To test your assumptions when trying to decide between renting vs. buying in the US you have to check out the modeling tool provided by the NY Times.
Note that this is very much a US model as they have built in the interest payment tax deduction. The model further assumes that a renter does not pay property taxes as that is the case for the US. My friends in the UK are using the model but adjusting for these differences. Check the methodology page if you need more detail on what is built in to the calculation. Use the advanced settings if you want to change the tax rate, adjust for buying and selling costs or factor in HOA and other charges for common areas.
Appreciation?
So, what rate of appreciation is reasonable for 30 years? As an investor I would put in 5%. I work from the assumption that values double every 10 to 12 years so 5% is on the lower end. If you are buying in a market that is going to see values drop for a period then you might want to go lower than 5% to smooth things out. If you are in certain parts of the US, 2% or 3% might be generous even if there is no correction. Remember, a number of areas of the US did not experience a house price boom earlier this decade. Follow this this link and scroll to the bottom where 12 cities are presented graphically. You will see what I mean about markets that missed the boom.
Rent increases?
What about rents? Historically rents broadly track wages. If wages are expected to go up over 30 years then rents will do likewise. You could put in the inflation rate with the expectation that wages and rents will more or less keep up with inflation.
Before boring you with too many fine details and questions go play with the model. Watch how the curve moves after you change the assumptions and recalculate.
Post a comment here as to what you observed. Does the model help?
Note: If you missed the prior post on rent vs. buy, here is the link. David Cook’s article Why Your Home Isn’t the Investment You Think It Is published in the Wall Street Journal was discussed.
