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The cover of Your Money Milestones: A Guide to Making the 9 Most Important Financial Decisions of Your Life, written by Moshe Milevsky
The cover of Your Money Milestones: A Guide to Making the 9 Most Important Financial Decisions of Your Life, written by Moshe Milevsky

Book Excerpt No. 2

Many homeowners should have rented Add to ...

If you would like to calculate the impact of rent-versus-buy decision in your own life, I have created a calculator that can help you work through some scenarios, so you can see what decision makes the most sense in your case and what the impacts are with different variables. Go to www.qwema.ca to do your own analysis.

The Missing Factor: Housing and Social Capital During most of this chapter (and this book), I have focused my efforts on teasing out the impact of human capital considerations as they apply to financial capital decisions, using basic rules of arithmetic. And yet, although I have emphasized these two forms of capital, I have so far overlooked a third form of capital, which completes the trinity: social capital.

Social capital-more so than human capital or financial capital-is not visible to the naked eye, is not easy to measure, and, unlike every other form of capital I've discussed to date, does not belong on the personal balance sheet. Social capital is loosely defined as the collection of networks, cooperation, relationship, norms, mutual aid, faith, and various other forms of "glue" that hold a community together. But what does social capital have to do with housing? There is actually a strong link between home ownership and social capital, which is one of the reasons policy makers in the United States (and, to a lesser extent, in the rest of the world) have encouraged and promoted homeownership.

Please note that I am not veering from my mandate of discussing money milestones and personal finance when I mention the role of social capital. The reality is that social capital also serves a smoothing function. How so? If you live in a community or society with high social capital values, you are much less likely to experience disruptions in your standard of living. Think about the neighborhood or community where you live. If you happen to run out of flour while baking a cake or need to jump-start your vehicle to get to work one morning, how many neighbors within short walking distance would you feel comfortable borrowing the cup of flour or jumper cables from? All of them? Some of them? None of them? And do you know the names of all your immediate neighbors?

These might sound like unimportant and even off-topic questions, but they can have a profound impact on financial matters. Although it doesn't belong on the personal balance sheet, social capital is an asset class you can invest in by creating it. Individuals can do this on a community-specific basis; for example, you can arrange a monthly "neighbors' barbeque" for everyone on the block. Specific communities (and religions and schools) can produce social capital as well. Researchers-mostly sociologists-have developed indices of social capital that they've used to indentify regions of the country that score highly, versus poorly, in this dimension. (Apparently Vermont and Minnesota score highly but Georgia and Tennessee do not.) At this point, you may be asking, what does all this have to do with housing?

Well, according to a recent study by researchers at the Federal Reserve Bank of Chicago and the Office of the Comptroller of the Currency; housing, social capital, and financial well-being are all intertwined. According to the authors, greater homeownership rates increase the social capital of a neighborhood simply because homeowners (versus renters) face larger transaction costs in selling their house and moving away. This reduced mobility incentivizes homeowners to invest in things that increase their property value, which, in turn, also creates more social capital. So social capital is created as a result of home ownership, and property values rise in the process as well. Although you might not think about the investment you are making when you lend that gallon of milk, the logic of investing in social capital is clear.

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