Rent or Buy? Well, I bought a house.

The decision of whether to rent or buy a house is a real obsession in the Personal Finance world. I’m going to tell you why I’ve shifted sides in this debate, just as renting seemed to be getting more popular. I am contrarian like that.

Of course, let me highlight that having the choice between renting or buying, in itself, represents some incredibly good fortune – which must be acknowledged, even if it’s not the main driver of this post. And to be clear, I’m not just saying that to be politically correct. I genuinely believe that a larger awareness of your context makes you a better decision-maker, as well as a nicer person.

The House Rules

The heart of this question is a basic fact: shelter is an essential human need, and it has a price. Not every human need has an observable price. Oxygenated air, for example, is free. But shelter? You can price it.

In our modern Capitalist world, there are essentially two ways of meeting that need:

  1. A Permanent Right to Shelter – that is, you can buy a Title to a piece of land, and the building atop it, to reside in indefinitely.
  2. A Temporary Right to Shelter – that is, you can rent the right to reside in the building (and land) from someone that has already bought the Title.

Just looking at these two options, it seems pretty intuitive that a permanent right would be better than a temporary one. It would be more secure.

But I could present you with a choice that might change your mind:

  1. The house costs $1 million to own.
  2. If you join a 2 year loyalty program for a subscription fee of $100 per month, you can live in that house for free.

In that scenario, would you take what is almost free accommodation for two years?

If no, then this post is perhaps not for you.

If yes, then we’ve agreed that you’d rent at the right price (which is what the loyalty subscription represents), and now we can discuss what makes for the “right” rental price.

But even if price doesn’t convince you, here is another scenario that might:

  1. The house costs $1 million to own.
  2. The house can be rented for $100 per day.
  3. You’re emigrating to Australia next week Thursday

Would buying a house for a week’s stay make sense?

One more:

  1. The house in walking distance to your office is on the market for $1 million. You can’t afford to buy it today, but you can afford to rent it.
  2. A much less nice house costs $100,000, but you can afford to buy with your current savings. It’s in a terrible area, and you’d take over an hour to get to work every day.
  3. Your grandfather died recently, leaving you a cash fortune of $5 million in his will. Once the estate is closed, you can take the money and buy the better house outright.

Would you wait?

For me, these examples illustrate the boundary markers of the decision:

  1. Expensive permanent residency is not always better than cheap temporary residency – even when you’re talking about the exact same building.
  2. A need for temporary residence works better with a temporary residence right.
  3. It’s better to settle where you want to settle permanently, rather than settle permanently for what you can only afford right now. (Within reason. If you’re holding out for a palace, then unless you’re a prince due to inherit one, you’re probably dreaming. We’re not here for unrealistic dreams – just probable ones.)

While we’re here, I want to emphasise that I’m using a term like “residency” because it’s not so emotionally loaded. We’ve been marketed into thinking that home ownership means success while renters are second class citizens. That is not helpful at this point in the discussion. It may be relevant a little further on.

With these scenarios in play, I think you can see why the “Rent or Buy” decision is so vexing for most of us. The problem is multidimensional while the choices are binary.

So how do you make this decision?

My suggestion is that you start with the easiest question first: “Do you want to move some place else any time soon?”

If yes, go straight to the “For Rent” section of the classifieds.

Anything else, and then you can start doing some calculations to compare the cost of buying with the cost of renting.

What are you even trying to calculate?

Please note, we are not trying to calculate the answer. We are trying to calculate the question.

Bear with me while I explain what I mean. Let’s say that you are trying to figure out whether to buy a suit jacket from your local boutique store here in South Africa, or whether you should order it online from Europe. The jacket costs ZAR 3,000, or you can order it online for EUR 200.

Which is cheaper?

If I just compared the number 3,000 with the number 200, then you’d obviously buy the lower number of 200. It’s the cheapest.

“But!” you exclaim “These are different currencies – you need to compare using an exchange rate!”

That is exactly right. I need compare those numbers in the same currency. So either I am going to convert the local ZAR 3,000 price to euros (that would be around EUR 155 as of the time of writing – so this is clearly the cheapest); or I am going to convert the online EUR 200 price to rands (that would be around ZAR 3,900 at the time of writing, so local is still lekker).

This is comparing apples with apples.

The rent or buy question faces the same measurement problem. “Rent” is measured in monthly lease payments, while “Buy” is measured in house prices.

And these aren’t really the same “currency” either. Renting is in the currency where you have no upfront costs, no taxes, few (if any) maintenance responsibilities, and nothing to show for your payments at the end. Buying is in the currency of heavy upfront costs, ongoing rates and taxes, full maintenance responsibilities, and (hopefully) something to show for your payments at the end.

So before you can even start thinking through this decision, you have to make sure that you have got the question right. And that means, either:

  1. You compare the monthly cost of renting with the effective monthly cost of home ownership; or
  2. You compare the effective home value of the rental payments with the price of the property.

This is a tricky translation to get right. Some folks might say “Just compare your mortgage payments with your lease payments.” While that’s a reasonable starting point (and I mean that), what is missing is all the hidden costs of home ownership. In South Africa, those can easily be in the region of 25% to 30% of the house price (that’s my lived experience, and it hurts).

I recommend that you find a good rent-or-buy calculator to help you figure this out. I’d refer you to my old calculator on RollingAlpha, but that one needs a bit of an upgrade. In the meantime, if you’d like some help with these numbers, you’re welcome to find me on LinkedIn.

But I don’t want to get too fixated on the numbers, because while you need them to have a clear view of the financial implications of your decision-making, they are only a starting point.

Even if they are such an important starting point to get right.

Why are the numbers so important?

In some situations, the numbers make this decision a no-brainer. South Africa is a really good example of where this happens quite frequently. If you’re not in South Africa, read through this section anyway – it’s helpful to have these kinds of contributing factors in mind for your own context.

In South Africa, the transaction costs of home ownership (transfer duty, regulated conveyancing and bond registration fees, estate agent commissions) are simply far too high. Sure, they’re limited for homes valued below R 1 million. But let’s be plain about this: if you’re facing this decision, a R1 million home is not where you want to live. Your middle class status is not something that our tax system can afford to incentivise – you’re in the taxpayer class that needs to help lift millions of South Africans out of poverty. That is an unfortunate fact.

It is also clear that the Central Bank’s target of controlling inflation can only be met with higher interest rates (under its current framework). It’s a blunt tool, but about the safest tool for central bankers to leverage. The practical reality is that this also is a tax on home ownership. It may be paid to banks, but the base rate is intended to disincentivise your spending by confiscating your disposable income. This is another unfortunate fact.

New homeowners are then subjected to credit testing to see if you can even afford the mortgages in the first place. Banks are aware of the high transaction costs, so they usually insist on a 10% downpayment and proof that you are able to pay the transfer costs. That 10% downpayment is there to give the bank a loss cushion, and to cover their own transfer costs if you default. So you’ll need to have +/- 20% of the value of the house available in cash in advance. Yet one more unfortunate fact.

These effects compound together into more hidden costs that are quite difficult to measure. But you can measure what drives these hidden costs, because they are often the result of long-listing times (which are, in turn, an outcome of high costs of home ownership).

The price of neglect

Average listing times for a home in South Africa are reported as 10 to 12 weeks, and are often said to be coming down. But this always strikes me as a sleight of hand. There will always be some properties that are in high demand and move quickly. These short listing times affect the average. But if you look at FNB’s property statistics (the January 2023 report is here), you will notice that 49% of homes have taken longer than 3 months to sell. That proportion has been increasing for over two years.

Why is this an issue for hidden costs? Well, the likelihood is that most folks who are selling their homes are going to stop investing in them. Electric fences will degrade. Gardens will overgrow. Leaks will be left unattended. There might be some superficial effort for show days – but you cannot escape the reality that once the decision to sell has been taken, any further costs are a “sunk cost” for the seller. The longer this sale period continues, the more neglected the home becomes.

Then remember that even once an offer is accepted, you are still three or four months away from occupation. So most homes face a maintenance window of at least six months prior to occupation.

Once you arrive fresh on the scene, having had to hand over 20% or more of the value of the house during the transaction, then what budget would you have for all those urgent home repairs?

My guess is less than no budget. That maintenance gap could last for years. And the longer it continues, the more expensive it becomes to get it right.

For example, you can paint over a ceiling leak and avoid waterproofing the roof. It’s cheaper in cash terms. But today’s saved waterproofing bill is tomorrow’s to do list of replacing the ceiling and the rotted support beams, and fixing the damp.

These considerations help to get you to the full picture of the cost of home ownership. Upfront costs are the most cash-flow heavy. Deferred costs are the most expensive.

You have to take those costs into account. And they are nowhere to be found in a mortgage bond quote.

But wait a minute – didn’t I just buy a house?

I did.

And I incurred all those costs, and then some.

So let me explain why I’ve shifted to thinking that the costs will probably be worth it.

First off, home prices have remained fairly static in Rand terms for almost eight years now. And in USD terms, home prices have absolutely tanked, meaning that property in South Africa is now cheap. That doesn’t necessarily mean it’s good value for money – but at this point, let’s just agree that it’s cheap in comparison to the rest of the world.

In addition to this, right now, with the waves of emigration, some home owners are being forced to discount their housing prices to account for all those high transaction costs. This is particularly pronounced in the higher-valued properties, which are worst affected by high transfer duties and large down-payments.

We’re talking discounts of around, oh, 20% or so.

So at least on paper, a chunk of the upfront transaction costs is being absorbed by the seller. That’s what happens in a buyers’ market when the transaction costs are high.

Why is this impact most pronounced in higher valued properties?

(Apart from all those high transaction costs)

The engine of the housing market is really shifting stages of life. It goes something like this:

  1. Young couples and professionals buy their first flat in their early 20s.
  2. With the first baby and/or big promotion, they upgrade to a small house in their late 20s.
  3. With growing kids and/or executive promotions, they upgrade to their “aspirational” homes in their late-30s, that will be their family home.
  4. At retirement and/or once the kids leave the house, people downscale into smaller homes that are more convenient.

Here’s the trouble: with the loadshedding and the riots and a general disenchantment with South Africa, the folks in category 3, with their in-demand skill-sets and concerns about their young families, are the ones most likely to opt out. Instead of an aspirational upgrade, many of them are making sideways moves instead into the greener pastures of Australia/the Netherlands/the UK/the US/etc. There is a gap of those buyers in the market.

But there is no gap in the passage of time. There are still the folks in Category 4, looking to downgrade. Much loved family homes, that have been cared about for decades, with a real concern for the longevity of the improvements, are coming onto the market – and the professional class are either moving abroad, or are pragmatically renting in case they decide to make their move sometime in the next year or two.

So this means that there are aspirational homes available, that have been well-maintained and cared for, with not enough buyers. And the market has forced those sellers to absorb the costs of transfer into a discounted price.

As a contrarian, this makes the situation quite attractive. Market sentiment is extremely pessimistic. The question to ask is “Perhaps too pessimistic?”

Possibly. But not for the reasons that you think.

I absolutely expect the State of the Nation to get worse

Loadshedding is here to stay: it can’t be fixed in time. And we’re starting to deal with the fall-out in other utilities as well. Water is a classic example: recently, parts of Johannesburg have had days of no water due to the impact of loadshedding on the City’s reservoir systems.

Even as a long-term renter, I had planned for this.

Four years ago, I made the choice to move out of the security of a residential complex, and into a free-standing house. I wanted to have enough space to install a large water tank in the garden, and I wanted to avoid negotiating the installation with a sticky body corporate afraid of setting precedents. I would also eventually need to have the space for a generator. And I especially wanted to have some space between me and my neighbours, so that I would be able to tolerate the sound of their generators when they eventually arrived. Even the stickiest body corporates are going to have to give in to them. Solar and the high cost of fuel will help to mitigate some of the generator usage – but you will still have neighbours who want full back-up solutions, and solar just isn’t capable of that.

So water tanks and generators are going to be the reality of South African life. They are already the reality of life in our neighbouring countries (Zimbabwe, Mozambique, Malawi, Zambia, etc).

At first, I tried to share some of these off-grid activation costs with a landlord. Landlords do not like to pay for this scale of improvement, even when subsidised. The water tank installation was a precondition for a 2 year lease extension; but after 8 months, we went to arbitration, and by the time the installation was done, I too was done.

Most folks are not yet alive to this new reality. Renting is fine for maintenance, but it is not good for fundamental improvements.

And this is also the place to emphasise that apartment buildings and residential complexes are not good for generators and water tanks. Solutions will be found, of course – but not quickly.

To me, those well-located, detached family homes felt like a really good hedge of your bets:

  1. If things improve, aspirational homes will recover from their dip;
  2. If things get worse, aspirational homes will become more desirable for a much more practical reason: the ability to be freely self-sufficient, with minimal inconvenience.

And even if things do get worse, as homeowners build resilience into their properties, the inconvenience of infrastructure will begin to fade away.

South Africa has a great climate, and a really low cost of living. We have great healthcare, excellent restaurants, good private schools, well-connected airports and a thriving art scene. We live in a post-Covid world where folks can work much more remotely. Tourism has recovered.

The SA pessimism won’t disappear – but it’ll probably be more balanced. Because life is pretty sweet here once you have a solid inverter system, a backup generator, and a water tank. And that’s especially true when you’re well situated and work from home a few days a week.

This is not a roadmap that I’m inventing. Our neighbouring countries have been through far worse, and you should take a look at their property prices in affluent areas. They’re certainly not “cheap” by global standards.

And they have less to offer.

This has really been the driver of my own long-term decision-making as well.

I’ve stopped worrying about whether I’m going to move to Europe. I’m not going to. I’m invested in what it means, and will mean, to live here in South Africa, indefinitely.

Once I’d made that decision, everything else became sort of obvious. Although it still needed to be pointed out.

Enter: my Dad

In July last year, my objections to home ownership were really starting to crack. I was about 8 months away from a lease renewal, and after three years of no renovations and barely any maintenance, I knew I’d have to move. At the last lease renewal, I’d asked for the kitchen floor to be fixed. The landlords decided to paint the concrete. Even the handyman employed to do the work was confused. And this was separate to the arbitration process around the water tank.

I guess you’d call this the hidden cost of renting – which certainly deserves its own post.

Dad had noticed the cracks, and so he went on a hunt to find me a house. Eventually, he shared a listing over Whatsapp, then called repeatedly until I answered him, at which point he made me look at the listing while he waited on the line. He then called repeatedly that day until I’d arranged to see it, and then repeatedly until I’d seen it.

He was right. You don’t want to rush into these things, and say that the house was perfect. But, it was within throwing distance of it. A little unloved by the time I saw it, yes. But that’s a fairly minor problem, all things considered.

As a side note, I do think that we underestimate how good parents are at knowing what their children need. It’s no doubt why arranged marriages often work. As humans, we’re pretty terrible at forecasting what will make us happy – but parents have learned from their life experience what they need, and given the extraordinary genetic and environmental influence they have on us, they have a particular and specific insight here.

So I put in an offer on the house. And Dad insisted on helping with those extraordinary upfront costs. He helped with the initial deposit. And four days before he died, he wired me the funding to pay for the transfer duty.

This is where home ownership takes on a particular quality that you cannot replicate with renting. For all its risks and costs, the Title of home ownership has the power to be an enduring generational gift.

Rational Decision Making when it comes to “Rent or Buy”

The financial decision-making strips out the qualitative factors to make your cost calculations “rational”.

But once you are done with those calculations, it is only rational to factor back in the qualitative.

I stand by all the financial observations that are in this post. They were a fundamental part of the decision-making. My own Rent or Buy Calculator basically screamed “BUY” at me. I’ve gone back and sense-checked it again now that I’ve paid my hidden costs (at least double what I’d budgeted, and my first budget was generous). The calculator has stopped screaming and is now just politely affirming my decision – even if it is also silently pointing out that I have installed and upgraded everything that I would need, all at once.

But I cannot deny now that my home carries a resonance for me that is far greater than any of my calculations. It was the gift of my dad’s love for me, and the full expression of his concern that I would one day reach a point where my right to shelter would be perpetually met.

It has also reminded me that when we acquire the right to a permanent home, then that also becomes our gift to give.

And my guess is that, deep down, it’s why we romanticise this life goal.

Long term home owners are investing in a home and a neighbourhood; while both renters and short-term home-owners are making a fairly pure financial decision and will move when they can afford to do better.

I can’t really deny that. It’s why I’ve found renting so attractive for so long.

And I still believe that renting is better than buying when you hope to leave your place of residence once you can find a better alternative.

“rent or buy or Buy?”

This all brings me back to the original binary question: “Rent or Buy?” I think it’s a bad question. It would be better to ask “Short-term rent or short-term buy?”

Because that’s a real financial decision.

Beyond that, you are Buying rather than buying.

That is: at that point, you’re actually engaged in a debate around what is the most cost effective way to achieve long term home ownership. And the decision to own a home is already made, and makes sense for you.

And one more thing

My original rent or buy conclusion went something like this: “When it is clear that renting is so much cheaper than home-ownership for the kind of home that you want to live in – it’s better to rent, save the money, and buy the house you want to live in long-term once you can afford to pay for it.”

This conclusion still feels right to me.

Ten years ago, I would have been able to buy a small flat in an area that I did not want to live in. Instead of doing that, I rented a cottage in an area where I wanted to live, and I invested the savings elsewhere.

Ten years later, I was able to afford a mortgage on a family home in an area where I had always wanted to live, all within the same 3km radius of where I’ve situated myself for the last decade.

Could I afford it?

Well, my dad helped me shortcut the process. I would have needed to liquidate some of the investments that I had been building. He helped me keep both.

So in that, I have been incredibly blessed to have arrived at this point, in the way that I did.

But it also a strange feeling to look back at, and realise that I’ve somehow done what I’d encouraged my readers to do. And while I’d love to say “I told you so” – I’m mostly just relieved that I can point to one example where it has sort of worked. And I hope for everyone reading this that you might have someone looking out for you the way that my Dad did for me.

And finally, I hope that I can also say the same thing about this post, in 30 years time, when I am looking to downscale!

more insights

Diary of an Impact Executive

A better business model

The world needs a model for doing business where positive multiplier effects are natural and self-reinforcing. We think we’ve found a way to do that.

Read More »
The Good Life

Working Through Grief

Even when life ends for a loved one, our working lives will carry on. The time to mentally prepare to go on with the show is…right now.

Read More »
Money is backed by everything
Rethinking Economics

Money is backed by everything

Money is backed by everything, and by nothing, and by whatever you want. It’s the piece of string whose length is as long as you want it to be. That’s a good thing.

Read More »