Money | Should you buy a house?
That depends on if you want to bet your future on your local housing market.
Are you just throwing away money when you rent? No you aren’t. You pay a premium so that somebody else takes risks, commitment, and hassle away from you. Is it a good deal for you? We are taking three different lenses to help you answer that question.
Also, just to be clear, this is not financial advice, this is some guys sharing tips they heard from some other guys and gals and AIs.
Three different lenses
The rent lens
As a rule of thumb, you shouldn’t buy if the rent-equivalent yield (yearly equivalent rent / house price) on your house is low (<5%). If that’s the case, you’re probably better off just investing your money elsewhere and paying the rent. The more detailed view:
Estimate your mortgage: You care about three numbers: How much you have to put down, how much you get, and your interest rate. This takes a few minutes in an online calculator of your local bank.
Plug it into a calculator: We won’t cover everything in one blogpost. Luckily other people did. Try this one as a good comprehensive one or these ones for country-specific calculations.
Understand sensitivities: Calculators give a false sense of certainty. Play with the assumptions and see how it changes. Which factors have the largest implications? As you’ll probably see, home appreciation is a very large factor. Because leverage.
When using the calculators, it’s important to check if they use local inventive schemes. In the UK, one option is the Lifetime ISA, where the government adds a 25% bonus to your savings, up to £1,000 per year, which can be used towards your first home or later life. It’s easy to miss, but it could save you a significant amount of money.
Cameron
The leverage lens
Buying a house is this weird exception where most people can get loans vastly larger than they would otherwise have access to. This means you take a large financial bet that probably has larger implications than any other factor in the calculations.
Create scenarios: Which factors would lead to your house price to grow beyond today? Migration? Local regulation? A conflict? Change in desirability of your location? More or fewer houses being built? Demographic change?
Diversify: The best hedge to the downside is diversification. Do you have enough capital or income to diversify away from “just” your house? This lowers the implications of your bet going sideways. If not, it’s probably not worth it.
Mortgagemaxx: Instead of optimizing for the highest absolute mortgage and being undiversified, try optimizing for high loan-to-value (LTV) ratio. Get high leverage for little input, and use your remaining capital to diversify.
The lifestyle lens
This might be a lazy way out but ask yourself: In your price segment, do you value the idea of homeownership more or less than the average person? If less and you can assume a somewhat efficient market, it’s probably not worth it for you. What determines that preference?
Loss aversion: The happiness you gain from increasing your net worth by 50% is much smaller than the pain of losing that same amount.
Move: How likely are you to move in the next 1-5 years? For a job? For love? For family? For children? The one-off transaction costs (both in money and in your time) are often not worth it if this is a serious possibility.
Emotions: What comes up with this topic? Anxiety for financial commitment? FOMO when all of your friends get high returns on their house? Being aware of the driving factor can help you assess the situation more calmly.
For me the biggest emotion driving this is some kind of fear of missing out. Working hard to make money and then just seeing some friends making tons of money on their house because it went up in market value always feels rough.
Christoph
Things to get started
Try one of those house calculators, they’re easy and fun
If you’re actually thinking of buying a house, book a call with an advisor
Commit to doing these things by betting money on it
Missing something? Add a comment and we’ll add it to next year’s version