Is it best to rent or buy your home?

Is it best to rent or buy your home?

Few financial decisions cause families more agonising than whether to rent or buy a home. Imagine the cost of renting or buying a particular house in a particular location is roughly the same. Which makes more sense? The difficulty is that, much like the stock market, the housing market is very hard to predict in the short to medium term, so the answer depends far more on your circumstances than on trying to forecast prices.

In this video, financial author Jason Butler explains the real trade-offs involved. Buying looks great while property prices keep rising, but if prices stall or fall, you can end up worse off than if you'd rented, because it has cost you more, you carry the risk of further falls, and you have to maintain the property yourself. It's a point many first-time buyers overlook: as the homeowner, you pay all the maintenance costs and take on all the capital risk.

You'll learn that the key question to ask yourself is how much flexibility you need in the short term. Buying is expensive and time-consuming, and you don't want to go through it all again in two or three years. If you're likely to move within that time, need lots of flexibility, or believe prices are about to fall significantly, renting is probably the better choice, offering more flexibility and less risk. But for most people taking a genuinely long-term view of 20 years or more, buying almost certainly makes sense, because you need somewhere to live anyway. As with stock markets, short-term crashes matter far less over the long run, especially if you plan to trade up, since a home you're selling in a falling market is being replaced by one that's also cheaper.

You'll also learn about the long-term advantage of buying: building up equity in your home, which can provide real financial security. If the worst happens, homeowners can sell up, turn their property into cash and other assets, or downsize to release capital and live rent-free or mortgage-free. Some may even sell entirely and use the money to live off. Butler offers one important caution, though: don't rely on your home as a pension pot, because when you come to cash it in, many others may be trying to do the same, and you might not get what you expect.

The takeaway: over the long term, buying your home does make sense for most people. But don't overstretch yourself financially, and be prepared for prices to fall in the short term. The rent-versus-buy decision is ultimately about your time horizon, your need for flexibility, and your capacity to weather short-term risk.

Chapters / Key points

• Why rent versus buy is such a difficult decision
• Why the housing market is hard to predict short-term
• The hidden costs and risks of owning a home
• Why homeowners take on all maintenance costs and capital risk
• The key question: how much short-term flexibility do you need?
• When renting is the better option
• Why buying makes sense over 20 years or more
• How building home equity provides financial security
• Why you shouldn't rely on your home as a pension pot

Transcript

Is it best to rent or buy your home?

Robin Powell: One of the 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.

Jason Butler: 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 risks.

Robin Powell: 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.

Jason Butler: 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, like stock markets, short-term market crashes are not a problem, particularly if you're eventually going to be trading up, and if your property is falling in value, then the next one you're going to buy is falling in value too.

Robin Powell: 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.

Jason Butler: The benefit for people who've built equity in their home is that, if 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 become a renter or a global nomad and use the money to live off, 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.

Robin Powell: 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.