I think for most people buying a house is a very bad move, financially and for people’s wellbeing. My friends often say things like
“Rent is throwing money down the drain” and “My parents bought their house for £100k, but it’s now worth £550k”
Thoughts like this are wide of the mark and lead people to make decisions that make their lives worse. Here is a spreadsheet that sets out all of the costs and benefits of owning a house. If you’re thinking about buying a house, you should input your own figures and see what comes out.
Opportunity cost
Many people neglect the opportunity cost of their deposit and their mortgage repayments. That is money that could otherwise be invested in stocks or other investments. Investing in stocks is easy with Vanguard LifeStrategy or Nutmeg. Stocks tend to strongly outperform real estate as an asset class – 10% over the 20th century for stocks, vs barely beating inflation for real estate. Real estate does a bit better in places like London and the South East, but still worse than stocks. That £100k you put into your deposit could go into a Vanguard stocks account and get you £60-£90k in 10 years. This would be money you can actually spend as well, of which more later.
Home ownership is burning money
People say that renting is burning money. But buying, selling and owning a house involves massive costs that you don’t incur when renting, including:
- Legal fees
- Stamp duty
- Estate agent fees
- Property inspection
- Repairs
These costs will set you back about £50k over 10 years. All of this will likely burn through a substantial chunk of the profit you make when buying and selling a house. If you buy more than once in the space of 10 years, you’ll likely lose money.
Then you have to consider mortgage interest, which in my model would cost me about £67k over ten years.
House value is money I’ll only have when I’m old
Suppose my house increases in value from £200k to £400k. This is nice but it is not money I can actually spend, unless
- I sell and start renting again
- I move to a cheaper house – either a worse house or one in a less desirable area
Most people don’t want to do option 2 – they want to live in ever nicer areas in ever nicer house. But then if your house has increased in value, then the houses in the nicer areas probably have as well – we’d expect the tide to lift all ships. The only time home owners will get to enjoy their winnings is once their kids leave and they retire to a less popular area. e.g. move out of zone 2 London and go and live in a suburb in zone 6. So, it’s only money you get when you’re old.
In contrast, if the value of my stocks doubles, then I can actually spend the money on things that make my life better, such as nicer rental properties, child care, etc.
Owning a house is very risky
Buying a house puts all your eggs in one locational basket. I live in Oxford. Suppose I buy a house, and five years down the line the price is the same or has fallen, but I want to move to San Francisco. If so, I will lose a lot of money. It’s true that the stock market can fall as well. However, I have no reason to sell my stocks just because I want to move house. I can move, sit on my stocks for another five years and the market will likely have risen and I can enjoy my winnings. (Over ten years, the stock market almost never falls.)
Things can also go wrong with houses. You might have Japanese knotweed in your garden, you might need to put on an entirely new roof, your chimney might fall off, the last owners might have concealed rotting foundations from you. In short, you could end up unlucky and have something that costs you loads of money or makes your house plummet in value. This could mean financial ruin. Such risks do not exist for the happy renter.
Compare like with like
I find that a lot of people who say “I’m paying less now than I was in rent” aren’t comparing like with like. They’ll have lived in a central Oxford flat and then move outside the ring road to a house worth £400k. If they bought the house they were previously renting, they would likely pay £1m.
House prices can rise above rental costs because there are two housing markets – houses are an asset and so will be bought for speculation, but there is also a rental market for people who just want somewhere to live. This means that price to rental ratios are an important indicator of whether you are mugging yourself off by buying a house rather than renting. I discuss this in the spreadsheet. The price rental ratio in Oxford is over 20, which makes buying a house a bad move. This will likely be true in most desirable cities.
This means you can live in a much nicer house if you rent rather than buy. People on decent money can rent somewhere in zone 2 London, but if you wanted to buy it, you would need to be a millionaire. I’d rather have the 20 minute walk to work than the house I own in Crouch End, and an hour each way.
What if interest rates go up?
Interest rates are at historic lows at the moment, and were even before COVID-19. This has been a major driver of recent house price increases. The question then is – what if interest rates increase? Then home owners would be in lots of trouble.
Advantages of home ownership
The main advantages of home ownership are
- Additional security – your landlord might sell your house
- You can change the house how you like
It is true that home ownership gives you more security along one dimension but as discussed above, it also makes you much more precarious along many others. I think other costs and risks far outweigh this benefit.
It is true that you can knock down walls and install new bathrooms. But then if you want a really nice rental, you can also just get a nicer rental (using the money from your stocks). I’m personally not massively eager to knock down walls. I’m not a property developer, and I don’t know why everyone in England thinks they are one.
When people tell you about all the money they’re saving owning a house, they don’t often mention the 20 grand they spent on their new kitchen and the 10 grand they spent on their new bathroom. It would be more accurate to say that people have bought a house to and it has cost them a tonne, but they really wanted to do it.
What about leverage?
One advantage of buying rather than renting is that banks will lend you money to buy a house, which they won’t do for stocks. Even though returns to real estate are smaller than houses, this leverage can mean that property does much better than stocks. Indeed, in my model if housing does really well, then the asset value you own can be a lot higher than if you went for stocks ten years down the line. But two things. Firstly, remember that you can’t actually spend the money until you’re old.
Secondly, the downside of leverage is that it leaves you massively screwed if your house falls in value. This defence of home ownership is more along the lines of “roll the dice” than sage advice from your parents. If banks did lend money to let people invest in stocks, would you be advising your kids to get involved?
Policy implications
Governments in the UK are very keen on building a property-owning democracy. 60% of people in the UK own a home. 60%! The government, even actively subsidises people to buy houses. This is bonkers, immoral and inequitable. For a lot of people, it’s a really bad choice.