ReNe: owning versus renting

Was just reading an interesting thread about home ownership, precisely, about how it may not always be a good thing. The discussions revolves around the US market in particular, a sore topic now with the subprime crisis, and admittedly something I didn't anything about until I came here, not that I'm claiming I know a lot about it now.

It was always considered so, and is actively promoted in the US with mortgage interest deductibility. However it has also perhaps had some detrimental environmental effects, including sprawl, long commutes and far more cars on the road than a system where people rent and have a bit more flexibility in the size of unit for their needs or the distance to their jobs.

Lloyd Alter

James Surowiecki wrote an illuminating article on the problems with home ownership. A few bullet points:

• Buying a home used to require a sizable down payment: in 1976, the average for a first-time buyer was eighteen per cent. By contrast, a National Association of Realtors study of first-time buyers between mid-2005 and mid-2006 found that almost half put down nothing at all, and that the median down payment was just two per cent. If you earn eighty thousand a year, no one will lend you four hundred thousand dollars to buy stocks, but plenty of people were willing to lend you that money to buy a house.
• As long as home prices were rising, all this leverage seemed like a good thing: it let people buy homes that they couldn’t otherwise afford, and maximized their return on investment. But, with home prices sinking—in the final quarter of 2007, they were down almost nine per cent from the year before—the downside has become clear: as many as fifteen million homeowners now owe more on their mortgages than their homes are worth. Homeownership isn’t building wealth for these people; it’s locking them into indentured servitude.
• Homeownership also impedes the economy’s readjustment by tying people down. From a social point of view, it’s beneficial that homeownership encourages commitment to a given town or city. But, from an economic point of view, it’s good for people to be able to leave places where there’s less work and move to places where there’s more. Homeowners are much less likely to move than renters, especially during a downturn, when they aren’t willing (or can’t afford) to sell at market prices. As a result, they often stay in towns even after the jobs leave. That may be why a study of several major developed economies between 1960 and 1996, by the British economist Andrew Oswald, found a strong relationship between increases in homeownership and increases in the unemployment rate; a ten-per-cent increase in homeownership correlated with a two-per-cent increase in unemployment.

In Singapore, it was *always* considered a good thing to be able to own a home; even dinky little HDB flats appreciate appreciably in value; three-room flats bought in the 70s increased their value 10-fold in thirty years. And even if you do not sell at a good profit years later, even if you just break even, you still 'make money' because you've 'saved' on rental over the years. An article I read a long time ago (like over a decade ago) said that in Singapore, the type of investment that generally has the highest rate of return is property; though this article was written before the property cool-down in the recent years, the appreciation rate on property is still very decent. Moreover, one can 'live in their investments' and kill two birds with one stone. So even though home prices are pretty astronomical (for the size of the flat), 93% of Singaporeans own their home.

In countries bigger than Singapore, where a lot of people actually do move from one state or city to another (quite a foreign concept to Singaporeans, literally), people usually rent instead. Still, the US is proud of the fact that over 60% own homes. I, too, thought it was generally a good idea to own rather than rent, so it was pretty interesting to read the articles that argue against home ownership (note, the writers say home ownership is only not economically viable in some scenarios; it's not a sweeping statement). When we left Singapore, I was initially glum about the thought that we would probably be renting for many years to come -- all that 'wasted' money. However, there are advantages to renting, as I'm beginning to realize. Hardly anyone in Singapore rent, those who do are usually foreigners, so I've never really thought much about the issue before.