the rent trap

It's commonplace to believe that renting a home in the 21st century is a financial dead-end. When you are renting your home, the money you part with each month is not accumulating to anything. Generally speaking, you will never own the home you are renting and so you will always have that payment to make each month, even after you retire. So it's easy to see why people assume that buying a home is the best financial decision. But is it really that clear-cut?

When you take out a mortgage, usually you are thinking long-term. You are setting yourself down and planting your roots firmly into a particular home, in a particular neighbourhood of a particular country. If you want to travel the world, setting your roots down and tying up all your money in bricks and mortar is non-sensical. In the words of Joshua Fields Millburn, "renting is paying for the ability to be mobile, to be able to leave when you want." He also says that, as a general rule, if you don't think you will still be living in a particular area in 5 years time, then you should not get a mortgage. Obviously there will be circumstantial caveats to this, but what he means is if the only job you can pick up right now is hundreds of miles away in a distant city, don't immediately go buy a house there. Rent for a bit and see if it actually works out the way you were hoping first. 

There are people out there who move city, move country even, every few months. They move to a new place, work there for a few months, see all there is to see, then they move on. That is their definition of success and I'm so here for it. They are out there exploring the world before life ties them down - and quite right too. They're not doing that by buying a flat everywhere they go, that would be lunacy. They take out short term rentals, stick around for a few months, then move on. Working and earning, and seeing the world. What a life! Yet our old fashioned definition of success, the 'get a job, get married, buy a house' template, would have you believe that this is somehow the wrong thing to do. 

Buying a home is actually a relatively new concept. Just 80 years ago, renting your home was far more common than buying one. Yet today, despite this being a fairly new approach to housing, a staggering two thirds of Britons own their own home, either outright or with a mortgage.

Home ownership can be a good investment, but it's by no means a guarantee. There is always the possibility that your home simply won't resell - or if it does, it could loose a significant amount of its' value. Then there is the general maintenance of the house to consider. I bought my first flat at 21 and six months later, the boiler packed in! Not an ideal start to my 20's I can assure you! And that's before you look at the bigger picture.

Home ownership can cook up a recipe for economic disaster. When comparing Britain's housing market and economy against that of Switzerland, The Economist deduced that "there's evidence to show that ownership rates and market volatility are connected." They found that the Swiss housing market is more stable than Britains and that the population enjoys a better quality of life, despite 62% of its citizens renting their home. Seems counter-intuitive, doesn't it? Let's dive deeper.

In Britain, various first-time buyer incentives were offered by the Government in the 1950s, causing the number of people who were buying their own homes to shoot up. But in the long run, home ownership caused more problems than it solved. The crash of 2008 was a housing crisis, a consequence of the banks cashing-in on the new home ownership craze. The new-found demand for housing was outpacing supply, which slowly but steadily pushed prices up. Of course as prices rose, so too did the sums of money being borrowed from the banks. In its essence, a single mortgage is a fairly safe loan. Since the value of the loan being issued is secured against property, if the lender stops meeting the repayments the bank can simply seize and sell the property to get their money back. It was a win-win system. A new booming market, the property bubble, was emerging. Thinking this growing market was a sure-thing, a more stable source of passive income than its' alternatives, investors started getting involved. Banks thought up an idea called Mortgage-Backed Securities. These are pools of thousands of separate mortgages that can be sold to investors as shares, allowing both the bank and investor to profit from the interest paid on the loans.

Profits were up, investors were happy and continued to buy shares. The economy was booming - things were great. But of course, the banks wanted more. They continued to sell, pushing for more and more people to take out mortgages - stretching to reckless extremes in the process. They eased off their lending requirements in a move which is now referred to as Predatory Lending Practices. They offered 100% mortgages with adjustable, ballooning interest rates and were performing very minimal screening of income. All of this culminated into a ticking time bomb. The banks had no real idea whether the lender could actually afford the repayments. And so, in the words of Tiny House Designer Jay Austin, "after a few years of people buying houses that they weren't actually buying, they were just hoping to buy someday, the entire housing market collapsed."

Thousands of borrowers, duped into taking out a mortgage they could afford at first but which eventually spiralled out of control, were now defaulting on their mortgages. More and more houses were being put back on the market, where they stayed and slowly accumulated. Suddenly, supply had out-paced demand and so prices plummeted. The housing bubble had burst.

Many who did still have their home were paying for a mortgage that was significantly more than their home was actually worth. This lead not only to further defaults, but to lenders having their home repossessed to recoup the debt, yet they were still in debt to the bank for a loan on a house they didn't even have anymore. Demand continued to fall and house prices continued to plummet. Investors were stunned. Their sure-thing wasn't quite as sure as they thought, and now they were stuck with a load of bad investments that they couldn't sell. By 2008, the biggest investment company on Wall Street, Lehman Brothers, declared bankruptcy and the western world was plunged into the worst recession in decades.

In the wake of a recession, it's easy to blame the banks. The sub-prime mortgages were created to allow the fat cats on Wall Street to squeeze as much money as was possible from the consumer. It was scandalous and should never have been allowed to happen - so much so that laws now exist to prevent it! But we must remember that people did ultimately take out the mortgages on their own. Incentives, coercion and recklessness aside, it is the innate and very-much human compulsion to own things which drives us. It is that which compels us to part with hundreds of thousands of pounds, exchanged over the course of several decades, for four walls and a roof. You might even want four bigger walls after a few years, just to keep up with the Joneses. This is the root of the problem. People came in their droves, lining up like lambs to the slaughter, ready to surrender their financial freedom in exchange for the mere prospect of owning a home, someday. The merry money men of Wall Street simply capitalised on this craze, just like any Scottish corner shop that suddenly started stocking fidget spinners in 2017, albeit on a much larger scale. Home ownership can be an investment, but mortgage debt is still debt. There's no such thing as good debt.

The alternatives however are just as bleak. Renting in the UK is an up-hill battle, one which is both stigmatised and expensive - especially if you live in the cities. Private tenants feel they are not getting a good deal when comparing the monthly rent payments against a comparable mortgage repayment each month. Rent prices in the private letting market consumes "close to 40% of average incomes," according to an article by Inside Housing. It details several examples of problems renters have experienced, including a health hazard reported to a particular council being ignored, and a complaint to a landlord about the state of a property's heating system resulting in a threat being made. It even tells a tale of one tenant who returned home one day to find a sealed plastic case covering his thermostat after his landlord deemed that he and his housemates "couldn't be trusted to set the heating during winter." Summarising it perfectly, the article says the problem is with "landlords who hold the belief that 'It's my property, I can do what I want with it, if you don't like it you can leave.'" The article is deeply shocking but sadly, this is a reality for thousands of people up and down the country. Renters rights are not actively protected in the UK. 

Tenants can be forced to ask permission before they simply paint a wall or hang a picture, they may be forced to stay with a particular energy supplier and can be subject to periodic 'inspections' from the landlord. The article reports the account of one renter, who said, "[the letting] agent's staff can walk into my home and invade my privacy in a way that even the police can't." By law, tenants have the right to a 24-hour notice period before the landlord enters the property. And by law, a tenant has the power to refuse entry to their home. But even if tenants know this is their right, it may be unlikely for them to evoke it given all the cards are ultimately held by the owner. If the owner feels a tenant is being uncooperative, they can serve a Section 21 notice on the tenant, forcing them to vacate the property. In the UK then, it seems the only rental properties which are truly secure, affordable and liveable are council-managed properties - which you can be waiting years for.

So that brings us back to Switzerland. How come their housing market is so damn stable, even during the 2008 crash? Well in their video, The Economist reports on a woman called Diana, a University Lecturer who has been "renting for the whole 20 years since [she] came to Switzerland." She moved to Switzerland, rented an apartment and simply never chose to buy her own home. But why? 

Well, property prices in Switzerland are very expensive for starters. Many people who work in Switzerland will choose to buy homes in bordering countries to save money. However Swiss law is also extremely pro-tenant, providing tenants rights which are legally protected. Rental leases can last up to twenty years and prices are stable. Diana, who has lived in several homes during her 20 years in Switzerland, says "in all those years, we have never [had] an increased price." She even goes on to explain how she once made a request to her landlord to reduce the price due to a drop in interest rates, which is permitted under Swiss law. She wrote a letter to her landlord and three months later their monthly rent price was reduced. She says, "Switzerland is special with regard to [its'] rental law. I wouldn't feel so secure in another country." In addition to this, according to TransferWise, "accommodation in Switzerland is generally of a very high standard - with even city apartments built to allow families to have some room to grow." So while you can't exactly outlaw the pursuit of home ownership, you can create laws which help people feel more secure with their rental status. Switzerland is a testament to this.

Modern day has converted the West to assuming that buying a home is always the best option, when of course that's far from the truth. It boils down to circumstance, to privilege (or lack thereof) and to personal preference. There is no one right way to live. I actually had to mute a particular estate agency on Instagram this week after the owner took to their story to proselytise. He said that first time buyers should "get on the housing market as quickly as you possibly can... start saving for a deposit." It's a nonsense. Now, obviously he's bias. He's an estate agent, he literally gets paid to say that! But if I were to give the same type of advice from a more neutral point of view, I'd say "Start saving and investing for the future you want for yourself - not the one everyone else has earmarked for you."

~ Aedan.