The problem with stories about why we rent, instead of buying, is that many of them don’t make much sense. Owning a home, as opposed to renting, is clearly beneficial insofar as it allows the homeowner to make investments which improve the property. If renting is more efficient, there must be a countervailing force undoing the inherent advantage homebuying has.
So let’s go through the stories. Take flexibility. People, the story goes, wish to rent a dwelling instead of buying it because it will allow them to change where they live more rapidly. The landlord, rather than the renter, takes on the risk of not being able to sell the dwelling in a timely manner. Yet, there is no reason why a homebuyer can’t have this service — the real estate agent could assume ownership of the property until it is sold. Real estate agents already get a fee for selling the house — for a bit extra in taking on the risk, they are indistinguishable from renting. It is also much harder to break a lease than to sell a house, as anyone who’s rented will tell you.
Or take capital constraints. People rent, the story goes, because they cannot raise enough capital. Homes, however, are stable in value and easily collateralized — it is hard to believe that this is what keeps people from buying! Nor does it seem that government policy favors renting — indeed it goes the opposite direction, with homeowners being allowed to deduct the interest on their mortgage. Rent control and tenant protection will mean that some apartments will stay rented for much longer than the market would ordinarily allow, but the net effect of those laws is to encourage selling rather than renting. Renting could be thought to represent a call option on the property, and thus a trade between risk-preferring landlords, and risk-averse tenants. This doesn’t make sense simply insofar as renting is clearly more tenuous (even the word is the same!). You can’t be evicted on a few weeks notice from a house you own, simply because the landlord wishes to sell or move into the dwelling themselves! In addition, the utility of income for individuals is universally assumed to be logarithmic, or risk averse. While companies (which can hedge by owning many properties) could be risk preferring, many landlords are small, perhaps owning only one property. In addition, you can buy insurance against the risk that your home declines in value due to factors outside of your control.
A story which is easier to believe is that landlords specialize in providing repair services. In the context of apartment buildings, for example, central heating and air conditioning would be a public good problem if everyone owned their own apartment. Owning the residual aligns the incentive of the landlord with the tenants to provide the repairs promptly and well. Of course, we mustn’t take this argument too far — condos have homeowner’s associations, which, much like corporations, allow the homeowners to delegate the cost of solving collective action problems. And for renters of single family homes, repairs are not a collective action problem at all — the best the landlord is doing is specializing in knowing the local repairmen better than you do.
A story which explains why renting rooms in a house, although it does not explain the renting of whole houses or apartments, is that it makes it easier to combine the assets again. This is a Klein, Crawford, and Alchian (1978) esque story —if you divide the house and sell a room or basement, and you could profit by combining it again and selling the house, now the other owner can extract the profits you would make by holding up the deal. This is a very good story for renting a room, and probably solves it entirely, but is poor for explaining homes and apartments, which either have nothing to be combined with, or are only rarely combined back into a larger bundle.
Another possibility is pure irrationality — people dislike being in debt, and avoid it just to avoid being in debt. While such preferences are perhaps a reasonable check on frivolous consumer spending, it harms the person when it means they spend much more than they would otherwise just for the privilege of avoiding a bank. I don’t like this as an explanation — “people are just stupid, bro” has always felt lazy — but it is probably true.
I wrote all this as preamble to an alternative explanation, which, while likely insufficient in explaining renting vs buying, might shed some light. In 1972, Ronald Coase published the paper “Durability and Monopoly”. It is an arresting work, citing no sources and relying on logic alone. Suppose that there is a monopolist owning a perfectly durable good — he uses the example of “all the land in the United States”. We shall assume the land is identical for clarity. There are many buyers, whose various values form a downward sloping demand curve, all the way down to zero. The monopolist has constant marginal costs, and can only sell at one price. Thus, in order to sell a unit to another person, they would have to lower their price for all people. The only way to maximize their profit, then, is to not sell all of the land.
We have a problem though. The monopolist has some land left over. What are they gonna do, not sell it? They would do another round of selling, restricting quantity sold as before, thus leaving them with a little land left over, which they’ll sell — and so on, and so on. Everyone knows that the monopolist is going to sell the land eventually, and won’t buy for any more than the competitive price. The monopolist, in essence, is in competition with future versions of themselves! This is called the Coase conjecture, and it holds up even after relaxing many of the assumptions.
So how does the monopolist get out of the trap? They need some way to bind their own hands, which generally takes one of two forms — an HOA, or renting. When people move into a place, they are affected by people around them. They do not wish, after buying a condominium, for their developer to subdivide the other condominiums and sell them at a lower price per unit! That would place negative externalities on them. If the landlord develops the property in ways that the renters dislike, they can punish the landlord by moving.
This is but a sketch of the idea — if I had it fully fleshed out and tested, I would be submitting for publication! Nevertheless, it would be rewarding to speculate some ways that this could be tested. We would expect that, as alternative ways for landlords to bind their hands decrease or increase, for the share of people renting to increase or decrease, respectively. For example, we would expect the unenforceability of restrictive covenants to increase the share of people renting. A weakening of the power of HOAs would have a similar effect. If these are accomplished through state legislature, then you may be able to tell a story comparing border counties (especially those counties which are formed by arbitrarily drawn lines).
Suppose that this were true. What policy implications would it have? I’m not convinced that any particular policy actions are wise. There may be an insufficient supply of housing due to this, but the restriction of supply may be to solve problems of externalities, not necessarily to extract rents. Even if it were inefficient, the government would have great difficulty in finding the optimal quantity of housing to build. The problem isn’t so much vacant housing — it is housing which could be built, but isn’t, so a tax on vacant homes would be ineffective. In truth, this is a possible distortion of secondary importance to simply allowing housing to be built.