Can't I just rent forever?
March 31, 2014 8:38 AM   Subscribe

I rent a flat with my SO in London. We've finally saved enough to be in a position to buy a home but the insanity of the market is making me hesitate. What to do?

We originally moved here years ago and have come to love London - apart from the housing madness. After five years in noisy, cramped expensive places close to the centre we moved further out in the hopes of finding some way of living here that didn't make us crazy. The plan was to rent for one more year then either bite the bullet and buy a flat, or just cut our losses and plan to move back to our previous (cheaper) city.

The first part worked out well: we found a great place in a location that we love, and decided we'd like to stick around for a few more years. We have savings enough to provide a deposit + fees + moving costs + emergency fund, and our mortgage application prospects are looking good - we're all set to get on the ladder at the end of our current lease if we want to.

Except, the housing market has become super-crazed in the past 12 months and I'm freaked out by what appears to be a massive bubble. Flats on our street are sold in days at way above asking prices - and this is in a relative backwater. The places we can afford to buy now are not places we'd be happy to live which would kind of defeat the object. We also love our current flat and don't want to move. In an ideal world we'd offer to buy this place but if it were to go on the market we'd be trampled in the rush to outbid us.

The second complication is my age - I'm late 30's (he's younger) and after years of moving around I just want to settle for a bit but I cannot get my head round committing myself to a 25 year mortgage on a tiny, crappy flat that will suck up all of our income, especially seeing as interest rates are predicted to rise. This is not helped by knowing we could have a whole house fully paid off in fifteen years if we go back home, a place we both know and love but - well, it's not London.

We both have decent careers with in-demand skills, we have no other consumer debt and we won't be having kids so we are pretty flexible. I just look at the money we've taken years to build up and I'm scared about spending it all on something I'm not sure I even want. However if we don't do it now we may be priced out altogether, in which case we're renting for as long as we're here (is that even a bad thing?).

Our options therefore seem to be:

1. Stay and keep renting nice flat (happy life now but insecure in the long term)
2. Stay and buy crappy flat now (misery and short-term financial instability now but potential long-term gain)
3. Stay, keep saving and buy nicer flat later (risk of being priced out of market altogether)
4. Leave to buy elsewhere (???)

None seem all that appealing. SO is equally ambivalent. Is there anything else I need to consider here?
posted by socksister to Home & Garden (25 answers total) 6 users marked this as a favorite
Are your criteria primarily financial? There are some markets where it never makes sense, numbers-wise, to buy. Check out this calculator on renting vs. buying--it's in USD but I imagine you can adjust it to your variables as needed and just leave whatever doesn't apply blank.

Now, there are emotional criteria which cannot be answered easily. How much are you willing to pay to have the ability to renovate, give a long-term home to children, never have to move? That's entirely up to you.
posted by epanalepsis at 8:49 AM on March 31, 2014 [2 favorites]

You know the saying "we'll cross that bridge when we get to it"? The choice you'll have to make if you're not able to stay long-term in the rental flat you love at a price you can afford is that bridge.

Your alternative #2 is jumping into the roiling waters of a storm-flood creek right now, before you even get to the bridge.

Alternative #3 is the same thing as alternative #1.

Alternative #4 is just changing your path entirely, walking away from the roiling creek to a different destination even though the path along the creek is mostly taking you in the direction you want to go. Well, when you come to the bridge (your flat gets sold out from under you) and it turns out you can't cross the creek at that point because the floodwaters have completely engulfed even the bridge (you've been priced out of the market), THEN you can think about changing directions entirely--that option should still be open to you.
posted by drlith at 8:50 AM on March 31, 2014

I cannot get my head round committing myself to a 25 year mortgage on a tiny, crappy flat that will suck up all of our income

This seems to be the heart of your problem. It sounds like you don't want to live there. You can weigh renting and owning separately, I think, but it sounds like you should not buy THIS place at all.
posted by roomthreeseventeen at 8:52 AM on March 31, 2014 [2 favorites]

Well if the housing bubble here in the US taught us anything - don't count on option 2 being a potential long-term gain. As soon as your local housing bubble pops, you'll be cursing yourself.

Personally, I'd go for option 1. There are a lot of merits to renting that people don't consider. For example - no expensive repairs or appliance replacements (I assume landlords in UK are responsible for these like they are in US). No property taxes, maintenance fees, or the like. And of course financial flexibility - one of you loses a job, you can break your lease and downsize to a smaller place. Can't do that with a mortgage.
As for making the place truly feel like your own - most landlords (at least in US) will allow you, with their prior approval, to make improvements to the space that will increase its value. So if you want to renovate the kitchen at your expense, your landlord will probably get on board. So you don't necessarily need to own to accomplish this.

Also if you're still contemplating moving back home, you won't want the hassle of owning an investment property where you don't live. Even if everything goes smoothly, you'll still end up hating it.
posted by trivia genius at 8:53 AM on March 31, 2014 [5 favorites]

South-East England is currently in the throes of a housing bubble. The market is overheated. Buying now just for the sake of buying is .. well, I wouldn't do it. I would do it if I really loved the place and I could see myself living there forever.
posted by kariebookish at 8:59 AM on March 31, 2014 [11 favorites]

I'm not sure how mortgages work in the UK, but here in the States the fact that it's a 25-year mortgage is not really a commitment - if you sell the house, the mortgage gets paid off using the proceeds from the sale.

I don't think I'd want to buy an apartment/flat in a major city like London or New York when I could just rent. But that's just my own opinion.

If you perceive the local real estate market to be in a bubble, then wait until that bubble bursts before you buy, and keep renting in the meantime. I'd say consult a real estate agent, however, any agent has a vested interest in getting you to buy (their commission on the sale).

If it were me, I'd stay a renter in my nice apartment until the bubble bursts and I can buy a similarly nice apartment for a lot less money.
posted by tckma at 9:04 AM on March 31, 2014

Addendum: If I were you, I would wait around 18 months to see how prices react to a) the Russian money and the potential for instability in Eastern Europe (Russian gas money play a huge part in the current housing bubble); b) the outcome of the Scottish independence referendum as it may affect UK economic outlook; c) the 2015 referendum results. All three things may deflate or inflate the housing bubble.
posted by kariebookish at 9:07 AM on March 31, 2014 [4 favorites]

I was a home owner for the past 20 years, I surfed the wave and got caught out on the last house. Can you say "money pit?"

I am now a happy renter. I have the perfect place for me, and when things go wrong, it's someone else's headache.

You know what else is nice about renting? If you want to move, all you have to do is find the place you want to move to, give notice, and move. You don't have to wait for a buyer, or fix things up for showings, or keep the joint spotless.

If you can afford to rent less expensively than buying, and you LOVE your rental. I so NO reason to buy just for the sake of buying.

Look at all that hassle you just saved yourself. You don't have to pack, you don't have to move, you don't have to spend your weekends looking at places, and your future weekends are all yours, no decorating projects, or hassles with a boiler breaking and having to pony up a bunch of cash to fix it.

Save your money, you never know, the bubble will burst and you'll be in a position to buy a wonderful place. But never settle, you'll HATE any place you buy that isn't right for you.

It's never a mistake to live within your means.
posted by Ruthless Bunny at 9:12 AM on March 31, 2014 [11 favorites]

This is a really tricky one, and I'm not sure many responses drawing from American experiences (other than NY and SF) will be germane here.

The housing insanity translates into more BTL owners and more crappy rentals and higher rents to cover the costs of the BTL owners, so you're going to be feeding the beast one way or another. That's even before considering the effects of London property becoming the way that the world's gajillionaires store their money.

The standard London path for middle-class people has been: rent crappy place / houseshare, then rent nicer place, then buy crappy place, then buy less crappy place using profits on crappy place, and somewhere along the line you cash out and move to a bigger house in Surrey or buy a village in Shropshire or something similar.

Personally, I think the only way to win here is not to play, because you're competing with other desperate first-time buyers who'll fight like it's the Hunger Games, a host of BTL skimmers, and a pack of foreign oligarchs. I've had friends had to deal with "ghost gazumping" recently, where the seller raises the price at the last minute by pretending there's a new offer, and the purchase falls through. That's how crazy it is right now, and as you said, the governor of the Bank of England has made some unsubtle hints about raising interest rates in the mid term.

If you're comfortable paying rent, have a landlord who isn't going to sell out or price you out, and are comfortable not thinking about the multiplier effect of buying in London -- after all, a house is primarily a place to live -- then keep renting, keep putting money away, and wait until you're finally sick of London to buy.
posted by holgate at 9:15 AM on March 31, 2014 [6 favorites]

What about stay where you seem to like renting and working and keep saving toward retirement and a retirement-era home later?

As you get older, it becomes more likely that you will tire of London (but not life) or London rents and have the desire and professional clout to go somewhere quieter. Or rent in the city and own a vacation/summer home that you can rent out for income when you're not using it. Or save for another 20 years and buy a boat and sail around the world, whatever seems right for you at the time.

Buying is no longer a guarantee of future wealth, and the value of renting's flexibility is not always obvious until you've had some sort of life event that shines a light on it. The worst reason to buy is fear of missing out on a deal that's barely a deal. And if you're both under 40 you guys may have serious professional advances in the near future that would suck if you couldn't take them because you're tied to a location.
posted by Lyn Never at 9:24 AM on March 31, 2014 [2 favorites]

Just to chime in - I'm not sure the standard Rent vs Buy calculators and logical chains apply here - the London market is INSANE and has been so for literally years. There was never even really a bust, even after 2008, just a momentary dip. There are also real signs that the Help to Buy scheme is helping to reinflate a nasty looking secondary bubble.

If you buy now, you'd have to want to live in London for 10+ years at least, I reckon, otherwise you stand a pretty high chance of paying a ludicrous mortgage in a massively overheated market for no real gain.

If I were you, I'd continue to rent and save (although if you've got together a decent deposit, you might be able to save towards other things, like emergency fund, or even a holiday), then eject from London in a few years and buy somewhere you really want to live.

You could take the chance that the bubble will still be going up (and there's so much hot international money in London that it's actually not a crazy bet, just a scary one) and you'll be able to sell at a profit in a few years, but that's not a bet I'd take.
posted by Happy Dave at 9:30 AM on March 31, 2014 [1 favorite]

Hi! I'm writing from Vancouver Canada where we are also under the spell of a historically enormous housing bubble, and I am well acquainted with the sense of pressure you feel to "buy now or forever be priced out". These feelings are the result of a speculative mania that reinforces the feelings of success and security of those already locked-in to the housing ladder and which only serves to normalize the profoundly abnormal conditions that feed this bubble. People will be compelled to offer every kind of rationalization for what would otherwise be recognized as poor logic. Disregard this. There is no shame in renting, and the greatest indignity you put yourself at risk for is having to move somewhat more often than you may like. There are however other advantages to renting. But those don't matter, it's not so simple an equation between the two. Buying in what is, around here, casually referred to as a "frothy" market has so many attendant risks that are easy to gloss over when speculators appear to be laughing their way to the bank all around you. From my perspective, it's simply not worth it, even if you can stretch yourself to "afford" it. The costs are higher than they appear, the risks far greater, and the entire charade is at root only the result of historically aberrant low interest rates that everyone knows will eventually rise. Over here the sense is that astronomical prices are justified, that we are getting our due, that we deserve these valuations, but underneath all that everyone acknowledges it is "crazy" and that affordability (absurd mortgages are justified by their current carrying costs) will fall. I sense you understand these realities but feel pressure from the environment around you. I would encourage you to listen for and examine deeply your doubts, they are steering you right.
posted by kaspen at 9:35 AM on March 31, 2014 [4 favorites]

there's so much hot international money in London that it's actually not a crazy bet, just a scary one

This is the key issue: London itself is increasingly disconnected from the UK housing market, and has more in common with other cities around the world whose property is now a deposit box for global capital, like Sydney and Vancouver; SE England has become its penumbra as "normal" Londoners cash out in a hot market.

Everything I hear from my London-based friends speaks to the craziness; those friends who work in the City and have to judge the markets for their day job are about ready to hit the eject button, but they're generally in their early forties and had the advantage of getting on the housing ladder a decade ago.
posted by holgate at 9:44 AM on March 31, 2014 [1 favorite]

there's so much hot international money in London that it's actually not a crazy bet, just a scary one

>This is the key issue: London itself is increasingly disconnected from the UK housing market, and has more in common with other cities around the world whose property is now a deposit box for global capital, like Sydney and Vancouver; SE England has become its penumbra as "normal" Londoners cash out in a hot market.

If I could interject once more, from a Vancouver perspective this is all just part of the self-reinforcing narrative that there is some justifiable fundamental reason to explain the absurdity of the bubble. I'm not saying Russian money doesn't exist and doesn't impact London, and over here the media is dominated by apocryphal stories of Mainland Chinese money flooding about, and again it does exist and does have impact, but it is not the make-or-break be all end all. The root is still historically low interest rates and the associated carrying costs of previously unthinkably large mortgages, and the bulk of the market remains local players investing with locally obtained debt. The "international finance" angle is just another of the rationalizations current homeowners and debt-holders use to justify their positions.
posted by kaspen at 10:00 AM on March 31, 2014 [3 favorites]

The question you need to answer is - where do I want to be in 25 years time? Do I still want to be in London, working and paying the mortgage? In which case, sure you can buy, as long as you are comfortable with the possibility that you might stay in that flat for 25 years. If that sounds realistic then it doesn't really matter what the housing market does, because you wont be selling.

If you want to buy a flat, then in 5 or 10 years move into something bigger, then buying during the bubble is riskier, because you need prices to have increased by that point, or you need to have paid off enough to be able to handle the loss of value.

If you want to move back to your home town within 25 years to retire, then its kind of the same as my previous option, but a bit less risky because presumably housing is way cheaper there.
posted by Joh at 10:10 AM on March 31, 2014

My wife and I originally moved to a London for a two-year stay. We fell in love with the city and kept extending it year-by-year. Eventually we decided we were here for the near-term, at least, and we started thinking about buying.

What helped us was the following process:

1A. Figure out what we would pay in rent for a livable flat.
2A. Added up the money we had for a deposit, and figured out what it would be worth in 10 years if we invested it in the stock market, assuming standard rates of stock market gain.
3A. To the amount in 2A, we also added in whatever we'd be able to invest each month (if anything) after we had paid our rent.

Then we did the same calculation for buying:
1B. Figure out what we would pay per month for a mortgage on a liveable flat.
2B. Figure out how much equity we'd have built up in the house in 10 years, and what the total value of the house would likely be, assuming standard rates of housing gain.
3B. Then we added in whatever we'd be able to pay invest each month (if anything) after we paid our rent (plus money for repairs, etc).

Obviously this requires a lot of assumptions and guesswork about the future. But it helped clarify things for us. By putting both these formulas into a spreadsheet, we could tinker with all kinds of different assumptions. What if the housing market crashes? What if interest rates go up? What if we only hang on to the house for 5 years? What if one or both of us is unemployed for a month? For a year? FOREVER???!?!?

After we had done that for a while, we knew, basically, that if we could find a house we liked for £X, and get an interest rate of Y%, it would probably make sense to buy. If not, the rational decision would be to rent.

As it happens, I think that approach steered us away from buying during the previous height. We held our fire and didn't buy until we found a flat that made sense to us at a price that made sense to us, and we ended up (inadvertently) timing the market pretty well.

We weren't trying to forecast any sort of grand economic trend -- but as it happens, if the renting vs buying vs investing numbers don't make sense for you, they probably don't make sense for the economy as a whole.

So I would encourage you to just put your head down and worry about your personal household math. Ignore the friends who say "You're crazy if you buy now!" and ignore the friends who say "You're crazy if you DON'T buy!" I totally get how personal and emotional a decision buying a house can be, but the more you treat it like an abstract mathematical problem, the more likely you are to make a good decision.
posted by yankeefog at 11:58 AM on March 31, 2014 [10 favorites]

Just chiming in from Sydney... we sort of did what yankeefog suggests and played around with the nytimes rent vs buy calculator and made peace with renting until we're ready to move. We're in a situation very similar to you.

And yeah, I have a handful of co-workers all freaked out about buying and getting a foot in "the market". I'm sure they think I'm crazy, but it's mutual ;-)
posted by jrobin276 at 2:39 PM on March 31, 2014

We are about to move from owning to renting. We are RELIEVED. Home ownership and upkeep is expensive and we are almost 50% underwater in our house. We don't and won't have children to leave anything to so we will be in no hurry to buy again, if ever. We are in our late 40s.
posted by michellenoel at 3:18 PM on March 31, 2014 [1 favorite]

I own my flat in London. I love it, I could never ever rent again. I love the fact that it is my space, that I can do what I like with it, I don't have deal with housemates, and no shitty landlord can take it away from me. What swayed it for me was when I realised it was an investment in my quality of life rather than a financial one. But I was able to buy in 2008, and I know how lucky I was. I don't know what I'd do if I had to make the same decision now. I couldn't afford to rent a place by myself back then, and I certainly can't afford the rents now.

I think sometimes people worry too much about the housing market without thinking about what they want in a home. If the financial risks are more worrisome than having to deal with lettings agencies (or whatever it is that you want to gain from owning your own place), then don't buy, continue to rent your nice flat and put your money somewhere else.
posted by Helga-woo at 3:45 PM on March 31, 2014

I've lived in zone 2 for 10yrs. I just played around with the rent/buy calculator linked above based on what we paid for our house in 2003, and despite the fact that it doesn't charge renters for utilities or taxes (occupier pays them here, not owner), and random $20000 "closing costs" which we don't have here, I am apparently £408000 in credit.

What people outside the UK do not seem to realise is that rents are extremely high here, because you are basically paying the landlord's mortgage, plus a buffer for his repair fund, and then 10-20% profit for him on top. Rents in our area are 25% more than a mortgage on the same place would be, and rents are rising faster than house prices at the minute. Tenants don't have any security or stability - it's expected that you'll move every 12months so the landlord can crank the price up for the next tenant. You can get priced out of London even as a renter, ask some of my friends.

I'd be more worried about affordability if interest rates go up. If you can cope with 5%, which I do remember paying about 15yrs ago, I would go for it. That would be based on buying something you actually want to live in though, you're likely to need to stay put for 5+ years to make any money back on it.

I'd also consider your job prospects - is your household income likely to go up (will stretching yourself now be less of a stretch in 5yrs), or will you be struggling for money for the next 20yrs? When we bought ours in our early 20s it was at the limits of affordability for us, and now in our late thirties it is a much smaller percentage of our income, which is handy when you have kids and want to work fewer hours.

Good luck with it, it's a difficult decision and I don't envy you.
posted by tinkletown at 4:39 PM on March 31, 2014 [1 favorite]

I think, in Sydney, rents are artificially low compared to what tinkletown is indicating is the case in London. Many rentals here were purchased a LONG time ago (or with foreign inv. capital, I think), so there's *no way* we could put enough down on a mortgage to get a mortgage payment similar to what we pay in rent. We'd need a deposit of about 60-70% in order for what we'd be able to charge in rent to just cover the mortgage payment. (Our rent is about 20-25% of our income - we're being practical here!)

60% of market value of our unit would buy us a nice-ish 2-3 bed house outright in a country town, or two 4-bed houses from the mid 1990's (again, outright) within commuting distance of Chicago (I'm from the US; friend of mine just bought such a house). That's life-changing amounts of money for us... there's no way I'm spending that much on a tiny 2-bed unit in Sydney as a deposit.

I don't know if this helps you necessarily, but it made our decision a lot easier! (And is likely the case in places like NY or SF)

In my experience, this is what a rent vs. buy calculator should be telling you: comparing your current rent with what mortgage payment you'd be able to get, and how long it would take for that to start paying off. Math is the same everywhere - even in London.
posted by jrobin276 at 5:36 PM on March 31, 2014

Having been an owner and renter in London, I must say for quality of life renting is far superior. Many London properties, which are usually old, are one time-consuming pain and expense after another for the owner/occupier. But for profit, I have never seen a better investment than London property. It never really goes down. It may rise less slowly from time to time, but in decades has not failed to rise. No one I have ever heard of has lost money buying and then selling London property (unless they over-improve). It is quite a dilemma. So perhaps the question is which is more important to you-quality of life or making a profit?
posted by claptrap at 3:11 AM on April 1, 2014 [1 favorite]

how about option 5: stay renting in London, buy a nice place in your hometown, rent it out and pay off the mortgage with the rent income, move back at some point to your own house that's all paid up. Or sell it, if you decide you want to stay in London. Or move back if the rental market prices you out.
posted by corvine at 7:40 AM on April 1, 2014

I just wanted to add one thing to my previous comment:

In the US, I believe interest paid on a mortgage is tax-deductible. There is no equivalent deduction in the UK. If you use a rent vs. buy webpage that is based in the US, it may be assuming you will get a tax deduction, which will obviously skew things. It may also be making certain assumptions about property tax and fixed-rate mortgages which may not apply to UK property.

If you have some spreadsheet skills, I'd encourage you to make a spreadsheet and do your own calculations, just because I think that will help you understand all the factors you're dealing with. If you aren't comfortable with that, and you want to use a web-based calculator, do make sure it is a UK website.
posted by yankeefog at 3:08 AM on April 2, 2014 [1 favorite]

If you're happy renting, then keep renting until you're unhappy. We purchased at the peak of the bubble, in fear of being priced out forever if we didn't buy *right then*. Now we'd love nothing more than to be renters, but we can't afford to sell any time soon, so we're wearily staring down the barrel of another decade as homeowners.
posted by spinturtle at 5:14 AM on April 3, 2014 [1 favorite]

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