Tuesday 19 June 2012

"Buying beats renting by almost £200,000 over lifetime"

Here's the original Barclays press release which has been re-hashed by most newspapers over the past two days:

Stepping onto the property ladder has enormous financial benefits over a person's adult lifetime. According to a new study from Barclays, owning your home rather than renting it will save you £194,000 over a fifty year period. And this figure doesn't even account for the value of the home the buyer will own at the end of it.

While the total cost of mortgage repayments, maintenance, and other costs associated with owning the average home would come to £429,000 over fifty years (a person's adult lifetime since a typical buyer purchases in his early thirties) renting a similar home over the same period would cost £623,000. Recognising that getting on the housing ladder, or trading up is still a substantial barrier to many, Barclays has created a new mortgage scheme (Helpful Start) which has a Family Affordability Plan incorporated into it, that lets parents help their children with loan affordability...

"Well, they would say that, wouldn't they?" you might think, but at least they explain why:

Over a fifty year span, roughly 50 per cent of the cost of occupying your own home comes in the form of mortgage payments - £210,000 out of the £429,000. Two fifths of that £210,000 is interest cost, while the rest is capital repayment. The next largest outlay is maintenance at £170,000. The initial purchase deposit is the next biggest cost, while insurance, stamp duty and other costs associated with buying the house in the first place make up the rest.

Yup, you "save" £194,000 and the bank earns £84,000 interest, of which it pays half to depositors and the rest is pure profit. Fag packet says £129,000 x 2% margin (rent) x 25 years, minus a third because mortgages are reducing balance = £43,000.

Only the "saving" is nowhere near what they claim, is it? They explain their assumptions (rents rise by 2% inflation and the tenant earns interest on the money he would have used as a deposit etc) and the total figure of £623,000 spent over the next fifty years looks about right - but they do not then discount this figure backwards to give the net present value. If you discount these payments backwards at Barclays' assumed savings rate net of tax (for want of a better discount rate), the total cost of renting in today's money is £310,000 and the total cost of buying is £277,000.

In relative terms, buying is more expensive because payments are front loaded, at a time when you might have other things to spend money on, like having children etc. For completeness; if you use a higher discount rate of 3.8%, the cash cost is exactly the same for renting and buying.

So there's not that much difference in the cash cost, the difference is that you will (hopefully) end up with a mortgage-free house*, the value of which will almost certainly have gone up faster than inflation and probably faster than wages. But I see no great urgency to "step onto the property ladder".

* Or maybe not.

13 comments:

Anonymous said...

Who rents the same house for 50 years? That's what they're comparing buying to.

Mark Wadsworth said...

J, true, tenants are much quicker to downsize when needs be, but then you have to start making increasingly specific and hence questionable assumptions.

Lola said...

Very roughly the rent for the mortgage money = the rent for a comparable house. The 'capital repayment' is forced saving. If you put this 'forced saving away very roughly you will have a fund big enough to pay enough interest to rent the house you would have bought 25 years previously. Or to put it another way what is the opportunity cost of owning a house outright?

Mark Wadsworth said...

L, yes, that's another way of doing what is basically the same comparison.

mombers said...

Rents are lot more stable than prices too, so if you're unlucky and buy at the wrong time, it can be very costly. Especially if you have to crystallise a loss to move!
J, homeowners typically move every 12 years or so I think, so the comparison is even less accurate as it doesn't take into account paying stamp duty, legal fess, etc 4 times compared to small (although increasing) letting 'admin charges' a little more frequently.

Bayard said...

It's a sales puff for a mortgage scheme FFS. What did anyone expect, accuracy? I'm just surprised they didn't fudge it any more than they have.

Mark, I'm suprised you didn't do one of your mash-ups on this and rewrite it as a advert for "Barclays Property", a letting agency.

Mark Wadsworth said...

B, being fair to Barclays, under current tax rules and most of the time and in the long term etc. you are better off buying, but the difference is nowhere near as huge as they make out, the difference is mainly increases in selling prices.

B, ha that's a good idea, I was thinking of re-titling it "Granting you a mortgage beats renting by £42,000 over a lifetime".

Bayard said...

"the difference is mainly increases in selling prices."

Well, 50 years is about two and a half boom-bust cycles, so it all depends where on the cycle you buy. You could end up a loser, which is, I suppose, why Barclays say, craftily, "And this figure doesn't even account for the value of the home the buyer will own at the end of it," making the capital gain implied, not stated.

Bayard said...

A quick visual canter through the BoE's table of base rates since 1694 suggests the average rate is about 4%. However, 50 years ago it was 5%, 40 years ago it was around 8%, 30 years ago it was about 11%, 20 years ago it was about 8% etc etc. Of course Barclays aren't going to point out that interest rates are at their lowest since the C17th and there's only one way they can go and that's up, are they?

Anonymous said...

You would expect renting to be more expensive because you are paying the landlord's profit!

After all, even if you rent, the landlord has borrowed the money so you still end up paying the interest.

Robin Smith said...

MW. Do you still think that banks lend depositors money or their own capital? All the margin is rent.

Ignore the balance sheets, a smoke screen.

Mark Wadsworth said...

RS, daft question, it's neither really but probably more the former.

And I'm not here to give people bookkeeping lessons, a balance sheet is quite a different concept serving a different purpose to the cash flow statement/profit and loss account (those two are quite similar).

Physiocrat said...

Buying with a loan from the bank is functionally equivalent to being the bank's tenant for the duration of the loan. The bank is in effect, in part, the landlord. And a landowner who takes a one-way bet, since if the value of the property falls, it seems the state will come to the rescue.