Renting A Home Makes More Financial Sense Than Buying

To Buy or Not to Buy? That is the Question

It is always better to buy a house; paying rent is like pouring money down the drain. For years, such advice has encouraged people to borrow heavily to get on the property ladder as soon as possible. But it is still sound advice? House prices are currently at record levels in relation to rents in many parts of the world and it now often makes more financial sense especially for first-time buyers to rent instead.

Home buyers tend to underestimate their costs. Once maintenance costs, insurance and property taxes are added to mortgage payments, total annual outgoings now easily exceed the cost of renting an equivalent property, even after taking account of tax breaks. But capital gains will more than make up for that, it is popularly argued. Over the past seven years, average house prices in America have risen by 65%, those in Britain, Spain, Australia and Ireland have more than doubled. But it is unrealistic to expect such gains to continue. Making the assumption that house prices instead rise in line with inflation, and including buying and selling costs, then over a period of seven years-the average time American owners stay in one house, the calculation show that you would generally be better off renting.

Be warned, if you make such a bold claim at a dinner party, you will immediately be set upon. Paying rent is throwing money away, it will be argued. It is much better to spend the money on mortgage, and by so doing build up equity. The snag is that the typical first -time buyer keeps a house for less then five years, and during that time most mortgage payments go on interest, not on repaying the loan. And if prices fall, it could wipe out your equity. In any case, a renter can accumulate wealth by renting the money saved each year from the lower cost of renting into shares. These have, historically, yielded a higher return than housing. Putting all your money into a house also breaks the basic rule of prudent investing: diversify. And yes, it is true that a mortgage leverages the gains on your initial deposit on a house, but it also amplifies your losses if house prices fall.