Osmeña: Who can afford a home?

By Antonio V. Osmeña

IT IS often said that it is better to rent than to own. From the aesthetic point of view, no doubt home ownership is more desirable. From the financial side, the argument is a little keener. It is sometimes said home ownership costs more than renting, but actually one is probably no more expensive than the other.

Unfortunately, there are special groups or interests that stand to benefit materially from a community of home owners, and their active advertising appears to support the impression that the home owner can “have his cake and eat it too.”

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Yes, home ownership has its merits, but it would constitute grave folly to urge it on each and all—though the means are available—unless the principles of home ownership can reasonably be applied. A rule for buying that has gained widespread acceptance is that the price of a home should not exceed two to 2.5 times the buyer’s annual income.

This rule and the cost of home maintenance rule, which follows, are relied upon exclusively by many private lending agencies as a cardinal guide to successful home ownership. Under this rule, an ordinary worker earning P100,000 per annum should limit his search for a home to those offered at P250,000 or less, in the current market.
A price in excess of two to 2.5 times the annual income will impose a strain on a family’s operating budget. The rule was formulated after long investigation and study, which disclosed that home expenditures average about nine to 10 percent of the purchase price (value) of the house per year.

Departures from this rule are in order, of course, depending on the size of the family and living habits of the individuals. A household without children can afford to allocate more for household expenses than families who must provide for the health, welfare and education of their children. Exceptions, however, should be held closely to the 20 percent maintenance rule, which requires that the total outlay for maintaining a home and the investment in a home should not exceed 20 percent of the buyer’s current and reasonably anticipated future income.

The failure of lending institutions in the United States to strictly adhere to this rule has caused the foreclosure of millions of homes in recent years. In the 20 percent cost of maintenance rule, consideration is given to such items as real estate taxes, interest on the mortgage indebtedness, amortization of the mortgage principal, fire and typhoon insurance, and costs of utilities, which if unpaid can cause a lien to be placed on the owner’s property.

This rule, too, was formulated after investigation and field study of millions of homes. In making all the pro-rated expenditures payable monthly to the lending agency, the chances of debt accumulation, the chief cause of foreclosures in depression years, is mitigated.

Then, too, the lending agency can advise the home owner as soon as a monthly default occurs and see him through periods of temporary distress by extending or adjusting the periodic payments. Experience in recent years has proven the income rule to be highly successful. In the final analysis, it is the income of the buyer—more than the price paid for the home—that governs his ability to carry through the financial obligations that home ownership imposes.

Often, attempts are made to circumvent the 20 percent rule by those who advocate home ownership, at any cost, by de-emphasizing indirect costs like deferred maintenance and the cost of home replacements. A favorite scheme, too, is to encourage the lengthening of the period over which the mortgage indebtedness is to be recouped. Then, too, who will be happy about the thought of assuming equal payment burdens over a life period of 30 years?

It seems that tampering with the established rules or principles of home ownership may at times be politically expedient, but economically questionable. Although homes are largely paid for out of income, a wise rule provides that the purchaser’s accumulated savings should be equal, at the time of purchase, to not less than 20 percent of the price of the home.

The rapid urbanization of Cebu has caused shelter problems for the thousands of migrant workers seeking employment opportunities.

There is now a need for lending agencies, whether private or government, to extend low interest rates to real estate developers who desire to provide economic apartments for rent to serve these thousands of migrant workers.