To buy or to rent? The new math By Shelley Emling International Herald Tribune
Published: October 6, 2006

Kim Blasberg, an American working in London, has become an old hand at the rent-versus-buy debate. After renting an apartment in Putney, a suburb southwest of London, for 18 months, she has finally decided - she thinks - that she wants to buy property now that she is certain she will be here for a few more years.

But she sees the pros and cons to both sides - especially in her adopted home city.

"It is much better to buy than rent if your horizon is three years out or more," Blasberg said, "and if you are looking in an area of town that has not already profited from huge gains in the market, such as East London."

On the other hand, Blasberg said, rising interest rates could make buying seem risky, while the one-time fees associated with buying could easily price someone out of the market.

"Even so, I feel it is still better to buy," she said.

Blasberg's Hamlet act - to buy or not to buy? - is being performed more frequently at kitchen tables and real estate offices around the world. That is because the math associated with the rent-versus-buy debate has grown a lot fuzzier lately, and the numbers threaten to swamp long-held convictions about the value of buying property.

Measured by cash flow, the cost of renting seems cheaper than buying: Even without the need to scrape together a down payment or pay closing costs, the monthly outlays of not only the mortgage payment but also local taxes, insurance, utilities and maintenance in many markets have actually tilted the balance toward renting rather than buying.

Historically, though, home ownership has been seen as being about more than just money. A home has been seen as social currency, a symbol of status and stability, while renting has been viewed as more of a steppingstone used by the poor, the young and the mobile.

More important, homeowners have thought of their properties as sound financial investments they can one day pass on to their children.

But today, with rising interest rates reflected in higher rates on mortgages, with house prices softening in many markets but not yet hitting bottom, and with higher tax assessments lifting the cost of ownership beyond more households' ability to pay, more people are deciding to rent - at least until market conditions improve.

"In general, with prices so high and the cost of turnover so high, almost everyone is making much more considered decisions when thinking about whether to buy or to rent," said Matt Hobbs, a rental agent at the Savills real estate agency in London.

In fact, in cities around the world, a stronger rental market has pushed rents up 3 percent to 5 percent this year, according to RealFacts, a California-based company specializing in multifamily housing.

In the United States, rents in many cities have increased 4 percent to 6 percent this year, and are seen as likely to increase next year as well.

James Gaines, an economist at the Real Estate Center at Texas A&M University, said the rental market was picking up in countries where interest rates are rising - which includes most of the developed world - and lenders are tightening up in the face of rising default and foreclosure rates.

About 115,292 properties entered the foreclosure process in the United States in August, a jump of nearly 53 percent compared with August 2005, according to RealtyTrac, an Internet site that tracks foreclosures. That, in turn, is creating a greater number of households that cannot qualify for a mortgage and therefore seek rental housing.

"We can expect to see the lenders hit the market with deals and specials," Gaines said, "but I think we can also expect them not to go back to the very easy underwriting practices of the past three years. They are getting a little leery of the relatively high risk level that some of the portfolios have taken."

The rise in rental activity, he added, "comes down to basic home-cost economics that now favor renting rather than buying."

As housing becomes less affordable for many buyers, the inventory of houses for sale has reached levels not seen in years. Some 570,000 unsold homes were recorded in August in the United States, a record level. As a result, house prices have started softening - not the kind of market many prospective homeowners want to be buying into.

"Inventory levels remain high and the critical issue is whether potential home buyers believe that market prices represent a 'fair' price or whether they need to come down further," said Chris Lucas, a research analyst at Robert W. Baird & Co., an investment bank based in Milwaukee.

Dairin Garnier, a rental manager at Henry & James Estate Agents in London, said that rents in central London had climbed 5 percent this year, a reflection of increased demand at all levels, even the highest: A penthouse in the posh London neighborhood of Knightsbridge might rent for £15,000 to £18,000 a week, or $28,000 to $34,000.

Garnier said property prices had risen so much in London - in the most desirable neighborhoods prices have risen more than 250 percent in the past 15 years - that many people have sold to real profits, only to find that, in space-squeezed London, there is nothing on the market to put those profits back into.

"People are turning to renting until they can find something" to buy, she said.

Even in places like Hong Kong, where there is a long and deep tradition of home ownership, renting has become more palatable. Over the past five years, property prices have risen by 2.2 percent a year in Hong Kong while rents have fallen by about 1.9 percent a year.

"We believe the market between buying and renting is relatively balanced at the moment," said Kenneth Tsang, head of research for greater China at Jones Lang LaSalle, a real estate consulting firm in Hong Kong.

The fact that rents in Hong Kong are about 20 percent lower than the cost of owning the same property accounted for much of the interest in renting, Tsang said. "A lot of potential buyers on the market are taking a wait-and- see approach," he said.

Even in markets where property prices have been stagnant, renting might make more sense than buying, according to some experts.

Noel Whittaker, a joint managing director of Whittaker Macnaught, a financial services company near Brisbane, Australia, said the property market in Australia was flat and forecast to stay that way. Meanwhile, the share market is at a record high.

"It's not hard to see why so many young couples are debating whether they should rent and invest elsewhere, or simply get into the housing market now and try to make some headway with the mortgage," he said.

"In most locations it's always cheaper to rent than to buy, and there is really no reason to rush into the property market unless you see prices start to surge," he said.

Whittaker cited the example of a property that costs $300,000 and which can be rented for $300 a week. "If you rent it, the total cost is $15,600 a year," he said. "But, if you buy it, you will be up for at least $24,500 a year when you take interest rates and maintenance into account." That's nearly $9,000 a year in favor of the renter.

A couple that rented for two years "will have an extra $18,000 to use as a deposit when they eventually do buy," he said.


Related website:
RealFacts
Real Estate Center at Texas A&M University
Is It Better to Buy or Rent?
Yahoo: The Buy vs. Rent Decision
Renting vs. Buying Calculator
Rent vs. Buy Calculator
Bankrate.com  ¶ 1:53 AM