To buy or not to buy? That is the question

It is always better to buy a house; paying rent is like pouring money down the drain." For years, such advice has encouraged people to borrowheavily to get on the property ladder as soon as possible. But is it still a sound advice? House prices are currently at record levels in relation to rents in many parts of the world and it now often makes more financial sense – especially for first-time buyers – to rent instead.

Homebuyers tend to underestimate their costs. Once maintenance costs, insurance and property taxes are added to mortgage payments, total annual outgoings now easily exceed the cost of renting an equivalent property, even after taking account of tax breaks. Ah, but capital gains will more than make up for that, it is popularly argued. Over the past seven years, average house prices in America have risen by 65%, those in Britain, Spain, Australia and Ireland have more than doubled. But it is unrealistic to expect such gains to continue. Making the optimistic assumption that house prices instead rise in line with inflation, and including buying and selling costs, then over a period of seven years – the average time American owners stay in one house – our calculations show that you would generally be better off renting.

Payingrentis throwing money away. Much better to spend the money on a mortgage, and by so doing build up equity. The snag is that the typical first-time buyer keeps a house for less than five years, and during that time most mortgage paymentsgo oninterest, not on repaying the loan. And if prices fall, it could wipe out your equity. In any case, a renter can accumulate wealth by putting the money saved each year from the lower cost of renting into shares. These have, historically, yielded a higher return than housing. Putting all your money into a house also breaks the basic rule of prudent investing: diversify. And yes, it is true that a mortgage leverages the gains on your initial deposit on a house, but it also amplifies your losses if house prices fall.

"I want to have a place to call home," is a popular retort. Renting provides less long-term security and you cannot paint all the walls orange if you want to. Home ownership is an excellent personal goal, but it may not always make financial sense. The pride of "owning" your own home may quickly fade if you are saddled with amortgage that costs much more than renting. Also, renting does have some advantages. Renters find it easier to move for job or family reasons.

“If I don't buy now, I'll never get on the property ladder" is a common cry from first-time buyers. If house prices continue to outpace wages, that is true. But it now looks unlikely. When prices get out of line with what first-timers can afford, as they are today, they always eventually fall in real terms. The myth that buying is always better than renting grew out of the high inflation era of the 1970s and 1980s. First-time buyers then always ended up better off than renters, because inflation eroded the real value of mortgages even while it pushed up rents.Mortgage-interesttax relief was also worth more when inflation, and hence nominal interest rates, was high. With inflation now tamed, home ownership is far less attractive.

The divergence between rents and house prices is, of course, evidence of a housing bubble. Someday prices will fall relative to rents and wages. After they do, it will make sense to buy a home. Until they do, the smart money is on renting.

(the source: adapted from www.economist.com/blogs/freeexchange/2008/03/ )

C. State if the following statement are true or false. Correct the false ones:

1. Paying rent is much more expensive in modern Britain than buying a house.

2. Nowadays it often makes more financial sense – especially for first-time buyers – to save instead of renting.

3. Calculations show that it might be more beneficial to rent a house.

4. For the first five years most mortgage payments go on interest, not on repaying the loan.

5. Historically, renting have yielded a lower return than housing.

6. When inflation rate is high, home ownership is far less attractive.

7. When prices fall relative to rents and wages it will make sense to buy a home.

8. Mortgage-interest tax relief is worth more when inflation and nominal interest rates are decreasing.

9. A renter can accumulate wealth by putting the money saved each year from the lower cost of renting into shares.

10. It is more reasonable today to spend the money on a mortgage, and by doing so to build up equity.

D. Read the text again and answer the questions below:

1. What makes more financial sense nowadays for first-time buyers: buying a house or renting it?

2. Is it reasonable to spend the money on a mortgage? Why?

3. How can a renter accumulate wealth?

4. Does renting have any advantages? What about buying a house?

5. Is home ownership less attractive nowadays for the first-time buyers? Why?

6. How do you understand the phrase “the smart money”?

7. Do you agree with the author’s point of view that these days the smart money is on renting? Give your reasons.

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