I really appreciated the discussion on my last post, and wanted to clarify some of the issues raised.
My two key points were:
1. The capital gain made from buying a cheap home and upgrading later does not always improve your ability to buy a larger place in the future, and
2. That forgoing life's little luxuries to start a savings plan directed at owning your own home is not always effective. The 'work hard and save' mantra does not work if prices increase faster than your ability to save.
The issues flagged by readers were that
1. I ignored increased wages
2. I ignored the paying down of principle, and
3. I ignored the fact that rents increase in line with CPI while loan repayments do not.
My response is under the fold.
In light of these issues I have posted a spreadsheet here that compares the true investment outcomes of 3 scenarios; buying a home to occupy, buying a home as an investment but renting where you live, and renting and investing the difference between the rent and the cost of home ownership.
The assumptions are outlined at the bottom of the first worksheet, and you can change the scenarios by choosing from the drop down boxes for each of the inputs in black font in the top white boxes. The alternative investment option is that rate of return (combining captial gain and income) from other non-property investment to which the cost savings from renting are directed.
Some scenarios I have run are in the table to the right showing how changing some of the inputs changes the outcome.
The second worksheet shows the calculations, where in each scenario the annual cost is equal to the home ownership option over 30 years. Using this common cost we can overcome the issue of paying down principle, and of increasing wages. Note that rents take about 30 years to reach the current cost of home ownership with compounding 3% annual increases.
What we learn from this exercise is that buying your own home in today's economy is far inferior to buying a home as an investment, or renting and staying out of the property market completely.
Maybe that is a reasonable position, as buying your own home provides some security for which people are willing to pay a premium. But the idea that home ownership is an investment, which is a commonly held belief, is far from an accurate interpretation of the facts.