Why do people rent rather than buy in high-yield markets?

[Tracey B.]

I'm an Aussie investor researching your markets. Our yields in cities vary approx 2-4%, so I'm trying to come to terms with some cultural differences regarding home ownership.

In a recent discussion on an Aussie property forum regarding forecast flat or falling property values, many local investors put the view that there is a natural floor on values caused by the rent/buy decisions of current tenants. In the current low-yield environment here, it is clearly cheaper every month to rent rather than buy. One only buys in anticipation of appreciation, and for the lifestyle benefits (stability of tenure, etc), and this is what 70% of the market does. (Even without the tax breaks that you are fortunate to have! Our mortgage interest isn't deductible on our own home; only on investment properties.)

I estimate that the cost of ownership of a property in the US each year, if 100% financed, is around 10% of purchase price (6% interest, 2.5% property taxes, 1.5% repairs). Now I know from investigating your markets that there are many, many cities in the USA where yields are 10% or more for SFRs. When you factor in anticipated appreciation, it seems to me that anything close to 10% would cause tenants to prefer to be owners. Factoring in some modest appreciation, it's hard (from our perspective) to understand why anybody would pay more than 5% yield! When you factor in time - and that your mortgage payment remains static whereas rents increase - the balance swings even further towards ownership.

So my question is: why do tenants pay such high yields rather than buy the property themselves?

My guesses are:

* they can't get finance
* it just doesn't occur to them - home ownership is outside their expectations
* they are concerned that they won't cope with the bills (eg repairs)