Property is the world’s biggest store of wealth.
Founded in the U.K. in 1855, Savills is one of the world's leading property agents. According to their annual global report, the value of the world’s real estate in 2020 (as reported in the September 2021 report) was:
- Real Estate (commercial, residential, agricultural land): $326.5 trillion
- Debt securities: $123.5 trillion
- Equities: $109.2 trillion
Real estate is the most valuable asset in the world.
And buying a house is perhaps the biggest financial decision for most people. It is also a highly emotional one. Hence, when it comes to such decisions, you cannot rely totally on the numbers.
Nothing will drive my point home better than some real instances.
I know a young couple who lives in Bandra West, Mumbai. From a real estate point of view, this is an expensive location and they spend a fair amount of money on rent. What’s interesting is that they own a house in Navi Mumbai, which they have leased. The rent they earn (from the Navi Mumbai house) is way, way below the rent that they pay (for the Bandra house).
If we look at pure financial considerations, the clichéd “rent is money down the drain” argument comes into play. Logically, they should be living in their own house and investing all the money that they spend on rent.
However, investing is not all about logic and numbers.
Their decision is not based purely on the financial aspect. They have family and friends living in and around Bandra. They find it more central when it comes to travelling on work. They like the social aspects of living there as well as the convenience. Staying there gives them fulfilment and a sense of contentment. They can afford it. Both are earning. Zero debt. No children.
Neither do they plan on retiring in Mumbai. So building a community in Navi Mumbai is not on their radar.
Now let me narrate the example of a lady who works in a salon in Mumbai. Her husband is an electrician. This is what she told me.
They were staying in a one-room house paying Rs 6,000 as rent. They decided to buy a small 1-bedroom, but it would be a monthly outdoing (Equated Monthly Instalment, EMI) of Rs 15,000 for 15 years. Difference of 9K, which was a significant amount for them. But they also realised that 6K is a lot to “give away” every month.
So they decided to buy their own home. They worked hard, cut down extra expenses and put all “extra earnings” into prepayment. She said once they decided the route they were going to take, they made it their focus. No whining. No crying. No comparing. No unnecessary spending. No feeling ashamed asking for odd jobs to help prepayment. They never lost track of their goal. They paid off the entire loan within 10 years.
She explained to me that the security she got from owning her own home was absolutely precious. During the pandemic, when they struggled to make ends meet, it was the mortgage-free home that she owned that made her feel secure and safe. For someone who is financially insecure, a home is the best safety you can buy.
Morningstar’s director of personal finance and retirement, Christine Benz, once related a very interesting situation. A newly divorced friend in Chicago asked her for advice on whether she should buy a home. Christine replied by asking her another question: “Do you like owning a home?"
The friend wanted financial advice. But Christine responded by encouraging her friend to dig deeper into the emotional aspects of home ownership at that point in time. Do you mind having to deal with repairs when they come up? Do you feel like you would get to know your neighbours better if you were a homeowner? Are you certain you want to live in this area for many years? Can you afford to buy a house at a locality where you have a community? What is it you like about owning a home right now? What is ownership going to give you that rental does not?
Those who advocate rent to the exclusion or owning a property, or vice versa, are deeply undervaluing the emotional aspect of owning a home.
The decision of whether to buy or rent is not purely a financial decision. Look beyond the numbers.
One of the biggest misconceptions is that money is all about math. There are numerous intangible factors that come into play. And you cannot put a number to it. For some, it is quite primal to have roots somewhere, a place called home. For others, the freedom and flexibility offered by way of rental is much more valuable.
Yes, there will always be the financial aspect. But there are also social and emotional considerations. That is why these decisions are very personal. There are no cookie cutter solutions or one-size-fits-all answers.
Renting isn't inherently "throwing money away." It can often be the right call when you take into account non-financial considerations. If an individual only plans to live in the city for a few years, why should she purchase a home there? Or, if she wants to live in a specific locality but cannot afford to buy a house there, renting gives her the option to live where she wants to. Or, if she eventually plans to retire in her ancestral home in her home town, she would prefer renting in the city she is employed in.
No one should buy a home purely for financial reasons as some quality-of-life considerations are central to the thought process.
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