Question

In: Economics

explain the factors that contribute to the uers costs of owner-occupiers and the decision to rent...

explain the factors that contribute to the uers costs of owner-occupiers and the decision to rent or own.

Solutions

Expert Solution

The user costs of owner-occupied houses are related to the usage and maintenance of the house as well as the construction of the house—in terms of whether it’s a new construction or an old one. The old constructions will obviously have higher depreciation and hence may end up having more repair costs than their newer counterparts. The costs of owner occupied houses could also include the home loan that the owner may have taken for to construct the home, so though saving on the payment of rent if he were to be staying in rented homes, the interest payment as well as payment of the principal loan amount have to be borne.

The owner occupied houses maybe be a shade better maintained than if they were rented out since the owner of the house may be well aware of the difficulties of the construction of the house and the costs of repair works if any. The owner may also be aware of the real cost – the pain and sacrifice involved in the construction of the house and hence may be more sensitive towards its maintenance.

However the older houses may be needing more amount to be set aside for depreciation charges –since their wear and tear (or usage) maybe more .

Hosing is considered one of the basic necessities of life and many of us have a dream to own a home of our own at least one if not more!!. The decision to own or rent depends on m any factors some of the being the income of the consumer, the occupation and growth prospects of his income, the interest rates of home loans offered by the banks , the age of the consumer—( its not wise to take a loan near retirement age !!) and so on.

However economically speaking, the decision to rent or own could effectively be taken keeping in mind factors like loans for housing offered by companies at zero or nominal interest rates, in such cases the employees are at an advantage and can avail such loans since they are offered by the companies they work for , it in effect could also lead to the employee being more ‘bonded’ towards the company at least during the period involved for repayment of loans. Such low interest or zero interest loans are a great relief and provide scope for more disposable income in the hands of the buyer of the home.

Another factor is the value of the collateral security that is given by the buyer when applying for a home loan. If the value of the security is expected to appreciate then such factors should be taken into account and suitably imputed. Tax savings , if any as allowed by the income tax regulations should be suitably considered since the tax savings could be very helpful to the buyer.

The general price level prevailing is also an important factor to be considered while buying a home , inflationary effect could be more harmful in case of home loans that have flexible interest rates and hence a higher interest rate could adversely affect the buyer in two ways—1.pay a higher interest rate than before 2.lower level of disposable income. This could be a delicate situation since the buyer has to also pay the principal amount simultaneously along with the interest on the loan.Lower disposable income could lead to making expenditure choices and decisions regarding opportunity costs of spending.

The decision to buy also requires the need to impute the costs of the wear and tear that could naturally occur to every asset during its course of use—hence the maintenance costs of owning a home, the marginal efficiency of the asset has to also be calculated although at a discounted rate since it is the value of the asset in the future and since it cannot be accurately calculated we impute the value at a discounted rate.

It would also include home insurance costs if any and the amount of premium that we need to pay on such insurance, this needs a restructuring of the income and expenditure statement of the buyer giving suitable allowances for such changes in future expenses that may occur as a result of investing in buying a home.

Alternatively, the other option could be to rent a home rather than buying. By calculating all the above said expenses involved in buying a home, an individual can as well use the money to invest in the various options that are available to investors and can opt for renting a home.

The individual can opt to be a risky investor and invest in the stock market—both at the national as well as the international level and by suitable calculations can steadily work to increase his investment income. Another option though which is less attractive yet safe is to invest in government backed securities and bonds where the interest could be low as compared to other market securities and stock yet might give a sense of security about the money that the investor had invested. Other options could be mutual funds, insurance policies and so on which could prove to be worthy financial assets and act as securities for the investor at a later stage if he decides to buy a home.


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