<p>Note that the "cost of home ownership" depends not only on the house and the market, but also the individual. For someone who moves every year, home ownership is generally not a good option - that person incurs closing costs every year, and most of their mortgage payments at the start of the loan go to interest, rather than building a meaningful amount of equity in the house.  It would be far better for that person to simply rent, rather than throwing away a few percent of their home's value every year in closing costs.</p>

<p>With this in mind, it's possible that the <em>characteristics of the population</em> make renting and home ownership roughly equal in cost, when averaged over a long period of time and the entire population. If you're not going to stay in a home for several years, it will generally be more favorable to rent, since you do not have enough time to recoup up-front costs associated with buying. I don't have hard numbers to show this equivalence, but it's worth pointing out that annual cost of home ownership vs. renting has a component that is unrelated to market value or interest rate - individual lifestyle choices play a role as well. Empirically, we might find that renting is the better financial option for about as many people as would be better off with home ownership.</p>

CC BY-SA 4.0
2020-05-19T13:50:39.930Z
2020-05-19T13:50:39.930Z
Nuclear Hoagie
<p>A rent requires a payment every period of time but it's not charged by the interest rate required in a mortgage because you aren't asking for a loan , and also if you rent then some of the costs are paid by the owner ( renovation, for example) . If you buy a house you will be able to sell it again at a certain price when you have finished to pay for it, but if you have no more money to pay for the loan you will be in bad problems because mortgages aren't liquid activities, instead renting a house doesn't require a stable income because you can always rent a cheapier house. So, all of this factors (and many other) have to be considered ; therefore, not always it's better to buy a house. Anyway , I wouldn't say that they are roughly equal , it all depends on the features of the buyer and the conditions of the market (Maybe,it could be an empirical evidence?) but for sure they're not perfect substitute goods.</p>

CC BY-SA 4.0
2020-05-19T13:23:58.793Z
2020-05-19T13:35:34.283Z
2020-05-19T13:35:34.283Z
Tortar
<p>According to the person <a href="https://www.youtube.com/watch?v=kkVEt5tC2xU" rel="nofollow noreferrer">in this</a> video (at about 10:10) from the economist, the evidence shows that long run cost of owning and renting homes are approximately same. </p>

<p>The video itself tries to explain it in the minute before that person speaks about the evidence showing this, but I dont understand the explanation. </p>

<p>The video says that this is because home buyers have to make mortgage payments which include interest and maintenance costs such as insurance, repairs and so on. </p>

<p>But I still don't understand their explanation because when people rent they have to make rent payments forever and they never get the house. However, when people buy house they have to make mortgage payements maybe for 30-40 years and after that the home is theirs and now they only need to make the upkeep cost which I always thought are small (but I am not a home owner so I dont know that for sure). So how come the evidence shows that they are roughly equal? Or is the video incorrect? </p>

CC BY-SA 4.0
2020-05-20T13:59:03.130Z
Assuming they’re taxed the same, any cost (including financing costs and opportunity cost of capital) that a homeowner faces is also a cost that a landlord faces and has to factor into rental prices. It’s really that simple. Things like different tax treatments can change this calculation, but as a baseline, it’s correct.
dismalscience
CC BY-SA 4.0
2020-05-20T14:17:23.637Z
@dismalscience But on average, landlords make a profit, otherwise no one would want to be one. The price of rent effectively includes all the costs of home ownership, plus the landlord's profit. At some point, the landlord's costs will go down (when the mortgage is paid off), but rent generally only goes up. The time frame is key here, if you stay in a home 30 years, owning is almost certainly more cost-effective, but if you stay there only 1 year, renting is often the better option.
Nuclear Hoagie
CC BY-SA 4.0
2020-05-20T14:38:12.053Z
@dismalscience thats interesting, but I am not sure if I understand the argument correctly do you know of some good page that explains it in a greater detail?
Ezekiel
CC BY-SA 4.0
2020-05-20T15:07:12.980Z
@NuclearWang That was addressed in my comment. Landlord profits should equal the opportunity cost of capital— the risk-adjusted return of deploying their capital elsewhere. That doesn’t change whether they’re using a loan or financing it themselves. Same for a homeowner making the rent vs. buy decision— they can rent and take their down payment and invest for a return elsewhere. While the time frame point is true on a micro level due to transaction costs, broadly it should have no effect in equilibrium.
dismalscience
CC BY-SA 4.0
2020-05-20T15:15:41.883Z
@Ezekiel I’ll look for a simple primer. The theory behind this is called the “user cost” model, and there’s a related model known as “rental equivalence.”  Basically the point is that the two should generally be equal as a baseline, though there are certain factors (taxes and the hedge value of ownership against future price increases are the big ones but by no means the only) that can push them away from equivalence.
dismalscience
CC BY-SA 4.0
2020-05-20T15:47:17.690Z
@Ezekiel This paper does a decent job of explaining it: https://pubs.aeaweb.org/doi/pdf/10.1257/089533005775196769 (please ignore its cringe-worthy conclusion that prices in 2004 looked reasonable, as, I’m hindsight, we know that they were not). There’s also a short description here: https://rutgersrealestate.com/blog-re/housing-prices-the-ins-and-outs/ (though they quickly resort to “it’s complicated,” which it is).
dismalscience
CC BY-SA 4.0
2020-05-21T23:20:12.750Z
@dismalscience Thanks for the sources!
Ezekiel
<econometrics><mathematical-economics><housing>
Why should the cost of home ownership and home renting be equal in the long run?
Ezekiel
# Why should the cost of home ownership and home renting be equal in the long run?

(Asked by: username_0 on 2020-05-19)

According to the person [in this](https://www.youtube.com/watch?v=kkVEt5tC2xU) video (at about 10:10) from the economist, the evidence shows that long run cost of owning and renting homes are approximately same.

The video itself tries to explain it in the minute before that person speaks about the evidence showing this, but I dont understand the explanation.

The video says that this is because home buyers have to make mortgage payments which include interest and maintenance costs such as insurance, repairs and so on.

But I still don't understand their explanation because when people rent they have to make rent payments forever and they never get the house. However, when people buy house they have to make mortgage payements maybe for 30-40 years and after that the home is theirs and now they only need to make the upkeep cost which I always thought are small (but I am not a home owner so I dont know that for sure). So how come the evidence shows that they are roughly equal? Or is the video incorrect?

**Tags:** econometrics, mathematical-economics, housing
> **Comments:**
> **username_1**: Assuming they’re taxed the same, any cost (including financing costs and opportunity cost of capital) that a homeowner faces is also a cost that a landlord faces and has to factor into rental prices. It’s really that simple. Things like different tax treatments can change this calculation, but as a baseline, it’s correct.  
> **username_2**: @dismalscience But on average, landlords make a profit, otherwise no one would want to be one. The price of rent effectively includes all the costs of home ownership, plus the landlord's profit. At some point, the landlord's costs will go down (when the mortgage is paid off), but rent generally only goes up. The time frame is key here, if you stay in a home 30 years, owning is almost certainly more cost-effective, but if you stay there only 1 year, renting is often the better option.  
> **username_0**: @dismalscience thats interesting, but I am not sure if I understand the argument correctly do you know of some good page that explains it in a greater detail?  
> **username_1**: @NuclearWang That was addressed in my comment. Landlord profits should equal the opportunity cost of capital— the risk-adjusted return of deploying their capital elsewhere. That doesn’t change whether they’re using a loan or financing it themselves. Same for a homeowner making the rent vs. buy decision— they can rent and take their down payment and invest for a return elsewhere. While the time frame point is true on a micro level due to transaction costs, broadly it should have no effect in equilibrium.  
> **username_1**: @Ezekiel I’ll look for a simple primer. The theory behind this is called the “user cost” model, and there’s a related model known as “rental equivalence.”  Basically the point is that the two should generally be equal as a baseline, though there are certain factors (taxes and the hedge value of ownership against future price increases are the big ones but by no means the only) that can push them away from equivalence.  
> **username_1**: @Ezekiel This paper does a decent job of explaining it: https://pubs.aeaweb.org/doi/pdf/10.1257/089533005775196769 (please ignore its cringe-worthy conclusion that prices in 2004 looked reasonable, as, I’m hindsight, we know that they were not). There’s also a short description here: https://rutgersrealestate.com/blog-re/housing-prices-the-ins-and-outs/ (though they quickly resort to “it’s complicated,” which it is).  
> **username_0**: @dismalscience Thanks for the sources!  

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## 2 answers

### Answer by username_2 on 2020-05-19. Score: 1 | Accepted answer

Note that the "cost of home ownership" depends not only on the house and the market, but also the individual. For someone who moves every year, home ownership is generally not a good option - that person incurs closing costs every year, and most of their mortgage payments at the start of the loan go to interest, rather than building a meaningful amount of equity in the house. It would be far better for that person to simply rent, rather than throwing away a few percent of their home's value every year in closing costs.

With this in mind, it's possible that the *characteristics of the population* make renting and home ownership roughly equal in cost, when averaged over a long period of time and the entire population. If you're not going to stay in a home for several years, it will generally be more favorable to rent, since you do not have enough time to recoup up-front costs associated with buying. I don't have hard numbers to show this equivalence, but it's worth pointing out that annual cost of home ownership vs. renting has a component that is unrelated to market value or interest rate - individual lifestyle choices play a role as well. Empirically, we might find that renting is the better financial option for about as many people as would be better off with home ownership.


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### Answer by username_3 on 2020-05-19. Score: 0

A rent requires a payment every period of time but it's not charged by the interest rate required in a mortgage because you aren't asking for a loan , and also if you rent then some of the costs are paid by the owner ( renovation, for example) . If you buy a house you will be able to sell it again at a certain price when you have finished to pay for it, but if you have no more money to pay for the loan you will be in bad problems because mortgages aren't liquid activities, instead renting a house doesn't require a stable income because you can always rent a cheapier house. So, all of this factors (and many other) have to be considered ; therefore, not always it's better to buy a house. Anyway , I wouldn't say that they are roughly equal , it all depends on the features of the buyer and the conditions of the market (Maybe,it could be an empirical evidence?) but for sure they're not perfect substitute goods.


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