Most people who have lived through the housing boom and bust of the last 25 years are now finding that a lot of the myths of the Thatcher era have now been well and truly laid to rest through their own experience. How many of us were convinced that buying a house was in our family's long term interest? How many fell into the trap of believing that an endowment policy linked to unit trusts was going to pay off their mortgage early and give a nice lump sum to help them finance their daughter's wedding? We believed the myths that financial advisers told to us because that was what we wanted to believe - so we knew it must be true.
But have we really laid those myths to rest? Or are we still advising our children to take on huge mortgages to protect them and give them and our grandchildren security in the future? Is there any alternative to house buying in order to have control over one's own housing needs in years to come?
I believe that housing co-operatives offer that choice. Purely from a financial point of view, I mean. I'll leave the social, emotional and environmental benefits for later.
In order to test out my theory I compared three options facing young couples looking to solve their housing needs for the next 25 years. The first would be buying a house through taking out a mortgage of £100,000 over 25 years. The second would be paying rent on a private studio apartment. The third would be becoming a member of a housing co-operative and renting a double room with shared communal space. I put together a spreadsheet showing the costs of home ownership, including interest and capital repayments, life insurance, maintenance of the house, legal and estate agency fees for both buying and selling at the end of the 25 years. For the rented apartment there were none of these bills, no insurance, no maintenance, no estate agents fees, just a lack of control over rising rents over the same period of time. Who would have suspected 25 years ago that rents would have risen to such figures as they are at today? Very few people earned in a year what couples are being asked to pay for a month's rent in a small bedsit these days. It's impossible to guess what that figure will be in 2034. Who knows?
Then I looked at the relative stability of rents in a housing co-op. Basically the co-op has to take out a mortgage from a building society just like a couple would do. But the rent covers the maintenance costs, the estate agents' fees, the legal fees. Nobody needs take out life insurance since the co-op can never die. The house need never be sold because members come and live for a while, then they die, or they leave and new ones come and stay there. Once the mortgage is paid off the only rent that needs to be paid is to cover ongoing maintenance on the house. So in the long term rents go down, not up. Yes, of course, if mortgage interest rates go up, then rents may have to go up to reflect that, but at least the people living in the house have control over what the rent increase will be and are not subject to a requirement for any landlord's desire to earn an income off the rent. They may even decide to stretch the mortgage out over a longer term instead of putting up rents. Nobody can profit from a housing co-operative. It is against the rules administered by the Financial Services Authority.
Anyway, to cut a long story short, when I looked at the financial comparisons after 25 years I was staggered. I had, of course, built in assumptions into my financial model - that all the money the couple would have spent on capital repayment of the mortgage, interest payments, life insurance, legal fees, house maintenance and estate agents commission would instead be saved and invested - that the house the couple bought would be sold in 25 years time for a price of £250,000 - a conservative growth rate, given the experience of the current decline - that the average interest rate over the next 25 years would be 6% - could it ever get back up to 10% again, one wonders?
And the figures I arrived at? Well, the couple that bought the £100,000 house ended up paying a total of £228,290 in repayment of capital, interest payments, insurance etc. So after their sale they were left with only £21,709 for all their efforts.
The couple who rented the studio apartment ended up paying £124,918 in rent over 25 years - assuming only a 2% increase in rent each year. If they saved all the money they would have paid out in mortgage payments, interest, insurance etc. then they would now have a tidy capital sum worth £54,688.
The couple who went into the housing co-operative, however, would be sitting pretty with all their invested loot. Since rent would not have had to go towards the landlord's profits they would now be able to take a few trips around the world to visit all their grandchildren - now living happily ever after in their own housing co-operatives - with their total savings of £111,806.
It seems to me that, even if they don't end up with a house to sell of their own, the money your children could save by joining a housing co-op - not having to keep up with all those extra payments throughout their life - will more than compensate their own family when it comes around to their inheritance. I wish I'd done it myself, years ago.
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