For years people have believed that it is better to own a home rather than rent one due to financial benefits, but it turns out that the benefits of renting a home may be underrated.
According to recent research the prospect of no longer having to pay rent, known as imputed rent, is often cited as a major incentive to owning a home. But buyers overlook costs included in their rent, such as building insurance and property maintenance and this failure to properly account for these outgoings can cause householders to overestimate the financial benefits of owning versus renting.
Individual circumstances and market conditions play a big part in determining whether it is smarter to rent or buy, but this research should help households, financial planners and policy-makers make an informed choice.
The study offers a step-by-step explanation of how households can objectively compare the costs of renting versus buying a home, while taking their own personal circumstances and macro-economic conditions into account.
In reviewing transaction costs, imputed rental yields, opportunity costs, inflation and the length of time owning a home, the study also shows that — during periods of deflation or zero inflation — people who rent are financially better-off than those who own their home.
Even when economic conditions are favorable, households may need to own their home for between five and 10 years before returns from the rent they are no longer paying are sufficient to compensate for the high transaction costs of buying. However, increases in inflation and imputed rent, tip the balance in favor of ownership.
It is often thought that buying a house makes more financial sense in the long run: however, renting is frequently more worthwhile than buying for financially-constrained households, as well as households likely to relocate within 10 years.
As well as a reduced ability to recover transaction costs, households relocating within a few years face a higher risk that medium-term prices will move against them, thus reducing or eliminating their equity, while financially-constrained households face much higher mortgage costs.
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