Whether it was the crippling indecision of Hamlet in the early 1600’s, or the dilemma experienced by many today, one thing is for sure, this innate human trait of indecision has been around for a long time. It is ironic, since indecision is the thief of time itself.
To Buy or to Rent, is a question that many in Dubai are currently asking. The question is certainly easier than the answer, so in this article, I intend to explore the implications and the mechanics of the decision making process.
Firstly, it is important to consider the primary reasons for owning your own home, rather than renting it. I see three primary reasons, which are as follows:
1. Security of tenure
The guaranteed right to live in the property for an open ended and unspecified period of time;
In many cultures, it is emotionally rewarding to live in a property that you own, and also to have the opportunity of making changes, alterations and upgrades, without the prior consent of a Landlord; and
It can be financially rewarding and more beneficial, to live in a property that you own, when compared to renting a similar property.
For a lot of Expats making the “Buy or Rent” decision in Dubai, time scales (in the context of their time spent in the region) will also be a fundamentally relevant factor unlike that which might typically be the case if they were making the same decision in their home country. For that reason, the financial consideration is often a dominant component of the answer.
With this in mind, I think that it is important to consider the value of property in terms of its ability to generate a net return on capital in a mortgaged scenario. Most people with a keen eye on the property market might look only at the simplistic Gross Yield and not the more relevant Net Yield (Net ROI), however, the true net return on capital, in a mortgaged scenario is rarely calculated. I think it is therefore important to consider this key metric because it takes the mortgage costs into consideration, and helps highlight the potential strain that can be caused if or when interest rates rise.
Higher interest rates inevitably result in higher mortgage costs, which as a result increases the cost of ownership, and decreases the net return on capital. To illustrate this more effectively, and to enable a more analytical assessment of the financial benefits of owning a property rather than renting it, one can build a basic “net return on Capital” calculator using our excel spreadsheet. Please use the spreadsheet I have devised and insert your own data into the relevant cells. The variable factors should be inserted into the cells highlighted in light grey and you can change these to suit your specific requirements, which I hope you find helpful.
For simplicity, the calculator functions on a mortgage interest only basis, and does not account for the impact of reducing the mortgage balance over the longer term, or the degree to which the term of the mortgage will impact the final results.
However, this basic calculator does highlight the initial net return on capital that you can expect to receive, if you decide to buy a property using your maximum Loan to Value mortgage product rather than renting a directly comparable property.
There is no steadfast rule for what represents “fair value” in terms of net return on capital, however, the market will always find its level and it is perhaps obvious to say that as the return on capital rises, the more compelling option is to buy. On the flip side, the lower the percentage return, the more attractive it becomes to rent and to invest your capital elsewhere. The capital value of the property market will therefore rise and fall to maintain a suitable equilibrium.
As you play around with the calculator, you will notice that the net return on capital increases when rental prices rise and when interest rates fall. Whereas, when interest rates rise, and rents fall, the rate of return will decline.
Rising interest rates could have a negative impact on the market if other influencing factors do not act as a counterbalance. However, the authorities have some powerful fiscal policy tools to stimulate the market if it is deemed necessary.
For example, if the recently imposed restrictions on mortgage lending are relaxed, this will result in higher Loan to value (LTV) mortgage products, which will reduce the initial capital that buyers will require to invest. This in turn, will raise the net return on capital, making it more appealing to own or buy. To analyse the impact of this you can change the mortgage LTV percentage in the calculator above to suit your own circumstances or requirements.
Ultimately, the decision with regards to Buying or Renting is not an exact science, as there is risk attached to both options. The right decision is always linked to personal circumstances, as much as it is to market fundamentals. As a general rule of thumb, I have always been of the opinion that if you intend to live in a property for 5 years or more, then there is a high probability in my view, of it being financially more rewarding to buy than to rent.
Head of Sales & Leasing
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