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In this week’s Grumpy Economist Weekly Rant, John Cochrane makes a case for treating renting as a normal and often preferable form of housing rather than as a policy failure to be corrected. American housing policy, he argues, heavily favors homeownership through mortgage subsidies, tax preferences, and rules that make large-scale rental housing harder to provide, even though renters need housing just as much as buyers do.
Cochrane challenges the cultural and political assumption that owning is always superior to renting. He argues that professional landlords can provide well-managed housing, that stable societies such as Germany function perfectly well with far higher rates of renting, and that owner-occupied housing is often overrated as an investment. The better approach, he suggests, is not to privilege one model over another, but to let housing markets provide what people actually need at different stages of life.
Transcript
Hi. I’m John Cochrane. I’m a senior fellow here at the Hoover Institution, and welcome to the Grumpy Economist Weekly Rant.
Today, I’m going to rant about an ode to renting. Our government does a huge amount of promoting and subsidizing homeownership. It subsidizes mortgages. There’s an interest deduction that you can get on your mortgage.
Recently, it came to mind because of the administration’s ban on institutional investors buying houses. Why does this matter? Institutional investors buy houses and then rent them out. They don’t leave the houses empty. People can still live in them, but they live in them as renters until the institutional investors turn around and sell them. So what’s wrong with renters?
We also disparage renting. Rent control, of course, destroys the stock of rental housing and encourages people to put up condos instead. Renter protections make it hard for people to get rental housing.
Renting houses and apartments is fine. Corporate landlords are even better. They’re professional. They have economies of scale. They have good accounting. They keep up their properties. They manage things professionally.
What about the argument that people who rent won’t take care of the property? Look around. Landlords, especially small landlords who have put their life savings into a rental property, tend to be very, very careful about maintaining the property if they’re allowed to charge rent to make up the maintenance.
Maintenance falling apart tends to happen where there’s rent control, and landlords aren’t allowed to make up the cost. I’ve seen lots of people who just let their houses fall to pieces.
Look around other countries. In Germany, for example, 47% of people rent their houses; they don’t own them. Germany’s a fine country. It’s not great, not terrible, but you don’t see it falling apart because of the evils of rental housing.
There’s this image of buying a house, owning it for 30 years, and living in it when you retire, sort of like working in the same business for 30 years and retiring with the gold watch and the defined benefit pension. That’s from the 1950s.
People move in and move out. You want a bigger house when you get kids. You want a smaller house when you want to downsize or move away. It’s not necessarily true that you want to stay in the same place, and lots of people only want to stay a couple of years. They want a good stock of rental housing.
What about building generational wealth through housing? I used to be a finance professor. Let me clue you in on a little piece of news. Owner-occupied houses are terrible investments. Put your money in stocks if you want to make money. The rate of return is much bigger.
Indeed, if I could be the chair of the Consumer Financial Protection Bureau, the first thing I’d want to do is encourage people not to put their money in a hugely leveraged, risky, undiversifiable, illiquid, hard-to-sell investment: the owner-occupied house. Put your money in a nice diversified stock fund instead.
Now, owning a house has a big advantage. You have the option to stay. If you own a house and the rents in your neighborhood go up, you can afford to live there pretty much as long as you can pay the property taxes.
I’m puzzled why markets haven’t solved that with multi-year rent contracts or with insurance against rental increases. Business idea for any of you looking for a business idea.
Owning a house is great for some people. Renting a house is great for many others. What should policy be? Indifferent. Let the market provide what people want.
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John H. Cochrane is the Rose-Marie and Jack Anderson Senior Fellow of the Hoover Institution at Stanford University. An economist specializing in financial economics and macroeconomics, he is the author of The Fiscal Theory of the Price Level. He also authors a popular Substack called The Grumpy Economist.