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

See all articles by Isaac T. Tabner

Isaac T. Tabner

University of Stirling - Accounting and Finance Division

Date Written: July 8, 2016

Abstract

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

Tabner, Isaac T., Buying versus Renting – Determinants of the Net Present Value of Home Ownership for Individual Households (July 8, 2016). International Review of Financial Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2539630 or http://dx.doi.org/10.2139/ssrn.2539630

Isaac T. Tabner (Contact Author)

University of Stirling - Accounting and Finance Division ( email )

Accounting and Finance Division
University of Stirling
Stirling FK9 4LA, Scotland
United Kingdom
44 (0) 1786 467305 (Phone)
44 (0) 1786 467308 (Fax)

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