Sometimes Buying Property Is Dead Money – MoneyWeek

Youseeitalloverthetelevisiontoo。

Lastweek’sBankHolidayMondaysawproperty‘experts’KirstyandPhilon“Location,Location,Location”tryingtogetayoungcoupleoutof(verynice)rentedaccommodationintoa(quitenasty)“homeoftheirown,”themonthlypaymentsonwhichwouldbehigher。

Thecouple,weweretold,hadcometorealisethatrentingwastantamountto“payingsomeoneelse’smortgage”andthatwas“madness。

”ThereisadownsidetobuyingKirsty,toldthepair。

It“bringssacrifices。

”Ifyoumovefromrentingtobuyingyoucanfindyousee“arealdropinyourstandardofliving”asitcanbe“impossibletoreplicatethespace”forthemoney。

Thisseemedlikeawhopperofadownsidetome,butasfaraspropertycrazyKirstywasconcerneditwasasacrificeworthmaking:likemostoftheUKsheclearlybelievesthatbeingonthepropertyladderisadesirableaiminitself,regardlessofthecosts,andthateveryoneshoulddoeverythingtheycantoavoidpayingoutdeadmoneyinrent。

Butisrentreallydeadmoney?

Theansweristhatsometimesitisandsometimesitisn’t。

Basicallyifhousepricesarerisinganditcostslesstopaytheinterestonamortgageandtomaintainyourhouse(insurance,repairsetc)thanitdoestorentasimilarpropertythenbuyingisagoodidea。

If,ontheotherhand,housepricesareflatorfallinganditcostslesstorentthantopaymortgageinterestandmaintainapropertythenrentingisagoodidea。

Inthefirstcaseyouarepayingoffyourmortgagebitbybitandgraduallygainingownershipofanappreciatingassetbutforlessthanitwouldcostyoutorent。

Andinthesecondwhatyousavebyrentingcanbeinvestedsoyoucanbuywhencircumstanceschange。

Obviouslyafewotherfactorsarerelevanttoo(therearethehugecostsassociatedwithbuyingstampduty,legalfeesetc-forexample)buttheequationbasicallycomesdowntohouseprices,rentalpricesandinterestrates。

Sowhichofthesesituationsareweinatthemoment?

Ithinkit’sprettyclear。

I’vewrittenhereaboutpropertypricesbeforesoIwon’tgoonaboutit(much)butpricesaremostcertainlynotrisingandtheyaren’tstaticeither。

They’vefallenfor14monthsinarowandatotalof3。

7%inthelastyearaccordingtoHometrack。

Andwiththenumbersofbuyersfallingandthenumberofsellersrisingthatisn’tgoingtochangeanytimesoon,particularlygiventhatpricestodayarestillnearthehighesttheyhaveeverbeeninrealterms。

Atthesametimerentsarelowandinmanyplacesfalling,thankstothemassiveoversupplyofpropertiesavailabletorentfromthenation’smiserablegangofbuy-to-letinvestorsandgiventherisinglevelsofinflationthereiseverychancethatinterestratesmaysoonrisetoo(thisincreasesthemonthlycostofamortgagebuthasnoeffectonrentalprices)。

AdditallupandinalmosteverycityintheUKitisnowcheapertorentthantobuy。

InmybuildinginPaddington,forexample,Ifigureitisnowaround£5,000ayearcheapertorentatwobedroomapartmentthantobuyone(assumingyoudosowitha90%interestonlymortgage)despitethefactthataskingpricesinthebuildingarealreadydown20-oddpercentfromtheirhighsayearago。

Sowhyonearthwouldyoubuyone?

It’saveryexpensivewaytoputyourself‘ontheladder。

’Ifyourentinsteadyoucansaveyourfivegrandayearandputittowardsbuyingaflatwhenpriceshavefallenanother20%(whichtheywill)。

You’llalsokeepyourselffreefromthehideousfinancialburdenthatcomeswithbuyingover-pricedpropertyandtheriskofnegativeequity。

Lookatitlikethatanditseemstomethatrightnowitisn’trentthatis‘deadmoney’fornewbuyers,it’smortgages。

I’mpleasedtosaythatKirstyandPhildidn’tmanagetofindahousefortherentingcouplementionedabove(actuallyI’veneverseenthemsuccessfullyfindahouseforanyone,althoughthey’vebeenontheairforsolongnowI’msuretheymusthave…)。

Sohopefullytheyarestillrentingtheircharmingcountrycottage,andputtingthesavingsthatcomewithitasideforatimewhenbuyingdoesmakesense。

Iwishthefirsttimebuyersamongmyfamilyandfriendswoulddothesame。