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You have to live somewhere

You have to live somewhere

After moving house 13 times in the last 20 years, this is what I know:

  • Moving sucks, and is expensive.
  • Clutter multiplies when we aren’t looking.
  • Stuff will break and get lost in transit.
  • Furniture that looked great in your old house likely won’t even fit in the new one.
  • Establishing internet connectivity is never as quick or seamless as the suppliers promise.

I will confess to once purchasing a property I was renting at the time, mostly to avoid moving!

Throughout that period, I have owned a portfolio of well-located investment properties. However the majority of the time I have chosen to rent where I lived. Renting provided a nicer standard of accommodation, with a shorter commute, than the equivalent mortgage payment could support.

I recently caught myself falling into the trap of unquestionably accepting that today reflects how they will always be. Some things don’t change, but these all do!

Negligible interest rates?

Low inflation?

Full employment?

Ever-rising property prices?

Booming stock market?

My being young, slim, able to run a sub-20 minute 5km… oh wait, that was a flashback to the days before I got old and started wearing my beer. Perhaps some things actually do change!

Being a cantankerous individual who usually challenges everything, this blind acceptance alarmed me. I decided to recalibrate what I considered “normal” by researching longer-term trends.

This exercise also caused me to challenge some of my own long-held beliefs. One of those was whether it really does make more sense to rent rather than own where I live?

Is it cheaper to buy or rent?

The first chart plots the current monthly buy versus rent cash flow position. Data sourced from Zoopla’s current average rental and purchase prices for my postcode, and a typical tracker mortgage from MoneySavingExpert’s comparison tables.

Monthly cashflow by property ownership option

Monthly cashflow by property ownership option

Conclusion: Today owning costs more than renting… in my postcode area.

End of discussion, right?

Isn’t rent supposed to be “dead money“?

Wait a second… isn’t renting “dead money”? Once the mortgage is paid off I would own a house!

This point requires an examination of opportunity cost. I could have paid the mortgage every month, or I could have paid the rent and invested any difference in the stock market.

Nobody knows what the future will hold, so instead let’s travel back in time the duration of a typical 25-year variable rate mortgage to evaluate what the outcomes would have been.

The life of a mortgage in pictures

This chart displays the composition of payments over the life of the mortgage. The recent period of record low-interest rates makes for an interesting picture.

Payment composition over the life of a 25 year mortgage

Payment composition over the life of a 25 year mortgage

Conclusion: Since the financial crisis mortgages have been almost “free”. Doh!

Next, we have the cumulative loan principal and interest over the duration of the mortgage. Owning occupying a property avoids spending on rent, though mortgage interest is still a considerable expense.

Cost of using a mortgage to purchase a property

Cost of using a mortgage to purchase a property

Conclusion: Over the duration of a mortgage the interest component certainly adds up.

This chart is an interesting one. When you purchase an asset you retain any capital growth it experiences. My postcode area has experienced a CAGR rate of 9.41% over the last 25 years, although the actual investment ride has been bumpier than the CAGR makes it sound.

Property equity accumulation breakdown over 25 year mortgage term

Property equity accumulation breakdown over 25 year mortgage term

Conclusion: By missing the property appreciation gravy train, renters like myself potentially left a lot of money on the table.

Renting is cheaper today, but will that always be so?

With the development of the homeowner equity position understood, we can compare the rent versus buy outcome.

25 years ago renting cost less than buying, just as it does today. That situation soon reversed, as rental prices increased over time.

Rents versus mortgage payments over the 25 year mortgage term

Rents versus mortgage payments over the 25 year mortgage term

Conclusion: Mortgage payments are anchored by the property purchase price. Property prices and rents both fluctuate in response to supply and demand.

The stock market must have outperformed property?

What would have happened if I had invested the surplus between rent and mortgage payments while it was cheaper to rent? The following chart displays the outcome of having purchased the S&P500 Total Return index.

Stock market investment performance over the 25 year mortgage term

Stock market investment performance over the 25 year mortgage term

Conclusion: The stock market performed strongly over the 25 year period, accruing a CAGR of 12.68%. However, contributions would have ceased once renting became more expensive than the mortgage payment.

Property ownership for the win

Would renting have proved to be a suboptimal choice over the last 25 years?

Buy versus rent: Accumulated equity after the 25 year mortgage term

Buy versus rent: Accumulated equity after the 25 year mortgage term

Conclusion: Absolutely, by more than one million pounds!

History doesn’t predict future performance

Will the outcome be the same over the next 25 years? Without a crystal ball, there is no way to tell.

During the accumulation phase of wealth management, building up equity rather than incurring expenses is vital. Whether that equity is accumulated in shares, investment properties, or owner-occupied real estate should be determined by the individual’s risk appetite and assessment of the investment landscape.

For most people housing is their second highest outgoing after taxation.

You have to live somewhere

The thing to remember is you have to live somewhere, and (unless you are freeloading off your parents) that residence is going to cost you something. That housing cost could be making money for someone else’s business, your landlord, or it could be accumulating equity for yourself.

Robert Kiyosaki is famous for stating owner-occupier property is not an asset, because it consumes rather than generates income. The charts here have demonstrated that well located real estate can generate significant wealth for the property owner, in a similar manner to a company or accumulation fund that chooses not to distribute dividends.

When combined with the careful application of leverage those returns can be magnified.

Do your own homework, as the prospects for any investment can vary considerably by locale and over time. Property is a long-term game, not least because moving sucks and you have to live somewhere!

Next Steps

  • Run the numbers on your own residence. Does it make more sense to rent or buy?
  • If you liked this post then please share it with your friends.
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