That our people should live in their own homes is a sentiment deep in the heart of our race and of American life,” said President Herbert Hoover, perhaps the most important advocate of mass homeownership in the country’s history, in 1931. “They never sing songs about a pile of rent receipts.”

But a ballad about the rental market is overdue. When rich-world interest rates began to surge in 2022, renting became a better deal than buying. House prices have since stagnated or slumped in many places, and rates are falling. Even so, there is reason to think that the winning streak for renters will continue.

According to Zillow, an American property website, the monthly cost of buying and keeping a home—including taxes, insurance, a modest maintenance cost and a downpayment of 20%—came to less than that of renting from 2015 to 2021, an era of ultra-low interest rates. Since then, however, the picture has flipped. Today a new buyer pays about $400 more a month. In several of the country’s largest cities, the difference runs to thousands of dollars a month.

This is not just an American phenomenon. According to CBRE, an estate agent, there is no Australian precinct where it is cheaper to buy a flat than to rent one. Rathbones, a British wealth-management firm, estimates that rental yields—the amount landlords make from tenants relative to the price of the house—are 5% or so, not much above the 4.4% for five-year fixed mortgages. Given that landlords must also meet steep maintenance and tax costs, this indicates renters are getting a good deal.

Renters often fear they are throwing away money by handing it to landlords, while buyers build up home equity. But property is not the only investment available. Arthur Cox of the University of Northern Iowa finds that, even from 1984 to 2013, a period of rising house prices and declining interest rates, people were sometimes better off if they avoided homeownership. In three of the six American metropolitan areas he investigated, renting and investing the extra money that would have been required for mortgage payments in stocks and corporate bonds was the more profitable choice.

True, in some places renters have recently lost ground. In Hong Kong, for instance, rental yields have risen from less than 2.5% four years ago to 3.5% today. The shift has been driven by a slump in house prices, which have fallen by a third in real terms since 2021.

But there is a difference between mortgages in Hong Kong and those in other rich-world locations. Hong Kong’s borrowers mostly take on floating-rate mortgages, which typically move with the Federal Reserve’s short-term interest rates. Elsewhere, mortgages are more likely to depend on longer-term rates. And they have barely budged: despite recent interest-rate cuts, five- and ten-year government-bond yields mostly sit where they did three years ago. In America 30-year mortgage rates remain above 6%, more than twice the rock-bottom levels reached in the covid-19 pandemic. Although buyers can find shorter-term mortgages, they take on the risk of a rebound in inflation when doing so.

Picking a likely victor in the ongoing battle between tenancy and ownership thus means taking a view on the future path of long-term interest rates. Your columnist would suggest that they look worryingly sticky. Concerns about government debt and long-term inflationary pressures are not going anywhere.

Moreover, in recent years renter-friendly regulation has swept the West. Britain’s Renters’ Rights Act makes it more difficult for landlords to evict residents, and enables tenants to challenge rent increases via tribunals. Many American cities have frozen regulated rents, as Zohran Mamdani, New York’s new mayor, intends to do in his city. Such rules are terrible news for anyone considering making an investment in housing. They tip the calculation further in favour of tenants.

Buyers have reasons to own a home that surmount cold financial logic. Many feel the same emotional pull that animated Hoover almost a century ago. Others want a secure and long tenure. And in some markets, it is just a question of practicality: finding a large, single-family home to rent can be difficult. But for the cool, unemotional resident weighing up the pros and cons of buying, there is a clear winner. Absent a much steeper fall in house prices, a sudden decline in long-term interest rates or a protracted surge in rents, renting will remain the better option. ■

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The Economist