by Noriyuki Morimoto
According to financial theory, things that have the same economic effect in terms of the function of housing must be equivalent in value. Therefore, if the function of living in a house is the same, the cost must be the same, whether you rent or buy it.
Needless to say, things that are theoretically assumed to be equivalent are not always equivalent in reality. Rather, housing prices and rents move in search of an equilibrium point while maintaining a certain rational interconnectedness through numerous variables such as mortgage interest rates.
In the actual economy, however, there are so many intervening variables between buying and renting that it is impossible to determine whether or not there is an equilibrium, or how the equilibrium works. But pursuing an explanation starts to uncover the unexplainable points, and one begins to see the non-economic factors that depend more on the emotional than the rational side of human nature.
Such irrational factors include the desire to own one’s home and the myth-like expectation that property prices will keep rising. Under these desires and expectations, buying naturally becomes more expensive than renting, but this premium is the cost paid to satisfy the desire to own a home and the price of believing in the property myth.
On the other hand, the convenience of renting should justify a reasonable price. That is, renting should be more expensive than owning because it offers the convenience of being able to move.
In terms of the value of the property itself, housing prices and rents are probably in constant equilibrium so that the value is the same whether one buys or rents. In essence, the preference to buy or rent is determined by factors other than the value of the house, such as the desire for home ownership, the property myth, convenience, and other aspects. Today, the desire for home ownership and the property myth of the older generation are receding, and the new generation’s emphasis on convenience is expanding, more or less creating an equilibrium.
Then, overall, the cost of buying or renting a home is the same.
[Category /Deconstruction of Finance]
Chief Executive Officer, HC Asset Management Co.,Ltd. Noriyuki Morimoto founded HC Asset Management in November 2002. As a pioneer investment consultant in Japan, he established the investment consulting business of Watson Wyatt K.K. (now Willis Towers Watson) in 1990.