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Making money or saving money - why do we buy?
10 March 2008
After more than a decade of rapid price rises, buying a home is still cheaper than renting. So says the latest annual UK Rent versus Buy Index from Abbey.
The Index concluded that the average home would cost £437,925 to buy (with a 25-year mortgage at 6.5%), while the average cost of renting would total £443,736 over the same period.
£443,736 |
(renting) | |
| - | £437,925 |
(buying) |
| --------------------------- |
£5,811 |
cheaper for homeowners – £232.44 per year |
(Of course, homebuyers also end up with a substantial asset at the end of the period, but the Index focuses on the 25 years in question.)
The figures can change quickly: just last year, Abbey’s Index calculated that buying a home would work out over £24,000 cheaper than renting. If house prices came down, for example, the figures could swing more heavily in homeowners’ favour again.
But whatever happens, the start of the credit crunch and the end of the house price boom have led to a fundamental shift in the mathematics of house-buying.
Rather than “How much would this home make me?” the question may now be “How much would it save me?” Of course, it depends on what’s about to happen to house prices, a question that’s always sure to spark off a lively debate.
What’s next for the housing market?
Some are predicting a house price crash – good news for would-be buyers but terrible news for the millions potentially left with negative equity and huge debts. Others point out that the UK’s a small country with a large population, so the demand for houses won’t let prices fall too far.
Almost no-one expects prices to start ‘booming’ again soon, which comes as a relief to millions of potential buyers. Double-digit growth can easily lead to a sense that whatever your finances today, houses will be less affordable tomorrow, and even less affordable the day after that. In recent years, many people have ‘jumped too fast’, and many are now finding themselves in urgent need of debt help.
But when prices aren’t rocketing, people feel they can take their time and buy a house when the time is right for them.
Is the time right for you?
If you’re thinking of buying, a look at your finances might prove more useful than speculation about the housing market.
Income:
- Are you in line for a pay-rise, in danger of losing your job, or neither?
- Is your income dependent on overtime / bonuses that might not always be available?
- If you’re receiving any benefits, are they about to change – and if so, for the better or for the worse?
- How likely are you to receive a ‘windfall’, such as an inheritance, an insurance policy maturing or financial compensation of some sort?
Expenditure:
- Are you planning on having children? If you already have a family, are the kids about to leave home or just entering an expensive age?
- Do you have any expensive ‘habits’, from fast cars to fancy holidays? Could you honestly give them up, and how much could you save if you did?
- Are you in debt? How long will it take you to get out – and could you do it any faster? Do you need professional debt help or debt advice?
These are just examples, but this simple list demonstrates an important point: you don’t know what tomorrow will bring, but if you’re confident about the rough direction your finances are heading in, your own future is probably a lot more predictable than the housing market’s!
Predicting the future
Of course, there’s no accounting for bad luck: a series of disasters could easily add tens of thousands of pounds to the cost of owning a home. On the other hand, a £750 rent could easily be £2,000 25 years from now, while the final monthly payment on a fixed rate mortgage wouldn’t be any more expensive than the first.
In short, buying and renting both come with risks, and the individual’s decision depends on their personality as much as their finances. Studies of the housing market can give you all kinds of valuable information, but they can’t reveal what’s right for you.
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