The following figures factor in real life examples taken from existing lending rates/rental prices and the forward estimation on rates is taken from presumptions in the current yield curve (chart is below). The terms applied in each example are 30 years, and the purchase is assumed to be a couple buying together, we can examine the impact for a single person in a separate post.
If you were to take a price of €313,000 for a two bed property (current average taken as a mean of prices in todays daft report – this figure is the Dublin average price across all geographic areas, the figures can be determined for any county the same way) and do the following.
1. Compare the total cost of ownership (we are not factoring in house insurance, bin charges, life cover, management fees etc. as the scope for that is too wide – if individually specific we can work this out for you) if you were to buy a property at today’s price and get a current 5 year fixed rate.
2. This will be compared to renting for the same period. (again, this won’t include any additional charges such as contents insurance, management fees, bin collection etc.)
3. What does this look like vs renting for a few years then buying if property prices were to drop significantly further? (we’ll assume c. 18% over the next two years with a yield curve indicating rates may be 2% higher at that point)
The cost of buying today: €313,000 purchase price with a 90% mortgage then the borrowings would be €281,700 and the mortgage payments at a rate of 3.6% (5yr fixed price as of today) would be €1,307 per month before TRS. Tax Relief at Source (TRS) is applied to a max of €10,000 per person with 25% applied in the first two years, 22.5% in years 3 4 & 5 then 20% in 6 and 7, after that is 15% of the interest to a ceiling of €10,000. In plain English it would mean the following:
Year 1 TRS would be c. €215 per month (€2580 p.a.)
Year 2 TRS would be c. €209 pm (€2508 p.a.)
Year 3 TRS would be c. €184 pm (€2208 p.a.)
Year 4 TRS would be c. €179pm (€2148 p.a.)
Year 5 TRS would be c. €176pm (€2112 p.a.)
The total interest paid during the period would be €49,246 and the capital would be €29,180 giving a total of €78,426 with €11,556 of meaning the total financing costs would be €66,870 and at the end of five years your mortgage balance would be €253,000
The cost of renting for 5 years: The average rental price in the city is c. €1,250 per month, rents may well drop as the economy goes through further adjustment we’ll factor in an 8% drop over two ensuing years then stagnation.
Rent in year 1: €15,000
Rent in year 2: €13,800
Rent in year 3: €12,700
Rent in year 4: €12,700
Rent in year 5: €12700
Renters allowance would be (for two people claiming the max allowable) €800 p.a. or €4,000 over the course of five years. Giving a total cost of €66,900 with €4,000 in allowances giving a net cost of €62,900
The cost of waiting then buying: This would be where you pay the rental prices as per above, then you purchase at a price which is 18% less than today.
Rent in year 1: €15,000
Rent in year 2: €13,800
Purchase with a 5 year fixed rate which is 2% higher than todays price ie: 5.6%, if prices were to drop 18% during this time then your purchase price would be c. €257,000 with a 90% mortgage you would borrow and you get a monthly cost of €1,327 per month before TRS.
TRS year 1: €269 p.m. (€3,238 p.a.)
TRS year 2:€264 p.m. (€3,178 p.a.)
TRS year 3: € 235 p.m. (€2,822 p.a.)
Giving a total financing cost over the remaining 36 months (to make it comparabile to the 5 year time frame in part 1) of €47,772 less the TRS (€9,238) gives you €38,534 plus the rent paid of €28,800 minus (€1,600 in rent allowance) which is €27,200, so your total outlay would be €65,734. At the end of the first 36 months your mortgage balance would be €221,600.
So to compare them side by side
1. Buy today: Total cost €66,870 with a balance of €253,000 at the end
2. Rent for the next five years: Total cost €62,900 no mortgage, but equally no ownership.
3. Rent then buy: Total cost €65,734 and a mortgage balance of €221,600 at the end.
So in the current market renting or buying is basically down to personal preference and job security, those without job security would be misguided in buying right now. Those with it need to decide if they feel they are getting a good deal. Rates are at historic lows but with a market set to see further correction it is not an environment in which making a decision is an easy one, nobody can time the market either.
The argument for buying now would be if you want to buy. The argument for renting is if you lack job security and in particular if this is the case relocation may be a vital factor to re-entering the work force so renting could be part of the mobility required to do so (depending on where work is available).
Renting then buying may be a solution for people who are unsure and want to wait and see. Prices are, no doubt, going to see the beginning of a final correction stage in 09′ which will last into 10′, the speed of decline or level cannot be known but in looking at corrections around the world one can guess that what started in 06′ should be over by 11′, that, coupled with an increased inflation risk
In conversations with developers many are saying that they are in talks with the banks about the ‘size’ of their markdowns rather than ‘if’ they will, and for that reason I think we will see market clearing prices reached sooner rather than later, that, mixed with historically low rates may mean that the summer will be a busier selling period than the spring or indeed the last four quarters.