Came across an interesting article from the Globe and Mail (a Canadian newspaper) a while back discussing why Why Many Homeowners Should Have Rented, excerpts in bold blue below.
Now before you all roll your eyes at the article (and perhaps at me?) and say: DUH! Of COURSE!!! *pshaw* HIndsight after the subprime debacle is 20/20!!, there are some very interesting points in the article I want to bring up.
Buying a home means you are pre-paying your shelter for life.*
“By purchasing a house you are pre-paying that liability in advance. Think of it like a pre-paid phone card, but for rent and for the rest of your life.
According to this line of thinking, the $450,000 mortgage doesn’t quite increase your total liabilities by $450,000 because you have reduced your implicit housing liability.
What all this implies is that housing is part consumption (to defuse your implicit shelter liabilities) and part investment, and you should keep both of these dimensions in mind when you consider the housing money milestone.“
*Well, perhaps not in England because many leaseholds are capped at 99 years and at the end of the 750,000 pounds you forked over for a home, you have to buy it again. No joke!
This is not fresh or novel, but it’s a good reminder of why people should consider their reasons for buying a home and to compare renting and purchasing a home on such a basis.
When I casually poll friends about why they bought a home, they said things like: It’s an investment or I’m building equity, or I never want to pay rent to anyone else again.
Valid, but if you buy a home and take a mortgage along with it… you are kind of paying a rent of some sort — you are renting that money (the mortgage) from the banks at a certain interest rate, because it is better for you in the long run versus renting an apartment from a landlord.
People under 40 should rent, not buy
“Here’s the Spock argument against home ownership early in life: When you are young the vast majority of your true wealth is locked up in human capital*, which is illiquid, nondiversified, and definitely nontradable.
It therefore makes little sense to invest yet another substantial amount of total wealth in yet another illiquid and nondiversifiable item like a house.“
Stack on top of that the fact that you may have graduated penniless or in debt (like myself), and it becomes an even stronger argument in my mind, to wait.
*Explanatory Note: Human Capital = Your Brains and Youth
What they mean is that you are young, and you haven’t worked your requisite 40-50 years yet, and you are starting at the bottom rung of the ladder in most cases, which means the salary is low.
That being said, as you progress through your career, in 20 years you’d presumably have a better job, more money saved, and have started converting your human capital (youth + fresh brains) into better jobs over time (age + experience).
“However, when you are older (say 50 or 60) and you have unlocked a large portion of your illiquid and nontradable human capital and converted it into financial capital, you can afford to “freeze” some financial capital and lock into a home purchase.
At that stage, not only do you have more wealth in total, but also your balance sheet (and especially your human capital) is likely not as sensitive to the state of the economy and its disruptive impact on wages.“
This, I agree with. Most people don’t have amazing jobs until around 40 years old, or older.
Your wealth is also sensitive to economic climates
“In addition, when you are young, your human capital and hence your total wealth is sensitive to the evolution of your wages and income over time.
These two factors tend to decline in a recession and bad economic times, just like housing. In other words, there is a good chance that if your job wages take a hit, so will your real estate. “
Another “Duh!” moment, but a good one to bring up.
SUMMARY
“In sum, I suspect that people grossly underestimate their home ownership expenditures.
They overestimate the amount by which the house will appreciate over time.
They tend to live where they work (obviously), which means that their housing capital (which is a subset of financial capital) is exposed to the same economic risks as their human capital.
And yet, the one thing an investment in housing might achieve is that it creates its own investment in social capital.
Perhaps this one factor outweighs the many other negatives and makes this particular money milestone worth pursuing.”
As for myself, I will never say never, but I REALLY don’t see myself buying a home in North America for these 3 reasons:
- They are made out of “wood” (really, chipboard) for the price of a stone mansion
- I’m less of a ‘settle down and plant roots’ kind of person
- I prefer to hold my wealth in money rather than in a physical asset I can’t move or take with me
These are of course my own PERSONAL reasons and not suggestions for anyone to do the same without evaluating their own situation first.
I have known plenty of people who bought homes, and have seen them appreciate to 50% – 100% over their value in a short period of time, but like with any investment, you cannot predict what will happen with absolute certainty.
The above in bold blue were just excerpts. Read Why Many Homeowners Should Have Rented in its entirety.
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This post is really interesting to me. I hate it when people say that a home is an investment. I actually think that a home (or home ownership) is a status symbol.
I absolutely think that the old adage that a home is worth the investment has hit some hard times, and needs to be reevaluated and stop being pushed by so many people. I'm 28, and so I'm victim to many of these pushers, who are just convinced it's a "waste of money to rent" despite the fact that several of my coworkers who are around my age are now upside down in their home purchases, one of them by $150,000!!! So I don't believe that where I live (San Diego, CA) it's the best idea to buy, nor do I think that the home prices overall are going to go up consistently over the next 50 years like they did over the last 50. I guess it's a good thing I don't have any money to be buying a house, since I don't really want one anyway 😉
Depends on where you live. If I lived and rented where I live, I'd never afford a home cash. Sorry but rents are expensive period. Does that make homeownership right? Not necessarily. It's a lifestyle choice.
Preface: I currently rent and have no plans to change that for the next 2-5 years.
I agree with most of the article. Renting can often be better on your finances than owning a house and busy, young professionals don't have to worry about maintenance, repairs, or snow removal.
That said, I completely disagree that people should wait until their 40's to buy a house. On average, a house would take 15-20 years to pay off. Essentially, you'd be 55 or 60 before the house was paid off. Most people start thinking about downsizing at that time once their kids are off at college, have moved out of the house, and they cannot physically keep up with the demands of a house. (stairs, lawn care, and snow removal) By that point, there may not be enough equity in the house to buy a condo or rent comfortably, compared to 40 years of equity growth.
Also, employers do value flexibility but I do think a steady resume still attracts the right employers. When someone moves every year, they start to look unreliable and employers will be less willing to train, assuming the employee will take off in a year or two.
I agree with looking at home ownership from a more critical point of view, but I can't say I agree with not purchasing a home until 40. We bought a home at 23 years old and before 5 years had passed, the cost of purchasing the home doubled. Which is nice but kind of useless in that house prices rise for other people too, and to buy someone else's place often negates the rise right? But what is nice, is that at the time we bought, the mortgage was a little over rental prices, but 10 years later, our mortgage is a little over $200 a week (although we pay more), and rent for a similar home is $400 a week. We could make that difference work for us even if we had to live somewhere else by renting the place to someone.
In our instance, waiting even 5 years more would have made a significantly poorer outcome for our finances. It's all so specific to individuals and location and timing and I agree it is highly unpredictable – as is predicting rental availability and pricing a decade in advance.
This is so interesting and timely as I was recently reading Richard Florida's new book The Great Reset. He makes arguments similar to the ones you highlighted in blue. As a young, educated professional, one of your greatest assets in a globalized economy is mobility, and being tied to a home you bought (especially if it's an "underwater" home that's depreciated to the point where it's worth less than the mortgage you have on it) is a liability. That being said, I see myself establishing long-term roots in Vancouver and Vancouver does not fit the profile of the "real estate bubble, growth and development for the sake of growth and development" city that Florida describes. Prices have risen steadily since the 80s here, and geographically speaking, being constrained by mountains and water means there isn't a lot of room for urban sprawl, which means denser, more compact, and often more expensive housing.
Very good post, not many people bother to do this level of analysis.
However, a home isn't just used for living. Here's some of the stuff I do with my house (detached, large garage)
–fix my own vehicles (I could rent a bay in a garage, I guess)
–grow a few of my own garden veggies (I could rent a garden plot, I guess)
–occasionally board a dog for a friend
–refinish furniture
–store and repair bikes for friends
None of these activities, or very few of them, would be possible in rented facilities, at least not with the degree of freedom I enjoy. All of them provide income or defray cost.
Also, in regard to "wood" construction, materials like oriented-strand board (OSB, or chipboard), plastic, vinyl, and aluminum are superior to stone for certain environments (like the Canadian prairies). You have to take an engineering view of such things. Believe me, I've heard the same comments from many Dutch and German friends who still can't believe they're living in a "wood" house.
I totally dig those little hide-out houses though! cool pictures.
I am taking over my parents mortgage when they move in four to five years. It's cheaper than what I was paying for rent (I was paying $602, utilities incl. minus telephone, internet) and even with utilities, it will still be cheaper. Sure I have to mow the grass and shovel the snow, but I prefer living in a house. 🙂
I wish I had read this 4 years ago, and showed the article to my parents. They are of the mindset that buying a home is THE most important thing you can do (oops, second to getting married :p), but for their generation homes were MUCH cheaper and there were more incentives to buy. As a result of our ignorance and lack of the buy vs rent arguments, I purchased a (overpriced) condo at age 24…. yup.
How do you always post topics that I'm so interested in ? 🙂
Well, certain repairs this month have me almost wishing that I was renting, lol.
But I don't think there should be a certain age. You should be able to afford the house you choose, of course. Being completely out of debt and having an emergency fund would be ideal. My husband and I at least have the latter, though we're working on the former. And boy did the EF come in handy this month!
I think a lot of the benefits to having a house come in when you buy earlier than later. If you're hoping to save money in the distant future by having a paid of mortgage, then buying earlier is much better. And it can also help you to lock in your monthly housing expenses when property values rise again.
We're lucky in that we still pay less for our mortgage (taxes and insurance included) than we would if we were renting a similar place or even many apartments in the area. Of course, with extra maintenance and repair costs, it's much harder to tell if we break even or better, but we do get a lot more for the money. And, when we finish paying off the rest of our debts, we plan to hit the mortgage hard. We could conceivably have our house paid off in our 40s.
Now, we have thought about downsizing, at least some day when we have fewer furry roommates. But I think we'll keep the house as an investment property and rent it out, depending on the market. We'll see.
Good post – you have me reassessing why I want to own my own home and why the idea of home ownership appeals to me so much. For me, it boils down to two main reasons:
– Land is a finite resource; and
– I don't want to pay someone else's mortgage all my life.
Sure I am still at an age where I command a low salary but I'd happily borrow from my older self to ensure my older self has an asset to live in and won't have to pay rent until I die.
You make some excellent points about doing what is right in everyone's circumstances and perhaps holding off until you are older. I think the important thing is to buy as much house as you can afford i.e. factor in 12% of the house's value per year for repairs/improvements etc. in addition to repayments, taxes and so on.
I think people need to do what works for them. IMO a home is the type of thing you buy when you know you want to live in an area for 10+ years. In the 90s when I was a teen, the finance advisors always told people to buy a home because a home is a good investment, and it is for some people, but it depends on what you want out of life and if a home will fit into that life.
There are many people who don't like homes and prefer to buy condos because they don't really care about owning a house, they don't want to take care of a house, they don't plan on having kids, etc. Its just sad that many people got themselves into trouble, from advice touted by many finance experts. And yes while people are responsible for their actions, bankers shouldn't have given mortgages to people who couldn't afford to pay.
And what about the claim, that people don't have amazing jobs until their 40s and 50s, really? Its the first time I've heard that. I didn't read the article, so I'm just taking your word for it. I'm kind of confused about this because it seems that if you go to college and pick the right major or go into business for yourself you could have an amazing job in your mid twenties & thirties.
But back to the home thing, one of the reasons why I resist home ownership is because I don't want to work 30 years to pay off a mortgage, that's basically the equivalent of slavery. btw, you posted my favorite shipping container home, bf and I have been considering alternatives to housing, and we're thinking about that as one of them.
I showed him that pic and told him it was such a cute home, I'd actually would live in it. Honestly though I would rather spend my 20s and 30s, building up savings, investing, saving for retirement, etc. That to me is much more important.
To me a home is the type of thing you buy once you know where you want to live permanently & have enough disposable income in the bank and it shouldn't make you tap your emergency fund at the bank. Plus with property taxes, repairs, etc, in the long run it seems the home becomes a money pit no matter if its in a middle class neighborhood or in an affluent neighborhood.
I actually think most Canadians and Americans could afford to buy their homes outright if they lived below their means, saved, and rented for awhile.
I totally agree. It worries me how much importance young people place on home ownership – it seems like people just automatically assume it is the best thing to do, but don't question why – or if it's even true. I posted about this on my blog this morning because I think this is a really good post 🙂