Mar 132017
 

[Disclaimer: This post is not sarcastic]

Owning a house is one of the biggest aspiration of modern families. Its generally an emotional choice rather than an economical or financial choice when one decides to purchase a house.

Buying a house is a life event and generally one of the bucket list of a family. While it’s difficult to quantify the emotional quotient in this decision making, here’s an attempt to evaluate the decision based purely on economics.

Owning vs Renting

Owning vs Renting

The above mathematical exercise clearly puts Renting ahead of Owning for the short term; but then this is based on static assumptions on Interest rate, Inflation, rate of appreciation of House value and also rate of appreciation of money if not invested in House.

The true cost of purchasing a House is actually quite complex, specially in Metros where House means flat in a large complex of flats. See this to understand the true landed cost of a flat.

One important factor which changes this calculation completely is the rate of appreciation of money, if not invested in House vs rate of appreciation of House property. For someone who purchases a House, specially with a Loan there is a good amount of money that gets locked in the House value. However, someone who rents a house has this money available to oneself to invest elsewhere- in a business, stock market, fixed deposit, jewelry etc. The return generated through these investments can be higher or lower vs the return generated in House property. And this is the biggest factor which tilts the decision in favor of Owning or Renting.

If one has ideal money available with no immediate need/want to better utilize elsewhere, buying a House might make sense, while for someone who has little money on hand should rather look to rent. How much ideal money is good enough? Rule of thumb is 25% of House cost.

Even when someone has money on hand, it might not make sense to purchase House; if he/she has a better opportunity to invest the money- for example in a business idea or to fund World Trip (generating emotional returns which can far out weigh any financial return)

Apart from these economic factors, here are some of the qualitative factors to consider for this decision making-

  • Permanent vs Temporary stay in a city- Depending on one’s job/business profile, living in a particular city may be a permanent option (atleast 10 years or more) or temporary one (say change of city/location every 3-5 years). So purchasing a house where one is not going to live forever is not a wise choice, given that the hassle of giving it out on rent are many.
  • Life Stage: Purchasing a house make sense for a family, rarely it does for bachelors. Since as bachelors there are much cheaper options available for stay- like PG, sharing flat with friends etc.

To summarize the choice of Owning or Renting is more a Social Science decision than an Economics one!

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 Posted by at 12:07 am

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