Rent or Buy: We Are All Renters

In response to last week’s update on why I’m still renting, my friend Leon posted a comment, I posted a reply, and now I’m turning that conversation into a post, because I think that there was an important point there that sometimes gets ignored.

Before I get to that, some background:

  1. I have written about buying and renting a lot, mainly because it brings up the old “number of page views” (I’m not ashamed). I did some re-tagging this morning, and you can find them all collected here.
  2. My main point has always been: in the current environment, and particularly in South Africa, renting a place is cheaper than buying on a mortgage*. So if you have the discipline to do it, then you could save the difference, and you’d be able to buy a house outright for cash sooner than it would take to pay off the mortgage in full.
    *see the first post
  3. For the most part, many of us will end up paying for much of our homes in “outright cash” anyway – by prepaying the mortgage (meaning that anything you pay over and above the mortgage repayment is an outright buy and a future saving of interest*).
    *see this post about repaying the mortgage in 7 years.
  4. But even if you decide to head down this road, the risk of home ownership is much higher than estate agents would have you believe. After all, you’re taking big bets on the future of the street, suburb, city and country that you just bought in*.
    *See this post about putting all your eggs in one basket.
  5. As a final observation, I need to point out that the hidden cost of renting is the risk of eviction. This cost becomes more onerous as we get older (firstly with families, then with old age)*. This hidden cost of renting is the corresponding benefit of home ownership. And because nothing in life is free – that benefit comes at a premium (hence why buying ought to be more expensive than renting).
    *see this post about why/when you should really just buy that house.

And that’s the basic summary.

Here is the comment:

So we were having this very conversation – the old buy vs rent argument and we agree the spreadsheets say rent, rent, rent. But has someone in reality ever proven it to be so? Any real world examples out there of someone who has actually rented, invested the difference and went back and bought a house in cash from those savings?

And here is my response:

I hear what you’re saying – going against popular opinion is difficult, especially when the popular opinion takes the “I won’t pay someone else’s mortgage!” line, and then ridicules those who do.

And that kind of pressure almost demands a “Look at this successful guy – d’you see what he did? Empirical evidence, bru.” response.

The trouble is: that’s fighting against a prejudice, not a real argument. Any “real-life” examples will be treated as once-offs and exceptional items. Probably because, for most people, there’s a deeply vested interest in asserting the fiscal soundness of a decision that they’ve already made.

As I see it: this argument doesn’t require empirical evidence. It’s a case of looking at the options (annual rent at a cost of 3% of asset value vs annual mortgage interest of 9% of asset value, or whatever), and then deciding which option is more expensive for you. If you choose to save the 6% and plan to buy later, or spend the 6% on holidays, or spend the 6% on paying off your own home today, then those are all legitimate ways of spending your money…

To address the prejudice, I would ask “And why shouldn’t I help pay someone else’s mortgage? Why this particular aversion to helping someone acquire more assets? After all, every single day at work, I allow someone to profit off my intellectual capital. I add more value than I cost in salary – which is the negative sum total of why I get hired, because if I added no value, then I would not be needed. In this particular situation – renting makes the landlord’s investment cheaper, and it allows me to live more cheaply and invest in other things. We both win – and that’s no less acceptable than deciding that I want to be both landlord and renter (because that is the home ownership decision).”

In my mind, that’s probably the biggest misconception of this debate: because we are all renters, and there is no such thing as costless living.

Some of us also choose to be our own landlords. With all the costs and benefits that implies.

Which means that the only real question worth asking is: “Do I want to be exposed to the risk of this particular house, with all the benefits it brings – or would I prefer to try my luck with other classes of asset?”

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.

Make money? Start a church

I recently watched “Going Clear: Scientology and the Prison of Belief“. Three things, I realised:

  1. L. Ron Hubbard (or “LRH”, as he’s affectionately referred to) was a bit sickening to watch talk. Something about his bottom lip.

  2. Which was especially unfortunate, because whatever his theological aspirations, they apparently didn’t extend to dental hygiene.

  3. I realise points 1 and 2 make me sound both biased and shallow. Which, you know, true. But even if the documentary and I are both biased – there was direct video footage of LRH. And the trouble is that a lot of what he said sounded incredibly lucid and reasonable, all the way to the part about volcanos and thetans. And that, right there, is the devastatingly dangerous kind of human: rational, smart, personable, almost certainly a sociopath.

As most people know, LRH is especially famous for this line:

“Writing for a penny a word is ridiculous. If a man really wants to make a million dollars, the best way would be to start his own religion.”

Which I’ve written about before – so I thought I’d do a little update and replay.

Here goes:

When I read articles about people like Bishop Edir Macedo, I find my own inner peace cracking under an onslaught of irritation. I’m just not convinced that peddling salvation is fair play in the world of free markets – it’s like a teacher telling her students* that there is a correlation between end-of-term-gifts-for-teacher and exam results. Some might call that an authoritarian abuse of the child’s fear of failure.
*After all, aren’t we all children in this context?

But somehow, when it comes to the fear of death and damnation (some might say: the Ultimate Failure), then there is no apparent problem with asking the freshly-converted to purchase their salvation for 10% of monthly income. Which begs the question:

  • Why does tithing work?

But before I get there, some background:

The Evolution of a Divine Business Model

  1. The church begins small: a backyard, underground community of the broken under the leadership of a likewise-broken founder-leader.
  2. The community grows, and begins to need bigger spaces and more formalised routines.
  3. The founder asks the community to help cover the cost of renting an auditorium on a Sunday, the cost of hiring lighting equipment, and the cost of organising a sound system. So the foundling Church begins to host bake sales and fund-raising drives.
  4. As more money comes in, nicer auditoriums are rented, better sound systems are acquired, and so on.
  5. More people are drawn in by this sense of community and its attractive sense of purpose.
  6. The Founder realises that he can’t drive the whole thing on his own. So he re-organises the church leadership into a group of elders, under the inspiration of the Book of Acts and a few choice verses from the Pauline epistles.
  7. The Founder tries to make sure that the congregation feel closer to God during his services. He appoints choir leaders and introduces instrumentation.
  8. The group of elders, chaired by the Founder, begin to take ownership of the fund-raising activities of the Church. They realise that all those bake-sales are continuously asking Church members to give of their time and resources (which some do more than others), and that this is beginning to cause resentment and tension within the flock.
  9. After this revelation, the Founder begins to make calls from the pulpit. He points out that the historical faiths had a practice of giving tithes to the Temple. He sees his congregation spending money on new cars, on new clothing, on fancy parties and big wedding celebrations. He asks whether they are really putting God first – because surely they should be gifting back just a small portion of the bounteous gifts that they have received? Say 10% of their remuneration. But no pressure – just whatever they feel they can offer. Be guided.
  10. Certain members of the congregation react with fervour.
  11. The Founder publicly thanks these initial supporters for their generosity, calling them “blessed” and “filled with the Spirit”. And expresses confidence that their generosity will be returned “a hundredfold”.
  12. The rest of the congregation joins in, longing also to be praised and named as blessed. Also, the hundredfold.
  13. The Church continues to grow as the money floods in.
  14. Suddenly, there are bookshops and radio stations, retreats and cell groups.
  15. The Church becomes missionary, requiring members to continue contributing to the spreading of God’s Word.
  16. Tithing is formalised into a required strongly-encouraged debit order. Servers begin to wander through the congregation during the services with credit card machines, in case anyone would prefer to avoid holding cash.
  17. The Church starts investing her spare money.
  18. The Founder, still broken, gets sued for tax evasion by the State.

What Happens Next

Once the Church becomes a haven for tax-free money (lest we forget, all non-profits get tax benefits), it can start to attract the kind of unscrupulous leader whose good intentions just “fortuitously” coincide with his ability to live like a Kardashian.

And look at what he’d be blessed with:

  • A captive consumer base – held in check by their longing for acceptance and their deep fear of death (or hell after death).
  • Annuity income from those consumers.
  • All for the price of good lighting and lyrically-selective rock music.

Which is the kind of situation that is open to abuse.

And after that?

Well – at this point, you should ask the Catholic Church what happens. Because greedy spiritual leaders cause Reformations and schisms; which are the religious equivalent of rival brands entering the market, offering the same service at less cost. So selling indulgences becomes a bit of a no-go area; and the institutionalised Church moves toward becoming more self-sustaining and less demanding of the Faithful. Serving rather than insisting on service.

But that’s terrible for business – because attendance begins to dwindle, and the donations begin to dry up.

?

But why is that?

And at least part of the answer is that there are good reasons why tithing works to keep people in the fold.

Why People Tithe

Here’s a parallel: if your partner demanded nothing of you – neither fidelity, credit card nor attention – what kind of marriage would you have?

It would be perfect for some, I’m sure. Zero obligation and all that.

But for most of us, it would be empty and boring: what I want, when I want it, for free, no strings. There would be no reason to value the relationship, because it asks nothing of me. So why should a Faithful relationship be any different?

Once I start tithing, I am invested in the Church. I have paid my membership fees, and I can be welcomed into the club with the self-surety of knowing that I have a right to be there.

Also: it will pay off.

When you’re part of a club, you’re part of the network. And when you’re part of a network, you’re in luck*. After all, the Church is now an expanding network of individuals. Suddenly, people in the Church appear more “blessed” as they benefit from exposure to a social network united in a cause of mutual obligation.
*For a fuller explanation, you should check out Richard Wiseman’s “The Luck Factor”. The luckiest people have the largest social circles. It’s not a coincidence.

Which makes tithing a small cost with great return.

But after all that, let me return to the schoolteacher pointing out to her students that their grades are for sale.

If I were able to buy my exam results with apples and chocolate and floral arrangements, then that would also be “a small cost with great return”… But would you still want to hire me?

Probably not. Because you’d quickly establish that I’m not educated – I just paid for a grade transcript.

My main question: what if the congregation hits the Pearly Gates, only to find out that they’re not actually the faithful, but that they really just paid for a club membership card?

Here’s the link to the old post: The Economics of Faith: Once Bitten, Tithe Shy

Also, for the record, I want to point out that I’m not a religious skeptic. I choose to believe in my God and His Church because that is what makes sense for me. But that doesn’t mean that one needs to be blind to unscrupulous and/or pharisaic church leaders that twist Faith.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.

Xenophobia: confessions of an immigrant

As I see it: in the years to come, we’re going to look back on xenophobia in the same way that we look at racism, sexism, anti-semitism and homophobia.

It’s one of the remaining bastions of “legitimate” prejudice – whereby it’s “okay” to shut people out purely due to the geographic accident of their birth. In South Africa, you can also burn immigrant homes, loot their shops, and anoint them and their children with necklaces of burning tyres for the terrible crime of their birthplace.

But you don’t need to look at the atrocity.

I’m also an immigrant to South Africa. And while I have to pay tax in South Africa as though I were a full resident (for over a decade, I might add), and while I have to contribute to the national Unemployment Insurance Fund every month:

  • For any job application, I can only be hired when there are no other South Africans that fill the requirements for that position. And the employer has to prove to the Department of Home Affairs that I am literally the last person on their list of potential applicants before the Department will agree to even consider granting a permit.
  • I can never claim unemployment benefits, despite my contributions.
  • I don’t have real access to credit.
  • I can’t vote.
  • I can’t change jobs without applying for a new permit.
  • I’m completely subject to the whims of immigration regulations over which I have no voting power.
  • Every time I have to reapply for a new temporary residence permit, it costs somewhere in the region of R15,000 a pop. And that’s a pure cash cost – none of the opportunity cost of my time (permit applications take up weeks of working hours, arranging multiple police clearances, medical reports, radiological reports, the list is almost endless).
  • That permit application process can take as long as the Department of Home Affairs chooses to take with it.
  • And if they take too long, and my permit expires, I’m automatically declared “undesirable” (their words), and I’d be banned from entering South Africa for a minimum of 18 months.
  • At any time, after over a decade of living and contributing, regulations could change again, and I would have to leave my life and my home at a moment’s notice.

There is no justification for it.

The whole notion of immigration control began with America trying to shut out the waves of Chinese immigrants in the 1880s. For almost all of human history, men were free to move from place to place. But in the last 150 years, slowly but surely, each country has closed its borders and created areas where certain people are allowed and welcomed, and areas for the unwanted immigrant leeches.

How is that any different to a racist policy of segregation?

And before anyone ascends their haughty horses and declares that these immigrants are stealing their jobs and taking their money (as though, somehow, they have a pre-emptive right to those things because they were born somewhere privileged and the immigrant was not), here is an picture:

According to the last World Bank datasets available:

  • Immigrants and local South Africans might send out $643 million a year into the world; but
  • South African immigrants send back over $1 billion each year.

Because, South Africa, you too have sent your people out across the world. And they are sending you back far more than you are losing.

Should the world necklace them?

xenophobia

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.

Rent or Buy: an update, still renting

I’m officially two weeks into new digs. There is a library, and that pretty much makes it the dream.

New digs come with visitors, and most of those conversations go a lot like this:

Me: I feel like I’m living in a country cottage. All I can see from the bedroom window is rolling green. At night, I can hear the river nearby. And the best part: I can’t smell it*.
*Almost a default script at this point.

Visitor: Amazing.

*contented silence with birdsong and brook-babbling in the background*

Visitor: If you don’t mind me asking, what are you paying in rent?

Me: *answers*

Visitor: *EYES*

Visitor: Do you know what kind of place you could buy in suburbia if you were paying off a mortgage bond at that price?!

Me: Yes. But then I’d live in suburbia. I want to say something like “I’d rather die” – but moving to suburbia would mean that I’d actually died, which makes it roughly the same thing. 

Visitor: But then why don’t you try and buy this place?

Me: Because I have a spreadsheet. Would you like to see it? 

*awkward silence*

Visitor: I’m okay, thanks…

*more awkward silence*

Me: …so, um, how are you enjoying your new place? Have your conveyancing people managed to finalise the transfer yet?

Visitor: They tell me end of April at the latest. Of course, they also told me “before Christmas”, so I’m not holding my breath… Oh my word, is this the library?!

*conversation moves on to better things*

Some observations

House-buying can make a lot of sense if you’re willing to live anywhere (because then you can get a good deal even if the living is sub-optimal).

But if you want to live in an area that is quite popular because of its convenience, setting, and low traffic thanks to lower-density housing, the current situation sounds a lot like this:

  • The landlord tells you “Houses in this area are very expensive now. I mean, you hear of places going for R3.5 million and upwards.”
  • But when you look around at the rentals, rental yields (based on those numbers) are between 5% and 8%.
  • Between 5% and 8% gross.
  • I would guess that most home-owners are only making 3% on their investment after home maintenance, rates, etc.
  • If I was to become the landlord by buying, I would save the 3% that I’m offering as a renter, and then pay 9%/10% each year in interest to the bank.
  • Not including all the transaction costs.
  • And that’s just in Johannesburg. If you head to London or Cape Town – those discrepancies are much bigger.

Each time I do these numbers, I ask myself this question: “Sentiment aside, if I owned this as investment property, would I sell it?”

The answer is almost always “Well, I hope I would”.

Because of course, sentiment can’t be held aside – we’re not talking about bricks and mortar; we’re talking about former-old-homes and life-time investments and hope. Which is a loss aversion bias that I’m attempting to avoid for as long as possible.

Although I know it’ll get me in the end.

Speaking of which, this post was inspired by the recent “My long road to freedom” piece by Magnus Heystek. I’m not always his biggest fan – but I liked this one.

A highlight:

Following another unreasonable demand from the tenants, this time wanting the pool remarble-lited, I decided to give notice and put the house on the market. This was over-and-above other ‘discussions’ we had about the sprinkler systems/imaginary rising damp/the fish pond/curtains … you can fill in the rest. In short, I was gatvol. I just wanted shot of the house.

The discussions I had with a number of estate agents in the Dainfern area went something like this:

Me: “How’s the market?”

Agents: “Great, couldn’t be better. Show days are busy and there is a shortage of stock. All the experts agree. We will move the house quickly”.

Three months later the discussion went something like this:

Me: “What’s happening? Any offers yet?”

Agents:” The market has gone very quiet. Maybe we should drop the selling price some more….”

And so on. We all know the story.

The conclusion:

If you want to invest in bricks and mortar, do so via listed property counters on the JSE or a collective investment property fund. Far better still, invest into an offshore property fund. Last year the returns were in excess of 30% and no local rate and taxes that can be squandered.

Check it out. Also, his earlier article: “Sell Your Investment Properties now“.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.

Californian Farmers: Shipping Water to China, One Alfalfa Bale at a Time

Oh California.

So as we all should know, there’s a serious water shortage going on there, climate change, where-are-the-deniers-now, and so on.

Background notes:

  1. The governor has introduced compulsory water restrictions.
  2. But the compulsory water restrictions don’t apply to farmers.
  3. 80% of California’s water gets used by farmers.
  4. Not by leaving the tap on while toothbrushing.

A chart:

Things that I thought until recently:

  1. The real water guzzlers are the almond trees.
  2. Curse those almond farmers for using all that water.
  3. The price (for water) is not right – and that’s the whole problem here*.
    *Okay, so I didn’t actually think that the price of the water was the whole problem. The drought is the whole problem, and prices are irrelevant when there is no water. However, prices are still a problem when they don’t sufficiently adjust to the fact that there is less water than before.

But here are things that I learned yesterday:

  1. The trouble with almonds is that they grow on trees. And the trees will die if you don’t water them – meaning that there is no short-term drought measure for almond trees. There are only long-term measures. And in terms of value creation terms, you get some of your best bang for your gallon/litre with an almond tree.
  2. That aside, this graph:

  3. So alfalfa then.
  4. Most of which gets grown for California’s dairy cows.
  5. But a growing amount of which gets exported to China to feed their cows.

The Awkward Economics of California’s Trade Deficit

California runs a massive trade deficit – importing plenty of Asian goods and not exporting plenty of California goods.

Which sounds too much like economic theory. So here’s what that means in practice:

  • The Container Ships crossing the Pacific from Asia are packed to capacity.
  • The Container Ships returning to Asia tend to run empty.

And what that means: transportation costs for any Californian exports to the East are dirt cheap.

So if you could find something to make cheaply in California, that couldn’t be made as cheaply in the East, then you’re in the money. And if you could find something to make cheaply in California that can’t be produced in the East, then you’re in plenty more of the money.

It’s a giant opportunity just dying for a product.

Did we mention that China lacks enough of its own water and arable land to produce livestock feed? Especially given the fact that China’s middle class boom over the last three decades has meant that hundreds of millions of Chinese nationals are now in a position to choose beef over pork and chicken?

The Tragic Economics of Farmer Water Rights

Back in California, in the Imperial valley where much of the alfalfa is grown, farmers have historic rights to use their allotments of water from the Colorado river. If they don’t use it, they lose it. So they use it.

Just to backtrack here, the big argument against Free Market economics is the Tragedy of the Commons. In this tale:

  1. There is a patch of communal land upon which the villagers can graze their sheep.
  2. It is in each villager’s individual interest to graze as many sheep as possible on the land (I mean, the grass if free, and more lamb means more money/milk/meat).
  3. But if each villager keeps adding more sheep to his/her flock, there will not be enough grass, and the patch of communal land gets desertified. And no more lamb for anyone.
  4. Tragic.

The water rights situation results in something similar:

  1. Each individual farmer needs to use their full allocation of water, otherwise they’ll lose that allocation.
  2. Even if there isn’t enough water.
  3. And actually, it’s in their interest to be lavish with it – because that might result in higher future allocations.

So the water gets used on alfalfa. And not particularly well either – because why use drip technology when you can just flood the field?

And in some ways, it’s almost irrelevant what the price is, if the risk is losing your allocation.

Californian farmers: totally incentivised to use more water. In the middle of this crazy drought. And to send the water-products to other places that don’t have enough water. Like China.

Madness.

Other articles to check out:

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.

The Power of Networks, Network Thinking, and other cool stuff

Here is a speech and animation that I liked a lot (and this is the link for the email subscribers – The Power of Networks, or you can check it out directly on rollingalpha.com).

The basic summary being:

  1. Once, we liked to think of things as linear (direct cause and effect – that sort of thing).
  2. Then, we realised that there was interconnection, and it all looked highly chaotic.
  3. Now, we’re learning to see the mind/body/world/Life/the Universe as giant networks of organised complexity.

It’s almost like science is becoming more spiritual: moving from linear moralism, to the agnostic I’m-too-limited-and-the-Universe-is-too-unlimited-for-me-to-say-anything-really, and now reaching a kind of mystical state where Self-Understanding reflects Universal Understanding and vice versa, with all the fun multiplier effects that implies.

From an economic standpoint, I guess this represents the move away from Market Intervention (linear cause and effect) and Neoliberalism (where everything is too chaotic for us to understand – so rather just let everything do what it must to stay in balance, and stay out of it with all your regulation, Big Government), and towards a pluralistic Schrödinger-esque view of Economies as places where you can both intervene and not intervene and that really depends on your perspective.

That might seem a bit heavy for a Monday morning. But there are pictures.

Also, this:

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.

Timeline Of The Far Future

Following a week of forecasting, I’m closing with this:

Is that not magnificent?

I am off to celebrate Pascha this weekend. So Kαλό Πάσχα and Kαλή Aνάσταση to all my Orthodox readers.

And happy weekend to everyone else.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.