When should you buy a house? Homeownership versus Renting

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.


“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:

  1. They are made out of “wood” (really, chipboard) for the price of a stone mansion
  2. I’m less of a ‘settle down and plant roots’ kind of person
  3. 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.

What do you think about the article? Should homeowners wait until they’re about 40 to buy a home?

(Assume the majority, not the 10% who have the means & the job to buy a home before 40)

About the Author

Just a girl trying to find a balance between being a Shopaholic and a Saver. I cleared $60,000 in 18 months earning $65,000 gross/year. Now I am self-employed, and you can read more about my story here, or visit my other blog: The Everyday Minimalist.