Shall we buy?

Ken writes:

Although I am gloomy and bearish about the state of the Irish economy and this makes me doubt the value of buying a house now, a man with philosophical training should always be able to argue both sides of the question. So here is a rationalisation for buying now.

If we were to buy now, we could avail of a three year fixed rate mortgage of 4.45%. With that money, we could buy a three bedroom terraced house in a mature estate close to the Dart for €250000. (I’m thinking about the area around Harmonstown and Raheny on the Northside– e.g. some of these). Three bedroom terraced houses there rent for €1,100pm (e.g.–not one we’ve looked at)).

Now if you paid €250k for something generating €1,100 a month, that comes to a rental yield of 5.016% (1100 x 12 x 0.95 to cover maintenance and when the house is empty = 12540, which is 5.016% of 250k).

Now. If we bought the house, we could consider ourselves renting the house from ourselves (as being both tenant and landlord). This makes the 0.95 multiplier, and consequently the rental yield value, a safer assumption since there wouldn’t be period when the house is empty. We’d live in it all year round on an on-going basis.

With these assumptions in place, it makes sense to buy, because, as landlords, we would be borrowing at 4.45% to acquire an asset that generates an income of 5.016% (so we were better off than doing nothing by 0.71%). In fact, it’s a little better than that since we wouldn’t be borrowing the whole 250k, but only some of it. It makes sense to buy for us considered as tenants, because we would be reducing our rent cost from 5.016% of the price of a three bed terrace to 4.45% of the cost. Since we need to live somewhere anyway, we might as well take the reduction.

I think the foregoing is a reasonably cogent chain of reasoning in support of buying now. But I think it also makes clear how contingent the factors that favour buying are. The current European Central Bank interest rate is at a historic low of 1%. This means mortgage interest rates can really only increase from here. On the other hand, I think rents will drop because the Government is likely to reduce the rent supplement it pays to the needy as part of an overall package of austerity measures. If rents fell to 1000pm for the same sort of house, the yield off a purchase price of 250000 would drop to 4.56%. So the numbers could reverse and the same reasoning tell against buying in the space of this year.

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5 thoughts on “Shall we buy?

  1. mairij

    Reason only gets one so far; the heart is also a factor. For purely emotional and symbolic reasons, owning is different from renting.

  2. I’m too sleep deprived to get the maths. What I do know is that there are additional costs when buying – home insurance, maintenance, repairs that are not there when renting. I’m not sure if this is factored in the calculation to the level needed. For almost 2 years I couldn’t sell my old flat and I rented it out. It was so not worth it because of all the additional costs.

    In favour of buying: no danger of landlord chucking you out with one month warning. You can decorate as you like, plant your garden as you like. It depends on the market too – if renting is well established, it may work well as a long term option (I grew up in a rented house and it definitely was our home) – I can’t say this is the case where I am, maybe it is in Dublin.

    Interest rates will probably remain low for another 2 years, so worthwhile considering the impact of them going up again.

    1. Dot

      If we buy, because we’ll be buying in a cheaper area than the one we live in, we will be paying less per month than we are at the moment for a larger house, but of course we could just move to a cheaper rental. Renting is not regarded as a long-term option in Ireland and one feels a bit second-class renting; renters don’t have that many rights and landlords can be frustrating (last time we tried to contact ours he was incommunicado in hospital – worse for him than for us, of course, but it was January and the living-room heater had broken).

      Interest rates are already rising in Ireland and likely to rise further as the banks try to finance their debts. If we take out a fixed-rate mortgage now it will be cheaper than any mortgage we could get for quite a few years. That’s another consideration. Also, it’s likely rental prices will rise before selling prices do.

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