A home is an asset class like no other - It's private, personal and a place of intimate memories. It is assurance, for times unknown. It’s showered with love, affection and more importantly time. It's packed with labour of love, built with care, ushered with irrational devotion dedicated only to the divine and very close loved ones. The relationship with one’s home is so personal that it could almost be mistaken for a very close personal friend. Homeowners in cities spend years in debt just to have their name etched in front of a concrete box. Many times these boxes are miles away from anything resembling a city and people spend hours every day in traffic just to arguably enjoy the benefits of owning a home. While there is an investment component when most people buy homes, inevitably our homes are humanized, even deified.
So the question arises, does this emotional attachment with our homes, break the home rental market? And does this lead to a predicament where home buying is always preferred to renting, resulting in frequent housing market bubbles?
Money Vs Homes
In our experience, as a property management provider to tens of thousands of homeowners, there is some truth to the inefficient rental market due to this emotional attachment. In one of our user research drives, we met a homeowner who held over a dozen high-quality homes in a premium area in Bangalore. “How much money have your founders personally invested in the company? How do you assess the quality of the tenants you bring in?” he asked, much to our surprise. When probed further he revealed his real motive. “You are no different from my bank. I ask these questions to my bank also to be sure my money is safe. My house is just another form of investment.” A very enlightened thought, we thought and hoped most homeowners looked at the asset in the same manner. If you think about it, Investing in and renting out of a home is not different from putting one's money in a bank and earning interest income on it. The only difference is that with rental homes, unlike money, the end use is very restrictive and linked to many ill-thought-out terms.
Money, the most sought after asset in the world is devoid of any emotional hangovers, hence its success in generating exponential value when it’s rented out. On the other hand, homeowners or property management firms govern how a particular home should be used and how it shouldn’t in an imprecise and subjective manner. A renting out process is seen as giving out some part of oneself. No other form of wealth holding suffers from this peculiar problem.
Bank of homes
Say a property management company deals with 30,000 homes. Assuming an average home value of $250,000, the ‘Assets Under Management (AUM)’ would exceed $7.5 billion, which is the AUM equivalent to a mid-size bank. But the income a mid-size bank generates out of renting out your money is exponentially higher than any property management firm holding 30,000 homes. The valuation multiples markets give property management firms vs banks is also comparatively lower. While there are only about 4,909 FDIC-insured commercial banks in the United States, the number of property management firms cross 250,000. While it can be argued that the reason for such a scattered low-value industry is because property management is a very service-oriented personal touch industry, so in banking. Broadly the same trend holds true for many other developed and emerging markets. A bank can rent your depositor’s money for 50 days to 20 years with precise calculation of yield and risk without ever asking the depositor of money how it should be used or whom it should be given out to. Compare this to a regular house renting out process. We have instances in India, where being a Non-vegetarian automatically selects you out of renting in certain housing societies, so does being a pet owner or a single woman. The process of tenant screening is more similar to a father interviewing him to be son/daughter in law than a simple process of ascertaining creditworthiness.
Renting and Technology
While technology has certainly made a dent in the better discovery of rental properties and price discovery, it has not done enough to improve liquidity in the rental market. This is why in almost all rental markets there is a clear supply scarcity issue, unlike home buying markets. According to a United Nations study, 55% of the world’s population lives in urban areas now, a proportion that is expected to increase to 68% by 2050. Median job duration in most advanced cities is shrinking. Renting should be efficient for homeownership under these conditions.
Technology has come into the property management/home rental industry that is more than just in online discovery and listing. There are companies like Zillow, Hello World working on better data models to predict rental prices crunching billions of data points than going by expectations set by a few property brokers. There are startups like Jetty working for better integration of financial services and home renting. Companies like Zeus living are specializing in bulk breaking larger houses into shared spaces, breaking long term leases into smaller time chunks. We are working on a better review system to ascertain the quality of tenants and homes based on historical data than subjective parameters. The larger ecosystem to truly have industry around the bank of homes is getting built as we read this.
Is technology finally making our temperamental homes as placid as money?