Buy a house or live for rent? The answer lies in savings rather than salary

Buy or rent? This question, which seems common many times, is not because the rent becomes an ‘imposition’ for many people who cannot afford the initial cost of a mortgage. The ability to save is the determining variable to access home ownership. The difficulties faced by Spanish households (especially young people) to save a sufficient amount that many end up resorting to rent without remedy. However, this decision, which undoubtedly also has advantages, can be an even greater burden to reach at some point the necessary capital to acquire a home. In many cases, it is the rental prices themselves that reduce family savings, generating a vicious circle that prevents the ‘dream’ of home ownership from being achieved.

This is one of the conclusions reached by the CaixaBank Research department. In its latest real estate report, it estimates that around 49% of tenants have a sufficient level of income to buy a home, but only 13% also have the necessary savings to face the initial outlay. In other words, although many households that live on rent generate enough income (salaries, dividends…) to purchase a home, they cannot pay the down payment plus the rest of the initial costs associated with buying a home.

Normally, housing affordability indicators (such as the one used by the Bank of Spain) usually take into account the average prices of real estate and the income of individuals. Although it is true that the level of income is usually quite related to savings, the lower propensity to save part of the income can end up being key when accessing a home. The tightening of some conditions to access a mortgage since the 2008 crisis have made saving essential. As a general rule, no bank offers more than 80% of the appraised value of the home. In addition, there are a series of initial expenses, such as notary fees, appraisals or taxes that must be paid directly, which represents between 10 and 15% of the total. This initial outlay is what prevents many tenants from accessing a home, despite the sharp rise in rents.

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” in recent years has led many tenants to consider the option of buying a home. The decision to rent is less attractive when a mortgage payment for an equivalent home can be paid for an amount similar to the monthly rent.” Today and according to the data presented by Eurostat, the monthly effort to pay for a home ownership is probably much lower than rent. “But in addition to the income necessary to meet the monthly mortgage payment, the purchase of a home requires considerable savings,” they explain from CaixaBank Research.

How do I know if I can buy a home?

That last one is the big stumbling block. Judit Montoriol-Garriga, a senior economist at CaixaBank Research, uses the HARI index (), an index that he takes into account if the income of current tenants is sufficient to become owners. The conventional HARI index (without savings) measures how many renters have the same or more income than those who recently bought a house through a mortgage, in this way we are “in effect measuring how many renters have enough income to buy a house”, according to Laurie Goodman, Wei Li and Jun Zhu creators of this index. CaixaBank Research economists add these people’s savings to the equation to end up creating the HARI-savings index, obtaining a comparison with more variables to determine the degree of accessibility to housing in Spain.

Taking into account only income (without including savings in the equation), 49% of tenants in Spain could access a home according to the pure HARI index. “This means that approximately half of the tenants in Spain have a sufficient level of income to buy a home. This figure is relatively high when compared to the 27% obtained by Goldman, Li and Zhu for the United States. Therefore, It seems that a good part of Spanish tenants are in a good position to buy a home if we look at their income. But do they have a sufficient level of savings to make the purchase?” asks the CaixaBank Research economist. to purchase a home in each CCAA.

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What happens when you include savings?

However, adding the savings distribution variable, “we obtain the HARI-savings index, which takes a much lower value of 13%. That is, we estimate that only 13% of Spanish tenants could access a home ownership given their financial situation”.

“This means that 36% of tenants would have enough income to buy a home, but do not have sufficient savings capacity. This percentage rises to 41% for young people (between 18 and 35 years old), which shows the greater difficulties of access to home ownership for this group due to the inability to save”, Montoriol-Garriga sentences.

From this it can be concluded that starting savings and not income is the main obstacle to accessing home ownership, a barrier that rises the lower the age. According to internal data handled by CaixaBank, the median income of homebuyers is 1,845 euros per month, while that of tenants is 1,524 euros. This is a notable difference, but without a doubt the big gap comes with savings: home buyers have a median savings of 14,530 euros (national level) while renters have 1,816 euros.

According to 2019 data published by Eurostat, in Spain only 3.7% of households with a home with a mortgage spend more than 40% of their disposable income on paying it. Yet nearly 40% of renters spend 40% or more of their disposable income on rent. Probably, many tenants would like to be owners, an unattainable dream for a significant part due to the lack of sufficient savings, which in turn may be a consequence of the high cost of rentals.

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“Although the income between young people who buy and those who rent are not so different, the difference between both groups lies in the savings balance they have. For example, in the cities of Bilbao, Malaga and Valencia, more than one 45% of young tenants have a sufficient level of income to buy a home, but do not have the necessary savings,” concludes the Catalan bank’s report.

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