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Should I Buy or Just Keep Renting

Should I Buy or Just Keep Renting

Ya - That Age Old Dilemma

Michael O'Connor
May 03, 2024

A little bit Investing, A little bit personal

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I’m currently sitting in an airport frantically trying to put together a newsletter I forgot I needed to write until now.

The only solution - share a financial predicament I’m currently trying to solve in my own head in the hope it helps someone who might be in the same situation.

Yup you guessed it, it’s the ‘Should I buy or just keep renting’ dilemma that has frazzled the minds of every 20 to 30-something-year-old for millennia.

This isn’t a piece about my overall views on the real estate market.

I wrote a piece about this over 2 years ago, and to be honest, my views remain the same.

You can read it here.

Allow me to quote myself….

Do I think house prices are cripplingly high for first-time buyers? Yes.

Do I think they can go higher? Absolutely.

There is this unsupported opinion that what goes up must come down, but unfortunately, the economics are a bit more nuanced.

While I don’t think that property can continue to grow at the same clip into a rising interest rate environment, there are too many supportive variables at play to justify any significant move lower.

It’s a simple supply/demand breakdown. We didn’t build enough homes following the last housing crash to meet the demand coming from millennials reaching their household formation years.

I expect home prices to grow more modestly in the coming years, but those waiting for a considerable pullback could be left wanting.

Don’t expect housing to become affordable any time soon.

Author: Me

So ya, I basically predicted the future, no biggie.

Humble brags aside, now that we are facing a 'higher-for-longer' interest rate environment, I expect to see a bit more pricing pressure, but demand will continue to put a floor under any major pullbacks.

Things are bad for first-time buyers out there, there are endless charts to show this.

Housing Affordability is at an All Time Low in the U.S. (It’s Even Worse in Europe)

At Current Mortgage Rates - It’s More expensive to Own Vs. Rent

But in equally depressing news, things can get a whole lot worse…

In other words, for those sitting around anchoring to old prices, waiting for housing to become ‘reasonable’ again…maybe you should take a seat, because I’ve got some bad news.

Unless you’ve got Marty Mcfly on speed dial, you need to adjust your expectations.

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Let’s Run The Numbers

Many of the calculations below are based on assumptions set out in Nick Maggiulli’s awesome piece. Read here. (you should definitely read it)

Before I get into the specifics, I feel the need to heavily caveat this one.

Real estate as a direct investment has never been my thing, I prioritise liquidity and flexibility so all my savings have ended up in the stock market.

Not to mention, my DIY skills are sub-par at best so the active management of it just isn’t for me.

With that said, if you have the time, the skills to fix and flip, and feel you have some local knowledge that gives you an advantage in a specific region then real estate investing can work for you.

It’s just never been my game.

So with the preamble out of the way, here are my numbers.

I currently rent a 2-bedroom apartment in Cayman. My rent is 3,500Ci so about 4,260 USD a month.

Yes, it’s extortionate to be paying over $45K a year on rent but spare me. I already get enough grief about this from the folks.

But let’s look at the alternative.

If I wanted to buy in the same complex, I’d have to drop roughly $1 Million USD.

So, let’s run the numbers.

Assuming a 30-year mortgage with 20% down payment at a 7% interest rate, your mortgage repayments would be $5,322 a month.

Additionally, you need to

Amortise your closing costs and stamp duty of 10%.
Pay Strata Fees of roughly 1% annually (adjusting for inflation over time).
Account for household maintenance and upkeep of roughly 1% annually(adjusting for inflation over time).

Your all-in monthly cost would be $7,258 starting out (that’s if it’s furnished!!).

I’m not sure I need to explicitly say this but…THAT’S INSANE.

I’m not forking out for my dream house here. This is an 800 sq ft apartment we're talking about.

Anywho, I'll save my 'home-buyers lament' for another day.

So, if back-of-the-envelope math is the only contributing factor, then renting is the obvious winner, especially if you take the deposit and the difference between the rental cost and mortgage payments and invest it in the stock market each month (assuming an 8% annual return).

But we need to account for two more things.

The potential capital appreciation of the house and the increase in rent over time.

Both of these can be accounted for by adjusting the price of the rent and the house over time by the average annual rent inflation (this has been 4.8% since 1950 to today).

When you apply this inflation adjustment. Your rent becomes more expensive while the house (which you will own) becomes more expensive too. A major win for the ‘buy’ camp.

As you can see from the calculations below. ‘Team rent’ starts off strong. Your deposit, and the $2,998 of extra savings by renting instead of buying is invested in the stock market.

But by the last few years, given the assumed inflation adjustment, the cost of renting becomes much higher than the mortgage costs.

All-in-all the number suggest, that given the above assumptions, I would be marginally better off to buy than rent over the next 30 years.

*Obviously if the assumptions change the outcome will change

It’s hardly breakthrough information to say that buying is more beneficially than renting over very long periods, but two things stand out.

The difference is marginal (54K over a 30 year period).

We have a tendency to put home ownership on a pedestal. It’s a borderline obsession in Ireland. There tends to be this societal urge pushing everyone to buy a house and stop ‘pissing away your money’ on rent, but the difference on your overall finances is overhyped in my opinion.

This is purely subjective, but I’m not convinced that the historical data used above will persist over the next 30 years.

The house price appreciation we have seen over the last 30+ years has been facilitated by a generation of falling interest rates.

This allowed people to take on more and more debt without severely impacting their ability to repay that debt. A precipitous drop in interest rates and the extension of mortgage periods allowed mortgage payments to remain affordable while house prices surged.

But as we sit contemplating a higher-for-longer rate environment, the juice has been squeezed. Sure, we will still see property prices increase over time, but the rate of growth just won’t be as meaningful.

My Decision

So, if renting isn’t quite as financially devastating as first anticipated, then maybe, just maybe, your decision should be based on other factors.

Strangely, what is often pegged as the most important financial decision of your life, isn’t really a financial decision at all given the similarity in the numbers over time.

It all comes down to your lifestyle choice.

So.

Do you want a stable home for you and your family to settle down. If the answer is yes, then you should probably be looking to buy a house.
Do you want flexibility and the freedom to move around without worrying about looking after a property… then keep renting and stop stressing about buying. There are other ways to put your money to work.

It really is as simple as that.

As for me, I intend to buy one day, but no rush just yet.

I do have my eye on one house in Cayman at the moment. The only catch - it’s about $9 million dollars over my budget.

So, if you could incessantly share this post to help my ‘Cayman Dreamhouse Fantasy’ that would great.