The combination of removing the wealth tax and the introduction of a 30% rebate on all interest costs for individuals have really combined to clusterfuck the Swedish housing market.
Now, the interest rebate seems politically impossible to touch, even long term and through minor transitioning. Home ownership is so important to the economy and affects so many voters, that the property owning class always must be looked after.
People have been talking about the bubble bursting for years now, but it's only in the past year or so that the decline truly has been expected. Only a few weeks ago, there was an article in a major paper about a couple who quinnied about not being able to sell their house with the expected 1000% profit (over 30+ years). How ever would they manage, once they'd sold the house, bought an apartment, and didn't have the cool million SEK to splurge on whatever people in their 70s enjoy?
I absolutely hate speaking to Swedish people who invest all of their retirement savings in their home. It just breaks my heart to know that they are taking on a very high risk by putting all of their eggs into one, figurative basket when other types of investing are not only less risky but also often present more of a reward too.
And, add the fact that investing in your house is one of the least helpful investments for creating new jobs and wealth for future generations. The people who had this idea have my pity but I won't refrain from using their story as a cautionary tale.
They buy more expensive homes than they need (or stay in the one that housed a family of four way after their kids have moved out) and pay off the mortgage. That's "saving" for retirement; they expect to get the money they've payed on their mortgage back when they sell it. Some practically only pay off the interest because we can do generous deductions off it and we have low demands of paying off the principal (or at least we used to have, now the Department of Finance is advising the government to require that banks make higher demands of paying back the principal) and why should I pay off the mortgage in full if the property prices always go up? At least that's the reasoning.
I have nothing against paying off your loan, but seeing it as your one and only retirement investment is something I have serious problems with. You should live where you are most comfortable living, I don't want people speculating in their homes on a casual basis "knowing" it always pays off. If you're going to really invest in your home, renovate a floor and rent it out. That way, you're contributing to the economy, you're not just speculating you're value investing and you know what the revenue stream of your investment really is. I had the privilege of growing up in a wealthy household with 7 bedrooms and after me and my brother moved out my parents decided three rooms was enough and converted the house into three apartments, living in one and renting out the other two.
Many of the neighboring families however don't like the idea since it means work, but they also don't want to move into something that won't grow as much over time. They're staying put even after the kids have moved out in hopes of cashing in right before retirement.
The relentlessly negative reporting here would be funny if it wasn't so pernicious. "risk ... backfire ... risks sinking ... worrying".
And yet they're explicitly talking about a correction. Making something that isn't correct, correct. You might think that was a good thing.
If you don't want a correction, stop pumping up bubbles. You can keep 'em inflated a long time, longer than many people can remain solvent, but if you shut out the younger generations then eventually the political calculation will change, and that change will not be in your favour. As Mark Blyth is fond of observing, the Hamptons are not a defensible position.
The funny thing about the housing correction in the US was that prices dropped back to their historical trendline, as if the housing bubble had never happened. There wasn't even much overshoot.
Local municipalities have veto rights to block development.
There are also a bunch of rules, often overlapping, than may stop planning. All planning decisions can also be (and are) appealed for years.
There is also a lack of cheap housing, most houses built today are unaffordable to most low/medium earners. This has become an even more acute problem with the recent influx of refugees. This has lead to overcrowding in poorer suburbs.
Sweden has rent controls, which has caused long queues to apartments (we're talking wait times of 20 years) as well as a significant grey/black market in second, third and even fourth hand contracts, because the regulated first contract is so valuable that people keep them and rent them onwards.
It has also created situations where e.g. trade unions and other organisations (who own rental apartments) arrange nicely-located apartments to friendly politicians (and their relatives) ahead of the queue at very advantageous rents.
As someone just bought an apartment in Stockholm two years ago I was shocked seeing that I made 50 or more percent on how much I paid for my apartment but when I checked the data there I saw not all the areas in Stockholm raised in the same time and rate. I think there were many areas got hyped and there are many old buildings which raised and if you check the data you will see the start of falling in prices is not happening everywhere. I would guess prices will continue falling for two or more years but to the point, before the scare and excitement started which raised the prices too high in a year, and then it will stabilize. There is a talk also to loosen the restriction on companies which renting apartments. I really do not think this is like US's 2008 era inflation.
There are tons of things inflating house prices. The most important for Sweden are
- Deduction of interest expenses from income tax.
- Too long mortgages (100 years or more) means nominal prices are high which add to the risk
- Historically big mortgages (90, 100 or even 110% of the cost could be financed - yes
negativev down payments existed in the early 2000's).
- Rent control of almost all flats, meaning no one will build places to rent, only to buy.
- Extremely low interest rates as the central bank refuses to look at housing costs and interest rates when aiming for the inflation target.
This is the recipe for disaster. Now, it's not ALL doom and gloom, a lot has actually improved. Down payments have been 15-25% for some time now, mortgages are no longer infinite, and banks are using max-multiple-of-household-income caps (typically 4-5x) to limit lending. I think the situation now is a bit brighter than it would have been if we had been hit by a big correction in 2008 (which we were not). Many would welcome a controlled price correction (say 10-15%), and it IS expected since all the above changes have yet NOT changed the prices downward, even though the pool of prospective buyers gets smaller and smaller the more restrictive lenders are. It would be very welcome to see the correction now that both domestic and global economy is decent, interest rates are low etc.
> Too long mortgages (100 years or more) means nominal prices are high which add to the risk
That is absolutely bananas. Almost like a Chinese-style 99 year lease. Your kids might be dead by the time it's paid off, you'll never own it.
Edit: apparently the AVERAGE mortgage term is 140 years! Just recently the Swedish government limited the maximum mortgage term to 105 years. That is some absolutely stupid policy.
As an American I am absolutely shocked anybody thought that was a good idea. If an average person making $50k/year finds it affordable to pay $1200/month on housing, they're just going to shop for a house that will yield that desired monthly payment. When interest rates are low, how is this not a recipe for runaway housing costs?
What's worse is that this is actually a huge subsidy for landlords, unless their mortgage terms are limited to be much shorter. A landlord can afford the downpayment to finance many homes at low interest rates, whereas a poorer person may be able to make the payments on such a mortgage, but can't save up enough to afford a down payment.
A 30 year loan is not much different really. Too long. It was rare in the US before various government subsidies and encouragements. First, Fannie Mae (1938), securitizing FHA backed home mortgages. Next, Freddie Mac (1970), securitizing home loans not backed by the US government.
Shocked because it seems obvious to me that this would have undesirable effects down the road. It also funnels even more money into banks because the net effect is that homeowners are essentially renting from banks for most of their lives until they get a significant windfall.
In the US, we saw what happens when you make getting a mortgage "easy". People bought more house than they could afford and got screwed.
> A 140 year mortgage can't possibly be appreciably different from renting.
The fact that as a homeowner ("owner") you can deduct interest rates, means that by "renting from the bank" you have a 30% rebate compared to renting from a landlord, and obviously you have no landlord taking a cut on top of that. So apart from the risk of depreciation, people seem to have little interest in owning their homes outright. So people pay off quickly in the beginning to get some margin on their valuation, but after that when the loan is e.g. 50% of the valuation, people might prefer buying a car to paying off $10k per year on their home. And it's probably better to have a mortgage fixed at 50% forever with 2-3% interest rate, and avoid the car loan with 5% interest.
Yes, but landlords also pay taxes on profits. As a homeowner, you won't pay tax on the difference between rental cost and your mortgage interest payment.
In the US home sale profits are taxed as capital gains with an exemption based on marital status. It's hard to compare, though, since homeowners are not permitted to write off routine maintenance as would a landlord.
Would be interesting to simplify tax codes and handle homeowners as both renter-landlord on their own home.
A car decreases in value each year, houses on average over time increases in value. Rent also increases but the loan don't increase so only changes in the interest will change how much you have to pay. (Not saying 140 year mortgage is a good thing, plan to pay down mine in 10-15 years if I don't move, but still think it could be better than renting)
> Your kids might be dead by the time it's paid off, you'll never own it.
Exactly right. I don't know anyone who buys with the intention to own.
Effectively you rent it from the bank. I don't mind, I mean I don't mind renting from the bank. I pay off my mortgage (2% per year, so 50 years) but only as long as its reasonably high, in order to lower interest rate costs and reduce the risk of being under water.
I have no interest in paying it off completely, so I'll stop paying 2% per year when the mortgage is down to e.g. 40% of the value. Obviosly as a banks have zero interest in your customers loans shrinking, it's lost revenue!
The big downside of very long mortgages is that it brings up nominal prices, and thus the volatility
In the UK, around a fifth of mortgages are interest-only, which I guess is effectively an infinite-term mortgage. In comparison, at least you're paying some part of the capital back on a 100 year mortgage. Of course, both are storing up trouble for the future.
Does the FT article give any details of how that fifth is broken down? I suspect they'd be predominantly buy-to-let; my understanding is that there are significant barriers to getting an interest-only residential mortgage.
If you're getting an interest only mortgage, at least you know what you're getting into. They're great for investment properties and other investments, not so much for your main residence.
Then again, there is the problem of refinancing when the end date comes due, which is probably why you have 100+ years mortgages in Sweden.
I would agree that my interest only mortgage is storing up trouble for my future. However given I bought my 1st house in 1996 with no deposit, the reality is that interest only has worked well given that I have leveraged the housing market over 20 years and have now have a mortgage that is around 40% of the value of the house and is probably enough to move somewhere significantly less expensive and retire.
However I recognise that my gain is also a problem for my teenage daughter who will struggle immensely to get on the housing ladder. In the UK, it really does not help that housing is considered an investment opportunity. I have a feeling rent control is the only way we will ever get to the point where we remove this 'investment' opportunity.
More interestingly, it's within landlord's interest to work with developers to ensure whole developments are primarily bought up by landlords to maintain the value of housing stock.
> I have a feeling rent control is the only way we will ever get to the point where we remove this 'investment' opportunity.
And also remove the opportunity to live in the city. Rent-control is one of those policies that the economic community has consensus that its one of the worst things you can do.
"In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing."
Interest-only mortgages can work well - but only if you know what you are doing. Historically at least, the biggest issue with these kinds of mortgages is that most people simply don't.
> Just recently the Swedish government limited the maximum mortgage term to 105 years. That is some absolutely stupid policy.
It is a bad situation. But on the other hand you can't just change the max mortgage to 30 years either, or remove the interest tax deduction over night, as that would immediately create the problem you were trying to avoid to begin with (an unstable housing market).
I think what they are doing to mortgage lengths is entirely sensible now: they are increasing the required down payments (effectively 25% now) and then requiring a higher pace of repayment initially. That's when it really matters to stability. E.g. if people pay off 3%/year for the first 10 years of their mortgage, it doesn't really matter whether they have a 30, 40 or 100 year mortgage. They will have paid it down to around half the valuation which lowers the risk.
Also to add to that, an extreme number of new people immigrating to Sweden, especially under 2014-2016 [1] (which is my personal belief that is the leading cause to the biggest increases in prices). Many municipalities also letting up to 25% of these new people jump ahead the queues leaving Swedes to be even more forced to buy an apartment instead of renting [2].
Also in Sweden for apartments, you don't own it. Most apartments for sale is so called "Bostadsrätter" which means you own a percentage of the association that owns the apartment building(s). If the association/organization has a bad economy and can't pay the debt they could be forced to sell the entire apartment building(s) and you'd loose your apartment while still having a loan to the bank.
Of course you would get that % of the profit, but since it selling in a time of crisis, that would mean you would most likely get significantly less than you otherwise would do.
It doesn't even matter if you have a good economy, the association must have it as well. Lots of those associations or organizations have a really shitty economy and are sensitive to market changes. Especially in Gothenburg and Stockholm.
I upvoted. I guess it's the first few words that suggest a racist / popularist post, but it's ontopic IMHO.
You point to an influx of people in the age range that usually rents an apartment. Such local equilibria are quite instable. It only takes a few hundred excess renters to destabilize a local (regulated) market for housing. That leads to crowding out where those that usually would rent, but can afford to buy will buy. A few more buyers will lead to the a dysequilibrium in the next market.
One thing - you expect upward pressure on prices, with more people competing for the same number of houses. The OP is about falling prices.
Well, if you are increasing the population a lot, all of those people are going to need somewhere to live. It isn't really hard to figure that out but most people don't seem to make that connection.
Don't understand how it could even be remotely racist or popular. The statistics of housing prices correlates very well with increases in immigration. Of course, correlation does not imply causation but in this case I'm personally pretty convinced it is the main causation of the extreme increases.
Regarding the falling prices, yes, I believe they were about to fall even before the massive influx of new people (because of all the other things mentioned) but were artificially held up a couple of extra years due to new people.
Your chain breaks at "less people willing to buy goods due to risk".
SEK going down will push the costs of imports up. It will also make Swedish exports more competitive. Imports being more costly will cause Swedish consumers to substitute imported goods with local alternatives.
The net will be that wages will go up and unemployment will go down. This is good. But the price of goods will become dear to the Swedish consumer and this is bad. And there's a possibility of a wage/price spiral driving up inflation.
It's over 3.5% of the total population, which is equivalent to the U.S. adding about a million people. Also note that they're going to be concentrated into relatively few urban areas, instead of being spread out over the entire country.
In 92 there was a five times jump in asylum applications from the previous year (to 69 000 people), can you guess what inflation adjusted house prices index did at that time, and some time on?
It takes great effort to see a correlation between yearly applications (between 2000 and 2008 an average of 25 k persons varying with at most 30%, 7 years below that average and 3 above) and house price index (steadily up 62 % from 2000 to 2007, never failing to increase from one year to another).
So, could you explain why the housing prices fell in the 90s when we took in more refugees than ever before? And why they rose considerably when immigration slowed down in the mid 2000s?
Because, for some reason you're convinced immigration is the main cause of rising housing prices and that the two clearly correlates, even though you can only back that up with stats that are about a decade old, any older than that and the correlation disappears. Maybe I'm missing something?
I don't really have any data from the 90s and I wasn't very old back then so I cannot really say anything about it.
And stop putting words into my mouth. I wrote that I believe immigration is the main cause of the most extreme increases not the main cause of rising housing prices in general.
The difference is that the number of people Sweden has recieved is so much larger 2013-2016 so basically every system we had failed and all municipalities was forced to buy apartments.
If you have stable immigration that are predictable it's easy to plan ahead and adjust the society for it but when it comes like 160k people in one year to such a small country as Sweden everything fails. Of course this will have economic effects such as in the housing market.
Fair enough, I’ll stop putting words in your mouth.
SiemperVernes supplied stats that showed that the correlation goes from weak to non-existant when you look at the past three decades, despite the fact that the early 90s was record years of immigration. You said the correlation was clear and that you think it’s the main cause of rising housing prices, why do you think that? Is it only because of news stories that the local governments had a hard time finding places to rent out? You don’t base it on data?
I would gladly base my thoughts on data but unfortunately when it comes to immigration the government doesn't really publish/store any data of any negative effects immigration could have.
I base my thoughts on the data that is available (which isn't much) and I still think it's different from the 90s because of the much higher number of people that came to Sweden in the last years. Basically no systems worked as you surely know and the government had to abort the whole situation because it became unreasonable even for them. And to my knowledge, Sweden didn't let immigrants jump queues nor buy apartments for them and their wives in the 90s.
For example regarding the lack of data, I am sure they know how many apartments they bought for immigrants but in order for me as a citizen to get that information I would probably have to request it from every single municipality which quickly becomes unreasonable.
Just think what you would have to do in order to base the thoughts on data:
I would have to request data from every municipality in the country regarding different factors that the immigration could have an effect on. Then I would probably take that data and compile it with other data that is basically impossible to get hold of and then have to compare it with the same data from the 90s. That is of course if every municipality even answers your request (they do not always do that, even if they must) and if they actually keep the records of the data. As with any topic that involves immigration in Sweden, statistics are simply not very often even recorded or stored.
Even if you had this specific information, it wouldn't answer your question. It would mostly serve to re-enforce the beliefs you came in with, because you also need to look for other factors which might explain the housing increases.
For example, in another part of this thread I quoted a news article as saying "Prices have also been pushed up since a law change in 2013, allowing private individuals to charge tenants based on their mortgage costs rather than comparable rent prices in the neighbourhood." How much of an effect has this had in the rents in 2014-2016?
You appear to be young person, so you personally are likely in the same housing market at the refugees. This can make it seem particularly dire for you as most of the new housing being built is for a more expensive part of the market.
So, why is the new housing built for a more expensive part of the market?
Another factor which is harder to plan for and which affects the housing market is internal migration. Just like in the US, smaller towns and cities in Sweden are depopulating as people move to the bigger ones, where there is a stronger economy.
Was that planned for, and how much of effect has that had on housing prices in the big cities?
Finally, here's a quote from an article from 2009 titled "Sweden risks facing severe labour shortages" / "Over the next ten years, the number of native-born Swedes of working age will decline by 100,000. Without more immigrants, we will be unable to sustain our welfare standards, writes Olle Wästberg, head of the Swedish Institute." https://www.thelocal.se/20091222/24004
> Almost all Swedish regions have set population targets that emphasise growth. The Greater Gothenburg area wants to have a population of 1.5 million in just ten years’ time. Stockholm wants to have 600,000 more inhabitants over the next 20 years.
Was enough housing built to meet the desired growth goals?
But there is data of how many refugees entered Sweden in the 90s, it was roughly a hundred thousand a year then just like in the recent years. Did you read any of the links SiemperVernes linked to? You also say that you don't believe refugees could cut the line to public housing, did you check at all to find out if that was the case? Did you also cross check with SCB to find out how many new houses were built, since that statistics stretches well past the Million program more than 50 years ago? It even stretches back before WWII.
Or is your personal belief based on your gut feeling?
And, when you say that "they correlate well", what time period are you then looking at? And what data? Because immigration decreased in the mid 2000s while the housing prices increased. No offense, but it looks like your analytical method is "there's lots of newspaper articles about refugees these days, and lots of newspaper articles about rising housing prices, one of them must the main cause of the other". I might as well say "there's lots of articles about smartphones lately while the housing prices are increasing, maybe smartphones lets us live alone more effectively meaning that we take up more space when everyone gets their own apartment instead of a room mate".
> Also in Sweden for apartments, you don't own it. Most apartments for sale is so called "Bostadsrätter" which means you own a percentage of the association that owns the apartment building(s). If the association/organization has a bad economy and can't pay the debt they could be forced to sell the entire apartment building(s) and you'd loose your apartment while still having a loan to the bank.
In the US we call these co-ops and they are mostly an NYC phenomenon. Fun fact, some co-ops don't own the land they sit on, they rent it. And those rents get renegotiated every 30 years, potentially making a bunch of co-op owners suddenly unable to afford their monthly maintenance payments.
It's not actually. Unlike strata, in a Swedish "Brf" you don't actually hold title to any real estate.
As the GP says, you own a share in a co-op that itself owns the real estate, and that gives you the right to use the apartment that corresponds to your share.
Something similar to strata title has been discussed for many years in Sweden: ägarlägenheter. I don't know whether anything has ever come of it, however.
It has not been that much of a price change and while it will of course affect some it has not been the driver. It is not THAT difficult to get an apartment in the shitty areas where immigrants want to live but those who buy apartments won't buy in those areas anyway.
Increase in immigration absolutely increases the demand for housing, but it's often not enough to increase the housing prices alone. Look at what happened in the early 90s during the Yugoslav Wars, Sweden took in more refugees than ever before in history yet the housing prices went down and threw the country into economic recession because of all the investments into real estate.
The financial regulations (or lack thereof) are far more responsible. They're present in all of Sweden's housing crises, this one included. It's the same when you look internationally.
Already the prices were high and housing scarce in 2010. https://www.thelocal.se/20100928/29292 , dateline 28 September 2010, quoting the local paper "Housing crisis worse than ever!"
http://www.bbc.com/capital/story/20160517-this-is-one-city-w... from 2016 points out "But amid strict building regulations and a lack of investment over a number of decades, successive governments have failed to build enough homes for its long-term residents, let alone the latest arrivals. ... Prices have also been pushed up since a law change in 2013, allowing private individuals to charge tenants based on their mortgage costs rather than comparable rent prices in the neighbourhood."
That 2013 change is just before your 2014-2016 time frame. Perhaps it had a bigger effect on the market than you think?
Yes, Sweden accepted a lot of refugees in the last few years. But as the first link points out, they cannot "afford the kind of houses that were being built in the years following the crunch." It seems more that they are priced out of the market more than causing the market prices to rise. (There are certainly secondary effects.)
I tried to find something in the Swedish press. I think this is relevant: http://www.gp.se/nyheter/g%C3%B6teborg/s%C3%A5-l%C3%A4nge-m%... from 2014, so before the timeframe you describe. If I read it correctly (thanks Google Translate), in Gothenburg there were 20,000 fewer homes, relative to the size of the population, than there was in the 1970s. There were 210,000 people registered in the housing queue, and the time an applicant needed to queue was 950 days.
One of the people being interviewed also argues that "there is big gap between what is being built and what those who need a home can afford to pay. A survey conducted recently by Sifo on behalf of the Tenant Association shows that 70 percent of them are considered to be able to pay a maximum of SEK 5,000 for a one. A newly built one in Kvillestaden costs over 6 500 kronor."
This seems to confirm the arguments presented in the English language press, that is, there are large-scale systemic factors that lead to the current housing crisis, and it cannot easily be explained by the large number of refugees.
Oh really? Where can I get that %25 get ahead in the queue thing? I am an immigrant moved in 2014, and I had to buy an apartment. Because of the freaking long queues. I have never heard of that %25 thing.
Not the mention that residents register their kids at very early age to these rental queues, giving them a way ahead in these queues.
> This is basically a mortgage and reverse mortgage
We don't have a specific term for "mortgages" as meaning home loans - we treat them as any bank loan. I hadn't heard the term "reverse mortgage" before, so had to look it up. It's not quite that (interests are always paid).
100 year mortgages? Why is this? Because prices are too high for average folks to purchase otherwise, or because people prefer "owning" (renting from a bank) instead of renting from a landlord?
> Because prices are too high for average folks to purchase otherwise
Yes. In a sell to the highest bidder, you aren't going to win with the amount you can borrow over 30 years, if the people bidding against you borrow on 50 or 100 years. Simple as that. So without any caps, people will request long mortgages simply to be able to win these auctions. Should be noted that this is now developing backwars again, and "peak insanity" was early 2000's. What we are seeing now is to a large extent the effect of common sense on the prices. The attempts to stop the insanity over the last 5-10 years (e.g. down payments went from 5, to 10, to 15 to 20 % etc) unfortunately coincided with negative interest rates, meaning people could still push prices up. Now we are finally seeing the effect.
> or because people prefer "owning" (renting from a bank) instead of renting from a landlord?
Yes, there is effectively zero renting of 1-family homes. If you rent, it's a flat. And there are very few flats to rent. A LOT of the people having to buy these expensive homes would rather rent, but there is nothing to rent.
Varies, of course. Average house is basically $100 to $350k but the average in Stockholm is probably around $1M depending on what areas you count. Not sure what the average salary is, but loan caps now are ~5 times the household (gross) salary. which sets the equation somewhat.
So a couple buying a stockholm home at $1M today (which isnt an uncommon price) would be borrowing say 75-80% of that, so making at least $1Mx0.8/5 as a couple or $1Mx0.8/5/2 each, or $80k/year. That's a good salary, but more commonly this couple would be selling something they made a nice profit on, and borrow less, lowering the income requirement.
This equation could be cut in 2 for a more average (4MSEK house, not 8MSEK) city or cut in 3 for more rural areas. Salaries fall off slower than house prices do, so rural areas spend less on housing than city dwellers.
I'm assuming that $80k/year is gross? Given Sweden has high income taxes, borrowing say $800k on a $40k net salary (for a house!) seems like extremely bad financial management.
Which sane person who is good with money does that? That sets you up for a life of misery (and not unrealistically, an underwater house during your lifetime).
Yes gross. $80k gross is around $53k net (depends on where you live but roughly).
Now, remember that reason we are in this mess is because interest rates are so low. We still have pretty low living costs. Our $1M house at 80% is pretty cheap, due to low interest rates. Now, everyone knows interest rates can and will be higher in the future, but people have to buy on the current market regardless (And everyone seems to accept to have less spending money when interest rates double or triple).
The calculation now for our couple with $100k household net income isn't all that bad. The monthly "rent" for the house is between $2k and $3k of which $1.2k is down payment ($24k-36k year). Double the interest rates from 2% to 4% and it's $3k to $4k/month. I think spending over 50% your net income on living costs is proabably a limit to look out for - and that will certainly happen to these people should interest rates go north of 5% or there about. We also need to remember that in Sweden people generally don't save up for a rainy day. I'm not saving for retirement, kids edication, risk of being ill etc. So in a nanny state the equation is slightly different than in say the US.
> Which sane person who is good with money does that?
It doesn't matter so long as it is at least one person in the auction for each house does it. If there are no homes to rent and nothing is built, there will be competition for the existing homes on the market.
> not unrealistically, an underwater house during your lifetime
This is definitely a risk. And banks are now lending less and less. With a 25% down payment the bank will know the hose can take a 25% correction and still be over water.
But the scary bit is of course that if there is a 20% correction, no one can move, and no one will consume anything for a very long time, which will lead to pretty significant economic fallout.
You're talking about these interest rates as though they can just move around - are these adjustable-rate mortgages? In the US, the standard mortgage has a fixed rate. So people with those mortgages would benefit from increased interest rates and/or inflation in the wider economy.
Yes, many homeowners have all or a large part of the mortgage at a rate adjusted several times per year. Right now these variable rates are around 2%. So a lot of people will see their interest rate expenses double if (when) rates normalize at say 4%.
I have my mortgage split between 5year fixed, 2 year fixed and the 3month rate, in order to limit my exposure to variations somewhat.
The general consensus is long fixed mortgages are a poor economic choice for those that have the economic margins to be on the variable rates, since the banks margins are so much higher.
Of course, most people who borrow 80+% can't _really_ afford the risk of an adjustable-rate mortgage, but they think they can because rates are always low and will never go back up ;)
Banks do stress tests at 7% interest rate which was a reasonable "high" interest rate 10 years ago, but now it seems almost unimaginably high.
So I think people (and banks) have calculated with higher rates, but there is always illness, divorce, unemployment...
Lots and lots of people would have a pretty miserable economy if interest rates go over 6% (i.e triple) - spending most of their money on mortgages.
So this creates the risk that rates will be self sustaining at a low level because even a 2% increase will reduce consumption and halt inflation pretty quickly.
Adjustable at a month's notice in Norway. You're free to refinance or change banks whenever you want. But if some crisis forces your bank to increase rates quickly (e.g. due to increased costs for the bonds that support their loan portfolio), you can bet every other bank will be forced to increase rates too.
This happened in 2008, and a disaster was averted only because the government bailed out the banks by allowing them to trade their now-bad commercial bonds for government bonds. It turned out to be a good deal for the government, because commercial bond rates came back down quickly. (No guarantee that this would have happened, just luck).
"And everyone seems to accept to have less spending money when interest rates double or triple" another angle to look at this phrase would be "people don't see other option". Another option could be renting, but then there are many downsides - you are wasting rent money on temporary living instead of paying for your own house. Another downside at least in my country is difficulty to live normal life in rented apartment - usually there are restrictions (from landlord) to not own a pet, or they refuse to rent apartment for young family with babies. So people are kind of forced to purchase apartments, and ususally the need is to live in city where employment is highest, otherwise you will be unemployed or your expenses on commute will be the same as difference in loan payment which you saved with cheaper purchase.
I am waiting (and renting) for "good time" to purchase apartment, and it's more than five years like that and I don't see any signs for hope anytime soon, and you realize that time goes by and you are getting older and your timeframe for which you can take loan is shrinking anyway, so situation becomes a bit desperate I would say.
So decision making with real estate is not only rational but emotional too.
In most places it's rational[1] to max out the loan. It's the cheapest kind of financing you can get privately, it makes more sense to put your money in other vehicles than mortgage payments. Of course you may think there's intrinsic value in being mortgage free.
When will we learn that a "strong" housing market is not necessarily a good thing? High housing prices are great for those who already owned houses but terrible for everyone else (e.g. the entire generations born after prices became inflated). Not to mention people are greedy and will over leverage themselves when interest rates are good. No country should let the "landed gentry" hold them hostage over interest rates or tax policy so that their assets - many of which they do not even actually own - can appreciate.
Totally agree. It seems one of the factors that helped the US until the 90s was that housing was affordable so people could move around easily. A "strong" housing market seems to indicate that there are no productive places for investing and no wage growth so people need to gamble on houses to rise instead.
> A "strong" housing market seems to indicate that there are no productive places for investing and no wage growth so people need to gamble on houses to rise instead.
You've just summarized the situation in Prague, Czech Republic.
Same in Romania. For the first time in my life (I’m 37 now) I heard a couple of acquantainces saying something like “We’re 20,000 Euros reacher now compared to last November, our apparment is now worth 90,000 euros compared to 70,000 euros last November”. This discussion happened this summer, since then I’ve heard at least a couple other different couples saying pretty much the same thing (only the sums were different). Never mind they their investments are a hell of a inliquid ones and that the banking rules can change anytime, just like that (like it happened after 2008), which would send the real estate market collapsing.
I think a strong housing market may be the result of lack of productive capital, but I think it has more to do with supply and demand. Most average people pay for a house using a mortgage payment, so when buying a house, they'll be looking for a house that has an affordable mortgage payment.
Let's say Joe wants to spend / can afford a $1000/month mortgage payment. If interest rates are 5% and the maximum mortgage period is 30 years, Joe can afford to buy a house worth $190,000. However, if interest rates go down to 2% and Joe can now take a 40 year mortgage, Joe can now buy a house worth about $330,000. Great for Joe! The only problem is that housing supply is relatively inelastic, so the supply of housing didn't magically increase overnight. When Joe buys a house, he's essentially bidding against a bunch of other people for that house. If those other people's mortgage payments were affected the same way, then the actual effect is that what was once a house worth $190,000 is now worth $330,000.
This sounds like a problem out of an Econ 101 exercise. Either politicians are stupid, or more likely, they know that "homeowner policy" like this can make them and their other rich buddies even richer.
Homes are important to people and they tend to buy as good as they can afford. When employment is stable and interest rates are low people will spend more because they can and feel safe doing so.
Early movers purchase a higher grade of home than they could have previously. Eventually this shifts the market as a whole as income distribution remains stable. Then people buy the same house they would have previously at a higher price. Now nothing has changed and people are more in debt as the cycle returns to normal, if it ever does.
Plus the whole investor (foreign and domestic) vs owner occupier discussions we are seeing plenty of...
Isn't it inherently bad to buy "as good as you can afford"? Employment is rarely stable throughout a 30-year period. Shouldn't people be much more careful when maxing out their mortgage relative to 'the good times'?
That depends. Location location location. The right answer changes based on what side of the city you live in. As such nobody can give a definitive answer.
In all but the smallest cities you have options for a different job. They might not be as good, but there is an option. If you lose your job you can find a different job close enough to your current house that you don't have to move.
Remember this is NOT an rational economic problem. There are good reasons to live near by the same neighbors that you know well for years. There are good reasons to live near your family. When you own a house you can make modifications to support your hobbies which in turn make your house a better place for your to live than anyone else. These all mean there are good reasons to accept a job that pays less than you could earn elsewhere and thus stay in the same house. With inflation you can probably afford the house on a lesser paying job after a few years.
> Remember this is NOT an rational economic problem. There are good reasons to live near by the same neighbors that you know well for years.
Why is a living near the same people you know and love irrational or somehow an inappropriate object of economic reasoning? You could even estimate prices for such things! Just because they're not typically represented as currency amounts doesn't mean they're not 'rationally economic' or that making tradeoffs that involve these things couldn't be better done with good economics.
Generally rational economics assumes someone who is rationally trying to optimizes for other factors.
You are correct that it is fully rational behavior for people. However that is not the definition used in economics. (sort of like physics tends to assume no friction where possible)
No such assumptions are made in the axioms of VNM-rationality[1] or any other model of rationality of which I am aware. If it is not rational to live near people you like it is difficult to see why it would be pay more for a house with any other luxury.
Cf. China, which has seen unbelievably explosive growth in its cities in the last 40 years and China has also seen ~1 billion people lifted out of poverty during exactly the same time period.
Sure. This is inspite of the hukou system, which is basically a kind of apartheid that keeps rural migrants from receiving services in the urban locales they are working at.
Yes, I think so, but only because "as good as you can afford" usually means to people "as much money as the bank will loan me" instead of "as much as I have carefully budgeted."
I bought as much as I could afford, but my budget included savings and a cushion. The bank would have loaned me plenty more than what my budget could afford. And my budget included repairs and maintenance. I also included in my budget a 4 bedroom house costs more than a 900 sqft town house to heat and cool. The big thing was I wasn't willing to give up maxing out our retirement accounts.
In theory, sure. If there were ever any options to be careful, that might be relevant.
But in practice, "as good as you can afford" really means "buy the lead paint, lead water, asbestos ridden, foundation broken 'cheap' house? Or buy the no-lead, no asbestos, no mold 'expensive' house? "As good as you can afford" actually translates to the "least shitty" option, for most people.
Buying an 8 bedroom house just because the bank will technically let you, is a fun TV sitcom joke. Not a real thing most people are ever able to actually do.
For many it is also tied to expectations of what they should be able to afford that are born out of what they saw their parents afford and what they grew up in.
If you grew up in a modest but well-kept house in a decent neighborhood, that is your baseline. If you then go on to reach some level of success in your career such that you are roughly on par or exceeding your parents income, your expectation naturally is that you should be able to afford something similar or better. Unfortunately the market dynamics have completely shifted since parents bought, and so people are having to take a really harsh look at the reality of their past expectations and how they align with their current reality. It often means paying way more than they ever wanted or thought was necessary to buy something way crappier.
As good as you can afford would be fine. The problem is mortgages and the fact that people are buying more than they can afford. They're buying as much as they will be able to afford over the next 30 years. We've developed a system were some people make large amounts of money by creating the fiction that housing should be as expensive as it is.
There's a lot of evidence that shows that for every dollar of loans made available to students, the price of education rises, and that's a system without supply/demand dynamics since admissions aren't (supposed to be) based on a bidding process. It seems only reasonable to conclude that the availability of mortgages has similarly increased the price of housing. It's a hidden cost of our housing market that banks (and a few others) profit by. The banks loan fictional money, created out of thin air thanks to fractional lending requirements, and collect a percentage of that back every year on a house that only costs what it does because of that loan. Without mortgages, people would be forced to save up and the price of housing would be governed more by the cost of actually constructing houses and the amount that people were able to save before buying rather than a percentage of their income over the next 30 years.
Think, for example, if banks decided to change the standard loan time from 30 years to 40 years. What would happen to housing prices in areas with somewhat constrained supply? Homebuyers would still look at monthly payments and buy as much house as they could afford. So housing prices would increase accordingly and instead of mortgaging 30 years of our futures, we'd be mortgaging 40. We'd be buying the same houses and banks would be making more money. Change 30 years to 20 years and you'd get a similar drop in housing prices.
More than any other thing that we spend money on these days, housing prices have been decoupled from their cost of production and banks are largely the ones skimming that difference between what housing should cost and what it actually costs.
It's sort of telling how many prominent politicians in the UK make much of their income off of housing. Boris Johnson, George Osbourne, and David Cameron all come to mind - all who were in prime places to improve the situation, but it was against their best interests.
I don’t think you can really blame 3 conservative politicians for the home price boom in most western countries over the past 20 years! They weren’t even in power for a major part of the boom in the UK (Labour were in power from 1997-2010).
The most recent part of the increase has come from the slashing of interest rates to rock bottom following the global financial crisis and quantative easing, neither of which is the responsibility of the government.
Yes it’s not their fault - just saying it’s not in their interest to improve things, and they didn’t. But you think government has no influence over house prices? How about help to buy schemes and similar? London bubble is pretty extreme even compared to most other places, and the median price has doubled in the last decade under the tories.
> Either politicians are stupid, or more likely, they know that "homeowner policy" like this can make them and their other rich buddies even richer.
It's not a malice vs idiocy situation, actually there is a third explaination : economy needs a growing money supply to work properly (and the money creation need to compensate the economic growth AND the reduction of money velocity[1]). But since the late seventies, money creation is only possible through the banking system via credit. That's why central banks reduces interest rates to stimulate economy, because you need to create money to enable economic growth. To get out of the rising housing prices trap, we need another money creation mechanism, but many people are affraid of the old ones (state-controlled monetary creation) and a lot of people (bankers, homeowners) have a lot to lose if we changed the system.
[1]: this is the failure of the monetarist view from the seventies, which predicted a constant money velocity, in fact we've had a declining one for the last four decades.
..or they can give it directly to people. There is an initiative for Europe that wants exactly that, Quantitive Easing for People. I love the idea and am sure it would do more for the economy than just pushing banks to lend more money.
That could be a good idea, even though we don't really know the impact it will have on inflation. Imho, the impact would be close to zero in nowadays economy where the lack of demand is much more of a problem than an hypothetical shortage of goods. In the long run though, the demand would catch up and the supply could be the limit, like it was after the first oil crisis.
Personnally, I'd rather give the money to the governement like we did in the keynesian golden age, because it fuels the development of infrastructures, housing and social security. And at our point in history, it could be used to transition to a sustainable society. But that's because I don't trust the market on this, I'm kind of a socialist.
> am sure it would do more for the economy than just pushing banks to lend more money.
This is such a failure (esp. in the EU) I don't see how I could disagree with you on this.
The problem with this idea is that the central bank doesn't have a list of bank accounts for the entire population and even if they did not everyone has a bank account.
It's more likely that negative interest rates will be passed onto consumer bank accounts by elmininating cash.
If money is given directly to people then that money will disappear in non-productive spending such as luxury goods and services, which typically mean that the nation's trade balance would suffer greatly.
Thanks for the paper, but having skimmed through I don't think the word research is appropriate for this, it's more of a compilation of autrian propaganda than anything else.
Gold standard failed, no matter what libertarians like to fantasize about it.
And what prevents the arbitrary extension of credit?
The present primary reliance on fractional reserve monetary is not a carved-in-stone requirement of financial systems, only the present norm.
If you're interested in ideas and thoughts on money, I'd suggest William Stanley Jevons writing as a starting point for modern views. A. Mitchell Innis's "What is Money?" (1913) is not entirely mainstream, but strikes me as among the more insightful enquiries I've read:
> The present primary reliance on fractional reserve monetary is not a carved-in-stone requirement of financial systems, only the present norm.
Their is no fractionnal reserve banking in the modern world anymore. And circa 2007, virtually nothing prevented the infinit expansion of credit, with the result we all know.
If you want to learn more about these topics, the keen-krugman debate (more of a controversy than a civil debate) a few years ago was really enlightening.
In the US, there is no limit anymore on how much credit you can lend given the amount of reserve you have, the reserve requirement is on deposit not credit lent.
Very good point. My pet theory is that the emphasis on asset-ownership as a means of retirement is what is decreasing the velocity of money. For example, let's say we had a system where instead of purchasing a home/stocks/bonds to save for retirement, you could instead pay the government $X which essentially goes toward an annuity with payout determined by the age at which you retire. The government could just immediately spend that money - perhaps on other retirements - and your actual annuity is just an accounting entry. So this is similar to social security, except you can pay more if you want to.
The emphasis on assets for retirement locks a lot of money up in an unproductive musical-chairs of asset transfership. For example let's say I have a pay-day and want to spend $100 on buying stock. When I buy that stock I'm purchasing it directly from someone else who now has $100 instead of the stock. They can spend that money on goods and services, but in my opinion there is a far greater chance that they will reinvest that money in some other asset. If the actual assets in the market don't change, I think you can say that my investment increased the total sum of costs of all assets. I'm not 100% sure this is solid logic but it's some rough reasoning.
The problem is that at any given time more people are buying new assets instead of selling them off. This is because you can make money on purchased assets through rentiership (dividends, renting, or collateral for a leveraged investment that pays dividends/can be rented), and also because people are cautious and save more than they need, since asset prices are unstable.
That's an interesting point, and easily challenged since my country (France) is actually doing what you suggest. And as a matter of fact, retirement here is part of the social security system (La sécurité sociale). I'll check if we see the same kind of slowdown of money during the past decades here.
I have two personal pet theories (is that really a common idiom in english ? I like it !) on that topic.
1. since we now focus on low inflation, people have little incentive to spend/invest their money, they can just hoard cash for a long time with no risk of losing money.
2. The low imposition rate since Reagan accelerate the concentration of capital, and rich people buy assets with their money, not consuption goods.
One thing I'd worry about is that this kind of pension may only work in a closed system. People not living in France may still purchase French assets for investment, just as they continue to purchase international assets for investment, which will still drive an increase in demand. That could incentivize French people to continue investment, in the absence of strict capital controls.
And yes, it is somewhat common! I think your second point is definitely part of the problem. As to your first, I think that looking at inflation in these terms requires looking at interest rates as well. When both inflation and interest rates are low, hoarding cash is highly incentivized. If inflation is low and interest is high, there is a large opportunity cost to holding cash rather than collecting interest via a mechanism directly tied to the cash (e.g. a bond). If both inflation and interest are high, it would probably be optimal to invest in assets that won't have their underlying value erode as they do with bonds.
I'm sorry I think you are confused. When you buy stock, you are providing capital to the company issuing that stock. Yes, even in the secondary market, although indirectly. The company then invests that money productively and the economy grows.
Ah, no.
The moment the company gets money, is when it sells the stock. After that, unless the company sells more stock, or buys and re-sells its stock, it receives zero more capital financing dollars, unless it undertakes other financing activity, such as the sale of bonds.
There is no indirect means to receive money, except for profit, and that it is not related to stock.
Profit is ultimately the primary means for company cash liquidity, held as retained earnings, after the company has survived its initial years of inception and growth.
Sorry, you are missing the point. A liquid secondary market is what enables the company to go public in the first place. There would be no initial sale of stock without it at all. In addition, liquid secondary market enables the company to incentivize its employees and undertake other financing activities, as well as gives value to its remaining treasury stock.
No. Growth companies may not pay dividends for years and still go public. Dividends are paid by private companies too. The only reason to go public is the liquidity
That's not true. A company doesn't manage to sell its shares because of dividends. Dividends may be used to estimate value base on the expectation of returns, but if dividends were relevant or even dictated the share price then stocks of companies that posted negative results would be worth zero. Which they don't.
"But since the late seventies, money creation is only possible through the banking system via credit."
? I don't know how the Kroner works, but usually a central bank issues currency into the market in exchange for some kind of asset - this is the primary mechanism for controlling interest rates.
Yes, more credit is created through fractional reserver, but this is taken into account.
> more credit is created through fractional reserve
There is no such thing as fractionnal reserve credit in 2017, bank don't need reserve to lend, they need reserve to hold bank accounts for their customers.
The link you sent doesn't say that they lend out more than they have in deposits (it says loans create deposits... so they will always have more deposits than there are loans).
And the following passage doesn't make much sense: "When a bank makes a loan, there are two corresponding entries that are made on its balance sheet, one on the assets side and one on the liabilities side."
If you take a loan to buy a house, it will not be a new deposit at your bank. It will be a new deposit at the seller's bank. And against that new deposit, that bank can extend new loans. Etc. http://thenextturn.com/wp-content/uploads/2015/04/Fractional...
Of course when you are just getting the loan it will appear as a deposit at your bank. But this is not to balance the loan. The loan is coming from a reduction in reserves. This temporary deposit (on the liabilities side) will increase the reserves temporarily (on the assets side), but only until you take the money out to do whatever you asked the money for.
Definitely banks do not lend out more than they have in deposits (ignoring other forms of financing for banks, of course).
I see what you are saying, I agree, we are just arguing over words.
Technically, you are correct - they don't lend out more than what is deposited, but what is deposited is 'created' (or at least deposited and lent money against those deposits are both considered 'in circulation') by they or other banks, ergo, banks end up lending out considerably more money than is created from the central bank.
We agree, then. Simplifying a bit, M0 (physical cash) is lower than M1 (M0 + checking accounts) and M2 (M1 + savings accounts) which are the usual measures for money in circulation. Note that there are also broader definitions of money, including as well long-term deposits and other money-like instruments.
> To get out of the rising housing prices trap, we need another money creation mechanism,
...or simply a way to deflate the housing market, such as public housing and urban renewal projects.
I don't understand why a small issue that's easily solved and a very basic strategy all over the world is somehow interpreted as a insurmountable problem that means the entire economical system is broken.
Also, at least in the US, there are enormous tax advantages to speculating/investing in your house instead of in other mediums (equities/bonds/etc). Capital gains tax on gains is basically 0 on your primary home and you can deduct the mortgage (already low) interest (compare to a margin position).
I don't think it's that there aren't productive places for investing. Housing is unique in that a regular person can get a loan to purchase an asset that normally appreciates, and they can deduct the interest from their taxes. There are a lot of transaction costs, so the market isn't as liquid as some others, but where else can the average person get that kind of leveraged investment?
There's been a number of great bits of research over the past few years arguing that our "strong" housing market is a primary cause of economic stagnation.
Let me count the ways:
(1) reduced labor force agility as you say
(2) high rent and mortgage cost soaks up money that could otherwise fuel consumer spending, creating a demand constrained economy
(3) high housing costs in major cities also contribute to poverty elsewhere by preventing people from circulating between high priced urban and lower priced rural areas
(4) high housing costs risk actually destroying centers of excellence like the SF Bay Area and New York by making it impractical for new talent to move there
I somewhat disagree. The opposite can also occur. Because everyone is gambling on the house market, the amount of productive places for investing diminishes as they are left to be forgotten. This can be obviously self-perpetuating but this is how I would characterize New Zealand.
I agree. The article isn't very clear on what the problem would be, though it does mention deflation. Deflation is bad by axiom, and we must be pathologically afraid of it. If housing prices sink enough, that may mean that the overall inflation rate turns negative, which is deflation, and thus bad. Even if this "bad" thing, in this case, would just mean that people could consume, save, and invest more.
People don't consume more in a deflationary world, per the economists, because that dollar you've got today is worth more tomorrow, so you put off as many purchases as possible. Fewer people would take out loans as well, because the loan would become harder and harder to repay over it's life (which means fewer opportunities for investors)
That doesn’t make sense at all except for with housing. If I want to go vacation I will, if I need a new washing machine I will get it, if I want a cappuccino every morning now I can afford it no matter who I am!
What seems to matter more is that there has been a productive deployment of capital that gives you a reason to buy a new product, and that you have discretionary income after housing cost and other fixed costs are paid.
High housing costs are an incredibly unproductive use of capital unless it leads to building new supply and is therefore effectively a temporary incentive for developers to build more. Landlords on the other hand want there to be an undersupply, and don’t fully align with developer interests.
Prices for consumer goods have decreased for quite a while and people still buy.
And even when computers were improving significantly every year and prices went down people on average still increased their buying of new computers.
Right, and the economists argue a deflationary market makes capital scarce
High housing costs are an incredibly unproductive use of capital
Right; it seems desirable for housing costs to keep even pace with the rest of the market, and ideally stay close to depreciated replacement cost
And even when computers were improving significantly every year and prices went down people on average still increased their buying of new computers.
I still buy computers in the deflationary technology market, like everyone else. But because I am putting off purchases and cannot recoup my costs with a sale, I probably buy a lot less computing hardware than I would if, for example, improvements were still just as big but much less frequent. I'm not saying it would be better for the world if computers improved more slowly- but clearly market behavior would change.
> Right; it seems desirable for housing costs to keep even pace with the rest of the market, and ideally stay close to depreciated replacement cost
In markets where there is enough housing supply, do we see people change housing ownership more often? E.g. buy a bigger apartment when they get kids or downsize when they are empty nesters.
In markets with enough housing supply, do we see higher expectations for housing being modernized and up to code instead of being resold with only cosmetic changes? E.g. most bay area housing is very drafty and energy inefficient since it was built in the 60s/70s.
I don't have a study, but I think you expect to see all the things you ask about.
If there is enough housing supply, prices are reasonable and moving to a different house isn't a $2M transaction, it's $100k. Aside from other things this makes the finances easier- if the down payment is $200k, you must line up the purchase & sale. If the down payment is $10k, you can front that, and the purchase isn't 100% contingent on the sale. (purchase/sale contingencies sink a lot of home sales) Additionally shopping for a house is not a dog-eat-dog fight.
If there is enough supply, you don't have to spend every dime of your income in a bidding cage match with other buyers, which leaves you with capital available for real repairs & renovations. Builders and private developers can buy the really crappy old houses for very low prices and knock the whole thing down and build new. Plus, in a market where appreciation is the prime determinant of value, and it's a major seller's market, why bother doing much renovation? It'll sell no matter how bad it is.
My local market certainly shows all these things compared to California- but, who can say exactly how much of the state of the California housing market is due to Prop 13?
P.S. Yeah, it's ironic how the Bay Area is this wealthy progressive metro, and yet so much of the housing stock is ancient, way behind code, and terribly energy inefficient.
Different types of goods are affected differently. Groceries aren't affected at all, but for large purchases there is empirical evidence that expectations of deflation lead to a general decrease in spending:
On the other hand, prices of computers and electronics are always dropping due to technology improvements. Stocking up on computer equipment in advance rarely makes sense since next year it will be better.
But this doesn't seem like a bad thing. Would you prefer the alternative, that technology improvements stop and computers become more expensive, so they become good investments? And people do still seem to buy lots of electronics even though they don't hold their value.
Generally speaking, lower prices are better. There are only a few exceptions such fossil fuels and cigarettes where you can say cheaper is worse, due to externalities.
To be sure, if tomorrow a magical new technology gave us free, clean energy, health care, or housing, this would be a tremendous financial shock. Many investments would be worthless. But this is because it's a big, sudden change, not because it's inherently bad. A more gradual decrease in prices is a good thing.
Not an economist, but I believe that statement needs to be indexed to inflation/deflation. Lower prices relative to income, in other words higher purchasing power, is good. But you can't inflate/deflate your way to lower real production costs or higher wages.
prices of computers and electronics are always dropping due to technology improvements
Right, the electronics market is in some senses an example of the behavior of a deflationary market, but it is also different than prices dropping due to financial wizardry.
Would you prefer the alternative, that technology improvements stop
In many parts of the market, improvements have stopped. Continuing improvement is clearly best, but not always an option. A gallon of milk or a shovel isn't getting any better next year. So what then?
Yes, I agree, lower prices are better except for wages. If most prices go down and wages stay the same, that's measured as an increase in productivity.
Technology hasn't stopped in agriculture. For example, there are automatic milking machines [1], and there's a well-funded startup that wants to grow lettuce in warehouses built near distribution centers [2].
I wouldn't expect the price of milk to change much in the short term. In the long run, who knows? Maybe biotech improvements will mean we don't need cows?
The fact that you take that as an axiom is frightening. Moderate deflation is no more scary than moderate inflation, and the idea that an "overall inflation rate" determines people's behavior is laughably wrong.
I mean, which of the thousands of inflation rate definitions are you talking about? The FRED database tracks 34,000 different series of some 10,000 inflation measures. More importantly, people don't sense overall inflation at all, they make decisions on domain specific inflation. Prices dropping for farm equipment or homes does not mean businesses stop buying computers and homes stop buying washing machines. It is entirely possible for housing prices to tank while prices for nearly everything else increase...in fact, we've already seen it happen.
Think about what you are proposing: you're saying that even if prices are irrational and we are in a bubble, the only response is to maintain those irrational prices for that bubbled item and inflate everything else until we reach equilibrium. That is insane. If we did that, we'd still be trying to catch up with railway mania. And it puts us at far more of a risk of runaway inflation problems than letting housing prices drop would ever put us at a risk of a deflationary spiral.
It's time to start questioning your axioms. Don't get me wrong, there are plenty of blowhard macroeconomists out there that share the idea, but there are far more economists that have far more nuanced views and understanding of inflation and how it really affects people's behavior, and it is nowhere near axiomatic.
I think the post you're responding to is being critical of the unexplained/unexamined axiom that "deflation is bad", which is usually an underlying assumption in the financial press.
Deflation means a drop in price levels, a systematic effect. Housing prices falling while consumer prices hold steady isn’t deflation. Deflation is scary because (a) it encourages capital to hold money over productive investments and (b) it is very difficult to fight. Deflation usually occurs once an economy is already at the zero bound of interest rates; no help there. You could monetise a bunch of fiscal spending, but that, too, has a bunch of nasty side effects.
> Housing prices falling while consumer prices hold steady isn’t deflation.
We're both handwaving here, but Wikipedia says: "In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate)." https://en.wikipedia.org/wiki/Deflation
The inflation rate is given by a price index which typically includes housing. If housing prices fall while everything else holds steady, that index has nowhere to go but below 0%.
I realize that this is distinct from a systematic deflationary spiral that affects the entire economy. The point was, some people might only look at the inflation rate, see it's below 0, and start panicking and doing stuff to "prop up" prices instead of letting people profit from affordable housing.
In Ireland we had a property bubble during the "Celtic Tiger" years, and suffered a major correction after 2007 [1]. Apartments in Dublin the capital city lost about 62% of their value. 10years later and prices are climbing steadily upwards [2]. It's deja vu all over again.
In Ireland we have a national obsession with owning property.
Your use of the term "obsession" implies a degree of irrationality. Many people, myself included, would contend that the desire to own your own home is eminently sensible.
Jeez, nobody said the desire to own your home was irrational, by definition. You can have a rational desire to own a home or you can have an irrational obsession.
Irrational obsession would include things like when you prioritize homeownership over financial security and other basic necessities like healthcare or food. For example I know someone who gave up health insurance to buy house - and she readily admits this.
Of course, it was merely an example of an unhealthy obsession I've personally seen. There are many more. Another would be neglecting to save anything for retirement because you believe your home is your retirement fund.
Or more accurately, you cannot avoid paying for it (as it is collected in employment taxes). The employer has to pay 4,35 % as sjukförsäkringsavgift, as well as other payroll taxes that total 31,42 % of nominal salary (2017).
Correct, nobody said that the desire to own your home was axiomatically irrational. I didn't claim that anyone did. What I took issue with was the statement that the Irish populace have an obsessive (i.e. irrational) focus on property ownership.
We do prefer to own our own homes, but that preference is not evidence of a national personality disorder.
A broader definition of financial security _includes_ home ownership. The other options are homelessness and renting. The first one is silly, the second is just paying the landlord mortgage while being exposed to financial risk over the long term.
> the second is just paying the landlord mortgage while being exposed to financial risk over the long term
Homeownership, for most, is a leveraged play on a politically-sensitive asset. Consider two companies. One goes all in—-with borrowed money—-on a deal that does well if the cards fall right but results in default if e.g. property taxes or zoning laws change. The other has higher fixed costs but diversifies its investments. It’s apparent which one is riskier.
This has been repeated ad nauseum but if it were correct all businesses would always strive to buy their real estate as soon as they could afford it and since many (including my employer, who brings in a billion dollars a year) are content renting long term, that's obviously not the case.
If you buy once you factor in taxes, insurance, upgrades, maintenance, repairs, commission, closing costs, opportunity costs compared to other investments, interest, PMI, etc., assuming you were in a good financial position to buy in the first place so you don't default, you probably will come out ahead compared to renting if you live in your house for more than 5 or so years.
But! That's only if the cards fall just right. So if the neighborhood is still desirable, tax policy/political landscape doesn't change, your neighbors keep up with their maintenance, your HoA doesn't go into bankruptcy, a major employer doesn't leave town, tastes in housing doesn't change, the housing market doesn't crash, too many of your neighbors don't foreclose, nearby amenities don't leave, a major highway isn't built through your neighborhood, interest rates haven't soared, political housing incentives/programs haven't gone away, too many black people don't move in(1), etc., etc. You're taking on a very large risk if your buying vs renting, sure it has the ability to work in your favor (extreme example - buying in San Francisco in the 90s) or not in your favor (extreme example - buying in Detroit in the 50s).
I've seen people lose out terribly financially buying a house, and not just in 2008 recession, my parents house was bought in 1995 and hasn't even kept up with inflation. That doesn't mean it was the wrong choice for them to buy though, houses are really good at providing shelter.
You also have to have the ability and wherewithal to take care of a house - and tons of people don't.
I'm a homeowner, I'm not against home ownership.
(1) I'm not trying to be racist, but white flight does exist.
>if it were correct all businesses would always strive to buy their real estate as soon as they could afford
Unlike people, businesses do not reach a certain age then lose their capacity to earn (retire). A business can carry the cost of their leases as an operating expense, where individuals who do this will hit a roadblock when they retire as their operational funding is no longer able to cover the cost of rent.
There are of course exceptions for particularly high earners who manage to build up sufficient funds to be able to perpetually rent, even sometimes without drawing down on their principle savings. But this is far from attainable for most.
Except for the lack of readily available credit. For the most part, it seems the people paying the high prices are "able" to afford it. The problem is that home ownership (and the security that brings, particularly in Ireland) is not attainable for most young people and families anymore.
Could this be a result of Ireland being somewhat of a tax haven? If there's a lot of capital just sitting in Ireland waiting to be repatriated, it might make sense to invest that money within Ireland in the interim. That would increase demand for housing in the short term. The main thing to worry about would be that your housing market could experience a crash whenever that money does get repatriated
> Could this be a result of Ireland being somewhat of a tax haven?
Not really. The problem is that building all but stopped in the aftermath of the 2007/8 crash. Meanwhile the economy recovered, Dublin in particular is booming now but we're still lacking enough homes to meet demand and building never recovered to the necessary levels. Add in a reluctance for "building up" and a growing population, that gets you higher and higher prices...
No, it's nothing to do with Apple's tax arrangements. They're not in the business of buying houses. It's a simple supply and demand issue. There are a lot of young people who want to buy a home, and not enough housing stock to meet their requirements.
> Could this be a result of Ireland being somewhat of a tax haven?
In short, no. It's not as if the EU lacks capital markets.
Also: "Is anyone really so naive to imagine that these balances are not already fully available to finance new investments by U.S. companies here? Do they think the global financial system is that unsophisticated? At present interest rate levels, a company needs only to issue debt at favorable rates in the U.S., invest the funds held abroad at floating rates, enter a fixed-floating interest rate swap, and voila, the company has access to the funds exactly as if they had been brought home. Indeed, this is just what many U.S. corporations appear to have done. So cry me some crocodile tears for companies that hold profits abroad." [1]
We house owners pay a lot of taxes on houses in Italy so it's not exactly a paradise, the real problem is selling them.
Anyway I bought mine when I was 29 and rates were much higher
My friends at the time were richer than me, their families were richer than mine, they just loved spending money on cars and expensive goods in general instead of houses, that they possessed as a family
There's a difference, a big one, between an housing bubble and an honest investment
I knew the neighborhood in Rome where I bought the house would expand in the next 10 years, I wasn't trying to exploit newer generations (I'm 40 BTW) I was trying to secure my future
The older generation could buy at a very low price and refinance during a very long almost nul interest rate era. Guess which generation owns the political and financial power... I am scared that in some high public debt countries they will confiscate value through (increased) inheritance tax... But I am even more scared by the ECB normalizing the interest rates...
In this case home prices rose because it became cheaper to make mortgage payments on a house. People were willing to spend the same mortgage payment as before, so the net effect is that housing prices rose.
Salaries don't necessarily rise at the same rate as inflation. If they did, there would be 0% real growth in the economy. Inflation is usually measured by watching the prices of a basket of goods: if those goods' prices increased by 5%, then inflation is 5% (in reality it can be more complex than this).
Inflation isn't a "real" metric in the sense that it affects all things equally. Housing prices could increase by 50% but the price of a gallon of oil or a bar of soap could decrease by 10%.
> Salaries don't necessarily rise at the same rate as inflation. If they did, there would be 0% real growth in the economy.
You are confusing “salaries” with “output”; salaries (or even domestic incomes in total, which involves more than salaries) growing at the rate of inflation can occur with negative or positive real growth. Zero real growth means output growing at the rate of inflation. (National economies aren't closed systems, and some output may produce foreign rather than domestic income, as in returns to overseas investors.)
True, but for practical purposes salaries (or the mean of salaries + returns from investments) closely approximate output. In any case it should be clear that salaries and inflation aren't directly linked. Salaries should (generally) increase slightly more than inflation as productivity increases over time
As you get richer, you have a choice as to what to spend your money on. You could buy more expensive food or eat out more, buy hand-made suits, go on expensive holidays, buy a huge car, etc, but most people seem to put higher utility on a better (size, location, whatever) house. Therefore, the distribution of your spending over the various categories can change as your income goes up.
This is very location-dependent. Here in the UK, the nearest thing to a property tax is the "council tax", which is based on the estimated value of the property in 1991.
There is also a tax on property transactions which can be considerable.
This totally depends on how your municipality levies property taxes. In many parts of the Northeast US, for example, the county first sets its budget for the year, and then levies tax by dividing the budged among property owners in proportion to assessed property value. Therefore, if the county's budget hasn't changed, and if all of your neighbors' houses have increased in value by the same % as yours, then you'll pay the same tax as last year. Conversely, it's possible for your house to increase in value but to owe less tax if your neighbors' houses increased in value by more than yours.
> High housing prices are great for those who already owned houses
Not really. Rising prices (not high prices) are great for people holding houses as investments. But for owner-occupied houses, rising prices are as bad for the owners as they are for everyone else.
my wife and I own a house in Northern California, which we bought during the sub-prime crash. Since then it has nearly doubled in price. It is also too big for us, so we'd like to sell it and move to a smaller house. But we can't. Why? Because by the time you factor in:
1. Capital gains tax
2. Real estate agent fees
3. Higher property taxes (even a smaller house costs much more than the prop-13 basis in our current house)
> #1 only consumes a percentage of profits, sit it can't make a sale unprofitable.
Yes, that's true, but it makes a move less efficient. If we sell our house and buy another one of equal value, the higher the price, the more we lose in capital gain tax in the transition. If our house had not appreciated, we would pay zero cap gains. The higher prices go, the more expensive it becomes to move locally.
The first 500,000$ of capital gains are excluded when selling a primary residence jointly. So, if your net profit > 500,000$ yes it costs money, but if your actually downsizing then you will very likely come out ahead. Further, your new home is also worth more money in the event you move out of the area.
You also save that 500,000$ of appreciation when selling the second house. AKA, if house 1 gained 2 million and house 2 gained 2 million your better off than if house 1 gained 4 million.
Now, you can get into cash flow issues etc. But, with home interest being tax deductible and long term capital gains being below normal taxes your almost always better off over time to sell after a bubble than before.
PS: If your investment makes 4% and your mortgage is 5% then you have a net savings after taxes.
That's why 2 houses with 2 mill gains is better than 1 house with a 4 million gain.
Selling 1 house with a 4 million gain is one transaction with a 500k cap so you pay taxes on 3.5 million. But selling one house with a 2 million gain then another house with another 2 million gain is 2 transactions so you pay capital gains on 3 million and get an extra 500k tax free.
Remember, until you sell the second house it's value is meaningless but when do sell it's purchase price and value become important.
He does not want to fill his bank account and be homeless. He wants a house. To be bought with the same money. That does not go into the bank account but into the new house.
You can use that 750,000$ to buy anywhere else that's not inflated. If you want to buy a house in an inflated area you end up in the same situation as anyone else that wants to buy a house in an inflated area.
AKA, if a prison opened up next to their current house keeping property values the same then they would be strictly worse off.
I think the issue is that if housing prices hadn't gone up, they could buy a house of equal price without triggering capital gains.
So if your house is 1m and 10 years later stays at 1m, then you can swap for any other house in the neighborhood.
If your house was 1m but in 10 years becomes 2m, and all the other houses in the neighborhood are now 2m... you would hypothetically not be able to swap for another home. You now have 1.75m to buy with. A good problem to have, no doubt.
The cap gains is also a big factor. Even if prop 13 were not a factor, the higher prices go, the more expensive it becomes to make a lateral move, or even to downsize.
Lateral move or downsize are two different transactions. Capital gains has no effect on the second one.
People who are complaining about the capital gains taxes pretending that such taxes prevent them from either moving laterally or downsizing are complaining that other properties also appreciated in price. What they would have preferred is that their property appreciated and the properties they wanted to move to did not.
If I buy a house for 50k and want to immediately move laterally to another house worth 50k then the cost is 0 + overhead. If I buy a house for 50k and want to move laterally when it's worth 100k then the cost is the taxes of the 50k profit + overhead.
This gets even worse if you want to buy a larger house (if appreciation is percentage based).
You bought a house for $50k, which in a year appreciated to $100k. You sell the house for $100k, pay the capital gains of X% on the $50k of appreciation which gets you $100k - ($50k * X% ) to play with.
You lateral move would not be to a house worth $100k, it would be to a house worth $100k-($50k * X%) because you d not have $100k, you only have $100 - (50k * X%).
If you wanted to defer capital gains and play with entire 100k, then instead of doing a sale you would do 1031 exchange.
Well, if you didn't have prop-13 wouldn't your taxes just go up anyway even if you didn't sell? Around these parts all real property is reassessed every five years. So the tax burden would hit right away rather than when you sell which would be worse.
I have a family friend whose neighborhood became really high end since the 30 years she bought the house. Her taxes are really high now and it's becoming a financial burden on her.
A hidden consequence of prop-13 is that every city wants commercial real-estate and none want residential because they get more taxes from businesses. This restricts the supply of housing, and is one of the root causes of high prices and long commutes.
Without prop-13 we'd have more housing, more convenient housing options, and lower prices. Yes, long-term residents would have higher taxes. However most of us would save both time and money on our housing costs.
Just to be clear, we didn't buy this house as an investment, we bought it to live in. We're actually hoping for prices to come down so we can downsize without taking a huge financial hit in the process.
Won't you only pay a % of the gain in price in tax? In that case you're strictly worse if it goes down in price. You'd pay less tax, yes, but as tax is % of gains you're net worse off. If this really isn't the case can you share some example numbers showing how you can be worse off with a house that's worth more?
Suppose we bought our house for $1M and now it's worth $2M. We have to pay 25% cap gains (federal + state) on $500k so it costs us $125k to move to a house of equal value. If prices were stable, we could move without taking that hit. The higher prices go, the higher the cost of moving.
What you say is true, but it misses the point, which is that big gains only help you if you actually cash out. If you're making a lateral move, or downsizing in the same area, it doesn't matter whether you're leveraged or not. A loss is still a loss.
The example is useful, thanks. I see that there's $125k of cap gains to pay for a move to a property of the same price. You're calling that a loss though, and I'm not sure I see it that way. Sure, if house prices hadn't gone up you could have moved from a $1M house to another $1M house and paid nothing. But in your example you're still $875k "in profit", so it's not really a loss, it's just a cost associated with a lateral move in the same area. If you downsize you actually realize some of those gains - of course not all of them because tax must be paid, but there's no avoiding taxes :)
Why not rent this one out and then rent a smaller place yourselves? Anyways, this is a good problem to have. I don't think 1.) and 2.) justify wanting prices to come down since they only affect a % of your appreciation.
You get a property manager. The net cash flow is going to be much higher than the mortgage payment and the tenants pay the mortgage. Or, if it’s paid for, you do the same thing except cash out equity, let the tenants pay the equity loan, use that loan to buy the house you want to live in, take a deduction on the interest and you end up with two houses — both paid for by someone else and with a property manager you don’t have to fix toilets. Since you aren’t selling anything, you have no cap gains AND you can deduct depreciation from the rental income which means you end up paying no taxes on the rental income. With Valley housing in short supply you probably have at most an average on 1 month per year of vacancy — if that.
Then if you ultimately sell both houses, you can do a 1031 exchange and invest all of the proceeds into a new house — and defer the cap gains until you sell that.
These problems aren’t that hard unless you look at them from a single direction.
But you're not taking a hit really. You just think your are. You have made a profit still if you sell your house, tax the hit in capital gains and buy another place. It's not as much profit as without the capital gains but it's a lot more profit then if you took that original house price money and put it in a mattress. Hell that's even more money then just sticking it in the bank and getting a small interest rate.
You're not taking a financial hit, you just feel as you are. You think the capital gains tax is taking out a huge financial hit on something you already made lots of profit from. So you're still making a profit just not the one you imagined you were making.
That's like someone seeing their pay for the first and releasing the difference between gross pay and net pay. They think they are getting X but really they are getting Y. Both amounts of which are > 0 and so they are still making money. Like you still are.
Yes, exactly. The higher prices go, the more it costs to make a local move. We only "win" if we actually cash out and move to a different, less expensive area, but we don't want to do that. We like it here.
Do you mean “win” compared to the counterfactual where the house has appreciated and you don’t move to a similar one, or compared to the counterfactual where the house didn’t appreciate and you move to another one at the original price?
If there had been no appreciation, your final wealth (cash + home equity) would be lower than in the case where the houses are more expensive, even after paying taxes, so it’s hard to see where is the loss.
But of course if you expect prices to go down it’s a good idea to avoid paying taxes on a gain that may be reduced in the future.
> Do you mean “win” compared to the counterfactual where the house has appreciated and you don’t move to a similar one, or compared to the counterfactual where the house didn’t appreciate and you move to another one at the original price?
Either one.
We put a certain intrinsic value on a local lateral move. If the cost of moving is less than that intrinsic value, and we find a house we like, we'll move. If the cost of moving is more than that intrinsic value we'll stay regardless of whether we find a house we like. So the higher prices go, the less likely we are to move. So when prices go up, that removes liquidity from the market, which perversely drives prices up even further and makes the problem worse. So while we're sitting on a pile of equity, we can't actually use it unless we move out of the area, and that has a huge negative intrinsic value for us. We really like it here.
I must say I am thoroughly impressed by your patience. You're repeatedly explaining what seems to me like a pretty simple calculation to lots of different people who only gets it after a lengthy explanation.
It's a first-world problem, but as you say, it's still a problem. Unless you're okay with taking the loss, or just moving somewhere far away because the market decided that this area has now become too expensive to allow existing homeowners to downsize.
I understand your point, but saying that "rising prices are as bad for the owners as they are for everyone else" is hard to justify.
In your case, you can a) stay where you are or b) sell the house, pay the tax, and buy a similar house (or a cheaper one elsewhere).
An alternative you that didn't buy that house at that time, and got lower after-tax returns on that money, doesn't have option a) and has less capital available for option b).
Everyone else is in an strictly worse position than owners.
You have an unrealized capital gain and an unrealized tax liablity. Selling the house you'll realize both. You "feel" that you are not realizing the capital gain if you buy a similar house with that money. It's understandable, nobody likes paying taxes. But if you were to sell the new house in the future (maybe to downsize) the transaction would be tax free if prices don't change.
And as I said already, if you think prices may go down it's rational that you avoid realizing the capital gain and the tax liability at the current level if the utility gain from moving to a "similar" house is not larger than the expected savings of realizing (maybe) a lower capital gain in the future and paying less taxes.
Fellow Northern California homeowner here. You can sell it and you will net a return. I'm not sure I understand your gripe. It sounds like you're annoyed about the hassle of moving , the associated fees, etc. But the parent's point is valid - the appreciation of value of your house is great for you.
> 1. Capital gains tax
Note - if it's your primary residence you get capital gains relief on the first $500k.
> 2. Real estate agent fees
If you're in the bay area, then you negotiate these down to the minimum (IIRC 2.5%) because the market is so liquid and the agents add very little value (if you're smart). Also, you can negotiate not to pay the commission if you're the buyer. So the only burden is on the sale, which is less impactful since you've already made a profit on it.
> 3. Higher property taxes
Yes, this is a bitch in CA...see next point.
> we can't afford to move!
Clarification - you can't afford to move in the general vicinity, but you could certainly move to Nevada (for example). If you are not viewing your house as an investment, then guess what? You get to live in an area that is high demand! Good for you for timing the market appropriately when you bought.
> if it's your primary residence you get capital gains relief on the first $500k.
Yes, I know. But our appreciation is substantially more than that. The higher it goes, the more expensive it becomes to make a move.
> which is less impactful since you've already made a profit on it
Only if we move to a less expensive area. If we make a local move, that "profit" just gets rolled in to the next house. There's no way to cash out without leaving the area.
> Clarification - you can't afford to move in the general vicinity, but you could certainly move to Nevada (for example).
Yes, exactly right. What we really want to do, but can't because it's too expensive, is downsize. This would not be the case if prices were stable.
Awww poor baby. You’ve made more than $500K, much of which will be untaxed, simply by owning a house. Jesus fucking Christ. Cry me a river. Most people would trade their arm in for that kind of leveraged gain.
Likely they could. "Colorful words" are often used to elicit an emotional response, and emotion can significantly impair one's ability to self-reflect and remove bias. If the goal is civil, substantive discourse (as is the goal of HN), all parties involved need to keep this in mind when commenting. That does take additional effort, but it's worth it to keep HN one of the better places to engage on the internet.
I think you have a point. It depends on context. Within the context of HN, you at least have to be civil. Civility and respect are not exactly equivalent, but they're quite close.
Maybe if the comment added to the conversation somehow it'd be more tolerable. However, all the comment does is insult someone without adding anything interesting. It's a waste of space and time for everyone else reading it. It doesn't belong in HN.
Expressing incredulity and frustration at the obtuseness of someone's complaint doesn't seem especially useless to me.
Why is expressing emotional reactions pointless, in your mind? Doing so gives everyone more information about the reactions they might expect to their concerns... it enforces social norms, etc.
> Why is expressing emotional reactions pointless, in your mind? Doing so gives everyone more information about the reactions they might expect to their concerns
The problem is that the comment provides nothing else. You can do the same thing in a more civil and constructive way. Just look at your comments. You are providing logic and rationale for your argument. I don't agree with you, but you're adding to the discussion. Now compare that to "I'm sick of you people. Stop whining about other people's comments you big baby". Someone can correct me, but that doesn't belong here and that rule has been around since the beginning of HN. It's been written and clear along with the reasons why. It's the way things have been done here. If someone doesn't like it, they can post on reddit instead.
"Be civil. Don't say things you wouldn't say face-to-face. Don't be snarky. Comments should get more civil and substantive, not less, as a topic gets more divisive.
When disagreeing, please reply to the argument instead of calling names. 'That is idiotic; 1 + 1 is 2, not 3' can be shortened to '1 + 1 is 2, not 3.'"
I don't disagree that the comment is probably against the rules.
I just believe the rules tend to stifle people from expressing how they truly feel about topics, and are therefore information limiting and generally a net loss.
It's a fine line. Some people's feelings are toxic all the time and wrong-headed and truly add nothing of value. Other people, when they have a negative emotional reaction there is probably a lot of accumulated wisdom behind it and you should really listen instead of censoring or rambling on about civility. Very subjective though.
Also, in my opinion, the constant suppression of any negative speech is exactly what gets someone like Trump elected. "Finally, someone on TV is saying what I FEEL and no one can stop him!"
To stay on point, my argument is that the rules are clear and they make sense. There are emotional comments on HN that are fine. However they are different. The particular comment we're referring is toxic and adds nothing to the actual discussion; there's no wisdom to calling someone a 'baby'. The only thing it promotes is a flame war since it personally insults someone. It shuts down discussion because it needlessly attempts to piss off someone. There were plenty of other comments that were both critical, insightful, and civil.
It's not about a "negative emotion", it's about saying something that you probably wouldn't say to someone's face.
If I were talking to lisper over a beer, I'd probably smile and say that that problem is one that 99% of the world's population would love to have, or something to that effect. Or maybe without the smile and straight to the point "complaining about profits so high that you're getting taxed on them when there are people who are homeless is not a great look".
OTOH, I don't think he's really complaining, just pointing out that the system is pretty screwy even for someone who is in no uncertain terms doing pretty well.
> In any case, complaining about having to pay capital gains tax on gains OVER $500k really is the ultimate first world, privileged problem.
Almost every complaint levied on this forum is a first world problem. Complaining about the ergonomics of a programming language is a first world problem. And secondly, he wasn't complaining, he was describing the economics of his choices. What is infinitely more toxic than 'complaining' about first world problems, is people jumping on explanations like the above as 'complaints' that need to be silenced.
>What is infinitely more toxic than 'complaining' about first world problems
That's just like, your opinion man.
>Complaining about the ergonomics
Look, complaining about work is a typical first world problem, sure. And of course we're all lucky to do the work we do and not live in [wherever.]
Complaining about 20% taxes on $200k of a ~$700k windfall is truly more like a .00001% issue and is pretty obtuse by any measure.
You wouldn't raise an eyebrow, or have any negative reaction to someone making $400k / year bitterly complaining that they have to pay taxes on it? I don't know anyone who wouldn't think that was obnoxious.
>he was describing the economics of his choices.
Sort of, in a fairly facile and borderline deceptive manner.
> You wouldn't raise an eyebrow, or have any negative reaction to someone making $400k / year bitterly complaining that they have to pay taxes on it? I don't know anyone who wouldn't think that was obnoxious.
Where are these bitter complaints? He commented to say that rising housing prices weren't good for him. He explained why. That isn't a complaint. He didn't say "I deserve this money from my rising house price!". He didn't say "the world is so unfair to me". He just explained why this thing that people thought would be helpful to someone like him, was in fact, not helpful.
> Sort of, in a fairly facile and borderline deceptive manner.
What was facile or deceptive about what he said? He's absolutely correct.
>What was facile or deceptive about what he said? He's absolutely correct.
First, he withheld the amount of capital gains, so everyone who initially responded naturally assumed it was under $500k, which is true of 99.9% of transactions. That was very misleading information to omit.
Secondly, he complained about broker fees, but it isn't required to sell a house using a broker by any stretch. Just do FSBO if you think the 3% cut (probably less) isn't worth it. And 3% isn't much at all when your already expensive house just went up over 100% in value. Facile and disingenuous.
>Where are these bitter complaints?
Pretending that he and his wife are "trapped" in his house and "can't afford to sell" makes it sound like a horrific and dire situation. Which is completely misleading, he and his wife are quite wealthy and could do anything they wanted. They are pretty much the opposite of "trapped."
>we can't afford to move!
Lies. They could easily afford to move.
They bought their house for something like $600k and now it's probably worth $1.3M. They pay 20% taxes on the $200k, so $40k and they lose 3% if they use a broker. That's another $40k, so $80k total. Let's make it an even $100k. So they have $1.2M to throw around, subtract $500k to pay off the existing mortgage, that's $700k free and clear.
$700k is a hell of a down-payment, even in the ritziest areas of Marin. Buy whatever you want.
I own a restaurant in norcal and have an employee whose room share / rental house burned in the recent fires. He goes to SRJC, doesn't have any family in the area, had no rental insurance, makes $12 an hour and no savings.
THAT's a dire situation, and considering I know people in situations like that, OP's framing of his (extremely cushy) situation as "I can't afford X!" is pretty disgusting to me.
> First, he withheld the amount of capital gains, so everyone who initially responded naturally assumed it was under $500k, which is true of 99.9% of transactions. That was very misleading information to omit.
Secondly, he complained about broker fees, but it isn't required to sell a house using a broker by any stretch. Just do FSBO if you think the 3% cut (probably less) isn't worth it. And 3% isn't much at all when your already expensive house just went up over 100% in value. Facile and disingenuous.
There's nothing misleading about that. He didn't mislead you. You misled you.
> Pretending that he and his wife are "trapped" in his house and "can't afford to sell" makes it sound like a horrific and dire situation. Which is completely misleading, he and his wife are quite wealthy and could do anything they wanted. They are pretty much the opposite of "trapped."
You don't really understand money, it seems like. The fact that you have equity in the home you live in doesn't mean you can "do anything you want". I already explained why this is so.
> They bought their house for something like $600k and now it's probably worth $1.3M. They pay 20% taxes on the $200k, so $40k and they lose 3% if they use a broker. That's another $40k, so $80k total. Let's make it an even $100k. So they have $1.2M to throw around, subtract $500k to pay off the existing mortgage, that's $700k free and clear.
$700k is a hell of a down-payment, even in the ritziest areas of Marin. Buy whatever you want.
700k is indeed a great down payment. But you have no idea what their income stream is like. If they aren't making a large income, they won't be able to afford their mortgage payments if they need to buy a house in an expensive area like SF. What he means by 'trapped' is that they have theoretically made all this money, but the money is of no actual use to them. And he is completely correct.
> I own a restaurant in norcal and have an employee whose room share / rental house burned in the recent fires. He goes to SRJC, doesn't have any family in the area, had no rental insurance, makes $12 an hour and no savings.
THAT's a dire situation, and considering I know people in situations like that, OP's framing of his (extremely cushy) situation as "I can't afford X!" is pretty disgusting to me.
Gee, it does indeed sound dire. Maybe you should pay your employees more rather than yelling at people on the internet for being insensitive about money? Seems you're in a position to actually do something about that situation. But you won't. And there's a very good reason you won't: because it's bad business. The economics don't make sense for you to do that. Just like the economics of the OP's situation don't make him wealthy. Absolute values are irrelevant, it's the equilibrium that matters.
And secondly, making silly statements like "THATS NOT DIRE THIS IS DIRE" is absurd. Almost everyone posting here lives in a first world country. There are infinitely 'more dire' situations out there than any of us are in, and playing this childish 'no true scotsman' game is a waste of time.
It seems your comment is characterizing the OP as a complaint mostly in search of sympathy. That doesn’t strike me to be the purpose of the post at all.
The OP is using him or herself as an example of a real behavior in response to real economic incentives, no matter how unsympathetic you find their circumstance. The fact that this situation discourages moves that most other markets encourage is a worthwhile point to bring up. Among other things, it reduces supply which has a profound effect on new buyers.
Incentives influence actions much more than personal criticism does. The OP’s relatively fortunate outcome does not mean that they don’t have something relevant to share. In contrast, targeting them with pejorative shaming is totally unhelpful.
They bought their house for something like $600k and now it's probably worth $1.3M. They pay 20% capital gains taxes on $200k, so $40k, and they lose 3% if they use a broker. That's another $40k, so $80k total. Let's make it an even $100k. So they have $1.2M to throw around after the sale. Subtract $500k to pay off the existing mortgage, that's $700k free and clear.
$700k is a hell of a down-payment, even in the ritziest areas of Marin. They can buy whatever they want.
I agree that we don't need to be robotically respectful. If someone's a real asshole, I have no qualms with responding in kind, even if doing so is debatably effective. I wrote what I wrote because I thought that ttul's comment was baselessly disrespectful. The parent wasn't being a jerk, but ttul responded with out of place ad hominem attacks instead of addressing the argument.
That's purely a paper profit. As the parent said, they can't afford to move to a similar apartment, so they're unwilling to sell. That probably goes for a lot of other homeowners in the area, which seems likely to contribute further to higher prices. Seems pretty dysfunctional to me.
I'm not asking anyone to feel sorry for us. I'm just pointing out that rising prices are not a panacea for owner-occupied primary residences. The result is bad for everyone because people like us end up staying in houses that are too big. That takes housing stock off the market and drives prices up even further. That's good for investors, but bad for everyone who wants to buy a house to live in.
Let's say the house didn't go up in value.. where would that leave you? Would you be any more capable to sell? (Serious question, not a rhetorical or sarcastic one.. just seems to me you'd still be in a hole, just a different hole)
Let's plug in some plausible numbers. Say someone buys a 3-bedroom house for $300k (they have kids). At the same time, 1-bedroom houses sell for $200k.
Time passes, the kids grow up and move out. Say house prices didn't change at all. You sell for $300k, buy for $200k, pay some agent fees, have $85k or so left over.
Now say prices went up and the 3-bedroom house is $1,500,000. You sell, have a $1.2e6 capital gain. $500k is deductible, you pay taxes on the remaining $700k. That's taxed at 20% federal plus the ACA 3.8% investment income tax (because your income is way over that boundary) plus state capital gains taxes. In California, capital gains are taxed the same as other income, at first glance; let's be charitable and assume you avoid the higher tax brackets (12.3%) and get taxed at an effective 10% here. That's 33.8% tax. So your after-tax sale proceeds are $500k + 0.662*$700k = $963k.
Note that your house went up in price by 5x. If the smaller one did too, it costs $1 million and you can't pay for it anymore. If it went up by more than that (e.g. if the primary inflation was in land prices, which it often is) you might be even more in the hole.
Things are even worse if you're trying to sell and buy something equivalent instead of downsizing.
You'r missing 300k from your after tax sale proceeds. You could still afford the smaller house with 263k left over. You would make a 37k loss yes, but you could buy the new house. An important distinction in my opinion.
Of course all that assumes that you're not leveraged at all (paid-off morgage). If you're leveraged, price increases are generally a win even in the face of capital gains taxes on the increase.
I’m amazed that the US charge capital gains on primary residence sales - in the UK we have Private Residence Relief which means you pay no capital gains from the sale of your primary residence, so long as you meet some requirements that are very easy to meet and I would say 99% of owner occupiers meet.
Nope! This is all speculative until you need to "sell & move". If you want to move to another place in the same area, guess what, you've probably made nothing. With all the taxes and fees that you have to pay on the sale price you can't buy the equivalent of your house. You can only capitalize on that appreciation if you move somewhere considerably cheaper.
Not only that, the owner faces higher (in some cases much higher) property taxes due to increasing house prices, which is totally out of their control.
I'm not suggesting that they're in a bad spot. It's just not the "jackpot" that your post is suggesting.
In all fairness, I can see wanting to, say, downsize and move to a more walkable community relatively nearby. (Or, for that matter, move out of an expensive urban condo and move somewhere with more room--although that will harder in the Bay area specifically.) To the degree that market value of the two is similar, the financial hit will be substantial.
But a lot of this is true with moving generally when you're living somewhere that's OK but isn't really optimal for you any longer.
In short, what is important to people in their residence changes.
Friend of mine bought a house he and his wife loved. Five years later he came to understand what owning a Dr Horton house means, and they wanted a better-built house.
Except you can really only "cash out" in a meaningful way if you sell and relocate to a cheaper area/somewhere without a housing bubble, which is extremely disruptive to your life.
I am the only one not seeing "reply" links on some of these posts? I see others of the same depth with reply links...
Edit: Actually it's just the one from davidw
Suppose they move horizontally to a similar house. I don't know, they want one story instead of two.
Since a rising tide lifts all boats, the new purchase is about even with the old sale- but they also owe taxes. So within this window, they are objectively worse off than your average Joe who can move across town without owning those taxes.
Anyone trading up is also impacted as well. Suppose you bought a condo at 100k, and SFH was 200k. In five years you want to trade up, but the market went up 100%. Your condo sells for 200k, but the SFH costs 400k. Despite the lovely appreciation on your condo, you'd probably prefer if the market hadn't moved.
Sure, there's people who have it worse. Owning any home at all puts them in better shape than most of the world. But it's still not enviable to be unable to move within your community.
These comments are helpful because this is how people think.
When a suit or Talbots customer argues over a price at Wal-Mart you should hear the similar type of tone the cashier takes after they leave. Especially if they argue for a buck or two.
But you don't realize a net loss from moving to a smaller home in the same area. The only hinderance is paying a higher tax % (because of CA), but you'll likely net more positive cash (because of the transaction) + the absolute value of your new taxes will be less.
I'm still not sure why exactly the issue is. You literally can afford to downsize and you'll make a ton of money doing so.
> If we make a local move, that "profit" just gets rolled in to the next house.
Huh? That's not how it works...
2008 - Buy house for $1M
2017 - Sell house for $2M
2017 - Buy new house for $1M (but smaller size)
Congrats you have an asset worth $1M you've just made $1M in cash. Now net out fees and you have a downsized home and are more liquid than you were before, but with slightly less wealth than you had yesterday (due to netting of fees associated with the transaction).
But if you're downsizing then yes there is a cheaper house. That's how the housing market generally works ($ per square foot * # of square feet).
> The problems start when there isn't.
And the market always opens up when there isn't because it means the demand goes higher and thus creates new sellers. That also "rises the tide" and increase everyone in the area's house prices. So it nets it self out.
Because of the expenses (moving, taxes, fees, etc) amount to $400K, you've just spent a lot of effort to replace a more expensive property with cheaper and smaller one for no gain.
Real-life numbers will differ, but that's roughly the point.
But there is a gain, you just turned an illiquid asset into a liquid asset. The fact that this exchange is even possible is why you are even able to say "its worth $2M" in the first place. If you couldn't turn an illiquid asset into a liquid asset it would be worth nothing, so you neither "gain" nor "lose". Would you rather have that scenario?
Lastly - if you see personal value in purchasing a smaller house, wouldn't you expect service providers (agents, movers, etc) to charge you for that value?
No, you do not. If you buy a house for $1M, sell for $2M, you pay taxes on $500k. Those taxes are ~34% if you're in California, so you pay about $150k in taxes. You buy a house for $1.6M, you have $250k left, not $400k.
I'm looking at the exact same source you are. What part of what I said is not correct, exactly? The capital gains are $1 million. $500k of it is excluded (assuming you're married filing jointly). The rest gets taxed.
If you think that's incorrect, what do _you_ think happens with taxes when selling a home for $2 million that was bought for $1 million?
> you said = But it might be (for the "buy new house") $1.6 million, not $1 million, in your example...
> I said = so they can still afford it.
> you said = You don't get to keep the whole $2M. That's the point.
So, let's do this again.
1. Sell house for $2M
2. Buy house for $1.6M as you suggested
3. Congrats you now have $1.6M in illiquid assets and $400k in liquid assets (cash)
Note - I recognize that my original example was buy at $1M and sell for $2M, where you are correct you're not taxed on the first $500k and the remaining $500k is taxed at capital gains. I also recognize that this whole scenario is purely illustrative and doesn't take into acount all of the transation fees.
This has nothing to do with equity (except insofar as equity is part of your net worth). This has to do with the actual cost of a move, that is, the difference in your net worth at the end of the day once all the dust settles. The higher prices go, the higher that cost goes. It's easiest to see that when considering a purely lateral move, but the cost of a move doesn't really depend on the cost of what you buy with the proceeds of the sale, it just makes the math easier if the prices are the same.
We put a certain positive intrinsic value on a local move (and a very high negative intrinsic value on a remote move), because we like the area but the house we're in is not ideal. If the cost of a local move is less than this intrinsic value, we'll move, otherwise we won't. The higher prices go, the higher the actual cost of moving goes, and the less likely we are to move.
> The higher prices go, the higher the actual cost of moving goes
Sans CA taxes, this is relative to the increase of wealth you've accumulated. So yes in the absolute it's higher, but relatively speaking you've still are earning more money in liquidity during the transaction.
> This has to do with the actual cost of a move, that is, the difference in your net worth at the end of the day once all the dust settles.
I think I finally understand your position now. The cost isn't prohibitive, it's the negative impact on your wealth. Which is true. The reason I and others are reacting strongly to your position is because your conflating transactional costs (expenses, fees, etc) with wealth (accumulation of assets). Two very different things that use a common medium to interact (i.e. currency).
Here's the predicament. Your implying that you can transfer assets (wealth) without any transactional costs. This is just not how the market for any asset transfer works (stocks, cash, etc), because someone or some system has to be setup to broker the transaction. What your essentially complaining about is why you have to pay fees to complete an asset transfer. I know very few markets were transferring assets doesn't incur a fee. I don't know what to tell you other than this is basically economics 101.
CA taxes on the other hand - that's something to complain about. CA taxes inadvertently nudge people to hold on to property longer, reducing supply and thus driving overall prices up.
I think the core contention here is that, at the end of the day, you are better off because of rising housing prices. You're complaining about transnational prices on your massive amount of equity while brushing aside the fact that you have such a massive amount of equity because of the real estate market.
I don't deny that. But right now I'm worse off relative to my goals at the moment than I would be if house prices were more stable. I'm not saying that rising prices are not good for some home owners, only that they are not good for all home owners in all circumstances.
So you want prices to rise while you're comfortable building equity, and then level off when you've decided you have enough money? Your viewpoint is incredibly confusing to me.
Do you really feel like you'd be better off if your house sold for exactly what you bought it for?
> We have a HELOC so we can turn our equity into cash on demand.
But that HELOC has financing terms associated with it. Getting cash out from your HELOC does impact your overall "wealth" because you have to pay a fee (financing terms) to actual turn that credit line into cash. You could in turn take that cash that you borrowed at 3% interest and put it into assets that net you 4% return and effectively increase your wealth. You may take a short term hit to your income (the 3% interest fee) but you net out in the end.
> I'm just saying that transactional costs decrease your wealth, which is simply a fact.
That's not true in real terms. Your talking about a decrease of your perceived wealth. If the only asset I own is $1,000 in public traded stocks (i.e. I look at the stock market this second and they're worth $1,000), you could say your wealth is $1,000, but only for that second. However in practice your real wealth is the amount someone is willing to pay for your assets (when you put a sell order out) minus the transaction fees associated with making the transaction. That's the actual process ("in real terms") you would go through to realize your wealth.
This is effectively what people say when someone is "paper rich" E.g. a startup founder who has 30% of a business that is worth $300M, now has wealth valued at $90M...if he/she were actually liquidate to a seller at $300M, his/her wealth would probably be more like $40M-ish after taxes, transaction fees, etc.
> What exactly is the difference between "cost" and "negative impact on your wealth"? Those two seem like the same thing to me.
I should have probably said income instead instead of "cost". From wikipedia:[0]
Economic terminology distinguishes between wealth and income. Wealth or savings is a stock variable, that is, measurable at a date in time, for example the value of an orchard on December 31 minus debt owed on the orchard. For a given amount of wealth, say at the beginning of the year, income from that wealth, as measurable over say a year is a flow variable. What marks the income as a flow is its measurement per unit of time, such as the value of apples yielded from the orchard per year.
In other words, your wealth is measurable at a moment in time and can't realize a true negative impact on it unless it actually gets liquidated. Otherwise the measurement of it today is simply theoretical.
My understanding was that you can avoid all capital gains taxes via "1031 like kind exchange": you sell your house, buy one elsewhere for about the same amount, and pay no capital gains taxes?
1031 is only for business property. Specifically doesn’t apply to primary residence.
But CA Prop 60 allows Californians over 55 to downsize their house and maintain the same tax basis they had before the exchange, which very well might apply here, although IIRC it has weird county by county restrictions.
That's not the parent's point. If I buy a $1M home in CA 10 years ago and I pay 1% in taxes then and the house is worth $2M 10 years later, I don't get charged 1% of $2M after 10 years. I get charged a marginal increase ever year and this increase isn't based on market norms (I forget what the actual # is, but it would be like paying 1% of $1.25M). This means, if I sell my $2M house after 10 years), and buy another $2M house next door, my taxes are way higher in my second home due to prop 13.
I can only imagine the pain of owning a house that has increased over $500k in value in less than a decade. Are there support groups in your area you can turn to?
Oh, for Christ's sake. The OP isn't saying that he's being lynched or thrown into a gas chamber. Just that spiraling housing costs aren't an unalloyed good for home owners who want to stay in the area they live in.
I am very confused on your reasons not being able to downsize. Capital gains should have no impact, since first 500K is exempt. So you will have at least 500K in cash. Real estate agent fees are everywhere and can be negotiated to 2%. Property taxes are not really high. I live in Union City, and pay 1.2%.
I guess you cannot downsize because a smaller home costs a lot of money these days. Which is fair enough, but you can book your profits, invest that cash in other assets and rent for a few years till the market comes down.
That's true, we could do that. But then we'd have to move twice, and at this point in our lives (we're both >50) moving is a non-trivial hassle. It's also not a given that prices will come down, so this strategy carries some risk that we end up stuck in a rental.
And this is the problem with Sweden; we got rid of the property tax, but we kept the capital gains tax meaning people are less incentivized to sell since the prices are rising anyway, meaning fewer houses end up on the market, meaning the prices rise.
This is one of the many contributors to this crisis; high capital gains taxes for people selling their house, no property tax for people keeping it. Add to that our tax deductions on interest rates and local government monopoly on what types of houses gets built (obviously not affordable housing projects, they pay terrible taxes compared to the nice people who would move into luxury condos) and you have a recipe for disaster. There's many, many other reasons too but those things are what the government could and should work on.
Is this really true?? I think if you are selling a home that is not your primary residence then there is some sort of tax but I'm not 100% sure of the details.
Capital gains is only applicable when you sell the house and it's not your primary residence, or if you made a ton of money on it. And it's only a tax on the appreciation of the house, not its market value.
Real estate agent fees are only applicable on x% of the value of the house you sell.
Higher property taxes do stink but are not applicable after you sell the house.
I'm not sure why you can't afford to move. Have you talked to a tax specialist or a financial advisor? If you bought a house at X and sold it at 2x, even if you haven't paid any of the principal of your mortgage(if you have one), you would likely pay a maximum of ~25% of X between capital gains (if you own multiple homes) and real estate agent fees. So you still made 75% of X from appreciation. I don't really understand what you think your problem is.
Capital gains is never a "cost" to them, they are by definition only going to be taxed on their gains.
Real estate agent fees, like you said, are based off of the sell value, so unless their commission starts approaching 50% of the value of the house on a 2x gain...they make money. And if their mega-agent charges them 50% of the value of the house, then at least there are no longer any gains to be taxed on :)
The property taxes, however, make sense. Some places lock you in to a certain rate at the purchase price, and they said they bought very low. The argument is that they would be paying more in property taxes for a cheaper house, because they would no longer be locked in to their favorable current rate, which is entire likely given their circumstance.
You're right, I thought the parent was complaining about higher property taxes, not that property taxes would increase if they were to move to a similarly valued house.
That does disincentivize moving into an equally valued house, but moving into that house would have the parent paying about ~2% of X each year in property taxes as opposed to ~1% of X. The appreciation of the house still covers the increase in property taxes for the next 75 years.
Suppose I bought my house for $1M and prices are stable. I can sell my $1M house and buy a different $1M house and the net cost to me is 6% agent fees.
But if prices have doubled now the net cost to me is much higher. The agent fees are double what they were, and I have to pay cap gains on $500k. All that is money I have to come up with somehow in order to complete the transaction. I either have to write a check, or take on more debt. The higher prices go, the more expensive a lateral move becomes.
Yes, I have more home equity if prices go up, but that only helps me if I cash out and move out of the area.
Aren't agent fees and capital gains only applicable after the sale of the house?
I think I'm beginning to see your problem, which is that a lateral move is expensive. But the lateral move is only more relative to your initial buying price. A lateral move (in terms of value of your house and in the same area) would in your example cost about ~$135,000. I see why that would cause a liquidity problem but your actual equity is still higher than before.
Not understanding your complaint.
You would have to sell your house for more than $1.5M to have any taxable capital gains. You would have to sell your house for more than $2.5m to have an effective tax rate of more than 10% on the sale. (For example, if you sold your house for $2m, your effective tax rate on the sale would be 5%, ignoring AMT and assuming no other significant sources of income.) Boo hoo.
On the second point: the only cash you need to come up with is the down payment for the new house, which you would get out of the proceeds from selling your old house. If you sold your house for 2x the purchase price, you have more than enough cash to pay the down payment. Boo hoo.
Complaints like yours are why people outside of the Bay Area really hate Silicon Valley.
It only becomes remotely intelligible if you include these extra constraints:
- Assume all other houses in the area also appreciated the same amount as the poster's house (say 2x).
- Assume the poster will only consider a move within the same area.
Now if they want to make a "lateral" move, they are looking at $2m houses, not $1m houses, since all other houses they would consider - local to their area - also increased in value.
I feel like they should just get a $1m house (yes, a "downgrade") if that's the case and have fun with their near-$1m profits, but what do I know.
I don't think there are $1m houses in their area. My guess is that the value of a $2m house in that area is land $1.5m, structure $500k. Even if they downsize the house cost by half, and buy in a smaller lot, the minimum house cost is still $1.5m.
I think the one element that the OP is missing is that after the transaction, he is better off by about $130k in tax due to the increase in basis of his home. If he eventually sells and doesn't buy another home in that area, he will realize an additional $130k in profits on the second home that would be lost to tax if he had not sold the first house.
> For example, if you sold your house for $2m, your effective tax rate on the sale would be 5%
The tax on capital gains in this case would be 20% federal, ~10% state (in California), 3.8% ACA investment tax. That's an ~34% rate, not the 20% you seem to think applies.
> the only cash you need to come up with is the down payment for the new house
Let's take the simple case where the old house was paid off, no mortgage. Are you suggesting that it's unreasonable to want to downsize and still not have a mortgage?
If you do have a significant mortgage, and are hence highly leveraged, an increase in property prices is pretty good. If your mortgage is more or less paid off, you can in fact end up in a situation where you can't buy any house at all in the same general market after selling your existing one and paying the property taxes. See a worked-out example at https://news.ycombinator.com/item?id=15706565
The 3.8% net investment income tax doesn't apply to real property, it applies to investment property. The NIIT specifically excludes gains from the sale of primary residences. The IRS provides a helpful FAQ on this: https://www.irs.gov/newsroom/net-investment-income-tax-faqs.
Second, the 25% rate is an approximate rate that combines the federal and state rates while taking into account the deduction for state and local taxes. 25% is a nice round number. I'm not going to prepare a detailed tax model for an anonymous internet comment.
My point stands either way: he's whining about having to pay an effective tax rate of 10-15% on his profits from selling his million dollar house while people in other parts of the country are struggling to even afford rent. He's acting like an entitled child and quivering about the exact tax rate he pays doesn't change that.
> The 3.8% net investment income tax doesn't apply to real property
Ah, I didn't realize that, thank you!
> he's whining about having to pay an effective tax rate of 10-15% on his profits
No, the key part of the complaint is that the combination of price rise and tax structure mean that a lateral move requires liquidity he does not have.
It's a first-world problem for sure, but it's still a problem caused by the fact that we have various fairly dumb tax policies.
You can actually get screwed more by going from X to 4X than by going from X to 2X _if_ you want to buy your new house in the same market.
In the simplest case, consider that you want to move to a house of the same value (e.g. closer to work). That's a lot easier to do if there was no taxable appreciation in value than if there was.
Well, it's all of the above really. But does it really matter? The point is that we'd be better off relative to our goals if prices were stable. So we are a counter-example to the claim that rising prices benefit all home owners. They don't.
High housing prices are also very nice for banks and benks control nations. Essentially all mortgage money is created as dept. Banks can simply say: Here you go ma'am/sir, here is your money, created out of thin air. Now, please sign here to pay for your house twice, 1 time to the original owner and 1 time to us, because we created this money for you out of thin air.
Exactly, the bank is not hurt from money devaluating when they don't have to do anything for it but create a dept in their books. Sure, what you will pay them will be less in 20 years but it more than the nothing they had before...
>"No country should let the "landed gentry" hold them hostage over interest rates or tax policy so that their assets - many of which they do not even actually own - can appreciate."
Can you elaborate on what you mean here?
What would be examples of ways in which people who live in places with strong housing markets hold others hostage via interest rates or tax policy? What policies are the policies that accomplish this specifically?
Sure, as a politician you shouldn't be favoring homeowners more than people who don't currently own a home / younger generations. Passing policies that increase home value necessarily makes it harder to own a home than before, and also raises rent prices.
Homeowners essentially hold everyone else hostage because they are able to vote and youth/the unborn/many immigrants cannot. So politicians are highly incentivized to pass policies that increase home values. Of course, not everyone who can vote is a homeowner, but politicians and wealthy/connected people disproportionately are.
The main way to increase home prices is to make the monthly payments lower than before, by either decreasing interest rates or extending the maximum mortgage loan length. In another one of my posts, I explained why this will actually simply raise the values of the homes without affecting mortgage payments very much. This has the added effect of pricing a lot of people out of home ownership compared to the previous market, because this does increase the down payments that you need to make. Thus the increase in rents.
Regarding tax, if you let interest be deductible from your taxes, you are making mortgage payments even lower. Again, this raises home value because mortgage payments will again revert to what they were before.
>'The main way to increase home prices is to make the monthly payments lower than before, by either decreasing interest rates or extending the maximum mortgage loan length"
>"Regarding tax, if you let interest be deductible from your taxes, you are making mortgage payments even lower. Again, this raises home value because mortgage payments will again revert to what they were before."
But these two policies/practices also allow more people to become homeowners and part of the "landed gentry." Isn't this acceleration of home values a side effect of encouraging home ownership rather than a strategic attempt by the segment of homeowners to keep other's out? I think you are making this side effect out to be something conspiratorial and I just don't believe there is any such unified home-owner voting block.
Rising housing costs used to be considered a public crisis that required intervention. For instance, in the 1960s Sweden responded to a housing crisis with their "Million Houses Program."[0]
But after decades of "ownership society" propaganda all we hear about now when there's a shortage of an essential good like housing is the comparatively few winners and their unearned windfalls. The much more numerous victims don't matter and aren't considered.
Agreed. It's odd to hear people boast about housing prices being high, considering that shelter is a basic need just like food. You don't hear praise being thrown about when milk, eggs, and bread reach unaffordable prices as they are in northern Canada.
Perhaps basic human needs shouldn't be subject to the same market forces as caviar and champagne are...
I don't know much about this. What would have happened if the other countries/currencies didn't cut rates? Is it just capital flight to the lower-interest currency?
There's some indication that Adam Smith was aware of this:
The plenty and cheapness of good land, it has already been observed, are the principal causes of the rapid prosperity of new colonies. The engrossing of land, in effect, destroys this plenty and cheapness. The engrossing of uncultivated land, besides, is the greatest obstruction to its improvement. But the labour that is employed in the improvement and cultivation of land affords the greatest and most valuable produce to the society.
It helps greatly to know that "engross" in this context means "to purchase or control large quantities".
Another realisation I've had is that the incentive amongst those who hold valuable assets is to see their value increased. This includes land, money, financial holdings, commodities, licences (think of taxi medallions or professional licenses), education, and the like.
And the means of increasing price generally involves restricting the supply, or throwing constraints on the production of more of a thing.
Where the underlying asset is itself directly productive or essential, this tends to be tremdously disruptive.
Nice subreddit, I agree with a lot of what you write. In particular I wish more people were looser, as you seem to be, with the assumption that actors within an economy act rationally. It's impossible to act rationally given the huge amount of information asymmetry in the economy, and especially given that others' information asymmetry will cause the economy to not behave rationally regardless of whether you can make rational decisions on it.
It's also impossible to rationally determine whether an arbitrary law / policy change will pass at arbitrary point in the future. So with housing, because we aren't guaranteed that interest rates/zoning/taxes will behave predictably, we can't really rationally determine a "true" price for a house in a market where those may change
this is short sighted. while its 'nice' to buy when the housing market is going down, essentially what you are saying is that a house should not appreciate in value. but in reality, there is virtually no good reason to own a home unless its an appreciating asset.
after owning a home, i have nightmares about water. that was before the city flooded my basement with 3 feet of water (destroyed my washer, dryer, furnace, water heater) and said they have an ordinance that they cant be sued by accidents they cause. you may not get it, but anything that breaks, YOU MUST FIX. it doesn't matter if you had a hard day at work or you have to take your kid to the doctor that day, it has to get done and you need to have money available to do it.
the fact that homes ARE appreciating assets is what makes them so good everyone (even if you rent)
I think the better question to ask is, when will certain people learn that a continually 'weak' housing market is bad for everyone. dips in the housing market give good opportunities for people to get a home cheap, but they are still bad overall for the economy. its also only an opportunity if the housing market turns around and goes back into its upward trajectory.
the city collects taxes on me even though my home is not on the market. when I bought my home, I spent at least 8000$ at home depot, IKEA, etc, plus another 3000$ on a new roof and water heater (because the existing water heater was from the 70s and super energy inefficient). see, even good for the green crowd. although i wish i hadnt, the city was about to destroy it a year later anyways. i digress.
and while you think a trashed housing market would be great at lowering your rent, you might be surprised to find out landlords would have no incentive to keep your facilities nice if it was not a profitable endeavor.
I don't understand your argument. $11000 in repairs is basically nothing compared to the cost of a home which even in cheap cities will cost you at least $250000. If the prices double to $500000 then $11000 suddenly becomes such a tiny amount it's not even worth thinking about it.
i live in philadelphia, the median home value is around ~200k I think, but that doesnt really matter based on your comment. the ~11k$ was brought up to mention how that helps the economy. a lot of people were put to work just by me buying a home. it also misses the point that 11,000$ to burn on something that is not going up is a really bad decision.
>>When will we learn that a "strong" housing market is not necessarily a good thing?
Because you can't operate the housing market in isolation. Housing market is basically everything connected to the housing markets. Plumbing to paint, it includes everything.
The economy is a whole. Sectors are only for our understanding. Economy works as largely a monolith, so its just free market economy at the end.
Only thing that matters in a set up like this is Demand and supply equations.
While a drop in house prices might, in theory, negatively effect the economy in the short term as homeowners, in theory, have less disposable income, in the long term land prices/speculation (and when people talk about house prices, they really mean land prices) are a huge rentier suck on the economy, and should be taxed to the point that speculation or 'investment' in land itself (not the development of it) reaps zero gains.
After all, why should anyone profit merely by owning land, when the value of that land really reflects other people's economic activity and development in the surrounding area.
> After all, why should anyone profit merely by owning land, when the value of that land really reflects other people's economic activity and development in the surrounding area.
After all, why should anybody profit from merely owning a stock? Or vintage car/painting, whatever that can appreciate over time because of supply/demand. This is how people invest. I understand that being on the other side of equation might suck, but that't not the problem of equation.
I don't get it. When prices are high, it's a housing crisis. When prices are going down, it's a housing crisis. It's almost as if news articles just need to be written regardless of the reason.
No, not at all. Other economic views are definitely comprehensible to me, however this particular one is mind boggling because me and OP seem to have genuinely incompatible principals and values. "housing should be free" - according to who? What entity is coercing the 'should' in that sentence? What law of nature says that housing should be free? It implies in a society that you have a right to someone else's time and labor. That's amazing! It makes me wonder why the OP thinks that way and what circumstances led them to think that way.
I mean, in every modern country you have the right to someone elses time and labor. Most places have socialized medicine, literal usage of someones elses time for free and compensated by society as a whole, you use roads you didn't directly pay for, etc.
In a lot of places you can (or used to) get free water. Literally other peoples work for free.
Almost all the structural parts of modern society are built on providing people with services for free that come from the tax pool. You can even, depending on country, get free housing through poverty programs!
But in general, modern states exist in part to forcibly take from some to give to others by the whims of the majority. They all do it. "Public" housing is just another proposition in that spectrum of policies.
But specifically:
> according to who?
Currently them, but if it were according to most in most democracies that would mean it would eventually become law.
> What entity is coercing the 'should' in that sentence?
States, as with all other legal uses of force.
> What law of nature says that housing should be free?
No law of nature says property rights exist (especially intellectual property), but we make those up to establish civilization.
You can definitely be ideologically opposed to those ideas! But their existence shouldn't be a surprise, humans have been establishing radically different rules of society for millennia from one another, and seeing someone on the Internet propose something you find far out should be expected!
> I mean, in every modern country you have the right to someone elses time and labor.
I notice you qualified this with 'every modern country'. Is this a coincidence or do you believe that a 'right' to other people's time and labor is necessary for being a 'modern country'?
> Most places have socialized medicine, literal usage of someones elses time for free and compensated by society as a whole, you use roads you didn't directly pay for, etc.
Usages of socialized medicine, roads and anything else that is compensated by "society" are not rights. They are privileges paid for by taxes.
> In a lot of places you can (or used to) get free water. Literally other peoples work for free.
Getting something for no cost because it's given to you at no cost does not constitute a 'right' to that thing. If I gave you a bottle of water, that does not mean you have a right to my bottled water, or bottled water in general.
> But in general, modern states exist in part to forcibly take from some to give to others by the whims of the majority.
Now this statement is utterly fascinating! What are the other parts that they exist for, in your opinion?
> Currently them, but if it were according to most in most democracies that would mean it would eventually become law.
Let's be clear, your statement about "housing should be free" means "housing should be free because the people that want housing decide it should be free". It's totally fine if you want free housing - 100% fine for you to want it. That's your right. It's not your right however to get free housing.
> States, as with all other legal uses of force.
Not quite, or at least not yet. We're still just talking about "people that think housing should be free". If you want to promote that responsibility to the State you have to make it a law, which means you'd have to draft a law (in the US at least) that did not violate the Constitution or the Bill of Rights. Even if it's a law, it would still not be a right.
> No law of nature says property rights exist (especially intellectual property), but we make those up to establish civilization.
I would argue that nature says I have a right to whatever land I can take and defend. If I can't defend it (by paying taxes, or whatever other modern agreements there are between me and everyone else) it will likely be repossessed. Society tends to support that natural right by acknowledging things (at least in the US) like private property laws, trespass laws and castle doctrines. Of course ultimately the state could just take my land by force - that's nature's law in action!
The root of my objection is that no one has a right to my time and labor (or yours or anyone else's). You can buy my time and labor, or we can barter for my time and labor, or I can choose to give you my time and labor. People can take it by force[1], but not by right.
The first part makes sense, the second is just communist non-sense. Location is still important and better location will be desirable, regardless of the value system you use to value desirability.
If falling house prices are so problematic, then why do governments allow house prices to rise so sharply?
If house price stability was explicitly a part of our central banks' mandate, we wouldn't have such ridiculously low interest rates, people wouldn't be borrowing vast multiples of their salary to buy a house, and we wouldn't have the sword of damocles hanging over us in the form of another property slump.
The housing market in Sweden has been like borrowing money to buy stock and while everyone earns a profit, no one complains and it would be unpopular to make a change politically.
Contrarian position: low inflation seems like a good problem to have. You can always increase inflation much more easily than decrease it -- such as printing more money and giving it to people or businesses to spend on things, which spurs the economy.
What is interesting to me is that, even though it seems to take less Kronor now to buy something, somehow it slumped against the Euro so it takes even less Euro to buy that same thing? Yet the thing remained the same?
As a foreigner here in Sweden I've heard about this mystical bubble which will burst sometime soon causing morgage rates to skyrocket. If I was going to buy something, say in North Stockholm, how long would you recommend waiting?
That's the wrong way to look at it. If you wait for the bubble to pop, it may never happen. Or it could happen, but only after prices doubles, and the "crash" may only take the price back to where it is now.
Buy now IF you can afford to hold onto the property through a crash. If you expect to need to sell this property in the next 2-5 years, do not buy it.
I recently sold my appartment in central Stockholm, I am reinvesting my money in stocks and renting for 1-2 years before hopefully entering a more healthy housing market. Of course it is all a gamble, but most people I talk to recommend waiting +1,5 years, if you can.
Couldn’t agree more. The current market situation here looks downright bizarre at times, I’m having trouble seeing how any substantial investment in this makes sense.
If bubbles were predictable, they wouldn't be bubbles. Everyone claims they're in a housing bubble when prices rise for years on end. They often aren't. Even when they are, literally nobody knows when they will break, or by how much.
Does anyone have a good resource (book or site) that explains the interactions between central banks and the economies they influence? My macro-economic knowledge is lacking...
Don't conflate cryptocurrencies with blockchains. Blockchains are merely a decentralized way to prove stake in something.
Cryptocurrencies with a fixed supply like Bitcoin are deflationary, especially since mining costs increase over time.
Cryptocurrencies need not have a fixed supply, and in fact a "currency" with a fixed supply is indeed not a currency but an asset. Currencies must slowly and predictably inflate to be useful, otherwise people don't spend today since the "currency" is worth more tomorrow.
Currencies facilitate commerce and should grow in supply with the economy. They should not be a speculative tool to benefit first movers.
tl;dr: inflation is necessary, deflation is bad, hyperinflation is the worst.
What are the major tech hubs with the "weakest" housing markets? This would be an interesting list of options for techies that do not want to pay so much for land and housing.
As a Swede owning an expensive apartment this sucks. Currently we only need to pay mortgage down to 75%, so a lot of young swedes will loose a great deal of money.
It's not just Sweden, it's almost everywhere (in the western world at least).
It's almost entirely down to the effects of unprecedented quantitative easing over the past decade or so.
When you print more money than you've ever printed before, it's only natural that the prices of things will rise as more people can afford to buy things. And even if more people can't afford to buy things, the money goes somewhere so it probably means the rich people get richer. And they'll go out and buy things they know poorer people will always need i.e. property.
It all works well until property gets so expensive that the only people that can afford to buy it are other wealthy people. Eventually someone gets forced in to selling at a loss and the whole house of cards collapses as the wealthy who can afford to buy more property sit on the sidelines and wait / hope for a catastrophic collapse.
Rinse, wash, repeat and yet we still question why the rich get richer... the only way to prevent property getting out of control is by regulating it so that it remains affordable and that speculators are discouraged from entering the market and encouraged to sell. But that won't happen either because most politicians own large amounts of property and they've a vested interest in seeing the price of property rise...
It's less about printing money and more about falling long-term interest rates (and thus, discount rates). Fundamentally, a house is worth the net present value of its use value. Lower discount rates means that more of that value gets pulled forward into its present valuation.
An equivalent way of thinking of it is that house prices are fixed by mortgages to rents - when mortgage payments are lower than rents, people buy houses and rent them out, pushing house prices up. Falling mortgage interest rates push mortgage payments lower at the same principle amount, which convinces people to buy and push up housing prices.
The analysis generally works for the value of owner-captured imputed rents, too. If shaving 10 minutes off your commute is worth $100/mo to you, that's going to cause homes closer to jobs to rise in price with interest-rate sensitivity.
Housing, just like any other input, is best for the economy when prices go down. The less money spent for housing, the more money that can be spent on other goods and services (the same is true of food, healthcare, fuel prices, ....).
Much of the cost of rising housing is because of the increasing scarcity of land in desired locations (read major cities such as NYC, SF, Boston, London, Paris, ...) though "rent-seeking" which in this case is politically induced scarcity through zoning density restrictions, overuse of historic landmark status, and overregulation. The "rent-seeking" causes market inefficiencies or "market-failure." Healthy economies rely on wealth creation. Rent-seeking is a form of robbing Peter to pay Paul without creating wealth.
Happily, the solution costs no money at all. It simply entails ridding the legislation that caused the rent-seeking, the artificial scarcity of land. For example, in Japan, the federal government overrides local laws that limit zoning densities.
See Economists Edward Glaeser and Tim Harford (in his case, Greenbelting) for more details.
Some of my thoughts regarding the housing market, they come from both observing the market and from first hand experience by selling in Sept 2017.
- A widespread mindset of people living in Stockholm has been that the housing prices will continue upwards because they have been doing so for 15+ years. A change to this mindset was starting to be noticed in the spring of 2017 and recently rapidly changed. 66% believed in rising prices in September 2017 compared to 43% in October[1].
- The time it takes to sell an apartment in Stockholm is up from ~3-4 days to weeks.
- It was previously possible to earn $10k - $50k by flipping a newly produced apartment. This was done by commiting to buy the apartment when it is finished by paying a deposit and then sell it when you get the keys. This opportunity ceased to exist around the end of 2016.
- Trusted sources such as Svensk Mäklarstatistik[2] and Valueguard[3] indicate that the fall in prices is around 3% - 5% this far. Untrusted sources[4] indicate that the fall is above 10%. Trusted sources uses formulas to give better stability to their indexes, but they also react slower than the untrusted sources due to that. I suspect that untrusted sources also use data points that are removed even though they failed to close the deal.
- The difference between renting and cost of ownership is still huge, would estimate a 400% increase in interest rate would make the costs about even.
- About 56 250 (24.96% of total) people aged 20 - 27 in Stockholm are still living with their parents even though they would like to move to their own place. In the central parts of the city this share is above 60%. [5]
- Rising prices, difference between renting and cost of ownership and flipping of newly produced apartments has attracted a lot of people that invest/speculate in buying and renting out. They have probably not realized until now when the prices start to dip that they are sitting with a huge leverage on their investment/speculation and what risk that comes with. So they are probably the first ones to panic.
- Production of new apartments has exploded in Sweden the last 2 years, most of these are quite expensive which might have saturated the higher end of the market.
- The increase of prices has acted as jet fuel for different industries since a lot of people feel rich, increase their mortgage and consume the money. Companies that work with home makeover will be the first to get hit, but new car sales will also dip.
With this said I cannot be other than uncertain about the direction of the market, there are still a lot of things that indicate that the prices will increase (cost of ownership vs rent, demand for housing, interest rate prognosis). But if the market keep going down I am quite certain that it will drag a lot of other stuff with it and become a self fulfilling prophecy.
Edit: Sorry for a lot of typos and language that could be improved, just did a brain dump in a rush.
The interesting lines are apartment prices (yellow/orange) and salary (green). Note that the small bump in the early 90s was the last economic crisis...
It's getting harder and harder to keep inflation on target. Universal income may become attractive from a monetary policy position at some point on top of the other reasons that have already been discussed.
personally I like "quantitative easing for the people" - it doesn't provide guarantees like ubi, but it does a very similar thing, and, I think it would be a more powerful tool to combat inflation that the qe we know today, (which just swaps long term gov bonds for cash... two almost equivalent asset classes)
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[ 4.2 ms ] story [ 119 ms ] threadNow, the interest rebate seems politically impossible to touch, even long term and through minor transitioning. Home ownership is so important to the economy and affects so many voters, that the property owning class always must be looked after.
People have been talking about the bubble bursting for years now, but it's only in the past year or so that the decline truly has been expected. Only a few weeks ago, there was an article in a major paper about a couple who quinnied about not being able to sell their house with the expected 1000% profit (over 30+ years). How ever would they manage, once they'd sold the house, bought an apartment, and didn't have the cool million SEK to splurge on whatever people in their 70s enjoy?
Low interest rates, the deduction, no wealth tax and a massively reduced property tax all contributed to this bubble though.
And, add the fact that investing in your house is one of the least helpful investments for creating new jobs and wealth for future generations. The people who had this idea have my pity but I won't refrain from using their story as a cautionary tale.
I have nothing against paying off your loan, but seeing it as your one and only retirement investment is something I have serious problems with. You should live where you are most comfortable living, I don't want people speculating in their homes on a casual basis "knowing" it always pays off. If you're going to really invest in your home, renovate a floor and rent it out. That way, you're contributing to the economy, you're not just speculating you're value investing and you know what the revenue stream of your investment really is. I had the privilege of growing up in a wealthy household with 7 bedrooms and after me and my brother moved out my parents decided three rooms was enough and converted the house into three apartments, living in one and renting out the other two.
Many of the neighboring families however don't like the idea since it means work, but they also don't want to move into something that won't grow as much over time. They're staying put even after the kids have moved out in hopes of cashing in right before retirement.
And yet they're explicitly talking about a correction. Making something that isn't correct, correct. You might think that was a good thing.
If you don't want a correction, stop pumping up bubbles. You can keep 'em inflated a long time, longer than many people can remain solvent, but if you shut out the younger generations then eventually the political calculation will change, and that change will not be in your favour. As Mark Blyth is fond of observing, the Hamptons are not a defensible position.
There is also a lack of cheap housing, most houses built today are unaffordable to most low/medium earners. This has become an even more acute problem with the recent influx of refugees. This has lead to overcrowding in poorer suburbs.
It has also created situations where e.g. trade unions and other organisations (who own rental apartments) arrange nicely-located apartments to friendly politicians (and their relatives) ahead of the queue at very advantageous rents.
- Deduction of interest expenses from income tax.
- Too long mortgages (100 years or more) means nominal prices are high which add to the risk
- Historically big mortgages (90, 100 or even 110% of the cost could be financed - yes negativev down payments existed in the early 2000's).
- Rent control of almost all flats, meaning no one will build places to rent, only to buy.
- Extremely low interest rates as the central bank refuses to look at housing costs and interest rates when aiming for the inflation target.
This is the recipe for disaster. Now, it's not ALL doom and gloom, a lot has actually improved. Down payments have been 15-25% for some time now, mortgages are no longer infinite, and banks are using max-multiple-of-household-income caps (typically 4-5x) to limit lending. I think the situation now is a bit brighter than it would have been if we had been hit by a big correction in 2008 (which we were not). Many would welcome a controlled price correction (say 10-15%), and it IS expected since all the above changes have yet NOT changed the prices downward, even though the pool of prospective buyers gets smaller and smaller the more restrictive lenders are. It would be very welcome to see the correction now that both domestic and global economy is decent, interest rates are low etc.
That is absolutely bananas. Almost like a Chinese-style 99 year lease. Your kids might be dead by the time it's paid off, you'll never own it.
Edit: apparently the AVERAGE mortgage term is 140 years! Just recently the Swedish government limited the maximum mortgage term to 105 years. That is some absolutely stupid policy.
What's worse is that this is actually a huge subsidy for landlords, unless their mortgage terms are limited to be much shorter. A landlord can afford the downpayment to finance many homes at low interest rates, whereas a poorer person may be able to make the payments on such a mortgage, but can't save up enough to afford a down payment.
A 30 year loan is not much different really. Too long. It was rare in the US before various government subsidies and encouragements. First, Fannie Mae (1938), securitizing FHA backed home mortgages. Next, Freddie Mac (1970), securitizing home loans not backed by the US government.
In the US, we saw what happens when you make getting a mortgage "easy". People bought more house than they could afford and got screwed.
A 140 year mortgage can't possibly be appreciably different from renting.
The fact that as a homeowner ("owner") you can deduct interest rates, means that by "renting from the bank" you have a 30% rebate compared to renting from a landlord, and obviously you have no landlord taking a cut on top of that. So apart from the risk of depreciation, people seem to have little interest in owning their homes outright. So people pay off quickly in the beginning to get some margin on their valuation, but after that when the loan is e.g. 50% of the valuation, people might prefer buying a car to paying off $10k per year on their home. And it's probably better to have a mortgage fixed at 50% forever with 2-3% interest rate, and avoid the car loan with 5% interest.
https://economix.blogs.nytimes.com/2013/09/03/taxing-homeown...
Would be interesting to simplify tax codes and handle homeowners as both renter-landlord on their own home.
As nominal marginal tax rates are somewhere in the 40-50 % range, this typically means <15 % actual reduction in taxes.
Exactly right. I don't know anyone who buys with the intention to own.
Effectively you rent it from the bank. I don't mind, I mean I don't mind renting from the bank. I pay off my mortgage (2% per year, so 50 years) but only as long as its reasonably high, in order to lower interest rate costs and reduce the risk of being under water.
I have no interest in paying it off completely, so I'll stop paying 2% per year when the mortgage is down to e.g. 40% of the value. Obviosly as a banks have zero interest in your customers loans shrinking, it's lost revenue!
The big downside of very long mortgages is that it brings up nominal prices, and thus the volatility
https://www.ft.com/content/4e0377e6-6ad4-11e7-bfeb-33fe0c5b7...
Then again, there is the problem of refinancing when the end date comes due, which is probably why you have 100+ years mortgages in Sweden.
However I recognise that my gain is also a problem for my teenage daughter who will struggle immensely to get on the housing ladder. In the UK, it really does not help that housing is considered an investment opportunity. I have a feeling rent control is the only way we will ever get to the point where we remove this 'investment' opportunity.
More interestingly, it's within landlord's interest to work with developers to ensure whole developments are primarily bought up by landlords to maintain the value of housing stock.
And also remove the opportunity to live in the city. Rent-control is one of those policies that the economic community has consensus that its one of the worst things you can do.
"In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing."
It is a bad situation. But on the other hand you can't just change the max mortgage to 30 years either, or remove the interest tax deduction over night, as that would immediately create the problem you were trying to avoid to begin with (an unstable housing market).
I think what they are doing to mortgage lengths is entirely sensible now: they are increasing the required down payments (effectively 25% now) and then requiring a higher pace of repayment initially. That's when it really matters to stability. E.g. if people pay off 3%/year for the first 10 years of their mortgage, it doesn't really matter whether they have a 30, 40 or 100 year mortgage. They will have paid it down to around half the valuation which lowers the risk.
Also in Sweden for apartments, you don't own it. Most apartments for sale is so called "Bostadsrätter" which means you own a percentage of the association that owns the apartment building(s). If the association/organization has a bad economy and can't pay the debt they could be forced to sell the entire apartment building(s) and you'd loose your apartment while still having a loan to the bank.
Of course you would get that % of the profit, but since it selling in a time of crisis, that would mean you would most likely get significantly less than you otherwise would do.
It doesn't even matter if you have a good economy, the association must have it as well. Lots of those associations or organizations have a really shitty economy and are sensitive to market changes. Especially in Gothenburg and Stockholm.
[1] https://www.migrationsverket.se/images/18.5bc6881815e14db675...
[2] http://sverigesradio.se/sida/artikel.aspx?programid=98&artik...
EDIT: If you downvote / disagree, please explain why? What I stated is pure fact a with a touch of stated opinion which is backed by the numbers.
EDIT 2: I've added sources for the stuff regarding to immigration.
You point to an influx of people in the age range that usually rents an apartment. Such local equilibria are quite instable. It only takes a few hundred excess renters to destabilize a local (regulated) market for housing. That leads to crowding out where those that usually would rent, but can afford to buy will buy. A few more buyers will lead to the a dysequilibrium in the next market.
One thing - you expect upward pressure on prices, with more people competing for the same number of houses. The OP is about falling prices.
Don't understand how it could even be remotely racist or popular. The statistics of housing prices correlates very well with increases in immigration. Of course, correlation does not imply causation but in this case I'm personally pretty convinced it is the main causation of the extreme increases.
Regarding the falling prices, yes, I believe they were about to fall even before the massive influx of new people (because of all the other things mentioned) but were artificially held up a couple of extra years due to new people.
- Housing falls
- Investors sell
- Stock drops
- SEK value drops (We are here)
- Import prices goes up
- Goods prices goes up
- Less people are wiling to buy goods due to risk
- Wages go down
- People are let go
- Fewer people are willing to buy goods
- and so on..
SEK going down will push the costs of imports up. It will also make Swedish exports more competitive. Imports being more costly will cause Swedish consumers to substitute imported goods with local alternatives.
The net will be that wages will go up and unemployment will go down. This is good. But the price of goods will become dear to the Swedish consumer and this is bad. And there's a possibility of a wage/price spiral driving up inflation.
But you aren't increasing the population "a lot", now are you?
You linked to a graph that shows around 350,000 asylum seekers over 5 years. What percentage of Sweden's population is that?
> note that they're going to be concentrated into relatively few urban areas
Well surely that's a more likely cause, right? Not the actual number, but how they're being distributed.
It takes great effort to see a correlation between yearly applications (between 2000 and 2008 an average of 25 k persons varying with at most 30%, 7 years below that average and 3 above) and house price index (steadily up 62 % from 2000 to 2007, never failing to increase from one year to another).
https://www.ekonomifakta.se/Fakta/Ekonomi/Hushallens-ekonomi...
https://www.migrationsverket.se/download/18.585fa5be158ee6bf...
Because, for some reason you're convinced immigration is the main cause of rising housing prices and that the two clearly correlates, even though you can only back that up with stats that are about a decade old, any older than that and the correlation disappears. Maybe I'm missing something?
And stop putting words into my mouth. I wrote that I believe immigration is the main cause of the most extreme increases not the main cause of rising housing prices in general.
The difference is that the number of people Sweden has recieved is so much larger 2013-2016 so basically every system we had failed and all municipalities was forced to buy apartments.
If you have stable immigration that are predictable it's easy to plan ahead and adjust the society for it but when it comes like 160k people in one year to such a small country as Sweden everything fails. Of course this will have economic effects such as in the housing market.
SiemperVernes supplied stats that showed that the correlation goes from weak to non-existant when you look at the past three decades, despite the fact that the early 90s was record years of immigration. You said the correlation was clear and that you think it’s the main cause of rising housing prices, why do you think that? Is it only because of news stories that the local governments had a hard time finding places to rent out? You don’t base it on data?
I base my thoughts on the data that is available (which isn't much) and I still think it's different from the 90s because of the much higher number of people that came to Sweden in the last years. Basically no systems worked as you surely know and the government had to abort the whole situation because it became unreasonable even for them. And to my knowledge, Sweden didn't let immigrants jump queues nor buy apartments for them and their wives in the 90s.
For example regarding the lack of data, I am sure they know how many apartments they bought for immigrants but in order for me as a citizen to get that information I would probably have to request it from every single municipality which quickly becomes unreasonable.
Just think what you would have to do in order to base the thoughts on data:
I would have to request data from every municipality in the country regarding different factors that the immigration could have an effect on. Then I would probably take that data and compile it with other data that is basically impossible to get hold of and then have to compare it with the same data from the 90s. That is of course if every municipality even answers your request (they do not always do that, even if they must) and if they actually keep the records of the data. As with any topic that involves immigration in Sweden, statistics are simply not very often even recorded or stored.
For example, in another part of this thread I quoted a news article as saying "Prices have also been pushed up since a law change in 2013, allowing private individuals to charge tenants based on their mortgage costs rather than comparable rent prices in the neighbourhood." How much of an effect has this had in the rents in 2014-2016?
You appear to be young person, so you personally are likely in the same housing market at the refugees. This can make it seem particularly dire for you as most of the new housing being built is for a more expensive part of the market.
So, why is the new housing built for a more expensive part of the market?
Another factor which is harder to plan for and which affects the housing market is internal migration. Just like in the US, smaller towns and cities in Sweden are depopulating as people move to the bigger ones, where there is a stronger economy.
Was that planned for, and how much of effect has that had on housing prices in the big cities?
Furthermore, as https://www.thelocal.se/20170205/swedens-urban-rural-divide-... points out, "It is primarily young people leaving". This is again the population which is in the same housing market as most of the refugees.
Finally, here's a quote from an article from 2009 titled "Sweden risks facing severe labour shortages" / "Over the next ten years, the number of native-born Swedes of working age will decline by 100,000. Without more immigrants, we will be unable to sustain our welfare standards, writes Olle Wästberg, head of the Swedish Institute." https://www.thelocal.se/20091222/24004
> Almost all Swedish regions have set population targets that emphasise growth. The Greater Gothenburg area wants to have a population of 1.5 million in just ten years’ time. Stockholm wants to have 600,000 more inhabitants over the next 20 years.
Was enough housing built to meet the desired growth goals?
https://www.scb.se/hitta-statistik/statistik-efter-amne/boen...
Or is your personal belief based on your gut feeling?
And, when you say that "they correlate well", what time period are you then looking at? And what data? Because immigration decreased in the mid 2000s while the housing prices increased. No offense, but it looks like your analytical method is "there's lots of newspaper articles about refugees these days, and lots of newspaper articles about rising housing prices, one of them must the main cause of the other". I might as well say "there's lots of articles about smartphones lately while the housing prices are increasing, maybe smartphones lets us live alone more effectively meaning that we take up more space when everyone gets their own apartment instead of a room mate".
In the US we call these co-ops and they are mostly an NYC phenomenon. Fun fact, some co-ops don't own the land they sit on, they rent it. And those rents get renegotiated every 30 years, potentially making a bunch of co-op owners suddenly unable to afford their monthly maintenance payments.
Unfortunately, not many buildings have that.
As the GP says, you own a share in a co-op that itself owns the real estate, and that gives you the right to use the apartment that corresponds to your share.
Something similar to strata title has been discussed for many years in Sweden: ägarlägenheter. I don't know whether anything has ever come of it, however.
The financial regulations (or lack thereof) are far more responsible. They're present in all of Sweden's housing crises, this one included. It's the same when you look internationally.
The Sweden housing crises was decades in the making. https://www.thelocal.se/20170828/the-story-of-swedens-housin... .
Already the prices were high and housing scarce in 2010. https://www.thelocal.se/20100928/29292 , dateline 28 September 2010, quoting the local paper "Housing crisis worse than ever!"
http://www.bbc.com/capital/story/20160517-this-is-one-city-w... from 2016 points out "But amid strict building regulations and a lack of investment over a number of decades, successive governments have failed to build enough homes for its long-term residents, let alone the latest arrivals. ... Prices have also been pushed up since a law change in 2013, allowing private individuals to charge tenants based on their mortgage costs rather than comparable rent prices in the neighbourhood."
That 2013 change is just before your 2014-2016 time frame. Perhaps it had a bigger effect on the market than you think?
Yes, Sweden accepted a lot of refugees in the last few years. But as the first link points out, they cannot "afford the kind of houses that were being built in the years following the crunch." It seems more that they are priced out of the market more than causing the market prices to rise. (There are certainly secondary effects.)
I tried to find something in the Swedish press. I think this is relevant: http://www.gp.se/nyheter/g%C3%B6teborg/s%C3%A5-l%C3%A4nge-m%... from 2014, so before the timeframe you describe. If I read it correctly (thanks Google Translate), in Gothenburg there were 20,000 fewer homes, relative to the size of the population, than there was in the 1970s. There were 210,000 people registered in the housing queue, and the time an applicant needed to queue was 950 days.
One of the people being interviewed also argues that "there is big gap between what is being built and what those who need a home can afford to pay. A survey conducted recently by Sifo on behalf of the Tenant Association shows that 70 percent of them are considered to be able to pay a maximum of SEK 5,000 for a one. A newly built one in Kvillestaden costs over 6 500 kronor."
This seems to confirm the arguments presented in the English language press, that is, there are large-scale systemic factors that lead to the current housing crisis, and it cannot easily be explained by the large number of refugees.
Not the mention that residents register their kids at very early age to these rental queues, giving them a way ahead in these queues.
This is basically a mortgage and reverse mortgage in one package, isn't it?
We don't have a specific term for "mortgages" as meaning home loans - we treat them as any bank loan. I hadn't heard the term "reverse mortgage" before, so had to look it up. It's not quite that (interests are always paid).
Yes. In a sell to the highest bidder, you aren't going to win with the amount you can borrow over 30 years, if the people bidding against you borrow on 50 or 100 years. Simple as that. So without any caps, people will request long mortgages simply to be able to win these auctions. Should be noted that this is now developing backwars again, and "peak insanity" was early 2000's. What we are seeing now is to a large extent the effect of common sense on the prices. The attempts to stop the insanity over the last 5-10 years (e.g. down payments went from 5, to 10, to 15 to 20 % etc) unfortunately coincided with negative interest rates, meaning people could still push prices up. Now we are finally seeing the effect.
> or because people prefer "owning" (renting from a bank) instead of renting from a landlord?
Yes, there is effectively zero renting of 1-family homes. If you rent, it's a flat. And there are very few flats to rent. A LOT of the people having to buy these expensive homes would rather rent, but there is nothing to rent.
So a couple buying a stockholm home at $1M today (which isnt an uncommon price) would be borrowing say 75-80% of that, so making at least $1Mx0.8/5 as a couple or $1Mx0.8/5/2 each, or $80k/year. That's a good salary, but more commonly this couple would be selling something they made a nice profit on, and borrow less, lowering the income requirement.
This equation could be cut in 2 for a more average (4MSEK house, not 8MSEK) city or cut in 3 for more rural areas. Salaries fall off slower than house prices do, so rural areas spend less on housing than city dwellers.
Which sane person who is good with money does that? That sets you up for a life of misery (and not unrealistically, an underwater house during your lifetime).
The calculation now for our couple with $100k household net income isn't all that bad. The monthly "rent" for the house is between $2k and $3k of which $1.2k is down payment ($24k-36k year). Double the interest rates from 2% to 4% and it's $3k to $4k/month. I think spending over 50% your net income on living costs is proabably a limit to look out for - and that will certainly happen to these people should interest rates go north of 5% or there about. We also need to remember that in Sweden people generally don't save up for a rainy day. I'm not saving for retirement, kids edication, risk of being ill etc. So in a nanny state the equation is slightly different than in say the US.
> Which sane person who is good with money does that?
It doesn't matter so long as it is at least one person in the auction for each house does it. If there are no homes to rent and nothing is built, there will be competition for the existing homes on the market.
> not unrealistically, an underwater house during your lifetime
This is definitely a risk. And banks are now lending less and less. With a 25% down payment the bank will know the hose can take a 25% correction and still be over water. But the scary bit is of course that if there is a 20% correction, no one can move, and no one will consume anything for a very long time, which will lead to pretty significant economic fallout.
As a French living in Sweden,this system seems sooo fucked up but everybody seems to think it's normal.
I have my mortgage split between 5year fixed, 2 year fixed and the 3month rate, in order to limit my exposure to variations somewhat.
The general consensus is long fixed mortgages are a poor economic choice for those that have the economic margins to be on the variable rates, since the banks margins are so much higher.
So I think people (and banks) have calculated with higher rates, but there is always illness, divorce, unemployment...
Lots and lots of people would have a pretty miserable economy if interest rates go over 6% (i.e triple) - spending most of their money on mortgages.
So this creates the risk that rates will be self sustaining at a low level because even a 2% increase will reduce consumption and halt inflation pretty quickly.
This happened in 2008, and a disaster was averted only because the government bailed out the banks by allowing them to trade their now-bad commercial bonds for government bonds. It turned out to be a good deal for the government, because commercial bond rates came back down quickly. (No guarantee that this would have happened, just luck).
I am waiting (and renting) for "good time" to purchase apartment, and it's more than five years like that and I don't see any signs for hope anytime soon, and you realize that time goes by and you are getting older and your timeframe for which you can take loan is shrinking anyway, so situation becomes a bit desperate I would say.
So decision making with real estate is not only rational but emotional too.
[1] in the econ/ferengi "maximize profit" meaning
You've just summarized the situation in Prague, Czech Republic.
Same in Australia.
https://www.youtube.com/watch?v=TpCb3xjh-Kk#t=04m05s
Let's say Joe wants to spend / can afford a $1000/month mortgage payment. If interest rates are 5% and the maximum mortgage period is 30 years, Joe can afford to buy a house worth $190,000. However, if interest rates go down to 2% and Joe can now take a 40 year mortgage, Joe can now buy a house worth about $330,000. Great for Joe! The only problem is that housing supply is relatively inelastic, so the supply of housing didn't magically increase overnight. When Joe buys a house, he's essentially bidding against a bunch of other people for that house. If those other people's mortgage payments were affected the same way, then the actual effect is that what was once a house worth $190,000 is now worth $330,000.
This sounds like a problem out of an Econ 101 exercise. Either politicians are stupid, or more likely, they know that "homeowner policy" like this can make them and their other rich buddies even richer.
Early movers purchase a higher grade of home than they could have previously. Eventually this shifts the market as a whole as income distribution remains stable. Then people buy the same house they would have previously at a higher price. Now nothing has changed and people are more in debt as the cycle returns to normal, if it ever does.
Plus the whole investor (foreign and domestic) vs owner occupier discussions we are seeing plenty of...
In all but the smallest cities you have options for a different job. They might not be as good, but there is an option. If you lose your job you can find a different job close enough to your current house that you don't have to move.
Remember this is NOT an rational economic problem. There are good reasons to live near by the same neighbors that you know well for years. There are good reasons to live near your family. When you own a house you can make modifications to support your hobbies which in turn make your house a better place for your to live than anyone else. These all mean there are good reasons to accept a job that pays less than you could earn elsewhere and thus stay in the same house. With inflation you can probably afford the house on a lesser paying job after a few years.
Why is a living near the same people you know and love irrational or somehow an inappropriate object of economic reasoning? You could even estimate prices for such things! Just because they're not typically represented as currency amounts doesn't mean they're not 'rationally economic' or that making tradeoffs that involve these things couldn't be better done with good economics.
You are correct that it is fully rational behavior for people. However that is not the definition used in economics. (sort of like physics tends to assume no friction where possible)
[1]: https://en.wikipedia.org/wiki/Von_Neumann–Morgenstern_utilit...
* https://www.axios.com/sky-high-home-prices-are-thwarting-thw...
* https://www.citylab.com/equity/2017/06/the-other-side-of-har...
Cf. China, which has seen unbelievably explosive growth in its cities in the last 40 years and China has also seen ~1 billion people lifted out of poverty during exactly the same time period.
I bought as much as I could afford, but my budget included savings and a cushion. The bank would have loaned me plenty more than what my budget could afford. And my budget included repairs and maintenance. I also included in my budget a 4 bedroom house costs more than a 900 sqft town house to heat and cool. The big thing was I wasn't willing to give up maxing out our retirement accounts.
But in practice, "as good as you can afford" really means "buy the lead paint, lead water, asbestos ridden, foundation broken 'cheap' house? Or buy the no-lead, no asbestos, no mold 'expensive' house? "As good as you can afford" actually translates to the "least shitty" option, for most people.
Buying an 8 bedroom house just because the bank will technically let you, is a fun TV sitcom joke. Not a real thing most people are ever able to actually do.
If you grew up in a modest but well-kept house in a decent neighborhood, that is your baseline. If you then go on to reach some level of success in your career such that you are roughly on par or exceeding your parents income, your expectation naturally is that you should be able to afford something similar or better. Unfortunately the market dynamics have completely shifted since parents bought, and so people are having to take a really harsh look at the reality of their past expectations and how they align with their current reality. It often means paying way more than they ever wanted or thought was necessary to buy something way crappier.
There's a lot of evidence that shows that for every dollar of loans made available to students, the price of education rises, and that's a system without supply/demand dynamics since admissions aren't (supposed to be) based on a bidding process. It seems only reasonable to conclude that the availability of mortgages has similarly increased the price of housing. It's a hidden cost of our housing market that banks (and a few others) profit by. The banks loan fictional money, created out of thin air thanks to fractional lending requirements, and collect a percentage of that back every year on a house that only costs what it does because of that loan. Without mortgages, people would be forced to save up and the price of housing would be governed more by the cost of actually constructing houses and the amount that people were able to save before buying rather than a percentage of their income over the next 30 years.
Think, for example, if banks decided to change the standard loan time from 30 years to 40 years. What would happen to housing prices in areas with somewhat constrained supply? Homebuyers would still look at monthly payments and buy as much house as they could afford. So housing prices would increase accordingly and instead of mortgaging 30 years of our futures, we'd be mortgaging 40. We'd be buying the same houses and banks would be making more money. Change 30 years to 20 years and you'd get a similar drop in housing prices.
More than any other thing that we spend money on these days, housing prices have been decoupled from their cost of production and banks are largely the ones skimming that difference between what housing should cost and what it actually costs.
The most recent part of the increase has come from the slashing of interest rates to rock bottom following the global financial crisis and quantative easing, neither of which is the responsibility of the government.
It's not a malice vs idiocy situation, actually there is a third explaination : economy needs a growing money supply to work properly (and the money creation need to compensate the economic growth AND the reduction of money velocity[1]). But since the late seventies, money creation is only possible through the banking system via credit. That's why central banks reduces interest rates to stimulate economy, because you need to create money to enable economic growth. To get out of the rising housing prices trap, we need another money creation mechanism, but many people are affraid of the old ones (state-controlled monetary creation) and a lot of people (bankers, homeowners) have a lot to lose if we changed the system.
[1]: this is the failure of the monetarist view from the seventies, which predicted a constant money velocity, in fact we've had a declining one for the last four decades.
Personnally, I'd rather give the money to the governement like we did in the keynesian golden age, because it fuels the development of infrastructures, housing and social security. And at our point in history, it could be used to transition to a sustainable society. But that's because I don't trust the market on this, I'm kind of a socialist.
> am sure it would do more for the economy than just pushing banks to lend more money.
This is such a failure (esp. in the EU) I don't see how I could disagree with you on this.
Share market jumped, retailers rolled out significant sales. People bought TVs.
It's more likely that negative interest rates will be passed onto consumer bank accounts by elmininating cash.
http://saifedean.com/Saifedean%20Ammous%20The%20Bitcoin%20St...
A slowdown a la Thiel due to fundamentally flawed monetary policies.
Gold standard failed, no matter what libertarians like to fantasize about it.
The present primary reliance on fractional reserve monetary is not a carved-in-stone requirement of financial systems, only the present norm.
If you're interested in ideas and thoughts on money, I'd suggest William Stanley Jevons writing as a starting point for modern views. A. Mitchell Innis's "What is Money?" (1913) is not entirely mainstream, but strikes me as among the more insightful enquiries I've read:
https://www.community-exchange.org/docs/what%20is%20money.ht...
I'd stumbled across that here: http://neweconomicperspectives.org/2013/09/money-created-ove...
Their is no fractionnal reserve banking in the modern world anymore. And circa 2007, virtually nothing prevented the infinit expansion of credit, with the result we all know.
If you want to learn more about these topics, the keen-krugman debate (more of a controversy than a civil debate) a few years ago was really enlightening.
The St. Louis Fed tends to have the largest set of articles on economic policy, generally.
Here are 632 results for "fractional reserve":
https://encrypted.google.com/search?hl=en&q=site%3Astlouisfe...
And limiting to 2010 and subesequently, 27. None declaring the concept dead.
https://encrypted.google.com/search?q=site%3Astlouisfed.org+...
The second paper on the page is from 1968 …
In the US, there is no limit anymore on how much credit you can lend given the amount of reserve you have, the reserve requirement is on deposit not credit lent.
https://en.m.wikipedia.org/wiki/Reserve_requirement
Thank you.
The emphasis on assets for retirement locks a lot of money up in an unproductive musical-chairs of asset transfership. For example let's say I have a pay-day and want to spend $100 on buying stock. When I buy that stock I'm purchasing it directly from someone else who now has $100 instead of the stock. They can spend that money on goods and services, but in my opinion there is a far greater chance that they will reinvest that money in some other asset. If the actual assets in the market don't change, I think you can say that my investment increased the total sum of costs of all assets. I'm not 100% sure this is solid logic but it's some rough reasoning.
The problem is that at any given time more people are buying new assets instead of selling them off. This is because you can make money on purchased assets through rentiership (dividends, renting, or collateral for a leveraged investment that pays dividends/can be rented), and also because people are cautious and save more than they need, since asset prices are unstable.
I have two personal pet theories (is that really a common idiom in english ? I like it !) on that topic.
1. since we now focus on low inflation, people have little incentive to spend/invest their money, they can just hoard cash for a long time with no risk of losing money.
2. The low imposition rate since Reagan accelerate the concentration of capital, and rich people buy assets with their money, not consuption goods.
And yes, it is somewhat common! I think your second point is definitely part of the problem. As to your first, I think that looking at inflation in these terms requires looking at interest rates as well. When both inflation and interest rates are low, hoarding cash is highly incentivized. If inflation is low and interest is high, there is a large opportunity cost to holding cash rather than collecting interest via a mechanism directly tied to the cash (e.g. a bond). If both inflation and interest are high, it would probably be optimal to invest in assets that won't have their underlying value erode as they do with bonds.
There is no indirect means to receive money, except for profit, and that it is not related to stock.
Profit is ultimately the primary means for company cash liquidity, held as retained earnings, after the company has survived its initial years of inception and growth.
Dividends enable the company to go public. The secondary market makes the stock liquid, which is convenient but not mandatory.
? I don't know how the Kroner works, but usually a central bank issues currency into the market in exchange for some kind of asset - this is the primary mechanism for controlling interest rates.
Yes, more credit is created through fractional reserver, but this is taken into account.
There is no such thing as fractionnal reserve credit in 2017, bank don't need reserve to lend, they need reserve to hold bank accounts for their customers.
The fact banks can lend out more than they have in deposits means there is 'fractional reserve credit', or 'fractional lending' currently, in 2017.
Most of the credit in the world is created this way, actually.
It's why you've heard the term 'reserve ratios' etc..
[1] https://www.investopedia.com/articles/investing/022416/why-b...
And the following passage doesn't make much sense: "When a bank makes a loan, there are two corresponding entries that are made on its balance sheet, one on the assets side and one on the liabilities side."
If you take a loan to buy a house, it will not be a new deposit at your bank. It will be a new deposit at the seller's bank. And against that new deposit, that bank can extend new loans. Etc. http://thenextturn.com/wp-content/uploads/2015/04/Fractional...
Of course when you are just getting the loan it will appear as a deposit at your bank. But this is not to balance the loan. The loan is coming from a reduction in reserves. This temporary deposit (on the liabilities side) will increase the reserves temporarily (on the assets side), but only until you take the money out to do whatever you asked the money for.
Definitely banks do not lend out more than they have in deposits (ignoring other forms of financing for banks, of course).
Technically, you are correct - they don't lend out more than what is deposited, but what is deposited is 'created' (or at least deposited and lent money against those deposits are both considered 'in circulation') by they or other banks, ergo, banks end up lending out considerably more money than is created from the central bank.
...or simply a way to deflate the housing market, such as public housing and urban renewal projects.
I don't understand why a small issue that's easily solved and a very basic strategy all over the world is somehow interpreted as a insurmountable problem that means the entire economical system is broken.
Let me count the ways:
(1) reduced labor force agility as you say
(2) high rent and mortgage cost soaks up money that could otherwise fuel consumer spending, creating a demand constrained economy
(3) high housing costs in major cities also contribute to poverty elsewhere by preventing people from circulating between high priced urban and lower priced rural areas
(4) high housing costs risk actually destroying centers of excellence like the SF Bay Area and New York by making it impractical for new talent to move there
* 1st sub-$400 all-in-one with 6dof, face and finger tracking + 5 years
If your old washing machine still mostly works, the new one will be cheaper if you can get the old one to limp along for a while longer...
People don't completely stop buying things; life must go on. But people would start to drag out purchases where ever they can.
Have you ever put off buying a computer or phone because you know next year's chips will be faster and batteries will last longer?
High housing costs are an incredibly unproductive use of capital unless it leads to building new supply and is therefore effectively a temporary incentive for developers to build more. Landlords on the other hand want there to be an undersupply, and don’t fully align with developer interests.
Prices for consumer goods have decreased for quite a while and people still buy.
And even when computers were improving significantly every year and prices went down people on average still increased their buying of new computers.
Right, and the economists argue a deflationary market makes capital scarce
High housing costs are an incredibly unproductive use of capital
Right; it seems desirable for housing costs to keep even pace with the rest of the market, and ideally stay close to depreciated replacement cost
And even when computers were improving significantly every year and prices went down people on average still increased their buying of new computers.
I still buy computers in the deflationary technology market, like everyone else. But because I am putting off purchases and cannot recoup my costs with a sale, I probably buy a lot less computing hardware than I would if, for example, improvements were still just as big but much less frequent. I'm not saying it would be better for the world if computers improved more slowly- but clearly market behavior would change.
In markets where there is enough housing supply, do we see people change housing ownership more often? E.g. buy a bigger apartment when they get kids or downsize when they are empty nesters.
In markets with enough housing supply, do we see higher expectations for housing being modernized and up to code instead of being resold with only cosmetic changes? E.g. most bay area housing is very drafty and energy inefficient since it was built in the 60s/70s.
If there is enough housing supply, prices are reasonable and moving to a different house isn't a $2M transaction, it's $100k. Aside from other things this makes the finances easier- if the down payment is $200k, you must line up the purchase & sale. If the down payment is $10k, you can front that, and the purchase isn't 100% contingent on the sale. (purchase/sale contingencies sink a lot of home sales) Additionally shopping for a house is not a dog-eat-dog fight.
If there is enough supply, you don't have to spend every dime of your income in a bidding cage match with other buyers, which leaves you with capital available for real repairs & renovations. Builders and private developers can buy the really crappy old houses for very low prices and knock the whole thing down and build new. Plus, in a market where appreciation is the prime determinant of value, and it's a major seller's market, why bother doing much renovation? It'll sell no matter how bad it is.
My local market certainly shows all these things compared to California- but, who can say exactly how much of the state of the California housing market is due to Prop 13?
P.S. Yeah, it's ironic how the Bay Area is this wealthy progressive metro, and yet so much of the housing stock is ancient, way behind code, and terribly energy inefficient.
I don't even think people have a grasp of the effects on inflation/deflation in practice anyway, let alone suddenly make strategic decisions upon it.
e.g. https://www.dallasfed.org/assets/documents/institute/wpapers... , http://www.tandfonline.com/doi/abs/10.1080/13504851.2015.110...
But this doesn't seem like a bad thing. Would you prefer the alternative, that technology improvements stop and computers become more expensive, so they become good investments? And people do still seem to buy lots of electronics even though they don't hold their value.
Generally speaking, lower prices are better. There are only a few exceptions such fossil fuels and cigarettes where you can say cheaper is worse, due to externalities.
To be sure, if tomorrow a magical new technology gave us free, clean energy, health care, or housing, this would be a tremendous financial shock. Many investments would be worthless. But this is because it's a big, sudden change, not because it's inherently bad. A more gradual decrease in prices is a good thing.
Not an economist, but I believe that statement needs to be indexed to inflation/deflation. Lower prices relative to income, in other words higher purchasing power, is good. But you can't inflate/deflate your way to lower real production costs or higher wages.
prices of computers and electronics are always dropping due to technology improvements
Right, the electronics market is in some senses an example of the behavior of a deflationary market, but it is also different than prices dropping due to financial wizardry.
Would you prefer the alternative, that technology improvements stop
In many parts of the market, improvements have stopped. Continuing improvement is clearly best, but not always an option. A gallon of milk or a shovel isn't getting any better next year. So what then?
Technology hasn't stopped in agriculture. For example, there are automatic milking machines [1], and there's a well-funded startup that wants to grow lettuce in warehouses built near distribution centers [2].
I wouldn't expect the price of milk to change much in the short term. In the long run, who knows? Maybe biotech improvements will mean we don't need cows?
[1] https://www.nytimes.com/2014/04/23/nyregion/with-farm-roboti... [2] https://www.bloomberg.com/news/features/2017-09-06/this-high...
I mean, which of the thousands of inflation rate definitions are you talking about? The FRED database tracks 34,000 different series of some 10,000 inflation measures. More importantly, people don't sense overall inflation at all, they make decisions on domain specific inflation. Prices dropping for farm equipment or homes does not mean businesses stop buying computers and homes stop buying washing machines. It is entirely possible for housing prices to tank while prices for nearly everything else increase...in fact, we've already seen it happen.
Think about what you are proposing: you're saying that even if prices are irrational and we are in a bubble, the only response is to maintain those irrational prices for that bubbled item and inflate everything else until we reach equilibrium. That is insane. If we did that, we'd still be trying to catch up with railway mania. And it puts us at far more of a risk of runaway inflation problems than letting housing prices drop would ever put us at a risk of a deflationary spiral.
It's time to start questioning your axioms. Don't get me wrong, there are plenty of blowhard macroeconomists out there that share the idea, but there are far more economists that have far more nuanced views and understanding of inflation and how it really affects people's behavior, and it is nowhere near axiomatic.
We're both handwaving here, but Wikipedia says: "In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate)." https://en.wikipedia.org/wiki/Deflation
The inflation rate is given by a price index which typically includes housing. If housing prices fall while everything else holds steady, that index has nowhere to go but below 0%.
I realize that this is distinct from a systematic deflationary spiral that affects the entire economy. The point was, some people might only look at the inflation rate, see it's below 0, and start panicking and doing stuff to "prop up" prices instead of letting people profit from affordable housing.
[1] https://en.wikipedia.org/wiki/Irish_property_bubble [2] https://tradingeconomics.com/ireland/housing-index
Irrational obsession would include things like when you prioritize homeownership over financial security and other basic necessities like healthcare or food. For example I know someone who gave up health insurance to buy house - and she readily admits this.
https://sv.wikipedia.org/wiki/Arbetsgivaravgifter_i_Sverige
Employer pays $6000 per month, nominal salary is $4565, and employee's income tax 35 % => employee gets $3000.
We do prefer to own our own homes, but that preference is not evidence of a national personality disorder.
Homeownership, for most, is a leveraged play on a politically-sensitive asset. Consider two companies. One goes all in—-with borrowed money—-on a deal that does well if the cards fall right but results in default if e.g. property taxes or zoning laws change. The other has higher fixed costs but diversifies its investments. It’s apparent which one is riskier.
If you buy once you factor in taxes, insurance, upgrades, maintenance, repairs, commission, closing costs, opportunity costs compared to other investments, interest, PMI, etc., assuming you were in a good financial position to buy in the first place so you don't default, you probably will come out ahead compared to renting if you live in your house for more than 5 or so years.
But! That's only if the cards fall just right. So if the neighborhood is still desirable, tax policy/political landscape doesn't change, your neighbors keep up with their maintenance, your HoA doesn't go into bankruptcy, a major employer doesn't leave town, tastes in housing doesn't change, the housing market doesn't crash, too many of your neighbors don't foreclose, nearby amenities don't leave, a major highway isn't built through your neighborhood, interest rates haven't soared, political housing incentives/programs haven't gone away, too many black people don't move in(1), etc., etc. You're taking on a very large risk if your buying vs renting, sure it has the ability to work in your favor (extreme example - buying in San Francisco in the 90s) or not in your favor (extreme example - buying in Detroit in the 50s).
I've seen people lose out terribly financially buying a house, and not just in 2008 recession, my parents house was bought in 1995 and hasn't even kept up with inflation. That doesn't mean it was the wrong choice for them to buy though, houses are really good at providing shelter.
You also have to have the ability and wherewithal to take care of a house - and tons of people don't.
I'm a homeowner, I'm not against home ownership.
(1) I'm not trying to be racist, but white flight does exist.
Unlike people, businesses do not reach a certain age then lose their capacity to earn (retire). A business can carry the cost of their leases as an operating expense, where individuals who do this will hit a roadblock when they retire as their operational funding is no longer able to cover the cost of rent.
There are of course exceptions for particularly high earners who manage to build up sufficient funds to be able to perpetually rent, even sometimes without drawing down on their principle savings. But this is far from attainable for most.
So equating the two is not valid.
Except for the lack of readily available credit. For the most part, it seems the people paying the high prices are "able" to afford it. The problem is that home ownership (and the security that brings, particularly in Ireland) is not attainable for most young people and families anymore.
Not really. The problem is that building all but stopped in the aftermath of the 2007/8 crash. Meanwhile the economy recovered, Dublin in particular is booming now but we're still lacking enough homes to meet demand and building never recovered to the necessary levels. Add in a reluctance for "building up" and a growing population, that gets you higher and higher prices...
In short, no. It's not as if the EU lacks capital markets.
Also: "Is anyone really so naive to imagine that these balances are not already fully available to finance new investments by U.S. companies here? Do they think the global financial system is that unsophisticated? At present interest rate levels, a company needs only to issue debt at favorable rates in the U.S., invest the funds held abroad at floating rates, enter a fixed-floating interest rate swap, and voila, the company has access to the funds exactly as if they had been brought home. Indeed, this is just what many U.S. corporations appear to have done. So cry me some crocodile tears for companies that hold profits abroad." [1]
[1] https://www.hussmanfunds.com/wmc/wmc170821.htm
Anyway I bought mine when I was 29 and rates were much higher
My friends at the time were richer than me, their families were richer than mine, they just loved spending money on cars and expensive goods in general instead of houses, that they possessed as a family
There's a difference, a big one, between an housing bubble and an honest investment
I knew the neighborhood in Rome where I bought the house would expand in the next 10 years, I wasn't trying to exploit newer generations (I'm 40 BTW) I was trying to secure my future
The % of salary people devote to housing shouldn't increase by a large amount each year.
And people's salaries don't rise that much year to year either. It rises the same rate as inflation.
Salaries don't necessarily rise at the same rate as inflation. If they did, there would be 0% real growth in the economy. Inflation is usually measured by watching the prices of a basket of goods: if those goods' prices increased by 5%, then inflation is 5% (in reality it can be more complex than this).
Inflation isn't a "real" metric in the sense that it affects all things equally. Housing prices could increase by 50% but the price of a gallon of oil or a bar of soap could decrease by 10%.
You are confusing “salaries” with “output”; salaries (or even domestic incomes in total, which involves more than salaries) growing at the rate of inflation can occur with negative or positive real growth. Zero real growth means output growing at the rate of inflation. (National economies aren't closed systems, and some output may produce foreign rather than domestic income, as in returns to overseas investors.)
Not unless you are ready to sell, otherwise it kind of sucks to have your property taxes go up 10-20% every year.
There is also a tax on property transactions which can be considerable.
Also no inheritance or gift tax. Very good place to live if you are wealthy and don't make money the peasant way of going to work.
Ingvar Kamprad moved to Switzerland in 1976; in 2014, when the abolition of 2007 had survived one election cycle, he moved back to Småland.
Björn Borg moved out of Sweden already in 1974 at age of 18, perhaps more because on 90% income tax than property taxes.
Not really. Rising prices (not high prices) are great for people holding houses as investments. But for owner-occupied houses, rising prices are as bad for the owners as they are for everyone else.
my wife and I own a house in Northern California, which we bought during the sub-prime crash. Since then it has nearly doubled in price. It is also too big for us, so we'd like to sell it and move to a smaller house. But we can't. Why? Because by the time you factor in:
1. Capital gains tax
2. Real estate agent fees
3. Higher property taxes (even a smaller house costs much more than the prop-13 basis in our current house)
we can't afford to move!
PS: #1 only consumes a percentage of profits, so it can't make a sale unprofitable.
Yes, that's true, but it makes a move less efficient. If we sell our house and buy another one of equal value, the higher the price, the more we lose in capital gain tax in the transition. If our house had not appreciated, we would pay zero cap gains. The higher prices go, the more expensive it becomes to move locally.
It is.
> yes it costs money but assuming you want to down size that should hardly be an issue.
Why? A loss is a loss. What difference does it make if it comes out of your checking account or your home equity?
There is no loss. There is only the money you get net after the sale.
Now, you can get into cash flow issues etc. But, with home interest being tax deductible and long term capital gains being below normal taxes your almost always better off over time to sell after a bubble than before.
PS: If your investment makes 4% and your mortgage is 5% then you have a net savings after taxes.
No, that's not true because the $500k cap gains exemption is per-transaction.
Reread what I said?
That's why 2 houses with 2 mill gains is better than 1 house with a 4 million gain.
Selling 1 house with a 4 million gain is one transaction with a 500k cap so you pay taxes on 3.5 million. But selling one house with a 2 million gain then another house with another 2 million gain is 2 transactions so you pay capital gains on 3 million and get an extra 500k tax free.
Remember, until you sell the second house it's value is meaningless but when do sell it's purchase price and value become important.
Let's say your house is 1mn and stays 1mn. You have zero gains and pay zero taxes. Net cash in your bank = ZERO
Now your house becomes 2mn. So you have 1mn profit, first 500K is exempt. And you pay 25% on your next 500k. Net cash = 750K.
Are you suggesting that you would rather have zero dollars in your bank account than 750 K?
AKA, if a prison opened up next to their current house keeping property values the same then they would be strictly worse off.
So if your house is 1m and 10 years later stays at 1m, then you can swap for any other house in the neighborhood.
If your house was 1m but in 10 years becomes 2m, and all the other houses in the neighborhood are now 2m... you would hypothetically not be able to swap for another home. You now have 1.75m to buy with. A good problem to have, no doubt.
Lateral move or downsize are two different transactions. Capital gains has no effect on the second one.
People who are complaining about the capital gains taxes pretending that such taxes prevent them from either moving laterally or downsizing are complaining that other properties also appreciated in price. What they would have preferred is that their property appreciated and the properties they wanted to move to did not.
This gets even worse if you want to buy a larger house (if appreciation is percentage based).
In the second case:
You bought a house for $50k, which in a year appreciated to $100k. You sell the house for $100k, pay the capital gains of X% on the $50k of appreciation which gets you $100k - ($50k * X% ) to play with.
You lateral move would not be to a house worth $100k, it would be to a house worth $100k-($50k * X%) because you d not have $100k, you only have $100 - (50k * X%).
If you wanted to defer capital gains and play with entire 100k, then instead of doing a sale you would do 1031 exchange.
Of course it does. A loss is a loss. It doesn't matter whether it comes out of your checking account or your home equity.
> What they would have preferred is that their property appreciated and the properties they wanted to move to did not.
That's generally not an option if you want to move locally.
> That's generally not an option if you want to move locally.
You don't get to have your cake ( gain money on a sale of appreciated house) and eat it too ( buy at the price before the appreciation )
I have a family friend whose neighborhood became really high end since the 30 years she bought the house. Her taxes are really high now and it's becoming a financial burden on her.
Unless I'm mistaken.
Without prop-13 we'd have more housing, more convenient housing options, and lower prices. Yes, long-term residents would have higher taxes. However most of us would save both time and money on our housing costs.
Then if you ultimately sell both houses, you can do a 1031 exchange and invest all of the proceeds into a new house — and defer the cap gains until you sell that.
These problems aren’t that hard unless you look at them from a single direction.
You're not taking a financial hit, you just feel as you are. You think the capital gains tax is taking out a huge financial hit on something you already made lots of profit from. So you're still making a profit just not the one you imagined you were making.
That's like someone seeing their pay for the first and releasing the difference between gross pay and net pay. They think they are getting X but really they are getting Y. Both amounts of which are > 0 and so they are still making money. Like you still are.
Are you inferring to the fact that the rest of the market is appreciating at the same rate, and thus "losing" out when you buy on the downsize?
If there had been no appreciation, your final wealth (cash + home equity) would be lower than in the case where the houses are more expensive, even after paying taxes, so it’s hard to see where is the loss.
But of course if you expect prices to go down it’s a good idea to avoid paying taxes on a gain that may be reduced in the future.
Either one.
We put a certain intrinsic value on a local lateral move. If the cost of moving is less than that intrinsic value, and we find a house we like, we'll move. If the cost of moving is more than that intrinsic value we'll stay regardless of whether we find a house we like. So the higher prices go, the less likely we are to move. So when prices go up, that removes liquidity from the market, which perversely drives prices up even further and makes the problem worse. So while we're sitting on a pile of equity, we can't actually use it unless we move out of the area, and that has a huge negative intrinsic value for us. We really like it here.
It's a first-world problem, but as you say, it's still a problem. Unless you're okay with taking the loss, or just moving somewhere far away because the market decided that this area has now become too expensive to allow existing homeowners to downsize.
In your case, you can a) stay where you are or b) sell the house, pay the tax, and buy a similar house (or a cheaper one elsewhere).
An alternative you that didn't buy that house at that time, and got lower after-tax returns on that money, doesn't have option a) and has less capital available for option b).
Everyone else is in an strictly worse position than owners.
You have an unrealized capital gain and an unrealized tax liablity. Selling the house you'll realize both. You "feel" that you are not realizing the capital gain if you buy a similar house with that money. It's understandable, nobody likes paying taxes. But if you were to sell the new house in the future (maybe to downsize) the transaction would be tax free if prices don't change.
And as I said already, if you think prices may go down it's rational that you avoid realizing the capital gain and the tax liability at the current level if the utility gain from moving to a "similar" house is not larger than the expected savings of realizing (maybe) a lower capital gain in the future and paying less taxes.
You're right. I retract that. (Unfortunately, it's too late for me to go back and edit the original comment.)
Let me rephrase: rising prices are not always an unalloyed good even for home owners.
> 1. Capital gains tax
Note - if it's your primary residence you get capital gains relief on the first $500k.
> 2. Real estate agent fees
If you're in the bay area, then you negotiate these down to the minimum (IIRC 2.5%) because the market is so liquid and the agents add very little value (if you're smart). Also, you can negotiate not to pay the commission if you're the buyer. So the only burden is on the sale, which is less impactful since you've already made a profit on it.
> 3. Higher property taxes
Yes, this is a bitch in CA...see next point.
> we can't afford to move!
Clarification - you can't afford to move in the general vicinity, but you could certainly move to Nevada (for example). If you are not viewing your house as an investment, then guess what? You get to live in an area that is high demand! Good for you for timing the market appropriately when you bought.
Yes, I know. But our appreciation is substantially more than that. The higher it goes, the more expensive it becomes to make a move.
> which is less impactful since you've already made a profit on it
Only if we move to a less expensive area. If we make a local move, that "profit" just gets rolled in to the next house. There's no way to cash out without leaving the area.
> Clarification - you can't afford to move in the general vicinity, but you could certainly move to Nevada (for example).
Yes, exactly right. What we really want to do, but can't because it's too expensive, is downsize. This would not be the case if prices were stable.
Discourse shouldn't be baselessly disrespectful, sure.
But the robotic, tsk tsk, shaming attitude that gets thrown around on forums whenever someone expresses any negative emotion gets old too.
In any case, complaining about having to pay capital gains tax on gains OVER $500k really is the ultimate first world, privileged problem.
Why is expressing emotional reactions pointless, in your mind? Doing so gives everyone more information about the reactions they might expect to their concerns... it enforces social norms, etc.
The problem is that the comment provides nothing else. You can do the same thing in a more civil and constructive way. Just look at your comments. You are providing logic and rationale for your argument. I don't agree with you, but you're adding to the discussion. Now compare that to "I'm sick of you people. Stop whining about other people's comments you big baby". Someone can correct me, but that doesn't belong here and that rule has been around since the beginning of HN. It's been written and clear along with the reasons why. It's the way things have been done here. If someone doesn't like it, they can post on reddit instead.
https://news.ycombinator.com/newsguidelines.html
"Be civil. Don't say things you wouldn't say face-to-face. Don't be snarky. Comments should get more civil and substantive, not less, as a topic gets more divisive.
When disagreeing, please reply to the argument instead of calling names. 'That is idiotic; 1 + 1 is 2, not 3' can be shortened to '1 + 1 is 2, not 3.'"
I just believe the rules tend to stifle people from expressing how they truly feel about topics, and are therefore information limiting and generally a net loss.
It's a fine line. Some people's feelings are toxic all the time and wrong-headed and truly add nothing of value. Other people, when they have a negative emotional reaction there is probably a lot of accumulated wisdom behind it and you should really listen instead of censoring or rambling on about civility. Very subjective though.
Also, in my opinion, the constant suppression of any negative speech is exactly what gets someone like Trump elected. "Finally, someone on TV is saying what I FEEL and no one can stop him!"
If I were talking to lisper over a beer, I'd probably smile and say that that problem is one that 99% of the world's population would love to have, or something to that effect. Or maybe without the smile and straight to the point "complaining about profits so high that you're getting taxed on them when there are people who are homeless is not a great look".
OTOH, I don't think he's really complaining, just pointing out that the system is pretty screwy even for someone who is in no uncertain terms doing pretty well.
Almost every complaint levied on this forum is a first world problem. Complaining about the ergonomics of a programming language is a first world problem. And secondly, he wasn't complaining, he was describing the economics of his choices. What is infinitely more toxic than 'complaining' about first world problems, is people jumping on explanations like the above as 'complaints' that need to be silenced.
That's just like, your opinion man.
>Complaining about the ergonomics
Look, complaining about work is a typical first world problem, sure. And of course we're all lucky to do the work we do and not live in [wherever.]
Complaining about 20% taxes on $200k of a ~$700k windfall is truly more like a .00001% issue and is pretty obtuse by any measure.
You wouldn't raise an eyebrow, or have any negative reaction to someone making $400k / year bitterly complaining that they have to pay taxes on it? I don't know anyone who wouldn't think that was obnoxious.
>he was describing the economics of his choices.
Sort of, in a fairly facile and borderline deceptive manner.
Where are these bitter complaints? He commented to say that rising housing prices weren't good for him. He explained why. That isn't a complaint. He didn't say "I deserve this money from my rising house price!". He didn't say "the world is so unfair to me". He just explained why this thing that people thought would be helpful to someone like him, was in fact, not helpful.
> Sort of, in a fairly facile and borderline deceptive manner.
What was facile or deceptive about what he said? He's absolutely correct.
First, he withheld the amount of capital gains, so everyone who initially responded naturally assumed it was under $500k, which is true of 99.9% of transactions. That was very misleading information to omit.
Secondly, he complained about broker fees, but it isn't required to sell a house using a broker by any stretch. Just do FSBO if you think the 3% cut (probably less) isn't worth it. And 3% isn't much at all when your already expensive house just went up over 100% in value. Facile and disingenuous.
>Where are these bitter complaints?
Pretending that he and his wife are "trapped" in his house and "can't afford to sell" makes it sound like a horrific and dire situation. Which is completely misleading, he and his wife are quite wealthy and could do anything they wanted. They are pretty much the opposite of "trapped."
>we can't afford to move!
Lies. They could easily afford to move.
They bought their house for something like $600k and now it's probably worth $1.3M. They pay 20% taxes on the $200k, so $40k and they lose 3% if they use a broker. That's another $40k, so $80k total. Let's make it an even $100k. So they have $1.2M to throw around, subtract $500k to pay off the existing mortgage, that's $700k free and clear.
$700k is a hell of a down-payment, even in the ritziest areas of Marin. Buy whatever you want.
I own a restaurant in norcal and have an employee whose room share / rental house burned in the recent fires. He goes to SRJC, doesn't have any family in the area, had no rental insurance, makes $12 an hour and no savings.
THAT's a dire situation, and considering I know people in situations like that, OP's framing of his (extremely cushy) situation as "I can't afford X!" is pretty disgusting to me.
There's nothing misleading about that. He didn't mislead you. You misled you.
> Pretending that he and his wife are "trapped" in his house and "can't afford to sell" makes it sound like a horrific and dire situation. Which is completely misleading, he and his wife are quite wealthy and could do anything they wanted. They are pretty much the opposite of "trapped."
You don't really understand money, it seems like. The fact that you have equity in the home you live in doesn't mean you can "do anything you want". I already explained why this is so.
> They bought their house for something like $600k and now it's probably worth $1.3M. They pay 20% taxes on the $200k, so $40k and they lose 3% if they use a broker. That's another $40k, so $80k total. Let's make it an even $100k. So they have $1.2M to throw around, subtract $500k to pay off the existing mortgage, that's $700k free and clear. $700k is a hell of a down-payment, even in the ritziest areas of Marin. Buy whatever you want.
700k is indeed a great down payment. But you have no idea what their income stream is like. If they aren't making a large income, they won't be able to afford their mortgage payments if they need to buy a house in an expensive area like SF. What he means by 'trapped' is that they have theoretically made all this money, but the money is of no actual use to them. And he is completely correct.
> I own a restaurant in norcal and have an employee whose room share / rental house burned in the recent fires. He goes to SRJC, doesn't have any family in the area, had no rental insurance, makes $12 an hour and no savings. THAT's a dire situation, and considering I know people in situations like that, OP's framing of his (extremely cushy) situation as "I can't afford X!" is pretty disgusting to me.
Gee, it does indeed sound dire. Maybe you should pay your employees more rather than yelling at people on the internet for being insensitive about money? Seems you're in a position to actually do something about that situation. But you won't. And there's a very good reason you won't: because it's bad business. The economics don't make sense for you to do that. Just like the economics of the OP's situation don't make him wealthy. Absolute values are irrelevant, it's the equilibrium that matters.
And secondly, making silly statements like "THATS NOT DIRE THIS IS DIRE" is absurd. Almost everyone posting here lives in a first world country. There are infinitely 'more dire' situations out there than any of us are in, and playing this childish 'no true scotsman' game is a waste of time.
The OP is using him or herself as an example of a real behavior in response to real economic incentives, no matter how unsympathetic you find their circumstance. The fact that this situation discourages moves that most other markets encourage is a worthwhile point to bring up. Among other things, it reduces supply which has a profound effect on new buyers.
Incentives influence actions much more than personal criticism does. The OP’s relatively fortunate outcome does not mean that they don’t have something relevant to share. In contrast, targeting them with pejorative shaming is totally unhelpful.
They bought their house for something like $600k and now it's probably worth $1.3M. They pay 20% capital gains taxes on $200k, so $40k, and they lose 3% if they use a broker. That's another $40k, so $80k total. Let's make it an even $100k. So they have $1.2M to throw around after the sale. Subtract $500k to pay off the existing mortgage, that's $700k free and clear.
$700k is a hell of a down-payment, even in the ritziest areas of Marin. They can buy whatever they want.
Quite possibly, yes.
Let's plug in some plausible numbers. Say someone buys a 3-bedroom house for $300k (they have kids). At the same time, 1-bedroom houses sell for $200k.
Time passes, the kids grow up and move out. Say house prices didn't change at all. You sell for $300k, buy for $200k, pay some agent fees, have $85k or so left over.
Now say prices went up and the 3-bedroom house is $1,500,000. You sell, have a $1.2e6 capital gain. $500k is deductible, you pay taxes on the remaining $700k. That's taxed at 20% federal plus the ACA 3.8% investment income tax (because your income is way over that boundary) plus state capital gains taxes. In California, capital gains are taxed the same as other income, at first glance; let's be charitable and assume you avoid the higher tax brackets (12.3%) and get taxed at an effective 10% here. That's 33.8% tax. So your after-tax sale proceeds are $500k + 0.662*$700k = $963k.
Note that your house went up in price by 5x. If the smaller one did too, it costs $1 million and you can't pay for it anymore. If it went up by more than that (e.g. if the primary inflation was in land prices, which it often is) you might be even more in the hole.
Things are even worse if you're trying to sell and buy something equivalent instead of downsizing.
Of course all that assumes that you're not leveraged at all (paid-off morgage). If you're leveraged, price increases are generally a win even in the face of capital gains taxes on the increase.
Gains greater than 500k are extremely rare outside of certain overly restrictively zoned areas.
Nope! This is all speculative until you need to "sell & move". If you want to move to another place in the same area, guess what, you've probably made nothing. With all the taxes and fees that you have to pay on the sale price you can't buy the equivalent of your house. You can only capitalize on that appreciation if you move somewhere considerably cheaper.
Not only that, the owner faces higher (in some cases much higher) property taxes due to increasing house prices, which is totally out of their control.
I'm not suggesting that they're in a bad spot. It's just not the "jackpot" that your post is suggesting.
So why on earth would someone want to sell their house and buy an equivalent house in the same area...?
But a lot of this is true with moving generally when you're living somewhere that's OK but isn't really optimal for you any longer.
Friend of mine bought a house he and his wife loved. Five years later he came to understand what owning a Dr Horton house means, and they wanted a better-built house.
https://en.wikipedia.org/wiki/Reverse_mortgage
Since a rising tide lifts all boats, the new purchase is about even with the old sale- but they also owe taxes. So within this window, they are objectively worse off than your average Joe who can move across town without owning those taxes.
Anyone trading up is also impacted as well. Suppose you bought a condo at 100k, and SFH was 200k. In five years you want to trade up, but the market went up 100%. Your condo sells for 200k, but the SFH costs 400k. Despite the lovely appreciation on your condo, you'd probably prefer if the market hadn't moved.
Sure, there's people who have it worse. Owning any home at all puts them in better shape than most of the world. But it's still not enviable to be unable to move within your community.
When a suit or Talbots customer argues over a price at Wal-Mart you should hear the similar type of tone the cashier takes after they leave. Especially if they argue for a buck or two.
This is real world
https://news.ycombinator.com/newsguidelines.html
I'm still not sure why exactly the issue is. You literally can afford to downsize and you'll make a ton of money doing so.
> If we make a local move, that "profit" just gets rolled in to the next house.
Huh? That's not how it works...
2008 - Buy house for $1M
2017 - Sell house for $2M
2017 - Buy new house for $1M (but smaller size)
Congrats you have an asset worth $1M you've just made $1M in cash. Now net out fees and you have a downsized home and are more liquid than you were before, but with slightly less wealth than you had yesterday (due to netting of fees associated with the transaction).
Assuming there's anything on the market for $1M. The problems start when there isn't.
> The problems start when there isn't.
And the market always opens up when there isn't because it means the demand goes higher and thus creates new sellers. That also "rises the tide" and increase everyone in the area's house prices. So it nets it self out.
Sure. But it might be $1.6 million, not $1 million, in your example...
Real-life numbers will differ, but that's roughly the point.
But there is a gain, you just turned an illiquid asset into a liquid asset. The fact that this exchange is even possible is why you are even able to say "its worth $2M" in the first place. If you couldn't turn an illiquid asset into a liquid asset it would be worth nothing, so you neither "gain" nor "lose". Would you rather have that scenario?
Lastly - if you see personal value in purchasing a smaller house, wouldn't you expect service providers (agents, movers, etc) to charge you for that value?
https://ttlc.intuit.com/questions/3229450-sold-primary-house...
https://www.irs.gov/taxtopics/tc701
Where's your source?
If you think that's incorrect, what do _you_ think happens with taxes when selling a home for $2 million that was bought for $1 million?
> I said = 2017 - Buy new house for $1M
> you said = But it might be (for the "buy new house") $1.6 million, not $1 million, in your example...
> I said = so they can still afford it.
> you said = You don't get to keep the whole $2M. That's the point.
So, let's do this again.
1. Sell house for $2M
2. Buy house for $1.6M as you suggested
3. Congrats you now have $1.6M in illiquid assets and $400k in liquid assets (cash)
Note - I recognize that my original example was buy at $1M and sell for $2M, where you are correct you're not taxed on the first $500k and the remaining $500k is taxed at capital gains. I also recognize that this whole scenario is purely illustrative and doesn't take into acount all of the transation fees.
The ratio of profit you make moving from a $2m house to a $1m house is the same as moving from a $200k house to a $100k house in a "stable" area.
We put a certain positive intrinsic value on a local move (and a very high negative intrinsic value on a remote move), because we like the area but the house we're in is not ideal. If the cost of a local move is less than this intrinsic value, we'll move, otherwise we won't. The higher prices go, the higher the actual cost of moving goes, and the less likely we are to move.
Sans CA taxes, this is relative to the increase of wealth you've accumulated. So yes in the absolute it's higher, but relatively speaking you've still are earning more money in liquidity during the transaction.
> This has to do with the actual cost of a move, that is, the difference in your net worth at the end of the day once all the dust settles.
I think I finally understand your position now. The cost isn't prohibitive, it's the negative impact on your wealth. Which is true. The reason I and others are reacting strongly to your position is because your conflating transactional costs (expenses, fees, etc) with wealth (accumulation of assets). Two very different things that use a common medium to interact (i.e. currency).
Here's the predicament. Your implying that you can transfer assets (wealth) without any transactional costs. This is just not how the market for any asset transfer works (stocks, cash, etc), because someone or some system has to be setup to broker the transaction. What your essentially complaining about is why you have to pay fees to complete an asset transfer. I know very few markets were transferring assets doesn't incur a fee. I don't know what to tell you other than this is basically economics 101.
CA taxes on the other hand - that's something to complain about. CA taxes inadvertently nudge people to hold on to property longer, reducing supply and thus driving overall prices up.
So? How does that benefit us in any way? We don't need to sell to have liquidity. We have a HELOC so we can turn our equity into cash on demand.
> your conflating transactional costs (expenses, fees, etc) with wealth
No, I'm not. I'm just saying that transactional costs decrease your wealth, which is simply a fact.
> The cost isn't prohibitive, it's the negative impact on your wealth
What exactly is the difference between "cost" and "negative impact on your wealth"? Those two seem like the same thing to me.
Do you really feel like you'd be better off if your house sold for exactly what you bought it for?
But that HELOC has financing terms associated with it. Getting cash out from your HELOC does impact your overall "wealth" because you have to pay a fee (financing terms) to actual turn that credit line into cash. You could in turn take that cash that you borrowed at 3% interest and put it into assets that net you 4% return and effectively increase your wealth. You may take a short term hit to your income (the 3% interest fee) but you net out in the end.
> I'm just saying that transactional costs decrease your wealth, which is simply a fact.
That's not true in real terms. Your talking about a decrease of your perceived wealth. If the only asset I own is $1,000 in public traded stocks (i.e. I look at the stock market this second and they're worth $1,000), you could say your wealth is $1,000, but only for that second. However in practice your real wealth is the amount someone is willing to pay for your assets (when you put a sell order out) minus the transaction fees associated with making the transaction. That's the actual process ("in real terms") you would go through to realize your wealth.
This is effectively what people say when someone is "paper rich" E.g. a startup founder who has 30% of a business that is worth $300M, now has wealth valued at $90M...if he/she were actually liquidate to a seller at $300M, his/her wealth would probably be more like $40M-ish after taxes, transaction fees, etc.
> What exactly is the difference between "cost" and "negative impact on your wealth"? Those two seem like the same thing to me.
I should have probably said income instead instead of "cost". From wikipedia:[0]
Economic terminology distinguishes between wealth and income. Wealth or savings is a stock variable, that is, measurable at a date in time, for example the value of an orchard on December 31 minus debt owed on the orchard. For a given amount of wealth, say at the beginning of the year, income from that wealth, as measurable over say a year is a flow variable. What marks the income as a flow is its measurement per unit of time, such as the value of apples yielded from the orchard per year.
In other words, your wealth is measurable at a moment in time and can't realize a true negative impact on it unless it actually gets liquidated. Otherwise the measurement of it today is simply theoretical.
[0] - https://en.wikipedia.org/wiki/Wealth
But CA Prop 60 allows Californians over 55 to downsize their house and maintain the same tax basis they had before the exchange, which very well might apply here, although IIRC it has weird county by county restrictions.
>Yes, this is a bitch in CA...see next point.
Property taxes in CA are extremely low.
https://en.wikipedia.org/wiki/California_Proposition_13_(197...
[1] http://www.boe.ca.gov/proptaxes/faqs/propositions60_90.htm
EDIT: person
This is right. Part of the problem is that we don't refer to this by what it is: Inflation in housing prices.
The thing about housing is that you can't choose not to consume it. You can't anticipate your consumption to beat inflation either.
The only way to win with housing inflation is by exploting some subsidy like cheap leverage and the like.
Self-defeating definition. Inflation is generalized prices increases. It stops being generalized if you pick an asset type.
I guess you cannot downsize because a smaller home costs a lot of money these days. Which is fair enough, but you can book your profits, invest that cash in other assets and rent for a few years till the market comes down.
This is one of the many contributors to this crisis; high capital gains taxes for people selling their house, no property tax for people keeping it. Add to that our tax deductions on interest rates and local government monopoly on what types of houses gets built (obviously not affordable housing projects, they pay terrible taxes compared to the nice people who would move into luxury condos) and you have a recipe for disaster. There's many, many other reasons too but those things are what the government could and should work on.
I would say people are frantic to buy a home in Canada because it's tax free and the alternative (stocks/bonds/etc..) isn't.
For secondary properties most people are just going to move in for 2 years to meet the requirement.
Real estate agent fees are only applicable on x% of the value of the house you sell.
Higher property taxes do stink but are not applicable after you sell the house.
I'm not sure why you can't afford to move. Have you talked to a tax specialist or a financial advisor? If you bought a house at X and sold it at 2x, even if you haven't paid any of the principal of your mortgage(if you have one), you would likely pay a maximum of ~25% of X between capital gains (if you own multiple homes) and real estate agent fees. So you still made 75% of X from appreciation. I don't really understand what you think your problem is.
Do a FSBO if you're that worried about brokerage fees.
Capital gains is never a "cost" to them, they are by definition only going to be taxed on their gains.
Real estate agent fees, like you said, are based off of the sell value, so unless their commission starts approaching 50% of the value of the house on a 2x gain...they make money. And if their mega-agent charges them 50% of the value of the house, then at least there are no longer any gains to be taxed on :)
The property taxes, however, make sense. Some places lock you in to a certain rate at the purchase price, and they said they bought very low. The argument is that they would be paying more in property taxes for a cheaper house, because they would no longer be locked in to their favorable current rate, which is entire likely given their circumstance.
That does disincentivize moving into an equally valued house, but moving into that house would have the parent paying about ~2% of X each year in property taxes as opposed to ~1% of X. The appreciation of the house still covers the increase in property taxes for the next 75 years.
But if prices have doubled now the net cost to me is much higher. The agent fees are double what they were, and I have to pay cap gains on $500k. All that is money I have to come up with somehow in order to complete the transaction. I either have to write a check, or take on more debt. The higher prices go, the more expensive a lateral move becomes.
Yes, I have more home equity if prices go up, but that only helps me if I cash out and move out of the area.
I think I'm beginning to see your problem, which is that a lateral move is expensive. But the lateral move is only more relative to your initial buying price. A lateral move (in terms of value of your house and in the same area) would in your example cost about ~$135,000. I see why that would cause a liquidity problem but your actual equity is still higher than before.
On the second point: the only cash you need to come up with is the down payment for the new house, which you would get out of the proceeds from selling your old house. If you sold your house for 2x the purchase price, you have more than enough cash to pay the down payment. Boo hoo.
Complaints like yours are why people outside of the Bay Area really hate Silicon Valley.
- Assume all other houses in the area also appreciated the same amount as the poster's house (say 2x).
- Assume the poster will only consider a move within the same area.
Now if they want to make a "lateral" move, they are looking at $2m houses, not $1m houses, since all other houses they would consider - local to their area - also increased in value.
I feel like they should just get a $1m house (yes, a "downgrade") if that's the case and have fun with their near-$1m profits, but what do I know.
I think the one element that the OP is missing is that after the transaction, he is better off by about $130k in tax due to the increase in basis of his home. If he eventually sells and doesn't buy another home in that area, he will realize an additional $130k in profits on the second home that would be lost to tax if he had not sold the first house.
The tax on capital gains in this case would be 20% federal, ~10% state (in California), 3.8% ACA investment tax. That's an ~34% rate, not the 20% you seem to think applies.
> the only cash you need to come up with is the down payment for the new house
Let's take the simple case where the old house was paid off, no mortgage. Are you suggesting that it's unreasonable to want to downsize and still not have a mortgage?
If you do have a significant mortgage, and are hence highly leveraged, an increase in property prices is pretty good. If your mortgage is more or less paid off, you can in fact end up in a situation where you can't buy any house at all in the same general market after selling your existing one and paying the property taxes. See a worked-out example at https://news.ycombinator.com/item?id=15706565
Second, the 25% rate is an approximate rate that combines the federal and state rates while taking into account the deduction for state and local taxes. 25% is a nice round number. I'm not going to prepare a detailed tax model for an anonymous internet comment.
My point stands either way: he's whining about having to pay an effective tax rate of 10-15% on his profits from selling his million dollar house while people in other parts of the country are struggling to even afford rent. He's acting like an entitled child and quivering about the exact tax rate he pays doesn't change that.
Ah, I didn't realize that, thank you!
> he's whining about having to pay an effective tax rate of 10-15% on his profits
No, the key part of the complaint is that the combination of price rise and tax structure mean that a lateral move requires liquidity he does not have.
It's a first-world problem for sure, but it's still a problem caused by the fact that we have various fairly dumb tax policies.
In the simplest case, consider that you want to move to a house of the same value (e.g. closer to work). That's a lot easier to do if there was no taxable appreciation in value than if there was.
But even when downsizing you could run into problems; see the example I give elsewhere in this thread: https://news.ycombinator.com/item?id=15706565
--> The Bank effectively loses money
I think banks only really lose money on defaults, and that's if the house lost value.
Can you elaborate on what you mean here?
What would be examples of ways in which people who live in places with strong housing markets hold others hostage via interest rates or tax policy? What policies are the policies that accomplish this specifically?
Homeowners essentially hold everyone else hostage because they are able to vote and youth/the unborn/many immigrants cannot. So politicians are highly incentivized to pass policies that increase home values. Of course, not everyone who can vote is a homeowner, but politicians and wealthy/connected people disproportionately are.
The main way to increase home prices is to make the monthly payments lower than before, by either decreasing interest rates or extending the maximum mortgage loan length. In another one of my posts, I explained why this will actually simply raise the values of the homes without affecting mortgage payments very much. This has the added effect of pricing a lot of people out of home ownership compared to the previous market, because this does increase the down payments that you need to make. Thus the increase in rents.
Regarding tax, if you let interest be deductible from your taxes, you are making mortgage payments even lower. Again, this raises home value because mortgage payments will again revert to what they were before.
>"Regarding tax, if you let interest be deductible from your taxes, you are making mortgage payments even lower. Again, this raises home value because mortgage payments will again revert to what they were before."
But these two policies/practices also allow more people to become homeowners and part of the "landed gentry." Isn't this acceleration of home values a side effect of encouraging home ownership rather than a strategic attempt by the segment of homeowners to keep other's out? I think you are making this side effect out to be something conspiratorial and I just don't believe there is any such unified home-owner voting block.
But after decades of "ownership society" propaganda all we hear about now when there's a shortage of an essential good like housing is the comparatively few winners and their unearned windfalls. The much more numerous victims don't matter and aren't considered.
[0] https://en.wikipedia.org/wiki/Million_Programme
Perhaps basic human needs shouldn't be subject to the same market forces as caviar and champagne are...
The plenty and cheapness of good land, it has already been observed, are the principal causes of the rapid prosperity of new colonies. The engrossing of land, in effect, destroys this plenty and cheapness. The engrossing of uncultivated land, besides, is the greatest obstruction to its improvement. But the labour that is employed in the improvement and cultivation of land affords the greatest and most valuable produce to the society.
https://en.m.wikisource.org/wiki/The_Wealth_of_Nations/Book_...
It helps greatly to know that "engross" in this context means "to purchase or control large quantities".
Another realisation I've had is that the incentive amongst those who hold valuable assets is to see their value increased. This includes land, money, financial holdings, commodities, licences (think of taxi medallions or professional licenses), education, and the like.
And the means of increasing price generally involves restricting the supply, or throwing constraints on the production of more of a thing.
Where the underlying asset is itself directly productive or essential, this tends to be tremdously disruptive.
https://www.reddit.com/r/dredmorbius/comments/608w97/asset_p...
It's also impossible to rationally determine whether an arbitrary law / policy change will pass at arbitrary point in the future. So with housing, because we aren't guaranteed that interest rates/zoning/taxes will behave predictably, we can't really rationally determine a "true" price for a house in a market where those may change
Rational actor theory seems to be crumbling rapidly as behavioural economics progresses, so there's that.
after owning a home, i have nightmares about water. that was before the city flooded my basement with 3 feet of water (destroyed my washer, dryer, furnace, water heater) and said they have an ordinance that they cant be sued by accidents they cause. you may not get it, but anything that breaks, YOU MUST FIX. it doesn't matter if you had a hard day at work or you have to take your kid to the doctor that day, it has to get done and you need to have money available to do it.
the fact that homes ARE appreciating assets is what makes them so good everyone (even if you rent)
I think the better question to ask is, when will certain people learn that a continually 'weak' housing market is bad for everyone. dips in the housing market give good opportunities for people to get a home cheap, but they are still bad overall for the economy. its also only an opportunity if the housing market turns around and goes back into its upward trajectory.
the city collects taxes on me even though my home is not on the market. when I bought my home, I spent at least 8000$ at home depot, IKEA, etc, plus another 3000$ on a new roof and water heater (because the existing water heater was from the 70s and super energy inefficient). see, even good for the green crowd. although i wish i hadnt, the city was about to destroy it a year later anyways. i digress.
and while you think a trashed housing market would be great at lowering your rent, you might be surprised to find out landlords would have no incentive to keep your facilities nice if it was not a profitable endeavor.
Because you can't operate the housing market in isolation. Housing market is basically everything connected to the housing markets. Plumbing to paint, it includes everything.
The economy is a whole. Sectors are only for our understanding. Economy works as largely a monolith, so its just free market economy at the end.
Only thing that matters in a set up like this is Demand and supply equations.
After all, why should anyone profit merely by owning land, when the value of that land really reflects other people's economic activity and development in the surrounding area.
After all, why should anybody profit from merely owning a stock? Or vintage car/painting, whatever that can appreciate over time because of supply/demand. This is how people invest. I understand that being on the other side of equation might suck, but that't not the problem of equation.
You're not presenting all scenarios however, there's the vast in-between, aka healthy, that sits between bubble and falling.
In a lot of places you can (or used to) get free water. Literally other peoples work for free.
Almost all the structural parts of modern society are built on providing people with services for free that come from the tax pool. You can even, depending on country, get free housing through poverty programs!
But in general, modern states exist in part to forcibly take from some to give to others by the whims of the majority. They all do it. "Public" housing is just another proposition in that spectrum of policies.
But specifically:
> according to who?
Currently them, but if it were according to most in most democracies that would mean it would eventually become law.
> What entity is coercing the 'should' in that sentence?
States, as with all other legal uses of force.
> What law of nature says that housing should be free?
No law of nature says property rights exist (especially intellectual property), but we make those up to establish civilization.
You can definitely be ideologically opposed to those ideas! But their existence shouldn't be a surprise, humans have been establishing radically different rules of society for millennia from one another, and seeing someone on the Internet propose something you find far out should be expected!
I notice you qualified this with 'every modern country'. Is this a coincidence or do you believe that a 'right' to other people's time and labor is necessary for being a 'modern country'?
> Most places have socialized medicine, literal usage of someones elses time for free and compensated by society as a whole, you use roads you didn't directly pay for, etc.
Usages of socialized medicine, roads and anything else that is compensated by "society" are not rights. They are privileges paid for by taxes.
> In a lot of places you can (or used to) get free water. Literally other peoples work for free.
Getting something for no cost because it's given to you at no cost does not constitute a 'right' to that thing. If I gave you a bottle of water, that does not mean you have a right to my bottled water, or bottled water in general.
> But in general, modern states exist in part to forcibly take from some to give to others by the whims of the majority.
Now this statement is utterly fascinating! What are the other parts that they exist for, in your opinion?
> Currently them, but if it were according to most in most democracies that would mean it would eventually become law.
Let's be clear, your statement about "housing should be free" means "housing should be free because the people that want housing decide it should be free". It's totally fine if you want free housing - 100% fine for you to want it. That's your right. It's not your right however to get free housing.
> States, as with all other legal uses of force.
Not quite, or at least not yet. We're still just talking about "people that think housing should be free". If you want to promote that responsibility to the State you have to make it a law, which means you'd have to draft a law (in the US at least) that did not violate the Constitution or the Bill of Rights. Even if it's a law, it would still not be a right.
> No law of nature says property rights exist (especially intellectual property), but we make those up to establish civilization.
I would argue that nature says I have a right to whatever land I can take and defend. If I can't defend it (by paying taxes, or whatever other modern agreements there are between me and everyone else) it will likely be repossessed. Society tends to support that natural right by acknowledging things (at least in the US) like private property laws, trespass laws and castle doctrines. Of course ultimately the state could just take my land by force - that's nature's law in action!
The root of my objection is that no one has a right to my time and labor (or yours or anyone else's). You can buy my time and labor, or we can barter for my time and labor, or I can choose to give you my time and labor. People can take it by force[1], but not by right.
[1] http://www.endslaverynow.org/act/educate/human-rights-and-sl...
If house price stability was explicitly a part of our central banks' mandate, we wouldn't have such ridiculously low interest rates, people wouldn't be borrowing vast multiples of their salary to buy a house, and we wouldn't have the sword of damocles hanging over us in the form of another property slump.
What is interesting to me is that, even though it seems to take less Kronor now to buy something, somehow it slumped against the Euro so it takes even less Euro to buy that same thing? Yet the thing remained the same?
Buy now IF you can afford to hold onto the property through a crash. If you expect to need to sell this property in the next 2-5 years, do not buy it.
Who did you talk to for advice in Stockholm?
Here's an article predicting the Stockholm "bubble" would pop in 2009: https://arbetet.se/2009/06/26/har-alla-glomt-90-talets-bosta...
And here's one predicting it in 2003: https://www.svd.se/prispress-okar-risk-for-bostadsbubbla
And here's what it did: https://www.globalpropertyguide.com/template/assets/img/swed...
So, if you followed internet advice, you would have pulled out of the market 15 years ago and still be waiting.
Could that be a way to counteract the deflationary tendencies of this market?
Cryptocurrencies with a fixed supply like Bitcoin are deflationary, especially since mining costs increase over time.
Cryptocurrencies need not have a fixed supply, and in fact a "currency" with a fixed supply is indeed not a currency but an asset. Currencies must slowly and predictably inflate to be useful, otherwise people don't spend today since the "currency" is worth more tomorrow.
Currencies facilitate commerce and should grow in supply with the economy. They should not be a speculative tool to benefit first movers.
tl;dr: inflation is necessary, deflation is bad, hyperinflation is the worst.
It's almost entirely down to the effects of unprecedented quantitative easing over the past decade or so.
When you print more money than you've ever printed before, it's only natural that the prices of things will rise as more people can afford to buy things. And even if more people can't afford to buy things, the money goes somewhere so it probably means the rich people get richer. And they'll go out and buy things they know poorer people will always need i.e. property.
It all works well until property gets so expensive that the only people that can afford to buy it are other wealthy people. Eventually someone gets forced in to selling at a loss and the whole house of cards collapses as the wealthy who can afford to buy more property sit on the sidelines and wait / hope for a catastrophic collapse.
Rinse, wash, repeat and yet we still question why the rich get richer... the only way to prevent property getting out of control is by regulating it so that it remains affordable and that speculators are discouraged from entering the market and encouraged to sell. But that won't happen either because most politicians own large amounts of property and they've a vested interest in seeing the price of property rise...
An equivalent way of thinking of it is that house prices are fixed by mortgages to rents - when mortgage payments are lower than rents, people buy houses and rent them out, pushing house prices up. Falling mortgage interest rates push mortgage payments lower at the same principle amount, which convinces people to buy and push up housing prices.
It's also generally not allowed to buy flats to rent them out which limits speculation in that market.
Much of the cost of rising housing is because of the increasing scarcity of land in desired locations (read major cities such as NYC, SF, Boston, London, Paris, ...) though "rent-seeking" which in this case is politically induced scarcity through zoning density restrictions, overuse of historic landmark status, and overregulation. The "rent-seeking" causes market inefficiencies or "market-failure." Healthy economies rely on wealth creation. Rent-seeking is a form of robbing Peter to pay Paul without creating wealth.
Happily, the solution costs no money at all. It simply entails ridding the legislation that caused the rent-seeking, the artificial scarcity of land. For example, in Japan, the federal government overrides local laws that limit zoning densities.
See Economists Edward Glaeser and Tim Harford (in his case, Greenbelting) for more details.
- A widespread mindset of people living in Stockholm has been that the housing prices will continue upwards because they have been doing so for 15+ years. A change to this mindset was starting to be noticed in the spring of 2017 and recently rapidly changed. 66% believed in rising prices in September 2017 compared to 43% in October[1].
- The time it takes to sell an apartment in Stockholm is up from ~3-4 days to weeks.
- It was previously possible to earn $10k - $50k by flipping a newly produced apartment. This was done by commiting to buy the apartment when it is finished by paying a deposit and then sell it when you get the keys. This opportunity ceased to exist around the end of 2016.
- Trusted sources such as Svensk Mäklarstatistik[2] and Valueguard[3] indicate that the fall in prices is around 3% - 5% this far. Untrusted sources[4] indicate that the fall is above 10%. Trusted sources uses formulas to give better stability to their indexes, but they also react slower than the untrusted sources due to that. I suspect that untrusted sources also use data points that are removed even though they failed to close the deal.
- The difference between renting and cost of ownership is still huge, would estimate a 400% increase in interest rate would make the costs about even.
- About 56 250 (24.96% of total) people aged 20 - 27 in Stockholm are still living with their parents even though they would like to move to their own place. In the central parts of the city this share is above 60%. [5]
- Rising prices, difference between renting and cost of ownership and flipping of newly produced apartments has attracted a lot of people that invest/speculate in buying and renting out. They have probably not realized until now when the prices start to dip that they are sitting with a huge leverage on their investment/speculation and what risk that comes with. So they are probably the first ones to panic.
- Production of new apartments has exploded in Sweden the last 2 years, most of these are quite expensive which might have saturated the higher end of the market.
- The increase of prices has acted as jet fuel for different industries since a lot of people feel rich, increase their mortgage and consume the money. Companies that work with home makeover will be the first to get hit, but new car sales will also dip.
With this said I cannot be other than uncertain about the direction of the market, there are still a lot of things that indicate that the prices will increase (cost of ownership vs rent, demand for housing, interest rate prognosis). But if the market keep going down I am quite certain that it will drag a lot of other stuff with it and become a self fulfilling prophecy.
Edit: Sorry for a lot of typos and language that could be improved, just did a brain dump in a rush.
[1] http://www.privataaffarer.se/bostad/seb-hushallens-boprisfor...
[2] https://www.maklarstatistik.se/omrade/riket/stockholms-lan/s...
[3] http://www.valueguard.se/stockholmbr
[4] https://husmask.se/kommun/stockholm/
[5] https://www.svd.se/en-tredjedel-av-stockholms-unga-tvingas-b...
https://2.bp.blogspot.com/-tonEuOE0IXE/WfpBpIzy8rI/AAAAAAAAF...
The interesting lines are apartment prices (yellow/orange) and salary (green). Note that the small bump in the early 90s was the last economic crisis...