Rent or Purchase

Granted that the discipline of economics assumes rationality on the part of most individuals most of the time, there are still a large number of myths and legends that inform people's action in markets. Reading through David Leonhardt's piece in the NYT reminds me of one that is most pervasive. Several months after the economic crises that engulfed most of the economies whose citizens earn high incomes, it is still taken as an article of faith that home ownership is much preferable to renting at any time.  I find that it is just so difficult to convince people that rental and ownership are alternatives that are dependent on the circumstances both of the individual and the overall market conditions.

In the piece, the author states that rental versus outright ownership requires a rough calculation of the ratio of rental to that of purchase. While it is not an iron law, it easily demonstrates that by dividing the purchase prices to the annual cost of rental is a good guide about the better decision to make. An index beyond 20 shows that the rental may be a better decision on the margin than ownership. So the instinct to purchase and be a home owner is strong but that should not make one opt to own a house by all means. And this is not advise that only favours the individual who is considering purchase because the same index suggests that an owner may sell to an unwise buyer when the ratio would call for renting instead.