Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5084618 | International Review of Financial Analysis | 2016 | 14 Pages |
â¢The net present value of homeownership versus renting is evaluatedâ¢Inflation tilts the balance in favour of ownership, deflation the reverseâ¢If the sum of rates of: inflation, imputed rental yield, real capital appreciation minus cost of homeowners' capital are positive then the net present value of ownership increases with holding period.
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.