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 The
Money Management Newsletter: Home
Ownership
Home as an investment, Rent Vs Buy.
Home Ownership Editor & OCNA
Special to Money Management Newsletter
Everybody has to live somewhere. When you rent
a home, your monthly payments go backward paying off somebody else's mortgage.
When you buy, your payments go toward paying off your own mortgage.
While you're acquiring a substantial capital asset,
you're also getting security of tenure, low-cost accommodation for your
retirement, control over your own living environment and pride of ownership.
You can increase your equity by:
a) inflation: As inflation increases your home's value,
every penny of that increase goes into your equity
- and there's no capital gains tax to pay. Over the past thirty years,
high levels of inflation have given a lot of home owners a very substantial
nest egg. Even if house prices only increase by one or two per cent a
year, that adds up to a slow but steady increase in equity.
b) Mortgage repayments: Every time you make a payment
on your mortgage, you're also increasing your equity. Any extra payments
you make help speed up that process. While rents generally increase with
inflation, mortgage payments stay relatively stable over time.
After the mortgage has been completely repaid, a home
owner's monthly costs drop substantially. All that's left are utilities,
taxes and normal maintenance costs - a total well below rents for comparable
homes. All these things combine over time to give home owners substantially
greater net worth than renters.
When comparing the past experience of home owners and
renters, experts forecast out into the future and calculated what would
happen if the home owners sold the first home and bought another. Except
for a few cases where people bought in overvalued markets at the height
of interest rate spiral in the early 1980s, owners end up better off than
renters in the long term - even in a low inflation environment.
In today's market (July 02) low interest rates seem
to be driving house prices higher. As we know, you can borrow more money
when rates are low. However caution is advised, inflation may cause interest
rates to increase, overvalued property owners entering into a rising interest
rates environment may find themselves with future mortgage renewals rates
digging into much need Cashflow. Under that same scenario - the renter,
landlords are not bound by rent controls and can freely pass along operating
expenses.
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