Home ownership vs. renting privately (May 2012)

Last week I met a uni friend for a drink and a catch up and we quickly started talking about our housing situation. We have both lived in a combination of halls of residence, shared student housing and shared professional housing since starting at Sheffield Uni in 2005. My friend explained she has had enough of shared housing and is desperate to buy her own house if only she could afford a deposit/a property in Bourneville. I, on the other hand, am happy to continue renting privately for the foreseeable future and to continue sharing in the short term. We each tried to convince the other of the advantages of our tenure preference – in the end we had to agree to disagree!

The next day I decided to do some research into home ownership vs. renting privately, and this is what I found.

Renters are slackers, the conventional thinking goes. If they had any brains and ambition, they’d own their own house. Other such conventional thinking includes “buying a home is a better financial move than renting. After all, you’re building equity instead of throwing your money away, right? Well, maybe not…

Whilst, admittedly, a renter spends a sum on rent every month that they will never see again, I wouldn’t exactly say it has been ‘thrown away’ any more that money spent on any other good or service is ‘thrown away’; not every expense can be a wise investment that you can sell later for a bigger profit. But granted, there is zero financial return on that money

However, if you look at a homeowner’s expenses, they are also spending a large amount of money that will never return either and which a renter doesn’t have to worry about: mortgage interest, maintenance, insurance, furnishing and decoration, estate agent and legal fees, etc.

And the arguments in favour of renting extend beyond the purely financial: it’s easier and quicker to move, and you have fewer maintenance responsibilities.

But let’s go back to the financial arguments, in particular, that buying a house is a wise investment as you’re building equity. The Economist has pointed out that “homeownership is in most cases a highly leveraged, undiversified, relatively illiquid bet, with a return that is highly correlated to local labour market conditions. In general, responsible financial planners would warn their clients away from such an investment. Sure, you get a roof over your head as part of the bargain, but the potential downside is enormous, as should be blindingly obvious to us all”.

Rather than relying on the house prices in the area to steadily increase over the term of a mortgage, homeowners would have been better off putting their deposit and the money they’d save if they rented each month into a savings account, as explained here. Or even investing in the stock market.

However, I recognise that a person’s choice between homeownership and renting privately is influenced by more than just the issues discussed so far, in particular the quality of properties, service and security of tenure on offer in the private rented sector is a turn off for many. Which is why I believe, for the benefit of everyone concerned, our Private Sector Leasing scheme is so important and that Housing Associations across the country have an important role to ensure the renting privately is a tenure of choice.

So my friend and I will both continue to rent privately, me out of choice, my friend because she has no other choice. However, I do intend to buy a house some day, but like Tim Ellis, I will be buying a house because I want a nice, permanent place to live where I’m the boss, not because I think it will help me to get rich.

Finally, a random fact that helps to explain the obsession with home ownership in the US and UK: “ownership and the American dream/property-owning democracy dream are deeply linked in government policies that favour mortgages over rent payments, dating back before Herbert Hoover was elected president in 1929. As secretary of commerce, amid the Red Scare, Hoover trumpeted homeownership, believing that if one had an equity stake in the country, they’d less likely fall under the spell of Communism”

Advertisements

Thoughts?

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s