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Buy or Rent? 18 Years of Rent Would Pay for the Whole House
11 May 2018
Rents are skyrocketing in Portugal. After 18 years of paying rent, tenants would have already paid enough to cover the value of the home in which they are living.
There are nowhere in the country where it is better to rent than to buy. For the first time, data published by the National Statistics Institute (INE) permit comparisons between the cost of buying and renting, and the conclusion is that even in areas of the country that have seen the greatest price pressures, where sales prices are demonstrably inflated in relation to the national average, buying a home is always cheaper than renting, as long as buyers have enough money to for the downpayment. After 18 years of paying rent, a tenant would have paid enough to cover the cost of the home he or she had been renting. In some cities, rents cost 60% more than equivalent payments for purchased homes.
ECO evaluated the case for renting or buying based on the average cost per square meter for each of the district capitals in Portugal. The data was extracted from the INE’s statistics. For rentals, ECO only considered the value of the monthly payment.
In the case of purchases, two alternative scenarios were taken into account. In the first, only the home’s purchase price was considered. The second accounts for the additional costs associated with home ownership: the monthly mortgage payment (including principal, interest, insurance and commissions), based on the calculations using the Bank of Portugal’s simulator, the Municipal Property Tax (IMI) due each year, the Municipal Tax on Real Estate Transfers (IMT) and the stamp duty payable at the time of purchase.
Payments for utilities, such as water, electricity and gas, were not considered for renting or buying.
In the first scenario, which only factored in the average purchase price per square meter, buying a 100-square-meter home in Portugal would cost 93,200 euros. Renting the same house would cost 439 euros per month.
This means that before the end of 18 years of rental payments (more precisely, at the end of 17 years, eight months and one week), the tenant would have already spent enough money to pay for the home, assuming that the rent remains stable during that period. In most cases, according to the Bank of Portugal’s data, mortgage contracts for home acquisitions last for over 30 years.
In some cases, it could take even less time. In Braga, Santarém and Beja, tenants would have to live in their homes for less than 15 years. On the other hand, it would take 21 years to pay the full amount of the average home in Lisbon.
Renting costs up to 60% more than buying a home
While the specific cost varies from region to region, there is a common thread: at the end of the month, even when factoring for the cost of taxes, insurance, commissions and interest associated with bank loans, renting always costs more than buying.
These simulations, which compare the monthly cost of renting or buying a 100-square-meter home, in a ten-year-old building, without a garage or any other significant added-value, in each district capital of the country, employed the following assumptions: the amount of the financing would be for 60% of the property’s total value, with a term of 30 years, an annual interest rate of 1.31% (calculated with a spread of 1.5%, and the monthly average of the 12-month Euribor at -0.19%). For calculating the IMI, it was assumed that the taxable asset value (VPT) would be equal to the purchase price. Expenses with condominium fees, maintenance, and expenses with water, gas, electricity and other services were excluded from both calculations.
The difference in cost exceeded 60%. Lisbon, the most expensive area of the country for renting or buying a home, has the small difference between the two options. Renting a home in the capital has an average cost of 962 euros per month. Buying the same home costs an average of 243,800 euros. At the end of the month, the owner of a home in Lisbon will have to pay 853 euros per month over 30 years.
In Porto, where housing costs are also much higher than the national average, the rent for 100 square meter home costs 677 euros per month. The monthly cost of purchasing this same home would be 450 euros per month over 30 years.
On the opposite side of the spectrum, the city of Beja has the highest difference between renting and buying: renting costs 68.9% more.
Original Story: Economia Online – Rafaela Burd Relvas
Translation: Richard Turner