The growing gap between tenants and owners
It is one thing to pay a lot more for a house than you would like because of rising house prices; it’s another, however, even not being able to do it, despite paying so much rent, you could potentially make the mortgage payments twice.
Yes, as a report from the Residential Tenancies Commission released on Wednesday shows, rent continues to consume a substantial portion of tenants’ take-home pay.
On average, tenants who responded to the report spent 36% of their net income on rent, which is not far from the level recommended by financial advisers, namely that around 30-35% of after-tax income should be spent on housing costs. .
Some, however, pay a lot more. In Dublin, for example, two-thirds reported spending more than 30% of their net income on rent. Other recent figures from Threshold show that about 12 percent of tenants forgo between 40 and 50 percent of their pay on rent each month.
It’s not just Ireland where the rent burden is a problem. Housing charity Trust for London, for example, claims that an average worker in London will give up 46.4% of their take-home pay for the average one-bedroom house in the city.
But, as tenants enter âstressedâ repayment levels, landlords face a lesser burden.
Widening of the ditch
In recent times, the main focus has been on rising house prices, as a combination of additional savings, an increased desire to own a home, and consistently high rents has led to a rapid increase in housing prices. request. Indeed, figures from the Central Bureau of Statistics show that prices rose at an annual rate of 5.5% in May, the fastest growth rate since December 2018, pushing prices a little closer to the levels of the peak era.
However, while there is no doubt that the rapid rise in prices is of concern, a combination of mortgage rules and internal lender rules regarding repayment capacity means that it is almost impossible to give up more than about 30 percent. of your after-tax income from your home when you own it.
These rules do not apply to people in the rental sector.
Yes, rent inflation has slowed down lately. However, this comes after years of significant growth. Figures from the European Commission show that between 2010 and 2019, rents in the European Union increased by 13%. In Ireland, however, rents rose 63 percent – the third largest increase recorded in the region, behind only Estonia (+156 percent) and Lithuania (+101 percent).
At the same time, upward profit growth has been weaker; the current average salary remains below the peak reached in 2009 of â¬ 51,488, for example.
This means that tenants bear more of their income than owners.
A recent report from the European Commission found that while the house price-to-income ratio, the affordability index for buyers, remained 27% below its pre-crisis peak, the affordability index for buyers. renters, as measured by income, was 22% above its pre-crisis level in mid-2019, and above its long-term average since 2014.
But those fortunate enough to be able to buy – even as many would argue, they do so at high prices – are likely to experience a sharp drop in their housing costs.
Cheaper to buy
This is not the case for all places in Ireland, but as Daft’s latest rental report shows, buying a house, with a down payment of at least 10% and low interest rates, can be considerably cheaper than renting.
Take West Dublin as an example; a two-bedroom house in the area will cost around â¬ 1,572 per month to rent. But the mortgage payments on such a house will only be â¬ 841, or almost half. And that’s probably an overestimate, given that a mortgage rate of 3.25% was used in the calculation, with 30-year rates now available starting at 2.85%.
Or how about in the Dublin 2 docks where a one-bedroom apartment will cost around â¬ 1,665 a month to rent, but over a quarter less, to â¬ 1,218, to buy. Or Galway City, where a three-bedroom house will cost around â¬ 1,288 per month to rent, but â¬ 906 to buy.
If you think of this as a percentage of the average income, which is around â¬ 45,111, according to the CSO, that means that a person earning the average income will have â¬ 2,857 in take-home pay. Renting this house in Blanchardstown would cost them over 50 percent of their after-tax income; but if they owned it, it would be about 30 percent. Likewise, in Galway, rental accounts for 45% of income, but ownership is only 32%.
With a typical affordability measure of keeping housing costs around 30-35% of take-home pay, we can see how homeownership is still more affordable than renting, depending on the region.
Why not buy?
Bad luck for the tenants then, you might say, because surely they could swap that rent for a mortgage if they wanted to.
But it is not that simple. While a person may give up more than 50 percent of their income on rent – and therefore could obviously pay off a mortgage that is considerably less than that – they will often be prevented from doing so because of the Central Bank’s mortgage rules. .
This is because the rules, as they exist, mean that the amount a person can borrow is tied to their gross income (usually 3.5 times, with exceptions available, usually for high income earners), rather than the amount. amount she can afford to repay each month.
So is it time for a change?
Kevin Johnson, chief executive of the Credit Union Development Association, thinks so. He notes that some applicants’ mortgage payments are only 20-25% of their net income under the 3.5 times income rules, but they can’t borrow more. Instead, he suggests the regulator switch to a different measure, used in some other European countries, that allows people to borrow up to a maximum of 50% of net income spent on all debt repayments, including including the mortgage. This would allow a cohort of people, including those who are forced to pay large rents, the opportunity to buy.
While 50 percent may seem a bit high, there may be an argument to relax the rules somewhat for those with such high housing costs.
As the regulator undertakes a review of its mortgage rules (you can answer here), at the very least, reducing the growing divide between tenants and landlords should be a consideration.