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 “rent money is dead money” argument.

Some time ago I built a model to evaluate scenarios for myself.

Model Details

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 been paid on the investment income.
  • A reasonable estimation of holding/carrying costs is made. These represent:
    • Interest.
    • Insurance.
    • Council rates, taxes and levies.
    • Service fees that are borne by the owner. (water/sewerage)
    • Maintenance.
  • The different accounting of costs are balanced (double-entry bookkeeping).
    • All inflows and outflows should reconcile.

The limitations of the model are:

  • No attempt to calculate capital returns is made.
  • 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 (a government tax on property purchases) are rolled into the mortgage and amortized.)

Example Calculations

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 principal payment, which is effectively a capital investment (building equity, not a cost).

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 per week

The interpretation is if you can afford $642 a week in cash flow, you are better off owning 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 per week

The interpretation is if you can afford $1147 a week in cash flow, you are better off owning than paying $750 a week in rent, but worse 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 does not need 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.

Implementation

About the implementation:

  • A GUI framework independent model is implemented in TypeScript.
  • A front end is implemented in Vue 3/TypeScript.