To buy or not to buy

I have been making the following argument for years:

Take a two-bedroom flat in London, which you could buy for £450,000 ($865,000). To rent the same flat would currently cost £1,700 a month. In addition to a 6% mortgage rate, a buyer would face annual maintenance and insurance costs of, say, 1.25%. In the first year, the rent of £20,400 compares with total mortgage interest and maintenance payments of £33,000, a saving of £12,600. Interest payments would be less if a large deposit were paid, but in that case the income lost from not investing that money elsewhere has to be taken into account.

Assume that rents rise by 3% a year, in line with wages, while house prices from now on rise in line with inflation of 2%. At the end of seven years (the average time before the typical homeowner moves), you would be almost £35,000 better off renting, taking account of the capital appreciation and buying and selling costs. In other words, even without a fall in real house prices—which many believe to be likely—buying a house in Britain today seems a poor investment.

I’m glad to see that the Economist backs up my calcullations. Hopefully, house prices *will* finally start to drop. Also, don’t miss the point that house prices are supposedly 60% over valued in the UK.

Link via TJ’s Weblog

1 Comment

  1. Too right,
    my girlfriend and I own a two bed room box-sized appartment outside of zone 6 for which we still paid 200k. Her sister in Australia just bought a five bedroom house with pool five minutes from the beach in Perth. On a cold March day its enough to make you want to book that one way Quantas ticket!

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