The UK and US have very homeownership biased belief systems. This makes it difficult to decide if you should buy vs rent a house. The wheels are constantly turning on the real estate propaganda machine and there is pressure to conform to buying a house.

On average I would say that 9 out of 10 housing-related articles on my newsfeed are by real estate companies (with an obvious agenda) telling us that house prices will continue to rise. It sends the message that house prices can only go up, which we know is not true.

On top of this, our friends, family and colleagues also all positively reinforce buying a house, whilst rejecting the rent model.

They have no qualms about making sweeping statements such as “renting is just paying someone else’s mortgage” and “property is the only safe place to put your money”. People look at renters as financial failures.

Disclaimer: This article should not be considered as financial advice. You are responsible for your own financial research and decisions.

Andrew / Mr Money Side Up

Unaffordability As Economic Policy

This is especially the case for older homeowners. This is because the recent economic policies have been designed to keep this segment of voters happy, in their expensive homes.

The policies have been centred around driving up house prices and giving tax breaks to people wanting to upscale or buy a second home.

For example, the stamp duty cuts are of no benefit to first-time buyers but have driven up house prices by 6.5% since March-20. The stamp duty holiday has increased prices beyond the benefit of any tax-saving.

As a result, house prices have risen by a record rate not seen since June 2016. This is at a time of economic contraction, which usually causes house prices to fall.

Rather than tackle the problems of insufficient supply or an unregulated rental market. They have opted to make homes more unaffordable for young people.

What If You Discovered Real Estate Isn’t As Good An Investment As Everyone Says?

Everyone seems to know at least one person, maybe an auntie or a great auntie that brought a house in the 70s, 80s (perhaps under the right to buy policy) and it has now risen to £500,000 or even £1,000,000 in value.

Obviously, this makes buying a house as attractive as a winning lottery ticket. However, just because it was a good investment two decades ago, it doesn’t necessarily mean it’s a good one now.

The average house price in the UK is now over 8x the average person’s earnings. This contrasts distinctly with the ratio of between 4 to 6 seen over the last 100 years. In fact, the ratio hasn’t been this high since 1901.

Therefore you need to evaluate if buying is right for you based on your specific situation. This means dispelling the rental myths and crunching the numbers accurately.

As with stocks, you should first and foremost be a cynic, do the research and make your own decisions.

Myth #1 – Renting a house means you’re just paying for your landlord’s mortgage

This is the most widely perpetuated myth of the real estate propaganda machine. It’s powerful because as humans we are averse to inequitable interpersonal relationships.

We hate the idea of someone else getting a better end of the stick at our expense. So when we ask if we should buy vs rent a house, this emotion often drives our thought processes.

Whilst many people out there will make a significant profit out of their tenant, this is likely to be substantially less than it may first appear.

For example, my rent is £695 a month and on the face of it it might seem that my landlord is pocketing a £695 profit.In reality, the mortgage may actually be £600 and then there are tax deductions and running costs e.g. repairs.

Expensive Repairs

My last flat required a boiler change which cost £2,000 to £3,000 to repair (or so I was told). If my last landlady made a £100 a month profit, this is 30 months of lost profit. This could look like peanuts in comparison to something like a £10,000 roof repair for example.

There may also be periods where there is no tenant to cover the monthly payment. The property I currently rent was empty for 3 months, so that could be in the region of £2,000 that requires covering.

Yes it’s annoying that we have to pay an extra £95 or so but when you consider the above scenarios, it makes me feel less frustrated.

Myth #2 – If you’re paying rent, you’re throwing money away

This is one of those statements that is hard to challenge. In a sense it’s true, but it’s still an oversimplification.

In real estate, renting is demonised but this is not the case in other walks of life. For example, you technically have nothing to show from:

  • Your netflix subscription
  • A meal out at a restaurant
  • Week stay at a hotel
  • A night out at the movies
  • Your weekly shopping trip

Renting is buying a lifestyle in the same way that you pay for a service. I once upgraded my stay at a hotel to a sea-view room, even though I didn’t have any more to show for it at the end of the week.

Renting allows you to live where you want, for as long as you want. In some cases depending on the rent ratio, it can even be more affordable.

Given the seismic shift towards home working in this past year, someone who rents can adapt by moving to a property with a different layout or an extra room. This is significantly more difficult for a homeowner.

Myth #3 – Property Is The Only Safe Investment

A house is a liability because of the potential costs and until the mortgage is paid off its debt. Debt that is paid back with interest.

A house is not an asset until you rent it out or you get a positive return or dividend from a REIT. Many buy-to-let owners can’t handle the stress, legality and interpersonal requirements of rentals and should probably invest in REITs instead.

House prices and rents can also fall and owners can end up in negative equity. This is often dismissed because of the recency effect.

Stocks, bonds, commodities are all viable alternatives to property. These are easily dismissed because people (especially boomers) do not understand them. As a result, property is the only investment they have ultra-benefited from?

> Cryptocurrency vs Stocks vs Real Estate: Where Is The Opportunity Right Now?


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When Is It A Good Time To Buy vs Rent A House

There are a number of indicators I use to make a decision on if I should buy a home. These are both economic and lifestyle based. These are the questions I would ask myself before buying a home:

1. Will I Live There For More Than 10 to 15 Years?

This is one of the major factors you should consider when deciding if you should buy vs rent a house.

Life happens and you may need to adapt quickly. Renting gives you the freedom to make easy changes to your lifestyle and employment.

  • If you want to live a more social outgoing lifestyle you can move to the city centre.
  • If you want to change employers, you can move to be within commuting distance. This is highly beneficial for millennials and Gen Z who job hop over 2 to 3 years.

It costs money to move both in terms of legal costs, taxes and other moving costs such as hiring a vehicle.

However, if you are planning to settle down and would be highly reluctant to change then buying a house is better suited.

Do I Care If The Value Goes Down?

The buy and hold strategy is also a great way of balancing out any volatility with the housing market. If the value goes down then you will want to be happy with the bricks and mortar composition of the property you own.

I very much doubt someone who paid £500,000 for a 1 bedroom London flat would be happy with what they own if the market crashes by 50%. Then you’re left with a very expensive closet.

By contrast, If I owned a 3 bed house with a garden and the market fell, I would probably feel like at the end of the day it’s still a very livable space.

2. Will It Reduce My Monthly Outgoings In The Short To Mid-Term

Of course, the idea of not having minimal accommodation costs in 25 years time would be amazing. However, if it’s cheaper to rent I can use this cost-saving to build passive income to offset the cost of renting.

Even just saving my current deposit of between £9,000 to 10,000 is money that could be earning 7% to 10% per year in the stock market.

Incrementally speaking, this would have been an extra £200 a month going into the stock market.

However, If I can save money immediately on my accommodation costs in the short to mid term then this is a win either way.

The Rent Ratio

There are mortgage calculators you can use to work out if it’s more affordable to buy or rent. However, one great rule of thumb is to calculate the rent ratio for your area.

The price-to-rent ratio is calculated by dividing the median home price by the median yearly rent and the formula for the price-to-rent ratio is as follows:

The established thresholds for the ratios as follows:

  • A price-to-rent ratio of 1 to 15 indicates it is much better to buy than rent.
  • A price-to-rent ratio of 16 to 20 indicates it is typically better to rent than buy.
  • A price-to-rent ratio of 21 or more indicates it is much better to rent than buy.

It can be difficult to find the median house price or rent but you should be able to find the average.

The average house price in my area is £210,150 and the median yearly rent is £8,688. This is a rent-ratio of 24.2. Indicating that I should rent until there is a house price correction it may not be as beneficial to buy vs rent a house.

3. Will It Improve My Current Lifestyle?

As with all money decisions I ask if the purchase will improve my current lifestyle. For the past few years, this has been a no when it comes to buying vs renting a house.

I’ve enjoyed renting my current and last apartment because it has suited my lifestyle, in terms of access to parks, a good commute, close to the city centre.

However, buying vs renting a house allows more freedom and flexibility to change the space to suit you. You can re-design the kitchen or knock through a wall to make it open plan. This is something I would like to have control over in the future.

What Are Your Options Outside Of Buying A Home?

You don’t necessarily have to commit to one financial goal or another. You can weigh your savings to achieve the priority goal whilst saving for the other. Deciding to buy vs rent a house doesn’t need to be an all or nothing question.

Historically I have tended to save £400 into the stock market and £200 into a help to buy ISA. Which has allowed me to save around £60,000 and potentially more than even some of my home-owner peers.

If your rent ratio is extremely high and buying seems unaffordable then you might want to consider other assets as an option. Despite what many people think investing in the stock market is:

  • It’s easy
  • If you do it right, you’ll make a ton of money
  • You can do it all online
  • It’s the best way to save for retirement
  • You can get huge tax advantages

Many people, including myself find it a much simpler path to wealth than property. Many people consider buying a house the ultimate triumph.

However, until you can generate passive income you will have to work forever.

With passive income, you can go anywhere and do anything. So, learn how to build passive income in just 5 steps.