iMoney Phils. – Wed, 16 April 2014
Many of us working-age folk grew up in an environment where home ownership is held in high esteem. Our parents and grandparents have instilled in us the importance of owning a home where to raise a family and live out the rest of our day.
My dad, for instance, was able to save up for a parcel of land in his mid-30s, build a house for his family of 11, and then eventually bought a small farmstead not far from our home. Although both houses are projected continuously being improved, he’s now looking forward to his retirement as all of us kids are of working age and have fled the family nest.
The Filipino dream of owning one’s home where one can raise a family is much akin to its American counterpart. Most baby boomers—my dad being one—grew up firmly believing in this philosophy.
But after having watched the U.S. Housing market collapse in 2007–2008, taking the global economy with it, many people of my generation are wondering whether owning A home is as sturdy an investment as our predecessors have heralded them to be. After all, the properties are not liquid assets, they can depreciate, and hot spots come and go. The notion that properties make smart investment has time and again dispelled even by the most respected of economists, chief of which is the Nobel Prizewinning Robert J. Shiller (of the Case–Shiller Index).
According to Shiller, housing traditionally is not viewed as a great investment because it takes maintenance, it depreciates, and it goes out of style.
“And there’s technical progress in housing… the new ones are better…so why consider it as an investment?” In a nutshell, housing is not really an investment vehicle.
Unless you’re an end-user and wants to buy real estate for your personal reasons.
And to this I agree with Mr. Shiller wholeheartedly. The importance of purchasing a piece of real estate for one’s residence cannot be overemphasized. Living in one’s own home gives families a great sense of security. Sure, there are maintenance issues, but owning lets them sleep soundly at night knowing there’s no landlord who’ll kick them out anytime.
However, because a home purchase in itself is a costly pursuit, buyers are well advised to read these four considerations before making a purchase, even for one to be used as a place for residence.
1. If You Plan to Stay Put for at Least 5 Years
As a rule of thumb, it is generally not advisable to purchase a home unless the property is expected to be owned for a long enough period of time to recoup expenses. If you plan to relocate to another city, say Cebu or Davao, or even overseas, within the next five years for an impending job change, then renting is for you. Or if you plan to start a family soon, then a one-bedroom condo may not be for you. Spur-in-the-moment decisions in home buying may result in firesale if circumstances require moving, and fire sales usually do not work in favor of the seller. As home buying will make the buyer short on liquid cash reserves, he or she must make sure that the property is to be used for a fairly long time.
2. If You Look at the Non- Financial Aspects
The more I read and learn about real estate, the more I realize that the notion of home ownership as a magical path to wealth is just a marketing ploy of the real estate industry to sell more units. Historically speaking, home prices generally barely keep pace with inflation, so why invest in one?
However, there is a nonfinancial aspect of real estate investing, and it is a rather important one. Buying a house makes perfect sense because it gives us stability and freedom. Financially, it may not be the best bet, but there is still a certain level of financial independence that home ownership brings, such as not having to pay for monthly rent, not to mention taking a pesky landlord out of the equation and the eventuality of finally owning the property once the mortgage loan has been paid.
3. If the Price–Rent Ratio Is Lower Than 20
If the housing market’s price–rent (P/R) ratio is lower than 20, then it makes more sense to buy rather than rent. But what is this number and how do you come up with it.
A P/R ratio gives you a rough idea whether homes in your area are fairly priced. All you have to do this is find two similar houses (condos or houses)—one for sale and one for rent—and divide the sale price of the one place of the annual rent for the other. The quotient is the P/R ratio.
For example, there are two identical condo properties (94 sq. meters, three bedrooms) in Penhurst Place in Bonifacio Global City. The first one is listed for sale for Php10 million, while the second is for rent for Php65,000 per month (or Php780,000 per year). If you divide Php10 million by Php780,000, you get a P/R ratio of 12.82.
According to David Leonhardt, in his article published in the New York Times, a P/R above 20 means that the monthly costs of ownership will exceed the cost of renting. A little opaque, but it gives an idea when it makes more sense to buy than to rent. In the case of the Penhurst property mentioned above, it makes much more sense to buy as the monthly rent is greater than what the homeowner would pay on a monthly basis if he buys the property.
4. If You Look at the Financial-Use Aspect
Finally, every home buyer should consider the personal-use aspect when making a purchase. When the house is purchased as a residence, then the property provides both personal-use return and investment return. This means the homeowner can live in the house and avoid paying rent while he or she also experiences gained in the house through appreciation (though appreciation is locked in as the owner cannot use it without selling the house—and lose the place to live in the process).
But in this case the personal use aspect is more important. An initial comparison between renting and buying offhand might favor the former, especially if one takes into consideration the combined costs of mortgage, maintenance, insurance, and taxes.
However, mortgage payment is finite and fixed, whereas rental costs may and will increase. In addition, the mortgage should eventually be paid off, providing the homeowner with a rent-free place to live, which is a great retirement strategy—if the mortgage is paid off at the time of retirement, there will be a reduction in expenses at the same time income falls.
ZipMatch is the first comprehensive online community of sellers, developers, brokers, and buyers in the Philippines. It offers everything to make your home purchase easy, from finding the right property and broker to tips on how making money from real estate investment. For more information, visit www.zipmatch.com.
About the Author
Rodel Ambas is a former editor-in-chief of a property magazine, has written extensively for Philippine-based publications, and is now in charge of ZipMatch’s content strategy. He attended the University of the Philippines, where he majored in Development Communication.