UK Property: Trade-off decision - to buy or rent? Is it financially the same?

[sconry]

We are facing the big dilemma: buy property in a popular UK city, or rent?
Rent, of course, is money down the drain. If you pay £1.5k a month in rent, after a year you have spent £18k in return for 0% ownership.
With mortgage interest rates increasing (since BoE raised interest rates last week by 0.75%), the interest portion of any mortgage payment also increases. Nonetheless, if you pay £1.5k a month in mortgage payments, after a year, you may have spent £9k on interest, but £9k against the principle, thus increasing your % ownership of the housing asset.
So after three years, you'd have built up equity of £27k in your property.
Now, let's say the property is worth £270k. If property prices drop by 10% over three years, you would lose £27k. Is that not then breaking even versus renting?
I guess what I'm saying is that you lose money either way (rent or buy) in the current climate, and rent prices are high.
But maybe, just maybe, investing in a house could leave you with an asset, and therefore still be worthwhile?
I would love to hear the opinion of others. Do you feel interest rates will increase even more? If so, would waiting for house prices to drop be futile, as you'd end up paying an even higher interest rate (shiver) on a lower principle? Again, net / net, the same?
So ... we have a deposit, we have mortgage approval, we've spotted a house in our budget we like ... it's not a forever home, but a stepping stone 3 - 8 year home. Do we take the plunge and get our foot in the door of the housing market, or do we continue to throw money at the overpriced and under-supplied rental market?

Geez, great question! Anyone got a crystal ball?! But the longer you delay getting on the property ladder, the harder it will be in my opinion. You make a good point that rent is wasted money, so even if the property value drops a bit in the short term, you're not losing any more than you would with rent...

It surprised me how much the fees are. Factor in legal, stamp duty, mortgage fees. Of course when you sell this property you will need to pay estate agents fees. You might find you can't justify these fixed costs for 3 years but could for 8 years. That's what we found.

Another cost with ownership is fixing things. We choose a house that didn't need much upkeep/work, so it's not cost us much at all. Other homes are money pits. Although landlords pay for upkeep, some don't bother and then you are left living in bad conditions but you aren't financially on the hook

If you look at historical figures prices don't drop much but volumes do. Ie when prices drop typically people just don't sell. So if you delay you will find it harder to buy when the price is lower because there will be less on the market. Equally if you buy, can you afford to sit tight and wait until the prices rise..... If you can wait in this climate you are less likely to loose the 10%.

The other factors to consider is; how important is stability for you? You can't be chucked out. Do you like interior decor and making a place "yours", that has value to some people.

It's harder to move house if you have to buy and sell simultaneously, rather than just buy.

You might loose money if you buy now. But if you wait, you might feel you can never afford a house. If we waited 3 years this would have happened to us and if we bought 5 years earlier we would be in a 4 bed detached, rather than 3 bed semi. So we should have bought earlier. I guess it might not be optimal now but if you wait you might end up but being able to get anything you want, which is a worse feeling to loose the options.

I probably made it harder but these are the things we noticed upon buying

You should consider inflation as well - a debt of 100k now will only be "worth" 90k in next year's money, if the inflation is 10%. If you want to consider a price depreciation of 10% as well, it means you haven't gained or lost anything by buying during these times, but some of the money you've paid might be recouped in a sale from the house equity, unlike renting.

Also, the cash in the bank is depreciating quite quickly at the moment, so it's better invested in something that could potentially keep up with inflation ( could be property, could be s&s, depending on your preferences)

Fees are another thing though - stamp duty can be crippling if you buy multiple properties in a "short" amount of time.

You need to compare rent to the interest payments.

£250k borrowing at 5% is about £1000 a month in interest. 5% would be my ballpark, despite being lower than actual historical average.

Buying has a lot of pluses - not having to deal with landlords, able to do what you want with the property (decor etc), but also means other costs: buying fees, paying for repairs etc.

Everyone recognises that property prices are likely to fall by up to 20% over the coming few years, but I went through negative equity in the 90s and it was no problem really - if you don’t move you don’t realise any loss and in 5 years the house will be worth what you paid for it.

I’ve both rented and bought at different times and if you get a good landlord you can sometimes live in a house you couldn’t afford to buy.

If you stay renting how will you fund your rent when you retire? Generation rent is going to need huge help with housing benefit in retirement and who knows how much will be available.

Don’t forget maintenance, repairs and replacements cost if you buy. A new roof will cost £10-15k, a new boiler £2k, nothing lasts forever and eventually you’ll need a new kitchen, new bathrooms, re-wiring, replacement windows, etc. The longer you own it, the more you’ll have to repair/replace. If you don’t, it will start to lose value (compared to the market).

A few points:

only the interest part of the mortgage is a cost; the capital repayment is money you are paying back to yourself, but you seem to have understood this.

In summary, the upfront costs to buy a property (stamp duty, solicitors, refurbishment, etc) are very high. Even if the real estate market is on fire (and it's not now), you're unlikely to get your money back if you change house too quickly - eg if you're likely to move every 18-24 months, it tends to be better to rent than to buy.

If instead you remain in the property long enough, even if the real estate market goes down, buying still tends to work out cheaper than renting.

You say you are likely to stay from 3 to 8 years in this home. With this horizon I'd buy, but cautiously - bear in mind the post-covid market was a bit of a bubble so don't use that as a reference, eg don't think that 5% below what the house next door sold in the post-covid craze will necessarily be a bargain.

Don't lose sight of the fact that whatever you decide, making that decision will change the person you become.

I rented for a long time. I liked it. My philosophy was "low, light and lucky" and I lived accordingly. I didn't have many possessions. I didn't spend money on decorating, or things for the garden. That meant I didn't have any great hang ups about moving on a whim. So the advantages of renting worked for me because I made all my other decisions in accordance with the options I had as a renter.

Once I bought, I liked that too. But I now had different wants. I started thinking like an owner. I justified to myself, and made, 'investment' decisions about new kitchens, new bathrooms and thought about priorities in other ways than before. I started spending a smaller proportion of my income on experiences and a social life. I acquired a lot more stuff. Power tools. Garden furniture. Ladders.

Neither situation was worse than the other. But I think it is probably harder to transition back from being and thinking like an owner, to being and thinking like a renter. And I think that being younger, or single, suits the advantages of renting and being older, or with dependents, suits the advantages of owning.

If you've previously owned, you'll know this already. But if what you are contemplating represents a change, don't discount how differently you may think about a house primarily as an owner rather than primarily as an occupier.

And - never buy the 'wrong' house just to co-opt that experience of being an owner. For the level of investment buying a house represents, it should be the right house, one that you believe will make you happy, and once you've found somewhere that hits that spot, I'd do whatever it takes to acquire it, and then never think about it again.

Probably a good time to buy IMHO. You look at loads. Put in silly offers. Someone will be anxious to sell.