Sometime ago the Office for National Statistics published its report Wealth in Great Britain: main results from the wealth and assets survey 2006/2008. According to it on average half of our wealth is tied in non-income generating real estate; or put in another way in our houses. This should not come as a surprise: people in the UK see their houses mostly as an investment. More seriously, we see our houses as our main investment. Our houses are our castles and paying off the mortgage gives us a sense of security and achievement.

Although we all need shelter, we also ought to recognise that our houses are one of our largest liabilities and they continuously take money out of our pockets. As to being an ‘investment’, houses we live in make money only when their price goes up; this happens either because of market properties (scarcity, for example) or because of improvements to the property (and this one is fairly limited; often changes to the property do not affect its price or can even affect it negatively). When there is ‘property boom’ house prices go up; between 2000 and 2005 there were periods when they went up by as much as 15-20%. Great, you may think.

Well, not really. First, property markets are volatile and prices come back down; in the process people get caught up in ‘negative equity’. Second, one can realise the benefit of the increase in price only if they sell. What then? If you buy similar property you can expect to pay similar price; the only way to have something left is to ‘downgrade’.

This is why we don’t see our house as an investment – we do see it as a home, however. Once John and I made this leap, the next question to ask was ‘when, if at all, would it make sense to stop owning and start renting?’ This is what we came up with.

Value of the house

Renting makes sense if the expected return on investment on the value of the house is substantially higher than the rent one would to pay for it. Assuming that the house has a value of £800,000 at 10% return on investment should generate £80,000 per year.   No sensible business will aim for less than a 10% return on investment in the long term.  The same house can be rented for about £2,000 per month or £24,000 per year. A middle of the market £250,000 house at 10% should generate £25,000; a house of similar value can be rented for £800 per month (or £9,600 per year).  At the lower end, a £100,000 property should generate £10,000 a year but can be rented for perhaps £400 a month or £4800 a year.   So the cash benefit of the expensive house is £56,000 (7% of the house value) at the middle it is £15,400 (6.16%) and at the lower end it is £5200 (5.2%).   The size of the mortgage doesn’t really matter – you either release capital or income.

Your age

Here, it seems to me, that the older one is the more sense it makes to rent. Dark, as this may seem, it is about life expectancy and changing needs and possibilities. It is also probably better to leave behind liquid wealth (if there is any left) rather than property.

Life-style preferences

Owning houses ties us to one place and makes it cumbersome and expensive to move. If one were to choose a life-style involving moving and living at different places (and countries) it makes sense to rent rather than buy property; any property.

Other benefits include not having to pay house insurance and possibly some utility charges, a general lack of responsibility for house maintenance and the flexibility of being able to move quickly as rental agreements are much less involved than conveyancing arrangements.

Looking at these three conditions it may make sense for us to look into renting more carefully. What do you reckon?