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Dias comments on Open thread, Mar. 23 - Mar. 31, 2015 - Less Wrong Discussion
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Do people who passionate argue for buying a home instead of renting violate the Efficient Market Hypothesis? If that is so much better, why don't see a lot of people making money from landlording, by buying on mortgage and renting it out? Actually, I would think if you live somewhere where you see that, buying may be a good idea. If you personally rent from a landlord and you have a good idea that you and another family just paid for the landlords holiday cruise, you may want to stop that. But if you live somewhere where renting from co-ops, councils etc. is more frequent, and you see nobody profiting off landlording, and this suggests buying and re-renting is not really an option, you probably don't win much by buying.
Let's call it the Diamond Houses Fallacy. A Diamond House one that is indestructible and its value can only go up. Everything paid in mortgage for a Diamond House beyond the interest goes towards the equity, which is better than throwing it away in rent. However, real houses depreciate, need renovation, and you must also price in a certain risk of the neighborhood becoming lower value, kinda slum. If your country allows - for tax purposes - depreciating a house over 25 or 40 years, it may mean a 25 or 40 year mortgage would buy nothing, in the accounting sense: of course the house worths something, but you may have spent more on renovation.
But the real point here is that if you trust in efficient markets, you need not speculate on whether rent is spent on renovation or eaten up by depreciation. All you need to look around and see if people are making money with arbitraging it or not.
The explanation for this market inefficiency, as for so many others, is the government. There are massive tax benefits to owner-occupied housing, like the non-taxation of imputed rent. This means that the value of a house to a homeowner exceeds the value to a landlord. This plus the liquidity-constraints of the marginal homebuyer mean that the marginal house is worth more to the marginal homebuyer than he is able to pay for it.
As for whether people are arbitraging this or not? Yes, millions of middle class homebuyers are arb'ing this, saving themselves a huge amount of money.
I thought it is just the US-specific stuff, then I realized that the rent non-taxation applies everywhere the landlord is supposed to pay income tax on the rent, except where it is cash under the table, except where landlords are offshore companies with tax shenaningans, except where it is rented from a non-profit co-op, this third is actually our case.
But this gives a useful heuristic, if anyone pays tax on your rent - I think our co-op doesn't but I need to verify it - that is an argument for ownership.
I too have noticed that the weird part of taxation is that it encourages barter and DIY. This is not every efficient. It is value in general and not cash movements that ought to be taxed, but of course it is both hard and useless, as governments need cash to finance services. I wonder what non-market-distorting tax ideas exist.
I think our co-op or non-profit organizations in general, if they are tax-free or tax-reduced, are good ways to deal with these distorting effects. If we ever decide to buy a property, we will probably look into a credit union mortgage, not a for-profit bank, and not necessarily because profits are evil but because - probably, need to find out - non-profits are not or lower taxed.