It seems obvious that buying a house is financially better then renting. The monthly cost is usually similar (this is because the market adjusts to keep them similar. If renting were more expensive, everyone renting could afford to buy. They would do that which would push up house prices and push down rents. Buying can theoretically be more expensive than renting (imagine a society made up only of poor workers and rich landlords, where house prices are set by what landlords can afford) but usually housing pressure pushes up rental prices first, to match the most people can afford, then housing prices rise slower, because of the bottleneck of the difficulty in getting mortgages. When rents are much higher than mortgages that means the government and banks are severely hindering people who have the means to get mortgages from getting them, probably to the advantage of investment funds and other cash buyers) and one results in eventually owning an asset while the other does not.
But to verify this, a thought experiment is required.
- you are already renting a house
- you buy a house
- instead of living in the new house, you rent it out to someone else.
So here you have a situation which is financially identical to buying and living in a house, but you are still renting. The rent you receive offsets the rent you pay. (please, all the people who like nitpicking, ignore the different tax implications etc for now.) This house is a financial investment that can be compared against others, like savings accounts and stocks. It’s possible to study if the return in investment would have been better had you chosen a different investment.
The capital investment is the deposit. If you invested the deposit amount in whatever, then added to it the mortgage amount every month, you would accumulate some wealth. I’d the wealth you accumulate from the house is greater, accounting for the profit the bank extracts from your investment through interest, then you should buy the house. That is the test.
(of course there are other benefits to owning your own house but they are out of scope. this is a purely financial argument)
The bank takes a huge cut of your profit. You might pay the bank in interest double what you pay the seller. So you pay for the house three times. That is worse than the cut taken by a broker of any other investment.
Cash buyers (investment funds) do not pay 3x the price of the house. So maybe you’re better off investing in housing through an investment fund!
I don’t actually know if it is usually better to buy than to rent. I have never done this calculation. I only know that most people assume so, without ever doing the calculation.
One possibility is that the market self-adjusts so the buying and renting (taking your deposits for the house and investing it in something else) are equally profitable.
I suspect that the market is set by what investment funds (not people) are willing to pay. So house prices are set so that they are equally profitable for them as other investments. This means houses are less profitable than other investments for non cash buyers. It means most people should continue to rent, instead of buying, and just invest their money better.
This article feels a but unfinished, like there is something missing it overlooked. Maybe someone else can spot it. I think more thought or research, or putting more minds together, is needed.
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You don’t buy a house. You buy a mortgage. Then the final cost of the house is substantially higher than the original cost. The bank, which did not even have the money (30 to one minimum liquidity reserve requirement) to lend for the mortgage, invents the money at a click of a mouse and makes money off you interest.
It artificially drives up housing costs and should be illegal.
If you have the money it is better to buy than to rent. If you don’t have the cash and you have to borrow too much on your mortgage, chances are that you will have been better off renting.
Yes, it is better to buy than to rent, but that is kind of like saying it is better to be rich than to be poor.
in the long term buying is always better. in the short term it can vary with a bunch of variables.
Yes, buying is always better. Mortgage prices are significantly lower than rent. You are gaining equity too. Paying rent is just giving someone else equity.
I am lucky enough to have a mortgage on a 1 bedroom flat. I am paying about 300-500 quid less per month that if I were to rent the same flat. And the majority of what I am paying is still actually my money as each mortgage payment buys me back a little bit more of the property from the bank.
Buying and then renting to someone should be punishable by death.
Yes, buying is always better.
Do you still believe this after reading this article? If so, where in logic of the article do you think is the flaw?
I’m quite happy making money from the fruit of my labour. Passive income is parasitical and I respect myself too much to pursue it.
Ben Felix has a video on this. I trust him as a good source of financial information. https://youtu.be/q9Golcxjpi8?feature=shared
But essentially it has to do with your time horizon and yearly needs.
Yes that’s exactly it. Thanks for the link.
There are a lot of factors that go into “better,” and they’re not the same for everyone. Generally, if you can afford to buy, it’s better financially long term because your money is going into something that you can sell, often for more. But some other factors a person should consider:
- If you don’t have a good percentage of the purchase price to put down, you’re unlikely to get good terms on a loan. That’s likely to drive the mortgage payments up above rental price in that market.
- In addition to the mortgage payments, are you able to take the risk on maintenance and repairs. When you rent, those costs tend to be spread across the life of the rental by the landlord, but if you own you need to be able to cover it if you have to repair the roof, fix a major plumbing leak, replace a bad electrical panel, or whatever. Those costs can be significant in a single month.
- There’s always a risk that you’re buying at the top of the market over a given period, and the value of your house can plummet. I know someone who had to walk away from a house and let the banks take it because prices plummeted, he couldn’t sell it for what he owed, and he needed to move.
- If you end up wanting to leave the area too soon, you might not get enough appreciation to cover mortgage fees and the other costs of buying.
Simplified, there are more risks associated with buying, but potentially more rewards.
if you can afford to buy, it’s better financially long term because your money is going into something that you can sell
This is the only point addressed by the article. Do you still believe this after reading it? If so, where in logic of the article do you think is the flaw?
The article being the body text of the post? I didn’t see a link otherwise.
I guess the potential flaws are that the other factors I mentioned aren’t mentioned in the text, and that being able to afford rent doesn’t at all mean your can afford to buy a house and end up with that same amount as mortgage. The thought experiment says assume you’re renting and then you buy a house, but the point is that, like I said in my first two bullets, a lot of renters just can’t afford to buy.
it depends on the country
If you aren’t going to live somewhere at least 2 years it’s always a bad call to buy. There’s a lot of closing costs to buying, you pay realtors when you sell. After 2 years it really depends on what the housing market has been like. When I bought my house I was up 50% on what I paid after like 3 years. It’s basically always going to be a better decision to buy if you live in the house 5+ years.
Rent keeps going up, house prices in recent history have always trended up. The longer you live there the less your mortgage is in comparison to market rent rates and the more equity you have built. Renting is never a better long term decision in America. You only want to rent if you might move relatively often.
In the long term: Yes.
It really depends.
I think there’s a lot of risks involved when taking on a long term mortgage. Everyone says renting is worse because you’re paying off someone else’s loan. Of course in a vacuum that’s true. But by renting you’re not taking a 30 year risk. If you feel that something is brewing in the economic system (another GFC) maybe it’s safer to consider renting until the odds are in your favour.
Some questions to ask yourself:
Is the housing market in a bubble? Is there a possibility of a correction. Can you weather that?
Are your central banks and banks raising interest rates? Could that affect your loan commitments.
Job stability and availability. Are these interest rates/inflation affecting the job market? Can you hold a job for the next 30 years.
