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.