Renting is here, but are rentals really going away?

why the rapid shift from renting to renting

there are now more people living in rented homes than renting homes across the country. While renting used to be mainly centered on townhouses and studios, it has recently spread to apartments.

a confluence of factors, including the Rent Act, rising property taxes, the end of the low-interest-rate era, and restrictions on charter lending, are driving the pace of home rentalization faster than you might think. this real estate paradigm shift is expected to be a game changer for the entire real estate market in the coming years.

for a long time, real estate academics have predicted the end of the charter system, which is often referred to as a backward private banking system. the idea was that as the financial industry evolved and institutionalized mortgages developed, charters, as private mortgages, would naturally fade into history.

however, charter lending, which began in 2009, has greatly extended the life of charters. As a housing cost burden, charters were much lower than rent, so many people preferred them, and the growing demand for charter lending led to the revitalization of gap investments.

the two faces of the rent-to-own era: opportunities and risks

the positive effect of ending charter fraud

there is a growing consensus that reckless charter lending needs to be put on hold. the negative perception of gap investing is also growing, and it seems inevitable that there will be less lending in the future.

with fewer rentals, the demand for rentals will likely decline, especially in high-priced neighborhoods, and be rapidly replaced by renting. with the demise of rentals, there will be no more tenants losing their entire life savings to tin can rentals or rental scams.

the negative reality of rising rent burdens

however, with every positive action comes a negative reaction. The demise of shadow banking and the shift to renting could perpetuate the high cost structure of housing.

in developed economies like Europe and the US, salaried workers pay 30-50% of their salary in rent. after paying rent, they have less disposable income to live on. in short, renting without a home is a struggle.

how scaling back rental lending will change that

renting used to be a stepping stone to owning your own home, a way to save up and move up the ladder of homeownership. Today's younger generation's upward mobility is also capitalizing on this gap investment.

but once you hit the rent-to-own era, the homeownership ladder disappears. the pattern of renting for a few years, saving up, and then buying your own home becomes difficult. Once the buffer of renting is gone, you have to make the leap from renting to owning.

there's a saying that you know a day is short when you're unemployed, and you know a month is short when you're paying rent. the reason why young people are buying homes even with the recent rise in interest rates may be because they are tired of paying rent and want to own their own home. the reality is that young people are more afraid of the prospect of owning a home than they are of interest rates.

how to buy a home with an ultra-long term mortgage

it is essential to promote ultra-long-term mortgages that can replace the private financing function of renting. there should be a mortgage product that allows people to buy a house with only 10% of the house price, like in the US.

newly built properties are also unaffordable for people in their 20s and 30s. there should be more equity-based housing schemes, where people can take a small share at first and increase their share over time.

we also need to increase housing voucher support for marginalized groups who cannot afford to buy a home. a housing policy that combines homeownership support with housing welfare will help solve the housing shortage of young people.

why owning your own home in old age is essential

imagine the end of renting. you have to choose between living on your own or renting. people who have never lived in rented housing don't understand the pain.

when you're young, renting is tolerable. you can invest heavily, so you don't have to buy a house, you can invest elsewhere to make up for it. plus, you have an income every month, so you can afford to pay the rent.

however, it's different for retirees who don't have a steady income. imagine paying rent when you're barely making ends meet. it's hard enough to pack your belongings when you're older. the housing crisis for retirees with nowhere to go is, in a word, terrifying.

as you age, your home becomes an integral part of your life and a hill to lean on, whether prices rise or fall. you may be homeless when you're younger, but when your hair is graying, you need a place to call home. in fact, a survey of U.S. seniors found that 92% wanted their own home as their preferred form of housing.

the age of rent-to-own apartments

in the rent-to-own era, apartment valuation will be different than it was in the rental era: it will be based on the amount of rent received relative to the amount invested, or rent yield.

this means that apartments may also come under the spotlight of the income approach, which estimates the fair value of an apartment based on the expected future income. This approach has been used to buy and sell income-producing real estate, such as multifamily or multi-unit houses, but may now be applied to apartments.

apartments are currently more of a market arbitrage property than an income property. Gap investing has become a way of financing because of the rental system. gap investments were rewarded with capital gains rather than cash flow.

but in the age of renting, it's all about cash flow. if a rental home is an equity home, a rent-to-own home is a bond home. you get paid rent on a regular basis, like interest on a bond.

how to choose a rent-to-own apartment

compare the volume and value of rent-to-own transactions on your portal or real estate mobile app with comparable complexes. Even for apartments of the same value, the one with higher rental income will be more beneficial in the long run.

if it's a brand-new apartment in a large complex in a highly sought-after double-train station or business district, you're in luck. apartments that rent well will also have a favorable location in terms of transportation, amenities, and more.

in the future, the gap between the sale price of a home that rents well and one that doesn't is likely to widen. when buying or switching apartments, it's a good idea to focus on the likelihood that you'll be able to live in the apartment initially, but turn it into a rental later - a so-called convertible apartment.

while renting an apartment is sad for renters, for retirees, an apartment is likely to be just another financial instrument that pays rent.

frequently asked questions

Q1. Will subletting disappear completely?

A. While we won't see subletting disappear completely in the short term, it is rapidly shifting to renting, especially in higher-priced homes, due to stricter subletting regulations and fewer gap investments. in the mid- to low-priced housing segment, subletting may remain for the time being, but in the long term, the share of renting will continue to increase.

Q2. What is an ultra-long term mortgage?

A. An ultra-long term mortgage is a mortgage product that is repaid over a long period of time, 30 years or more. in the U.S., it lowers the barrier to entry for homeownership by allowing borrowers to prepare only 10% of the house price as equity and finance the rest with a long-term loan. we need to revitalize these products in Korea as well.

Q3. How do you calculate the rental yield?

A. Rental yield is the annual rental income divided by the sale price of the home. for example, if you rent a 300 million won apartment for 1 million won per month, you earn 12 million won per year, so the yield is about 4%. it is more accurate to calculate it as a net profit rate that takes into account management fees and taxes.

Q4. What is an equity-type sale?

A. Shared ownership is a method of purchasing a partial share of a home initially, and then purchasing additional shares over time to secure full ownership. it is a system that helps young people buy a home by reducing the initial capital burden, and has been implemented in the UK and other countries.

Q5. Why do I need to own my own home in retirement?

A. After retirement, it's difficult to pay rent every month because you don't have a steady income. If you have to live on your pension or savings, paying rent will make your retirement life very unstable. Also, it's harder to move as you get older, so having a stable place to live is essential.

the bottom line: in the age of rent, only the prepared will survive

the age of renting has already begun, and since the end of renting, homeownership strategies with ultra-long-term mortgages and real estate choices centered around rental yields have become crucial. Owning your own home, especially in retirement, is not an option, but a necessity.

how are you preparing for the age of renting? share your thoughts in the comments. for more information on real estate investing and housing strategies, hit the subscribe button.