Generation Rent? Try generation Broke

It bothers me when people promote long-term renting as a better choice than home ownership because it belies some basic facts.

When I was studying accounting, I was taught to be accurate. When I was learning about financial advice, I was taught to be prudent. Yet both of these concerns are often cast aside when debating the benefits of buying versus renting.

Nationally we are at an important juncture. It’s acknowledged that huge numbers of people won’t be able to afford to buy a home. If this proves to be true, many will also be locked out of one of life’s most wealth-creating activities.

The first problem is the nature of the comparison. If rent is €1,300 a month and a mortgage costs €1,500, then it’s cheaper to rent, right? Well . . . no it isn’t. The outlay is less, but the actual cost of the provision of occupancy is the rent versus the interest portion of the mortgage, not the entire payment. I will explain that point.

People often say rent is dead money. To be fair, so is mortgage interest, and it isn’t ‘dead’ because you do get something for it. We don’t say buying petrol is ‘dead money’ because we use it, although we don’t have a tangible end product.

Unlike rent, mortgage interest is just part of the repayment; the other part is a capital payment and it acts the same as savings or an investment does. So, when we compare renting to buying, we should compare the cost of the interest portion of the loan to the cost of rent because any capital is not on a like-for-like basis. We ought to measure only the value of the consumed part of the repayment and not the savings element.

Say a house rents for €1,500 a month. The equivalent mortgage interest would be on a loan of over €500,000 at a rate of 4.5 per cent over 25 years. Your monthly payment would be twice as much at just over €3,070. But remember, the other half of that money improves your personal statement of financial position.

Think about it like this: if markets stay stagnant, then after 25 years you will own the asset worth over half a million. People tend not to miss their mortgage payment, whereas the person who commits to saving €1,500 a month on top of their €1,500 rent rarely sticks to it (that’s based on my experience as a financial adviser).

Obviously, price movements go up and down. Significant corrections can obliterate personal finances. For that reason, high expectation should not be part of the decision on homeownership.

Historical price growth in Ireland is about 2-3 per cent in the long run; chronic mismanagement has ensured this never happens smoothly.

Instead we were, are and will be committed to a pattern of boom and bust to get us up that price curve. The short explanation is that it’s due to the inherent disequilibrium of supply and demand in the Irish property market.

This will continue despite having the best housing team and minister we have had in recent memory. The issue is simply not one you can get on top of in the short term.

Long-term renters will face into an uncertain retirement as well. Irish state pensions are not designed to pay rent and with half of people not having another pension provision, it suggests that the money won’t be forthcoming.

The greatest intergenerational fight card is lining up, we simply haven’t realised that we are looking at an economic ‘rumble in the (concrete) jungle’ yet. When younger generations come to a deeper understanding of what higher rents, higher house prices, longer working lives for lower wages and less state spending directed at them means, things are likely to get ugly.

How improvements affect an area for renters vs buyers: we build the Metro north and house prices go up, local property tax captures only a sliver of that (or none because no politician wants to be the one to trigger the revaluation process) and yet rents in the same places will shoot up.

Even with better security of tenure, even if we had steady and reliable long leases, it still doesn’t solve the other part of the conundrum: namely, how a generation which faces greater financial insecurity will be able to save enough to see them through?

There is a modern economic cohort called the ‘precariat’. Chances are you know many of them. They are the millennials and Gen-Z as well as some of Generation X who live a precarious existence, lacking job security, predictability and material welfare.

How will they fare in the new ‘long-term renting’ future? For anybody talking about the benefits of renting over buying, the conversation typically goes downhill after ‘ease of movement’ because Ireland is simply no country for old renters.

This article first appeared in the Sunday Business Post on the 5th of March 2017.

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