Buying v Renting

This week's Economist has two articles on Global House Prices that challenge the common assumption that it's always better to buy a house:

Assume that rents rise by 3% a year, in line with wages, while house prices from now on rise in line with inflation of 2%.....

The figures look even more striking in the San Francisco Bay Area, where it is possible to rent an $800,000 house for $2,000 a month. Making the same assumptions about rents and house prices, but also deducting tax relief on a fixed-rate mortgage and adding property taxes, a buyer would pay $120,000 more over seven years than if he had rented. House prices in San Francisco would need to rise by at least 4% a year (2% in real terms) for it to prove cheaper to buy a house. Since 1950 American house prices in real terms have risen by an annual average of just over 1%. To expect them to rise faster from their current dizzy heights smacks of irrational exuberance, to say the least.

Share this

Possible x-factors are

Possible x-factors are return on investment, freedom to customize, bequeathable asset, and so on. That said, why anyone would subject themselves to the political environment of San Fran is beyond me...unless ofcourse one sought same-sex marriage, in which case I say: have at it.

How odd. If it's actually

How odd. If it's actually cheaper to rent the house than to buy it and rent it out at the given price, why wouldn't renters simply charge more than that?

I'm not sure what you meant

I'm not sure what you meant by renters charging more. If you meant "why wouldn't the owners charge more", I think the answer is that they can't. They're constrained by what the market will bear. With so many first-time buyers now owning houses, the relative number of renters is probably low. With owning a house being considered such a "no-brainer", who is silly enough to rent? The only way to convince a potential home-owner to rent instead, is to lower the rent you're asking for.

Also remember, many owners

Also remember, many owners bought there property a long time ago, thus current rents exceed their mortgage payments. While higher rents would be preferred, they are willing to charge less to ensure 100% occupancy. Thus, they exert downward pressure on newer owners, and they have the ability to do this because they are still making a profit at that level.

doesn't the fact that the

doesn't the fact that the buyer owns the house and can sell it while the renter cannot matter?

Sorry, I meant "those who

Sorry, I meant "those who rent the house to others".

But if it's actually more costly to rent the house out, why not just live in it? Are there really so few people looking to move into the San Francisco area that the market won't bear any higher prices?

Something everyone has

Something everyone has forgotten, standard supply/demand analysis does not apply. Rents on residential real-estate are price controlled in S.F. Landlords can't just raise rents to market rates.

For the not as price

For the not as price controlled areas in the S.F. Bay area (like San Jose), housing prices are going up much faster than the national average, even while rents are going down faster than the national average. It's just another bubble. The SF Bay area seems particularly prone to bubbles.

There are tax advantages to

There are tax advantages to owning.

Also while the average increase in house prices might be 1 % a year my house has gone up over 150% in less than 5 years.