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.
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.