Exploring the 'should I buy or rent' dilemma

Tenants, 20-somethings reluctant to leave the parental nest and anybody else yet to take the plunge on the property market are often nervous about signing up to a financial commitment as life-changing as a mortgage.

The thought of taking on six-figure sums of debt can be intimidating at the best of times, long before potential first-time buyers start worrying about whether economic conditions mean it is currently a good or bad time to buy.

The oft-predicted crash in the housing market has yet to happen, but growth in property prices is slowing down. Interest rates are expected to go up soon, possibly before Christmas. Meanwhile, average rents are falling.

For the tentative tenant, there is plenty of scope to interpret the situation as a signal to shun buying and stick with renting. But is it ever a good time to rent?

"The day that prices stop rising is the day that people feel that renting is not such a bad deal," says Mr Colm McCarthy, an economist from consultancy firm DKM.

For many younger people and low-income earners it is not a matter of choice: their salaries are simply not high enough to be able to borrow what they need to purchase the tiniest of studio apartments in a commuter town 40 miles outside the city, much less a three-bedroom suburban starter home of old.

But this is very much a Dublin dilemma, according to Mr McCarthy.

"In Dublin, unless you're willing to live in Mullingar, you're looking at paying €300,000-€350,000 or more. You need to go very far out before you can go into the price bracket you can afford," he says.

"But in many places around the country, like Killarney or Birr or Loughrea, you can probably quite easily pick out a three-bedroom house with a back garden for under €200,000. With two incomes, that's not out of the question at all."

Even in Dublin there are people on the cusp of qualifying to borrow enough money to buy their own home, yet seeking mortgage approval is the last thing on their minds.

"You will always find excuses not to buy," according to Mr Austin Hughes, chief economist at IIB Bank.

Concerns that rising oil prices could lead to a massive worldwide economic slump have of late been voiced alongside news that interest rates in the euro zone are about to increase, he says.

"If you are a first-time buyer, that's probably the worst set of circumstances."

But much of the alarm is just "noise", Mr Hughes believes. "One of the difficulties people have is finding out what the real underlying trends are amidst all the headlines."

Nobody wants to be part of the generation that makes its move at exactly the wrong time.

Waiting to buy could mean house prices spiral further out of reach but, on the other hand, borrowing 92 per cent of the purchase price at the peak of the market could leave people trapped by negative equity.

A nightmare for all homeowners, negative equity occurs when homeowners owe more on their mortgage than the market value of their house, thanks to a fall in property prices.

If they sell their property, they would still owe their lender money, as well as having to fork out for legal and estate agent costs. Their 8 per cent deposit could also be lost.

Negative equity proves especially expensive and/or awkward when couples split or co-buying friends decide they want to sell the property and go their separate ways.

The good news is that few economists believe the housing market will crash dramatically anytime soon, if ever.

The rate of growth in the market hit a three-year low during the first half of 2004, according to the latest Permanent TSB/Economic and Social Research Institute (ESRI) house price index. But prices still rose by 5.7 per cent in the first seven months of the year.

The average sum paid for a property in Dublin in July was €324,070, compared to €308,214 in January. Outside Dublin, the average paid rose from €205,364 to €217,406 in just seven months.

So this year it has still paid to act as quickly as possible. Anyone who bought at the start of the year is already cushioned against negative equity and has already reaped the financial benefits of property investment.

From now on, however, it could pay to be selective about the property you buy, according to Mr Hughes.

The forecast for next year is that house prices will rise by an average of 6 per cent, he notes. Some properties will increase in value by exactly that 6 per cent, others will rise by 10 per cent, meaning others could fall in value.

Higher interest rates will also deter some buyers and Mr Hughes expects the property market to look "a little bit wobbly" over the next six to nine months as a result.

"If you're someone who doesn't sleep at night, that's going to be upsetting," he says.

But the underlying market is still solid and encouraging, he stresses.

"If you buy, you might not be dramatically better off in six months. You have got to factor in that, on a two- to three-year basis, you will be better off."

The "you have to get in, you have to get in now" arguments are less compelling than they might have been when percentage price gains more comfortably reached double digits.

"People can afford a little more leeway," says Mr Hughes.

Nevertheless, not all of the urgency to buy has dissipated - "getting in" sooner rather than later is still advisable.

So should would-be buyers be worried about interest rates rocketing?

Lenders set mortgage interest rates at a margin above the European Central Bank base rate. This is currently 2 per cent but is forecast to rise up to 2.25 per cent at the end of the year or in early 2005.

"If euro-zone interest rates do go up, then mortgages will become more expensive," says Mr McCarthy.

This will price more people out of the market.

But the cost of borrowing is not going to increase by frightening rates, according to Mr Hughes, who says that a three-year fixed-rate mortgage is always an option for first-time buyers who feel threatened by rising interest rates.

The decision to rent or buy is sometimes complicated.

Irish people want to own the house they live in. Long-term renting just isn't the cultural norm it is in the US or some European countries.

At the same time, a recent IIB/ESRI recent study indicates that Irish consumers are more worried about amassing debt than our UK counterparts. So we want to buy, but we don't enjoy borrowing.

Even when people can afford it, inertia and lifestyle concerns often deter them from buying.

First-time buyers usually end up compromising on location, settling for places "off the beaten track" where they would never consider renting, says Mr Eamonn Fallon, business development director for Daft.ie, a site advertising places to both let and buy.

Rents have gone down by as much as 10 per cent since 2002, Mr Fallon notes.

"It used to be a landlords' market, now it's definitely a tenants' market.

"People can take more time to choose, they can make demands and they can negotiate on rent."

Standards have gone up. No longer does rented property exclusively come in the form of dingy student digs to be escaped from as soon as possible.

Now tenants are re-signing leases because they like the property, enjoy the convenience the location offers and they know that if the pipes freeze it's the landlord who has to fix it and pay to fix it.

It may not make sound financial sense, but there are plenty of reasons not to buy without having to cough up the price of oil as an excuse.