But it's always been more expensive to buy a house than rent one in lots of places? That's certainly the way it is where I have lived. Sure, it might be illogical, but many people prefer to live in a place they own (or at least they and the bank own) rather than be at the mercy of a landlord's whims. Most people pay a premium for ownership.
Yes, that's true, and that analogy represented a static market. Let me try again.
Assume that being mostly aussie here, we all prefer steak to lamb. And at one time, there was only a small premium. $20/kg lamb vs $30/kg beef.
So right now, 80% of Australian's prefer beef, even at the higher price.
Bovine spongiform encephalopathy hits Australia, and over a period of a few weeks, beef becomes scarcer, and scarcer, and more and more expensive.
At $35 a kilo, nobody blinks an eye. at $40 a kilo, pensioners start eyeing off the lamb, at $50 a kilo, the working poor think Sam Kekovich is a true blue Aussie hero*. At $60 a kilo, we start talking about invading New Zealand.
...
At $100 a kilo, only the richest are eating beef and turning their noses down at those scum of the earth tenan... lamb eaters.
The insanity starts when people start buying beef not because they want to eat it, but because they think it will go up in value. (Well, I suppose there is some truth to that, aged beef does cost more). Hell, you might even start seeing beef futures contracts, and listed beef trusts.
But anyway...
Of course, there's a limited supply of lamb too. Baby sheep aren't edible from day one, you know. Where as almost all the lamb being farmed was sold when it was $20 a kilo, all the beef deserters, are driving up the price of lamb. So lamb goes up to $25 a kilo... Then $30 a kilo.
Isn't the same thing happening to housing? Foreclosures at decade highs, increasing listings - and at the same time, record rental demand pushing up rental prices?
At the end of the day we'll find a new equilibrium. If in the mind of investors, there was never again the chance of capital gain, then for anyone to invest in housing, yield >= interest rates, and rent would either have to rise, or prices fall for that to happen.
Of course there will always be a small ownership premium that will keep house prices up, but the gap of 4-6% vs 9.25% interest is way too big at the moment. The market is not in equilibrium, and that, is why we're seeing rental rises. When the "price stickiness" has worn off, we'll start seeing asking price falls too.
*