And in fact your mortgage would almost certainly be less than the rent for the same property, since the landlord will be using commercial financing which costs more, and will be paying taxes as a non-resident owner, which are higher. The landlord will also need to buy commercial property and liability insurance, which costs more.

Your residential mortgage will be at a lower rate and you will have property tax exemptions if the property is your primary residence and your insurance will be cheaper.

Yes.

Well, in the hypothetical system we are discussing there would presumably be no tax exemption for primary residences or other tax differences.

Why do you assume the landlord has a significant mortgage or any mortgage at all? Most landlords have owned the properties for decades. I know quite a few that bought the properties with cash and never had a mortgage.

If you buy a place for $1,000,000 at 7%, you can’t compete with someone that owes $100,000 at 2.5% on the same place, which is often the reality.

Whether your landlord owns outright or has a mortgage doesn't make much of a difference for this analysis. That's because even if you own outright, you have opportunity costs of capital.

> If you buy a place for $1,000,000 at 7%, you can’t compete with someone that owes $100,000 at 2.5% on the same place, which is often the reality.

Where does that 2.5% come from?

If mortgages cost more than the rental yield, then your landlord should sell the place and use the proceeds to get into the mortgage business. (If not, your landlord is doing the landlording as a charity, because they are leaving money on the table.)

> If you can afford the rent for your home, you can afford to own it via a mortgage.

This does not follow. It assumes the landlord has the same cost basis and cashflow requirements as the person with the mortgage, which is almost never the case. Your mortgage interest payments alone can be higher than a rent that allows a landlord to make a profit. This is not uncommon. Rents in Seattle, for example, are far lower than the equivalent mortgage if you bought the place.

Why does anyone in Seattle buy then?

Because most people don’t live their life by min-maxing their finances. They have other non-financial objectives that take priority over being efficient with money. You might as well ask why people buy nice cars, eat out at restaurants, etc. If people optimized for financial efficiency then the world would look very different, and the median household in the US has a lot of cash leftover to burn even after accounting for ordinary lifestyle expenses (~$12,000 per year, per the US BLS). Seattle, of course, is much wealthier and higher income than the US median so there is more money to burn.

That said, most people struggle with financial and investment math generally, even when they sincerely attempt to make prudent financial decisions. I can’t really blame people for not knowing how to build and reason about financial models, it isn’t a skill you ordinarily pick up in day-to-day life.