NY Times: Rent or Buy based on rent ratio

As Home Prices Drop Low Enough, a Committed Renter Decides to Buy

nytimes.com/2008/05/28/busin … 1212120000

“rent ratio above 20 is a good indication of a bubble”

Think we are still well into bubbleland in Ireland and prices have a bit to go if we are to see 15

I totally agree with the guys premise.

However his hard numbers may not apply here because Ireland has no property taxes. As these are many 1,000s a year in the US I would think that adjustments need to be made to take this into account.

Secondly the Americans tend to rent unfurnished more often and we tend to rent furnished, we therefore need to acquire some furniture as a one off cost and spread that over 3 years …or 10 …or 25 with a replacement algorithm .

Once these are calculated the guys principle is sound. Marrying a sensible woman with whom one finds agreement on big items like buying a house is also highly recommended by 2Pack . If the boss sez you are buying then you are buying …no matter how hairy a bear you really are.

2 extracts

and

Once the Pinsters factor in a cost of furniture and a property tax adjustment we then have our own ratio for Ireland .

Lots of empties in an area make a mess of the whole thing meaning we are a bit away from finding the ‘real’ rental value from which we can calculate the ‘real’ house value if there is an ongoing process of bringing empties into use as we see in parts of the main cities accounting for the rise on Daftwatch .

In Ireland its ( always) the empties stoopid

This is the absolute truth. I’ve noticed Tom et al aren’t making as much noise about Buying being cheaper than renting as they used to be. The fact remains in Ireland that buying is A LOT more expensive than renting.

Now the only question is, will house prices or rents fall faster?

-Rd

Buy this for €1.8m:

tinyurl.com/5uvmze

Or Rent this for €4k per month:

daft.ie/2561459

For a Rental Ratio of 37.5 :open_mouth:

Jesus we’ve a long way to go !!

Excellent article linked in the OP. The guy is buying but he’s doing it with eyes wide open. Chances are that will be me in a few years time.

2.7% gross yield. Seems about right for Ireland.

Don’t forget stamp duty, that ratio becomes 40.28

I have long maintained that there is a big difference between buying a property and buying a home. The first is an investment, the second a life choice.

I also consider the ladder metaphor to be a fairly spurious one when it comes to home (not property) ownership. Most people I knew 20-25 years ago bought when they got married, and bought a family home, and the majority are still there. In other words, they bought a home, not a foothold on some mystical ladder. Of course, a reasonable family home (3 bed semi in a decent area) was affordable for a young couple with fairly average income in those days.

Buying into the ladder metaphor to me is not “home ownership” rather it is property speculation, as it is dependent on the same basic premise which underlies most asset based investment, i.e. it can be disposed of in the future for a profit. There is no intention of residing in the property for any longer than is neccessary to realise the profit, and thus “step up” and there is no emotional attachment (an critical factor in true HOME ownership).

Good point.

Madness - and rents cannot increase until supply slows - which does not look like happening anytime soon. Yields are goin nowhere in the immediate future.

:unamused:

Rents don’t have to increase for Yields to increase.

House Prices can drop.

But it’s a bit of a race at the moment. House prices are going to have to fall faster than rents.

Take your bets, house prices vs rents…
will yields increase or decrease?

-Rd

Rents will decrease Rd !

That was my point - of course House Prices will drop :unamused: - and if rents also drop it leaves yields in no-man’s land for the foreseeable …

They’re already crap as Geckko pointed out in the above example.

I’d say they’ll both follow a similar slope down for the next 18 months or so …

The base case for the “no armageddon” argument in Irish property is that yields revive and a floor is put under prices by canny investors (and ‘attractive’ 5% yields) sometime in late 2009.

Unfortunately - if there is a substantial fall in rents this case blows up spectacularly.

Instead there is a scenario of forced sales by investors as higher rates and lower rents create an unexpected squeeze.

The 2005+ vintage investors whose economic security (and day job) are under threat by no / slow growth, are forced to bail.

The costs of voids - not to mention the joy of supporting the mortgage to the tune of a few hundred quid a month - take the fun out of an investment that has been more trouble than it’s worth.

Just get shot of it etc

Few other savvy’s will be waiting in the wings to take their place.

Yah , except that for me Its the empties stoopid so its not unexpected .

The real pandemonium starts when the greater unwashed investorcrati notcie the 350k empties dotted about, most of them still consider them to be ‘investments’ …even now.

Very interesting article and a handy new way to try and judge the over-valuation of the market. Of course, if the market operated on rational benchmarks like these, it wouldn’t be in the mess it’s in.

Redbricks in Rathgar being a bit too high up the ladder for your average well-to-do FTB, here’s a quick example from Malahide:

19 Seabury Place, Malahide, North Co. Dublin
Region €510,000 - 3 Bedrooms, 1 Bathroom, Semi-Detached House

Same house to let, Unfurnished, 1 Year Lease - €1,299 Monthly

That’s a buy/rent ratio of 32.7 (not incl. SD)

I don’t know if this has been posted on here before, but it’s a worthy addition to this thread anyway:

NY Times Buy/Rent Calculator

It’s a simple calculator that determines whether buying or renting works out best. Ignore the dollar symbol, it’s just a symbol after all, there is no need to convert between dollars/euro (I’m guessing you know this, but no harm pointing it out!).

Also, if you need a login for NY Time site: Bugmenot NY times logins

Even though I fully understand and appreciate compound interest, it’s still pretty amazing to see how quickly the buying/renting graph can swing. e.g.:

€1100/month rent, YOY appreciation 5%
House value €500000
Mortgage: 6.1%, 30 years, 90% LTV
With a 3% YOY appreciation of the house, it takes 28 years before it makes sense to buy, anything less than that and it never makes sense (in the 30 year window anyway).
With 4% YOY appreciation, it drops to year 15.
5%: Year 7

Buy this for €778,700

tinyurl.com/5c3s5f

Or Rent it for €2200 per month, €26,400 per annum.

daft.ie/2561195

For a Ratio of 29.5 before stamp duty - a gross yield of 2.8%.

This house has already dropped substantially in price - from €925k early last year to €778.7k now [16%].

[IPW picks it up at €850k - it had dropped from €925k previously, removed from market and now back on at this asking, also new to rental market on daft]

tinyurl.com/5alhd2

122 Ballinclea Heights now down another €40k.

tinyurl.com/5c3s5f

Removed from Daft.ie for rent.

Dropped from €925k early 07, to €738K now - 20.2%.

At the rental asking of €2200 per month, new Rental Ratio 27.95.

Or to put it another way - double it’s fundamental value at current rents, where a reasonable rental ratio is 14.

Priorsgate has a banner up blatantly proclaiming: “Why rent when its cheaper to buy?”
I wonder how many advertising guidelines that breaks?

And while they are both currently falling the ratio doesn’t which suggests buying price has further to go.