Renting rather than owning a home may not be as expensive as many people think.
The prospect of no longer having to pay rent, known as imputed rent, is often cited as a major incentive to owning a home.
However, a financial researcher has argued that many buyers overlook costs included in their rent, such as building insurance and property maintenance.
He believes a failure to properly account for these outgoings can cause householders to overestimate the financial benefits of owning versus renting.
Individual circumstances and market conditions play a big part in determining whether it is smarter to rent or buy, but this research should help households make an informed choice.
The new research provides a step-by-step explanation of how households can objectively compare the costs of renting versus buying a home, while taking their own personal circumstances and macro-economic conditions into account.
In reviewing transaction costs, imputed rental yields, opportunity costs, inflation and the length of time owning a home, the study also shows that – during periods of deflation or zero inflation – people who rent are financially better-off than those who own their home.
Even when economic conditions are favorable, households may need to own their home for between five and 10 years before returns from the rent they are no longer paying are sufficient to compensate for the high transaction costs of buying.
It is often thought that buying a house makes more financial sense in the long run: however, renting is frequently more worthwhile than buying for financially-constrained households, as well as households likely to relocate within 10 years.
As well as a reduced ability to recover transaction costs, households relocating within a few years face a higher risk that medium-term prices will move against them, thus reducing or eliminating their equity, while financially-constrained households face much higher mortgage costs.
The research charts how deflation, or rising interest rates without a corresponding increase in wages, has the potential to impact negatively on homeowners.