Sunday, 14 August 2011

Why I Prefer to Rent

There was a documentary on 60 Minutes this month called The Big Squeeze about families who made good incomes who borrowed incredibly large amounts of money from the bank to buy a lot of real estate. They then lived large and expected to come out ahead assuming that real estate prices always went up. Unfortunately, their dreams have now been crushed as rising prices of essentials, rising interest rates, and falling wages and even unemployment have squeezed them. The documentary asks whether it is better to rent rather than buy a home, as is the norm in Asia and Europe.

If you rent, you can live for cheaper and you can invest the difference in shares, managed funds, or property syndicates. If you buy the bank, you pay off the mortgage to the bank and hope the value of the family home rises steeply. The decision to buy or rent is quite an even match if you do the numbers, but the problem with making an economic forecast is that you are making massive assumptions over long period of time (the average mortgage lasts for about 30 years). After many of these buy vs rent calculations are done, renting and buying are normally about the same.

When you are buying a house, you are assuming many things working in your favour, namely that interest rates are low, house prices go up steeply, you keep your job and don't get a pay cut, and you live in the same place forever. This, in my opinion, is the deal breaker. Far from providing security and stability, buying a house actually locks you in and limits you. It denies you freedom to move to get a better job or to take a risk in your career. A home owership culture, in my opinion, does little in a country other than encourage wage slavery. When you get a mortgage, the bankers have you by the balls, and you stay quiet and work hard for them for the next thirty years of your life.

The benefit of renting is the flexibility. I spend about $10 per day to eat out at restaurants for lunch. If McDonald's offered to give you a $10 meal every single day for the rest of your life for a lump sum of $50,000, would you take it? I certainly wouldn't because I don't know if I will continue to like McDonald's for the rest of my life. Furthermore, if I give $50,000 to McDonald's then they have no incentive to work hard because they have all their money. They can produce poor quality food and it wouldn't matter because I have already paid the $50,000. This analogy is supposed to be similar to buying vs renting a house. If you buy a house, you lock yourself in because moving have immense costs (due to high stamp duty). Furthermore, if you buy a house, you are responsible for everything, for all the repairs and you even suffer is something goes wrong in the neighborhood that impacts the house price (e.g. if the council approves for a tip to be built next to your home). Buy renting allows you to shop around for the best product. Like the restaurants who fight over your money, lordlords will fight over your rent money.

1 comment:

Dave Velasco said...

Buying and renting are among the most frequent debates these days when it comes to housing opportunities. While both can give benefits, one must be able to recognize and consider things first whenever he/she chooses one over the other.

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