5 ms·

In a free market, rent will always be higher than cost of a property. If it were less, the property is an unprofitable investment and should be divested. This

by abtinf 8y ago

In a free market, rent will always be higher than cost of a property. If it were less, the property is an unprofitable investment and should be divested. This article drops critical context. 10 years ago, one of the earliest and most potent warning signs of the coming collapse was the extreme disparity between rents and mortgages. Home prices skyrocketed while rents remained relatively flat. And just a couple years before that, there were weekly newspaper articles about the unprecedented reversal of the rent-to-mortgage ratio.

woodpanel 8y ago
Interesting! Germany seems to be in the situation you described as "10 years ago".
- hobofan 8y ago
  > while rents remained relatively flat Unless you live in a more rural area in Germany that statement doesn't apply.
alex_duf 8y ago
> In a free market, rent will always be higher than cost of a property. If it were less, the property is an unprofitable investment and should be divested. That's assuming you finance your property with debt and let someone else pay for your debt. If you either happen to own a property you don't use, or own the property you live in, it makes perfect sense. You're describing everything that's wrong about the property market: owner expecting properties to magically create money out of someone else's labour.
- brightball 8y ago
  I’m not sure that’s anything other than math. If I have a property and I decide to rent it, why would I rent it for anything less than the sum of my expenses plus a profit margin that will cover maintenance or repairs? Why would anyone else? A rental property is just like any other business.
  - raverbashing 8y ago
    > why would I rent it for anything less than the sum of my expenses plus a profit margin that will cover maintenance or repairs? > Why would anyone else? A rental property is just like any other business. You're absolutely right if your financial and strategical planning only sees up to the next quarter.
    - roel_v 8y ago
      Let's say I look 10 years into the future. How does that change anything?
      - raverbashing 8y ago
        How much can real estate appreciate in 10 years again? (though it can definitely depreciate, but depends on its current situation). Also its future value may depend on how you're renting it currently. (Or even if your overcharging for rent and the property is empty because you are waiting for "the perfect tenant") You're also assuming buying and selling property is frictionless. If your equity is negative it might be better (or even be the only alternative) to rent it at a below mortgage cost to have fewer losses.
        roel_v 8y ago
        Wait, I'm not sure what you're arguing here. The GP said that houses rent for expenses plus profit. I can't quite tell if he meant to delineate that to strictly rental income, but I understood it as meaning 'a land lord prices his property (the rent of a property, of course) so that he will make back his expenses, plus a profit, over the expected ownership time span'. So that includes things like expected appreciation, any tax benefits etc. Is that what you are saying too? Because then there isn't much of an argument here :) I thought what you meant to say was that there is some factor other than financial that comes into play (or should come into play) when determining a rental price.
        abtinf 8y ago
        Housing is a consumable good, not an investment. That homes appreciate is a symptom that reveals the catastrophic government policies imposed on the market. In a free market, homes would be very unlikely to appreciate in value. Indeed, they would be much more likely to depreciate as they degrade and fall technologically behind.
- beagle3 8y ago
  > That's assuming you finance your property with debt and let someone else pay for your debt. If you either happen to own a property you don't use, or own the property you live in, it makes perfect sense. If you happen to own a property, but not use it, then you can either: a) rent it out, or b) sell it, and invest your proceeds according to your preferred risk/reward preferences. In an efficient free market, for similar risk you get similar reward; So, if the reward for real-estate is 3% with essentially no risk, you're generally able to get the same thing by selling and putting the money in bank / low risk stock portfolio. Alternatively, if you can't get 3% in other places, everyone will look to buy houses and rent them out (as an investment) in order to get those 3%. That's why the risk/reward profile equalizes across asset classes. What GP was describing is basic math and economics. The existing state of ownership only matters in the sense that changing it introduces economic friction (ownership deduction, property transfer taxes, title transfer, realtor and lawyer fees, etc). Other than that, it's just math.
- abtinf 8y ago
  The concepts of “cost of capital” and “opportunity cost” account for the scenarios you describe. Money has a price. If you want to borrow money, you pay interest. If you have uninvested money, you forego interest and suffer inflation. If you have investors’ funds, that has a cost too. The combined costs of your various sources of money are your cost of capital. Investments are only economically profitable if they make more than the cost of capital. It is quite common to earn an accounting profit but suffer an actual economic loss. If you own property you don’t use, then, assuming you aren’t enjoying some offsetting non-pecuniary benefit, you are suffering an economic loss. You would be better off selling that property so that you can reallocate your capital to a productive purpose.
shoo 8y ago
> In a free market, rent will always be higher than cost of a property. If it were less, the property is an unprofitable investment and should be divested. perhaps this might be true asymptotically in a sufficiently-qualified rational, efficient, spherical, theoretical market. also, a market where tax laws don't give preferential treatment to renting or buying. i'm currently renting in one of australia's major cities, the gross rental yield of this place would be something like 3% before subtracting costs (council rates, maintenance, interest, property management fees, insurance).
matthewmacleod 8y ago
That's only true if you're looking at the overall cost vs. investment profile, but I'm not entirely sure that's the point. Renting out a property that you own can still be a long-term beneficial investment so long as the rental costs exceed the costs of borrowing on a mortgage – and that's typically much, much lower than the value of the actual mortgage payments being made. Capital growth potential is a valid reason that people may choose to invest in property, and in a market where there are many rental properties to choose from it's quite possible that rents remain below the prevailing capital repayment + interest that a mortgage would require. But really it's hard to understand exactly what the point being made in this article is – it seems to be primarily that the "total amount" of rent being paid is now approaching parity with the "total amount" of payments being made by homeowners. I can't tell if that includes capital repayments, or if it's even accounting for an increase in renters vs. homeowners. There's basically no useful information there.
tway2888888 8y ago
>In a free market, rent will always be higher than cost of a property. ...In the long run, and on average. Economic "laws" aren't ironclad; people are free to make all kinds of poor decisions, and they do. This is the foundation of the parable of the economist walking down the street and refusing to pick up the $20 bill, because if it were real, someone already would have. We know how things should work, but they often don't. That's what is interesting.
J-dawg 8y ago
The article isn't talking about disparity between rents and mortgages. It's saying the total amount being paid in rent is approaching the total amount paid in mortgage payments. I'm not sure what that proves other than far more people are renting than previously. This needn't even be a problem, inherently. It's just that renting is often a miserable experience in the UK, and people are having to spend far too much of their income on it, which is setting us up for all sorts of societal problems in the future.
- turblety 8y ago
  > people are having to spend far too much of their income on it [rent], which is setting us up for all sorts of societal problems in the future. I wonder what the long term effects of this will be. When no one has any savings and no house when they retire, and all of a sudden have to live on a very small pension (which if the trends [1] are anything to go by may all collapse) what are people going to do? [1] https://www.forbes.com/consent/?toURL=https://www.forbes.com/sites/oliviergarret/2017/06/09/the-disturbing-trend-that-will-end-in-a-full-fledged-pension-crisis/ https://www.forbes.com/consent/?toURL=https://www.forbes.com...
  - J-dawg 8y ago
    Exactly. I expect a lot of people will decide to move to a cheaper part of the EU where their meagre pension will go further. Hey wait a minute...
    - majewsky 8y ago
      This is happening right now. I don't have any statistics, but I've seen TV reports (i.e., anecdata) about German retirees moving to Romania or Bulgaria. The biggest issue for them is that they only know German, and the locals in their age class only know their own native tongue. Maybe when people from my generation need to do the same in the future, it will be easier for them because English fluency is/will be more widespread by then. EDIT: Would be interesting to see how this might affect the economy at large when this gets widespread. There already are quite significant transfers of purchase power across borders within the EU, e.g. (IIRC) the main income source in the Republic of Kosovo is family members working in richer parts of the EU and sending money home. Retirees who receive their pensions from the rich countries, but spend it in the poor countries where they relocate to, would serve as another force in the same direction.
T-Winsnes 8y ago
That really depends on the Tax laws in the area you are looking at. Negative gains will help reduce the cost of the investment, and if you take capital gains fueled by the increase in population into account, it can be highly profitable. Even when rent doesn't cover the whole mortgage payment.
snarfybarfy 8y ago
I think this only due to the fact that most owners equate mortgage payment to rent. If you properly account for running costs, depreciation and capital cost then renting "should" cost about the same as ownership.

by abtinf 8y ago

woodpanel 8y ago

Interesting! Germany seems to be in the situation you described as "10 years ago".

hobofan 8y ago
> while rents remained relatively flat Unless you live in a more rural area in Germany that statement doesn't apply.

alex_duf 8y ago

> In a free market, rent will always be higher than cost of a property. If it were less, the property is an unprofitable investment and should be divested. That's assuming you finance your property with debt and let someone else pay for your debt. If you either happen to own a property you don't use, or own the property you live in, it makes perfect sense. You're describing everything that's wrong about the property market: owner expecting properties to magically create money out of someone else's labour.

brightball 8y ago
I’m not sure that’s anything other than math. If I have a property and I decide to rent it, why would I rent it for anything less than the sum of my expenses plus a profit margin that will cover maintenance or repairs? Why would anyone else? A rental property is just like any other business.
- raverbashing 8y ago
  > why would I rent it for anything less than the sum of my expenses plus a profit margin that will cover maintenance or repairs? > Why would anyone else? A rental property is just like any other business. You're absolutely right if your financial and strategical planning only sees up to the next quarter.
  - roel_v 8y ago
    Let's say I look 10 years into the future. How does that change anything?
    - raverbashing 8y ago
      How much can real estate appreciate in 10 years again? (though it can definitely depreciate, but depends on its current situation). Also its future value may depend on how you're renting it currently. (Or even if your overcharging for rent and the property is empty because you are waiting for "the perfect tenant") You're also assuming buying and selling property is frictionless. If your equity is negative it might be better (or even be the only alternative) to rent it at a below mortgage cost to have fewer losses.
      - roel_v 8y ago
        Wait, I'm not sure what you're arguing here. The GP said that houses rent for expenses plus profit. I can't quite tell if he meant to delineate that to strictly rental income, but I understood it as meaning 'a land lord prices his property (the rent of a property, of course) so that he will make back his expenses, plus a profit, over the expected ownership time span'. So that includes things like expected appreciation, any tax benefits etc. Is that what you are saying too? Because then there isn't much of an argument here :) I thought what you meant to say was that there is some factor other than financial that comes into play (or should come into play) when determining a rental price.
      - abtinf 8y ago
        Housing is a consumable good, not an investment. That homes appreciate is a symptom that reveals the catastrophic government policies imposed on the market. In a free market, homes would be very unlikely to appreciate in value. Indeed, they would be much more likely to depreciate as they degrade and fall technologically behind.
beagle3 8y ago
> That's assuming you finance your property with debt and let someone else pay for your debt. If you either happen to own a property you don't use, or own the property you live in, it makes perfect sense. If you happen to own a property, but not use it, then you can either: a) rent it out, or b) sell it, and invest your proceeds according to your preferred risk/reward preferences. In an efficient free market, for similar risk you get similar reward; So, if the reward for real-estate is 3% with essentially no risk, you're generally able to get the same thing by selling and putting the money in bank / low risk stock portfolio. Alternatively, if you can't get 3% in other places, everyone will look to buy houses and rent them out (as an investment) in order to get those 3%. That's why the risk/reward profile equalizes across asset classes. What GP was describing is basic math and economics. The existing state of ownership only matters in the sense that changing it introduces economic friction (ownership deduction, property transfer taxes, title transfer, realtor and lawyer fees, etc). Other than that, it's just math.
abtinf 8y ago
The concepts of “cost of capital” and “opportunity cost” account for the scenarios you describe. Money has a price. If you want to borrow money, you pay interest. If you have uninvested money, you forego interest and suffer inflation. If you have investors’ funds, that has a cost too. The combined costs of your various sources of money are your cost of capital. Investments are only economically profitable if they make more than the cost of capital. It is quite common to earn an accounting profit but suffer an actual economic loss. If you own property you don’t use, then, assuming you aren’t enjoying some offsetting non-pecuniary benefit, you are suffering an economic loss. You would be better off selling that property so that you can reallocate your capital to a productive purpose.

shoo 8y ago

> In a free market, rent will always be higher than cost of a property. If it were less, the property is an unprofitable investment and should be divested. perhaps this might be true asymptotically in a sufficiently-qualified rational, efficient, spherical, theoretical market. also, a market where tax laws don't give preferential treatment to renting or buying. i'm currently renting in one of australia's major cities, the gross rental yield of this place would be something like 3% before subtracting costs (council rates, maintenance, interest, property management fees, insurance).

matthewmacleod 8y ago

That's only true if you're looking at the overall cost vs. investment profile, but I'm not entirely sure that's the point. Renting out a property that you own can still be a long-term beneficial investment so long as the rental costs exceed the costs of borrowing on a mortgage – and that's typically much, much lower than the value of the actual mortgage payments being made. Capital growth potential is a valid reason that people may choose to invest in property, and in a market where there are many rental properties to choose from it's quite possible that rents remain below the prevailing capital repayment + interest that a mortgage would require. But really it's hard to understand exactly what the point being made in this article is – it seems to be primarily that the "total amount" of rent being paid is now approaching parity with the "total amount" of payments being made by homeowners. I can't tell if that includes capital repayments, or if it's even accounting for an increase in renters vs. homeowners. There's basically no useful information there.

tway2888888 8y ago

>In a free market, rent will always be higher than cost of a property. ...In the long run, and on average. Economic "laws" aren't ironclad; people are free to make all kinds of poor decisions, and they do. This is the foundation of the parable of the economist walking down the street and refusing to pick up the $20 bill, because if it were real, someone already would have. We know how things should work, but they often don't. That's what is interesting.

J-dawg 8y ago

The article isn't talking about disparity between rents and mortgages. It's saying the total amount being paid in rent is approaching the total amount paid in mortgage payments. I'm not sure what that proves other than far more people are renting than previously. This needn't even be a problem, inherently. It's just that renting is often a miserable experience in the UK, and people are having to spend far too much of their income on it, which is setting us up for all sorts of societal problems in the future.

turblety 8y ago
> people are having to spend far too much of their income on it [rent], which is setting us up for all sorts of societal problems in the future. I wonder what the long term effects of this will be. When no one has any savings and no house when they retire, and all of a sudden have to live on a very small pension (which if the trends [1] are anything to go by may all collapse) what are people going to do? [1] https://www.forbes.com/consent/?toURL=https://www.forbes.com/sites/oliviergarret/2017/06/09/the-disturbing-trend-that-will-end-in-a-full-fledged-pension-crisis/ https://www.forbes.com/consent/?toURL=https://www.forbes.com...
- J-dawg 8y ago
  Exactly. I expect a lot of people will decide to move to a cheaper part of the EU where their meagre pension will go further. Hey wait a minute...
  - majewsky 8y ago
    This is happening right now. I don't have any statistics, but I've seen TV reports (i.e., anecdata) about German retirees moving to Romania or Bulgaria. The biggest issue for them is that they only know German, and the locals in their age class only know their own native tongue. Maybe when people from my generation need to do the same in the future, it will be easier for them because English fluency is/will be more widespread by then. EDIT: Would be interesting to see how this might affect the economy at large when this gets widespread. There already are quite significant transfers of purchase power across borders within the EU, e.g. (IIRC) the main income source in the Republic of Kosovo is family members working in richer parts of the EU and sending money home. Retirees who receive their pensions from the rich countries, but spend it in the poor countries where they relocate to, would serve as another force in the same direction.

T-Winsnes 8y ago

That really depends on the Tax laws in the area you are looking at. Negative gains will help reduce the cost of the investment, and if you take capital gains fueled by the increase in population into account, it can be highly profitable. Even when rent doesn't cover the whole mortgage payment.

snarfybarfy 8y ago

I think this only due to the fact that most owners equate mortgage payment to rent. If you properly account for running costs, depreciation and capital cost then renting "should" cost about the same as ownership.