House prices

Many people are calling the housing market overvalued on the basis that rents don't even cover the payments on interest-only mortgages. Because of this fact, buy-to-let investors have to either contribute to their mortgages every month, or put down a very large deposit to reduce the monthly payments. The economics just don't add up, or do they?

My thought on the housing market is:

Monthly payments on 'interest-only' mortgages should always exceed the monthly rent.

Flipping this statement around and thinking from the buy-to-let perspective, what I am saying is that the rental proceed on a property should never cover the interest. Huh? Hear me out. My argument is that when you buy a house with an interest-only mortgage, your new landlord becomes the bank or building society and still don't really own the house. All you have done is switched one type of rent for another. However, this new rental agreement has several advantages over the traditional landlord:

* Whereas a normal landlord is able to kick you out of the house according to the break clauses of the contract, bank lenders don't this. That's one less worry.
* Landlords may increase rents every year. While rents don't rise that much in reality, incremental increases over the years add up. In contrast, the bank lender charges you a fixed interest rate (rent). This is based on a % of the nominal value outstanding on the mortgage and will not rise over time in nominal terms.
* Also, you have a hedge on the housing market. House prices rise over the long-term and even if you aren't betting on capital appreciation, should prices rise then you only have to pay down the original value. Good times.

Together, these factors must have a positive value. That is, they are all something that people would pay for. So, renting from a bank/building society is clearer better than renting from a landlord, and it is right that it should cost more. Perhaps the economics add up just fine.

(I know missed a lot of things out in this simplified example, but it's something to think about).