Owning your home is the most important financial objective of everyone (Buy vs. Rent)

[whathome]

Re: Owning your home is the most important financial objective of everyone (Buy vs. R

Hi Whathome
If I decide to rent a house and invest in the stockmarket, a stockmarket fall will put me under real pressure and I may not be able to afford the rent.

Why would a stockmarket fall affect my ability to pay rent?

If I buy a home and it falls in value, I will not be forced to sell it. If interest rates rise, I will be under pressure, but I will not be forced to sell it.

Here's where I have a real problem. We know that financial institutions have the capability to repossess if borrowers fall behind with payments. Where's the proof that they won't do it?

A lot of new mortgage lenders have joined the Irish market since the 80's - we don't know how they will behave in a downturn.
Mortgage securitisation didn't exist in the 80's.

If you rent an expensive house and your overall wealth drops, you will be under severe pressure on all sides.

Falling net worth while renting an expensive house would not put an equities investor under pressure, similar to the way that falling house prices should not put borrowers under pressure as long as they can make their payments.

 

[MugsGame]

Thank you for the well-reasoned posts so far. As I have time I'll add summaries of your arguments to the "key posts" at the top of the thread.

Nobody has posted anything that suggests rent-a-room makes a significant financial difference to the buy vs. rent decision, which is what I expected when I included it the factors I proposed to ignore! I've moved the rent-a-room posts to a separate thread.

 

[Brendan Burgess]

Re: Owning your home is the most important financial objective of everyone (Buy vs. R

We know that financial institutions have the capability to repossess if borrowers fall behind with payments. Where's the proof that they won't do it?

A lot of new mortgage lenders have joined the Irish market since the 80's - we don't know how they will behave in a downturn.
Mortgage securitisation didn't exist in the 80's.

Whathome

I have dealt with many cases of arrears and repossession orders by the Irish Nationwide and by other lenders. The courts are very reluctant to grant them. They force the lenders to jump through major hoops to justify them. They then give a stay of execution for 12 months. The Irish Nationwide has many repossession orders which it has simply never enforced.

If and when arrears become a serious problem again, there just will not be the resources in the courts or the lenders to process many of them.

Believe me, it is not easy to lose your home.

Brendan

 

[room305]

Re: Owning your home is the most important financial objective of everyone (Buy vs. R

The key point for me about buying a house rather than renting is that you own it by the time you retire at which point you no longer have to rent or pay a mortgage. Because of gearing and favourable tax implications, if you rent all your life and try to keep up through saving and alternative investments like the stock market, the odds are really stacked against you building up a sufficiently large pot to do the same once you retire. As it is possible this pot of money would need to fund rent for several decades.

The debate about borrowing and investing €500k in the stock market and renting vs. borrowing €500k for a house is somewhat academic - what bank is going to give a young buyer €500k to play the stock market with?

This doesn't mean the time to buy is always 'now', as like any major financial decision a poor one can involve years of regret. However, I think it does help to keep your eye on the longer term picture.

 

[Trish2006]

Many people wonder why everyone wants to own their own home instead of renting. One poster mentioned peace of mind, the rest mention the financial considerations.
For me the peace of mind element wins out. What Ireland is missing that other countries have is the scenario where a large corporation owns an apartment block and rents out the apartments. The tenants get a long term lease and everyone's happy. I lived in Paris for a while and I rented a 'spare room' in an apt block. Families move in, live there forever, if they need an extra room for, say, a teenager, they can rent an extra room, not necessarily attached but in the same building. So the problem of size doesn't arise. How many apartments are there in Ireland where you can move in and think with some confidence that you will be living there for 30 years. Too many are privately owned here. Too much rental property is owned by people who jumped on the property bandwagon and will sell in a few years to make their profit. The risk with renting in Ireland is that you decide to settle down, have a couple of kids, then all of a sudden the private owner wants to retire to the south of France and you have to find somewhere new to live. You have to move your kids from their school, their friends. Yes, most of us move at some stage, but you'd be moving to another rental, subject to the same risks, you could end up moving every 5 years. I personally want to put down some roots, know that I'll still be where I am in 30 years time, if that's my choice. It's about security, not money.

 

[conor_mc]

You are absolutely correct, I feel the same way. However the thread is about financial objectives (money).

Exactly. The flip-side of the warm fuzzy feeling of owning could be the sinking sensation felt when a market does crash. I don't think either point is relevant to a financial discussion.

I don't think you can have this debate though without giving weight to the current state of the market. To my mind, the decision to rent vs buy is based on the short-to-medium term differential between the two, not a long term lifestyle choice.

Prices fluctuate based on supply and demand - this is a given. With housing, fluctuations can become even more pronounced due to the long lead time of bringing a new house to the market, from land purchase through planning right up to building and snagging.

In the current market, renting has become an financially viable alternative. After a crashed market, or indeed a few years of price stagnation, the scales will tip and buying will become economically more attractive than renting.

I don't think that even the most bearish of property bears sees themselves renting right up to and through their retirement. They see a market which is not currently offering them good value and they are prepared to wait until value appears.

 

[demoivre]

Re: Owning your home is the most important financial objective of everyone (Buy vs. R

I meant to say financial factors. The other factors are worth considering, and are worth listing as factors we'll ignore in this thread, but are hard to value, and depend on personal circumstances.

The main question I'm interested in is: are owners better off financially than renters? The answer is probably yes, on average, but timing of the purchase may be important as conor says.

Fair enough but your main question is largely unanswerable since the renter doesn't know how long he is going to live which is as important a consideration as the timing of the purchase. The renter doesn't know what is lifetime outlay on rent is going to be.

 

[mf1]

"I have dealt with many cases of arrears and repossession orders by the Irish Nationwide and by other lenders. The courts are very reluctant to grant them. They force the lenders to jump through major hoops to justify them. They then give a stay of execution for 12 months. The Irish Nationwide has many repossession orders which it has simply never enforced.

If and when arrears become a serious problem again, there just will not be the resources in the courts or the lenders to process many of them.

Believe me, it is not easy to lose your home. "

I think it will become a great deal easier to lose your home. INBS was to some extent a special case. I think they were always regarded as a last resort type lender because they would lend to people who could not for various reasons borrow from anyone else. That set them aside for a start plus their borrower "profile" was probably more troubled than other lenders. Cue a sympathy vote from a Court. I understand also that some of their interest calculations were difficult to analyse or support( I am being kind here) and that some of the cases were what could genuinely be called very difficult cases. Finally, they did not want ( and most certainly do not now want) the adverse publicity of evicting people - I can just hear Joe Duffy.

Most lenders nowadays are extremely conscious of being able to stand over their mortgage calculations. So they won't get caught out on being perhaps regarded as duplicitous. Mostly they will not go legal without firstly trying to work out a solution with the borrower - perhaps in extreme cases persuading the borrower to sell and repay the outstanding mortgage before seeking to repossess.

The reality of repossession is that a borrower is seeking to retain an asset that has been mortgaged to a lender and which will continue to incur interest and penalties unless dealt with. The borrower very often has serious personal issues ( illness, disability, marital, alcoholism etc.,etc) and it is very unusual ( in my experience) for borrowers to turn those situations around and bring serious arrears under control.

I think the Courts are becoming more businesslike, the lenders are certainly far more focussed and borrowers less gummy eyed about "My Home" or better again " My Family Home". When I advise clients about mortgages, I make it very clear to them that if they fail to pay their mortgage that the bank will take their house away from them.

mf

 

[whathome]

Re: Owning your home is the most important financial objective of everyone (Buy vs. R

If and when arrears become a serious problem again, there just will not be the resources in the courts or the lenders to process many of them.

Relying on the inefficiency of a legal process to protect you when assessing investment risk is not a good idea in my opinion.

I do not think it's appropriate to advise first time buyers to assess risk based on the assumption that the courts won't have enough resources to facilitate lenders should borrowers run into problems making payments on their mortgage.

 

[Brendan Burgess]

Re: Owning your home is the most important financial objective of everyone (Buy vs. R

Whathome

You are missing the point again.

I am saying that it is very difficult for a lender to repossess a home based on a mortgage. There have been very few of them in recent years. It is not impossible and I would not advise someone to buy a home they cannot afford.

It is much easier for a landlord to remove someone who does not pay the rent.

Brendan

 

[whathome]

Re: Owning your home is the most important financial objective of everyone (Buy vs. R

Whathome

You are missing the point again.

I am saying that it is very difficult for a lender to repossess a home based on a mortgage. There have been very few of them in recent years. It is not impossible and I would not advise someone to buy a home they cannot afford.

It is much easier for a landlord to remove someone who does not pay the rent.

Brendan

Hi Brendan,

No, I'm not missing the point. The reference to repossession was made with regard to losing your investment should you fail to make payments, nothing to do with security of tenancy.

It is clearly stated on every loan agreement and mortgage advertisement:
"Your home is at risk if you do not keep up repayments on a mortgage"

Just because there have been very few repossessions in recent years is not a valid reason to discount the risk.

The fact is, you can lose your home if you fail to make mortgage payments.

 

[hmmm]

Re: Owning your home is the most important financial objective of everyone (Buy vs. R

I had assumed you buy €500k worth of equities with a loan of €500k.

I had further assumed a drop in the value of the equities to €400k.

No sensible financial advisor would advise borrowing more than a small percentage of assets to invest in equities, so this scenario is not a valid comparison.

The valid comparison is to compare the savings a renter will achieve through renting versus paying mortgage interest to the bank over the mortgage period. Assume that the savings will be invested in a balanced portfolio which historically has averaged about 9%. For most property in Ireland in this scenario the renter will end up with higher total assets at the end of the mortgage period than the equivalent purchaser. This reverses the scenario of the past, where buying has been almost always a better financial option, but with prices at their present bubble levels the situation has become reversed. Some time in the near future I expect the situation will again reverse and resume the historical norms.

Further to the sensible financial advice, as retirement age nears the prudent investor would move an increasing amount of their equity portfolio into money market assets, so shielding a large part of their assets from stock market turbulance. Scare stories about people not being able to pay rent because the stock market has fallen is only justified by assuming the investor is a moron.

 

[room305]

Re: Owning your home is the most important financial objective of everyone (Buy vs. R

The valid comparison is to compare the savings a renter will achieve through renting versus paying mortgage interest to the bank over the mortgage period.

The caveat being of course that the rent must be cheaper than mortgage interest repayments. In which case, is the time to buy simply when the monthly cost of doing so is cheaper or equivalent to rental payments*?

* On a reasonable length mortgage e.g. 20/25 years, as opposed to 35/40.

 

[Firefly]

Not sure if this was already pointed out, but why decide between one over the other...why not buy your own home first and enjoy all that that brings and then start accumulating shares on the stock market?

Firefly.