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Comment by uiri | Hacker News Reader

Let's say we have two individuals - Alice and Bob - who each own a house. Each house has the same price on the real estate and on the rental markets. If Alice lives in Bob's house and pays rent to Bob and Bob lives in Alice's house and pays rent to Alice, their balance sheets are the same as if Alice lived in her own house and Bob lived in his own house. Excluding the rent income and rent expense (which offset), their cash flows are also identical to the situation of each living in their own house.

Now, it is possible that you would not rent a place similar to the one that you buy. In this case, your savings are equal to (rent expense otherwise incurred) - (unrealized rental income). I think that the latter will tend to be higher than the former. This will result in a net loss for owning. This loss is simply the price the owner pays for occupying a nicer place and does not really have much to do with owning vs renting.

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Alice and Bob don't help or hinder your argument in any way. It just seems like a non sequitur.

Selection of choice to rent vs buy typically isn't driven by net wealth change considerations; rather, it's an investment in an area, because the transaction costs of house purchases are much higher than changing rental leases, and thus you need to stay in a bought house longer to spread the costs. In particular, houses bought for living (rather than rental) are more often selected for life-changing events, like starting a family, or downsizing when children have left the family home.

Further, your bald assertion that unrealized rental income will be greater than rent expense otherwise incurred - if I read this right, it means you think people will buy a more expensive property than they would rent - I think is wholly unjustified. I think you've got it exactly backward, and that's certainly the case in my rental vs purchasing history: I've always rented places that I couldn't afford to buy.

When I was younger, I valued being closer to the heart of the city (London in my case). That meant denser living, apartments, etc. When I chose to buy, I couldn't afford to buy the places I'd been renting, but also my values had changed: I wanted somewhere with more space, not least because I had more stuff (like motorcycles, which meant a garage; and an office distinct from the living room; etc.)

So to figure out the overall value of the investment, you'd need to add up not just all the money it's going to cost the owner, but also subtract all the money the the owner did not have to pay in rent.

I'm countering this assertion that you need to subtract all the money that the owner did not have to pay in rent because this is going to be equal to the amount that the owner did not earn in rent by renting out their house.

People who buy a house for living (rather than rental) do not often make a rational economic investment decision which is kind of my point.

Sorry, I did not make it clear that I was assuming a comparison between renting and owning in the same neighbourhood. People (Americans in particular) generally rent apartments and buy houses, as you rightly pointed out. Within the same neighbourhood, a house is going to cost more to rent than an apartment.

It varies. Personally if I am renting I want to minimize that outgoing when saving for a nicer place to buy. I came close but quantitative easing killed that for me but the intention was there and now I'm back renting a cheap a place that suits my circumstances.

This only works in some magical tax depreciation scheme. In reality, monthly mortgage costs in an area are going to be market driven as are rental prices for the exact same property, and while the two axis aren't completely orthogonal they are somewhat independent. My experience is that in any given year in most regions rent income will not cover house payments/taxes/upkeep without tying up absurd amounts of down payment. I finally bought the house I was renting and my mortgage alone is more than I was paying in rent. Only reason I did it was that it was a long term hedge on the 10% rent increases in my region that I'd been seeing and expecting for another few years at least. I'll let you know if it was a smart play in 30 years...

Well in 30 years you'll at least own it. Would suck to be renting in your late 60's and paying for that on retirement income.

But you can invest the difference in something more liquid and diversified and use that income to forever pay your rent.

That's true, but most of the time it's just as expensive to rent than buy. You are paying the mortgage of your landlord, along with their salary.

Not really true, especially with multi unit housing. The mortgage is split between tenants. Rentals are generally also not responsible for fixing things like broken pipes or furnace repairs either.

But not totally independent. Renting almost has to be more expensive than buying.

In a first approximation, if rent is much less than owning + expenses, the property owner will have to sell or go bankrupt, which will reduce property values. If rent is much greater, then property owners have an incentive to increase the rental market, lowering rents and raising property values. At a theoretical level, owning carries more uncertainty than renting.

Of course, weird circumstances can upset things: a decrease in acceptable uncertainty can cause rents to go up faster than the market can otherwise adjust, for example.

My past experience says that renting costs more than owning, but bit by much.

But I don't know what you think an inordinate down payment is.

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