It’s not uncommon, every few months, to hear of the rent-buy debate pick up in NYC real estate, whether it be catalyzed by a shift in interest rates or a change in prices. Usually, people point to the merits of one over the other based on financial ratios and long-term investment prospects. Well, we’re here to make a different case. We’re here to make the claim that renting has allowed far too many tenants to live way beyond their means … and, therefore, it represents for many the financially aggressive route.
We have all read the headlines that homeowners, lured by zero percent down loans or no income verification, were enabled by our financial system to purchase homes that they could otherwise never afford. And this is all true. We also know that homes became families’ ATMs and allowed them to stretch their wallets far outside of the boundaries of responsible spending. This is also true. But financial irresponsibility comes in many shapes and sizes. Few have criticized the rental decision as the financially unsound choice from this perspective.
Conventional wisdom states that, when in doubt, renting is the fiscally responsible path, that it allows you to remain conservative, not take big risks and save your money. Not so. At least, not in its practice (much like Communism, it might sound pretty in theory but the human intervention makes it ugly). The Harvard Joint Center for Housing Studies notes that 49% of renters pay more than they can afford (defined as more than 30% of their income).
True: if one were renting the equivalent home that one could afford to purchase, particularly if it were renting for a lower price, that would make for a sound decision. However, we have found that many tenants have chosen instead to use renting as they would a credit card – to stretch their bloated housing spending over months of low interest payments that feel less painful on a monthly basis but, in fact, represents the practice of living beyond their means. The general luxuryification trend we’ve seen over the last few years has translated into a mentality of “if I can’t buy it, then I’ll rent it”.
Just look at the plethora of luxury rental towers, with $3k studios, $4.5k one bedrooms, and $6k+ two bedrooms. They have been more readily absorbed by the NYC market than most expected. With such high priced rental inventory blossoming over the last year, it’s no surprise that average rents have increased 12%+ year on year. Furthermore, with so many having been turned off the concept of buying due to the housing downturn, many would-be purchasers have continued renting, pushing prices even higher.
Not only does splurging by a few hundred dollars a month quickly add up, but a year turns into two turns into five and, before you know it, you’ve shelled out in the hundreds of thousands of dollars on rent. The argument that often appears on StreetEasy or NYT forums is that your money could be working much harder for you in a high-performing asset versus plopping it down as a down-payment towards the purchase of a home. Unless you’re actively investing the money you would have otherwise placed towards a down-payment, however, you’ve got nothing to show for your perma-renting status. For many renters (and many long-term home-owners), the equity in their home is one of the few savings vehicles they have.
Now we’re not saying that buying is for everyone nor that all renters should convert. There are plenty of people who should not own. Rather, we want to point out that the pendulum has swung in the other direction. The same way you know a bubble is forming when your taxi driver gives you the advice touted all over the media, we think the renting “bubble” should be put into perspective. Over-spenders will do what over-spenders want to do, whether it’s via owning or renting. It just so happens that many of them are now congregating in the rental space, particularly in NYC. So if you thought that buying was too aggressive a move, think again – it may well be the conservative choice if done right!