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Reasons to rent a house instead of buying

Hermit crabs rent their homes. Sort of.

The following guest post on the reasons to rent a house instead of buying is from Graeme Pietersz, the man behind Moneyterms.

That it’s better to buy a house rather than rent is deeply ingrained in the British psyche. But the argument as to whether it is better to rent a house or buy is far from one-sided.

The core of the argument against renting is that rent is wasted money that you could instead save and invest in a house.

The flaw in this argument is that your entire mortgage payment is not an investment.

A mortgage payment is two payments combined:

  • One is the repayment of the amount you borrowed: this is an investment.

If paying rent to your landlord is a waste, then so is paying interest.

Rent a house or buy? The true cost comparison

You need to compare the cost of rent to the cost of paying mortgage interest. You cannot just compare rental yields to mortgage interest rates. You need to look at where both are likely to go over the lifetime of the mortgage.

For future interest rates (beyond any period for which mortgage rates are fixed) you look at a yield curve and add the spread over it that you expect to pay.

The amount you need to add is obvious for tracker mortgages, but the principle is the same for any variable rate because banks approximately follow market rates.

The Bank of England provides some nice graphs for UK rates. Similar data is available in other countries.

Model behaviour

The bad news for buyers is that it looks like we can expect yields to go up. Your mortgage payments will probably be a lot higher in five years.

To forecast future rents, the safest assumption is that they will, like house prices, roughly follow income growth over the long term.

By now you may be feeling that you are being asked to do a lot of financial modeling to decide whether to rent a house or buy. Sorry, but this is an important decision that does not have an obvious answer. It demands at least as much analysis as buying a share.

And we have not finished yet! There are more costs to be taken into account – and we have not even talked about risk.

Other costs of owning a house

Mortgage interest is not the only cost of owning a house:

  • If you own a house, you have to maintain, insure, and furnish it. Doing this costs you not only money, but time as well.
  • You need to take care to ensure that you maintain valid insurance (I know people who have happily paid for policies they did not realise were not valid).
  • You have to find plumbers and builders when needed — and pay them.
  • You have to replace old furniture, even if it has only suffered ‘fair wear and tear’.

So you need to add an estimate for all this to the cost of owning a house, and compare that number to your rent. Buying a house is probably looking a lot less attractive by now.

It looks worse when you consider the risks.

The risks of buying a house

The most obvious risk is that house prices will fall. In the long term, this risk is ameliorated by economic growth, as house prices have had a fairly stable long term correlation with incomes. The question is whether you have the will and means to last through crashes.

Also, the risks of owning a property are not just the risks to the property market in general. There are risks specific to the area you buy your house in, and to the particular property itself.

House prices do not follow the same trends all over a country. There can be huge divergences between regions. In addition, there are risks attached to your local area. It may become more or less desirable as an address.

Local facilities (schools, transport, shops) may improve or deteriorate. Changes to rivers or flood defences may make your house prone to flooding. Similar risks exist in areas vulnerable to erosion.

We touched on one of the risks peculiar to a particular property: the cost of repairs. There are a whole range of risks that can leave you badly out of pocket, from dry rot to fire. Some will be covered by your insurance, some will not be covered at all, and a good many will be inadequately covered. Regardless of who pays, it still costs you time and worry.

The price risk is far worse than similar volatility in any other investment, because most people borrow to buy a house — very few borrow to buy shares. Buying a house with a mortgage is therefore a massive margin trade

Buying a house also ties you down. If you rent a house and you are offered a job in another city, or even another country, you can be there in a few weeks. It may cost you a few months rent, but it is quick and easy, and the cost is predictable.

So, rent a house or buy?

There are times when it is obvious that buying a house is a good decision, often in the wake of a crash.

When house prices are low enough that you can pay the mortgage and also other costs with the equivalent in rent, you can’t really lose. Such high rental yields are a strong sign that prices are too low.

Most of the time it is much less clear that you are likely to benefit financially.

If house prices rise rapidly it may turn out to be a mistake to rent a house – but so would buying if they fall or stagnate. So why not keep your options open and your expenses predictable?

Note: I have updated this post from the archives because the core reasons to rent a house versus buying haven’t changed, even as various parameters have arguably become more stretched. Be aware that some of the older reader comments might now be dated, however. On the other hand, that does provide interesting context to this timeless back-and-forth!

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{ 54 comments… add one }
  • 50 RumTumF1 December 17, 2016, 5:37 pm

    It is also interesting to note how much of the desire to own a property in the UK arises from a traditional bias towards doing so. That same stimulus doesn’t seem to exist in some other European countries, where renting, even for a family with children, is, if not the norm, perfectly acceptable. But then many of these countries have more protection for renters written into law (such as Spain’s protected tenancy for the first three years in a property) that make it more attractive and stable to rent than it is in the UK.

    @EHB While that is certainly true of rural areas and many commuter belts, perhaps making their values more perilous, there is not the same ability to provide a surplus supply in many of the more prosperous urban centres, which should at least partially shield the value of properties in these areas. Long term, of course, Brexit may effect how many of our urban centres remain prosperous. And one only needs to look at many of the northern industrial cities to see the effect that reduced opportunities can have on property values.

  • 51 britinkiwi December 19, 2016, 10:04 am

    WNomad- welcome to NZ! DoC huts are an awesome resource aren’t they?

    Having sold up in the Uk some years ago and rented in NZ from then, then just recently completed a house build its probably the intangibles that swing it for me – having paid off my UK mortgage before shifting was an enormous relief and freedom (I even had an endowment insurance – maintained with MIRAS for 25 years- come through for me!)

    Renting is OK and you get to try different things (eg a lifestyle block with alpaca’s) but you remain at the mercy of the landlord, can’t put hooks in walls, repaint the bathroom and similar issues. Building a house to your design, now…and with the exchange rate constantly having gone south after we shifted and sold I’m feeling a little smug. Or at least happy to have dodged a 20% bullet.

    So new home built to our exact spec, the freedom to do what we want with it, the satisfaction of a minimal mortgage, easily serviced through income for a year or two to pay off, but the woes of a wasteland garden to address in the summer (well, next week, really….). WNomad – fancy a job? Nelson, South Island?

  • 52 Jason December 19, 2016, 12:07 pm

    “… house prices… roughly follow income growth over the long term.”

    It’s been a very long time since that was the case. 20 years?

    I also think London property might need it’s own article. There is a supply/demand issue with London property.

  • 53 Daniel H December 21, 2016, 8:30 pm

    The downside of renting is you’re mostly at the whim of the landlord once contracts have expired, through no fault of your own.

    Landlord wants to sell? Sorry, out the door you go
    Landlord wants to move in his daughter so needs you out in a month? Good luck out there buddy.
    Landlord wants to inspect the property? 24 hours notice.

    Additionally, want to own a pet? Paint the walls? Put a shelf up? Good luck finding a landlord that will accept that, you are there to protect and nurture his investment, not ruin it with your “homely” accoutrements.

    Renting would be fine if you as a tenant were put on an even keel, with more rights, longer contracts etc, but at the moment everything is tipped in the landlords favour.

    And lest we forget the awful concept of dealing with lettings agents and their fees (although I believe the government will ban them from doing so soon, unless they appeal)

  • 54 Alex January 12, 2017, 11:57 am

    I might be (or not?) in minority but I actually didn’t need a mortgage for our £40k house bought at auction.
    We paid for it using a 3% personal loan over 6 years which will really be paid in less than 2.

    I would have never signed up for a 30y mortgage on a £300k house, even though it wasn’t really a possibility as with my partner’s income and my own we could barely get a mortgage close to that figure.

    So I guess now you could ask how many thousand miles away from London is your house? It’s a question I was asking myself when I got into this and I found out that getting a house on a mortgage for less than £200k “near” London is quite a challenge anyway, which is why I decided to find one for much less and only drive 10-20 miles more than the other, more expensive, option.

    Is it a better choice in this case to get a house rather than invest the money in something else or even better not signing up for any debt at all and just rent a flat “near” London (as for the same monthly price we could only really afford a “big double room”) ?
    You tell me, however I would be really curious to see what you have to say about this option which is clearly available to everyone even though very few people seem to be talking about it or even consider it.

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