The Oil Drum

The rent-buy spread is out of whack for sure.

Yes. Those ratios in the graph are so low they must be comparing dissimilar properties. You have to compare apples vs apples. For example the rent on a 3/2 1500 sq ft SFR in a good neighborhood versus the price of same. For prospective landlords, normal property pricing gives you a gross annual ROI of 10% to 12%. You need this much cash flow to pay for the property manager, taxes, insurance, and maintenance and still have a return better than bonds to compensate for the risk and worry of managing property. I find the misleading suggestion that landlords have never earned over 6% annual gross ROI in the last 48 years absurd in the extreme.

The problem since 2002 has been that rental property purchases became a Ponzi scheme driven by speculative greed. Stupid people bought properties that were "negatively geared". By this I mean that the rental income didn't even cover the costs of holding the property. In extreme cases, the rental income didn't even pay the taxes and insurance, much less provide any return on capital (if purchased with cash) or pay the mortgage (if purchased with debt, which is much more common). The whole business plan devolved into hoping to quickly flip the properties for a capital gain. Well, now the music has stopped.

So when should a renter stop renting and buy? Buying makes sense if one has adequate assets or a secure stable income AND the neighborhood is not deteriorating, AND one plans to live there for several years AND the cost of purchase is less than 120 months rent. These conditions are not met in most parts of the western world at the moment. I am currently renting a 2000 sq ft 4/2 new brick SFR in a good walkable neighborhood of New Zealand for USD 1300/month. If I wanted to buy the house, the price would be 320 months rent. The price needs to fall over 60% before buying makes any economic sense. Of note, this is the exact inverse of the 150% house price appreciation over the last 4 years. The entire easy credit driven property price bubble will be reversed.

The same logic applies to prospective landlords. In New Zealand, risk free six month government bonds pay 7.5%. Bank CDs pay over 9% (although banks can fail). There will be absolutely no reason for investors to purchase rental properties until the annual gross rental income is well over 10% ROI. The nimrod investors sitting on negatively geared properties with sub 4% yields will be unable to unload these albatrosses for what they paid for them. Couldn't happen to nicer people.

My only worry is having to move if the bank forecloses on my Donald Trump wannabe landlord. Then I would get a new rental house from another insolvent fracked borrower/failed flipper landlord, another possible foreclosure, rinse and repeat. Well that is still better than buying and taking a capital loss of USD 75,000 every year for the next four years.