I am often surprised at how often people talk to me, even now, about the first Rent or Buy post that I wrote almost a year ago. And I’ve realised that it’s time for an update (or a clarification), because:
- People think that I’m not a fan of fun stuff like buying nice cars*; and
*what I actually hear is “Grinch“.
- My view has … evolved.
Oh – I haven’t changed my mind. I still think that home-owning is a (very) costly investment strategy. But not everything in life is an investment strategy, and not all the pay-offs result in higher net-worth.
To summarise the original position:
- Home-owning requires large upfront expenditure (the initial deposit, conveyancing fees, transfer duty, a bit of repainting, new furniture, etc).
- And the monthly cost of renting is almost always less than the monthly cost of home-owning (it’s not just mortgage repayments – there’s also maintenance, rates, etc).
- If you were disciplined enough to do it, it would be better to take that initial expenditure (and the money you’d save each month by renting) and invest it in something productive – like equities.
- And if you did that, you’d likely be able to buy your dream house in cash long before the mortgage repayment period on the original property expires*.
*Under the assumptions in my original scenario, you’d be able to buy the house outright for cash (at a real-adjusted cost) in year 10. I think this is the point that I should have emphasized – even if you do want to buy a house, I’m not convinced that going and buying a house today is the best way to get there.
And I want to reiterate here that I’m not talking about property investment in general – I’m talking specifically about how you pay for where you want to live. Property investment, I like. I wrote about it here: Rent or Buy: How To Be A Property Mogul.
But putting aside the investment strategy, I think that there are two particularly powerful (and economic) reasons for home-owning:
- Home-owning as an Insurance Policy.
- The Positive Externalities of Home-owning.
When A House Acts As Insurance
Home-owning is a little like health insurance: it becomes increasingly more important as you get older.
To illustrate: I’m unmarried and in my 20s (just). I don’t mind too much if my landlord wants to come round for an inspection, or if it takes a few months for him/her to fix the oven, or if I get evicted at two month’s notice. I can find a new place relatively easily. I don’t have too much in the way of prized furniture. My costs of inconvenience are low.
But as I get older, maybe there’ll be a family with small children, and a spouse that is prone to nagging. Small children necessitate cots and beds and admin. The home will gradually fill with dining room tables and sideboards of both the hire-purchased and inherited varieties. Suddenly, an inspection becomes a demeaning intrusion, and broken ovens make for a dissatisfying sex life. To say nothing of evictions, which may well break the marriage.
And then after that, it gets worse. Age brings loss of mobility and the setting of ways. There is emotional attachment and history invested in the walls. As sentiment starts to play a more important role than financial sense, eviction can become a death sentence.
I guess I’m saying that the original model from the first post does not take into account the hidden cost of renting. The inconvenience cost of eviction is one that increases with age, and is specific to the person in question. My inconvenience cost might be negligible – but for some of my peer group, that cost is intolerable. And they pay it by choosing to mortgage now and stay beholden to a bank for 20 years, rather than save now and own the house outright in half that time.
Home-owning is an insurance policy against an unwanted relocation. And the premium is your debt-burden.
The Home-owner’s Externalities
Externalities are the unintended benefits of a decision. And in this case, they’re psychological.
I think that most people would agree that they have a general desire to be “grounded”. Or, put differently, that they have a generalised aversion to change.
Given that, I suspect that there is a very clear psychological difference between home-owners and renters. When you rent, you are more aware of transience – almost as if you’re locked in a state of indecision, and continually aware of other options. And that awareness infuses your life with latent anxiety.
On the other hand, once you make the decision to buy a home, you’re committed. There is almost a calming matter-of-factness about it, as though you’ve made the leap. In the people around me that have recently bought a house, I have seen a perceptible relaxation in their characters (although that may just be relative to the amount of anxiety that preceded the bank’s approval of the mortgage!).
Speaking personally, my business just took the leap from being based out of coffee shops and client premises (the overhead-free approach) to having a three-year lease for offices in a well-manicured building with close proximity to a highway. On the face of it, there is just office space. But I seem to be working longer hours more productively, and I keep using phrases like “legitimacy” and “renewed sense of purpose”.
I can’t help but wonder whether the mental shift between renting and owning is just as dramatic as the one between squatting and renting. And also, if people that own homes don’t make more money: possibly because they have to (after all, they’ve got a mortgage to pay); but maybe also because the commitment makes them more fully invested in the life that they’re leading, alongside everything that accompanies it.
It’s just a thought.