Housing Rent vs Mortgage Calculator
Ever since reading this Economist article many years ago I’ve been interested in the actual cost of home ownership vs renting, as opposed to the the “rent money is dead money” argument.
Some time ago I built a model to evaluate scenarios for myself.
- The model can be accessed here: https://www.shincbm.com/house-cost-dist/#/
- The model source code is here: https://github.com/nakane1chome/house-cost-core
- NOTE: This is currently buggy, incomplete and may be out of date.
The key points of the model that differentiate it from a mortgage calculator are:
- “Cash flow” and “cost of ownership” are differentiated:
- “Cash flow” represents the income needed to hold on to the asset.
- The “cost of ownership” is the “dead money” (holding/carrying costs etc) that are lost by owning a property.
- The “cost of ownership” includes the opportunity cost of locking up a deposit as home equity.
- That is what income could have been earned via investment or interest if a home had not been bought.
- The effect of taxation is included here. That is the opportunity cost is reduced by the marginal tax that would have be paid on it.
- A reasonable estimation of holding/carrying costs is made. These represent:
- Council rates, taxes and levies.
- Service fees that are borne by the owner. (water/sewerage)
- The different accounting of costs are balanced.
- The should all add up..
The limitations of the model are:
- No attempt to calculate capital returns are done.
- No attempt to model inflation/time value of money.
- The model reduces the calculation to a single (current) year.
- No attempt is made to model future year expenses.
- The liabilities of the mortgage are amortized over the full term, as these are fixed upfront. No other amortization is made. (Upfront one off costs such as stamp duty are rolled into the mortgage and amortized.)
The Ownership Vs Rent comparison can be done by comparing the “cost of ownership” to rent.
- Mortgage servicing is not comparable to Rent as it includes the principle payment that is an effective capital investment.
e.g For a $500,000 house, with a 20% deposit at 5% interest the weekly amounts are:
- Cash Flow: $642
- Cost of Ownership: $394
- Comparative rent for area: $400-$450 pw
The interpretation is if you can effort $642 a week in cash flow, you are better off owning that than paying $400 a week in rent.
e.g For a $900,000 house, with a 20% deposit at 5% interest the weekly amounts are:
- Cash Flow: $1,147
- Cost of Ownership: $697
- Comparative rent for area: $650-$750 pw
The interpretation is if you can effort $1147 a week in cash flow, you are better off owning that than paying $750 a week in rent, but worst off owning than paying $650 a week in rent.
Estimations of capital growth would need to be factored in afterwards. For the first case capital growth is not needed to be considered in the decision. For the second case it may change the decision.
DISCLAIMER: This post is not financial advice. The calculations are examples only. The model is a prototype and has not been extensively verified.
About the implementation:
- A GUI framework independent model is implemented in Typescript.
- A front end is implemented in VUE3/Typescript.
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