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.