The cost of capital is part of the cost of buying.
The reason mortgage "looks" cheap, when only counting cashflow, is that they haven't considered the cost of capital.
If you add up all costs of a mortgage - including cost of capital (as well as maintenance etc) - it isn't cheaper than renting, and on average, i reckon it would be slightly more expensive, and at best it's neutral.
In my experience in the recent market (in a HCOL city in the U.S.), rentals (even only compared to the costs in homeownership, i.e. ignoring principal payments) are much cheaper than mortgages for an equivalently sized house/unit. That's the assertion of the article, and it rings true.
You're right that the bulk of the mortgage payments, especially towards the beginning, do not go towards building any capital, which makes the investment even less appealing.
It's not that straightforward. Because the capital generally appreciates too, the rental costs can be driven down below mortgage costs in some cases. But even without that, most mortgages require deposits, and to compare that against rental you also need to compare potential return from investing that deposit instead.
You can certainly profit by buying - I have profited substantially that way -, and buying serves as a hedge against outsize increases in rental costs, but there are also many situations where you can profit by renting.
Calling it out as a demonstration of frugality on the other hand is a bit odd.
The article's analysis missed one big thing in the comparison: rent (necessarily) includes a profit margin for the owners. In a mortgage this is the interest payment on the loan, but in a mortgage the owner gradually shifts from lender to buyer. (In fact, one way of looking at paying down a mortgage early is that the buyer is earning higher returns at the expense of the lender.)
It wouldn't surprise me at all that a mortgage, after accounting for all factors, is still cheaper than renting.
interest payments from the mortgage can be directly compared with rent, but not the principle repayment portion of the mortgage.
> assuming you can put up the standard up-front capital requirements.
which is also a cost - just more difficult to imagine as a cost. This cost is called the cost of capital, and is non-zero. If you take the minimum return, which is the risk-free rate from buying treasuries, this can be considered your cost of capital for this upfront deposit. More, if you consider this capital could be invested in the markets for some risk.
It isn't always clear cut which wins out, mortgage or renting. For the past few decades, mortgages have been winning out due to declining interest rates, but that might not last.
A good way of looking at the “hidden cost” of buying your home- when you get a mortgage to buy a house, you’ve simply shifted from renting your home to renting the money used to buy your home.
Since your house and that cash are (sorta definitionally) worth the same amount, which you do makes less of a difference than you would think. (And no, it doesn’t matter that the mortgage money is “rent to own”- as the article points out, a home-renter could have just as easily been putting that extra cost into stocks the whole time.)
Rent vs Buy has fairly standard calculators, especially when you're wealthy enough to factor in opportunity cost.
If you're able to take a 30 year loan w/ a 2.7% interest rate and invest the rest of the equity, your house is cheaper than someone who buys it outright in cash.
The only time I would disagree with you, however, is for poor people. "Mortgage principle is not an expense" is correct over a long-horizon, but families living month-to-month that somehow managed to purchase a house are severely unlikely to be able to really capitalize on any value generated from that. I think your comment primarily applies to upper middle-class and wealthy people.
Mortgage is not a cost accounting wise. Interest is a cost, but capital repayment is already "profit" which the landlord will keep at the end of the loan.
Let's say rent is mortgage + 30%. If we assume all the risks and costs (maintenance, insurance, etc) are eating up all of that 30%, they still make a whopping 200%+ profit in the long run.
In a fair business relation with 20-30% profit, the landlord would actually loose cash each month until the mortgage is over, with the expectation to realize profit when the property is sold. This rarely happens.
not the same - a mortgage require a deposit. Renting will be cheaper, because a deposit is basically a capital cost (that people comparing renting and buying don't take into account).
Why do people compare monthly mortgage amount and rent? It misses several big elements to housing costs: taxes, maintenance, closing costs, realtor costs, and opportunity cost of the money tied up.
Renting vs buying comparisons need to account for lot more than those two numbers but that's all I see posted most of the time.
the mortgage is not 100% comparable to the rent, since not 100% of the mortgage is unrecoverable cost, unlike rent.
Some percentage of the mortgage payment is the principle payment. If you subtract this principle payment, and add in the cost of capital for the mortgage (which is the opportunity cost of the initial deposit), you can then compare the cost of mortgage with rent.
In most cases, rent should be cheaper (but of course, not always).
A nice rule of thumb is to have a 5% rule - if you can rent annually for less than 5% of the cost of the property, you'd be ahead financially.
Not with the current interest rates renting is not cheaper than mortgage.
Hi thesis also probably ignores the the fact that a mortgage is one of the few ways a normal person can use leverage and I most countrys property is a tax efficient way of handing capital to your descendants.
I think it really boils down to what the relative costs are. There are many renters who pay as much or more as someone with a mortgage, and the person with the mortgage is obviously building up capital within that property (value Vs. current mortgage).
Rent is probably cheaper than ownership, except for the investment component. Because the market isn't efficient here, and because of the asset growth, owners can get a positive return even if rent doesn't pay the full mortgage.
The reason mortgage "looks" cheap, when only counting cashflow, is that they haven't considered the cost of capital.
If you add up all costs of a mortgage - including cost of capital (as well as maintenance etc) - it isn't cheaper than renting, and on average, i reckon it would be slightly more expensive, and at best it's neutral.
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