Yes the article seems to be written with the undertone that mortgages are somehow exploitative. It even goes all the way back to the GFC to point out the weird edge case where NINJAs were lent out like hotcakes. The reason that become toxic is because brokers were getting insane commissions signing people up for them.
Any mortgage at almost any fixed interest rate, assuming a market amenable to the local prevailing median income, will always beat renting. If the value goes to 0 somehow you still have a roof over your head. That is, assuming that the government doesnt take your property away. Which shockingly they can. Different discussion though.
There is a remark that's important here though. The math both you and I agree on assumes that the property is not an investment. The reality is all property is effectively an investment because even in good times 5-8x your salary was a decent price. Now it's more like 20x in some places. No one would make such a leap without being guaranteed something back. The calculus changes at that point. Even for first time homeowners.
> Any mortgage at almost any fixed interest rate, assuming a market amenable to the local prevailing median income, will always beat renting
Yes. One of the smartest finance guys I know says the simple model of taking the landlord's (imputed) mortgage yield and adding four percent nearly always predicts the rental level.
> even in good times 5-8x your salary was a decent price. Now it's more like 20x in some places.
But the causality of this is surprising: that's because interest rates have come down. So the repayment monthly cost has remained constant, but the deposit and salary ratio have shot up.
Now that rates are on the way back up one of two things has to happen to maintain the ratio:
- house prices drop
- inflation increases nominal-income rapidly past house prices
The use of 30-year mortgages hugely slows down those effects, though.
> If the value goes to 0 somehow you still have a roof over your head.
you got the cause and effect wrong here.
As long as you have the roof over your head, the value of the property isn't zero.
If you can no longer use the property as a roof over your head, it's value drops to zero. For example, the place is completely flooded, or destroyed in an earthquake (assuming no insurance etc).
> Any mortgage at almost any fixed interest rate ... will always beat renting
only true if you put enough constraints on the condition under which you consider this to be "amenable". In realistic situations, renting or mortgages could either be better or worse, depending on the circumstances. On average, it costs "the same" to live somewhere with rent, or via a mortgage - otherwise, there'd be an arbitrage opportunity!
Yes, people who would like to own but can't afford the upfront payment or are deemed too risky over a long time period have to rent from those with more capital - who turn a profit.
yes, and they turn a profit because they risked their capital into the property, but is allowing its use for the renter!
I dont think i'm missing the point. if mortgage is a lot cheaper than renting, nobody would rent. Therefore, market forces over time would push both to be mostly in equalibrium.
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.
You have a somewhat textbook view of the problem. That's okay, except it's wrong like most textbooks. At least in a practical sense.
The key mistake I think you made is here:
> I dont think i'm missing the point. if mortgage is a lot cheaper than renting, nobody would rent.
You're forgetting the people who own the capital. Yes, in theory, there's an arbitrage here. One that has been fully abused by landlords for the last decade or more. Here's the rules:
1. Possess enough assets, capital, or goodwill to get a loan
2. Buy the house below "rent-rate"
3. Rent the house above "rent-rate"
4. Get $XXX nearly risk free since people need a place to live
In this sense you could view the insane rise in house prices as the market becoming "arbitrage-free" to use the term as loosely as possible.
The problem is at step (1). The average citizen cannot capitalize on the opportunity. The average citizen scrapes together somewhere between 4% and 20% for the house and lives in it. That's a substantial amount of someone's savings. There's no arbitrage. The only thing that they get is some theoretical money back between the rent price and their mortgage. In a practical sense all the owner did was lock in a rent price. Most people cannot even capitalize on the interest rate arbitrage that is available because again, I emphasize, you need to live somewhere. To capitalize on it you need to sell your house and buy somewhere else cheaper (e.g. another state). I don't think it's hyperbolic to say this is extremely difficult and likely impossible for most people. Myself included.
You also didn't discuss the problem of housing being an investment at all. The fact my mortgage has gone up $100 (due to property tax) but the apartments I used to live in are now $1400 more expensive says there is legitimately exploitation of the market going on. In the stock market this kind of front-running is illegal. The current strategy is:
1. Buy up enough houses to drive market price up by suppressing supply
2. Keep supply low
3. Artificially increase rents to increase profit margins
In the stock market this is very illegal. In fact there are numerous cases of this occurring throughout history in the futures market and people have gone to prison for it. If we're unwilling to fix the problem perhaps the SEC has a few rules we can adopt. Still doesn't stop the problem of exploiting the lowest level of maslows hierarchy of needs. This is probably one of the places where the free market cannot address both concerns. There are no amount of first time buyers whose total capital could out-capitalize Blackrock and Vanguard. It's simply naivety to believe that average citizens are causing housing to become unaffordable.
Any mortgage at almost any fixed interest rate, assuming a market amenable to the local prevailing median income, will always beat renting. If the value goes to 0 somehow you still have a roof over your head. That is, assuming that the government doesnt take your property away. Which shockingly they can. Different discussion though.
There is a remark that's important here though. The math both you and I agree on assumes that the property is not an investment. The reality is all property is effectively an investment because even in good times 5-8x your salary was a decent price. Now it's more like 20x in some places. No one would make such a leap without being guaranteed something back. The calculus changes at that point. Even for first time homeowners.