Buying Is For Suckers, Why Renting Is The Way To Go

Written on October 2, 2007 by Tezza

Tuesday’s weekly guide to Personal Finance from 4EvaYoung.com

Humans seem to have this inbuilt need to own and control things. This primal instinct has resulted in tensions, disputes and in worst cases wars have broken out over disputed resources and land. While humanity has still not resolved this sense of entitlement, governments especially in developed nations have come up with creative ways to distribute land where more people than ever have a place to call home.

In fact home ownership has seen marginal growth since the period after World War II. OECD countries have fueled this insatiable dream of home ownership where now some 65% of households in OECD countries own their own home.

So what is wrong with this picture?

1. It’s Time To Shake Up Conventional Wisdom
Conventional wisdom argues that owning your own home should be the aspiration for every productive member of society. I know ever since I was a child my parents ingrained in me the ethic of buying a home and dutifully paying off your mortgage. I watched my parents slog away to pay down the mortgage and I vividly remember those times when either finances were tight or when my dad had lost his job what stress a mortgage can do. It doesn’t help that easy credit now is thrusted upon society pushed by everyone with a financial incentive and an agenda, espousing the many benefits of ownership and why going into large debt makes logical sense.

Just because everyone is telling you to buy your own home doesn’t mean it’s a sensible strategy for you. I’d rather consider whether conventional wisdom makes sense for my circumstances and my long term goals as apposed to blindly following social norms like a sheep. The problem is that many people get sold on this premise and just follow the crowd blindly sticking themselves with a 30 year mortgage.

2. You End Up Putting All Your Eggs In The One Basket
The problem I see with putting all your eggs in one basket is you can unknowingly put your financial health in peril. When your financial assets is largely composed of one major asset like a home then you better hope that this home is going to sufficiently provide for you in lean times and retirement.

This for some may not be as risky as it sounds since the argument is that at least you can keep a good eye on it unlike shares and over time it will appreciate in value. The downside is that most people aren’t very objective when it comes to their principle place of residence. The first thing any home owner does is that you start making emotional decisions like over paying for the property and thus stretching your finances to secure your dream home. You then compound this error by then over capitalizing the investment by making renovations, additions and general repairs.

The final argument for not putting all your eggs in one basket is your risk is not spread over a diversified pool of assets which perform in different ways depending on the current market conditions. So when property values are taking a hit because of outside forces like a recession or over supply then hopefully this financial shock can be somewhat minimized with your other asset classes performing well.

3. Loss of Freedom and Flexibility
Have you ever seen someone mortgaged to the tilt take a long term travel overseas. They are probably stressed working long hours and trying to squeeze in overtime every chance they get just to keep the banks off their backs.

By renting it gives you far greater freedom of mobility because you aren’t locked into one place. If for some reason you find it is no longer suitable to your needs, or you just don’t like the area then you can move without the same kind of hassles and stress associated by a home owner.

4. It’s a Poor Long Term Investment Strategy
For most people the principle place of residence is one of their largest financial commitments. But if someone tells you that their home is an investment then they are surely deluded. A home is one of the poorest investments (if you could even call a home an investment) once you consider the cost of home ownership. Most people look at the price they bought their home and the price they eventually sell their home without factoring in the money spent over the years to keep the home in it’s live able condition.

The big profit you thought you had, if you were honest about it would be much smaller than you realize. According to David Koch a financial expert he explains that “A university study a few of years ago concluded that, given the high costs involved in buying property, it’s only after 17 years of continuous ownership that a home buyer financially ends up in front of a person who rents!”

As such there are financial repercussions to consider. Ownership ties up considerable effort, energy, time and money into this one monstrous asset. People take great pains to ensure they meet their mortgage repayments. However, if you look at most financial statistics, a home on average over the long haul appreciate at around 4-6% per annum whereas other financial instruments like shares for example appreciate on average at a rate of 6-8% per annum. You might argue that the difference is minuscule, however over several decades the difference can amount to a considerable difference.

So if your looking for a long term investment strategy it would be more prudent to rent cheaply and invest the difference between your rent and what your mortgage would have been towards a growth investment such as stocks, an investment property or even just deposited in a high interest bearing account.

You also can’t retire on your home unless you either sell it to realize the equity or you draw down on your equity in which case you have a continuing debt owed to the banks in your old age. What’s more you need a place to put your head at night, so even if you were to sell you would still need to find another place to live and if your home has appreciated in value than you can bet that other houses has done the same. So unless you plan to downgrade then you’ll just be spending your so called good fortune on another house of either similar or higher value.

5. There’s More Than One Way To Skin A Cat - Be Creative
Just because everyone has a mortgage doesn’t mean it’s the best option for you. You have to consider your lifestyle and financial goals. If for instance you want to be able to settle down with a family then buying a home will enable continuity and stability. However if you are working in a job that doesn’t provide a regular paycheck amount or you are moving around constantly then renting is the logical choice.

Lifestyle factors also come into play with many families now opting to travel with young children so not having a mortgage hanging over your heads enable that freedom to move around. If your young then renting is also a great option to consider until you decide to settle down one day. The money saved will enable you to fund your dreams and experiences that you otherwise will be restricted on because of a mortgage.

6. It’s A Fallacy To Believe Rent Money Is Dead Money
This line is something that real estate agents and financial brokers embrace on their marketing material. While renting over the long term means that you don’t have a house at the end of it unlike your mortgage owning counterpart it doesn’t mean that your money went into a black hole somewhere. Think about this, the average home owner squanders thousands a year in taxes, fees, and repairs that don’t contribute towards their equity not to mention the upfront cost of home ownership such as stamp duties, conveyancing, legal fees, agent fees and bank fees.

Also you need to factor in what your time is worth. Those countless hours spent on weekends and nights on your home isn’t financially productive. Also most people who rent often are staying somewhere that is cheaper than what it would cost if he/she was a buyer. Renting for most people is not a forever proposition. So instead of buying a crummy place to own and then wasting all the money spent selling it, renting provides a temporary solution until you are in a position to settle in a place you want to live in longer term. So you shouldn’t compare your rental payment with a comparable mortgage payment since if you were buying you would be emotionally buying something that is much better than what you would rent.

7. Renter’s Have Greater Flexibility To Handle Financial Shocks
With a mortgage you are largely locked into repayments over a very long period of time. With renting though you generally only need to commit to a twelve month lease. If for some reason you lose your job, have a new addition to your family or your income source becomes erratic you have the ability to adjust your housing costs by moving rental house. The mortgagee on the other hand has to find ways to work around the financial hurdle while trying to meet their ongoing mortgage repayment schedule.

8. Most Home Buyer’s Over commit
One of the overriding reasons why people over commit themselves to a larger home and therefore a proportionately higher mortgage is because as humans we tend to be overly optimistic about our circumstances. So we borrow money against our future earnings and if we are young then we tend to do this with a higher rate of optimism.

Then when the house hunting begins emotions come into play and you have yourself a beautiful home but a mortgage which is a severe strain to the household budget. What is also interesting is that younger generations have become so accustomed to the lifestyle that their parents spent a lifetime to reach that they look for more and more expensive first homes. Their parents would have made do with something more modest when they were starting out in life and built their way up but young generations want it now and easy credit enables them to over commit.

9. It’s A Myth House Prices Always Go Up
The biggest myth with home ownership is the argument that you can’t lose money. In fact if you are one of those unfortunate home owners to have bought during the peak of a property cycle then you will be well aware that in the short term your property value can drop considerably when the market goes into a contraction cycle. In fact during a property squeeze it is not unknown for recent property owners to go into default because their house values have gone into negative equity and they are struggling to meet the repayments. With the ease at which credit is available and the ability for low income home owners to put up little or no deposit many of them get into financial distress when their dream home suddenly turns into a financial nightmare.

So you take a gamble that the day you sell your home it has appreciated in value sufficient to cover your capital expenditure on the property over the period of your ownership and still leaving you with a tidy profit. So otherwise conservative people spend a lifetime working to pay off the only asset they own hoping that it pays off for them one day, I think that is the ultimate gamble of life.

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