Sometimes Buying Property Is Dead Money

Everywhere you find a property boom you will also find a nation that hates to rent. A nation that thinks renting is a waste of money that money spent on rent is dead money.' Look the phrase' dead money' up on the internet and you'll find it in every discussion of property purchase by a first time buyer "everywhere we wanted to buy was a bit too expensivewe had to really stretch ourselves. The house isn't quite what we wanted but it is better than renting. Rent is just dead money."

I hear it all around me too from my sister who is buying a house in Battersea we both know she can't really afford because she can't bring herself to waste' money renting, to my friends who are forcing themselves to move further and further outside London to buy houses they don't really want to live in because they just won't rent further in, however much cheaper it may be to do so.

You see it all over the television too. Last week's Bank Holiday Monday saw property experts' Kirsty and Phil on "Location, Location, Location" trying to get a young couple out of (very nice) rented accommodation into a (quite nasty) "home of their own," the monthly payments on which would be higher. The couple, we were told, had come to realise that renting was tantamount to "paying someone else's mortgage" and that was "madness." There is a downside to buying Kirsty, told the pair. It "brings sacrifices." If you move from renting to buying you can find you see "a real drop in your standard of living" as it can be "impossible to replicate the space" for the money. This seemed like a whopper of a down side to me, but as far as property crazy Kirsty was concerned it was a sacrifice worth making: like most of the UK she clearly believes that being on the property ladder is a desirable aim in itself, regardless of the costs, and that everyone should do everything they can to avoid paying out dead money in rent.

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But is rent really dead money? The answer is that sometimes it is and sometimes it isn't. Basically if house prices are rising and it costs less to pay the interest on a mortgage and to maintain your house (insurance, repairs etc) than it does to rent a similar property then buying is a good idea.

If, on the other hand, house prices are flat or falling and it costs less to rent than to pay mortgage interest and maintain a property then renting is a good idea. In the first case you are paying off your mortgage bit by bit and gradually gaining ownership of an appreciating asset but for less than it would cost you to rent. And in the second what you save by renting can be invested so you can buy when circumstances change. Obviously a few other factors are relevant too (there are the huge costs associated with buying - stamp duty, legal fees etc- for example) but the equation basically comes down to house prices, rental prices and interest rates.

So which of these situations are we in at the moment? I think it's pretty clear. I've written here about property prices before so I won't go on about it (much) but prices are most certainly not rising and they aren't static either. They've fallen for 14 months in a row and a total of 3.7% in the last year according to Hometrack. And with the numbers of buyers falling and the number of sellers rising that isn't going to change anytime soon, particularly given that prices today are still near the highest they have ever been in real terms. At the same time rents are low and in many places falling, thanks to the massive oversupply of properties available to rent from the nation's miserable gang of buy-to-let investors and given the rising levels of inflation there is every chance that interest rates may soon rise too (this increases the monthly cost of a mortgage but has no effect on rental prices).

Add it all up and in almost every city in the UK it is now cheaper to rent than to buy. In my building in Paddington, for example, I figure it is now around £5,000 a year cheaper to rent a two bedroom apartment than to buy one (assuming you do so with a 90% interest only mortgage) despite the fact that asking prices in the building are already down 20-odd percent from their highs a year ago.

So why on earth would you buy one? It's a very expensive way to put yourself on the ladder.' If you rent instead you can save your five grand a year and put it towards buying a flat when prices have fallen another 20% (which they will). You'll also keep yourself free from the hideous financial burden that comes with buying over-priced property and the risk of negative equity. Look at it like that and it seems to me that right now it isn't rent that is dead money' for new buyers, it's mortgages.

I'm pleased to say that Kirsty and Phil didn't manage to find a house for the renting couple mentioned above (actually I've never seen them successfully find a house for anyone, although they've been on the air for so long now I'm sure they must have). So hopefully they are still renting their charming country cottage, and putting the savings that come with it aside for a time when buying does make sense. I wish the first time buyers among my family and friends would do the same.

By Merryn Somerset-Webb, editor-in-chief, MoneyWeeFirst published in The Sunday Times 4/9/2005