Symptoms Not Hungry Throw Up

Should I rent or Should I buy?

Following some light analysis on the match between rents and mortgages that lately have been suggesting that in relative terms is cheaper to rent ", I think it is worth making some comments (technical, tedious, accounting !) on the subject.


What better an example? Imagine a home of 275,000 pesos (rounded 60m2 to 1150 dollars per square meter to 4 pesos per dollar), an annual rent of 5.5% of property value (as I am informed, a reasonable approximation) and a mortgage to 20 years for the 100% of the value of the home, with a total financial cost of 25%, say, 15% expected inflation for the whole period plus a margin of 10% higher because of the inevitable uncertainty rating.

I anticipate some comments: (i) the bank typically finances 70% of the purchase, but still the opportunity cost of other 30% would become too cumbersome, and would peer markets essentially the same, (ii) expected inflation of 15? What is that? The bank would evaluate the practice of inflation for the next few years, and would adjust the loan rate from there. Again, do not hurt to take a couple inflation (alternatively, you can think of a 5-year contract).

So how are the numbers? According to the French system of fixed quotas, the annual fee of the mortgage is to be of 70000 pesos (5800 pesos per month), or 4 times the amount of rent. So far, the conventional argument: rent is cheap.

Is it cheaper? The above comparison is vitiated by so many errors that even worth mention. Best illustrated by the complete sample. Here goes:


gráfioo illustrates the essential point in answering the question in the title: the mortgage, even with an excessive margin of 10% for the bank, is a form of savings. This is precisely why pay more initially and less (and possibly zero) at the end. In exchange, lease, it is logical to assume will increase 15% per year as the value of the property (which, I assume, will increase with the price level, ignoring the possible real appreciation) will not stop grow. Thus, the debtor pays more because it becomes entitled to an income (the same income you will save when you pay off the loan).

The comparison is more obvious in real terms. After all, the debtor does not care how much weight it will pay but it represents in terms of their salary. Assuming that wages and rents rise pari passu with inflation of 15%, compración looks like this:


While flat fee drops by half in real terms liquefied by inflation, the rent remains contstante. The fee, which is 4 times the rent at the beginning, the rent falls below 10 years.

One way to summarize this is pointing to rent and fee are not comparable concepts: with a savings, the other not-and, as pointed , gives the impression that the recovery of income of the middle has led to a boom in consumption at the expense of savings.

That said, there are specific reasons that inhibit the family from Argentina to change LCD bricks. First, to access cash loans should provide 30% (80,000 dollars) at the time of purchase, and pay 4000 pesos per month (70% share estimated above).

why tuition is so expensive? In part by inflation, which I quickly liquefies remote payments, at the expense of increasing payments nearby. In financial jargon, I will shorten the life of the loan.

Leaving everything else constant (including bank margin should be cut as expected inflation), the monthly payment would fall by 37% if the expected inflation rate fell by 10%.


This is related to a feature of the French system that always caught my attention: the disproportionate burden (measured in real terms or, which is, in terms of salary) during the first years of the contract .

is true, as a distinguished colleague BEA, which the Americans tried to soften the negative slope of the second figure by increasing interest schemes (the infamous ARM) and fared well, but in our case inflation curve climbs dramatically. Just see how it changes the graph with expected inflation of 5% ...


... suggesting that it should be possible to soften financial engineering is pending and to open the door to housing to more people.

One last caveat: some of this applies to low-income sectors, who often have access to mortgage credit in any developing country (and to which access in the U.S. was one of the triggers of the financial crisis). These households' access to housing requires both supply-side policies (social housing) and demand (co-payments, guarantees, subsidized lines) that deserve a specific post (or several).