Buying a house will probably save you lots of money, which you can later donate, but it might not make much difference (and may work out as negative) in terms of your ability to do good.
It seems like common sense that buying a house saves you from wasting money on rent and works out better, financially, in the long term. But earlier this year, John Halstead wrote a blogpost providing a bunch of reasons not to buy a house.
I had another look at John’s calculations. I kept the basic calculations the same, but added a few considerations and re-checked the appropriate numbers for London (where I live). I also added various different tabs of the spreadsheet to compare things like variations in interest rates, property prices, timeframes for buying and selling, and other costs. In every scenario, unless there’s a housing crash shortly after you buy, it looks like buying comes out as far, far better, from a financial perspective. In the best guess, realistic scenario, buying came out as about £550,000 better after 10 years. John has also had another look at his calculations since his post and seems more optimistic about buying. I haven’t looked at figures and costs for countries other than the UK, but the differences are so large that I’d quite surprised if investing and renting came out as more favourable in (m)any countries.
This doesn’t address the concerns about buying in John’s blog post (e.g. that you will only be able access the money when you’re older). But if you’re interested in patient philanthropy, and are happy to donate more accumulated wealth in several decades’ time (when you downsize or die) rather than having a strong preference for donating less sooner, then buying a house looks better. (For discussion, see “Giving now vs giving later” and “How becoming a ‘patient philanthropist’ could allow you to do far more good”)
Despite the large raw difference between buying vs. renting and investing, these differences might mean surprisingly little, in terms of ability to do good in the world, if you apply a discount to the value of future money to calculate its net present value. If you apply a high discount rate, then the gains are practically zero. Indeed, some EA orgs express a strong preference for money sooner rather than later. I haven’t worked this bit out properly, but if you take these numbers literally (and reject patient philanthropy) it might be better to just donate sooner rather than to save up for a deposit.
I also live in London, and bought a house in April 2016. So I’ve thought about these calculations a fair bit, and happy to share some thoughts here:
One quick note on your calculations is that stamp duty has been massively, but temporarily, cut due to COVID. You note it’s currently £3k on a £560k flat. Normally it would be £18k. You can look at both sets of rates here.
When I looked at this, the calculation was heavily dependent on how often you expect to move. Every time you sell a home and buy a new one you incur large fixed costs; normally 2-4% of purchase price in stamp duty, 1-3% in estate agent fees, and a few other fixed costs which are minor in the context of the London property market but would be significant if you were looking at somewhere much cheaper (legal fees etc.). All of this seems well accounted for in your spreadsheet, but it means that if you expect to move every 1-3 years then the ongoing saving will be swamped by repeatedly incurring these costs.
There’s also a somewhat fixed time cost; when I bought a home I estimate I spent the equivalent of 1 week of full-time work on the process (not the moving itself), most of which was spent doing things I wouldn’t have needed to do for rented accomodation.
All told, for my personal situation in 2016 I thought I should only buy if I expected to stay in that flat for at least 5 years, and to make the calculation clear I would have wanted that to be more like 10 years. As a result, buying looks much better if you have outside factors already tying you down; a job that is very unlikely to be beaten, kids, a city you and/or your partner loves, etc.
This is a much closer calculation that will come out with your numbers, because I don’t think a 7.5% housing return is a sensible average to use going forward. I had something like a 2% real (~4% nominal, but I generally prefer to think in terms of real) estimate pencilled in for housing, and more like a 5% real (7% nominal) rate pencilled in for stocks. There’s a longer discussion there, but the key point I would make is that interest rates fallen dramatically in recent decades, boosting the value of assets which pay out streams of income, i.e. rent/dividends. It’s unclear to me that the recent trend towards ever lower rates can go much further, and markets don’t expect it to, so I didn’t want to tacitly assume that.
So far, that conservative estimate was much closer, London house prices rose by roughly 1.5% annualised between April 2016 and March 2020. Then a pandemic hit, but happy to exclude that from ‘things I could have reasonably expected’.
No, I didn’t list the “other” pros and cons, this is just the financial perspective.
I don’t have a good sense of how difficult it is to move houses. But my guess is that a decision to move for work or not wouldn’t be that dependent on selling a house. E.g. you either want to stay, come what may, because of reasons like friends, family, partners etc, or you’re personally happy to move, and wouldn’t mind selling then renting?
Thanks for this Jamie. Useful to know that the outcome can differ according to person/location. I reckon I’ll do this exercise for myself at some point. A few quick questions/comments (I haven’t looked at this in detail so apologies if I’ve missed anything):
Have you identified the key difference(s) between your calculation and John’s calculation that leads to the different result? It might be helpful to call this out
E.g. is it mainly driven by higher rental costs in London / the fact that you’ve assumed a smaller deposit for the house etc.
Pretty minor point, but the 3.5% discount rate should decline over time and it doesn’t seem you’ve factored this in (it shouldn’t really change much though as you’re not looking over a very long time scale)
I’m not really sure how useful the 3.5% discount rate is for philanthropists, in particular EA philanthropists. It includes a discount of future utility on account of the future being less morally valuable, which is something that philosophers have pretty much rejected and is quite counter to EA philosophy. There are good reasons for EA philanthropists to discount (more on that here and here) but I don’t there’s a good reason for us to expect it to lead to a 3.5% rate. It could actually be higher or lower depending on an individual’s preferred cause area/underlying ethical views. The general point that you’re making that buying a house only provides access to money when older, and therefore that this becomes subject to discounting is a very useful one though.
Doesn’t John’s calculation also say buying is better? Or am I missing something?
Have you identified the key difference(s) between your calculation and John’s calculation that leads to the different result? It might be helpful to call this out
No, I haven’t gone through and done that. Actually, John’s calculations still come out in favour of buying from a financial perspective, albeit by a much smaller margin than in my calculations; I think he was put off for other reasons.
Pretty minor point, but the 3.5% discount rate should decline over time and it doesn’t seem you’ve factored this in (it shouldn’t really change much though as you’re not looking over a very long time scale)
I’m probably doing the maths completely wrong on that bit… suggestions for correct formula to use are welcome. Commenting on the sheet is currently on if you want to comment on directly.
It could actually be higher or lower depending on an individual’s preferred cause area/underlying ethical views. The general point that you’re making that buying a house only provides access to money when older, and therefore that this becomes subject to discounting is a very useful one though
Yeah I haven’t got my head very thoroughly round the various arguments on this, so thanks for sharing. My impression was also that using 3.5% didn’t make much sense and should probably either go lower than that (for “patient” reasons) or much higher (if you think opportunities for cost-effective giving will diminish rapidly for various reasons.
Some relevant context I probably should have added to the post was that I did this calculation because I was very surprised at John’s overall conclusion and wanted to check it, and, despite this not being very thorough or anywhere near my research “expertise”, I thought other people might benefit from these rough and ready efforts, so decided to share.
Buying a house will probably save you lots of money, which you can later donate, but it might not make much difference (and may work out as negative) in terms of your ability to do good.
It seems like common sense that buying a house saves you from wasting money on rent and works out better, financially, in the long term. But earlier this year, John Halstead wrote a blogpost providing a bunch of reasons not to buy a house.
I had another look at John’s calculations. I kept the basic calculations the same, but added a few considerations and re-checked the appropriate numbers for London (where I live). I also added various different tabs of the spreadsheet to compare things like variations in interest rates, property prices, timeframes for buying and selling, and other costs. In every scenario, unless there’s a housing crash shortly after you buy, it looks like buying comes out as far, far better, from a financial perspective. In the best guess, realistic scenario, buying came out as about £550,000 better after 10 years. John has also had another look at his calculations since his post and seems more optimistic about buying. I haven’t looked at figures and costs for countries other than the UK, but the differences are so large that I’d quite surprised if investing and renting came out as more favourable in (m)any countries.
This doesn’t address the concerns about buying in John’s blog post (e.g. that you will only be able access the money when you’re older). But if you’re interested in patient philanthropy, and are happy to donate more accumulated wealth in several decades’ time (when you downsize or die) rather than having a strong preference for donating less sooner, then buying a house looks better. (For discussion, see “Giving now vs giving later” and “How becoming a ‘patient philanthropist’ could allow you to do far more good”)
Despite the large raw difference between buying vs. renting and investing, these differences might mean surprisingly little, in terms of ability to do good in the world, if you apply a discount to the value of future money to calculate its net present value. If you apply a high discount rate, then the gains are practically zero. Indeed, some EA orgs express a strong preference for money sooner rather than later. I haven’t worked this bit out properly, but if you take these numbers literally (and reject patient philanthropy) it might be better to just donate sooner rather than to save up for a deposit.
I also live in London, and bought a house in April 2016. So I’ve thought about these calculations a fair bit, and happy to share some thoughts here:
One quick note on your calculations is that stamp duty has been massively, but temporarily, cut due to COVID. You note it’s currently £3k on a £560k flat. Normally it would be £18k. You can look at both sets of rates here.
When I looked at this, the calculation was heavily dependent on how often you expect to move. Every time you sell a home and buy a new one you incur large fixed costs; normally 2-4% of purchase price in stamp duty, 1-3% in estate agent fees, and a few other fixed costs which are minor in the context of the London property market but would be significant if you were looking at somewhere much cheaper (legal fees etc.). All of this seems well accounted for in your spreadsheet, but it means that if you expect to move every 1-3 years then the ongoing saving will be swamped by repeatedly incurring these costs.
There’s also a somewhat fixed time cost; when I bought a home I estimate I spent the equivalent of 1 week of full-time work on the process (not the moving itself), most of which was spent doing things I wouldn’t have needed to do for rented accomodation.
All told, for my personal situation in 2016 I thought I should only buy if I expected to stay in that flat for at least 5 years, and to make the calculation clear I would have wanted that to be more like 10 years. As a result, buying looks much better if you have outside factors already tying you down; a job that is very unlikely to be beaten, kids, a city you and/or your partner loves, etc.
This is a much closer calculation that will come out with your numbers, because I don’t think a 7.5% housing return is a sensible average to use going forward. I had something like a 2% real (~4% nominal, but I generally prefer to think in terms of real) estimate pencilled in for housing, and more like a 5% real (7% nominal) rate pencilled in for stocks. There’s a longer discussion there, but the key point I would make is that interest rates fallen dramatically in recent decades, boosting the value of assets which pay out streams of income, i.e. rent/dividends. It’s unclear to me that the recent trend towards ever lower rates can go much further, and markets don’t expect it to, so I didn’t want to tacitly assume that.
So far, that conservative estimate was much closer, London house prices rose by roughly 1.5% annualised between April 2016 and March 2020. Then a pandemic hit, but happy to exclude that from ‘things I could have reasonably expected’.
Does this include how it might limit your ability to move for work, which might be the most important factor in salary/impact?
Good point although I guess there’s always the possibility of moving and renting out your home (and then renting yourself in the place you move to)
No, I didn’t list the “other” pros and cons, this is just the financial perspective.
I don’t have a good sense of how difficult it is to move houses. But my guess is that a decision to move for work or not wouldn’t be that dependent on selling a house. E.g. you either want to stay, come what may, because of reasons like friends, family, partners etc, or you’re personally happy to move, and wouldn’t mind selling then renting?
Thanks for this Jamie. Useful to know that the outcome can differ according to person/location. I reckon I’ll do this exercise for myself at some point. A few quick questions/comments (I haven’t looked at this in detail so apologies if I’ve missed anything):
Have you identified the key difference(s) between your calculation and John’s calculation that leads to the different result? It might be helpful to call this out
E.g. is it mainly driven by higher rental costs in London / the fact that you’ve assumed a smaller deposit for the house etc.
Pretty minor point, but the 3.5% discount rate should decline over time and it doesn’t seem you’ve factored this in (it shouldn’t really change much though as you’re not looking over a very long time scale)
I’m not really sure how useful the 3.5% discount rate is for philanthropists, in particular EA philanthropists. It includes a discount of future utility on account of the future being less morally valuable, which is something that philosophers have pretty much rejected and is quite counter to EA philosophy. There are good reasons for EA philanthropists to discount (more on that here and here) but I don’t there’s a good reason for us to expect it to lead to a 3.5% rate. It could actually be higher or lower depending on an individual’s preferred cause area/underlying ethical views. The general point that you’re making that buying a house only provides access to money when older, and therefore that this becomes subject to discounting is a very useful one though.
Doesn’t John’s calculation also say buying is better? Or am I missing something?
No, I haven’t gone through and done that. Actually, John’s calculations still come out in favour of buying from a financial perspective, albeit by a much smaller margin than in my calculations; I think he was put off for other reasons.
I’m probably doing the maths completely wrong on that bit… suggestions for correct formula to use are welcome. Commenting on the sheet is currently on if you want to comment on directly.
Yeah I haven’t got my head very thoroughly round the various arguments on this, so thanks for sharing. My impression was also that using 3.5% didn’t make much sense and should probably either go lower than that (for “patient” reasons) or much higher (if you think opportunities for cost-effective giving will diminish rapidly for various reasons.
Some relevant context I probably should have added to the post was that I did this calculation because I was very surprised at John’s overall conclusion and wanted to check it, and, despite this not being very thorough or anywhere near my research “expertise”, I thought other people might benefit from these rough and ready efforts, so decided to share.