Letter to the Editor: We’re Not Perfectly Rational Economic Actors
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In response to our post about a Rent vs. Buy calculator, Reader Z writes:
If you want to really get into the weeds on this topic, Ben Felix on YouTube has a few videos on Rent vs. Buy that covers it pretty well.
In the end, renting is usually the mathematically ideal way to go if you invest the difference. However, that last bit of investing the difference is a massive hurdle for us humans. For most people, the forced savings that happens with a mortgage is much more likely to build wealth over time compared to renting due to the discipline required. Even with automatic contributions, it’s easy to reduce those due to some “just this once” reason.
On the other hand, owning a home makes us more likely to spend more on the home to make it the way we want. We also fall into the trap of justifying these upgrades by assuming we’ll get at least as much money back in home equity. At least with a rental, it’s unlikely we’re going to spend thousands on a kitchen or bathroom renovation. Also, due to high transaction costs of selling a home, owning for less than around 9 years before moving can be very expensive.
The outcomes of each option is similar enough that it really does come down to feelings, in a way. Much to the chagrin of economists, we’re not perfectly rational economic actors. Some people truly would be happier with one over the other even if, in practice, they are identical or the other option is better overall. Of course they could also learn to overcome these biases that are limiting them to one choice, but if they’re similar enough, is it worth it? I don’t know.
Side note, but I’ve just bought a home after wanting to rent for my entire life. The main thing that led me to this was that the house was a setup that I really valued, but I could not find a way to rent my way into that situation. I’m not saving anything over renting, but I’m excited to live in a way that I’ve been dreaming of for a long time.
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Hey Z. Congrats on the new home and thanks for telling our readers about that YouTube channel. I strongly relate to what you said about wanting to avoid the trap of justifying upgrades: we had our floor done as soon as we moved in, which I’m glad we did, but it was the first time I felt the pull of that investment logic. It’s certainly something homeowners of an Escapological mindset should look out for.
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About Robert Wringham
Robert Wringham is the editor of New Escapologist. He also writes books and articles. Read more at wringham.co.uk