On Dead Rental Money

It’s a subject I try to avoid. But, at least once a month I will be berated by family, friends or work-mates for apparently throwing money away on rent. Being married with no home was greeted with quiet horror, but after announcing we now have a baby on the way and have still no plans to buy, people are beginning to shake their heads. “Would you not like to have your own place?”, “There is real value in the market now”, or the classic “Sure rent is dead money, you’d be better off with a mortgage”. Our decision just doesn’t compute for most people I meet. It’s like I am telling them 2+2 is 5.

I always want to defend my position, but an adequate defense is tricky for two reasons. The first is the difficult task of trying to dislodge the very fixed ideas Irish people have about the economics of buying house in a short conversation. And the second is not wanting to offend people who are generally heavily invested in the home-owning game with my estimates of what their houses are, and will be, worth. Schadenfreude is not an attractive characteristic to give off even if I bear none. Indeed I take absolutely no glee in the financial hell many people will find themselves in over the coming years because they followed the path of home ownership at all costs.

The Bank of Ireland Elf pondering getting up to her ears in mortgage debt circa. 2007

The Bank of Ireland Elf pondering getting up to her ears in mortgage debt circa. 2007

I can very easily see if you never left the country during the boom years, you could have got sucked into the great property cult. It was heavily reinforced by the media, the banks, parents and friends who had made a killing. Luckily, I left at the turn of the millennium, and headed to Los Angeles for a few years. Upon my return in 2002, I immediately noticed something very strange. Apartments in Dublin which friends very buying were going for 50% more than the equivalent in a flash neighborhood like West Hollywood, despite higher wages and lower taxes in Los Angeles. I was continually pestered into buying a 1-bedroom apartment anywhere despite the fact I had just started work and needed a mortgage in my early twenties like a hole in the head.  After a year back in the country, I ended up jetting off again for another few years, far from the house buying mania.  Upon my return in early 2006, things had got even stranger. People were going into 40 year mortgages with friends, or worse still, with girlfriends they had only known a few months. The numbers most definitely didn’t stack up in 2006 right before the crash, and after two years of tumbling prices, they still don’t.

Without belaboring this piece with too much numbers, I will go through a simple example of what I mean. Currently I am renting a two-bedroom house in Blackrock, and the current market rate is about 1,300 euros per month, and the only capital I have tied up is 1,300 euros deposit. The current asking price of a similar house in the neighborhood is about 500K euros. A regular mortgage for such a house, assuming I have 50K euros deposit, would be approximately 2,000 euros per month. While I could deduct interest relief from this, with all the life assurance and other things required in holding a mortgage, I will leave it at 2,000. Repairs, plumbers, things like broken washing machines and rates will easily add 200 euros to the monthly bill, and then there is the income the 50,000 euros could be generating had I not bought. Even at today’s meager interest rates, that comes to about 100 euros a month. So the monthly outgoing is easily 2300 euros per month to own.

Now it is not fair to compare the 2300 euros directly with the 1300 euros, as the former includes a capital repayment component, which is the equivalent of saving over in the rental world. Capital repayments average out at about 550 euros over the first five years. This leaves a real differential each month of about 450 euros between renting and owning. So 550 chips away at the capital each month, but what about the rest of the mortgage payment? Surely those 1450 euros each month wasn’t a waste? This is the very tricky bit for most Irish people. You see, interest repayments also follow their deathly cousin, the monthly rent, into the undiscovered country from which no traveling cash returns. In other words, it is also “Dead Money”, to use the term I hate.

So over the first five years, I will have saved 27K euros by renting the same house. But what about the value of the house? I think in the current economic climate of deflation, rising taxes, and falling wages, house prices will be lucky to stay level over that period. Feeling very safe in my assumption house prices will not increase over the next five years, I will be at least 27K euros better off, but probably more. In fact much, I believe much more. Revaluing the house by crudely letting the cost of owning it move in line with the rental it commands, I estimate the house is actually worth between 250K and 300K. And this is assuming rents are not falling, which they are. So we have a long way to go yet in this house price crash. In fact, we are only half way there. I expect this house to drop a further 40 to 50%

And there are multiple other benefits to not owning a home besides not being exposed to the downside risk that seems apparent in the Irish market. Having liquid assets could prove useful in the uncertain economic climate, as will the ability to be mobile should the need arise to find work elsewhere.

So that is why I am over thirty, married, soon to be a parent, and horror-of-middle-class-ireland-horrors, still renting. But I can never explain that to people directly when asked, as I outlined above. One particular colleague continues to advise me to move back in with the parents despite having outlined my arguments to him multiple times. So I don’t even bother anymore, as I always just end up feeling like some sort of Armageddon mongering conspiracy theorist, who lives in a bizarro netherworld somewhere between living his parents and living his own home, whose main hobbies are throwing away vast amounts of money.

And even if I did get all the points across, and all the points were digested without further responses involving rental money and its lack of vitality, I would still be asked the reasonable question, “But wouldn’t you just like us to have your own place?”. The answer to that is yes, of course I would. But it will happen when it economically makes sense to us, not when other people tell us we should. A while I would not mind paying a reasonable premium for home ownership, I don’t think it should be 450 euros a month and a heavy dose of risk. So we may try to buy a house in five years, ten years, or even next month. But right now, I firmly believe it is still financial madness, married, single, with or without children