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:
- 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.
- 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
- 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.
- 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.
- 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?”