Why do people rent rather than buy at the high end?
Posted by markharrison on January 12, 2011
My answer was, obviously aimed at the high-end, but most of the points relate to the whole of the market:
There are various reasons people choose to rent rather than buy. Many of these are just as true at the $10,000-and-higher end of the market as they are at the $1,000-and-lower end.
1: They can’t get a mortgage. In order to secure a tenancy, you typically have to come up with about three months’ rent in ready cash – for a mix of deposit, costs, and the first actual rent payment.
In order to buy a property, you might need to come up with a 20% deposit.
Just because you could afford $10,000 a month rent, doesn’t mean you could come up with $500,000 in ready cash for a down payment.
2: They expect that property prices will fall.
If you think that property prices will fall 10% this year, would you rather buy a $2m place, and find it lost $200,000 over 2011, plus pay maybe $50,000 in mortgage interest… or would you rather spend $120,000 in rent over the same period?
In my experience, this is more true at the high end of the market, probably because of the financial sophistication of the people who would do such a thing.
3: They don’t expect to be in that place long.
There are high costs to buying and selling. If you are only expecting to be in an area for a year, it can work out cheaper to rent than pay a mortgage, particularly if you don’t expect prices to go up. This isn’t just about job relocation, but about things like divorce settlements.
4: They believe their income will go up substantially, and therefore will be able to afford a better place next year.
This doesn’t apply so much at the top end of the market.
5: They are having a permanent place built / massively remodeled, but need to stay in another property for 6-12 months until it is completed.
6: They are not sure their level of commitment to their partner, and don’t want to buy a place together. A fair number of my tenants over the years have been “living together for the first time”. My experience is, to be fair, at the lower end of the market. At the higher end, particularly in the States where such things are legally binding, pre-nups may make this less of an issue than in the UK, where the divorce courts can award any settlement they like, and prenups are not legally binding.
Paying $10,000 a month rent is neither more nor less outlandish than paying $2,000,000 for an apartment. The fact that it’s rental rather than mortgage payment isn’t the big factor!