British Property Wisdom
British property wisdom
Originally from March 2007
Previous O & A on politics and religion might be considered academic and of insufficient practical interest. But not the following. What could be closer to everyday life than property.
"It is always better to buy a house; paying rent is like pouring money down the drain."
This statement is quoted at the beginning of a leader in The Economist (;"To buy or not to buy? That is the question", Saturday March 5th 2005). Let us call it the British property wisdom (Bpw), because reports suggest in Britain it is so entrenched as to be almost commonsensical. Rather than paying rent, the idea goes, homeowners pay off their mortgage and thus build up equity. As a buyer, you end up with (unencumbered) property. As a renter, you end up with nothing.
However, The Economist's opinion on the Bpw comes as a surprise. The article concludes by stating that in the current environment "the smart money is on renting".
If you think of it, the Bpw, or at least the idea behind it, invites a question anyway. How can it be that the buyer gets the property effectively for free, in a market driven by supply and demand? Owning the place you live in is seen as desirable and provides higher social status than living in "rented accommodation" — so, if anything, wouldn't you expect to pay a premium price for your property?
The Bpw reasoning must fail somewhere. Where? According to The Economist, the annual outgoings of a homebuyer are usually higher than those of a renter. And for a fair comparison we have to assume the renter saves the difference! This will result in regular savings, compensating for the lack of property ownership. Many buyers seem to claim they don't pay more than they would pay in rent, but we choose to believe The Economist here. Some of those buyers may be genuine exceptions, but others probably have errors in their calculations. As The Economist explains, to the mortgage payments you have to add maintenance costs, property taxes and insurance.
And most mortgages require a deposit, of course. We can regard this conceptually as just another difference for the renter to save. As it is sizeable and occurs early in time, its contribution to the final savings total could be substantial.
The question posed above is now answered, or rather invalidated: it is an illusion that the buyer can have the property effectively for free. But there is still a problem. If we look at real-world renters, we find many failing to end up with the savings that should make up for not owning a property. Some, indeed, end up with nothing, just as the Bpw predicts. Why? They didn't save the difference but spent it on clothes, travel, entertainment etc. And maybe this is what the Bpw is really all about: buying enforces savings discipline, renting does not.
While The Economist's analysis includes several aspects not covered here (inflation, for example), the role of savings discipline gets no mention. It was subsequently highlighted in readers' letters to the editor (Valuing property). For the purposes of the original article, buyer and renter might be best thought of as members of the species Homo economicus, whose main habitat is economic theory, as taught in the second half of the past century. For Homo economicus, who never deviates from the rational course anyway, discipline enforcement is unnecessary.
However, even for a common human renter, not belonging to Homo economicus, it should be possible to confirm The Economist's analysis by setting up a savings plan to save the difference, thereby proving cleverer than the buyers.
