love cars and boats(!) My swiss peers in work talk about these commodities, My irish colleagues talk about houses.

 

[Howitzer]

Incorrect.
It is by no means as likely that property will drop 20% rather than gain over the next 10 years.

The reality is that historically over the long term property does increase.

And with that in mind - while there is risk(yes - values may drop) - it is highly unlikely.

I'm not sure who you're trying to convince. The truism that property values only go up went out the window 18 months ago. I'm quite happy to pay someone elses mortgage in the short term for the serivce of a roof over my head with zero risk.

 

[z106]

I'm not sure who you're trying to convince. The truism that property values only go up went out the window 18 months ago. I'm quite happy to pay someone elses mortgage in the short term for the serivce of a roof over my head with zero risk.

I am not saying that property rises every year.

I am saying that over the long-term property rises on average every year.
And that's a fact going on decades of historical data.

Yes - there will be dips (we are in one now) - but it will continue to increase over the long-term if for no other reason than wages increase over the long term due to inflation existing.

Deciding to rent right now for maybe the next 2 years or so is something I would recommend - I certainly would not recommend it as a long term strategy though.

 

[Howitzer]

I am not saying that property rises every year.

I am saying that over the long-term property rises on average every year.
And that's a fact going on decades of historical data.

Yes - there will be dips (we are in one now) - but it will continue to increase over the long-term if for no other reason than wages increase over the long term due to inflation existing.

Deciding to rent right now for maybe the next 2 years or so is something I would recommend - I certainly would not recommend it as a long term strategy though.

Conversely buying now, or in the last 2 years, is not something I would recommend as a long term strategy. Whilst it's great to say anything increases on average over a long period of time property is the utimate in timing the market. You make a highly leveraged bet (100% in some cases), and you purchase at todays price, not the average over the last 20 years.

Thanks but I'll take my chances.

 

[MichaelDes]

Conversely buying now, or in the last 2 years, is not something I would recommend as a long term strategy.

Timing in an illiquid asset that reacts very slowly to sentiment, compared to equity, is paramount. Historical house price growth in the UK remained static in real terms from 1989 to 1999. But if a person rented during the same period and invested the balance of income to leverage on UK equity, the returns would have been astounding, see chart.

Timing is everything in all investments.

The compelte opposite occued for the intervening 10 years of 1998 to 2008, with FTSE trackers being static or losing in real terms and property going through the roof. Is UK and ROI property following the 1989 to 1999 trend again? Rather than trading up, it is easier for me to rent for 2 years. Half the price of interest only.

 

[Thomas22]

Incorrect.
It is by no means as likely that property will drop 20% rather than gain over the next 10 years.

The reality is that historically over the long term property does increase.

And with that in mind - while there is risk(yes - values may drop) - it is highly unlikely.

I agree that historically over the long term property has increased at about inflation plus 3%, around 9% historically. With inflation now at 3%-4% that means the returns on property should be around 6%. So how do you explain increases of 300% in ireland in the last 8 years? IMO there is none. So i think right now we are in for a long period of sub inflation like returns. And this is backed up by evidence from places where prices grew very quickly for periods and then crashed/stagnated for long periods ala Japan and the UK.

 

[shnaek]

From a purely economic viewpoint ...

This is a good point. Because people often compare the cost of renting in the city centre to buying in a commuter town, and in this case you aren't comparing like with like at all. If you were to take into account the opportunity cost of the hours you spend commuting instead of renting for less in a central location you would find another arguement against rent being regarded as 'dead money'.

 

[Thomas22]

This is a good point. Because people often compare the cost of renting in the city centre to buying in a commuter town, and in this case you aren't comparing like with like at all. If you were to take into account the opportunity cost of the hours you spend commuting instead of renting for less in a central location you would find another arguement against rent being regarded as 'dead money'.

Very good point.
Most people end up purchasing a house that costs significantly less the one they are renting.

At the moment from a financial point of view it just makes much more sense to rent than buy.

 

[badabing]

So how do you explain increases of 300% in ireland in the last 8 years? IMO there is none.

There was'nt. Average growth over the last 8 years has been around 8% pa and around 5% when taking into account inflation. House prices have been creeping alot more slowly than most people seem to accept.

 

[26cb]

Many years ago I was in Holland and the dutch found it amusing that many irish and english owned their houses but rented their televisions whereas many dutch owned their televisions but rented their houses. Of course it all came down to culture and rent control ( as it does in Manhattan ).

 

[Thomas22]

There was'nt. Average growth over the last 8 years has been around 8% pa and around 5% when taking into account inflation. House prices have been creeping alot more slowly than most people seem to accept.

Not too sure where you get you figures from but I don't see to many years below 8% and quite a few above 15%

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