Renting a house may be financially more beneficial than owning one, according to a new research which claims that people often overlook the costs of building insurance and property maintenance when buying homes.
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, Isaac Tabner from the University of Stirling in the UK 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.
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“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, financial planners and policy-makers make an informed choice,” said Tabner.
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 favourable, 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.
However, increases in inflation and imputed rent, tip the balance in favour of ownership.
“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,” said Tabner.
The research charts how deflation or rising interest rates without a corresponding increase in wages, has the potential to impact negatively on homeowners.
The study shows that, for someone purchasing a home with no mortgage, deflation of just one per cent per year can result in an equivalent loss of half the present purchase value of their home if they hold it for 45 years.
By contrast, inflation – including wages – of two per cent per year, results in the same individual gaining 50 per cent of the present purchase value of their home if held for around 28 years.
The study was published in the journal International Review of Financial Analysis.