To Own or Rent: Part I

Many people at some point in their life must make a decision on whether they want to own or rent the houses that they live in.  The decision made is influenced by a number of factors which when rationally analyzed should position a person to make the best tenure (possession) decision given their unique needs and circumstances. For some people owning and renting are substitutes while for others renting is but a step towards owning. Accordingly, the purpose of this article is to provide home seekers with the necessary information to enable them have control in the process of deciding which type or mode of home possession is ideal. This will be achieved through pointing out that:

There is a choice between owning and renting and that the two are different sides of the same coin called possession.

Advancing arguments in favor of renting and owning. That is at a given point in time you could be better of owning while at some other point you could be better of renting.

One’s decision of to own or to rent is influenced by:

 

2.1. YOUR INCOME OR INCOME OF THE HOUSEHOLD

This is the most important characteristic determining tenure choice. Increased income will cause a person to move to home ownership or to a rental class above the one s/he is occupying. However a decrease in income makes housing expensive, which will cause households to opt for rental accommodation or a cheaper house.

 

2.2. INVESTMENT CONSIDERATIONS

Real estate is a major investment area and a security for the future. As an investment, housing provides a steady flow of income in the form of rent. Rent is in this case defined as payment for space occupied calculated on a monthly basis. It includes the actual amount paid in rent for rented accommodation as well as other charges by the landlord to the tenant. Continued increase in rent however makes ownership a preferred option.

 

2.3. UNCERTAINTY OF TENURE

There are three types of uncertainties that will influence household tenure choice:

 

2.3.1. UNCERTAINTIES REGARDING FUTURE LEVELS OF RENT OR MORTGAGE REPAYMENT

In rental housing there is usually uncertainty regarding the levels of future rent and interest loan repayments depending on the agreements entered by the parties. Where the amount to be paid in the case of home ownership is certain because the terms of the mortgage are well defined and depending on the mortgage package it may not change over the lifetime of the loan repayment then household are likely to prefer ownership. In the case of rental housing, rents change from time to time and over time.

The uncertainties of the future level of rent will cause households to prefer owning while uncertainties in the level of future mortgage repayment will cause households to rent.

 

2.3.2. UNCERTAINTY REGARDING PERIOD OF RESIDENCE

If a household intends to stay for a long period of time then it may opt to own while in case it wants to stay a short period of time a household may opt to rent.

This is because a rented house is cheap to enter and leave, as there are less legal fees and deposits involved.

 

2.3.3. UNCERTAINTY REGARDING FUTURE STREAM OF INCOME

This is the uncertainty regarding the flow of income and consequently the ability to pay. This uncertainty may induce a household to live in a rented house. This is because the household is unsure of whether it will be able to meet future loan obligations. This uncertainty regarding future income is more of a feature of the groups working in the informal sector. Their incomes are irregular and uncertain and therefore they are safer renting a house, as they will not lose their savings in repaying the mortgage. They also stand no risk of defaulting.

 

2.4. COST OF POSSESSION

The cost involved in becoming a homeowner as well as maintaining a property is inherently higher than that of becoming a tenant. To become an owner one has to pay 10% of the purchase price as deposit and pay the balance within a specified period usually ninety days. Other costs include valuation and legal fees, stamp duty, insurance and renovation costs. In the case of renting ,the deposit is usually equal to one or two months rent and the property will have been put to a condition ready for occupation. Where costs of ownership are high ,households are likely to rent and vice versa.

 

2.5. INSTITUTIONAL FACTORS

The most important institutional factor that influences tenure choice is government policy. The Government policies, which have a significant impact on the relative cost versus buying are:

 

2.4.1. PROPERTY TAXATION

Where tax concessions are given a household may opt to purchase one. Where concessions are lacking purchasing a house becomes expensive. In this case households will opt to rent.

 

2.4.2. TAXATION ON INCOME FROM PROPERTY

Where this is higher on owner occupation the household will opt to rent. For example where one leaving in an owner occupied house and since s/he is paying no rent this is taken as an addition to his income and taxed accordingly

 

2.4.3. RENT CONTROL

Rent control legislation has the effect of freezing rental charges. Where they are below market price, it means that it is cheap for a household to rent a house. This is particularly so where the tenancies are old and under rent control legislation. Rent controls reduce the uncertainty regarding the future levels of rent since it freezes rent at their present rate.

 

2.5. PERIODICITY OF PAYMENT AND AVAILABILITY OF CREDIT

In purchasing a house one needs to pay a deposit in cash and then make periodic payments. The installments (periodic payments) depend on the length of time it will take to clear the mortgage. For example if the period is short then the installments will be high and vice versa. The terms of the mortgage vary and duration is usually between. If credit is easily available and the terms are favorable, household may opt to purchase a house. Where credit is lacking or terms are unfavorable to the household, the household will opt to rent.

2.6. CULTURAL FACTORS

Majority of people leaving in our urban areas are immigrants from rural areas. These people come to look for employment and other benefits that are perceived to exist in the towns. When they arrive these people rent or stay with friends or kin as a means of establishing themselves. The immigrants have strong ties with the rural areas, for they may have left their families behind or they may be having parcels of land or own other property in the rural areas. A household with strong rural links will tend to rent.