Readers’ questions on renting v home ownership
My last column — which said that you may do just as well renting as owning your home, provided you are disciplined about saving elsewhere — brought interesting questions from two readers.
The first one is 40 and planning to return to New Zealand with his family. “I would be happy renting until I retire whilst growing our capital in areas other than property,” he writes. “At some time later I might buy a small place to live in. However, do you think in 25 years that ownership of property might be out of reach?”
That’s certainly possible. So is the opposite: that your savings, invested in perhaps a low-fee share fund, will have grown enough to buy you a much better house than if you had invested in housing.
When we crunch the numbers on home ownership versus shares, the results vary hugely depending on our assumptions.
There’s no doubt that If you want to own your home at some point, it’s less risky to be in the housing market all along.
But if you are flexible about when you eventually buy a home, you should be fine renting, as long as you invest wisely the money that would have gone into your home.
After all, the returns on homes and shares can’t get too far apart. If either one starts to look superior, everyone clambers on board. That pushes up prices, which pushes returns back down. All you have to do, then, is wait for a time when house prices are relatively low.
Don’t forget the two rules of share investment. Diversify or use a share fund. And vow not to bail out, even when the market bombs.
The second reader asks several questions:
- “You quote that rents are at an all-time low relative to house prices (The Economist). True, but how relevant is this? Shouldn’t you be focusing on the rent-to-disposable income ratio?”
No. If a person is deciding whether to rent or own, their income is the same either way. They need to concentrate on what would differ, and that is paying off a house versus paying rent.
- “If a significant proportion of housing price increases is related to investment as opposed to shelter, doesn’t this put pressure on rents to increase? The renter might be inclined to save for rent hikes instead of investment.”
The opposite. The more people invest in rental properties, the more options tenants have. This puts downward pressure on rents as landlords compete to attract good tenants.
- “You said ‘Even if average (house) prices don’t fall — and they might — there are sure to be some bargains in the next few years, sold by people tired of being on the market.’ If everything is hunky dory and we’ve entered a new asset valuation paradigm, why would ‘bargains’ appear on the market and why would people sell the most sought-after asset simply because they’re ‘tired of being on the market’?”
Houses are already taking longer to sell than a couple of years ago, and whenever that happens sellers tend to lower their prices after a while. They may have bought elsewhere and be paying two mortgages, or have to change towns and don’t want to sell their house empty — which looks less attractive. Or they may just be sick of open homes and dashed hopes.
I haven’t heard about “a new asset valuation paradigm” in housing. But I did hear about it in international shares in the late 1990s when their prices soared. Then look what happened!
It sounds suspiciously like a line from people with a vested interest in seeing house prices continue to climb. Sniff, sniff. Anyone seen any rats around here?
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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.