Buying versus Renting – Determinants of the Net Present Value of Home Ownership for Individual Households
39 Pages Posted: 19 Dec 2014 Last revised: 14 Nov 2016
Date Written: July 8, 2016
The tenure decision upon whether to buy or to rent accommodation has long-term consequences for households’ financial wellbeing that influence macroeconomic development and stability when the cumulative effects of individual decisions are aggregated across populations. The author explains how the net present value (NPV) of ownership versus renting can be used as a framework for informing housing tenure decisions. Increases in holding periods, inflation and the spread between imputed rent and the opportunity cost of household savings shifts the balance in favour of ownership. With plausible assumptions the model demonstrates that households typically need a holding period of between five and ten years to achieve a breakeven NPV. The findings support the conjecture that inflation transfers wealth from renters and mortgage providers to owners, whereas deflation reverses the flow until rising default levels establish a new equilibrium.
Keywords: House Prices, Real Estate, Valuation, Household Finance, Integrated Household Welfare, Tenure Choice
JEL Classification: D1, D84, G10, G12, G14, L85, P36, P46, R21, R31
Suggested Citation: Suggested Citation