Why rent a house when you can buy?

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A common argument that I hear for buying a house is that paying rent is a waste of money. The main proponents of this point of view seem to be my parents’ generation, however it is a point of view I can’t easily agree with.

To compare buying a house to renting a house, we have to look at what we are buying in each case, and what the costs and benefits of each choice are. In the case renting a house we are purchasing ‘housing services’, while in the case of buying a house we are purchasing housing services AND an asset. The fundamental view that we should buy instead of renting comes from the fact that we receive an asset on top of the value of the services it provides. In some sense, the generation that is suggesting that we should all buy houses is doing so, because it was a (successful) rule of thumb that they followed at our age. However, the current situation is a little different.

The prior generation of homeowners were so successful because of the massive capital appreciation that they have experienced in recent years. Although it is debatable whether this was an upward correction in prices, or whether there will be a downward correction – the general feeling is that someone buying a house now will not receive significant capital gains.

So how should we think about the housing market. Well there is some gap between the price you pay when renting, and the price you pay when buying the house. In theory this gap should represent the asset value of the house, and some intrinsic measures (security of owning the house + ability to customise house – lack of flexibility when moving).

Given the high prices of housing (and my expectations for future house prices), New Zealand’s high equilibrium interest rate level, and my own value of flexibility I do not believe it would be optimal for me to buy a house at the moment.

So if my mum tells my brother or me to buy a house again, I can just point her to this post. The main point to come out of this is that renting is not throwing money away – it is equivalent to buying a service.

  • Kimble

    Can you please do a post on marriage vs serial monogamy?

  • you might also point out that the interest on a mortgage is equally “throwing money away”.

  • “Can you please do a post on marriage vs serial monogamy?”

    Maybe at some point, I’m a bit tied up at the moment.

    “you might also point out that the interest on a mortgage is equally “throwing money away”.”

    Exactly. I’ve heard of people paying $600 a week financing a mortgage, without repaying any of the principal, while people pay $400 a week on rent for the same sort of house.

    I wonder if anyone has tried to quantify the ‘intrinsic’ value that people would need to have over a house to justify current house price levels?

  • I’ve often wondered if New Zealanders knew a fraction about investing as they did about the property market, a lot of New Zealanders, in particular women (because so much wealth is tied up in the family home), would be wealthier than they are today.

  • I’m looking into making the buy/rent decision for the duration of my ph.d. program, and what really strikes me is the additional uncertainty. Your house can appreciate or depreciate, and you’re responsible if something goes wrong – if the roof falls in, you’re on the hook.

    Renting is associated in my mind with fewer transactions costs. Simplified taxes. Don’t need to worry about hunting down contractors in a possibly foreign city. If you land in a lemon, you can relocate much more cheaply than if you bought the house.

    …where’s that Akerlof paper on lemons? Might be relevant.

  • “I’ve often wondered if New Zealanders knew a fraction about investing as they did about the property market … would be wealthier than they are today”

    It is possible that society would be wealthier, but the individuals involved may not be happier. To some degree people choice to buy a house depends on the value they place on the ownership of the house vs other things.

    If this offers them sufficient satisfaction they may be willing to be poorer in the future in order to have the pleasure of ownership – this explains why New Zealander’s seem so happy to bury themselves in debt to own a house 😉

    “Renting is associated in my mind with fewer transactions costs.”

    That is an incredibly good point. When I read it I could relate to it, thats how I can tell that I really enjoyed it 😉

    This is a point that is similar to what I was saying about the flexibility of renting vs owning. I value the ability to move and the fact that I am protected from a natural disaster destroying the house.

    Good points everyone 🙂

  • Remember that the generation of our parents also grew up in a New Zealand when foreign exchange meant going somewhere to fight on behalf of Blighty and Uncle Sam. Home ownership as a goal has become highly ingrained in our national psyche if for no other reason than that for a long time there was no real other alternative for the vast majority of NZers who wanted to sve money. Bonus Bonds? Yeah right.

    Having recently (well, recently as in a few years ago, but I’m well beyond my 20s!) become a homeowner, I can really appreciate the lack of hassle with renting. No maintenance issues to worry about, no need to think about which utility is cheaper, getting permits, or even remotely consider renovating.

    As for serial monogamy – the big difference being that you can live in a rental place for 10 years and walk away. Try doing that with a relationship.

  • “Home ownership as a goal has become highly ingrained in our national psyche if for no other reason than that for a long time there was no real other alternative for the vast majority of NZers who wanted to save money.”

    Very true. Does this imply that the intrinsic value of owning a house is decreasing over time – if this is the case I suspect that housing doesn’t look like a very good asset 🙂

    “the big difference being that you can live in a rental place for 10 years and walk away”

    That sort of reminds me of all the foreclosures in the US at the moment – people are just walking away from the houses they own. Sorry state of affairs indeed

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