Buying Is Now Way More Costly Than Renting

November 8, 2023

Buying Is Now Way More Costly Than Renting

Accessing the property market has seldom been more challenging for prospective first-time buyers. Nevertheless, the constrained housing market does not translate into substantial gains for landlords.

The divergence between the cost of property ownership and renting has reached an unprecedented level, dating back at least to 1996. According to a comprehensive analysis by CBRE, the average monthly mortgage payment for newly acquired homes now exceeds the average rent for apartments by a staggering 52%. The last instance of such imbalance was observed prior to the housing crash in 2008, with the premium peaking at 33% in the second quarter of 2006.

In theory, the expenses associated with buying and renting properties should be reasonably commensurate. While homeowners stand to benefit from the appreciation of property values, they are also obliged to allocate more capital towards property maintenance and refurbishments compared to tenants.

Between 1996 and mid-2003, the average costs associated with property purchase or rental indeed remained relatively comparable. However, following the global financial crisis, a confluence of rock-bottom interest rates and a substantial housing supply rendered it, on average, 12% more cost-effective to purchase a property rather than rent one throughout the 2010s. The current substantial premium for property ownership can be attributed to the escalating cost of debt, driven by 30-year mortgage rates surging to 8%, in addition to the substantial rise in property prices occasioned by the increased valuation of domestic space during pandemic-induced lockdowns.

A person embarking on a 30-year mortgage today to acquire a home valued at $430,000, with a 10% down payment, would need to allocate approximately $3,200 monthly for repayments. This represents a 60% increase compared to a similar home purchase three years ago. Meanwhile, rents have experienced a more moderate 22% escalation over the same period, albeit still outpacing the broader inflation rate in the United States.

The continuous rise in property prices has made it increasingly difficult for renters to amass the requisite 10% down payment, let alone manage the spiraling mortgage expenses. 

The prospect of market equilibrium restoration through a significant price decline appears unlikely, barring a major economic recession. Those who acquired properties during periods of low interest rates have secured advantageous financing, with roughly 80% of outstanding mortgages in the United States boasting an interest rate below 5%. This provides homeowners with a strong incentive to remain in their current properties, contributing to the constraint on the supply of homes available for sale.

In theory, homeowners in this situation may appear to benefit, yet they are not devoid of challenges. Their mobility is restricted, and the practicality of downsizing to capitalize on historically high property prices may be compromised, particularly in light of the elevated mortgage rates prevailing in the market.

Under normal circumstances, in which homeownership is out of reach for many tenants, landlords would typically have the leverage to increase rents. However, the supply of available rental properties is not as constrained, due to a surplus of newly constructed apartment complexes exerting downward pressure on rent appreciation. Tenant demand is also less robust compared to the pandemic period, as a majority of individuals intending to relocate have already done so in the past two years. Fannie Mae anticipates that vacancy rates in multifamily properties in the United States will reach 6.25% by 2024, exceeding the 15-year average of 5.8%.

This predicament poses challenges for institutional investors who have injected substantial capital into the U.S. rental property market in recent years. Furthermore, stocks of apartment-related companies are experiencing underperformance. Since the resurgence of the buy-to-rent premium in early 2021, shares in AvalonBay Communities and Equity Residential have declined by 6% and 18%, respectively, while the S&P 500 index has recorded an 8% gain.

In a housing market that functions dysfunctionally, even one that ostensibly aligns with the interests of landlords, it appears that only lifelong renters may be realizing their desired outcomes.



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