Home ownership rates in Europe vary from Germany at 53 per cent to Romania at 96 per cent (the United States is 65 per cent), according to national data. Many around the world, including in the UAE, choose to own their own home because it makes financial sense. Here are five reasons why:
1. Inflation-proof investment
Inflation in the third quarter of last year was 4 per cent, according to Abu Dhabi Statistics Centre. This means things such as food, fuel, rent, etc appreciated in cost by 4 per cent. Inflation means that if you keep your money in a bank account at 1 per cent interest you are actually losing 3 per cent of that sum per year in real terms, as everything else is getting more expensive but your money stays almost the same. When you put your money in an asset that also appreciates along with inflation then you do not lose money. Very few banks offer anywhere near 4 per cent interest, so investing in an asset makes sense.
2. Capital appreciation
Let us take a real example: a three-bed apartment on Raha Beach, Al Muneera, in Abu Dhabi is about Dh190,000 to rent annually and Dh3.2 million to buy. When you buy a home with Dh3.2m of your own money and the home appreciates along with inflation by 4 per cent per year then you make 4 per cent on your money. If you buy a home worth Dh3.2m with just Dh800,000 (which is the minimum 25 per cent down payment required) and the other Dh2.6m of debt, and then your home appreciates by 4 per cent, you a get 16 per cent return on your Dh800,000 outlay. Sounds like a trick? It isn’t.
The asset is worth Dh3.2m — an increase of 4 per cent is Dh128,000. Whether you own the house outright or have borrowed to finance it, that Dh128,000 is added to the equity (the value of the house less debt owed to the bank) in the house, the bank does not get any of it. Your repayment stays the same and the amount owed to the bank is not adjusted. This is called leverage. Over five years it would add about Dh700,000 to the equity.
Warning: watch out when the market falls and leverage works the other way. Your bank does not take gains when your house appreciates, but also will not take losses if it goes down.
3. Paying down equity
When you rent, your money goes straight into your landlord's pocket. When the property is yours you either own it outright or more likely you have finance on it. The repayment on a Dh2.6m loan over 25 years is about Dh152,000 per year. That is Dh38,000 less than the amount to rent the same unit. The best thing is not just the Dh38,000 saving per year but your Dh152,000 repayment now goes to paying off your mortgage, adding to the equity.
Initially not a lot of your repayment goes to paying down the equity. In the first year the outstanding mortgage amount only decreases by about Dh57,000, but by the fifth year this rises to Dh67,000. The rest is used to pay back the interest to the bank. Over five years you would have paid off around Dh300,000 of debt and Dh460,000 towards interest repayments.
Warning: you need to add on the hidden cost of service charges on the building; a unit like this would charge around Dh20,000 per year, or Dh100,000 over five years.
4. Rent insulation
According to JLL, rents in Abu Dhabi over the past two years recorded 20-25 per cent increases, and, according to Colliers, the capital is facing a housing shortage of more than 50,000 units. Abu Dhabi rents are not falling (unlike Dubai) any time soon. If you own your own home your rent is the amount you are repaying to your bank every month, and with a fixed mortgage that amount does not change.
5. Pure financial sense
Assuming that everything works as it should, over five years your property will appreciate by Dh700,000 and you will pay off Dh300,000 of debt. Deduct Dh460,000 of interest and another Dh100,000 of service fees and you come out with a Dh440,000 positive return — more than 50 per cent on your Dh800,000 investment and you have not paid any rent. If your rent is Dh190,000 per year over five years that is Dh950,000, and that is assuming no rent rises. The difference between buying and renting is around Dh1.4m. Even if your home does not appreciate in value a single fil, you still come out ahead by Dh700,000.
Ben Crompton is the managing director of Crompton Partners Estate Agents
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