Home ownership is the most popular religion of the 21st century. It’s even more popular than stupidity and that’s saying something. If you wish to become a pariah amongst your fellow natives simply tell them that owning a home is not an investment, then tell them it’s potentially one of the dumbest things they can do with their capital, then duck for cover.
Those who by choice rent are a fringe group that surely can’t have all their internal organs in the correct place. Maybe they need examining? Heart? Yep, brain? Yep, lungs? Yep, radiator… ah found the problem!
It’s promoted from every level of society, and even agnostics and atheists are devout believers. Keeping the rubes in one location, and tied to that location, serves the interests of bankers and politicians extraordinarily well. “Citizens of the State” should be renamed “Serfs of the kingdom.” What better means of achieving this than getting said rubes to willingly chain themselves to an immovable, illiquid item for an eternity?
There’s no need to follow this pattern, it’s not the 18th century anymore. Technology has changed our world and how assets are valued. I contend that assets which can be moved easily hold increasing value over those that are fixed.
The home ownership “dream” is an easy sell. Can you imagine if Citizen Joe was so flexible as to be able at any time to say, “the hell with your rules and regulations, I’m outta here.” – Not optimal.
Citizen Joe might find that he can play in many markets rather than just one. Better to have Joe and Sheila Sixpack moldering in their cubicles 5 days a week in order to buy those things they don’t need, with the money they don’t have. All this while governments insert themselves into this equation by promoting home ownership and actively mismanaging interest rates in order to induce the rubes to the punch bowl. It’s standard procedure for government to do poorly what they shouldn’t be doing in the first instance, but such is the world we live in. Take a look at interest rates in the developed world and tell me this picture makes sense.
Buying your own home isn’t a bad thing provided you look upon it the same way you look at buying a toaster, which is to say realizing it’s simply a consumer item with utility, but not an investment.
Some reasons not to buy your own home:
- It’s illiquid and doesn’t pay you.
- It’s usually highly leveraged.
- It offers zero diversification.
- The job market is ruled by supply and demand. With increasing pressures on this front, being flexible with regards to your ability to move is highly advantageous. Owning your own home detracts from this. The supply of jobs in your sector in your own area is finite.
- How many people actually calculate the maintenance costs, annual taxes, and sundry other expenses of owning a home?
- Choices become limited. What if you don’t like the neighbors? What if a freeway is built nearby?
Let’s take a hypothetical example from a nearby neighborhood to me here in NZ where I am presently. You can do the same exercise wherever you happen to find yourself.
| 1st year buy vs rent | |
| buying | |
| Purchase price | $500,000 |
| Deposit | $100,000 |
| operational costs | $7,000 |
| Debt servicing interest only 6% | $24,000 |
| YE position | $(31,000) |
| Renting | |
| annual rent | $20,800 |
| Deposit interest 4.5% for 12 months | $ 936 |
| Total expenses (rent paid less int earned) | $ (19,864) |
In order to just break even you’ll need to achieve a 2.2% increase in value of your property after closing costs. This is all very simple, easy to follow math. But here is where it gets interesting.
The home owner has no surplus over the renter. The renter, by reinvesting this difference (money saved when renting), and compounding it creates the following situation.
| $100k over time (interest earned plus savings made) | ||||
| Buying | Renting | |||
| Year 1 | $ – | $ 111,136 | ||
| Year 2 | $ – | $ 116,137 | ||
| Year 3 | $ – | $ 121,363 | ||
| Year 4 | $ – | $ 126,825 | ||
| Year 5 | $ – | $ 132,532 | ||
| Year 6 | $ – | $ 138,496 | ||
| Year 7 | $ – | $ 144,728 | ||
| Year 8 | $ – | $ 151,241 | ||
| Year 9 | $ – | $ 158,047 | ||
| Year 10 | $ – | $ 165,159 | ||
Admittedly I’m oversimplifying here and haven’t taken into account inflation in rents, however these will impact ownership costs too.
My point is that you’d better be damn certain that you are going to get capital appreciation on your home that beats the completely brainless exercise of depositing money in a term deposit account, and I know full well that I can achieve an order of magnitude better returns than a 12 month CD.
Even if you think inflation will take home prices higher then why not buy two or three higher yielding apartments which might allow you to break even on cash flows. this way you’ll get better cash flow returns while still participating in home inflation, and you won’t be tied emotionally or physically since you wont be paying the mortgage, your tenants will.
Next week I’ll talk about what I think of the real estate markets here in Australia and NZ. It’ll be fun!
Have an extraordinary weekend. Life’s too short to have an ordinary one.
– Chris
“Never invest in anything that eats or needs repairing.” — Billy Rose
This Post Has 16 Comments
It’s interesting that in the bubble peak here in the US, we used to see a whole plethora of “flip this house” reality television shows on the channels. The “stars” of the shows even went on to write books on the subject of flipping homes for profits. While I don’t watch TV in general, I did tune into a couple of those shows to marvel in sheer amazement at the herd mentality of buying multiple properties at very high leverage thinking prices will always go up.
I have advised my college age kids to not buy residential property for their own use this early in their career. Cheap credit is a temptation, but being locked into an illiquid asset can limit mobility.
Thanks for a good article,
Martin
Ah yes, a very emotional topic. Considering I have just sold my house and am now a renter, my feelings have been a bit on the nervous side. After reading your take on the rental vs ownership I am now feeling a touch superior!
Looking at the capital gains tax the government gets as a reward for my hard work, the years of interest paid to the banks for doing nothing and various other maintenance costs, renting is rather attractive right now! I look forward to reading about the real estate markets in Australia.
Perhaps this entire post (have read a few recently taking this view) is a great contrarian indicator that housing is near a bottom, at least cyclically.
In the early 90’s, housing was dirt cheap, and you couldn’t give them away. When the view of home ownership as not desireable takes the street, you can be sure housing has bottomed… which bodes well for the future.
What people who critize homeownership forget to mention is that owning a home is psychological. Food, clothing, and shelter, are the primaries and fundamentals to every single life on this planet. Home ownership provides one of those. Yes, so does renting, but psychologically, people feel better owning. Always have, always will.
This is life. Not a model.
Jake,
Good points all. In this particular post I think Chris was speaking more about housing as an investment, but I won’t speak to that, I’ll let him answer.
My opinion (worth what you’re paying) is that housing has not yet bottomed. Interest rates are about as low as they can go and demand is still anemic. Prices are still too high in the developed world. Unemployment is at ridiculous levels in the US, so even with attractive interest rates buying isn’t an option for a lot of would be homeowners. Not to mention bank lending is extremely difficult. A good friend of mine has been a mortgage broker for the better part of 40 years now. He just relayed the story of a woman he was helping to obtain a loan on a $99k condo. She was looking for a 2/3 loan, or what amounted to about $66k, or a $375/mo. payment. She had enough assets to buy it outright 3 times over, her credit was in the high 700’s, and her income is about $4,500 per month. The loan almost didn’t go through, and it took the better part of 2 months. Yikes.
I think your comments on psychology are accurate, most of us like the security of “owning.” But, do we really own anything? Unless you buy outright you don’t. Even then, stop paying your property taxes and see what happens. Or stop mowing your lawn (and receive a handy citation from the municipality who will gladly mow it for you at $300/hr. and then bill you… Don’t pay and they’ll lean your property). As a previous (many times over) home owner I can say personally that I’m glad I’m renting. I’ll buy again, but only because I want some land that I can grow stuff on, and then I’ll buy it with cash and in a place where I can do what I want with it.
Thanks for the contrary viewpoints, and keep it coming.
I grew up with parents who worshipped at the altar of home ownership, and only looked at things from the renter’s viewpoint late in life. They sold their residence, and their new home wasn’t completed yet. Their whole outlook used to be, “Why are we just throwing money away on rent?” After the 6-month experience, they changed their tune to, “Now we’re tied down to this new house.”
Very interesting article except you overlook some IMPORTANT points. #1…EVERYONE, renter or owner, is paying a mortgage. Even as a TENANT you are STILL PAYING A MORTGAGE. It is just that as a Tenant you are paying someone else’s mortgage. #2…Real Estate is an ASSET and OVER TIME Real Estate has ALWAYS GONE UP and PLEASE don’t say “This time is different”. #3…you are correct in your above disclaimer that you have not made an allowance for rents going up. What you have ALSO NOT done is make adjustments for the value of the house going up AND the mortgage payments GOING DOWN. And the final and most important aspect is – leverage. Put down 10% on a place you have to have to live in anyway and when the value increases by 10% you’ve DOUBLED your money. In all fairness to the author…I agree 110% that it is a way to control the majority of the populace just as credit cards are another even more insidious way of doing it. And if you don’t want to use credit cards and pay cash you are even worse off because everytime you want to pay for something of any substantial value most everyone is obligated “by law” now to report it as a “SUSPICIOUS TRANSACTION” and the law will soon be knocking at your door and harassing you. Good article but unfairly biased. Have a FANTASTIC week everyone.
It is very tempting to just do a financial cost/benefit analysis here but often it boils down to a lifestyle choice. A complete analysis is impossible because you would need to put a value on the different life styles of renting vs. owning.
How much value do you add for the extra physical and financial freedom and flexibility that comes with renting or with having the down payment in a brokerage account instead? For example, not feeling tied down can open your mind to new job or investment opportunities that you would not even consider as a home owner. How much value do you subtract for the extra worries of home ownership or the pressure of having a large mortgage debt cloud?
FYI, as an independent financial advisor I have often advised clients to lighten up on their RE holdings and put the money into real inflation-beating assets. For a number of reasons, all emotional, I can’t think of a single client that took that advice. They only sold when either they had to, or when it was time to move on to a new phase in their life regardless of market conditions and several currently want to sell but are waiting for the market to come back… good luck with that plan.
Does anyone know where/how “Home ownership is the American dream” came about?
Mark.
Its not an American phenomenon solely. Its prevalent throughout much of the developed world and satisfies a basic human need referred to by “Jake The Truth” above.
The inflation hedge though needs to be considered with many other factors. Its entirely possible to have inflation in the money supply while having deflation in house prices.
Consider an example: The price of chickens. We can have a monetary inflationary environment and the price of chickens should rise. Simultaneously we could have a supply deficit of chickens. Again prices would rise. If however we have simultaneously an outbreak of Asian bird flu, we might have a preference for pork, all the while that the supply of chickens is collapsing due to fewer farmers farming chickens. If supply does not fall as fast as demand is falling prices will decline. All of this taking place while monetary inflation could be running red hot.
In short there are many factors which need considering. What is troublesome in the US is a large amount of delinquent loans still sitting on the books of mortgage lenders. At some point these will come to market adding to supply. Then there is the situation of interest rates. We believe that there is only one way for them to go. Since the majority of people look at what monthly payments they can afford in order to value a home this is naturally problematic.
rent: £800
mortgage: £350
Just bought a house bigger and nicer than the one I was renting. Even if property prices drop further, I don’t care because:
1) my monthly outgoings are still less
2) when it comes to moving it doesn’t matter if prices have gone up or down, I’ll effectively be swapping for a similar house.
I’m also in control of what happens to my house (whether its home improvements or deciding to rent it out, etc) and that flexibility gives me a lot of comfort.
Mark,
You left out some major advantages of not owning. Like every one that wrote in on this subject I have my own personal bias and it is to Rent. I suspect Jake must be a Home Owner and has a bias towards owning. I’ve notice People who own homes with Money Rented from the Bank hate to hear there is any advantage to not having a Mortgage. People who own homes out right don’t seem to care.
I have been a home owner and we loved owning a home. But, we needed job market flexibility because of the High Tech Depression that hit in 2001.
When you Rent….you never cut the lawn, no worries about sump pumps when Hurricane Irene comes to town, no contractors to hire, no Appliances to repair or replace, no paining , no wall papering, no snow removal, no roof repair worries and all of this adds up to additional cash.
While you rent there are other places for your money to grow.
When you rent – you get to spend your entire weekend with your family. I never need to tell my child that I can’t go to the park because of lawn care or home repairs.
Renting isn’t perfect – but, no one can argue that it gives you ultimate flexibility and more time with family .
Thank you
There are advantages and disadvantages to both renting and owning, my previous comment never indicated otherwise. Your article pointed out some disadvantages to owning (mainly financial) and my comment pointed out what are financial advantages in my case. Also just because I disagree with your opinion doesn’t mean I hate to hear someone say owning property is bad idea–I rented for over 10 years because it suited me, but now I’m better off owning. I know there are maintenance costs, but there are also hidden costs with renting too.
Regarding your argument about time: I have just as much time for my family as before, I mean how big is your lawn!? Hire a cleaner and gardner if your time soo precious, they’re not expensive.
Good points from all.
The point that I wanted to make is that buying something…anything (baked beans or a home) has its purposes. What one needs to do is to make decisions based on facts and not some brainwashed doctrine.
Nothing wrong with buying a home even if you realise that it makes no sense as a utilization of capital and this is not always the case as Djamel points out above. My examples refer to NZ but I could just as easily have chosen another country to make my point.
It doesn’t mean I would NEVER buy my own home. On the contrary when it makes sense to do so then fine.
This is a great discussion. From my perspective, owning is the way to go for us, in this market, at this point in time. Why?
1. At the time we purchased (10 yrs. ago), we could not rent the home we wanted to live in for even close to same price as owning, i.e., there was no inventory, therefore prices were up. We did rent for a while and our rent went up 10% every year for 4 years prior to this. Talk about compounding interest!
2. We got lucky in that the interest rates we in our favor 10 yrs ago, i.e., going down. We got 10 yrs of equity after the first year of ownership for $4K US on that deal via refinancing (it was just luck).
3. Today, even if we could find a similar house (I checked), it would cost about double our current costs (incl. mortgage, taxes, etc.) to rent it. I suspect that this follows along the argument in this market made above: everyone pays a mortgage here. If you own a house with a huge mortgage and are renting it, you need a huge rent payment.
Again that is us, this market, at this point in time. Today if I was going to buy I would look at the renting option, but not sure that would be a cost effective option vs. renting. Rents are still way out of wack.
To BK’s statements above, at least one of these does not “hold water” pardon the pun: “you never cut the lawn, no worries about sump pumps when Hurricane Irene comes to town, no contractors to hire, no Appliances to repair or replace, no paining , no wall papering, no snow removal, no roof repair worries and all of this adds up to additional cash.”
No sump pump worries when hurricane Irene comes to town? So if the sump pump in your rented house dosen’t work due to lack of power (you have no backup power source for the pump), wasn’t built right, fails, etc., the rented house gets flooded and ruins all your personal belongings, that is nothing to worry about? Certainly it is not your problem to fix the sump pump, but I think that you might be worried just slightly about the rest. I rented a house for years and had to do my own lawn, snow removal, etc., all while having my rent costs increase 10% each year. For us it was no picnic.
Thanks to all for the great discussion.
JP
Where you live frames whether Now is a good time to own – if we owned where we rent our annual property Taxes would be 35%-50% of our current Annual Rental costs. In addition, we won’t plan to be living where we are five years from now. I have no way to predict the direction of housing values in my local area = too much risk.
YES – caring for a home and yard consumes time/money. Sit down and do all the math – homes are constantly decaying. BTW- I have a Gibbs portable sump pump for crisis situations.
I loved working on my home when I was a Money Renter and humans take great pride in fixing up their home. For my family and our current circumstances renting is the way to go…..
In every aspect of life our choices define our bias and for now my bias is to see the value of renting a home and not to rent money. One day my choice will change and my bias will change as well.
Regards.