We had some pretty reasonable and insightful questions about the first Rent versus Buy article we posted a couple of weeks ago.
Here’s the original buying versus renting table again (assume stamp duty is included in the £500k flat price):
Let’s take this one step further.
So, the lucky homeowner is 55 and has paid off their mortgage. You’d assume they’d be way better off, right? Their costs from then onward are limited to repairs, while the renter has to keep paying rent.
There are tax considerations. The £9,000 will be taxable, but then again, the £4,500 has to come out of taxed income – swings and roundabouts.
The real difference may be how much capital gain you make. In that respect, house prices have seen periods of very strong growth, but the average is only 2%, while the stock market has given around 5% a year.
Of course, the flat at £500,000 is worth more than the stock market portfolio, at £227,000, so the total gain should be higher.
But – and it’s an important but – you can readily realise the gains on a stock market portfolio in a way you can’t with a house. This isn’t always a great idea, because you lose out on dividends and compound growth, but if you fancy a holiday or a new car, it’s easier to sell some shares than a house.
Again, there are a lot of assumptions in here, and both house price growth and the direction of stock markets are near-impossible to predict. The point is that owning a house is not always the most financially prudent option, no matter what older generations say. The fact is, it worked great for them, but there are no guarantees it will work as brilliantly for future generations.
What’s it like to rent long-term? John’s experience
John spent a long time working abroad in his early 20s and 30s. He bought a house briefly in his late 20s because he felt he should, but was moved again, this time to Japan, and had to rent it out. When he came back to London, with a wife and a young baby, the flat wasn’t right for his needs. After much debate, they put it on the market and received a good offer just as the market started to dip. Keen not to lose the buyer, they pressed ahead with the sale.
Now in his mid-50s, he has rented consistently. The time never seemed right to buy again. The market was either rising too fast, or they couldn’t get what they wanted in the right location. They wanted flexibility for their son’s schooling, and the freedom to pack up and move again should either of their careers necessitate it.
John feels that what he may have missed out on financially, he has gained in freedom. He has always tried to make sure they have a nest-egg elsewhere and has regularly invested in dividend-paying shares. Now his son is at university and he and his wife are debating their next move. They finally feel like putting down some roots and are considering buying abroad. However, they are likely to let out anywhere they buy – he’s grown used to generating an income from his investments.
A final word
If you're not sure you want to buy a house or if it's going to be a real stretch financially, this back-of-the-envelope analysis gives you some real alternatives. Consider investing long-term in a stocks and shares ISA or a robo adviser, for example. We were a little surprised by how closely renting and buying stacked up, within our assumptions of course. In the end, the decision to buy should fit in with how you want to live, not the other way around.
If you've got questions we haven't answered here, you can Ask Holly here.