Should I rent or should I buy? The bitter truth about property

Elsewhere a web-columnist regularly talks up the essential financial stupidity of renting over buying in a series of articles sponsored by a major developer. I once attempted to engage this would-be savant in objective debate about the whole thorny issue, but was rejected on the grounds that “those who haven’t bought property are normally the most bitter”. So that’s alright then, debate off because of presumed sour grapes.

And there lies the issue at the heart of the scrummage between those who buy property here and those who don’t. Rational argument is off because the former will not listen to anything that hints they weren’t absolutely right. Those of us, the majority incidentally, who consider other emotional reasons when choosing where to live — are simply sour at having missed out on this wonderful opportunity.

In fact the reality should lie between the two. I, for one, am not remotely interested in living on an estate in the boondocks together with several thousand clones. I do accept, however, that there are some to whom ‘Pleasantville’ is an attractive proposition and good luck to them. But to bring down the argument simply to one about money is neither appropriate nor sensible. There are many reasons why someone may decide against purchasing any of the current offerings but, as ever in Dubai, the arguments always centre on money. So in an attempt to redress the argument, lets look at an example given recently by one of the property scribblers.

I quote: Say you buy a typical five-bed villa for US$700,000 and take-up an 80% interest-only mortgage at 6% over 15 years, this gives you a monthly mortgage repayment of roughly US$2500, plus you will have US$165 in service charges and municipal tax of around US$160, making a total of US$2825. Of course, you have to find your US$140,000 down payment, which would cost around US$700 per month to borrow, or say US$580 in lost interest if you had kept that money on time deposit. In total then, the cost of buying per month is US$3405 to US$3525, or US$205,000 to US$210,000 over five years.

Now if you were renting the same villa, the rental cost would be around US$50,000 or US$4167 per month. Over a five-year period you would pay out US$250,000, if rents do not rise, which after 30% plus this year is quite an assumption.

Myth debunking time: Personally I’d love to borrow here at 6%. Virtually all the banks in the UAE charge between 7% and 9%, but hey let’s be generous and take a figure of 6.5% giving interest of US$3033 per month.Service charges and Dewa bills in the new developments are proving to be much higher than originally thought and are typically between three and five times higher than those quoted, adding a further US$1000 per month to the cost of buying.

When purchasing with the aid of a mortgage, few people could afford the extra US$25,000 per year necessary to repay capital at the same time, so let’s be kind again and leave it out. Even without this, the total over five years comes to nearly US$280,000.

House rents though, contrary to the doomsayers, are not up universally 40%-60% on last year. For example, I rent a four-bed property in Jumeirah, which, in keeping with virtually all the houses in my road, has undergone one rent rise of 10% in five years and costs substantially less than the figures quoted here.

On my calculation, rent over five years would be US$192,000. So in addition to the savings of US$90,000, I get to live in an attractive property, complete with swimming pool, right on top of my children’s schools, close to shops, restaurants and three minutes to the beach.

Apparently this is not an argument; it’s bitterness! Ah well, I guess you can fool some people….

Stephen Corley is a business consultant with experience in fund and asset management.
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