Saturday, June 25, 2016

Home sweet home - rent or mortgage?

Last time in the "Home sweet home" series, we discovered that for our parents, and grandparents, the house was an effective asset, for two main reasons:

1. The house market was expanding, so your house was becoming more and more precious. In other terms, its price was continously rising. If a price rises, all things being equal, it means that there is a strong demand for it.

2. Thanks to inflation, if you got a fixed interest rate mortgage since the beginning, you were in a good position: your wage was increasing, while the monthly payment was fixed. Heaven on Earth.

We may ask many other questions, notably:

  • Was inflation raising at a faster pace than the wages? Why were houses so demanded and so why was the real estate market expanding? 
  • Was the house market raising in price at a faster pace than the wages?
  • Why was there so much inflation in those years? 
  • Is inflation good or bad?
All these fair questions require time to be replied. One single post is not sufficient. That is why I think that understanding some basics principles of macroeconomics is essential to a family father who is about to purchase a house nowadays.

Exit Economics is voted at explaining average Joe what is better for his wallet in these days.

Nowadays I am asking myself on whether it is time to buy a house here in the Netherlands. Or if it is better to stay a still longer under rent.

Let's crunch some numbers.

  • In 2015, they would grant me a 30 year mortgage of 300 thousand euros at 3.1% rate.
  • In 2016, they have proposed me the same 30 year mortgage with a 2.1% interest rate.


The house market has not increased in this year, in the area where I live. But let's suppose that the house I liked is worth now 320 thousand euros, and not 300 thousand, as before.

For the sake of simplicity, let's assume that the mortgage covers 100% of the purchase of the house.
Let's suppose I am paying 1200 euros per month for the mortgage, so not a trivial amount for a family. It is a worst case scenario for a rent.

NOTE: I have written a couple of Excel spreadsheet, available on Google Documents Cloud, to perform the computation of a linear or French morgage which highlights the down payment, the government reimbursement on the intereset paid, etc. outputting the final monthly payment.
You can leave a comment if you would like to get these sheets.

So, is it convenient to buy a house now?

If I buy a 300000 house now, in 2016, with a 2.1% interest rate, I would pay in interests  113000 euros.
Had I bought a 320000 house in 2015 with a 3.1% interest rate, I would have paid in interests  163000 euros.

So, the price of the house in 1 year has increased by 20k, but the overall interest repaiment would have been 50000 more!

How much is one year of rent? 1200 euros per month times 12 months equals 14400 €.

So, in total, one year worth of waiting let me save 50000 - (14400 + 20000) =  15600, that is roughly another year of rent. And, under rent, I have not to take care of the maintenance of the house and the government taxes on the property.

NOTE: I considered a linear mortgage. A normal mortgage would have been even better for the rent!

So, in a deflationary period like nowadays, it is important to understand that not always buying a house is a good investment. Unless you have particular personal reasons to buy a real estate asset.
For our parents, and grandparents, it was completely different: you did not have to ask yourself, it was important to buy as soon as there was the chance to do that!
We are living in complex times.

Next time we will talk about the goverment tax breakes if you decide to purchase a house.

1 comment:

  1. dear,
    website author
    I read your blog, its really awesome,
    I am seeing that you are selling home. I have also a site related to you.
    A regularly asked question is is it better to rent your house or to buy it?. Very often this question actually translates into is it cheaper to buy than to rent?

    rent a house


    Your regards
    Alfaj Ripon

    ReplyDelete