Thursday, August 11, 2011

Buying a house, or not

There is lots of advice out there to help people who are trying to decide whether or not they should buy a home.  There are pretty big extremes on the issue, on one hand you have construction companies in the US 5 years ago who were happy to convince people with net incomes of $20,000 to buy houses worth $500,000 and for some reason thought this wasn't going to cause any problems.  On the other hand you have articles like this which basically accuse anybody currently owning or considering owning property of being a moron.  The gist of the 'just rent, why would you buy?' argument is that real estate is so overpriced due to competition that you would be much better off financially just renting for your entire life, particularly since it makes it so much easier and cheaper to relocate for whatever reason.  Buying houses is portrayed as a insanely expensive way to convince the world you are a grownup now that is completely unjustified.  Buying houses is sold along the lines of "What, you want to rent forever, like a broke student?"

It turns out that neither side really makes any sense.  After reading this article I went ahead and redid the numbers on purchasing my condo a few years ago and came to the conclusion that buying the condo has resulted in a steady 5% return on investment every year just based on the (condo fees+taxes) - (cost of rent) formula completely ignoring appreciation.  The place has also gone up in value a lot more than inflation so clearly for me the investment was a fantastic choice monetarily.  Obviously buying real estate is good if you can just buy it then, so the real problem is when people buy property with a low or nonexistent down payment and get reamed by interest over the next 25 years.  Given that it is safe to say that the majority of home purchases are terrible choices from a strictly financial point of view.  Thing is, that is completely irrelevant when you consider what the money would be spent on otherwise.

What exactly were those people buying homes with 5% down going to do with their money otherwise?  They clearly are in the market for status boosts so most likely they would instead spend their money on an expensive car, a huge TV, exotic vacations, jewelry or other conspicuous consumption.  The question is not whether buying a house with no down payment is a good idea but rather whether or not that purchase is better than trying to buy status with the other methods available.  The answer is rather hard to predict on a personal level because we don't have good benchmarks for how much status is gained from particular purchases that we can plot against price but it is clear that viewed in this way buying a house is much more of a murky business.  The best of all worlds is probably to rent a home for a long time and tell everyone you own it while simultaneously spending all your free cash on Porsches and Cancun vacations.  The whole house of cards comes tumbling down if anyone figures out you are lying about home ownership but as long as you are good at bluffing you can rack up big status for minimum investment!

This is a particularly North American affair of course because across the pond renting for life is considered a pretty normal thing to do.  Owning a house is just not the way everyone expects to live so people who do so presumably are a lot more interested in actual ownership and less interested in other people's reaction to their ownership status.  Of course if you really, really want to own a house and don't have the cash I hear there are some pretty great properties in Detroit that you can have for a couple grand... though impressing your friends might not be part of the bargain.


  1. I'd rather impress my friends with a squidy staff than with a big house or a fancy car. But then I don't have a big house or a fancy car and I do have a squidy staff...

  2. Bev:
    The people I know who have bought houses did so in order to have a nice place to live, nothing whatever to do with status.

  3. I agree with Bev - home ownership is about comfort and making your own choices and decisions about where and how you live. I also don't see tropical vacations as status seeking. It's more a health issue for sun and warmth starved Canadians, both a mental and physical reprieve.

  4. There are a couple things to note here: First, that there is absolutely nobody in the world who says "I am going to buy a bigger house than I can afford in order to project an image of higher status." Nobody. That said, *tons* of people do exactly that. People constantly take up smoking, buy Porsches, get over their heads in mortgages and do other silly things purely in pursuit of status but they always frame it as being a good choice for some other reason, no matter how flimsy. People can rent houses to have nice places to live, buying is not at all necessary for that.

    However, there are plenty of people who buy houses for reasons that aren't related to status. For example, if you want to live in O'Connor township and there are 3 houses for sale and 0 for rent you have to buy! If you want to build a greenhouse, plant a garden and chop down trees you probably have to buy instead of renting. That said, the great majority of house purchases these days are being made in huge tracts of identical structures where there is no difference between renting and buying except for financial considerations and status. I am not surprised that our experiences in this differ because neither of you has experienced the Toronto housing market firsthand and I have not owned a property in the country up north - the two are quite different.

    People do buy houses for reasons other than status but our ridiculous housing bubble and the incredible commonality of 0 down and 5% down mortagages in view of low rents clearly shows that most people are buying just to be buying.

  5. Buying, I think, adds one benefit: control over the property. You can stay as long as you like (and not get booted if the landlord decides to sell) and you can knock that wall down, or dig post holes for a hammock etc etc.

    For the record, I am a fan of renting. Seems to make a lot more sense if you live in a place with a ridiculous housing bubble (Cough... Vancouver... Cough)

  6. Whether to rent or to own depends a lot on how much rent is compared to the value of the property. In the extreme Irish housing bubble, property values hit 100 times the annual rent - at those rates real estate isn't a good investment even if you can pay the full price in cash.

    In North America home ownership has traditionally been very cheap compared to Europe. I don't really know why that is (I guess because there is so much more land?), but and the economically powerful areas of North America are increasingly dense in population, land is becoming as "scarce" as Europe, and I think the trend of home ownership is going to have to decline. Of course, if that is true, then buying a home is perhaps a good idea.