That analysis is on the basis of renting for the full 25 years, vs a 25 year mortgage.
What about renting for about 9 years, saving the different between rent and mortgage interest and then buying with a bigger deposit.
Of course they can’t do that analysis because it involves a prediction about where house prices will go over the course of 9 years.
Whether it makes sense over the long term like 9 or 10 years is debatable, but one thing is CERTAIN. It makes complete sense over the next 12 to 24 months to rent.
One objection I have with this type of thing is that buy/rent is always couched in terms of relative expected returns, when the most important issue is risk.
Buying a house is the risk free position. In financial parlance 100% cover of the NPV of you total lifetime rental liability. That means you pay up front at a known price for all your future rental costs and as a result opt out of any potential excess returns obtainable by investing away from the riskless position.
In Ireland of course, the problem has been:
people going 200%+ long and hence taking risk
people not properly evaluating the additional risk on the liability side due to gearing.
Buying a house as a primary residence is “Risk free” only with the following assumptions:
Interest rate **fixed** for total length of mortgage
The purchased dwelling will meet your lifetime accommodation needs (no upsizing will ever be required)
Mortgage lender won’t invoke “margin call” when house (collateral) value drops significantly during the length of the mortgage (I assume the standard contract prevents this???)
Biffo or his decedents won't bring in an annual property tax to balance the budget once the music stops for transaction based stamp duty. In countries such as the U.S. it's quite common for elderly to have to reverse mortgage to cash out their owned home in order to pay taxes. (I don't like it, I don't think it's a good idea but the current government gives me little confidence that they can live within our means.)
Job or other life changes won’t force relocation within your lifetime. (When this happens, the renter has a significant advantage over the upside-down mortgage holder, he’s out a few month’s rent while the owner might lose upwards of 3% of the purchase price of their home in a single year (e.g. FY 2007)
For me assuming no rent inflation for this place I can rent for 20 years before I’ve paid what the interest on a mortgage will cost. Obviously sometime over the next 20 years there will be rent inflation but with the current trends in supply and predictions by those who know a £(*$ of a lot more about macro economics than either of us, I think I’m safe to rent for another year or three.
The economic value of mobility varies by profession, for IT and construction I would say it is extremely high at the moment. If I’m wrong, at least I can emigrate.
I think you misread my post.
O.K. Does your assertion “buying a house is the risk free position” literally mean what it appears to or are you saying that only NPV risk is zero (which I still don’t agree with). Are you saying there truely is no risk with buying a house as compared to renting, or does the risk come out of another pocket which isn’t measured by standard financial accounting practices?
I’m not the only would like to know. A swarm of banks and other SIV holders around the world are desparately trying to shove their assumed housing asset backed risk under a rug. Show me the rug or sell it to one of these guys and make a fortune!
I might be wrong but I think geckko’s Risk Free idea applies if you buy the house for cash.
Risk gets introduced when you use gearing, i.e. a mortgage.
Nobody considers a mortgage risk, which is why some people end up in a mess, crying over on AskAboutMoney and getting virtual hugs from the very people who put the blindfold on them and helped them out onto the plank.
The very people who’ll tell you that gearing in property is risk free will tell you that you should NEVER borrow to invest.
Of course I could be completely misreading Geckko’s post, in which case he’ll hopefully set me straight.