The west has a housing problem and there is no easy solution, no matter what any political side wants you to believe. Any action taken to assist people to get on the property ladder has side effects that can make it worse for new buyers. With no good solutions being proposed, the problem will remain for the foreseeable future.
As a young person myself, many friends have shared with me how they hate how expensive it is to buy a home but that they would really want to as they believe renting a house is just throwing money away. I believe for many people, thinking that they need to buy as soon as possible is locking them into the rat race for decades and severely limits your life.
- Buying is more expensive than renting
Low mortgage interest rates have made people make inequivalent comparisons between monthly renting costs and mortgage payments. Most of the time, renting covers taxes, repairs, and maintenance and sometimes even bills. If you own your house, those costs get passed on to you along with compulsory insurance while you have a mortgage. Even if the total cost is still less than renting, it does not account for many human nature factors:
- You will probably buy a home that is bigger than you need. No one wants to swap houses every few years, so you will pay for something that is bigger than what you would rent
- You will buy more furniture and home devices. While renting, it is easier to justify having old furniture and not bothering with certain luxuries. It’s harder to do that when you own something and you will splash out money for refurbishments, decorations and devices.
Along with these human factors, people don’t consider the fact that mortgage interest rates are variable. And just because they have stayed low in the past few years, doesn’t guarantee that they won’t skyrocket, leaving you with much higher mortgage payments.
- Buying takes away your ability to invest or take risks
You want to change jobs? You want to set-up your own business? Invest in something wild but with great potential? All these things become hard if not impossible. Changing from a secure job to a better paid but riskier one becomes a no go. You don’t ask for a significant raise in case your boss decides he doesn’t like your ambitions anymore.
Investing in assets becomes hard to justify when you may need any saved-up money to make additional mortgage repayments or for emergencies. If your mortgage interest is 2% a year but you can get 7% a year average from investing into a world stocks fund, then you are losing a significant amount of money and future compounded earnings by paying off your mortgage. Even if you know this, it’s hard to resist the human nature craving security so you will most likely do what everyone else does and focus on repaying your mortgage. At best, this slows down your financial freedom. At worst, you become risk-averse and lose the ability to gain assets that enable better lifestyles.
If instead you use any money you earn to purchase assets (your own business, stocks, properties to rent, etc) then eventually the yield from your assets will make it easier to purchase your own home if you wish to.
- Buying locks you down into one location
You want to take a few months to a gap year to go travelling or do some exciting activity? Who is going to pay that mortgage? Yes, you can rent it out, but it is easier said than done when it is your home, and you will not be there to manage it.
Always wanted to live in sunny Spain or rainy Paris, or get offered a new opportunity abroad? The hassle of your mortgage remains. And selling is not an easy option as it is not a quick process.
There are solutions to these problems, but most people would rather ignore their dreams and passions then worry about collecting rent while thousands of miles away. Renting on the other hand gives you complete freedom to do as you please without the financial or emotional consequences.
When should you prioritise buying your home?
The one scenario I would suggest prioritising buying your home is if you have no safety net in regards to family or friends that could house you for a while if things go sour. This is one reason why richer people or people with stable families tend to have an easier time rising the class system. You have the luxury to focus on assets rather than security.
Of course, most people don’t want to live with their parents even if they can, but this is only for complete emergencies and will be temporary. Having that security enables you to weather the emotional rollercoaster of investing into assets. If you sell stocks every time they drop because you may need the money to pay off your living costs, then that won’t work.
Otherwise, owning your house is overly overrated and the narrative that we all need to own a house is political propaganda that has the secondary effect of planting the seed of locking you into the rat race. Some real inception stuff.
