Why it’s (much) smarter to buy than rent

Staff Reporter

6 SEP 2006, 07:34

3 min read

Buying a home is one of the smartest investment decisions anyone can ever make — and here’s the data to prove it.

Saul Geffen, CEO of MortgageSA, South Africa’s largest mortgage originator, says that there is a lot of conflicting advice out there at the moment because the market has cooled.

“It’s a spurious argument that some commentators are putting forward: that because house-price growth rates have moderated, people should rent.

“Investing in the property market is a long-term decision that does not rest on every wriggle in interest rates or the current pace of appreciation.

“Buying property is one of the basic tenets of long-term wealth creation and that should be at the top of people’s minds.

Geffen says that in its Survey of Consumer Finances, the United States Federal Reserve has consistently found a huge gap between the wealth piled up by homeowners and that accumulated by renters.

Average net worth of homeowners vs renters, by annual income (Source: VIP Forum, Federal Reserve Board)

$80 000 and up

Owners: $451 200

Renters: $87 400

$50 000 to $79 999

Owners: $194 610

Renters: $25 000

$30 000 to $49 999

Owners: $126 500

Renters: $10 600

$16 000 to $29 999

Owners: $112 600

Renters: $4 240

Less than $16 000

Owners: $73 000

Renters: $500

“As this table clearly shows, homeowners are significantly wealthier than renters — a fact that is consistent across all income groups,” says Geffen

“Home ownership builds wealth in two ways: through the ‘forced savings’ of paying off a bond, and through appreciation — the rise in the home’s value over time. The earlier you get in the game, the quicker you can get that appreciation working for you.

“The longer you rent, the harder it becomes to buy. You fall further and further behind.”

Four keys to profitable home ownership

You’re most likely to win by owning, rather than renting, if the following are true:

You plan to stay put at least three years and preferably more. In most markets, it can take three to six years for a home to appreciate enough to offset the costs of selling and moving. In markets that have had a great run, it’s best to enter a property investment decision with a five-year investment horizon or longer plan to ride out a real downturn.

You’re psychologically prepared. Home ownership means dealing with whatever comes up — from noisy neighbours to clogged plumbing. You can’t just call the landlord for help or pack up and move as easily as when you were renting.

You have some extra savings. Home buyers who spend every cent they have buying a house are often blindsided by repairs, maintenance and all the other costs of owning a home. Then they go into debt trying to keep up their current lifestyle. Smart home buyers make sure they have an amount in savings at least equal to two bond payments after the deal closes, and preferably much more.

You manage your money well. That “forced savings” aspect discussed above works only if you can keep your hands out of the cookie jar. Otherwise, it’s too easy to drain away your wealth with home equity loans, further advances and second bonds. If you’re the kind of person who lives on credit cards and doesn’t know where the money goes, you’d be wise to clean up your financial act long before you go hunting for a house.