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Financial Conduct Authority 

  • Stuart Fowler

Home truths about home ownership

Position Paper May 2010

Click No Monkey Business Home truths to download a pdf version of the full paper. We have edited the original version we posted to reflect feedback, including adding a section on the tax effects on the comparison of buying and renting. Only our summary and conclusions are extracted below.


Popular opinion about home ownership in the UK is that it has created real wealth, more than the stockmarket and with much less risk. By contrast, renting is ‘money down the drain’. Naturally, because people think house prices can grow faster than the economy, young people fear the bottom rung of the housing ladder will tend always to be moving out of reach.

These are false notions, based on imperfect accounting of people’s own experience, gained in a particular period of economic history, and interpreted with a shaky grasp of basic economics, both national and household. Though the popular illusions might well have been shattered by the credit crisis, they appear to have survived largely intact.

In this paper we explain in laymen’s terms the economics underlying decisions about home financing and suggest how they might be applied in different circumstances to reflect the benefits individuals most value.

conclusion: ten economics-based home truths

  1. There are no foregone conclusions about how best to pay to put a roof over your head: buy or rent. It has to be a bet.

  2. Be clear about what you most value in life or at different stages in your life. It may not be satisfied by large and inflexible bets. We show how many of the benefits people say they value are actually put at risk by their home financing choices.

  3. Comparisons before the event should not (but usually do) exclude the opportunity cost of higher savings when renting rather than repaying a mortgage. Overlooking opportunity costs explains many of the false assumptions people have about buying versus renting.

  4. The factors that after the event will prove what worked best are inextricably linked by national economics but can still vary dramatically through time and in different economic environments. Partial interpretation of history, such as your own or your parents’ experience, are likely to be misleading.

  5. Individual outcomes will be shaped by entry and exit points, not secular trends that are immutable and known to all. Much of the results of entry and exit points will be down to age and luck.

  6. If you really do believe in secular trends, remember that the corollary is that deviations from trend ‘revert to the mean’. That means that if leveraged home ownership was a winner for a long time, it might be about to be a loser for a long time.

  7. For most people, the eventual ‘balance sheet’ outcomes count for less than the impact of borrowing on household ‘profit and loss accounts’.

  8. Willingness to take on mortgage debt, and the size of that debt, should therefore be more about the ability to bear the additional financial stress that follows from adverse events.

  9. We find that the key determinant of long-term outcomes is the different impacts of general inflation on the cost of borrowed money and the return on investment. This makes leveraged home ownership a bet on the economic variable, inflation, which is the hardest to predict.

  10. The tax effects of owning versus renting that are widely touted in favour of owning are actually neutral except when either the main home or financial assets are sold to support spending; but the CGT advantage of property in that case is weakened by the scope to shelter, spread and time disposals of financial assets.

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