To Buy or Rent a Home: What is the Best Course?

19 December 2017

Many people decide to buy a house because monthly rental costs are close to mortgage payments. Is it a good deal? Maybe … but often it isn’t. The economists Nelson Camanho and Daniel Fernandes, authors of “The Mortgage Illusion” – an award-winning research paper – show that many decisions are made too hastily.

Buying vs renting is a financial decision that most families have to make, and the truth is that in the end, many people opt for buying a home. The majority of buyers only compare the cost of renting with the amount of the corresponding mortgage instalment. Dinheiro Vivo spoke with the authors of ” The Mortgage Illusion, who are both professors at the Catholic Lisbon School of Business and Economics. Both concluded, through research and experiences, that there are many people to let themselves be led by this illusion.

“Deciding for these reasons is a mistake. Because if the house is a bad deal, it will continue to be so even if the loan payments are the same as what would have been paid in rent,” Nelson Camanho argues. Why is that? Because a loan will always include interest and the term of the loan. A longer term makes the monthly performance competitive, and that is where you can hide a potentially bad deal. For the authors, the problem is that people try to compare two variables that are not directly comparable.

Rental costs are not competitive

The truth is that the value of rents has skyrocketed across the country, a factor that has led more and more people to decide to buy homes. The president of the Portuguese Association of Realtors and Real Estate Agents (APEMIP), Luis Lima, acknowledges that the Portuguese have “an ingrown tendency to prefer homeownership”, but also argues that home buying is driven by high rents.

In an interview with the publication, Luís Lima stated that to “compete with buying,” the value of the rents should be 30% lower. The head of the association believes that people opt for purchasing homes because they will own the asset from the beginning. However, he did not fail to point out a caveat: “If people do not have the money to pay the loan, they will lose the asset and the house they were living in.”

“To be appealing, the value of rents would have to be about 30% lower than that of the corresponding monthly instalment. When values are equal, people prefer to buy. Especially the Portuguese who have this natural affinity for homeownership,” Mr Lima said.

Original Story: Idealista

Translation: Richard Turner