To buy or rent when interest rates and rents are rising?

Question

I have heard that people use real estate as a hedge against inflation but what's the rational thing to do when, the stock market is dropping, housing is getting expensive (to buy and to rent) and interest rates will rise?

Is it better to get into the stock market when prices are low and continue renting or to buy now for fear of rising rents and future property values? The opportunity cost in not putting money into the stock market seems high but I can't tell. Any examples in history of similar conditions?

This situation is further compounded with the fact that most inventory out there is for renting and most new construction is for renting too so one's rent will likely be affected by someone else.

This investor is only working with a single income. No significant other's income is going to be included in the analysis.

Answer 1

There are plenty of answers on this site about whether it is better to rent or to buy. Mostly it comes down to a question of how long lasting you are expecting the arrangement to last. Buying has some high upfront costs but tends to be cheaper long term.

So to look at your specific question I would look at it like this. Firstly when you are renting you are paying the cost of someone else's mortgage plus some extra money to cover risk and so they can make some money (in the UK buy to let mortgages often stipulate a minimum of 150% of the interest payment as rent). Thus renting doesn't protect you from mortgage costs in fact it could be worse as you will be facing eviction if the land lord isn't making money.

When you buy a property the cost is fixed at todays price (plus the cost of lending), over the last decade or so house prices have increased say this has averaged 5% this is 5% of the value of the house. Whereas any return to be had by investing a deposit will be a percentage of that deposit maybe 10-15%. And of course any increase in property prices or lending costs will feed through to rental prices eventually anyway. Whereas only the cost of borrowing will impact a mortgage as you don't owe more money when the property increases in value (in fact this can work in your favour). Also fixed mortgages can protect you against increases in inflation/ base rates

When you buy (using a repayment mortgage) you are paying off the interest but also the principal and thus some would say you are gradually investing by putting the money into your house. Eventually when you have finished paying the mortgage you will not have to pay anything whereas rent has to be paid forever.

Inflation is an average and it is possible that increased inflation in one area may cause deflation or at least reduced inflation in some other areas. Thus its future effects on property prices are hard to predict. Property prices may be better correlated with other metrics than general inflation.

Trying to time markets or guess where inflation/stock markets will be is very hard to do and you would be well advised to act in a way that that takes possible changes in these values into account but doesn't rely on them. It may take a long time for markets to recover from the current position and even then there are no guarantees.

TLDR To rent is to pay off someone else's mortgage. You can't predict the future but you can protect yourself from some factors. Property is an asset class thus you're paying off your own house is a kind of investment.