Econ Duel: Rent or Buy?
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- เผยแพร่เมื่อ 12 ก.ย. 2016
- Owning a home is a huge part of the American Dream. But is the dream of homeownership really all it’s cracked up to be?
In this new Econ Duel from Marginal Revolution University, Professors Tyler Cowen and Alex Tabarrok weigh in on the issue. Each representing a side of the home ownership debate, the two professors ask what’s smarter-to rent, or to buy?
On the “buy” side, Tyler Cowen shares the tax advantages of buying a home as well as the effect homeownership has on one’s stability and savings regimen. Does buying a home force us into better savings habits?
Against those arguments, we have Alex Tabarrok, coming down on the “rent” side of the equation.
Among other points, he talks about the real beneficiary of tax breaks (hint: It may not be you!). Along with that, Alex tackles the trials and tribulations of home-buying, in places like San Francisco, New York, or Boston, where a combination of scarce building permits and increased demand drive up home prices. Plus, doesn’t owning a home -- and committing a 20% down payment -- break the diversification rule of good investing?
All that said, though, here’s the real question that matters-which side are YOU on? Watch and let us know in the comments!
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Interesting. I am an Econ undergrad I had one of my micro professors insist not to buy a house until we had a family. His argument was basically buying a house is a huge investment and keeps you grounded in one location. Earlier in life a big career move could also involve a location move. It is much easier to move as a renter than a person who owns a home.
The diversification argument nailed it!
Should have asked each other if they own a house personally or rent
That's not really relevant. This video is about whether buying a house is a good investment. Even if it's not, though, buying a house could make sense for non-financial / lifestyle reasons. For example, buying a new car is not a good investment (it's almost certainly going to depreciate) -- but you still might want to own one for non-financial reasons (you think it's cool).
@@s98715 They both appears to be over 45 years old. So I guess because of that, they already had the time to get a house. Another point: they're not low-income dudes.
They often argue not personally, but professionally. The arguments they present here might just be for arguments sake, not their personal opinions.
What a great video! Thank you for putting this one (and many other great videos) on TH-cam.
In India, the general rule of diversification does not apply as far as real estate is concerned. In a marriage, especially when only the man is earning, it is imperative for the man to buy his family a house. No matter how he rationalizes his decision on the basis of economic theories, he would end up buying a house, just for the sake of his family's welfare. I think this angle is missed in the discussion - that when it comes to real estate, people not only consider the financial outlay but also the security a permanent roof provides to a family, which makes it an emotional investment. I believe it is true for the US too. I mean, not all people are selling off their real estate like Elon Musk. Middle-class has different priorities.
It’s always seemed to me that the only point needed to choose ownership is that paying a mortgage pays for an asset you own. Paying rent just buys you time in a room. It’s like food, you spend a bundle and then you just eat it and it’s gone.
There are many points about not buying a house that are interesting, but you have to spend each month one way or another - rent or mortgage. So why not pay money for something you can sell later instead of for thin air? Too simplistic? Please tell me where that’s wrong.
I'm not quite sure any of them really explicitly mentioned the opportunity cost of renting instead of buying. What I mean by that is, for instance in the UK, you may be able to rent two rooms in your home for yearly gains of up to £7.5k tax-free; that should, at the very least, cover the utility bills and lower your mortgage expense, whilst building equity. On top of that, statistics wise you have an edge of your asset appreciating on a yearly basis, magnified thanks to the leverage. Whereas with renting all you seem to get is flexibility. Obviously if you're buying it as an investment vehicle you should do your due diligence, make sure gross rental yields are at the very least above 7% and that strong demand exists, location is key.
If you do all that, to me personally buying seems to be a no-brainer.
Most people buying a house don't want to rent out rooms to strangers. Remember the argument about the family with young children needing stability?
@@joecurran2811 I don't know whether most people want that or not, but I definitely know that some do and some don't.
Your point is very valid though, and in light of it, the most rational conclusion to me seems to be that the rent Vs buy has to be analysed on a case-by-case basis.
It's simply not a question that can be answered with a one-size-fits-all approach.
Although even just mentioning the capital gains appreciation of the underlying asset should suffice as a point for the opportunity cost thesis.
@@NotMadeOfManitobaFlour I agree it is a case-by-case question.
+Marginal Revolution University I remember watching a video where you establish the connection between free market, innovation and scale - couldn't find it. Can you give me the link?
thanks, and congratulation on the excellent work!
What if someone looks at buying a house as only a financial asset? meaning I buy a house which I have analyzed is going to g up in a city which is developing and I am sure the prices are gonna go up (like a share in the stock market that this company will really do well based on the management practices, team's capabilities, future of the idea, innovation and even performing fundamental analysis). And like the stock market if I am right in this decision making, it can make me earn a lot of profit by selling it at some point of time or just renting it out?? If more stability is not what I want and I just look at it as way of beating the market by diversifying into real estate, isn't real estate a good investment in that case?
I get what they are saying but here is my observations:
I dont know about the USA but in the UK rent is almost universally *more* expensive per month than a mortgage would be. So at least with buying the house you physically own it at the end. Even if it doesn't *increase* in value, you can pass on a 100k house that you bought as your kids inheritance. Meanwhile, if you spent the same 100k over decades renting, you don't have any assets to show for it.
And you don't really have the option of saying 'well i'll spend my money elsewhere'. There isn't the same aspect of opportunity cost as other purchases; you *must either* rent or buy. Because you will need *a* house.
@@victoneter house is an good asset compare to index fund. Also paying rent is like a liability, buying house can help you make money.
@@victoneter suppose you have rent of 300 dollars per month. You pay 3600 per year. For next 10 years you pay 36000 dollars enough to buy a good house. Index fund are not risky so low growth as compare to other risky stocks , agree.
My way of thinking is of security and fulfilling basic requirements.
The last point he makes is a good one. For me, I'm planning to buy a house for the stability, I will always own this home, I can leave my crap there, I don't have to deal with landlords or worry about getting kicked out. I also think it's cheaper in the long run, though this is not always the case. I'll be buying in a big city so his point about your employer going bust shouldn't effect me, though other aspects of that point may well.
I bought 6 houses in my 30 years of professional life by installments. Now I am retired and happy with the rent I collect for my liiving .
That's what I'd like to do. Any advice?
good for you-- but realize, this doesn't imply that buying is necessarily better than renting, on average. You had to make down payments- and those funds had an opportunity cost. You have to re-invest in the properties to counter depreciation. You took risk by not being diversified- though it seems to have worked out well. There's no free lunch. The point of the video is that there are tradeoffs...not that some people might not come out ahead.
@@martinhodell8465 you rent the house tenants pay for maintenance and pay the mortgage.
5:20 best advice , " be on the wealthier side of the equation."
I think you should unbutton your suit jacket when you sit. Great video.
What if you loose your job at least you have asset to sell if you have a house. You can also rent it out, with a apartment you can not do that. Another point is if you retire you can stay in your house after you paid it off. You might need to pay taxes on the house it might not be so expensive since you do not have a mortgage . If you are retired and rent the rent goes up every year this is an issue if retired since your income is fixed.
If you are not going to save money and you are going to spend everything paycheck to paycheck, then you are right. You should buy a house because it forces you to save. BUT, if you save and put money in an index fund, the same money you would spend on a down-payment and real estate transaction costs, then you will have the money in a more liquid asset than a house. If you own a home and lose your job and rent it out, you still need to live somewhere. Are you renting for cheaper? Then all of your assets are tied up in a house which costs money to sell and you may be forced to sell in a down market. There are many layers to the argument. They are pretty spot on, if you are a high earner and itemize deductions, buying a house can be beneficial in many ways, but if you make less than $150,000 as a family in a city, you are likely better off renting.
Professors, paying rent is like burning the money isnt it? After all, having rented an apartment for 20 years leaves you with nothing in the end, opposed to having bought it and paying of the mortage monthly. Assuming both strategies cost equal amounts of money, one cannot forget that the latter leaves the person with the asset at the end.
If you’re a landlord, aren’t you setting the rent high enough to pay for all of those expenses? Are landlords just absorbing the cost of maintenance / repairs out of the goodness of their hearts?
You are. But this cost is reflected in the rent and so you plan for it accordingly. Whereas with a house, people generally don't take into account the maintenance costs and it hits them by surprise.
A house doesn't have to increase in value for it to be a good investment vs renting, particularly if interest rates are low. It's not uncommon in popular, rich cities for people to pay half of their income on rent. If you can manage to pay the same amount to pay off a mortgage on a place that you own then of course it makes sense to buy. And this is a realistic scenario in the city where I live that you would pay about the same per month to own a place, including maintenance costs on a 25 year mortgage, than you would to rent.
He sounds like Ross from Friends
I am 37 with two kids Tyler!!! I don't want to own a house.
OMG ! They r two
warren Buffet lived in the same house for 40 years - that's the message. build a small house at 20 and stay in it until u are 80
You guys are missing a huge point. What happens if you are still renting when you retire and your income falls but then are faced with increasing rental costs? If you have bought with a mortgage when you are working, this debt is paid off when you retire and your home is rent and mortgage free. With respect guys, I don't think we should be following your investment advice!
No, I don't agree. It is all able supply and demand. If you find a house at an area with high demands. The house price will goes up to cover X times more of the cost on fixing the roof. You don't have to buy a fancy house that you can't afford. You can also rent out your house to passive income. Just like stock market, the majority of years are up. We don't need to scare ourself for the few years of big down term.
Diversification is for those who don't know what there are doing. They basically give up and hope diversification will reduce the investment risks
The guy on the right first says that houses aren't guaranteed to appreciate, and criticizes the "they don't make more" land argument. Then in his next point he points to markets like SF and NYC as examples of places where housing supply is low due to a lack of new development. Granted NYC and SF don't represent the nation as a whole, but he literally contradicts himself from one point to the next.
His point about markets like SF and NYC is that the housing supply is low because of political reasons and government regulations, creating an artificially low supply versus the market demand, and that's hardly stable, especially if such locales decide to support subsidized housing to try to solve their housing problem.
Renting long term just seems crazy to me. Unlike a mortgage, you don’t own anything after 15 - 30 years. All your money basically went into a black hole. And you have to keep paying rent forever, even when you’re 70 or 80 and are unable to work.
Also, unlike a mortgage, rents are always going up.
"Be wealthy" isn't good advice.
these guy's don't know what their talking about. it's like their completely foreign to the subject and just researched it for 20 minutes trying to find two sides of an argument. there are so many more reasons to own a home than to rent. saving for a 20% down payment while renting makes no financial sense. his point at 1:55 makes no sense, its pro buying a house if anything. these guys rent.
It really depends on your investment oportunities. If you have an investment choice with higher ROI that buying and renting a house, then you shouldnt invest your capital in a house.
@@gaeb-hd4lf it's more complicated then that. You literally have to live somewhere. If you're not paying a mortgage (which is almost always cheaper then rent would be for the same property) you're paying rent which gains you nothing, rather than paying a mortgage which gains you a property once it's paid off.
@@mr.9439 The last thing you said is not true. You are always paying a rent, whether you a renting a house or living in your own house. Living in you own house you are "paying" the opportunity cost of not renting it to someone else.
Buying a house and renting a house are 2 seperate things: the first one is an investment, the other one is a cost of living (similar to eating food) that you will pay directly or indirectly, whether you have a house or not.