In many parts of the UK this just isn't the case any more. There is a serious lack of housing due to many factors (the bigots will tell you it's all the fault of immigration) but the short story is that the competition for rental property is so fierce now that in many places, monthly rent to the private landlord is higher than a monthly mortgage payment would be to buy a similar property.
So why don't people just buy? Well, there is a shortage of houses to buy, and you can't usually get a 100% mortgage. You need to put down a substantial cash deposit towards the purchase price of the house, for example 15, 20 and even 25% in some cases.
So why don't people just save up for a deposit? Well, if you need to spend £250k on a very modest 3-bedroom house, you are looking at anything from £37.5k plus fees.
Housing is so expensive now in relation to average income, that people are effectively priced out of the market forever, unless they win or inherit a lot of money. It is not possible to save that amount in any reasonable time scale.
So why not get a second or third job? Maybe they'll work themselves to death before they need that house? Only joking, people have to work long hours at their main jobs nowadays. The contract may say 37.5 hours per week, and that's what you get paid for, but "You're all professionals..."
This is not a malfunction of the market. Economically renting is always expected to cost more than buying. Renting has advantages over buying:
* No need to have a significant amount of cash to deposit
* Flexibility to move out into a larger or smaller house that better fits your needs
* No exposure to the risk of changing housing prices (which don't always go up, and can be hugely impacted by policy)
* Less headaches over maintenance, etc. This is (typically) your landlords responsibility.
So, just like a flexible airfare is more expensive than a 'no changes allowed' fare, it makes perfect sense that a rental house on average is more expensive than owning a house. Also, if rental prices are lower than the mortgage cost, the owner should probably do something different with that house.
TL;DR: rental prices are expected to be higher than owning, because renters are willing to pay a premium, and because landlords otherwise have no incentive to let out a property in the first place.
Parent's comment still stands, but you have to take the regulation into account: * people can live in a bigger house than they could otherwise afford, e.g. if they can't make the deposit * people can live in a bigger house than they could have the mortgage for. (e.g. Dutch regulation you can mortgage 4.5x your yearly salary. If you make 40.000 Eur that is 180k, which perhaps buys you a small studio in Amsterdam). Renting you could probably live in a 250k valued house, because those restrictions don't apply.
"No exposure to the risk of changing housing prices (which don't always go up, and can be hugely impacted by policy)"
In our case, the homeowner thought the home was undervalued or marketable rent wasn't good enough. Just wasn't enough ROI. So, he sold the house out from under us to put the money in a better investment. Many years of on-time rent payments meant nothing. So, yes, renters have to worry about that stuff with quick, dire results when a problem happens.
" Flexibility to move out into a larger or smaller house that better fits your needs"
Most renting these days is done by agencies with formal procedures and tactics to maximize value for them. So, we had to fill out lots of paperwork, get credit checks, and otherwise go through the ringer. They were also all pushing us to accept a higher rate or trying to include stuff in the contract where we fix any problems in $80-200 range. All sorts of stuff. Fortunately, a friend at an agency that knew we were good tenants luckily pulled strings and got us a place just in time.
I imagine that if we were homeowners we'd have had that flexibility of moving into houses that fit our needs. We could shop around, identify the best deal, and move in at our own pace. Unfortunately, we were renters. That meant we had to act on homeowner's short timetable plus fit within the needs of renting agencies who were so picky we wouldn't have had a place.
Suddenly, renting doesn't sound so rosy, eh? ;)
Except when your 12 month lease expires and they jack up your rate 20%. If anything renters are at greater exposure to changing housing prices. Renters don't benefit from drops in pricing, and they only have detriment from increases. At least home owners benefit from one side.
Also, having a uncertain monthly expense is not nearly as much of a risk as having 100% or 200% of your networth tied to a volitile and usually zero-sum housing market. The counterfactual of owning a diversified portfolio of stocks and bonds is much better from an investment perspective.
They do, all the time.
> existing renters would make home purchasing a higher priority
They can't, there's such a low supply of housing in the entry-level price points
> uncertain monthly expense is not nearly as much of a risk as having 100% or 200% of your networth tied to a volitile
Most people do not own the vast majority of their home. Worst case scenario, they buy a house, it goes down a lot in value, and they do a strategic foreclosure and declare bankruptcy. Considering the average American has little to no savings and therefore nothing to lose in bankruptcy, there's really not much a downside. In fact they may even profit from it tremendously in other ways, such as wiping out their credit card debt at the same time.
The ones that do have any sizeable amount of savings are 40+ years old today and have benefited in insane amount in housing prices over the past two decades. Their home values will never go down anywhere near the amount they have gone up.
Compare this to a guaranteed, unavoidable loss with ever increasing rent prices. If rents actually do drop with housing prices over the long run, it certainly hasn't mattered at all for decades given the long term trend of the American housing market.
One of the greatest necessary advents in the near-term for prosperity of all is the correction of housing towards smaller, more affordable dwellings out of control of the rentiers racket that has now infected property ownership at a near global scale.
Come on. I buy a house for 100k, and rent it out for a bit less than the mortgage repayments. In 10 years, I sell it for 200k. How is there no incentive to rent in that period?
In Southern California the shortage in these desirable are is mostly driving by locals. In Santa Monica, I have observed a lot of development get killed by local activist groups who are mostly made up of not wealthy people on rent control. They have no upside that I can think of in the skyrocketing prices or rents. Though they are protected from the consequences by rent control. Yet they still very consistently vote against more housing, even if it's 20% mandatory affordable below market units...
The reasoning seems to be "if only all these gentrifiers stopped moving here and those who are here moved out!", but that's not gonna happen so long as jobs are blocked by impassible traffic.
So in Santa Monica, it's not the rich that are creating the problem. They are simply optimizing their lifestyle to have more free time by using resources at their disposal. If slightly more dense housing was built (Santa Monica averages about 1.5 floors from my observation), it could easily double the supply with only a modest gain in height. Utilities would have to be expanded, but that can be funded with the developments.
A lot of these foreign investments come from China. I don't know a solution - if I had buckets of money I'd love to have property abroad (although more for living, less as investment). I don't know what restricting local investments in property would do economically, but I know the current lack of restrictions cause terrible hurt to locals.
This is exactly part of the whole deal. It's inseparable. Why would they sell you something in the first place if they couldn't buy anything back?
China has gotten very rich in the last twenty years, but it has been nothing close to an equal rising tide of prosperity. There are now uber-rich competitive with the greatest dynasties of Euro-American enterprise that want to do something with all that wealth, and particular relative to the West they have a problem with their stock market being heavily state controlled and thus an undesirable place to safety hoard capital.
EDIT: just to add context - Israel had a huge challenge - it was created with the goal of being a home for every jew globally - and most have come - which lead for a huge demand for housing, for many poor people. And for the first decades of it's history it was mostly successful at that. And it didn't seem to inhibit growth or employment.
BTW, Singapore has an home ownership rate of 90%, so it seems like a big success.
That is demonstrably false. Renting is more than a mortgage interest payment would be. Unless you feel like you have some special knowledge about the local real estate market, your capital is likely better off in the stock market.
Rental real estate works on leverage to a greater degree than is possible with stocks. Most banks won't make loans to invest in the stock market. They will make loans for investment property. So if you have $100,000 you can buy maybe 4 or 5 $100,000 rental properties, and have your tenants pay off the loans. Not as likely that you can take $100,000 and buy $400,000 - $500,000 of stocks, at least not as an unsophisticated individual investor.
You can have a 5:1 margin account, like the one you describe, as an individual investor: If you have 100K to put in a brokerage account with your own money, you definitely have enough money for a brokerage to let you do it. It's just that it requires attention, because with a 5:1 ratio, a 5% loss just became a 25% loss. Ignore the market in the wrong week(say, in early October 2008), and all your margins get called, and you are in deep trouble.
Still, if you have 5 $100K rental properties, and you aren't bleeding a lot of money for a company to take care of it all for you, chances are you are still paying quite a bit of attention to your apartments anyway.
As far as whether mortgages or rentals are more expensive, it completely depends on the local market and local laws: In a pro-renter environment, rental is more expensive, because nobody wants to rent apartments out: People would rather let apartments sit empty. In a pro owner environment, at a place losing population, renting might be cheaper.
People generally don't buy houses in order to rent them. Usually houses are rented out when the owner is moving and decides to rent it out rather than sell, at which point the owner has a substantial amount of capital in the house.
Unless the rental unit is a standalone single family home (and sometimes even then), economies of scale in maintenance and upkeep result in those costs being cheaper to a landlord.
Downpayments required for loans with good terms have opportunity cost to the buyer. On average over the long term, it has been appropriate to assign that downpayment a discount rate which is a net negative against average market returns.
If realestate markets are stable or reasonably increasing, mortgages are safe. But renting reduces risk of being stuck in an upside down loan, and risk reduction has value.
Despite all of these factors, you're right that rent includes profit, so in many cases it's wiser to purchase. But it's not as globally true as the parent comment suggests. The best choice comes from a balanced assessment of a variety of factors.
1) You have to buy for resale, not to fit your budget best. People tend to want to max out their mortgages these days. And if you are trying to sell into a downturn, it can be a problem.
2) Fees at time of sale. 6% twice ( once at purchase, once at sale ) eats 12% for the life of the mortgage.
"Since it’s a payment for nothing that didn’t already exist, it’s a deadweight cost, and so not only unjust but also dysfunctional for the economy. "
The practice of renting exists as an option to owning. By renting, renters can engage in an activity with less up front capital to buying. For example, a contractor building a concrete sidewalk may choose to rent the mixer rather than owning it, so that it's cost is a cost of sale for the service, rather than a fixed cost that requires maintenance, storage and transportation. In that sense, the rental is a component of a larger transaction involving actual work being performed, and not parasitic. Moreover, by offering the mixer for rent, the 'rentier' reduces the total number of mixers that need to be produced, as it is a shared resource to contractors and they each do not need to own their own.
The same principle pertains to business. A fast growing startup may know they only need a space for a short time and will grow out of it. So it would make no sense to purchase the property they will inhabit for a short time. The rent they pay is an alternative to mortgage or cash, and it makes sense for their business purposes, which in theory do produce something of value.
In the example of home rental, making homes available for rent enables families to live in accommodations that they would not be able to purchase. These accommodations are not without cost to the owner: Taxes, utilities, maintenance, security and administration are all associated costs that rent payments offset. What the rentier provides in most cases, is a better quality of life than the family could have if they were forced to own the property they lived in.