New research claims that the financial benefits of renting rather than owning may have been under-rated.
A financial researcher at the University of Stirling, Dr Isaac Tabner, says the cost of renting includes many additional expenses incurred by home owners, such as building insurance and property maintenance.
He says a simple comparison between rent ands mortgage costs overlooks these additional hidden costs and can lead to an overestimate of the financial benefits of owning versus renting.
The new research, published in the International Review of Financial Analysis, provides a detailed explanation of how costs of renting versus buying a home can be compared, while taking tenants’ and owners’ own personal circumstances and macro-economic conditions into account.
In reviewing transaction costs, 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 typically better-off financially than those who own their home.
Even when economic conditions are favourable, 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 rent can tip the balance in favour 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” explains Tabner.
“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” he adds.
The study shows that, for someone purchasing a home with no mortgage, deflation of just one per cent per year can result in an equivalent loss of half the present purchase value of their home if they hold it for 45 years. By contrast, inflation – including wages – of two per cent per year, results in the same individual gaining 50 per cent of the present purchase value of their home if held for around 28 years.
You can see the research here.