In the midst of the U.S. housing crisis, Paul Kedrosky asks, quite reasonably, Why Do We Want People to Own Homes? I’ve been wondering that myself. Is it because people think houses are a good investment? Because they have sentimental attachments to the idea of owning the roof over their head? Because they want to be sure no-one can toss them out of their home? Because everyone else does?
I remember years ago in Australia (where almost everyone also wants to own their own home) talking to a German immigrant who complained bitterly that he couldn’t rent anywhere nice to live and so he had to buy a house. He would have been much happier renting, as people commonly do in Germany. Maybe the rental properties are better in Germany because so many people rent, or maybe part of it is because in Germany it’s common to make modifications to an apartment you rent, for example by renovating the kitchen (you own the appliances, the cabinets, etc, and take them with you if you move). People often rent the same apartment for 20 years or more, which is longer than many people in North America stay in houses they buy, so it’s worth their time and effort to make it a nice place to live.
Different countries, different ideas. For us ten years ago, there were a couple of reasons to buy rather than rent. We saw it as a reasonable investment, we wanted to live in a house with a garden, and I wanted a couple of cats. So buying made sense (many landlords don’t like pets).
As house prices climb to the extent that it’s questionable how good an investment they are (how high can they keep going?), it’ll be interesting to see what happens. Here in Vancouver house prices have been rising to the extent that many landlords are selling the rental houses to people who renovate and move in themselves, rather than renting them out. For families with children in local schools, having the landlord sell the house out from under them is extremely disruptive, especially when they can afford to rent, but can’t afford to buy, in the area they’re living in. From the landlord’s perspective, they’re cashing in on the capital gains rather than taking a rent that just can’t compare as a return on their investment. Either the house prices will have to come down, or the rents will have to go up, unless people are willing to continue to gamble on making their money from capital gains.
And in the U.S., owning the house doesn’t mean someone can’t turf you out if you default on a payment or two. The Economist has an article in this week’s magazine about the U.S. housing crisis, pointing out that foreclosure proceedings can take months in some states, but less than a month in Texas. Which makes me wonder even more why people buying houses they couldn’t afford didn’t rent instead.
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One of the main reasons that people in Germany prefer to rent is that owning property in Germany is outrageously expensive. There are (virtually) no tax advantages, since the mortgage interest of property you own is not tax deductible.
On the other side, loan interest on properties you rent out *is* deductible, so that rather absurd situations can arise: a friend of mine used to live on the second floor of a 3-family/3-floor house (she rented). The people above her owned the condo on the first floor, while the people below her owned the condo on the third floor. This was *significantly* cheaper for both parties.
The irony of this situation is, that almost 80% of the people between 16 and 29 dream of owning a house or condo by the time they turn 30. All to often, this does not happen: the own/rent ratio is approximately 20/80.
I’m not convinced the tax-deductibility of the mortgage interest is a significant factor — many people own homes in Australia, Canada, and the U.K. where mortgage interest for properties you live in also isn’t tax-deductible. See http://www.nytimes.com/2006/03/05/magazine/305deduction.1.html for some relevant discussion on this point.
Another important issue is how much money you will receive from your pension/superannuation/investments when you retire. In Germany, the pensions were (when I lived there) based on how much you were earning when you retired, so you would receive enough money to continue renting the same place.
By contrast, Australian pensions were never high enough to allow that, so you had to buy your own home or (likely) be forced out of your home when you retired. For the record, my parents rented until my father retired, and they had enough money at that stage to then buy a house outright without a mortgage.
Cheers, Tony.
I took the fifteen year mortgage after refinancing on the home I had built. It works out because I will have a home I can’t be forced out of unless I can’t work for the next six years.
It got scary last year when I was unemployed for ten months. This is one of the catches some employers depend on to keep one doing something they would rather not, so one has to balance necessities and income carefully. In this case, it was a choice of owning stock in a company I don’t think we stay highly valued vs the mortgage. It was an easy choice if a risky strategy. Once paid off, the risks are easier but more frequent and unexpected: the cost of aging — medical, kids get more expensive to keep as pets, and so on. So another way to look at this is which assets does one think they should secure first.
In Norway, most people own their own houses. Here, the mortgage interest is tax-deductible and renting home is usually almost just as expensive as paying a mortgage, so the common advice is to get into the home-buyer-market as soon as possible.
I think owning a home makes sense. Instead of paying for property someone else will gain all the benefits from, as well as possibly helping the owner increase his profits on it (by paintin, refurnishing, etc), it sounds more logical to put that money into something that you can reap the benefits from.
Most places in Norway a house will increase in value over time and there usually isn’t much of a problem getting one sold. So if you live in a house for 5 years and manage to reduce the mortgage by 5% during that time, plus sell for 20% more than what you bought it for, you’re out with a pretty significant profit and can leverage that when “upgrading” to your next home.
A house to me seems a huge liability. Ive made a good living of buying off plan properties in booming areas and then selling them before completion. I belive this is called flipping and supposed to be bad. But in all ive owned over 50 appartments and 6 houses. Im in my 30s and can retire now, still i live in a rented flat. Everytime i think of buying a house, i just think how much more a smart investment can make.… I guess 1 day i will buy completed houses outright and rent them out, but it just seems so easy to make money of plan… i dont limit my investments to anywhere geographicaly. Dubai and Abu Dhabi have been good recently, china and india and brazil look sure bets in the future…
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