Sunday, 5 October 2014

On home ownership

One of the things that have been discussed ad nauseam lately is the renting versus buying your home. You all know the drill: option one is to save for that downpayment of your home and then spend the next twenty or thirty years paying the mortgage, while enjoying this thing called home ownership. Option two is to rent your home and invest your excess cash into some form of investment (most likely tied to the stock market) and then hope that by the end of the thirty years, you would have benefitted from the arrangement one way or the other.

No, I am not going to do the numbers, or present them here for you. This is because these sort of comparative analyses often depend on the assumptions behind the model and if you are really clever, you can spin it whichever way you want to. This is not to say that these models are useless; rather, we must be critical of the information that's presented to us. Do not blindly believe everything you see. Question those assumptions, change them, see if the analysis still makes sense. You can forecast into the future however you want to, with varying degrees of conservativeness, and guess what - you can never will them to reality. Or maybe you can, when you get lucky.

And from time to time, we do get lucky, and yet when this happens, we think we were so smart to have foreseen this seemingly inevitable reality happening. Actually, no. There are so many things that are beyond our control that just happen to work for us. Of course it helps that we are prepared to seize the opportunity when it first appears. We even strategise on what we would do if and when those opportunities happen.

Getting back to the numbers, I think at the end of the day, they would be pretty much the same, i.e. neither is better than the other, especially when you take into account risks profiles, time horizons, tax concessions, liquidity, time value of money... your NPV in both scenarios are likely to be close together. So really, in my opinion, this is not a decision that one should make based on numbers alone. There a lot of things in life that we do not assess by numbers, so why is it the case that our living arrangement is a decision that we make based on numbers alone? Or at least, a decision that heavily skews towards what the numbers say.

I am going to say this: cash flow wise, depending on where you live, renting is almost always more forgiving towards your bank account than buying. More often than not, you will have less cash outflow as a renter than as a buyer. So if your decision is purely based on cash flow, then this is where you stop considering all the other factors that could be relevant on this issue. And it's ok to make this decision purely based on cash flow alone. I work with money on a daily basis, so I understand where you are coming from.

However, just because you are part of the number-focused party does not mean that everyone else should subscribe to the same school of thought. Because to those who can afford it, the intangible benefits of owning your own home is something that money can't buy - the fact that they can buy it with money is part of the intangible benefits so to speak.

From this perspective, it is somewhat irrational, particularly if you think that having numbers to back you up rationalise your perspective. However, just because they are seemingly irrational does not mean they are useless. I am talking about things like the trade off between stability v flexibility, high maintenance (and its associated freedom to do whatever you fucking want) vs low maintenance (and the hassle of obtaining permission to do the smallest things), and things of similar vein. And guess what - a lot of us are actually irrational people who like to rationalise our options and decisions - and using numbers to do this can be very very dangerous.

I belong to the buy-your-home camp. I am currently paying down the mortgage to my apartment. This decision costs me at least $10k more than renting (approximately $1k per month). And no, I don't think about this as an investment; I regard it as simply buying comfort. Yes, I get that you can buy comfort some other way, this is just how I buy my comfort.

That brings me to my next point: make this decision based on the lifestyle that you deem suitable for you, not for someone else. This is perhaps the hardest thing to figure out because while most of us probably know what we want, it takes quite a lot of guts to (1) admit it and (2) make sure that your actions actually align with it. Plus there is the fear factor - the fear of making the wrong decision, especially on something so... big.

Look, if it works for you, it works for you. If it doesn't, then you need to change it. Of course it always helps to have a buffer. As I have always said, one of the ways you can prepare for life is with a strong budget. The interest rate can raise two times its current rate, and you can ride it through with your budget. Seriously, it's not that hard. It just requires you to live within your means.

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