Conventional wisdom dictates that you grow up and buy a home because adulthood equates to homeownership. Now, why would anyone want to be a grownup and have responsibilities is beyond me? But, maybe you like having responsibilities.
As someone who staunchly opts for renting over buying, I've engaged in countless discussions on why I make this choice. Let's dive into the arguments that people have given to convince me to buy a house.
Argument #1: The Investment Myth
The biggest argument I have heard for owning a home is
It's an investment
However, Yale economist and Nobel prize winner Robert Shiller suggests otherwise; buying a house is "like a consumption choice, it's not an investment". He says that, overall, the housing market doesn’t have a significant long-term return.
Although I agree with him, you could be lucky and there could be a boom in the market when you are ready to sell. But, taking that gamble is riskier than investing in the stock market, which has a higher return in the long term.
There is also an opportunity cost to buying. When you go to buy a house, there is a significant down-payment that you have to pay. It might be better to invest the money instead. Additionally, if your rent is significantly cheaper than the mortgage, you would be better off renting a house and investing the difference.
Moreover, if you plan to cover the mortgage with rent, remember that rental income might not suffice, or that the house might be vacant for some time.
If your main reason for buying a house is an investment and you hope to sell it down the road for a tidy profit, all I can say is
May the odds be ever in your favour
"Hunger Games"
If you have been living under a rock and haven't read the books or seen the movies, they generally are not.
Argument #2: The Illusion of Ownership
The second argument that frequently comes up is that.
When you rent, you own nothing. When you buy, you eventually own the house
~~This is also why most people are baffled by my stance on renting a furnished apartment instead of purchasing the furniture myself.~~I have since changed my stance on this because most furnished places don't come with baby furniture or place to put them.
Let me start by saying that "When you are renting, you are paying to have a place to live". In most cases, it would be in a neighbourhood that suits your lifestyle.
Personal finance blogger Mr Money Mustache suggests you consider the commuting costs as well. A suburban house might mean a costly daily commute especially if you don’t have a public transit option. It would be easier to find a rental closer to your work saving you money and time. Plus, you're spared the headache of home maintenance.
What if your job requires you to move or you want to explore an exciting new opportunity in a new city? Chances are, if you have a mortgage to pay, financial considerations will weigh in, and you will have to forego the opportunity.
Argument #2A
Invariably, someone will counter with the argument
But Ankur, if you buy a house, you will eventually pay it off, and it will be yours
Now only if it was so easy. Most people forget about the payment to the government - the dreaded taxes. Even if you have paid off your mortgage and celebrate thinking that you finally own the house, you realize that property tax still exists. If you still believe you own the house, don't pay the tax for a while and see how fast the government comes after you.
The other cost that people forget is the home maintenance and repairs.
In fact, at one point, we almost fell into the trap and started looking for a house. Luckily, we didn't find anything that we liked. Being the epitome of laziness, I got tired of looking after a few days, and we decided to continue renting. This allowed us to pack up our bags and move to NZ easily when the opportunity arose.
Argument #3: Tax Savings
The third argument that comes up is
You save on tax when you buy a house
This is one of those classic cases of Penny Wise, Pound Foolish. The tax you save will probably be far from the interest you pay yearly. Yes, you get a tax benefit, but this should be a minor consideration to decide if you should buy a house.
Is buying a house for chumps?
This doesn't mean that you should never buy a house.
One advantage of purchasing a home is that you can do whatever you want. Customization FTW. As a renter, you are at the mercy of your landlord to get any changes made.
Owning is also the best way to lock in living costs if you plan to stay in the same place for a long time. After all, the landlord may ask you to move out. Rents can also increase, but so can monthly payments as can be seen in the NZ climate in 2023.
Can You Afford Homeownership?
So how do you decide whether you can afford to buy a house? By assessing your financial readiness.
When half of your salary is fed to the house, that means that you must be a lot more judicious with how you spend your money.
"I Will Teach You To Be Rich "
One rule of thumb is that your home should not cost you more than 2.5 times your salary or, better still, your net worth. You should have a cushion between your monthly income and expenses(including your mortgage). You should also not be buying a house if you have a massive credit card debt or other loans that need to be paid off.
If you are buying a house for investment purposes, you should follow the one per cent rule of investment, i.e. Does the monthly rent equal one per cent of the purchase price or more? Some people go a step further and claim that you should follow the 2 per cent rule, but I feel that it is too prohibitive.
Finally, you should remember to add mortgage payments, taxes and maintenance charges into your estimates and make sure it makes sense for you financially before taking a plunge into homeownership.
Conclusion
While I lean toward renting, I appreciate the value of informed homeownership decisions. If you buy for the right reason, homeownership, whether for yourself or as an investment, can be one of the best things.
However, it scares me how many couples I know have bought into the American/Indian Dream of buying a house without adequate due diligence, sacrificing life's joys for mortgage worries.
What's your take? Is renting the practical choice, or do you prefer homeownership? Share your thoughts!