We are a nation of homeowners. Aren't we?
You’ve got to have somewhere to live.
Rent or buy
Your first decision is whether to rent or buy.
If you rent you have flexibility but are at the mercy of a landlord you may not know. If you intend to buy sometime in the future you have taken on price risk – you’ll buy eventually, but at a price higher or lower than today.
If you buy you have taken on price risk of a different sort. Or have you? Surely you own an asset now and the value of assets matters if you own them, doesn’t it? It certainly does if you own shares.
But there’s a difference here. The value of an asset only matters twice – when you buy and when you sell. You are going to sell your house, or a similar asset you have arrived at through exchanges, when you enter your nursing home. And that’s a long time away.
Let's have a different look at it.
The economics of buying
You've got to live somewhere. So, to look at the economics of buying your own home, start with the assumption that you are renting it. Now, would buying it (instead of renting) be a good idea?
If your bought your house you would save the rental payments (in exchange for a mortgage).
Rentals are set by market forces. Rentals must compensate a landlord for:
- financing costs, offset by expected capital appreciation,
- repairs and upkeep,
- management fees,
- dead-letting periods,
- landlord's own management time and expenses,
- legal and other expenses relating to disputes with tenant,
- investment risk premium (no need to understand this! Yet!).
If you buy your own house you become a landlord with the most marvellous tenant:- yourself! Compared with an independent landlord:-
- Your financing costs net of capital appreciation will be the same or lower.
- Repairs and upkeep will be the same or lower (you will make sure they are done properly, with an owner's care and foresight; and you may do them yourself at zero cost or even as an enjoyable recreation).
- There will be no management fees.
- There will be no dead-letting periods.
- There will be no landlord's management time - what's to manage?
- There will be no disputes with the tenant.
- No investment risk premium will be required (still no need to understand this!).
Not only that, your 'profit' (the difference between the rental you would have paid and the costs of ownership) will be untaxed, as will any capital gain on sale of the property.
Can you think of a better investment? If you can, by all means make it and good luck to you.
No, we haven't said 'buy your house, and as soon as possible'. One of the the themes of this site is that financial management is above all a personal matter depending on your circumstances and temperament. And many view the current (August 2019) housing market as overheated and unsustainable, particularly in the South-East. If you want to take a view on these things that will affect your decisions in the short term.
What we are saying is that there is a fundamental financial advantage in the discipline of home ownership, which is the reward for giving up the flexibility of rental.
Don't let's get ahead of ourselves. This is just mechanics.
It's actually quite difficult mechanics. Ignore it for now. Or take a peek at What Mortgage?, if you must.
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