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.
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).
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.
Mortgages cause real estate to be more expensive than if everyone had to pay cash. So yes, mortgages payments are cheaper than rent. But rent would be much cheaper in a would without mortgages.
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.
Unfortunately, there are no fixed rate mortgages available in the UK. The second part I agree with, the interest is cheaper than rent, but the mortgage isn't.
There is a small seeming exception in regions where housing prices are rising rapidly: if the owner is willing to forgo increasing rent at the rate of housing price increases (which is pretty common among smalltime landlords), then renting can appear to be cheaper than the present-day mortgage for an equivalent property. Of course, in that market as a renter you lose out on appreciation of the house, so renting is only better if you can get bottom-market rates near the top of the market.
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.
> It shouldn’t be cheaper in a market that’s allowed to function.
in a perfectly efficient market, renting and home ownership costs exactly the same - not cheaper nor more expensive.
However, most home owners living in their home pay a premium for it, because they both want to secure their bid when they buy, and they are likely buying on more than just financial implications (like the location is great for their kids, etc). Therefore, a home owner is actually more likely to have a higher cost of capital over all - both the deposit and the mortgage added together, even if the mortgage interest by itself may be lower than renting.
Think of it this way - if renting was more expensive than the total cost of ownership, then an investor would borrow the capital needed for buying, and then rent it out and arbitrage the difference risk free. It is this mechanism that keeps the rent and the price of ownership at approx. equal.
In recent times, the price of ownership has grown due to the pandemic, and high availability of credit. Rent will follow, if it hasn't already, as landlords will not just eat the loss.
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.
Renting is short-term cheaper than owning, though (depending on local markets). I've rented a bunch of properties way out of my mortgage price range.
And I think gp's point was that if housing prices rise (so that they're a good investment) then they become unaffordable (as we're seeing). One or the other, not both.
> 1. Mortgage rates are lower than rental prices in many places
When this is true, this actually is a very convincing argument. Not only that, but you can effectively arbitrage yourself into a lot of wealth this way. You buy a house and move into it for awhile, but then you buy a new house, move into the new house, and rent out the old house. (You get better mortgage terms that way.) Rinse and repeat whenever you can afford to do so and you eventually end up with a large portfolio of profitable properties.
Of course, it's arbitrage--if enough people do it, it stops working. You can keep it going with more money, if you can make larger down payments, since at that point you're turning a one time lump sum into an ongoing cash flow. But eventually you have to have more money to make money, so not even this might be workable.
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.
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