Renting is great! I've been a renter since I graduated college and I have no intentions to buy a house any time soon. I've lived in three states in the past few years (and counting) and love the flexibility, I don't think there is anywhere in the country I'd actually want to buy property in now.
I could easily afford a down payment on a house, but instead I've invested and continue to invest my savings in the market instead, and I think that's the better financial move anyway. I'm getting paid to have a more flexible/enjoyable lifestyle.
Land value should increase roughly in line with gdp. There’s secular trends in it increasing relative to gdp since 1950 at about 2% a year in Australia. I’m pretty sure other places have grown at a slower rate and there’s less reason to believe this would continue. I’ll ballpark 1% + real gdp growth to account for the increasing value of positional goods. This gives us 3% yearly.
On the other hand residential structures depreciate at 2.5% a year linearly. In addition, repairs are said to come it at around 1% a year. What proportion of a property’s value from come the structure depends on the property and it’s location but I’ll assume 50%. Over the first 30 years this is going to lead to a net increase in property value net of repairs of 2% a year.
Property taxes also vary greatly from place to place. On average in the US they seem to be around 1% a year.
Add everything up and you get 6-5+2-1 or about 2% of the property value in annual ROI. If instead of leveraging yourself, you were to buy it outright, use stock returns instead of the mortgage to find economic profit. You get 0%. The market is efficient. The market is efficient. The market is efficient. You should expect to make about as much money on the stock market while renting your housing as you would to buy your house.
All that’s left is to determine whether you value the ownership itself due to customization and the like more or are trying to avoid the extra correlation with local economic conditions and give yourself more flexibility.
I was just talking last night to an old friend who is considering a move to Tokyo, where -- thanks to having actually built housing for the past 40 years, with a side order of depopulation and a culture where "building new" is expected -- it's not too difficult to get a family house, built in the 1990s, for well under $400k USD.
He's currently living in 950 square feet of university housing with his family of 4 in a heavily-NIMBY college town 25 miles from the nearest metro area. He tells me that he looked into a a three-bedroom, 1600-1900 sqft apartment near the heart of Tokyo, and found that, in USD, the rent there was identical to the rent on his current unit.
Tokyo's population is 4 or 5x larger than that of Chicago.
Renting is great! I've been a renter since I graduated college and I have no intentions to buy a house any time soon. I've lived in three states in the past few years (and counting) and love the flexibility, I don't think there is anywhere in the country I'd actually want to buy property in now.
I could easily afford a down payment on a house, but instead I've invested and continue to invest my savings in the market instead, and I think that's the better financial move anyway. I'm getting paid to have a more flexible/enjoyable lifestyle.
Usually I do the following to run the math:
Imputed rent is usually around 6% of home value, it was around 4.5% in 2022. https://fred.stlouisfed.org/graph/?g=1e7fn
Real interest rates on mortgages are usually around 5% and are currently around 5%. https://fred.stlouisfed.org/graph/?g=1e7fn
Land value should increase roughly in line with gdp. There’s secular trends in it increasing relative to gdp since 1950 at about 2% a year in Australia. I’m pretty sure other places have grown at a slower rate and there’s less reason to believe this would continue. I’ll ballpark 1% + real gdp growth to account for the increasing value of positional goods. This gives us 3% yearly.
On the other hand residential structures depreciate at 2.5% a year linearly. In addition, repairs are said to come it at around 1% a year. What proportion of a property’s value from come the structure depends on the property and it’s location but I’ll assume 50%. Over the first 30 years this is going to lead to a net increase in property value net of repairs of 2% a year.
Property taxes also vary greatly from place to place. On average in the US they seem to be around 1% a year.
Add everything up and you get 6-5+2-1 or about 2% of the property value in annual ROI. If instead of leveraging yourself, you were to buy it outright, use stock returns instead of the mortgage to find economic profit. You get 0%. The market is efficient. The market is efficient. The market is efficient. You should expect to make about as much money on the stock market while renting your housing as you would to buy your house.
All that’s left is to determine whether you value the ownership itself due to customization and the like more or are trying to avoid the extra correlation with local economic conditions and give yourself more flexibility.
You’ve put your finger on the exact interplay of emotions I experience about renting. Great piece
I was just talking last night to an old friend who is considering a move to Tokyo, where -- thanks to having actually built housing for the past 40 years, with a side order of depopulation and a culture where "building new" is expected -- it's not too difficult to get a family house, built in the 1990s, for well under $400k USD.
He's currently living in 950 square feet of university housing with his family of 4 in a heavily-NIMBY college town 25 miles from the nearest metro area. He tells me that he looked into a a three-bedroom, 1600-1900 sqft apartment near the heart of Tokyo, and found that, in USD, the rent there was identical to the rent on his current unit.
Tokyo's population is 4 or 5x larger than that of Chicago.
:(