Felix Salmon comments on rent own in Germany

Then there’s a scheme I’ve heard of in Germany. Essentially it takes banks and mortgages out of the picture altogether, and sets up a long-term contract between the buyer and the seller. The buyer pays rent monthly, the house is essentially placed in escrow, and the buyer ends up owning the house after a set number of years paying rent. I like this scheme because it involves buying a house without any debt — and the buyer can even move house and sublease the property, so long as she continues to make rent payments to the seller.

The wider question is why not simply sign long term leases. Perhaps, we are looking for greater stability. However, on average most American’s stay in their home about 7 years. After that time they’d be facing the loss from selling in a weak market or the increased cost of buying a move-up in strong market. A long term lease exposes most people no more market risk than buying, and possibly less.

Why then do we buy? Perhaps it has to do with monitoring costs. Someone could trash a leased home by far more than a damage deposit could cover. However, there is a robust market for both renting and buying in large cities. If the monitoring costs aren’t enough to stop people from effectively renting apartments why is it that anyone buys a condo?

I suspect that people want the collateral value of the home. That is, they want a large piece of property that they can readily borrow against. When people say owning a home provides security, what they really mean is “the ability to take out a second mortgage when things get rough” provides security.

If a second mortgage is not an option then you will be foreclosed upon as surely as you would have been evicted.

I am not sure what the implication for this are but it seems to me that it represents some type of dysfunction in financial markets or human discounting. Why is it better to accumulate a security through home equity rather than savings?

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