The comparisons at the top are simply irrelevant. You’re comparing ownership (financial and control) with production. Very few people build their own home, and close to zero (in the modern world) do so directly rather than by contract. Reasonable comparisons would be “how many households pay for and own their food/clothing that they use”. Which is close to 100%.
Rental is by far the weirder situation. Almost nothing you use day-to-day is rented, even things that have residual value, like your computer, your clothing, your tools. Your car may be, but it’s likely an agreement that looks a lot more like ownership with guaranteed buyback than like rental. Really, only housing is commonly rented rather than owned.
I didn’t read thoroughly, but found similar confusion throughout—like the weird belief that any of your assumption list isn’t baked into your rent. And the utter lack of consideration that the purpose of ownership is control—there is very benefit in being able to do what I want to my residence, to maximize my personal value, even if a landlord would disagree.
I won’t go so far as to say that everyone should strive to own their home, at least for long enough to understand the tradeoffs. I will say that 63% seems pretty reasonable to me.
Rent is much cheaper than mortgage. I don’t know about your country, but where I live mortgage is cheaper than rent. People actually buy flats, rent them out, pay mortgage out of rent income and even make small cash on top of it.
Comparing house to farmland is not fair. I can start comparing house to having kitchen utensils. Most of the people I know still cook their own food instead of ordering deliveries. And most of the people I know buy cars instead of renting them.
When you rent, you don’t have a control over your house. You would like to get new kitchen? Well, your landlord has different idea. So what, you gonna move out? Every stupid thing you want changed, you don’t really can.
Lastly, it’s a hedge. If you buy house to get wealthy, that might not be best idea. But if you buy it, because you want to live long term somewhere, then mortgage is a way to get “guaranteed rent”. No need to worry that because of some stupid market bubble, suddenly your rent will skyrocket.
Point 4 said a slightly different way: when you rent you are arguably shorting housing since you need to live someplace. When you own 1 place you are neutral and you aren’t long in housing until you own multiple places.
I largely agree with other commenters, but want to put some of these points in my own words.
The comparisons at the beginning of the post don’t make sense.
I would prefer to buy shoes rather than make all of my own shoes, because the cost of learning to make shoes, getting the necessary equipment, and taking the time to make them is too high. (Maybe it would be fun. But, even if I decided to do this as a hobby, I couldn’t simultaneously make all my own clothing, glasses, food, etc etc.)
However, a house is not like this. The analogous argument seems to be: I would not want to build my own house by hand. It would take too much of my time and money to obtain the necessary expertise and equipment.
Renting a house, on the other hand, is kind of like renting shoes. I would prefer to own them. Why should I pay a middle-man (a “shoelord”) a regular fee, when they add little of value? Yes, maybe they provide for my shoe repairs and new shoelaces. But I could do that myself just as easily!
Renting has downsides you underestimate.
Imagine renting shoes from a shoelord who is responsible for shoelaces and shoe repairs. The shoelord’s incentives point to finding the cheapest laces and repairs, with no regard to your personal convenience. Every time you need a shoe repair, you have to fight the shoelord about whether it’s necessary or frivolous.
Landlords and tenants do not have aligned incentives. Renting means giving up a lot of your power to optimize your environment to your liking, and handing it over to someone whose incentives are not aligned.
Renting can’t be sustainably cheaper than owning.
Unless I’m making some big mistake here, renting has to be at least a bit more expensive than owning, because otherwise landlords wouldn’t buy places to rent out. Being a landlord would not make financial sense.
In the post, you compare buying a house to putting money on the stock market. But your comparison should be renting vs buying. If I make rent for years, I own nothing in the end. If I make housing payments for years, I own something in the end. I need a place to live either way—I don’t want to put my money into investments and just live on the streets.
Agreed with all, but it’s worth noting that “renting has to be at least a bit more expensive than owning” is true only on average over long time periods. These particular markets are imperfect, distorted by legal/tax weirdness, and fairly opaque. So there are almost certainly periods of many years in many locations, where renting is cheaper than owning. But that requires specific analysis, not a general pro or con.
By hubris, you seem to mean “optimistic assumptions.” And I could make a similar post about the optimistic assumptions behind renting: the same assumptions about property rights and availability of insurance apply. And by renting, you are predicting that your landlord will not kick you out, stop maintaining the place, or raise rent to a point where you cannot afford it. Or that if they do, you will be able to find another affordable apartment in the area.
Predicting that your home is situated somewhere you will be able to live and work in the future. Or that you will be able to sell it at a good price if this is ever not the case.
//for many people, this is close enough to the case. What’s the statistic: 75% of everyone never moves more than an hour away from where they were born (and 33% never even go more than one hour away)? Something like that.
Predicting that the country/city your home is in will preserve your property rights over a long period of time. Considering that, with very few exceptions, property rights were arbitrarily taken away from people in almost all countries in Europe, South America, Asia, and Africa over the last 80 years, this is a fairly large gamble.
//is this actually true for individual homeowners, though? This is a risk for owning a large capital investment, but my understanding is that individuals generally got to keep (or re-assert ownership of) their personal residence despite political turmoil.
Predicting that you will be able to afford insurance for your home at all times and that the insurance companies will payout in case of a disaster.
//again, this is kind of a tail risk that would be correlated with a loss of value in stocks, bonds, and any other wealth instrument outside of bullets and rations.
Predicting that you will want to live in the area your home is in for a long time, sufficient enough to account for the large overhead of moving when one is buying as opposed to renting.
//isn’t this the same thing you said in point #1?
Predicting that your home investment is wise enough to beat a conservative investment strategy plus the cost of rent.
//As mentioned in other comments, the cost of rent will, in the long term, equal the cost of ownership. In the short term, owners have a more constant expense, and are protected from sudden large increases in rent, should the area become more popular. Also, you can borrow against the asset at rates lower than the long-term average market gains, if you are treating it as an investment (though, in most places, home values are mostly constant, rising at around the general rate of inflation, in which case it’s not really an investment)
In conclusion, more than 63% of people wanting to stay in the same place for an extended (7+ years) period of time, and lock in their housing cost (which is the single largest line item in anyone’s budget) for that time, seems completely reasonable. Some percentage of renters would prefer to own, but don’t have the assets (cash + earning capacity) to acquire a residence; some percentage of people are very mobile, or in an uncertain position, and don’t want to be tied down to a medium-term contract, because they might need or want to move for any number of reasons.
The second argument makes sense, but it doesnt seem to me like the math really checks out. That is to say, yes, a house will appreciate, but so will the money invested in a company concerned with buying, creating, maintaining, and renting houses.
Except that if you live in your investment , you save on rent. So you make at least one profit, and maybe two.
100/monthover38years.Or,assumethatthesamepersoninvested50 monthly in the SNP500 re-investing all dividends (averaging out an 11.3% increase every year) and spent 50$ on rent.
You’re assuming rent is half of mortgage. Why would it be, for equivalent accommodation?
I kind of see your point about the personal and societal benefits of renting, but there are a lot of ifs and buts. Whether renting is a good option depends a lot on the regulatory system and state policy. If renting is built on top of a largely mortgage-backed private ownership market, it’s going to be largely disadvantageous to the renter.
Unless you are moving from place to place to take up reasonably well paying jobs, which I did for a while myself.
And I kind of see the downsides of the property ownership obsession. In the UK, property is so much better than anything else as an investment that bonds and equities are almost ignored by the median person. Yet a lot of the gains are re-absorbed in swings and roundabouts—once a family pay off a mortgage, the equity is needed to get the next generation “on the ladder”, and so on.
In my experience (in the US), the nicer a house gets, the more you save buy owning the house vs renting it. For example, renting a house in my neighborhood costs $1200 per month more than my mortgage. It’s obviously not an optimal financial situation, since I could sell this house and rent a run-down 2-bedroom apartment for even cheaper, but I don’t want to live in a run-down 2-bedroom apartment anymore.
I suspect this is because of the disconnect between what makes rentals risky for landlords (tenants screwing things up) and the benefits of renting for a tenant (if you screw things up, there’s limits to how much it’s your problem). Once you reach a certain expense / necessary upkeep to remain nice-looking level, the only way to make it work is to either have insanely high rent so the landlord can afford to fix the place up if a rental goes bad, or to make the landlord and tenant the same person so their desire to not-screw-it-up is aligned.
Although for the record, at least in the US, high home ownership rates are a sign of a problem with society. Government planners think everyone should own their house whether they want to or not, so renters have to pay additional taxes which are used to subsidize home owners. The crossover point would presumably be different if our tax system was fair.
I suspect one factor in the question of housing as a good investment is the availability of credit—I can get a mortgage for almost the entire value of a house, pay a relatively low rate of interest on that debt (currently at least), then benefit from appreciation on the full value of the whole property.
Meanwhile I can’t make a comparably leveraged investment into the stock market—borrowing money secured against my ownership of shares or index funds or whatever would be much more expensive, if it were even available in the first place.
There are some additional and significant details that complicates this kind of analysis:
In some places, renters have something more accurately describable as quasi- or partial ownership.
In a lot (?) of places, owners also have to pay property taxes, which can change (e.g. increase) significantly over short periods.
In the U.S. (and I’d guess some other places), owners are subsidized, e.g. via the mortgage interest deduction.
It also the case that, (again!) in some places, it’s considerably cheaper to rent than own – these seem to be places where housing generally (and relatively) expensive but renters also have something like quasi- or partial ownership of the housing they’re renting.
In my experience, most housing rentals involve a significant time commitment, i.e. a twelve (12) month lease. That’s a very different situation than month-to-month or one in which a tenant could leave with a month or two notice. And moving itself is very costly – not just in financial terms, but in time, energy, and considerable stress. Transaction costs are important!
The comparisons at the top are simply irrelevant. You’re comparing ownership (financial and control) with production. Very few people build their own home, and close to zero (in the modern world) do so directly rather than by contract. Reasonable comparisons would be “how many households pay for and own their food/clothing that they use”. Which is close to 100%.
Rental is by far the weirder situation. Almost nothing you use day-to-day is rented, even things that have residual value, like your computer, your clothing, your tools. Your car may be, but it’s likely an agreement that looks a lot more like ownership with guaranteed buyback than like rental. Really, only housing is commonly rented rather than owned.
I didn’t read thoroughly, but found similar confusion throughout—like the weird belief that any of your assumption list isn’t baked into your rent. And the utter lack of consideration that the purpose of ownership is control—there is very benefit in being able to do what I want to my residence, to maximize my personal value, even if a landlord would disagree.
I won’t go so far as to say that everyone should strive to own their home, at least for long enough to understand the tradeoffs. I will say that 63% seems pretty reasonable to me.
Point, I’m not sure the analogy is correct here. Too many mistakes, moving this to draft, probably not worth debating in favor of.
You make few wrong assumptions here:
Rent is much cheaper than mortgage. I don’t know about your country, but where I live mortgage is cheaper than rent. People actually buy flats, rent them out, pay mortgage out of rent income and even make small cash on top of it.
Comparing house to farmland is not fair. I can start comparing house to having kitchen utensils. Most of the people I know still cook their own food instead of ordering deliveries. And most of the people I know buy cars instead of renting them.
When you rent, you don’t have a control over your house. You would like to get new kitchen? Well, your landlord has different idea. So what, you gonna move out? Every stupid thing you want changed, you don’t really can.
Lastly, it’s a hedge. If you buy house to get wealthy, that might not be best idea. But if you buy it, because you want to live long term somewhere, then mortgage is a way to get “guaranteed rent”. No need to worry that because of some stupid market bubble, suddenly your rent will skyrocket.
Point 4 said a slightly different way: when you rent you are arguably shorting housing since you need to live someplace. When you own 1 place you are neutral and you aren’t long in housing until you own multiple places.
It can be , if rented accommodation is publically owned , and not-for-profit, but the UK has stepped back from that .
I largely agree with other commenters, but want to put some of these points in my own words.
The comparisons at the beginning of the post don’t make sense.
I would prefer to buy shoes rather than make all of my own shoes, because the cost of learning to make shoes, getting the necessary equipment, and taking the time to make them is too high. (Maybe it would be fun. But, even if I decided to do this as a hobby, I couldn’t simultaneously make all my own clothing, glasses, food, etc etc.)
However, a house is not like this. The analogous argument seems to be: I would not want to build my own house by hand. It would take too much of my time and money to obtain the necessary expertise and equipment.
Renting a house, on the other hand, is kind of like renting shoes. I would prefer to own them. Why should I pay a middle-man (a “shoelord”) a regular fee, when they add little of value? Yes, maybe they provide for my shoe repairs and new shoelaces. But I could do that myself just as easily!
Renting has downsides you underestimate.
Imagine renting shoes from a shoelord who is responsible for shoelaces and shoe repairs. The shoelord’s incentives point to finding the cheapest laces and repairs, with no regard to your personal convenience. Every time you need a shoe repair, you have to fight the shoelord about whether it’s necessary or frivolous.
Landlords and tenants do not have aligned incentives. Renting means giving up a lot of your power to optimize your environment to your liking, and handing it over to someone whose incentives are not aligned.
Renting can’t be sustainably cheaper than owning.
Unless I’m making some big mistake here, renting has to be at least a bit more expensive than owning, because otherwise landlords wouldn’t buy places to rent out. Being a landlord would not make financial sense.
In the post, you compare buying a house to putting money on the stock market. But your comparison should be renting vs buying. If I make rent for years, I own nothing in the end. If I make housing payments for years, I own something in the end. I need a place to live either way—I don’t want to put my money into investments and just live on the streets.
Agreed with all, but it’s worth noting that “renting has to be at least a bit more expensive than owning” is true only on average over long time periods. These particular markets are imperfect, distorted by legal/tax weirdness, and fairly opaque. So there are almost certainly periods of many years in many locations, where renting is cheaper than owning. But that requires specific analysis, not a general pro or con.
By hubris, you seem to mean “optimistic assumptions.” And I could make a similar post about the optimistic assumptions behind renting: the same assumptions about property rights and availability of insurance apply. And by renting, you are predicting that your landlord will not kick you out, stop maintaining the place, or raise rent to a point where you cannot afford it. Or that if they do, you will be able to find another affordable apartment in the area.
Predicting that your home is situated somewhere you will be able to live and work in the future. Or that you will be able to sell it at a good price if this is ever not the case.
//for many people, this is close enough to the case. What’s the statistic: 75% of everyone never moves more than an hour away from where they were born (and 33% never even go more than one hour away)? Something like that.
Predicting that the country/city your home is in will preserve your property rights over a long period of time. Considering that, with very few exceptions, property rights were arbitrarily taken away from people in almost all countries in Europe, South America, Asia, and Africa over the last 80 years, this is a fairly large gamble.
//is this actually true for individual homeowners, though? This is a risk for owning a large capital investment, but my understanding is that individuals generally got to keep (or re-assert ownership of) their personal residence despite political turmoil.
Predicting that you will be able to afford insurance for your home at all times and that the insurance companies will payout in case of a disaster.
//again, this is kind of a tail risk that would be correlated with a loss of value in stocks, bonds, and any other wealth instrument outside of bullets and rations.
Predicting that you will want to live in the area your home is in for a long time, sufficient enough to account for the large overhead of moving when one is buying as opposed to renting.
//isn’t this the same thing you said in point #1?
Predicting that your home investment is wise enough to beat a conservative investment strategy plus the cost of rent.
//As mentioned in other comments, the cost of rent will, in the long term, equal the cost of ownership. In the short term, owners have a more constant expense, and are protected from sudden large increases in rent, should the area become more popular. Also, you can borrow against the asset at rates lower than the long-term average market gains, if you are treating it as an investment (though, in most places, home values are mostly constant, rising at around the general rate of inflation, in which case it’s not really an investment)
In conclusion, more than 63% of people wanting to stay in the same place for an extended (7+ years) period of time, and lock in their housing cost (which is the single largest line item in anyone’s budget) for that time, seems completely reasonable. Some percentage of renters would prefer to own, but don’t have the assets (cash + earning capacity) to acquire a residence; some percentage of people are very mobile, or in an uncertain position, and don’t want to be tied down to a medium-term contract, because they might need or want to move for any number of reasons.
Except that if you live in your investment , you save on rent. So you make at least one profit, and maybe two.
You’re assuming rent is half of mortgage. Why would it be, for equivalent accommodation?
I kind of see your point about the personal and societal benefits of renting, but there are a lot of ifs and buts. Whether renting is a good option depends a lot on the regulatory system and state policy. If renting is built on top of a largely mortgage-backed private ownership market, it’s going to be largely disadvantageous to the renter.
Unless you are moving from place to place to take up reasonably well paying jobs, which I did for a while myself.
And I kind of see the downsides of the property ownership obsession. In the UK, property is so much better than anything else as an investment that bonds and equities are almost ignored by the median person. Yet a lot of the gains are re-absorbed in swings and roundabouts—once a family pay off a mortgage, the equity is needed to get the next generation “on the ladder”, and so on.
In my experience (in the US), the nicer a house gets, the more you save buy owning the house vs renting it. For example, renting a house in my neighborhood costs $1200 per month more than my mortgage. It’s obviously not an optimal financial situation, since I could sell this house and rent a run-down 2-bedroom apartment for even cheaper, but I don’t want to live in a run-down 2-bedroom apartment anymore.
I suspect this is because of the disconnect between what makes rentals risky for landlords (tenants screwing things up) and the benefits of renting for a tenant (if you screw things up, there’s limits to how much it’s your problem). Once you reach a certain expense / necessary upkeep to remain nice-looking level, the only way to make it work is to either have insanely high rent so the landlord can afford to fix the place up if a rental goes bad, or to make the landlord and tenant the same person so their desire to not-screw-it-up is aligned.
Although for the record, at least in the US, high home ownership rates are a sign of a problem with society. Government planners think everyone should own their house whether they want to or not, so renters have to pay additional taxes which are used to subsidize home owners. The crossover point would presumably be different if our tax system was fair.
I suspect one factor in the question of housing as a good investment is the availability of credit—I can get a mortgage for almost the entire value of a house, pay a relatively low rate of interest on that debt (currently at least), then benefit from appreciation on the full value of the whole property.
Meanwhile I can’t make a comparably leveraged investment into the stock market—borrowing money secured against my ownership of shares or index funds or whatever would be much more expensive, if it were even available in the first place.
There are some additional and significant details that complicates this kind of analysis:
In some places, renters have something more accurately describable as quasi- or partial ownership.
In a lot (?) of places, owners also have to pay property taxes, which can change (e.g. increase) significantly over short periods.
In the U.S. (and I’d guess some other places), owners are subsidized, e.g. via the mortgage interest deduction.
It also the case that, (again!) in some places, it’s considerably cheaper to rent than own – these seem to be places where housing generally (and relatively) expensive but renters also have something like quasi- or partial ownership of the housing they’re renting.
In my experience, most housing rentals involve a significant time commitment, i.e. a twelve (12) month lease. That’s a very different situation than month-to-month or one in which a tenant could leave with a month or two notice. And moving itself is very costly – not just in financial terms, but in time, energy, and considerable stress. Transaction costs are important!