Being Unable to Buy a House (as Opposed to Renting) is Generally a Good Thing
Now, for many of us here in the UK, it seems like it's getting harder to reach the major milestones of adulthood. At the same time in our lives when our parents and grandparents would have been setting up their adult lives, buying their first home and having children, we're still renting property and getting frustrated over the increase in our Netflix subscriptions.
His emotional priors were thus obvious. It was actually quite touching to listen to such a sincere bit of sentimentality about the good old days. In many ways, life definitely is more challenging for young people today than it was for other generations after WWII (certainly harder than it was for Baby Boomers like me), and it is perhaps unsurprising that some young people would look wistfully back at those days of yore through an unrealistic lens.
The fact is, however, that the logic of owning one's own home has always been completely contingent on circumstances. I had hoped that the knee-jerk tendency to say that "I have to own a house or else I'm not a real grownup" had abated over the years, but at least this particular video indicated that the mythology is still alive and well. Even more surprisingly, the argument is completely lacking in nuance or even a minimal understanding of basic financial facts -- quite a problem for an argument that is supposed to teach young people how to be financially savvy. Later in that video, the host made these bold statements:
Purchasing your own home is probably one of the largest and costliest that you'll make as an adult. However, it's also one of the most financially advantageous. No longer are you throwing money away to a landlord. You're investing in an asset, an asset that, historically speaking, reliably appreciates in value. In essence, the sooner you get onto the property ladder, the sooner you're financially secure.
This is the kind of thing that one expects to hear from the National Association of Realtors or some other lobbying group, but the source here was a super-earnest journalist who simply misunderstands reality. I will get back to his specific errors in a moment, but I will add another datum from a US-based podcast last week, in which a slightly older group of American journalists (maybe 35 year olds?) were discussing the destruction of houses by the Los Angeles wildfires. One of the hosts put the point this way:
The increasing cost of the natural disaster may influence how we think about accruing wealth in this country, because for my whole life -- for decades -- it's been: You aspire to own your home, you want to buy a house. You work toward that for years, and that's how -- because that price goes up -- that's how you accrue wealth. And if so many homes in the country become hard to insure/uninsurable, that's not going to be a way that people get up into the middle class anymore.
I cannot imagine that anyone reading this column would be surprised by any of those statements, because they are ubiquitous. House = wealth = middle-class prosperity. More to the point, the belief is that that is the only way that non-wealthy people can build wealth. Neither is true. Owning a house is not a particularly good investment, on average, and there are ways to accumulate wealth more safely than putting everything into a house.
I will take a moment here to point out that the housing crisis in the US and elsewhere is a problem because too many people have nowhere to live at all. It is not a buy-or-rent problem, it is a roof-over-one's-head problem. The issue I am discussing here is thus a secondary one in the larger scheme of housing policy. Even so, that very scarcity of housing makes it all the more important that we stop convincing people to take a less advantageous route to having a stable home environment and financial stability.
This past Friday, I republished the Dorf on Law column that I wrote in 2012 when I bought a house outside of Washington, DC. I thought to do so both because I have been meaning to revisit the rent-or-buy question for the first time in a few years. Also, I had coincidentally just sold that house. I hope that the young couple who bought my now-former house will find many years of happiness in it, and it might well turn out to be a good choice for them to have bought it. My point in 2012 and now, however, is that it is not guaranteed to be a good choice for anyone to buy rather than rent their residence. In fact, the odds area against it.
As I explained in that 2012 piece, a person who has no non-financial bias regarding whether they want to be part of the American/Canadian/British/World Dream would want to make an apples-to-apples comparison between buying and renting. When someone (such as the British correspondent quoted above) talks knowingly about how paying rent is "throwing away money to a landlord," they ignore the fact that paying interest on a mortgage is just as much "throwing away money to a banker."
Yes, owning a house includes some amount of building equity (for most mortgage types), which means that a $3000 monthly rental payment is not as good as a $3000 monthly mortgage (principal and interest payments). But that will almost never be the market reality. Again, however, the interest included in the payment is just as "thrown away" as rent is -- which is not in fact being thrown away at all, because you are getting a valuable service in return, that is, a place to live. Buying food is not "throwing away your money to a grocer," at least as far as I know.
The problem is that getting to a true apples-to-apples comparison is extraordinarily difficult, because of possible tax differences in renting versus owning (not true in Canada, by the way), owners' responsibilities for things like roof replacements and other ongoing repairs that can be quite expensive (and "lumpy," making it especially important not to think that the monthly mortgage payment is the entire cost of owning), and on and on. There are many online calculators that attempt to clarify matters, but one should be aware that some of those are posted by interested parties who have an interest in pushing you to buy (such as homebuilders' lobbying groups).
I do not want to get into the weeds on all of those ancillary (but crucial) matters here. I will simply say that I bought that house in 2012 after I figured out that the best apples-to-apples comparison showed that for the location and type of dwelling that I was looking for, buying was clearly a smarter financial play than renting. I was honestly surprised by that conclusion, but I followed the numbers. By contrast, when I moved to Toronto and was trying to figure out whether to stay long term, I looked into the rent-or-buy numbers and found that it was not even close, but in the other direction. That is, even though Canadians are just as worked up as Americans and Brits are about how young people cannot afford to buy houses, the apples-to-apples comparison shows that buying here can be as much as twice as expensive as renting.
Ah, but what about "building wealth"? Looking at my recent sale, I was able to determine that the annualized rate of growth in the value of that house over the past five years was 2.03 percent (not adjusted for inflation). Meanwhile, the annualized rate of growth in the value of a plain-vanilla stock market index fund was 12.07 percent. Again, that house is in an upper-middle-class suburb of DC, so it's relatively sluggish growth is not due to being in a blah market.
So when that British millennial that I quote above said that buying a house means that "[y]ou're investing in an asset, an asset that, historically speaking, reliably appreciates in value," he is not so much wrong as much less than half right. It is just that there are other assets in which to invest that are appreciating much more quickly than houses. And this means that, even though I thought in 2012 that the apples-to-apples comparison favored owning, that turned out ex post not to have been the case.
Being on "the property ladder" thus does not necessarily make a person richer than they otherwise would have been. But my situation is an anecdote. Was I merely an outlier? There are certainly anecdotes on the other side, with some people being fortunate enough to make large gains on resale. But saying "it could go up" is true of junk bonds and beanie babies, too. What about aggregated data? The video from the British millennial that I quoted above includes a chart with an impressively upward sloping line showing the increase in average UK home prices, but again, compared to what? The annualized rate of return from the data shown on that chart from 2004 to 2024 ends up being 4.05 percent, whereas the US stock fund that I mentioned above averaged 8.23 percent growth over that 20-year period (which is almost identical to what UK-based funds would have paid out).
As I note every time I write on this topic, there is an even more important financial reason to avoid using a house as a wealth-building vehicle: it is a completely undiversified investment. Stock funds are diversified by design, whereas a house is a house. People who bought in South Florida are discovering that they do not have nearly as much wealth in their houses as they thought they did. People who were planning to cash in their homesteads during the 2008-10 financial crisis suddenly discovered that they were underwater financially. If my net worth were $33 million, I could buy this, but I would not want to put my basket of wealth in one Fabergé egg.
No responsible financial advisor would ever advise a one-asset savings strategy, but the entire social and policy conversations around housing in many countries all but begs young people to make decisions that will leave them poorer. And that is to say nothing of the increasing likelihood that a person will need to move unexpectedly, long before any growth in the value of their home outweighs the closing costs.
"But I want to buy a house!" they say. "But you've been given bad information, and it is not at all a given that that is your best option," I respond. "But I don't believe you, Boomer," they sarcastically reply. I have been trying to think of a good analogy to describe how the increasing unaffordability of owning versus renting is an accidental boon to young people, who would otherwise listen to the cacophony of social cues telling them to buy a house and thus ignore advice like mine. The world truly is challenging for them, but it just so happens that not being able to do one of the things that they most want is for the best. The only analogy I have come up with is to compare it to the availability of addictive drugs. "But I want heroin, which I hear is great!" "Sorry, you can't get any heroin." "Aww, rats! Old people suck."
I admit that that analogy is not particularly tight, but the point is that sometimes circumstances conspire to make something good happen for bad reasons. The US and other countries continue to sell people on the idea that they need to own a home not just to be grownups but to be financially stable and prosperous. That is simply wrong. Sometimes, buying a house will make sense. More often, however, not so much.
No one from my generation should say, "You're welcome, millennials." But we can at least say that there is one less thing for younger people to feel cheated about. We Baby Boomers screwed up a lot of things; but keeping larger numbers of young people out of owner-occupied houses -- however inadvertently on our part -- is not one of them.