First, where taxes are concerned, you’re not taking into consideration the standard deduction that everyone gets. If the TYPICAL home buyer nets out the difference between what they itemize for interest expense and their standard deduction, the actual tax savings aren’t that great… maybe 10%-15%. This obviously increases as one’s income increases.
Peace of mind is totally subjective. Your 5%-10% number might be a good start. (Although one could argue that this “peace of mind” should be offset to some degree by loss of mobility, from which many people derive value.)
Finally, the rent increase issue is a touch complicated from an analytical perspective. First of all, although your rent will increase in a rental, the cost to owning your home increases as well (upkeep and HOAs if you’re in a condo) – let’s say this adds 1% to your total gross housing payments each year. So, this upkeep/HOA issue has to be offset against the rental increase. So, let’s net the two out and say the difference is 2% annually (that’s 3%-1%). Now you have to figure out what the present value of those increases are going to cost you and AVERAGE this number out over the 10 year average ownership period. (Also, recall that you’re trying to decide whether to buy TODAY but you will be paying your rent or housing payments in inflated dollars tomorrow.) If you work through the math assuming a 6% discount rate, you’ll find that a 7% “ownership” premium, or thereabouts, will negate the effect of the higher rent payments. (Obviously, the higher the rate of rental increases you expect, the higher the ownership premium should be.)
So, the 20% premium may be on the low end, but it’s definitely not out of the question for some people. On the other hand, some people could probably justify a 40% premium depending on their circumstances.
