Buying versus renting – Determinants of the net present value of home ownership for individual households

Isaac T. Tabner

International Review of Financial Analysis, 2016, vol. 48, issue C, 233-246

Abstract: The tenure decision upon whether to buy or to rent accommodation has long-term consequences for households' financial wellbeing that influence macroeconomic development and stability when the cumulative effects of individual decisions are aggregated across populations. The author explains how the net present value (NPV) of ownership versus renting can be used as a framework for informing housing tenure decisions. Increases in holding periods, inflation and the spread between imputed rent and the opportunity cost of household savings shifts the balance in favour of ownership. With plausible assumptions the model demonstrates that households typically need a holding period of between five and ten years to achieve a breakeven NPV. The findings support the conjecture that inflation transfers wealth from renters and mortgage providers to owners, whereas deflation reverses the flow until rising default levels establish a new equilibrium.

Keywords: House prices; Real estate; Valuation; Household finance; Tenure choice; Buying versus renting (search for similar items in EconPapers)
JEL-codes: D1 D84 G10 G12 G14 L85 P36 P46 R21 R31 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:48:y:2016:i:c:p:233-246

DOI: 10.1016/j.irfa.2016.10.004

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