RP: One of most difficult financial decisions that younger adults face is whether to rent or buy a house. Say for example, the cost of renting or buying a particular house in a particular location is more or less the same. The problem is, like the stock market, the housing market is very difficult to predict in the short to medium term. Here’s the financial author Jason Butler
JB: It all goes great if the property price continues to go up, but if the property price stays the same or falls you are worse off than renting in that situation, because it’s cost you more, and you have the risk of the property falling in value further, and you have to maintain it. One of the things that people don’t realise when they’re buying a house is that you as the homeowner have to pay all of the maintenance costs, and you take all of the capital risk.
RP: The key question to ask yourself is, how much flexibility do you need in the short term? Buying a house is time consuming and expensive. You don’t want to do it all again in two or three years’ time.
JB: If you are likely to move in the next 2 to 3 years, or you need lots of flexibility, or you think that house prices are going to fall significantly, then renting probably is your better option – it certainly gives you more flexibility and reduces risk. But the reality for most people is that, in the long run, 20 years or more, almost certainly buying makes sense, on the basis that we need somewhere to live. So buying makes sense when you take a long term view, because you know, like stock markets, short term market crashes are not a problem, particularly if you’re eventually going to be trading up and trading up, if you’re property is falling in value, then the next one you’re going to buy is falling in value.
RP: If you can take a long term view the advantage of buying is that over the long term, you’re building up equity in your home. And that can give you a degree of financial security.
JB: The benefit for people who’ve built equity in their home is that, the worst comes to the worst, they can sell the property, turn the cash into assets, and yes they’ve got to pay rent, but at least they’ve got some assets to fall back on. Or, if they’ve got enough other assets working for them, they can live rent free in their house. So, whether you downscale your property to release a bit of capital and live rent free or mortgage free, or whether you sell it all and just go become a renter or a global nomad and use the money to live off of, it’s a good thing for most people. But don’t rely on your home as a pension pot, because the problem is that when you come to realise the money, probably a lot of other people are as well, and there may be a lot of people wanting to sell and cash their homes in, and you may not get what you expect.
RP: In the long term then, buying your home does make sense for most people. But don’t overstretch yourself, and be prepared for prices to fall in the short term.
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