Rent a house vs Buy a house. Rent/Lease a car vs Buy a car. These are probably decisions that you had to make at one point in your life. But what about renting a computer? Or shoes? Or sunglasses? Why do we buy these but rent the “bigger” things?
The most common explanation is the investment fallacy. They will say, “buy X” (X being one of the previous categories or something utterly different), “if you rent, you’ll just be giving your money away to someone else”. They might also say: “Buy. Buy, because it’s cheaper in the long run. Even if you can’t afford it now, you can pay in instalments to your bank or sales company and in the end, you’ll pay a lot less than if you keep renting”. Alright, the third argument, “Buy because then it will be your own. You will be able to customise it as much as you want and make holes on the walls [of the house], or paint it the way you want [the car] and add all the extras you want”.
Have you heard these before? I bet you did, some version of them at least. And where do you fall on them? I’m also willing to bet that if you’re a GenXer or older you’re more sympathetic towards the buy option and if you’re a millennial you’d rather go with the renting option. I can even stretch my bet to say that if you’re a millennial or under you can’t even consider the buy option because you don’t have a job that is steady enough for a bank loan since the banks tightened their grip on loans after the 2008 crisis. Why do you think there is this big divide in such a short time frame? [I’ll put a caveat here that this is approximate given that generations at the same point in time are different in different cultures]
We are used to seeing a big difference in attitudes towards renting in different countries. For example, as of 2015, the rate of renting a house in Switzerland (57%) is almost 10x more than in Romania (4%). So why is renting a house more popular in central and Northern Europe than in Southern Europe? It’s not the money since Northern Europeans have more disposable income than Southern Europeans. It could be the amount of available land per population, but then again how do you explain a country like Sweden that is mostly uninhabited and still favours renting when compared to more densely populated Southern European counterparts? Now you can say, no, it’s not the amount of land, it’s the market! The demand is higher than the supply. Then why are rents in London 3x higher than in Madrid, while London alone is 1.7x times bigger in size than Madrid? It could be that in Italy, the % of house purchases versus renting is higher because the family pitches in when the time comes and the loans are more agreeable or easier to get than with banks? It is clear that each culture deals with owning/renting a place in a very different manner, but that’s not what’s up for discussion. The discussion is which one is best? Renting the place or buying the place? You read the most common arguments for buying in the very first paragraph, now let us look at them again from a different angle.
If you buy a place, you will be making an investment, but only if you have some of the money to pay it upfront. And have a nice stable job where you make enough money to get good conditions on the loan. And if that loan’s monthly instalments are up to 1/3 of what you make per month. And if you intend to live in the same place for the rest of your life.
So here is a reality check, at least in the US and parts of Europe. If you are at an age where you are buying your first home (thus have not worked all your life for it or have no collateral like another home to “trade in”), you won’t have the money. Wage growth has been close to zero for many years, while prices and cost of lifestyle keep going up. The “gig economy” is in full swing and employers no longer want full-time employees. They prefer contractors that can shrink and grow their capacity on demand without any risk. Young workers on their end, also increasingly prefer to do part-time gigs here and there instead of sitting in a cubicle all day long. [I dare you to find a millennial that wants to have a job without an inspirational goal or fast career and personal growth.]
Anyway, with the “job for life” principle out of the window, you no longer have a simple way to tell the bank that you’re good to pay their loan back. It’s much harder to defend that you make the same amount of money from 3 different jobs that come and go depending on the season/fad/economy than it used to be with a letter from Big Stable Company Inc.
What about the part about living in the same place all of your life? That must still be true for the majority of us, right? There was a study in my parents’ generation that went to the point of saying that most people lived all of their lives in a 5-kilometre radius. That’s right, from when they’re born, until when they die all of their meaningful connections and jobs would all be within walking distance! And that certainly used to be true. You’d be born in a village and would live there all of your life. But then big cities came along that aggregated jobs and people in an unprecedented way. And cheaper flights made tourism and generally moving about much easier. You could even argue that globalisation and the internet played a role in the increased movement of people. Wars failed states and environmental catastrophes certainly have increased the number of people moving around the globe. So the trend is pointing to people NOT staying in the same place all of their lives. Hmmm…
Ok, but there are still a lot of people that don’t move much. And that has a steady job with an established company. And that makes a good living. Then you have “the markets”. You see, most of the housing loans have the bank fees, the “spread”, and then a variable interest rate. You can negotiate and account for the spread. But the interest rates have not been very stable as of late. For instance. The Euribor, the base rate that is used by most European banks for house loans has been in the last 10 years, close to 5% and also slightly negative (-0.25%). Which means that a loan today can cost you 400€ per month and the exact same loan, 10 years ago (and who knows, 10 years from now) would cost you over 1000€ per month! That destroys any middle-class budget, right?
Ok, ok. I’m picking on houses. Let’s go with a car. You get to a point in which you need a car and can afford it, at least partially. You find the car of your dreams and then ditch that idea because it’s too expensive (again this varies wildly by country). Then, you look around for cars “in your price range”. The salesperson immediately makes the case that you can paint it in gold if you want and put unicorns on top and select 300 extras which do not show up in the base price of the car they lured you in with. You decide to buy.
Did you know that the moment the car leaves the car stand, smelling like new, and shining all over, it loses 50% of its value? Yes, half of the money you paid for the car is gone. If you try to sell it immediately, that is. That 50% is the beginning of the depreciation that all objects have, but which is highest in objects like cars and electronics (a computer usually depreciates its full value in 3 years in case you were wondering).
I’d reckon that the only reason why cars are not mostly rented (like houses) in many countries, is because the big rental companies (Hertz, Avis, Europcar, Budget, etc) have calculated that the risk of renting a car and there being a problem with it upon return is not worthwhile (which is also why they make it so painful to rent a car for a couple of days as well). But then Uber and Lyft come along and all of a sudden, even in cities without a proper network of mass transportation, you see people buying fewer cars and just “renting” the service when they and if they need it. It certainly makes more economic sense, given that most cars are parked for over 95% of the time.
I used to be all for renting stuff. It’s better for the environment, it’s better for your wallet, it’s more flexible as our lifestyles demand nowadays. But recently I thought about the longer term effects of this and have been changing my mind. How far away are we from renting our time (with an appropriate hourly rate whilst freelancing) or renting a movie to play on a device or renting a surfboard to go and catch some waves. Or what about renting your bedroom while you’re not there? Or renting your shoes? This can stretch as much as your imagination can go along this line of thinking. And this may be fine for a lot of people, as I mentioned before millennials care more about experiences than stuff and renting is much better fitted to that. But will they want they all of their lives? What happens when they hit a rough spot and stop making money? Where will they sleep if the rent is late? Or who will they call if the phone bill was unpaid? What will they prioritise? That or food? And in a consumerist society, in which you need a very strong willpower to not buy things day in and day out, how will that work out? But that is for the individuals to decide.
The main reason why I’ve been changing my mind is the why. Why are we renting more and more? It’s because we can’t afford it anymore. The divide between the rich and the poor is settling along the lines of own vs rent. The rich own and rent out to the poor and with that money the rich pay for that property/thing and buy another one to rent to yet more people. Rent seeking is nothing new, but it’s becoming way too obvious and generating too much inequality. Because while the rich become richer, the poor cannot get out of their cycle because they cannot save.
How long until we the majority of people, tired of not being able to get out of the rat race and feeling like they’re going nowhere, start protesting? When will public authorities start thinking about imposing reasonable limits on Airbnb rentals, on the ratio of rent and house value and other measures like that?