I agree that a necessity such as housing being treated as an investment is insane. I usually bring this up to people whenever housing is discussed.
Most people I talk to are more concerned with eventually renting out their homes they bought decades ago and using that to buy another house, though. I'm really inclined to believe renting homes shouldn't be legal, perhaps, because eventually you wind up with a situation where no one even has the option of buying their own house.
By renting a home, I can let somebody else tie up a million dollars in capital and all I have to pay them is a few thousand a month. This seems like a great deal for me, why do you want to ban me from engaging in this transaction?
Having the option to rent is a gateway to having the government own all property? You're going to have to explain your logic a bit, because so far your position sounds ridiculously wrong.
So the claim is that verisimilitude's suggestion, that renting would be illegal, is a gateway the government owning all property and private ownership being illegal? I don't see how it's reasonable to suppose that would be the result. I also don't see how MagicPropmaker thinks that's what verisimilitude was thinking.
Am I missing something?
[Edit: I mean, I can see that renting being illegal is a restriction on use of property. That's a long distance from private property itself being illegal, though, and I don't see any reason to suppose that would be the end result - either the desired end result or the actual one.]
Housing is such a big problem. And a collective thing.
The key to solving it is to make sure everyone is focused on affordable housing.
Once you got a impactful part of society focused on something else, for example extracting rent - you've lost.
That's why Germany managed to create a working, affordable housing system after ww2.
And that's why Israel, in it's early years, managed to do the same, and offer affordable housing to everyone,while working under dire economic situation.
I think the solution is clear. Legalize tall buildings. Requiring someone to own or rent thousands of square feet of land to get access to hundreds of square feet of housing is guaranteed to lead to shortages.
correct me if I'm wrong but I heard it's very difficult to find any short term transitory housing in Germany, I had heard that short leases / rentals were 2 year terms. This makes it a lot harder to move into an area and decide where you want to live which in turn makes mobility more difficult.
In steeply appreciating markets, those people didn't tie up a million dollars. Just five or so years ago, a million dollar house sold for $500,000 (in some markets).
A steeply appreciating market is either an indication of a bubble or that the previous valuation of assets was highly inaccurate. They're market inefficiencies that, sure, people will try and arbitrage, but they're not the norm... except that the housing market is really weird due to the incredible illiquidity and non-divisibility of assets.
So I pay a few thousand a month; it's cheaper than the few thousand the owner paid back when that was the price (it's only a notional "million" in capital because they bought it decades ago for a few low thousands.)
In exchange for my illusory benefit of paying "only" a few thousand every month, I get:
- To keep the remaining 30% of my salary (as ever rising rents creep past 70% of take-home).
- Enjoy the 10% yearly rent raise.
- No security, can be kicked out any time (it happens every few years, sometimes a week before Christmas).
- No permission to paint anything.
- Forbidden to have pets of any kind. Could move, but can't find anywhere within commuting distance that allows pets and is in the same price bracket.
- Can't change anything structural, like a window for a nicer one.
- Can't change the locks to something I'd like.
- Can't try out the fancy new home control tech (Nest etc)
- Can't fit solar panels, even if subsidised by a power company, as the offer is only to homeowners.
- Forbidden to "run a business" from home (it says in the contract), and forbidden to register a company at my home address.
- No guests allowed to stay over longer than X days.
- When I hit retirement age and soon after that run out of money, I'll be evicted and homeless, because pension isn't enough to pay the rent, and rent is rising faster than inflation anyway. State benefits exist for pensioners, but the housing component intended to cover rent is widely known to be less than real rents.
So fair enough, I avoid buying somewhere with a million in capital.
Instead I spend more than a million in rent over a working lifetime. Sure would have been nice to live in a stable home during it, to enjoy the freedom to do what I want in the home, and to stay there at the end.
I personally don't live in SV and don't expect to.
My experiences are in various places, all outside the US, and some of them in "ordinary" towns that don't have unusually high prices.
Besides, where I am, renting is often more expensive than buying, at current mortgage rates. (It was the other way around when I looked into it about 17 years ago).
House prices are going up for buying and renting in tandem, with some lag either way depending on area. Do renters get a better deal as a result of those rising prices? I don't think so.
Why not buy then, you say? The gatekeeper for most people is limited access to mortgages, not the cost, because perversely they pay more in rent than they would on a mortgage for the same place, and to rub salt in the wound, the money they pay in rent consistently for years is ignored for the purpose of assessing their creditworthiness and affordability.
Not that opening that gate would help for long, because prices would adjust upwards if more people obtained access to mortgages, but it is still perverse when we describe buying as an unreasonable aspiration in an area, when people are paying more in rent than the cost of buying.
this all depends on the countrys laws. in germany you can't be evicted even if you fail to pay your rent. the landlord has to go through a lot of effort before they can kick you out.
also, the landlord has NO right to enter the property unless there is an emergency, and even then they may have to break the lock to do it because the lock may be changed, and the landlord may not have any keys.
we also did replace windows in one place we lived, and completely rewired the electricity (which included putting new pipes into the walls to hold the wires). it was an old building, and the change was made in consultation with the landlord, but there is no reason it can't be done.
apart from that any change that doesn't change the structure and stability of the house is possible, and any change that an easily be reversed in most cases doesn't even need permission of the landlord.
in another apartment we added a hardwood floor on top of the floor that was there. a sheet of foam and the hardwood on top. for the first room we paid a contractor, for the others we did it ourselves.
if my pension is not enough the government will chip in with housing allowance to make sure i can pay my rent. at worst they will ask me to move into a smaller home if i happen to occupy a place large enough for all my kids who have long moved out and no longer need the space.
i won't be living on the street and i enjoy the freedom to move whenever i like without being tied to a particular location.
also, being a landlord and renting out your property in germany is so onerous that it's not worth it unless you are doing it as a full time business.
that adds a further point in favor of renting because you can't just buy a property and rent it out without putting a major effort into maintenance and paying for upkeep.
finally, as long as you own property you generally don't qualify for financial support, should you ever need it
If nobody rented their house, wouldnt that reduce the supply of inexpensive housing? Now you are left with renting from mostly apartment buildings, and rents will probably go up due to the shorter supply.
Probably the greatest lie of the boomer generation was the presumption that quarter acre single family stick homes were ever going to be, in the long run, "inexpensive".
The externalities have come back to bite society at large in numerous forms. The unmanageable maintenance debt on the infrastructure to support them. The dependence on private enterprise storefronts to supply developments that can close up shop at any point and leave whole regions without access to a proper grocery store. The ongoing maintenance cost upkeeping all the land and structures. The time lost commuting around areas of extraordinarily low population density. The structural macroeconomic expenses in building supply chains to support such a spread out population. The social isolation and resulting depression that plagues the society as people silo themselves off behind their picket fences.
The broader trend must be towards density. That doesn't mean to compromise privacy, or even necessarily individual usable space - but it does mean a move away from stick houses with 4 lanes in between towards 4+ stories with bus and train access.
Why a a dichotomy between a decent house, and a 'stack em high' mindset?
Terraced housing as seen all over Europe could house single families without issue. London is full of these things.
100sqm is really quite a decently sized home with gardens front and back. That's already a 10x density improvement.
Not everyone wants to live in an apartment surrounded by other people on all sides with no control over the place they live in (because it's all outsourced to a "management company" e.g. nonsense bureaucracy).
As far as I can tell all you're going to do by building tons of flats is entrench some sort of class system. Outside of elite city center locations only proles will be living in apartments.
100 m^2 is 1,076 ft^2. You're right that it's not large by American standards, but it's also not that small. And if you got a substantially shorter commute out of it, it might appeal to a lot of people.
Where do you claim there are favorable conditions? As far as I am aware the homeless are everywhere; some places are simply impossible to live without shelter due to exposure.
Housing affordability and degree of government involvement are both on a spectrum; you don't need extremes to see if there is a relationship or which way it runs.
Affordable housing is code for unaffordable housing. Otherwise it'd just be housing. You're very correct it's on a spectrum—we're between being entirely homeless and entirely housed. Only one end of that spectrum is acceptable. Housing should be free to use (obviously not free to build and maintain). Everyone needs it, and we all have incentive to reduce costs—except landlords.
Right, so the market is what makes housing unaffordable. Making housing a guaranteed human right will make it entirely affordable—at least on the end of using it. Housing is entirely a cost that should be amortized over those able to afford and/or build it.
In socialist countries. In the Soviet Union, rent was 2% of take home pay. Many of these countries started out poor, so the housing quality may have been commeasurate with the development of the country. In the US, as a material issue, we could easily provide decent affordable housing to everyone by destroying the market and having the public march in and build.
One system that is being tried in some region in China is you buy your house from the government and sell it back. This keeps things democratic and market free. Landlords should be cast into the dustbin of history.
We have, I believe, about 3x the empty units as we have homeless people in this country. Sure there are distribution issues, but it’s a matter of political will.
Political will to redistribute the people? You must know that that's how it worked/works in socialist countries. You still need a permit in China to move to another city, AFAIK.
So long as the only option to sell is to the government this could be a short term solution to bring the market rate down, especially if we can modify eminent domain to reimburse well below market rate.
Or how about just not steal stuff from people and have the government pay market rate, using taxes?
As long as we are taking stuff from people, what makes the most sense is to so it equally through taxes, and compensate people fairly by purchasing houses.
Or even better, the government could pay money to build more houses.
> Housing doesn’t have to be a commodity at all. It can easily be an unconditional human right.
An unconditional human right... where? Does everyone have a right to housing in the uber popular San Francisco? Does everyone have a right to beachfront property in Hawaii? Or if you don't have a house are you provided one in North Dakota?
More people want to live in San Francisco than there are houses. There's going to be winners and losers. I would love to radically increase the number of immigrants we let into the country. Where do they have a right to housing? If that housing doesn't exist who is obligated to build it to give away?
Well the answer is to build more housing, and companies should start elsewhere if there isn’t the housing or talent in the area. Maybe I could move out of SF then...
We have these sorts of discussion for any positive right. If people have a right to food, what kind of food? If people have a right to medical care, what kind and how much? If people have a right to education, what does that mean in practice?
We also have similar discussions around many negative rights. E.g., in the US 4th Amendment rights are subject to all sorts of practical limitations.
That rights are complicated to implement doesn't mean that they shoudn't be rights.
Furthermore I hypothesize people would be motivated by bad conditions to either collectively invest in better housing or to move to where there is housing. This just removes wealth from that equation.
I agree with the notion that every human being should have a fundamental right to shelter. Maybe not in the location of their choosing, but somewhere on this d* planet there really ought to be a place where they can be.
The solution is, to give a plot of land to every human being that turns 18. there's enough land to do this. In most cases they wont want to live exactly in that spot. but, they can sell it or rent it out and use that money to move somewhere else. That's right folks, this is one of those situations where we can actually create wealth out of thin air, just by using up all that land that's been locked up for so long.
Electoralism, ideally. Traditionally, removing landlords has been very violent, and I would like to avoid that. The US guarantees market value for eminent domain, which is a sweet deal compared to, say, what’s happening in Berlin right now.
In fact, I think it would make more sense to say, "As a practical matter, housing could only be made available as an unconditional human right if there is [at least a subset of all] housing which IS a commodity."
In strictest terms, real estate can never be a commodity because it is all unique. Commodities have to have "full or substantial fungibility", which can't exist when housing occupies a fixed physical location, which is unique. (So perhaps some housing could be a "commodity" even in a strict sense if it could be moved around. . . Think mobile homes.)
And you still need a down payment. Are you suggesting that everyone should either own a home or be homeless? What about college students? Should they also buy houses just for the amount of times they are in college?
If I move for a job, should I immediately buy a house? On the other hand what if I know I don’t plan to be in an area for long? Should I buy a house for a year or two? What happens when I am ready to move and can’t find a seller?
Not if you take property off the market when it goes down.
>"The property developer behind the conversion of central London’s Centre Point office skyscraper into multimillion-pound luxury apartments has given up trying to sell the flats after receiving too many “detached from reality” lowball offers.
>Mike Hussey, chief executive of the developer Almacantar, said the company had decided to halt formal sales of the flats in the 1960s brutalist tower, now called Centre Point Residences, rather than slash prices.
>The company said concerns about Brexit and possible tax increases on overseas investors were encouraging potential buyers to make offers well below the asking price.
The reception at the redeveloped Centre Point building in London’s West End.
>The decision to halt sales means about half of the tower’s 82 flats, which range from £1.8m for a small one-bedroom apartment to £55m for the two-storey five-bedroom penthouse, will now lie empty, adding to a glut of unsold ultra-luxury property across London."
Oh, there's more. Centre Point has been a continual shitshow since inception. It is a case study in the kind of people who mistake their own snobbery for business acumen;
>"The building is 117 m (385 ft) high, has 34 floors and 27,180 m2 (292,563 sq ft) of floor space. Constructed from 1963 to 1966, it was one of the first skyscrapers in London and as of 2009 is the city's joint 27th tallest building. It stood empty from its completion until 1975, and was briefly occupied by housing activists in 1974. Since 1995 it has been a Grade II listed building. In 2015 it was converted from office space to luxury flats."
In most cases, a home isn't going to be rented forever. At some point properties get liquidated by the owner. If it's an individual, most likely at retirement or when they don't feel like managing the properties anymore. For a company, it's when it no longer profitable or when the company goes under.
My point is that properties, even rental houses, turn over at some point and there is typically enough turnover that it's probably not going to tie up affect the long term percentage of homes for sale.
The population is getting older. Right now those homes are being rented out, inevitably raising prices since some portion of the rent is profit. This is likely not a long term situation, making investing in houses seem very risky indeed. It's probably priced in though.
Renting or owning doesn't matter. The house is occupied. Other people have to live somewhere else.
As I've written elsewhere, a housing market has much in common with a traffic jam or a crowded bus. Everyone takes up space, so everyone is part of the problem, based on how much space they take up. The only way to fix it is to make more space or convince people to go elsewhere.
I'm really inclined to believe renting homes shouldn't be legal, perhaps, because eventually you wind up with a situation where no one even has the option of buying their own house.
I disagree. Home renting has all sorts of societal benefits and allows folks to be mobile when needed. Perhaps you are just going to be in the area for a couple of years, yet would like to have space for your dog to run, for example. Or need to divide your large, old house up so you don't have to move. It also means young folks can move out of the house and that everyone gets the choice of sharing walls with a neighbor.
Money and income is a much bigger indicator of whether or not someone can buy a house. If slews of people cannot save up money for a down payment, these folks cannot do such a thing. Bad zoning laws and other such things naturally influence it as well.
Yes it can. It would be a better investment for me to buy a cheap house then to rent an apartment at the same mortgage/rent even if the house never increased in value over time.
Start a multi-turn game at any point. Some players start with varying amounts of money and some players start with or choose to buy property on the first turn.
On subsequent turns, the property has either gone up by more than the average player is able to save (making it less affordable to those players who don't own it, while simultaneously making it a good investment for those who do) or it has not.
If it's to remain a good investment (as we've preached, observed, and generally sought to support), housing affordability is a seemingly inevitable casualty of it. Some would say "the solution is to build much more housing" (which I agree with in general). Those policies, in general, make housing more affordable (the explicit intent), which naturally makes existing housing a worse investment than if that additional housing was not built.
"good" is relative. the longterm rate of return on investment is 7% so a stable property portfolio returning 5% or less reliably can counter-balance higher risk exposure above 15%
remember that the rate of return in property investment has two components: the rent, offsets against tax for the maintenance of costs, and the capital gain. the show isn't over until the deal is done and like gambling you have to know when to hold 'em and know when to fold them into somebody else's property portfolio.
also, social housing is "good" for reasons which can go to longer term investment outcome. What if holding cheap housing stock in your portfolio also prevents competition setting up closer to your other valuable investment?
From the position of affordability housing should not appreciate faster than the income profile of the population. Since median income increased minimally (inflation adjusted) in the past 50 years one would expect that "affordable" housing should not increase beyond the rate of inflation. As such, 5% is far greater appreciation rate than what is sustainable (2-3% being more in line with income).
Yes. So rent had to be regulated and controlled. The ROI is across rent as income and capital gain. Capital gain would make up a lot of the long-term ROI of owning property. Even cooperative housing and co-owner models have to recognize this.
A lot of people buy housing with the idea that the house they live in is somehow an investment. This is also what was discussed in the article. Long term, this is not sustainable. If you rent out property, then it makes sense you can make more than inflation, but if you live in the house, you should have the same ROI as income growth in your area.
Yes. I think believing your home is an investment beyond providing your home is a huge mistake. But, its a common huge mistake.
The point I was trying to head to, is that rent doesn't have to rise, simply because people think rental investment has to return some arbitrary ROI for the capital invested in it. Lots of forms of investment exist, some of which return less than others, and we have a mix of investments for a mix of reasons.
In Brisbane (where I live, and co-own a house I live in which I do not regard as an investment in that sense), rents fell last year due to oversupply. Prices fell too, but the two were somewhat de-coupled. Supply of affordable housing fell too. Some people think there is a nexus, I think the fall in affordable housing is down to lack of rent controls, long term tenancies, and state and federal convergeance on housing policy.
If housing prices outpace wage growth than either housing costs will become a larger and larger portion of people's budget or housing quality will continue to become poorer and poorer.
(Unlikely third option: Wages begin to represent a smaller portion of total income)
5% annual return is significantly higher than wage growth.
Yes. I'm well paid but have been held to CPI for years. I absolutely agree that an ongoing rental price rise has been hugely toxic to affordable housing.
Amend Prop 13 to allow tax increase of up to 10% per year on rental properties. Houses will flood the resale market as owners try to avoid the taxes, driving down housing prices. Prop 13 wasn’t intended as a giveaway to rent seekers, and yet it’s made it crazy for anyone to sell if they can rent. That needs to be reversed.
Sure, if rentals becomes more scarce some will be forced to pay more and some will be driven out of the state. What other option is there? They can suddenly afford a house?
Housing is treated as a good investment because it is scarce. Stuff that's affordable is usually not scarce. Hence you can't have both something that's scarce and affordable.
That aside, the reason why people have been using housing as an investment vehicle is because there really aren't that many good investment opportunities over the long term. You have stuff like gold and stocks, but they have their own problems. Housing has the additional utility of the ability to live in it.
I suspect that the reason housing/real estate wouldn't be considered such a great investment if there were a better store of value.
In a lot of America, the scarcity is kind of artificial or unstable though, so it's still a risky investment. Look at California City - land there is anything but scarce. Or Detroit where the seemingly indestructible world-leading industry it depended on for house value shifted out from under it. Or the concepts of white flight and gentrification where neighborhoods can be tipped one way or the other in a self-perpetuating avalanche effect that doesn't necessarily correspond to any fundamental change in their utility. What's scarce isn't property in general, but property near rich people. If the rich people move away, so do the property values. I'd say property investors are chasing after rich people extracting value out of their desire to congregate together.
Housing investment doesn't really have the ability to live in it. If you don't rent out your house, you're losing investment returns. Plenty of property investors depend on rents, not just price rises for their profit. As long as you live in a house in the free market, you're paying for that privilege, whether you own it or not. What it does provide over renting is you can't be kicked out so easily. I think that could be the main reason families prefer to buy houses instead of rent.
Yes, but to be more precise, what's scarce is property near jobs. Jobs are ultimately what determine who moves where. That's critical for understanding the problem.
CA voters thought they could prevent people from coming here by reducing housing and boy were they ever wrong. It's too bad this lesson took 50 years to play out and awareness is only now slowly starting to arise.
> gentrification where neighborhoods can be tipped one way or the other in a self-perpetuating avalanche effect that doesn't necessarily correspond to any fundamental change in their utility
No fundamental change in their utility? Gentrification goes hand in hand with reduced crime rates, better education, increase in available public spaces/restaurants/bars. It's a feedback loop based off of people's tolerances. In one common model, for example, it begins with more desperate braver artists starting to congregate in an area because it's what they can afford. Their presence alone will typically change the dynamics of an area to a certain degree that is enough to create a tolerable pocket for the more adventurous that are better off (think software engineers opting to live in Mission/Oakland 5-10 years ago for the cultural element of the neighborhood). More tax money starts coming in, policing goes up and is partly responsible for crime going down, which also goes down due to demographic shift to wealthier people who are less likely to feel as though they must engage in crime. The children of these people can create a large enough community of kids that are culturally primed to take education seriously that the critical mass of a classroom can shift from boisterous and unruly to more manageable, further stabilizing the education situation for those that come after.
The point is, very little of this is just some arbitrary decision with no impact on the function of neighborhoods. Over the course of gentrification, neighborhoods change dramatically in ways other than demographic shift.
Probably the best and least emotionally-charged analysis of gentrification I’ve ever read. Thanks for writing this comment. Always suspected a lot of these things to be true.
The value changes from gentrification or owner flight (see' most mid-century US cities) come from the community rather than any significant owner-initiated changes to the propety itself.
You do nothing, rich people move in around you, value increases.
You do nothing, rich people move out around you, value decreases.
The direct utility of the property is unchanged. The owner has made, net, an insignificant contribution to the surrounding community. And yet value accrues (or diminishes) all the same.
Housing and real estate internalise the net community utility changes. The pathological cases are where the owners or investors are outside the community and strip-mine the resulting wealth.
Land value taxes both dampen wild valuation swings and internalise value gains to the community to provide infrastructure, institutions, and services.
Unfortunately, it's hard to find a way to allocate land without using the market. Yes it's unfair that rich people have to pay more to live where they want than poor people who are happy living near other poor people, but how else can you allocate land that gives the useful land to the people who'll get the most value from it? Central planning doesn't get it right, a lottery would mean people can't group themselves together so they would lose that important value (eg programmers in Silicon Valley).
Land value tax would take money from people who don't need those community services and give it to different people who happen to live nearby. That's not really fair. It's still a kind of rent seeking that also happens to give the rent to charity but not back to the original payers in proportion to what they paid. But it does sound more reasonable than the luck of the draw that property owners get.
Long-term leases and LVT seem among the better solutions.
It's the assetification of an essential economic input that seems to be the root of the problem. Bernhard J. Stern commented on this in the 1930s in several works I've submitted (to no traction) in recent weeks.
Great description. It’s also interesting to note that the description of gentrification given is indistinguishable from colonization, except that the colonizing is internal to a nation.
Not at all. Colonization used violence to take over people's land and enforce the incoming people's laws on the existing population. Peacefully buying it with no duress is a perfectly acceptable kind of colonization, but that's not the word we normally use. We call that "immigration", or in this case, internal migration.
It's naive to think that violence and laws that are onerous or disadvantageous to current residents are not employed in the process of gentrification. Suppose, for example, that you close a grocery store that serves thousands of lower-income, often low-mobility, residents, in preparation for building luxury apartments. Or you increase "broken windows" arrests in such a away that existing residents are disproportionately affected. How is that not duress? You have introduced conditions for continued residence that threaten life, comfort, and freedom.
You misunderstood me. You've described the same self-perpetuating phenomenon that I was referring to. By "fundamental", I meant something stable that isn't a consequence of gentrification or white-flight. For example, being near a harbor, on flat land, good ocean views, low risk of flooding, or for smaller areas with weak influence on their environment, near a big city, near convenient transport/roads, etc.
Without fundamentals like that, then it is arbitrary decision which neighborhoods have high prices and which have low. It becomes an accident of recent history that could flip the other way over a period of decades and ruin people's investments.
Yes. A given neighborhood might change, but a common, if not fundamental, characteristic of gentrification is that the associated demographic shifts constitute a commensurate shift in the location of community-related amenities, e.g., good schools, lower crime, public and private investment in public spaces. In other words, gentrification doesn't create more affluent communities, it simply shifts them, to places ready for new development as older communities become less desirable ultimately as a simple function of their age.
There is also the necessity of addressing the role of race and class anxiety in how, why, and when we invest in communities.
Housing, though, is the only place where you can get leverage with literally 0% down.
Real Estate is also MUCH less volatile than the stock market, which (I think) makes it seem less risky (and maybe factually is, but I don't know for sure).
People should also understand that a 'good investment' and a 'wealth building tool' are not necessarily the same thing. Consider a world in which housing only keeps up with inflation, and few people ever raid their home equity to buy stuff (the way it was traditionally). The house then truly is a good wealth-building tool - a savings account that most people never touch, that pays interest in the form of rent savings, and that can be liquidated in old age to use the funds. This view of things is not at odds with affordable housing, and I think is more in line with the traditional view of housing as a wealth building tool. Traditionally people didn't expect to strike it rich by buying a house.
That view does have some assumptions baked in, though.
For example, that term, "rent savings," is an assumption in and of itself. In the real estate market I live in, a house can easily offer negative rent savings. Based on the figures I've seen in my area, I'd estimate that the point at which my hypothetical lifetime expenditure on owning a house drops below my hypothetical lifetime expenditure on renting would come a decade or so after the point at which I can expect to die.
That said, I don't want to imply that buying a house is a bad idea, even in my market. Lately I've been getting more interested in doing it, myself. But, at least to me, this is right in line with how the clothing and food that I buy have also changed over the past couple decades: The more money I have, the more I can afford to spend it on having nice things.
"I'd estimate that the point at which my hypothetical lifetime expenditure on owning a house drops below my hypothetical lifetime expenditure on renting would come a decade or so after the point at which I can expect to die."
Can you share some of the numbers you used to get to that conclusion? I've done similar estimates in my (high cost-of-living) city, and even with pretty conservative estimates of property value growth the payoff is much sooner. Yes, the mortgage payments are more than rent for a comparable home, but the interest (plus estimated taxes, maintenance, etc) is somewhat less than rent.
I'd guess one of the following is true:
* you are assuming stock market returns will significantly outstrip growth in your housing market, even considering leverage
* you don't have access to tax breaks on mortgage payments
* you are much older than 30
* you live in an area where home prices are wildly inflated beyond what rents would predict
I don't have my notes or the exact numbers anymore. It sounds like we might have been doing a very different calculation. For me, I didn't consider property value growth at all. That all just sort of went into a bucket labeled, "Equity I have invested in some asset; regardless of whether it went into a house or into T-bills or ICOs, for my purposes none of it counts as money I spent."
From there I just looked at the money I would never see again - interest, taxes, maintenance, fees, assessments (if a condo), etc.
> there really aren't that many good investment opportunities over the long term
What’s wrong with the market as a long (emphasis) term investment vehicle? ~7% average yearly returns for the past 150 years is pretty solid. Yea you have to insulate yourself from market fluctuations, but that’s also true of the housing market (see the collapse of the US housing market 10 years ago). Barring a complete collapse of the US economic system, in which case Americans will have other things to worry about, how is housing superior than some boring-old Vanguard market tracking ETFs/Mutual Funds? Better returns?
To avoid cherry-picking, if we go out to 20 years housing has an average annual return of 4%, and the S&P 500 is at 6%. Go out 30 years and housing hits 5% while the S&P is at 10%.
PS, I really appreciate the Case-Schiller index used above for housing prices. It's methodology specifically targets the change in value of a house, instead of capturing overall price increases caused by house flipping, the expanding size of houses over time, etc.
I think that looking at avg house appreciation is probably not a very good way to measure things, since there are large swaths of empty land and then a few hot spots. What's the average return of urban real estate? The average return of urban real estate by state? Now those numbers, would probably be interesting.
There are separate Case-Shiller Indexes for 20 large metro areas, as well as composite indexes for the 10 or 20 largest metro areas.
For the 10 largest metro areas (https://fred.stlouisfed.org/series/SPCS10RSA), the annual returns are the following. Interesting to note that nationally home values are over their 2006 peak values, but that in the 10 largest metro areas home values are only about even with the previous peak.
Investment returns on German, Japanese, Russian, Polish, Zimbabwean, Austro-Hungarian stock exchanges since 1910 look pretty awful. More generally you’re assuming away political risk. Once your investments go to zero you’re done.
As an investment housing does much better when compared to equities than we thought until recently and it’s less risky. If the Communists come you’re screwed no matter what but if there’s regime change there’s a decent chance you can keep real property, especially if it’s local.
> The authors of the aforementioned study — Òscar Jordà, Moritz Schularick and Alan M. Taylor — have constructed a new database for the U.S. and 15 other advanced economies, ranging from 1870 through the present. Their striking finding is that housing returns are about equal to equity returns, and furthermore housing as an investment is significantly less risky than equities.
> In their full sample, equities average a 6.7 percent return per annum, and housing 6.9 percent. For the U.S. alone, equities return 8.5 percent and housing 6.1 percent, the latter figure being lower but still quite respectable. The standard deviation of housing returns, one measure of risk, is less than half of that for equities, whether for the cross-country data or for the U.S. alone. Another measure of risk, the covariance of housing returns with private consumption levels, also shows real estate to be a safer investment than equities, again on average.
>Stuff that's affordable is usually not scarce. Hence you can't have both something that's scarce and affordable.
A gram of dirt from my backyard is completely unique from any other gram (at a molecular level) and is therefore incredibly scarce - if you want exactly THAT gram and no other. I’d also sell it for almost nothing, so it’s affordable.
If you rent for long enough, you'll pay for a new roof eventually because buildings eventually need new roofs, and rental property repairs are funded from rent payments.
> Housing is treated as a good investment because it is scarce.
Here in Norway there's also some significant tax benefits which factors into it. For one the tax value of your primary home is one quarter the market value (higher for secondary homes). So you pay a lot less tax having your money tied up in your home than in the bank.
In addition you can deduct quite a lot based on the interest you pay on your loan.
Together they make it quite attractive to own rather than rent a home.
People are always surprised when I tell them, in the long term housing can only increase an amount equivalent to inflation or wages. Anything more, simply isn't sustainable or even desirable (for society anyway). In fact, in the longer term, if we were making actual progress in creating shelter for humanity, then housing should increase a bit less than inflation and return negative real rate of return.
There's a fixed amount of "desirable" land, and a growing population competing over it. This means some combination of "up" and "out" is necessary - either we end up using less land per person (density), or new growth gets channeled into marginally desirable locations (sprawl).
I don't think this is true at all. Even the nature of "desirable" land has changed drastically over the last few hundred years. There's no reason to think that change won't continue to happen. Especially given the rise of internet, climate change, and the necessary decarbonization of our economy, what's "desirable", it's ridiculous to think where people want to live is fixed.
Just to reinforce this: for the vast majority of people who don’t live in the countryside, desirability is almost all about nearby human activities. Look at what makes a location desirable: good schools, good job prospects, retail, night life, transportation, etc. It should be pretty clear that this is definitely not fixed.
That's uhh, way less true than you think it is. There's some pretty important geographical considerations.
1. Cheap shipping via navigable rivers
2. Deep water ports
3. Not subject to periodic flooding
4. Flatness (not a huge deal, but it does make construction cheaper)
5. Soil suitability for construction (especially relevant is where the bedrock is, and what kind of soil lies atop it)
Granted, a lot of this is merely the reason why network effects got started where they did. But they are still highly relevant considerations that add completely natural value to land, regardless of what people would decide to do with it.
I would submit that the first two are effectively irrelevant today. I agree they were historically important, but today we have cheap shipping handled.
It's a sensible thought, but EMH argues that speculators would have already priced in that future expected value, again leading to a price rise in line with salaries/inflation.
The speculators have to use a discount rate higher than the risk-free rate, otherwise why would they be doing real estate speculation instead of earning risk-free interest?
Granted, the risk-free rate doesn't have to be above-inflation, but the real interest rate currently is positive in the US.
I find it incredible as well. The only way housing can increase above inflation without it being a bubble is if everything else is below inflation -- because housing is a big part of the inflation calculation. If inflation is 2% and you are "making" a 10-15% return on your house investment, something is very seriously wrong where you live. The piper will be paid. The problem is that you don't know when. If you are opportunistic you might be able to make some money off this inbalance, but it's certainly not a condition you should wish for if you actually want to live in that area long term.
Part of it is that some areas grow. Some cities are growing, others shrinking; different neighborhoods in different places. Some people I know have done a double or better on their property values over the past decade-and-a-half because it is now an upscale area. It can't happen nationwide, but even an economy which is stagnant over all is constantly in flux.
Of course, others I know have also lost substantial value at times.
Inflation is normally shorthand for "basket of goods" inflation, which notoriously /does not/ include housing costs. That's how we've had "low inflation" whilst having a bubble in housing and equity, because these forms of wealth are excluded. Which works out because you can have a mostly silent concentration of wealth without people screaming about this big indicator.
Places can become more or less desirable to live in - all this talk about matching inflation rates etc. is about the housing market as a whole - average. If you bought in a bad neighborhood and suddenly the neighborhood gets renovated and richer people start moving in - your property can increase in value multiple times over what you paid for it initially. If your area has excellent job offers and limited housing supply you will see housing prices increase because more people with more income will come to that area to work there. The problem happens when the local job market hits a slump and you assumed the demand increase will fuel the growth to cover your investments.
>housing can only increase an amount equivalent to inflation or wages
inflation or wages within the pool of people eligible and willing to buy said housing. So you get weird distortion when housing is bought up by folks not actually living in them (foreign ownership, and kind of speculative buying)
Housing prices can increase faster than wages/inflation, that just means that the share of wages spent on housing has to increase. This can continue until nobody has discretionary money left, since shelter, being an essential part of life, has very inelastic demand.
Every step of that is awful, of course, but nothing disallows it from happening. And indeed, if you compare trends in wages[1] and home prices[2] you'll see two lines that don't look like they know each other.
(I pulled the first two graphs I found, if someone wants to go get wages and home prices and index them by the same inflation metric that'd be awesome.)
Yes this is true and important, but you and the parent poster probably agree. "in the long term" i.e. asymptotically is constrained by "nobody hav[ing] discretionary money left", hence the OP's conclusion.
Now ROI and asymptotic analysis are both mathematical niceties the belie real world limitations, but that's how people talk.
Yes, but you can never spend more than 100% of your income as long as your income is your primary means of obtaining money. In fact, I think most people would have a hard time spending more than even 65% of their income on housing.
Now, I can imagine an exponentially distopian world where 4 families are forced to live in a single house. In such a world, housing prices could rise faster than wages/inflation for quite some time, but not forever. There's only a finite amount of space inside a house. And at some point, you will run out of cubic feet of space (if disease and pestillence doesn't kill you first). In the infinite long run, those prices will only be able to increase as much as wages as long as wages remain the primary source of money.
> People are always surprised when I tell them, in the long term housing can only increase an amount equivalent to inflation or wages
I don't think this is true at all. Prices can outstrip wages easily when there's a large influx of new inhabitants, either through a high birth rate or through migration. See London over the last decade for an example. It's less common to see this effect in entire countries because it would take a vast number of people, but I do think it could happen.
Prices can continue to rise if mortgages become cheaper to service: as we've seen over the last thirty years, declining interest rates and lengthening mortgage terms push up the price of houses.
Prices can also rise if there is sustained outside investment - for example wealthy people outside the country looking for somewhere safe to stash their money (see London again).
OF course, all of this is contingent on what exactly you mean by "the long term". But the UK has seen a sustained boom in property prices for a generation. That seems pretty long term to me.
The article is true if you limit the definition of “good investment” and “wealth-building” to mean rent appreciation. But if you take a broader definition of investment (as in a farmer invested in a tractor, or a contractor invested in a pickup truck, or a property owner invested in improvements, or a landlord invested in buying an underpriced property with an unusually high capitalization rate), then it is counterproductive. When people talk about housing as an investment around the country, how often are they referring to zero-sum rent increases, vs. how often are they referring to capital expenditures that expand the pie? And how do we get people to celebrate one type of investing (capitalism) instead of the other kind of investing (rentiers).
Perhaps by national governments preventing local governments from artificially restricting the supply of housing? Local governments will always want those restrictions because their local homeowner voters will want it.
At least one national government was founded on the basis that those powers not explicitly granted to the national government nor reserved for the people remain in control of the states which united to form it. (That's not to say that they've followed that doctrine, but I predict it would be a long Constitutional challenge for that country to settle that real property [generally immobile, of course] is part of "interstate commerce".)
That national government could however put a lot of pressure on the states and local governments by banning federally guaranteed housing loans in areas where zoning laws were not to their liking. This would have a temporary effect (while it was being battled out) of smashing the property values of the little guy homeowners (whose next buyer will likely be taking a federal-supported loan), while leaving the jumbo loan market relatively untouched, so it's a pretty nuclear option to try to accomplish in any kind of a rapid fashion.
It's bizarre to talk with someone who views a house as a good "investment" and who doesn't see the danger of 4:1 leverage that a "standard" mortgage involves.
These are the kinds of people who get wiped out in real estate declines.
This is really important. I’ve reached income stability to purchase a home, but a recession seems looming, and even the market seems like it’d be ok during a recession near me, I feel it’s far too risky. People can’t handle large numbers well. When everything is hundreds of thousands of dollars more than you’re used to thinking about, judgments lose their rationality. People get exposed to all kinds of risk and they don’t realize it.
Considering the shear magnitude of the housing problem, I'm a little disappointed we haven't seen more startups/VC money chasing this problem. After all, housing in the US is worth 30+ trillion dollar industry, and that's just the US.
This, like many other problems we are facing now, doesn't have a private sector solution. It is a failure of regulation and needs to be fixed by better government.
The only way to solve the problem is to build more housing, and the only way to do that is to change the zoning laws. A startup cannot do much about that.
The only way to change the zoning laws is to convince the majority of voters that they need to be changed. A nonprofit would have just as much luck doing this as a VC-backed startup.
Well, as the decades roll by more and more innovation will be constrained by regulation (not just housing, but also transportation, medical, etc). Instead of tech startups, I think we may need political startups the aim of which is to change public policy, regulations and educate voters.
Housing affordability is part of a larger demographic/economic problem - due to extended longevity and declining birth rates, many Western societies are facing a higher ratio of retirees to workers.
This is a problem because essentially all current consumption is created by current workers, and retirees aren't working. The transfer from workers to retirees happens in one of two ways: either through taxation ("Pay As You Go" systems like Social Security), or in exchange for transferring a financial claim from retirees to workers. So as the retiree ratio increases, a combination of several things have to happen to balance the flows of goods and services:
1. Retiree consumption decreases.
2. Worker productivity goes up.
3. Taxes go up.
4. Workers spend more of their money on financial claims.
If you look at what happens when the first three are relatively fixed, what does the last one happening look like? The only household budget items big enough to swing the needle are things like paying back student loan debt, their rent or mortgage (basically equivalent here), 401k contributions and other retirement investments, and to a lesser extent automobile financing and other consumer debt.
Note that this is more like an energy-based physics analysis than a force-based ones - it illustrates the overall tradeoffs that have to get made somewhere, but doesn't specify causal mechanisms. The actual causal path is something like the increase in saving pushing down interest rates, which makes financing desirable long-term goods (housing, education) more affordable on a monthly cash flow basis, which drives up prices until the market clears once more. In other words, college and housing became more expensive because the aging population needs to loan more money to the next generation to fund their retirement.
Also, the demographic that's currently getting squeezed the hardest by all this isn't Millennials. It's middle-aged folks stuck in the awful gap of having aging parents and maturing children. After all, "retiree consumption decreases" is a really bland euphemism for what goes on at the ground level - retirees not having enough food to eat or being unable to afford medical care. And on the other end, it's getting harder for children to afford to take the steps required to become independent, so this unfortunate demographic also has to set aside more housing and other resources for their children than before.
I really don't have good ideas for any sort of practical action to resolve these tensions. It's extraordinarily depressing. Personally, I'm expecting these trends to continue, and for this all to result in lower per-capita retiree consumption when I'm of the appropriate age, so I'm saving at a higher clip now to compensate. All this does is, though, is increase current retiree consumption and improve my rank-ordering in my retirement cohort; saving more doesn't fix the problems my cohort will end up facing.
This is only a problem if you take the view that a nation needs to (and is able to) save for its future in terms of a currency it issues.
Increased taxation is not required to support a growing population of retirees, increased production is.
Taxation is neither here nor there: it is required as an inflation control and to give value to the currency but the limits on spending at the federal level (where social security/pensions SHOULD reside instead of in privately held pension funds) are total spending this year, not tax receipts last year.
Tax receipts extinguish a liability that was created when the federal government spent the money into existence in the first place.
It's not true that current consumption is created by current workers. Retirees spend. What's true is that we have an incredibly inefficient means of funding their retirement through property as an asset class which sucks money out of the current working population via private financial institutions and hands it to retirees, some of whom support their kids in purchasing exorbitantly priced property, placing them in a very precarious financial position which lowers birth rates and further exacerbates the problem down the line.
Property isn't required as an asset class, it's just a convenient thing most people understand and governments worldwide have been able to conveniently take their hands off the wheel.
>This is only a problem if you take the view that a nation needs to (and is able to) save for its future in terms of a currency it issues.
If you track the real goods and services involved, nations are essentially incapable of saving for the future. Ignore the financial claims and just look at the goods involved - today's retirees are consuming the fruit of today's labor, essentially. They're not making a car in 1980 so that they can drive it around today.
>Increased taxation is not required to support a growing population of retirees, increased production is.
Increased productivity definitely helps (see point 2 above). It has to grow in excess of the rate of growth of the gross retiree consumption, though, or else you're just facing a less intense version of the prior dilemma.
>Taxation is neither here nor there: it is required as an inflation control
Saying you don't have to tax workers and can allow inflation to rise instead is solving the problem through point 1: reducing the consumption of retirees (by inflating away their purchasing power).
> It's not true that current consumption is created by current workers.
Apologies for saying things in an unclear way - I probably should have used "produced" instead of "created", because I was getting at the physical act of producing goods and services for consumption, rather than the desire and means to consume goods and services.
This article takes a really bad situation and paints homeownership in general with the same brush. That’s really not helpful.
Buying a home is generally a good idea even if the “asset” isn’t growing very rapidly.
There are a lot of socioeconomic benefits to ownership, which I won’t rehash - google is your friend there.
For the financial benefits, provided interest rates make sense and the buy vs rent trade-off is sane (in SF it may not be), a mortgage essentially acts as a forced savings account, while providing you with a place to live.
Say you take out a 30 year loan, in 10 years, roughly 19% of the principle have been paid down. Assuming the house roughly stays with inflation and you made ZERO real profit on it, you are still wealthier.
Now, if the market moved significantly down or you had major repairs, it could still be a crappy savings account. However, all else being equal, it’s generally better than the exactly equivalent rent.
In the end, everyone’s situation is different - do your research and talk to professional advisors (the ones that are fiduciaries and not just sales people).
This article completely ignores rent as the means for wealth-building with real estate. Instead it focuses on the price of real estate. Even when prices stop rising, real estate can keep generating income.
Really, the opposite of the headline is true: If prices go too high, real estate stops becoming a good investment, because you can get better ROI elsewhere.
Any safe housing is a good investment. It is the bottom of the hierarchy of needs. While you might not make a profit on the property, you should at least come out even when selling. It provides a way to save money (to eventually own the home) and you can use that money to slowly climb into another better house and so on.
It's a good investment because it reduces your lifetime housing cost to zero. You can achieve that in other ways or basically just not care about it. There was a women in NYC who paid $25 a month since 1950... she got a deal. It wasn't zero and she didn't make money but she got a deal.
Taxes, upkeep, etc., is easily going to run into the tens of thousands of dollars annually depending on where you live. It's very far from zero.
I don't get OP's argument at all. You're never going to get housing costs anywhere close to zero unless you're grifting off someone else or living on the street.
"Home prices look remarkably stable when corrected for inflation. Over the 100 years ending in 1990 — before the recent housing boom — real home prices rose only 0.2 percent a year, on average. The smallness of that increase seems best explained by rising productivity in construction, which offset increasing costs of land and labor."
Tens of thousands? I'll admit I don't know the property tax nationwide, but in my county in Virginia it's under 1% (5 minutes to downtown Richmond).
A modest $300k home would have a tax of only $3000. And your maintenance is not going to be anywhere close to 10s of thousands, and it's extremely unlikely you'll even average 10k a year over 5 plus years.
> It's a good investment because it reduces your lifetime housing cost to zero
I think that depends on your definition of good. If you put the money you would have used for your down payment and what you would save by renting vs owning towards the s&p500 by the end of the 30 years your investment's yearly growth is more than your yearly rent.
Of course, lowering your expenses is less risky than growing your investments while keeping expenses the same so it's not a completely objective decision.
The biggest problem with this strategy is that most people end up having lifestyle creep and do not save as much if they rent vs being forced to save via a mortgage.
The fundamental issue with housing is that you cannot rent a home. You can rent a house. These are really very different.
Retiring in a (privately) rented property is so impractical in the UK that I would feel fairly comfortable in calling it impossible.
I would be extremely surprised to hear of more than a few token examples in London who have been privately renting the same property for the past 20 years, for example.
From the council, with secure tenure and at below-market rents? Sure.
Performing anything other than basic improvements to a rented property is also fairly pointless, so your options are to live in a cookie-cutter new build, a run down conversion, or if you're lucky an ex-family home.
I tend to think that this effect causes prices to skyrocket far beyond what they normally would do because there's such an enormous gulf between renting and ownership far beyond the basic financial calculations.
Have you ever tried negotiating improvements with a landlord?
Often what happens is one of (a) they don't like it so you can't - "I think no, let's stick with white for the walls so the next tenants won't be put off".
Or (b) it's a disruptive improvement with no obvious benefit to them while you're there - "no, let's keep the useless and ugly blocked-up fireplace that nobody can use but takes up a wall, I agree it's in the way but the next tenant might like it". Or "I'm not going to invest in solar panels, this is a business not a charity, and it's you paying electricity bills not me".
Or (c) it's a genuine improvement they go for, which makes the property more valuable to rent. So they kick you out at the next renewal (no reason given), and raise the rent by 30% when they advertise next.
Sometimes you're lucky. Most times, you're lucky to have working facilities and no mould, be grateful scum etc. I once had a wall knocked down onto my bed by builders while I was away. When I got back there was rubble on my bed, big chunks of wall on the floor throughout the house, old plaster dust in the food in the kitchen, and my bike which was kept indoors was making a grinding noise. The landlord's representative turned up and said they saw nothing wrong with the place, what was I complaining about... It was cleaned up eventually, but the cockroaches remained. Did I mention my friend whose landlord-provided bathroom has no floor, only broken-up rough crumbly concrete, no hot water, mould throughout the house, no door on the bedroom, etc... And my other friend who moved out of one place and into another, only to be told after getting there that she would need to "stay away at the weekends because we use your room to 'have girls over'"; we had to move her stuff out and get her to safe, temporary accomodation very quickly. Then there was that time I was about to fly home for Christmas, and my landlord told me he had sold the flat and I had 2 weeks to find somewhere else, which of course was impossible.
Such landlords do not budge when it comes to improvements, unless they think it will make them money.
I personally live in a nice enough place these days. But honestly, in 30 years of renting about 15 different places, negotiating anything but negligable improvements has been unrealistic most of the time. Even with the nicest landlords, who can be very kind, negotiating is usually limited to minor, cosmetic things. I've known some exceptions, but it's rare.
Curiously, commercial landlords (business rentals) are different. They will do all sorts of major works as part of a deal with the tenant.
You're using a nonstandard definition of home here that most people don't use. A home is wherever you reside, be that a single family house or apartment building.
My family lives in a relatively modest house in mid sized city. A thought that went through my mind when considering the house as an "investment" is that it's a portion of our overall investment portfolio, and it functions as a hedge against a rise in the cost of housing. It's an assurance that except under extreme circumstances, we can always afford a place to live without massive disruption to our lives.
When your final mortgage payment occurs then the sense of freedom is immeasurable. This feeling is beyond dollars and cents so my recommendation is always to buy and pay down your mortgage ASAP.
That was our approach. Especially when rates are high, the imputed return on paying down a loan early can beat most other investments. That way, we can pour all our money into college tuition instead. ;-(
I've got the opposite "problem" right now -- I have a 30 year fixed mortgage at 3.375% (and since that house is rented out now I can deduct the paid interest against rental income). So basically there's no point whatsoever in paying it down early because there are much better uses of money.
If you owned you home free and clear then would you mortgage it to invest? That's what your statement suggests. I won't gamble with my primary residence as I don't want the risk or stress.
I'm not sure what things are like in America, but when I lived in the UK I paid off my mortgage earlier than expected by paying more than the minimum monthly mortgage payments.
Once the mortgage was paid off I received the deeds to the property, and in this case it was a bundle of documents about an inch thick recording the details of the property and every single person who'd owned it since it was built in 1893 or so.
The first few owners lived there for 10+ years each, then later you'd see a couple of long stretches where one family had it for 20 years, before it came to the 80s and it seemed to change hands every 1-3 years.
The initial sale price was around £100, and it gradually jumped up to when I bought it for £97,500 and then sold it for £162,000.
Fascinating reading, I wish I'd scanned the documents before I passed them back when I sold the place. The only time I've ever owned a property outright, though I'm getting close to having paid off a place here in Helsinki now so I'll be curious to see what I receive, if anything, when I've done so.
There are two types of houses: The house you live in, and the house you rent to others (and sometimes one house is a mix of the two). One of these is an investment, one is an expense. If you can get on board with that mindset, you'll be ok and probably make good investment choices with the rest of your capital.
Maybe you will get lucky, and you wont have a true expense due to appreciation, but it's not something you should bank on. Houses take a lot of money to maintain, time to manage and sometimes just your mental capacity...be careful where you spread your effort.
I'll just say it. Commodification of housing is stupid and is a sign of cultural sickness. We can do better.
If housing was protected from market forces, then increases in productivity would actually be realized instead of spending all the gains we make over time as a society back into ever-increasing housing prices.
Capitalism is supposed to make things cheaper over time. It does not with housing, because housing cannot be "produced" more efficiently and is in somewhat limited supply. Because housing is also necessary (unless you find living in a van sufficient), then I believe it makes sense for all apartments, condos, duplexes, etc that are 4br or less to be municipally-owned.
We should reap the rewards of our gains in productivity, not increase our spending to match our income.
EDIT: As an addendum, we should also start trying to stabilize our population. The Earth ain't gettin any bigger.
Housing only needs to be a decent investment because is soaks up so much capital and in doing so, opportunity cost.
If housing was significantly cheaper there would be no need for it to be a good investment because you could use the money you would have spent on more expensive housing and put it into an actual investment.
So much written about housing is just... Wrong. And I don't mean factually inaccurate. I mean based on false premises.
Owning your own home serves several purposes:
1. Security
2. Stability
3. As a hedge against inflation
4. As a hedge against market forces
That doesn't mean buying is always a good idea. Clearly or isn't. Like don't but in a town where 70% of the adults are employed by the local coal mine, for example.
Here's how I like to think about it: you are never out of the housing market. By not owning you have a large short position in real estate. Given that rents eventually track prices, if prices go down you benefit (you're rent will eventually go down and you didn't lose capital). If prices go up you lose. You missed a gain and your rent will go up.
Given that, you buy your house to remove risk of local changes to your detriment.
The idea from the headline should be viewed at a more macro level. A society that views housing as an investment means that we wind up adopting housing policies that lead to people being priced out (i.e. regulatory capture). This eventually means people winding up in subpar situations like moving in with parents, couch surfing or living on the street.
Now your argument about housing on a personal financial level is spot-on, at least points #1 and #2. As for the latter points, the first purpose of a house should be to house people. When we view housing as an investment we start making economically rational (but morally questionable) arguments like, "ban new apartments because they'll lower my home's value."
Right, the problem is NIMBYs are allowed to rent-seek by preventing construction around them. And in San Francisco, Prop 13 / rent control insulates many people from any consequences of rising prices, as long as they don't have to move, which means they make decisions that push up prices for everyone else.
In the economically ideal case we'd have a fair Land Value Tax to encourage as much building as necessary.
So what might happen if California enacted statewide rent control? Capping yearly rent increases at inflation + 3%? There are places where properties have doubled in value in less than a dozen years while wages remain stagnant, leading to rents surging and more %income going to housing. Many low income renters are paying 50% or more of their income on rent, that's not sustainable for the wider economy that relies on low skill labor to function, and the solution is not to have people commute 4h every day to clean an office, teach a class, or fight a fire.
The housing market moves so much faster than wages ever will, and it seems having only some units rent controlled exacerbates the problem for units that aren't, so why not make every unit in the state a rent controlled unit? The landlords are already insulated from the whiplash of the housing market from statewide property tax control in the form of prop 13, why not let renters enjoy that isolation as well?
There are several rent control bills in California right now.
AB 36 will allow cities to enact rent control on older buildings. AB 36 would not apply to new construction, only to buildings older than 10 years. This should help to prevent supply crunches, or at least not make them worse.
AB 1482 would set a state-wide cap on rent increases, for example inflation + 10%. The idea is to stop massive rent increases that lead to evictions. The exact number hasn’t been determined yet, the bill sponsors are trying to figure out a good number that protects tenants and gives landlords a legally guaranteed return on investment.
These bills will face a lot of corporate opposition. It’s important that our electeds here from renters, homeowners and “mom & pop” landlords as they consider these bills.
AB 36 sounds like it would encourage a lot more turnover on older buildings, incentivizing the redevelopment of what is currently affordable housing. New York has similar regulations, and what you end up having happen is that landlords will either redevelop or renovate to whatever the threshold is to get out of the affordable housing requirement.
In California landlords
are already allowed to pass through “reasonable” capital costs on rent controlled units, so they can essentially already do this.
This is true in theory but in practice often hard to get approved. For example, in San Francisco you can never apply for a pass through on buildings occupied by the elderly or disabled even if that tenant sublets to non-protected people.
In my experience, pass throughs are a theoretical concession instead of a practical one.
The price of housing is only part of it. The rising prices reflect the rising demand and the relatively static supply. Even if prices were capped, it doesn’t mean more people would be able to get housing. There’s still fewer units than there are people who want them, so people would get units based on some other mechanism beside price such as a lottery.
The unpredictability this would entail would probably be worse than a functioning price mechanism. Imagine you get a job in San Francisco but there’s only a 20% chance you’ll be able to “win” a housing unit where you want. Versus the current reality of for sure being able to find housing given you’re willing to pay enough.
Exactly. It surprises me how many people don't understand the basic economics of scarcity. There has to be some rationing factor. In a free market this is price. If you remove price, it will be something else besides price, such as a lottery, how politically connected you are, or something else. The only real solution that doesn't result in shortages is to increase supply (build more housing).
I have seen it argued in gentrifying neighborhoods that we should reject all projects which make those neighborhoods nicer to live in, to discourage new residents. This is a pretty direct way of reducing demand: making your neighborhood shittier.
> Or, reduce demand by spreading out jobs to other cities and states where their more needed.
This does not happen, nor is it remotely desirable. Having a life involves much more than having a decent job. It entails living where the person chooses to live according to their personal tastes and desires.
If you force the decision on where to live based on a single constraint that in theory is only a major part of your life so that you can fund your personal life and personal interests then this leads to poor quality of living for all (including spouces, offsprings and immediatr family) just to cater to a company's bottom line.
It only matters where the people with money want to live, and in my experience they overwhelmingly choose to live in high cost of living cities. The rest have to follow, if they want high paying, upward mobility jobs.
> [people with money] overwhelmingly choose to live in high cost of living cities.
You're confounding your observations. People with money choose to live in areas that maximize their quality of life, and they don't mind paying a premium for that.
Quality of life matters to all, whether rich or poor. Poor people aren't masochists.
You keep thinking people move places and then find jobs. This is not correct in the USA. Also, the quality of life is not higher in these expensive cities.
Rent control prevents people who currently have homes from being displaced. It also limits the degree to which housing is a commodity investors can profit off of & the degree to which they can exploit their tenants. It is obviously not a complete solution to the housing crisis (and no housing advocate claims this) -- a complete solution means rent control and building more housing, especially high quality public housing.
As long as rent control prices existing homes above the cost of new construction, then there won't be a problem. However if rent controls cap the price at below the cost of new construction, nobody is going to build. They would be losing money if they do that.
> If you remove price, it will be something else besides price, such as a lottery, how politically connected you are, or something else.
The main driver of price is not "demand" imagined as how much people willing to pay for a particular house but demand as how much people are capable of paying, which is mediated by access to debt. If access to debt is clamed down on across the board, then prices will fall accross the board. People will still compete on price but as a society a smaller fraction of income will be spent on housing.
That is true for existing, middle class and below housing for sure. Whenever interest rates go up, we see the exact effect you are describing.
it's not the whole story however. In order to increase Supply, it has to be profitable to build new homes. If building new homes is not profitable, none will be built, and the price of existing homes will be forced upward until it matches the cost of new construction.
So I agree with you that access to debt is a very important factor, but I disagree that it is more important than demand when you look at the whole picture.
But the kind of people who can get an apartment would be normalized. Window cleaners would have a similar chance of getting an apartment as their boss. I think that would be better for the health of the city and a better solution until either demand lowers or supply grows than just excluding low income workers from the city.
Unpredictability is a major cause of economic dysfunction. If no one can reliably/predictably obtain housing even if it’s cheap, I’d be surprised if the economy didn’t go haywire and then those low income workers you speak of will be no-income non-workers.
Sweden has had rent control since the 1940's, and as a result the rental housing market is completely dysfunctional by international standards.
In Stockholm, demand for central inner city apartments is way, way, way higher than supply. The rationing method used is a queue administered by the city, and the queue time for the most sought-after areas is on average 17 years. Even the most remote areas have a queue-time of at least a year.
SEVENTEEN YEARS. GOOD LUCK, COMRADE.
This means that if you want to move to Stockholm from outside the city or outside the country, you will not get a rental apartment, unless you rent one second-hand or third-hand, unless you buy a rental apartment under the table, unless you have "contacts", or unless you buy a condo on the perfectly functional condo market.
Since there's a functioning market for condos, but a dysfunctional market for rental complexes, the ROI on building a condo complex is decent, but the ROI on building a rental complex is abysmal. You're better off setting your pile of money on fire than invest in building rental apartments. No private for-profit company will voluntarily build new rental apartments. So the only actors left that could do that is the city itself. However, the city government changes politically every four years, and even if there's a left-wing majority, there is absolutely no budget to increase supply meaningfully.
In addition, there's political and economical pressure to convert the city's housing stock to condos. Current renters love it, because it means they can realize the value of their rental into cold hard cash, and the city council loves it because they get a temporary cash infusion. It's zero-sum for the housing stock, and the long-term effects are shit, because the rental supply diminishes, making the queues worse.
The net result is that it is incredibly hard for companies to attract outside talent, because finding a place to live if you don't already live in Stockholm, is incredibly hard. If you're a transient worker or simply doesn't want to buy an apartment, and if you don't have a decade of accumulated queue time, you have to rent from the much more expensive second-hand weird market, which means that companies have to pay you much more than they would have to pay a local for the same job.
Compare this with SF, or any other large city with a functional housing market, where every company has to pay their employees a wage that covers the housing market rate, which means that there's no difference between local workers and outside workers, and it means that the city has a much easier time attracting new people who want to come there and live there. Because anyone can live there, if they just show up with enough cash to pay the market rate.
Yes, market rates means you get a host of problems, gentrification most of them, but that's a positive problem compared to all the horrible problems that rent control bring.
You fail to show how that's worse than the version in other places. All you have is an "appeal to anti-communism"(1). Not having to fear that you loose your living space because some investor decided to price you out of it seems valuable and something that should be weighted against the hardships of being able to rent something easily in Stockholm.
(1) Is there a fallacy name for that? I think there should be, it's one of the most popular fallacies here in any financial discussion.
I explicitly talked about how the job market is affected. If your only real options are to buy or to queue for a decade, that requires you to commit to a long-term plan if you want to move to Stockholm for work.
This means you can't grab quick opportunities, you can't move to Stockholm on a whim to try your luck, so local companies and the local economy suffers. Fewer people move to Stockholm than who otherwise would, which means the city misses out on potential growth. It's an inefficient allocation of the work force on a national level.
There might be some social good to artificially restricting the growth of your most important economical urban centers, but I highly doubt it.
The supposed benefit of rent control is that attractive inner-city apartments are cheap. Sure. But since rents are based on utility value instead of location or attractiveness or market value, this means that unattractive apartments two hours from the inner city cost as much to rent as comparable ones in the inner city. It's impossible to save money by renting in a less attractive area. Normal cities have some sort of parity between cost-to-own and cost-to-rent, regardless of area. In Stockholm instead, this parity changes dramatically depending on your distance from the inner city!
Another second-order effect from rent control is that having an attractive rental apartment in Stockholm suddenly has value. This makes people reluctant to let go of an apartment once they have it, which makes them reluctant to move away to pursue other opportunities elsewhere, even if that would be the better choice. Still, if you have one, you can rent it out on the second-hand rental market, so now you've created a class of rentiers, the people that have gone through the Soviet bread-queue can now cash in on that scarcity. But I thought rent control was about fairness?
When I moved from Stockholm to SF and told my friends, the first question every single one of them asked was "But how will you find somewhere to live?"
Because if you've only ever lived in Sweden and experienced its rent-controlled market, it's really hard to envision a different system, an actual free rent market, so all of my friends were really surprised that my answer was "I'm just gonna open craigslist and pick something."
I don't disagree that the situation is bad. But you can just go on "blocket" and rent an apartment in a similar manner. Software developers are paid at least €3k after taxes, unless you are just out of school. For €1k to €2k you can rent an apartment. That isn't great, but it isn't extremely bad either. Unless you compare it to previous times in Sweden.
In Sweden things are getting deregulated, income taxes are lowered and the social safety net is made less generous. The housing market is now mainly competitive. But for some reason people think they aren't the ones that are going to be affected, (partly because they aren't). If you don't have wealth or are willing to pay up your are a bit fucked, like myself. It is of course hard overstate how bad it is overall, especially for a smaller city. But the market itself isn't uniquely bad. It is mostly like everywhere else.
> But you can just go on "blocket" and rent an apartment in a similar manner.
Yes, but these are not rent-controlled apartments! These are second-hand apartments or houses that you rent from someone who either owns the place, or is already renting it from someone else. You are paying market rates for these, not rent-controlled rates.
Deregulation that allows people to rent out homes they own or rent is what has allowed this market to grow in the past few years, this is the very opposite of rent control!
I started this subthread to argue that rent control is shit, it has shit consequences, it has shit second-order consequences, it has shit third-order consequences. Maybe Stockholm isn't a shining example of how shit it is these days since deregulation and condo-conversions have effectively removed a lot of rent controlled stock, but that just proves my point!
No one should expect the rent controlled part of the Stockholm housing market to work as it is essentially defunct.
1. Subsidies for building rent controlled units were removed.
2. Publicly owned apartments were sold at below market value. Meaning those who already owned apartments got a discount in the market.
3. The profits weren't used to build new apartments, but to lower taxes.
4. Co-ops were favored by keeping deductions for mortgages, creating new ones for renovations.
5. Property taxes were removed for co-ops.
6. Credit remained largely unregulated and was then regulated to a hundred years.
7. Interest rates are being kept low by the central bank.
8. Taxes were lowered in general.
Of course this new market will never be able to produce affordable housing, so the rent controlled market doesn't "work". The whole thing is set to implode though. Already if you bought an apartment ~"two years ago" you have now lost your down payment.
It largely worked until it was dismantled. It is only 17 years because the market largely doesn’t exists. There are maybe a couple of hundred rent controlled apartments being distributed each year in central Stockholm. Which isn’t unique, many countries don’t have a rent controlled market at all.
What is pretty unique is the 100 year mortgages with no default.
> Window cleaners would have a similar chance of getting an apartment as their boss.
No they wouldn't. I lived in an european city with a socialist municipal government who enforced social housing programs which, on the brochure, meant that window cleaners would have a similar chance of getting an apartment as their boss, and when the program was put to practice... Surprise, surprise: the apartments were distributed throught the party's ranks and through minions in the local and national media.
In the end the municipality started dismantling the program due to the backlash and their solution was to sell the apartments to the current tenants at a firesale price (1/5th to 1/10th of the market value) which,again, led to some amusing anecdotes.
Consider the opposite - if San Francisco allowed building. Your charming San Francisco would get demolished in the same way the Pudong in Shanghai did. Housing prices would level out a bit as developers cashed in on the gold rush and the housing supply leveled off with the demand. SF has room to build up but no incentive with rent control and restrictions.
Consider Shanghai as described below. Consider following the link.
"In 1996: After the mayor boasted that 18% of the world’s construction cranes were at work in Shanghai, international media widely reported – and exaggerated – the statistic. Reports described the crane as China’s national bird. The figure on how many cranes were working in Shanghai got rounded up to “a fifth,” “a quarter” and, in more than one publication, “half” the world’s total. "[https://blogs.wsj.com/chinarealtime/2011/12/21/china-shangha...]
If you don't do any land seizures, shouldn't the result of upzoning be more mixed levels of density, according to who sells to developers and who doesn't? I don't see any scenario where SF gets "demolished" without active government redevelopment like what happened to the western addition.
Or you could just landmark a couple charming districts of SF to preserve some of its uniqueness, and let the rest get developed.
You’d lose some neighborhoods composed of endless streets dominated by garage doors at the ground level, and all those surface parking lots, but I think you guys could figure out how to cope.
> So what might happen if California enacted statewide rent control? Capping yearly rent increases at inflation + 3%?
No-one would move, ever. People wouldn't be able to change jobs even for much higher salaries or better conditions. Children would live with their parents forever. Many people would live precariously in illegal sublets with inadequate fire exits etc. Developers would stop building. Landlords would stop doing maintenance and let their buildings rot. Everyone would be miserable.
> Many low income renters are paying 50% or more of their income on rent, that's not sustainable for the wider economy that relies on low skill labor to function, and the solution is not to have people commute 4h every day to clean an office, teach a class, or fight a fire.
Rent control creates longer commutes. To the extent that the economy actually relies on low skill labour, it can pay the actual cost of having that labour where it needs it. In fact by having rent control you artificially depress wages and encourage companies to employ humans in bad jobs rather than finding ways to make things better.
> No-one would move, ever. People wouldn't be able to change jobs even for much higher salaries or better conditions. Children would live with their parents forever. Many people would live precariously in illegal sublets with inadequate fire exits etc.
Because anyone who's been living in the same place for a while is paying well below-market (by design, otherwise there'd be no point in the rent control). Actually it's worse than that: the market rate rises much faster because landlords have less upside so there's little reason to build, and existing buildings can make more money as offices rather than residential. And when there's a huge gap between what a new tenant would have to pay and what the current tenant pays, that creates a huge incentive to do illegal sublets, and if your sublet is already illegal then why bother spending money complying with fire regulations or any other safety regulations?
This depends how you implement rent control. The UAE market has rent controls - the landlord is only allowed to adjust rents within a % and if the rental index of the area is more than 10-15% higher than what you are currently paying. They are also building plenty of new housing to help keep rents stable. This second part is key - and needs to be there for this to work. Your comments assume a rental market that is not increasing in supply.
I'm assuming a rental market that isn't increasing in supply because that's the case that rent control is designed to address. If you're building enough supply to keep market-level rents low then rent control becomes irrelevant.
That is not how rent-control works in some places. For example here in Zurich Switzerland you cannot raise rents more than x% even when changing tenants, which means that moving is fine as all places are rent controlled together.
It is essentially never how it works. Why would you actively regulate something so people can't move? It is when you abandon rent control that the systems become incompatible and people can't move.
It's not "so people can't move," inflexibility is a side effect of rent control. The "I can't move because I'm locked into a rent-stabilized lease" phenomenon is real, painfully so in NYC.
It's also a problem that's essentially invisible to anyone who bought into the market at a good price, or is wealthy enough to pay market-rate rents. But for the rest of us, it hurts.
As far as I can tell that is exactly because they abandoned rent stabilization making that market incompatible as it now only applies to certain units and triggers rent increases when you move.
Inflation + 3% isn't that bad, though you're right that it's too low. There's a bill in committee right now to enact statewide CPI + 5% rent control, and the landlord lobby is not too upset, because inflation + 5% is really quite a large year-over-year amount. I think I read that inflation + 5% has basically never happened in California's history: times in which housing prices were rapidly rising were also times in which CPI was rising, so the allowable increase would have been high.
The really problematic rent control is in San Francisco, where rent increases are capped at 60% of CPI (well below inflation). This results in massive giveaways to the rich that grow every year.
Rent control is worse than useless. Not only does it not address the root cause of the problem, which is lack of supply, but it then skews prices and makes it so people won't move when they normally would.
Exactly. There are few positions that most working economists share, but a disdain for rent control is one of them. It seems to make sense, but creates perverse incentives that lead to urban blight, a shortage of new housing, etc.
As Walter E. Williams said in 1987: "Short of aerial saturation bombing, rent control might be one of the most effective means of destroying a city."
What is the downside to a land value tax? Or put another way, how can you fairly assess taxes based on the value of the land?
It seems absurd that a vacant parking lot pays basically nothing in property taxes while a hotel of the same size pays tens of thousand a month, but both take up the same amount of space and have the same potential. This kind of tax would certainly lead to better utilization.
most straight forward way is to buy a lot demolish everything on it, then sell it on the open market; voila you have a price point, do it a couple time and you can create a gradient
Actual valuation methods used in real world by countries like Taiwan, Estonia, and Singapore to levy lvt (all countries with 90% plus home ownership) are more sophisticated than that though
Land value tax is all about driving each parcel towards its highest-value, most economically rational use. City planning is all about cultivating low-value, (locally) irrational uses. So think about all the stuff that exists because planners kneecap its better-funded competition: art galleries, theaters, cute mom & pop retail, auto service & repair, manufacturing jobs, etc. Would you miss it? Could the city council get away with losing it?
LVT says the state should not only stop protecting these things, it should do a 180 and actively kill the uses by levying taxes they can't afford. Rather than slowing/blocking the transition to condos and formula retail, accelerate it.
In principle, the new denser buildings could have space for the old low-value uses, but new construction is expensive. The new buildings would have to age a while before those marginal uses could afford them, and in the meantime the tenant organizations would all die. Maybe this could be averted using some central-planning scheme, maybe not. But you can imagine how the electorate might not want to risk it. The trends LVT would tend to accelerate are the ones most residents lament.
I think we should allow sites that are already dead or are transitioning voluntarily to drastically increase density. Letting owners do this forces tenants' hands, which is a sad tradeoff (and to the left-NIMBYs, a dealbreaker). LVT goes even further and forces owners' hands, which I'm less wild about.
> art galleries, theaters, cute mom & pop retail, auto service & repair, manufacturing jobs
> LVT says the state should not only stop protecting these things, it should do a 180 and actively kill the uses by levying taxes they can't afford.
Do all of those things have to be at ground level? Remember space is not taxed (the marginal tax on building up more space vertically is 0), only land. If a theater is on the 5th floor of a larger building, does it stop being a theater?
Over the long run, densification should result in more and cheaper space, but it is not clear whether or how the theater would get that new lease at a rate it can afford (new-construction premium counteracting land efficiency) and how it would survive the transition period. The risk might be worth the reward, but reasonable people could also believe that it isn’t. So little is known about how to create these nice little small-business districts, or whether it’s even possible in this day and age, that there is a strong current towards preserving the ones we have.
> but it is not clear whether or how the theater would get that new lease at a rate it can afford
Can any theater afford a ground level space at current San Francisco prices?
If a theater can only afford to be in San Francisco because of Prop 13 then we should recognize that as a form of taxpayer subsidy for the theater.
If there is the political will for taxpayers to subsidize theaters (why not, art is nice), then why not subsidize a theater's lease on the 5th floor of some building, instead of preventing building up by subsidizing a one storey theater on the ground floor?
But I think there's a good argument to be made that the taxpayer subsidy process should be more transparent and less arbitrary than "whichever theater bought its land longer ago gets a bigger subsidy".
Emotionally loaded example: woman buys a modest home in the 1970’s in a poor neighborhood from her savings working at the local packaging plant, fast forward to today she is living on a fixed income in a neighborhood that has gentrified around her, with many developers and yuppies moving in and building new homes and apartments.
Your proposal would force this woman from her home as her land value tax rose (As she has no ability to pay for this increasing tax burden)
Genuinely curious, I thought the purpose of LVT was to split the current valuation into land and improvements and move most of it to the land. It is not intended to increase taxes on land that is already being used effectively. I think the bigger issue with LVT is figuring out what the right values are for taxing land vs improvements. As a first pass, I would aim to keep taxes the same just split it more like 80 (land) and 20 (improvements). This at least forces undeveloped property to be turned into a money making project very quickly.
There was a proposal in Chicago to put a cap on how quickly your taxes could go up relative to what you originally paid for your house. The motive was explicitly to protect homeowners in rapidly gentrifying neighborhoods.
I assume there would be limited capacity for abuse just so long as the break only applies to your primary residence.
That's Prop 13, and it's one of the worst public policies in the United States.
The tax break wouldn't be so bad if it only applied to primary residence, was means-tested, and couldn't be passed down to children. Regardless, though, homeowners tend to be more well-off than tenants; they shouldn't be receiving tax breaks in the first place.
California did that 40 years ago and just look at how affordable California housing is now. Also public schools' ratings have tanked due to shrinking property tax revenue.
Prop 13 empowers NIMBYs to vote to kill new construction, strangling supply and pushing prices up, without facing any of the consequences of those rising prices.
Very true, but in the context of an LVT, it shows a possible downside: if it's high enough, you're taxing away the majority of the site value, and so these people don't even have the silver lining of a big increase in home value to cushion them when they move.
Well by design, LVT discourages having land be the majority of your home's value. E.g. Single Family Homes are fine in the outskirts of the city where land is less valuable, but LVT encourages building up the more valuable parts of the city (e.g. downtown, next to the subway station).
In both cases (SFH on less valuable land, condos on more valuable land) the land shouldn't end up being the majority of the value, since with condos the land value is effectively split among all units in the building.
Yes, I was agreeing with that and pointing out that the defense of "at least they have the gain in home value" wouldn't apply to the high LVT case. Whether it's good for pricing to work like that is a separate question.
This sort of "logic" was used to justify efforts like Prop 13 in California. It creates a massive windfall to incumbents and little more. It also ignores the most basic of solutions to solving this "problem", if it even is a problem:
You can provide land tax subsidies or rebates to targeted individuals (eg the disabled, the retired) without providing massive tax breaks to everyone else.
What's more, this system makes it impossible for, say, retired people to downsize or move because that resets their tax base to a much higher level on their new property (in the Prop 13 case).
The downside is that evaluating potential versus using sales history or economic revenue is inherently subjective and ultimately disrespects property rights.
Ultimately, why should the owner of a vacant lot be compelled to sell or develop on the basis of the potential value?
And who decides the potential value? Should a 10 story hotel be taxed like a 100 story office tower? Should my $200k home be taxed like half of a 30 unit apartment block?
Simple: unused land and unoccupied buildings ultimately kills the cities that make that land valuable in the first place. This is a classic case of a series of short-term logical decisions ultimately benefitting no one.
Cities are (or should be) for the people in them. Not simply a vehicle for the ultra-wealthy to park wealth.
That's not compatible with how the law or principles of American governance work. Your home is your castle.
Ultra-wealthy aren't laundering money in real estate because property taxes are too low. The situation we have today is a obvious result of fiscal policy made in the 80s, that was predicted then.
> The downside is that evaluating potential versus using sales history or economic revenue is inherently subjective and ultimately disrespects property rights. Ultimately, why should the owner of a vacant lot be compelled to sell or develop on the basis of the potential value?
Property rights are important, but they aren't the end-all-be-all. Eminent domain, blight laws, zoning laws, tenant rights, and a variety of other property-related laws arguably disrespect property rights, but they have been a staple for hundreds of years. Property rights were never some sacred ground.
I had a good discussion with one of my dad's friends recently (who is a realtor), and mentioned that one of the biggest costs we never talk about is the cost of compliance.
Basically, his argument is that the cost of existing housing is driven by the cost of building new housing, of which places like San Francisco have been very effective at limiting! But as well as that, what are the development fees for example?
When politicians virtue signal about what percentage of a housing development will be below market rate for example, you have to remember that this sort of thing will be factored into the price you pay. Or the endless studies that city governments (again looking square at you San Francisco) commission. The buyer and the renter pay for these.
America actually has relatively cheap housing across the vast majority of the country, so it's not as if the buildings themselves are the major factor in jacking up the prices.
> A society that views housing as an investment means that we wind up adopting housing policies that lead to people being priced out (i.e. regulatory capture).
No. Housing that appreciates at exactly the rate of inflation can still be a good investment and a great tool for building wealth.
Homeowners aren't necessarily satisfied with that though, and they have voting power. Prop 13 is basically a voter-approved way of guaranteeing the upside of stratospheric rises in property value without reaping any of the downside (increased tax reflecting said skyrocketing property value).
I agree with you. I think articles like this one contribute to the problem by perpetuating a false sense of what housing prices should do to be a "good investment."
No they don’t. See the USSR, real prices were completely removed from what the government set. If SF set the price of a house to 100k, people would just bribe each other the difference.
And voters put people in power who restrict supply and thus guarantee profits for homeowners.
With how small polities are in the Bay Area this leads this to everyone pushing the burden onto someone else. With a large enough polity responsible for zoning (e.g. New York City's five boroughs) the pressure to add housing becomes too large to completely ignore.
I have observed the opposite. Slum lord owns over 50 rental properties, but does not live in the city, and tenants are registered voters of the municipality.
I wouldn't normally think of absentee landlords as the central example of a homeowner. Where do you live that the majority of housing units are owned by absentee landlords?
Homeownership is generally more correlated with wealth and financial security, which is more correlated with political involvement and having the time and the money to do so.
Short of massively expanding the poor's ability to vote (making Election Day a holiday, putting it on a weekend, mail-in voting) this holds true in American elections.
I came up with a clever solution to the Prop 13 problem: tax the sale of that property with all of the previous savings if they ever sell it for a profit. So sure, you can stay in the house you grew up in, but if you're thinking you can get that million+ dollar pay-day because the land under your tear-down is now worth a boat load...
It might make it sting a bit less buying a single-family home in San Jose for 1.5mil and knowing that you're paying 10x the tax of your next-door neighbors.
This would just trap people in their homes and exacerbate supply problems. Empty nesters would face a huge tax bill for vacating their home even if they sold and went to another state, so they might stay in a house that is way oversized for their current needs and take it away from someone else.
It costs thousands to maintain a house (I once spent, over $10,000 in one month on repairs)
It costs thousands in property tax and insurance
You pay thousands in interest and maybe PMI.
If the asset doesn't appreciate faster than inflation, where's the wealth building coming from? Sure, I'm not paying rent, but, honestly, it ends up being mostly a wash once you factor in all the expenses I am paying.
I bought a house because I wanted to own a house, not because i thought it would build wealth.
You're paying all the transaction costs and maintainance costs and tax and insurance costs when you rent too. The landlord passes them on to you in your rent.
One thing that can make it better to own (in the US) is that mortgage interest is tax deductible (at the federal level). Rent typically is not (although some states make rent tax deductible because voters naively believe this is a subsidy to renters and not to landlords).
Yes, but perennially unprofitable units are going to leave the rental market. So it's not like owners' expenses are not an input into the market price.
Yup. And even if you view housing as an investment and even if you create policies in favor of that, in the long run, you're not going to have greater gains anyways because the growth is not sustainable. Long run, housing always has to revert to a mean increase equivalent to incomes/inflation, even if in the short term you might have a huge run up. In the short term there can be a huge run up causing great pain, but after that it'll come back to it's income/inflation rate increase.
It also encourages people to buy the biggest house they can afford instead of the smallest one they can be comfortable in.
Very few people buy the nicest car or the best TV, because we know those don't have a return. But being bad at math, we can't seem to figure out that we only see 30% of every dollar put into the house (taxes, mortgage, upkeep, improvements) back and we conveniently forget about inflation.
Yeah, if your house doubled in value in 25 years that means you kept pace with inflation. You could have done better with CDs.
I would argue that security, stability and hedge are all perceived and not actual risks. I don't own but have quite a large position in index funds. I am both financially secure and stable in one of the fastest growing city in the world. My rent hasn't increased in 5 years and I pay half of what I would pay in mortgage for the same property. The property market has put up nearly 20% gain in those years.
You sound like you have the rarer, nice landlords with maybe a handful of properties that are being rented out. These are the landlords that as long as you pay their mortgage and provide little fuss, they are happy and not trying to constantly maximize their returns.
I'd imagine your scenario would not be the case with a typical management company. While your scenario is attainable for a small amount of people, it would be difficult to see happenning for the masses.
In terms of investment returns it should be pointed out that depending on country you can't get a lower rate of interest, better tax treatment and leverage than you can with your mortgage.
Lastly, we're in one off the longest bull runs on the stock market in history and the last 2 years in particular have been insane. This should not be treated as representative.
I’ll tell you two cities the OP could be in right now: SF and NYC. Lived in both, tried to buy in both, gave up both times because the numbers were silly.
Neither one makes much sense from a rent/buy perspective. New York is closer, but most properties are still cash-flow negative relative to rent. You have to assume unrealistic rates of appreciation and/or indefinite tax deductions for the numbers to work (and folks are finding out, right now, that those deductions can go away!)
People have been treating homes like investment vehicles for a while now, and there are actually very few big cities in the US where rental rates can cover costs of mortgage, taxes and insurance. Renting literally puts cash in your pocket.
I'm renting in Manhattan right now and this is absolutely the case for me. At the same monthly cost, I'd have to live farther out in a less desirable location. A lot of apartments cost more to own in monthly taxes and fees than my entire monthly rent cost when I first moved here (though admittedly I had roommates). Note, I'm not talking about a mortgage; that'd be way more. I'm just talking about coop fees. You can spend more on them buying an apartment than it costs to rent a bedroom in a shared apartment. And as people like to say about rent, that is also just "throwing money away".
I don’t think it’s fair to compare renting a room to buying an apartment (even a studio), but you don’t need to do that.
Right now, most properties in manhattan rent for less than their monthly carrying costs (including HOA fees). People have traditionally justified it via the mortgage interest and SALT tax deductions, but congress just blew the latter all to hell, and it’s making properties about 30% too expensive...
So many units have priced in the SALT tax deductions! The rent/buy calculation was borderline before, but now it’s just comically bad.
Speaking as someone who lives in Manhattan and owns my apartment, I can say from my example at least that my mortgage payment (plus property taxes), tax-adjusted, is less than what the same apartment would cost me to rent.
Now buying something to rent it out is a different story and I just don't see those numbers making sense from an investment POV if that's your point.
My point is that right now, for most units, it’s financially smarter to rent in Manhattan. It’s not even close.
I’ve been doing a search in Manhattan this spring. On nearly every property I see, mortgage + hoa / taxes + insurance easily exceeds equivalent monthly rent. And not by a little bit, but by hundreds of dollars a month.
Deduct mortgage interest and $10k of SALT, and a few properties (~10%) start to make sense on a 5-10 year timeframe. Most are nowhere close to affordable. Factor in opportunity cost at any reasonable long-term rate of return, and nothing makes sense (You basically have to assume that the stock market will underperform, and the housing market will over-perform to make the numbers work.)
The few properties that make sense on a spreadsheet sell quickly. Most linger. Ask any real estate agent - the market is shifting, and the shift reflects the fact that prices got ahead of fundamentals.
So it depends strongly on when you bought and how rare your deal was, but these days, the vast majority of the Manhattan market is overpriced, and implicitly betting on speculative price appreciation.
...can you? Even owning a home doesn't guarantee that you'll be able to live comfortably in one place for 3 decades. Median homeownership is usually shorter than 15 years[1]. (Per 2009* - more recent numbers that I've seen indicate that number is decreasing, not going up, but those are usually based on more short-term studies, post 2008.)
And renovations aren't exactly something homeowners are comfortable with, even if they technically can do it.
Source: I work for a homebuilder who aims to sell multiple homes to each customer (from first-time, to trade-up, to retirement.) If the median homeownership-length went up to 30 years, we'd have to reevaluate our entire business model.
SOME people renovate their houses SOME of the time. Our biggest market is trade-up buyers, which is usually viewed as the alternative to remodeling. The housing market has been on an uptick since 2008, which increases the rate of trading-up, as the hope of selling at a profit is one of the reasons people buy homes to begin with.
The remark I was responding to was "can you live in the same property for 30 years". Changing homes is not living in the same property, so I believe I chose the correct metric. Home ownership does not guarantee that you will be in the same place for 30 years.
All of this isn't even to consider the fact that most homeowners don't literally "own" their home in that timespan, as 30-year mortgages are very common. A lot of people buy homes because mortgage payments are oftentimes cheaper than rent payments (there are exceptions, obviously.)
The point is living in 7 different homes for 30 years, means at the end your home is paid off and you have no rent. Of course that is ideal, most people extend their loan terms often.
As you said - that's ideal. The home people trade-up to is usually more expensive than the home they move from (not counting empty-nesters) and - ideally - there will be a myriad of factors that can help one finish paying off their new more-expensive home within the same timespan, like more income or selling at a profit. But those aren't necessarily givens, as they're determined by things like your locale and the state of the housing market.
It would be completely within my control (excepting the extremely rare case of eminent domain being applied if the UK wanted to build a railway station or something).
What the median or mean or modal person does is neither here nor there. It's completely irrelevant.
15 years is also a colossal period of time compared to any private rental. The average tenancy length in the UK is about 2-3 years.
shh don't tell everyone about REITs and how you can get into and out of the upsides of housing markets without actually maintaining properties and dealing with tenants!
The thing that really convinced me was when you look at the appreciation of real estate, overall it appreciates by X, but a particular area is not guaranteed to do so. The intention is to have REITs finance my retirement home in the country.
More importantly, a house is mine (and the bank’s) and I decide all things about it so it’s my home. Renting is always temporary and generally doesn’t work in old age when homeowners are typically mortgage free.
I think you're joking, but just in case you're not (and for those reading): when you use a mortgage to buy a house, you own the house completely, and the bank owns it not at all. It's your property. That's why you can use it to secure the loan of the mortgage.
If you fail to satisfy your mortgage agreement with the bank, then yes, they can take the house from you in a foreclosure. But until then, it's yours, not theirs.
The point that was attempting to be made, which I agree with, was along the lines of the bank having the power to take it back means that they ultimately have control, regardless of the technical legal terms that indicate that the homeowner owns, well, the home. You REALLY own it after the mortgage is paid off and the bank has no interest in it. Same thing with vehicles. They're leinholders, which the first Google result defined as:
A lienholder is a lender that legally owns your property (a car, for example)
until you pay it off in full. The lender — which can be a bank, financial
institution or private party — holds a lien, or legal claim, on the property
because they lent you the money to purchase it.
Edit: legally they DO differ, but they're the same in that they allow the lender to take back the property in the event of non-payment. Therefore, even though you might legally technically own a property with a mortgage, the bank still has the ability to take it away from you, so do you REALLY control it? https://www.quora.com/How-do-a-lien-and-a-mortgage-differ
The bank can't take your property unless you fail to meet your obligations, which means you, not the bank, are in control of the situation.
I understand the point being made. It's a commonly held opinion, and it's fine for inspiring people to get out of debt, but legally it's not correct. Your home is your property, even with a mortgage.
Also, a foreclosure is not the only way to lose your property. Stop paying your taxes and see what happens. Even unpaid unsecured debt (like credit cards) can lead to your home being taken in some situations. Or the government can take your property via eminent domain.
So there is no such thing as REALLY controlling property, in terms of excluding any way it can be taken from you. But you do have specific legal rights to your property, and those apply to mortgages too.
Property tax? Do you really own something that someone else can take away?
And why would renting not work in old age? It works fine, its a value exchange and the money that ive saved for my old age in various investment vehicles will typically outperform most real estate investments.
A lot of things are missed if you just compare hard numbers. A home brings distance from neighbors and size of place means you have privacy and a place to stretch out. Most apts are built on top of one another and price is high per square foot.
I also have an asset I can sell which doesn't exist when renting. Property taxes are generally lower relative to where I could rent and simply don't enter into it.
I'm convinced renting is the best thing for old age.
The reason I say that is because 9 times out of 10, from what I observed, old people who own end up living in squalor because they lose the ability (financial or otherwise) to care for their house. Maintenance ends up being deferred indefinitely. At the same time senior apartments are incredibly affordable, at least in my area.
Sure, that's not every old person, but I see it enough that it's concerning.
Buying hedges against the market when you intend to live in the house. When the market goes up, your rent will increase, but the price to stay in the house you own is still zero.
I think the point is that it does the complete opposite if the market goes the other way, assuming you're taking out a loan to buy. If you have a net worth of $100k and take out a loan for a $500k property, as little as a 20% drop can wipe out your life's work, assuming the property market doesn't go back up.
I don't see how it's any different to me withdrawing my entire bank account, walking down to the casino and putting it all on black?
> I don't see how it's any different to me withdrawing my entire bank account, walking down to the casino and putting it all on black?
The difference is that you still own a home, even if it is worth less than what you paid for it. If you bet all your money on roulette and lose it, you have nothing left.
30 years from now, when you pay off your mortgage, your cost of living will be very low -- this is very good for retirement. People who are still renting 30 years from now will probably be paying monthly rental bills higher than your mortgage payments, due to inflation if nothing else. The difference over that time might exceed your hypothetical $100k.
It's a house and you can live in it. You're isolated from the job market because you receive a pension. It's definitively a good investment assuming you bought it in a good condition back when its price was $200000.
I still don't get it. If your house is worth less than your mortgage, then you're gambling on an increase in it's value. It's like taking out a loan and gambling with it to try and pay off a debt.
You aren't gambling on anything. You continue to pay the price you agreed to when you bought the house. It's unfortunate if it ends up being worth less than you agreed to pay for it, but it's not gambling -- that's what happens when you buy a car, and buying a car is not gambling either.
Yes you're paying the same amount, for an asset that's worth a variable amount. The only time the amount that asset doesn't matter is if you plan to never ever sell it, which isn't realistic for most people (see elsewhere in the thread where someone pointed out that the median ownership time was 15 years or so).
The difference is that you can ride out housing market downturns until home values recover but if you bet it all and lose at the casino, the game is over. Even though the housing market drops 20% in your example, you still have a place to live and your monthly cash flow is unchanged. Just be patient, and you can recover it all.
why do they have to hold on to some hope of price incrase just because they bought a house. Instead of having the freedom to choose the best investment like everyone else.
Sure hold on to it if you really think its the best investment for your money( i really doubt detroit house is best you can do with your money), not because of some sentimental value.
...assuming you also keep your income. If you lose your job (and job losses and housing downturns are highly correlated), you're looking at foreclosure and losing everything, along with a 7-year blight on your credit report.
Right, but if you're evicted from a rental your loss is limited to your security deposit. All past rent paid is already a sunk cost, analogous to interest on a mortgage. If you're foreclosed upon you lose any accumulated equity in the house, and have to start again from zero.
It's very similar to margin trading on a stock brokerage, except that margin accounts are generally higher interest and not tax-deductible, while getting margin-called does not affect your credit. In both cases, you forfeit accumulated wealth built up if the market moves against you.
Your security deposit is not a limit on your liability. If you cause more damage, or owe more money than your deposit covers, your landlord can sue you for the remainder and has a good chance of winning.
> but when your employment market changes and you need to move to Houston, the hedge is gone
That's the other end of the coin that's really easy to miss. I moved to Las Vegas in 2011, when my wife graduated (and where she landed in a nation-wide job search), thinking it'd be easy to find a job in any city with > 500k people (given that I had no trouble finding jobs as a recent CS grad in the relatively small metro of Champaign-Urbana, IL). It wasn't.
It's also easy to miss that "leverage" simply isn't available as an "investment tool" to most people, except with a mortage.
The price to stay in the house you own is almost never close to zero, you still have to pay the bills, the repairs and the property taxes. If the house you live in becomes bigger than your salary can afford (let’s say you built a McMansion when you used to earn $200-300,000 per year) then you’ll have a really, really hard time staying afloat when you suddenly become unemployed and you can’t even find a job for the next 12 months, if not more. The bills will keep piling up, you’d sell the house and move away to greener pastures where they still have decent jobs but you find out that that would entail a 50-to-80% cut on the value of the house (the most probably reason for you losing your job is because the economy sucks, during which time no-one sane will pay close-to-parity money for a house), your marriage will most probably be in the doldrums, too (imho financial-caused stress is one of the biggest reasons for divorce) and you wished that younger you hadn’t put all his eggs in this one big house which right now drives you into the ground.
Owning is the key. If you've got a 30 year mortgage you do not own your home. You only own part of it. Once a home is paid off, the equation changes. I would also make an exception for houses that are very expensive as they will have large price swings if the markets change.
I think I know what you're trying to do and I think it's well intentioned. However, I can already point out to mistakes in your own points.
Security and stability: in what sense? Owning a house explicitly means that you can't be evicted by the landlord, but there isn't any other significant feature that derives from owning the house.
Hedge against inflation or market forces (or "short position in real estate"): you can simply buy into a REIT, and enjoy similar benefits (actually, a much more diversified risk, which in most cases would be positive) compared to owning a single house.
"can't be evicted by the landlord" is a pretty good benefit. Also, if rents go up a lot in your area, renters end up spending more on housing. When you buy, your cost of housing becomes more predictable in the long-term.
Interest rates can change as well but are less volatile than rents, and become less of a concern as you pay off more of your principal.
Although that may be true, if the house is paid for by a loan, you have the additional insecurity that you need to pay $XXXX per month for the next 15-30 years. If something happens and you can't afford it anymore you risk foreclosure.
If a renter could not make the monthly payments it would result in eviction. Both eviction and foreclosure are bad for your credit, and both mean you need to find somewhere else to live.
"If something happens and you can't afford it anymore you risk foreclosure."
That's assuming the home value has gone down in addition to losing your job or whatever. If the home has kept its value, you can probably use a line of credit to bridge while you sell the house.
If something happens with my income I can just pay the interest for some time (several months to a year), which in my case is roughly half my monthly payment.
After those 15-30 years are up, you no longer have to pay that $XXXX per month.
In 20ish years, inflation is likely to have significantly reduced the value of $XXXX, it could have as little as half the purchasing power it does today. If renting, the rent is likely to increase (particularly if you move) so that you are still paying $XXXX in today's money. If repaying a mortgage, you are likely to be paying roughly $XXXX in absolute terms (depending on interest rate changes).
So yes, you are tying yourself to a risk that you will lose your house (and any difference between the outstanding loan and its sale value) if you lose your job over a certain period. However, after a certain period you are also reducing the risk that you won't be able to afford your housing costs if you lose your income.
Lenders are also more likely to consider a term extension to enable you to make more realistic payments, than a landlord is to agree to lower your rent.
Another reason is choice. In my area it is difficult to find a decently updated SFH to rent - the ratio of homes for sale vs for rent is 5 to 1 or greater
> Given that, you buy your house to remove risk of local changes to your detriment.
If you own real estate you're buying into local risk. Real estate generally isn't insured against things like acts of war, so if NYC gets nuked or whatever then you lose all your money.
If you're buying real estate right now then you're basically betting against war, automation, AI, climate change, energy price spikes, etc. Even if you don't think that any of those things will happen imminently, do you really want to bet against all of them over the next 30+ years?
What should be more worrying than all that is the correlation between local housing prices and the local labor market. Take Detroit, for example: it had both plummeting real estate prices and mass layoffs from the big automakers in 2007/2008.
And if you're working, you're already exposed to changing conditions in the local labor market. Owning your house exacerbates this in the worst way, just like how the very last company you should own stock in is your employer.
Different careers have different amounts of local correlation - I'm planning on waiting on buying a house until I get established as a remote programmer, then buying in a relatively low COL area.
Most scenarios where the U.S. gets nuked are at high altitude just to fry our electronics. If a nuke went off directly over your house you probably wouldn’t even notice for a couple hours if you were sleeping, but you probably wouldn’t be able to live there afterwards either.
You're thinking of purposes as an investment. The point of the article is precisely that it is not beneficial for it to be seen as an investment, but first and foremost as a practical human necessity.
Maybe I'm not old enough or it's due to the markets I've worked in, but I've literally never seen rent go down in price.
During the housing crisis, for example, rent went UP because as people became evicted there was higher demand for rentals. I acknowledge this was a black swan event though.
Sorry, I could have been more clear. I didn't mean that a recession is a black swan event, but that the specific nature of the housing crisis is considered a black swan.
More concretely, a recession is more predictable and to be expected while the failure of the mortgage-backed security market (and the broader consequences) less so.
I think a bigger concern with investing in housing WRT alternatives is this:
Rents don't usually go down, but they often stagnate ESPECIALLY in units owned mom n pop landlords. If your rent doesn't change for 5 years, but inflation is 2%, at the end of the period, your rent has effectively declined by about 10% in real terms. Additionally, you have your 20% down that would be paid for a house, but instead you invest in the stock market that returns 6% annually, at the end of 5 years, you have increased your assets by 33%
If you bought a home, and the home price did not increase for 5 years and you pay the normal 20% down mortgage, %6 closing costs, and 1.5% annual property tax, you're looking at some significant loss of net worth when compared to the rent alternative.
If your timeframe is less than 7 years buying a house is almost always a bad idea because of the risks. As you get over 7 years odds start to get good that you are even after the downturn (that is the loss in value during the downturn is just a loss back to what you paid in the first place), at which point your house payment vs rent is the only difference, and the foregone gains from the down payment investment. As you get over about 10 years you start to need to consider the costs of remodeling a house, but your rent would almost certainly gone up so again you are roughly even other than the down payment investments. As your get over 20 years rent has gone up again, but your house payment has not and so you are starting to catch up on the down payment investment. At 30 yours rent has gone up again, but the house payment is gone and you can really work at that down payment investment difference. At 40 years both retire, the renter has still more rent increases which need to be paid for from that down payment investment. AT 55 years both move to assisted living, the renter just sees another rent increase, while the homeowner sells the house and has a big influx of cash that should take care of rent until they die. Ideally both give their last 20 to the taxi outside the hospital 20 minutes before they die. The renter's highest investment balance was higher than the homeowners, but the renter had larger expenses latter in life and so had a bigger draw down of principal.
There are a number of assumptions in the above. Each that is different for you changes the analysis. In particular it assumes disciplined savings such that rent+savings == house payment + house maintenance + savings. It assumes that house maintenance and remodeling is not making the house more luxurious. Its assumes similar levels of luxury (renters are likely to go for a cheaper apartment and spend the difference in housing luxury on travel).
As always, location, location, location. Different areas have different situations that can make one significantly worse than the other.
Granted and that's why I made a caveat about the specific markets I've lived in. While I know HN is very Silicon Valley centric, for people who live outside that bubble Silicon Valley is generally viewed more of an anomaly than a market bellwether.
I'd be curious if there's any evidence as to why rent went down in SV. For example, did the lack of credit affect the venture capital necessary for start-ups and ultimately lead to less demand in housing?
Mostly people moving out. Silicon Valley has an unusually high number of transients in the U.S; when there's a downturn and people lose their job, domestic migrants tend to move back to their parents in other states, or at least go somewhere cheaper. A lot of people lost their job in 2009.
This is also why the rental market was more affected than the housing market: people who owned homes (particularly expensive single-family homes) had already put down roots in the area, and if they were foreclosed upon (and many were), they were replaced by other people who wanted to put down roots but had kept their jobs. The lower-end condo market softened significantly, though, because it draws from a similar demographic as the rental market.
I'm from Perth, Western Australia, a city that recently hit 2M population.
There was a massive China-fueled resources boom in the early 2000s that soaked up the available construction capacity (materials and labour) for capital projects like building oil rigs and ports and all the ancillary stuff that entailed.
In 2000 you could buy any number of 1970s houses for <$100k. These were relatively small 3x1s (like 1000-1500 sq ft) but solid. Concrete pad, brick-and-tile (Australia doesn't build timber-framed houses).
By 2006, those same houses now cost $350k. There were articles at the time stating that the cheapest house for sale in the city was $250k.
And all that paled in comparison to what happened at the high end of the market.
Anyway, rents went through the roof.
By 2011, the resources boom had definitely cooled and prices were starting to drop. There were less FIFO (fly-in fly-out) workers and so on. Rents had actually did drop through the middle 2010s, sometimes significantly. I used to rent out a house for $450/week and now I'd be lucky to get $300/week for. Thankfully I'd long since sold it.
2. You run great risk in terms of the market: look at anyone who bought in Detroit, pretty much ever. Buying in West Coast housing markets may look hot right now, but the minute a big earthquake hits one, a lot of people may be financially wiped out. A serious recession could do the same. Miami? It may be literally underwater. https://www.newyorker.com/news/news-desk/miami-faces-an-unde...
3. The neighborhood may change for the worse.
4. Given birth rates, you should be worried about deflation, not inflation.
The article GP posted addressed this (among a lot of other things... It's worth a read.)
>“Rachel’s landlord needs to make money. How could he/she possibly earn a profit under this scenario?”
>Here are many ways Rachel’s landlord could benefit:
>The landlord could purchase the property at a steep discount, such as through a foreclosure auction, short sale, estate sale, or by “driving for dollars” (making direct contact with the owners of distressed property.) This allows him/her to purchase the property significantly below market value.
>The landlord could be holding the property for the sake of inflation-protected wealth preservation, rather than as a cash flow investment. (Don’t assume all landlords share the goal of cash flow. Some simply want to diversify their assets.)
>The landlord could be making a speculative play on potential appreciation. (I don’t recommend this technique, but many landlords do this.)
>The landlord could have inherited the property.
The landlord could have purchased the property decades ago, paid off the mortgage, and now enjoys the cash flow. They don’t want to sell/trade into a different property due to the hassle involved, so they let this property ride.
The other secret is, many people, at the end of the day, simply make very little to no money as landlords. My parents were landlords for many years and broke even for all those years thinking that the profit was going to be right around the corner. Never came. The steps to being successful at real estate is not 1) buy house 2) print money like a lot of people think going in.
The other thing is, their calculations take in opportunity costs of having your money in your house vs having it in a better performing asset, which a lot of people simply ignore as "not a cost."
It's also highly dependant on your local market which one is cheaper.
In short: to make money in property, you need to be able to buy at a good price. You make your money when you buy, not when you sell.
Plenty of people buy investment properties generating them 2% a year thinking they're doing great!
This is however generally different to owning a house. If you want to own a house, it shouldn't really be seen as an investment, more as a place to live and put down some roots.
You shouldn't invest in putting the best kitchen in your rental property, but you can do that in your own house if you want to.
The article the GP posted (which I read in its entirety) is rambling clickbait.
If there's a long list of situations in which owning is less expensive than renting, it is intellectually dishonest to then assert that they cost the same.
The key mental breakthrough for understanding homeownership is that it's just like renting, except you are the landlord as well as the renter. So if you can imagine a bunch of different ways in which a landlord makes money with a rental property, then you can start to imagine situations in which homeownership will be better than renting for you.
You can buy foreclosures, short sales, estate sales, or just contact someone to buy their house.
You can hold property for the benefit of inflation-protected wealth preservation (in fact, this is one of the main ways homeownership helps build wealth).
You can speculate on potential appreciation (in fact, many people do this when selecting where to buy).
You can inherit property, or (more under your control) you can pass property on to your children.
You can hold a piece of property for decades, pay off the mortgage, and enjoy the greater cashflow--in your case, from income that would have gone toward rent.
Rental prices are also going to be influenced by the prevailing interest rates when the property was mortgaged. If interest rates have gone up since then, the cost of buying versus renting tips in their favor.
1% may not seem like much, but consider that you only pay 3.33% of the amount owed every year on a 30 year mortgage. Not only are their monthly payments lower, but they pay more principal sooner.
I think there was a citylab article posted a few weeks ago, where they determined the most profitable rental incomes are in low income areas, I believe somewhere in Wisconsin they mentioned.
The article differentiated two different investment strategies:
Low income property with a decent profit over monthly expenses.
High income property with little to no monthly profit, but large appreciation in value over a short time period.
So, instead of buuying one or two high income properties, one could purchase 5 to 10 low income units.
I found it interesting and a new perspective for me.
1. That article makes a number of very important assumptions which make or break the model.
The first is 5% interest. Mortgages can be significantly less interest - mine is 1.08% right now (fixed for 2 years, but those are the most important 2 years for paying down).
The second is that you'd pay the mortgage off over 30 years. It's entirely possible to pay off much quicker - perhaps 15 to 20 years - in which case the total interest paid drops significantly.
2. The article completely misses the other huge value of buying a home - risk mitigation. You can't be evicted suddenly for reasons out of your control, you're not subject to market whims in rent (there's an upside to this, but generally rents are sticky - you need to move house to get a better deal even in a falling market), you have no unexpected moving costs, your kids can stay in the same school. Looking at it purely from a monetary point of view completely misses the point.
Ultimately the benefits of stability are worth a lot, especially as you get older.
Regarding #2, there are quite a few instances of eminent domain, where the government forces the sale of the home, and this is not limited to government infrastructure projects.
We have examples of folks losing their homes to build gas pipelines and shopping malls.
> Regarding #2, there are quite a few instances of eminent domain, where the government forces the sale of the home, and this is not limited to government infrastructure projects.
As renters are also fully exposed to those, the existence of them does not alter the degree of the stability advantage for home ownership over renting.
To me, all the recent advocates for "renting & owning cost similar amounts" that I've seen have no decent counterargument for building equity, which is the single greatest benefit of owning vs. renting. This article hand-waves it away with "you 'throw away' some other money on top of your mortgage, at least at first," but how is this relevant? No one's saying that ownership = zero money "thrown away," or that ownership always means a lower monthly payment.
In the long run, these two factors tend towards irrelevance, relative to the tens or hundreds of thousands of dollars of wealth you build that you couldn't have built through rent payments.
> Given that, you buy your house to remove risk of local changes to your detriment.
I think the more reasonable complaint is that people don't like thinking about how much of a risk a leveraged, illiquid investment worth >100% of your net worth is, so they have to delude themselves into thinking of housing as unrelated to their finances (incidentally, this is why richer households' net worths recovered so much better from the financial crisis: poorer households' were more likely to have a portfolio tilted ludicrously towards a single, illiquid asset).
That is to say, you're definitely correct that getting equity in the housing market has concrete second-order benefits, financial and otherwise, that don't show up in a simple assessment of the asset classes in your portfolio. But the _amount_ of house people choose seems to be systematically skewed upwards, often for no real reason other than financial illiteracy and an aversion to sitting down and thinking through the purchase decision.
Oh man. They say there are two things you can't discuss over beers, but it's three.
Politics, religion, and whether their house is an investment.
People get pissed at you if you tell them that having all of their money in their house is a bad investment. You'd get less aggression telling your friend you think their wife is cheating on them.
If you are in a lower income bracket than what we used to call middle class (before being middle class meant "up to your eyeballs in credit card debt"), it's likely that the majority of your net worth is the equity the house. That's bad. And that doesn't mean "take out a second mortgage and start playing the stock market", that means you have more house than you can afford long term.
The people for whom it works as an investment are diversified. If less than 30% of your money is in your house you are probably doing it right. If it's 75% and you also don't have a retirement fund, well you're subsidizing those of us who are both more fortunate and better at math.
Too bad I only own it after paying massive interest for 30 years that is adjusted every 10 years (or unreasonably high). A house costs you a large part of your income for 30 years now and somehow people fail to see this as debt, they just accept it and hope their house grows even faster in value than the others.
After 30 years though... If you are not reasonably able to think 40 years ahead a house is not for you. But renting isn't going to do better either as you need to think 40 years ahead for any investment.
If the house is expensive (many years worth of income) and a dominant part of your assets, it's a big source of risk, dwarfing any hedge attributes you may pine for. Even in a normal city with diverse economy.
The premise of housing depends entirely on how society or more specifically the government or even more specifically banks/business want it to be.
The only true purpose housing serves is shelter. That's it.
Any other purpose is artificial. Housing normally is a depreciating asset, like cars. Normally it shouldn't be a hedge against anything, including inflation. It normally shouldn't be an asset of speculation, no more than tulips or bitcoin. And as for security and stability, you can get that from renting ( especially if you live in rent controlled apartments ).
The idea of a house as an asset or investment is due to government and business policy decisions. Increasing immigration, limiting development via zoning laws, creating tax incentives, advertising pushing home ownership, laws favoring home owners and landlords over renters, etc.
All the premises we believe are premises we are taught. Your premise is just as false as anyone elses. It's entirely artificial. Policy decisions could make renting more favorable than owning. Policy decisions could actually make owning a home near a coal mine more stable than owning a home in silicon valley. Policy decisions could make home prices decline considerably by encouraging overdevelopment so that supply outstrips demand.
Fundamentally, as I stated before, the only purpose of owning a house is shelter. Everything else are "false" premises we've been taught.
No need for name calling. With a stable population, no tax incentives, no legal or government incentives, etc, your home is a depreciating asset. If you've owned a home, you realize it is constantly breaking down and you have to constantly fix it. A home isn't a productive asset like a business. It isn't making you any money "productively". The only way homes become appreciating asset is purely through external manipulation. Increasing population, limiting development, tax incentives, legal incentives, etc. This isn't a secret.
It doesn't matter if you rent or buy: either way you have to pay for the maintenance costs. If you rent you don't directly pay it, but you still pay for it. As such maintenance costs are not a factor.
A house should ideally be a stable investment: the value should keep pace with inflation.
Most people pay more for house maintenance than required (updating a perfectly good kitchen...). That is an investment in quality of life.
Since you mostly just break the guidelines here we've banned the account. We'd like to unban you if you'd email hn@ycombinator.com and commit to using this site as intended.
Nothing is ever always a good idea. Real estate is a good investment when the fortunes of the area are on the rise.
A $30k house in 1980 is NYC could be worth $3M today. The same house in Cleveland is probably less than $250k. (Mostly inflation) Even in that situation, the Cleveland house may still have been a good value based on having a fixed expense vs dealing with landlords.
Likewise, when economic policy shifted to favor the south, lots of owners of swampland in Florida and other places became very rich.
I would also add that buying vs. not is also a lifestyle decision. I've owned and rented for > 10 years each and there are pluses and minuses to both. I consider any financial gain one way or the other to be side issues.
I think your comment is itself missing the point of the article: to the extent that housing is "affordable" in the sense that most necessities are affordable, it would not satisfy your points 3 and 4. That is, if it fell in price over time like food, and so were affordable in that sense, it would fail to be a hedge against inflation or market forces.
In fact, if you replace "housing" with "food", you see a natural response to your penultimate paragraph: "You're never out of the market for food. Therefore, it makes sense to buy a forward contract that pays out a [predefined] basket of groceries forever." The error in logic is that you expect food to fall in price, and or your tastes to change, so locking in such a contract would probably be a poor use of money, considering what they would charge.
It's less obvious, but the same logic applies to your points 1 and 2 as well. The very reason that a home provides security and stability is because you expect to get priced out of that neighborhood, or difficulty in moving to another nearby, similar home. That's also an artifact of housing being made "a good investment" by policies that make housing more expensive over time!
So, yes, housing does provide those things, but only because current policy picks one branch of the affordable/good investment dichotomy.
I don't see a huge difference between #1 and #2, so I'll address them together:
Home ownership as it stands today does not provide financial security / stability because of the degree of leverage required for most Americans to own a home. It is funny how much basic financial advice boils down to "diversify!" but then we turn around and define the "American Dream" as levering up to buy a single asset that is worth several multiples your networth.
Home prices are absolutely not hedged against market forces, and the double whammy of losing your job WHILE owning a house whose value is down significantly from your purchase price is substantially worse than losing your job while merely renting your home.
When your house value is underwater, your only play is to stay and wait it out until prices recover. But if you also get laid off and can't make the mortgage, you can't simply move to a smaller / cheaper home like you could had you been renting. You'd be forced to sell at the bottom, or try to rent out at currently depressed rental rates to make up for your mortgage that was locked in from when your house was worth much more.
To own a home is to be in a state of constant stress over the value of your home, and the more levered up you are, the worse this gets. This source of stress is why I believe NIMBYism is so prevalent.
> To own a home is to be in a state of constant stress over the value of your home, and the more levered up you are, the worse this gets. This source of stress is why I believe NIMBYism is so prevalent.
This is a major argument for living in a low cost-of-living area. While in Silicon Valley, house prices are 10-20x a developer salary, in my location in the midwest, houses are 1-2x developer salary.
>...Each pod has its own front door, balcony, kitchen and TV. The small, but perfectly formed units also feature a mezzanine floor with a desk, doubled bed, bathroom and storage space.
>The units cost between £80,000 and £120,000 to build and install depending on the specification.
>Designer of the pods, Bill Dunster, believes the homes are perfect for packed cities with little land space as the units can be built above existing structures such as car parks.
>“Importantly the ZEDPod concept decouples housing provision from land prices using air rights over car parks,” Mr Dunster said.
>“This enables affordable, quality city homes where land is scarce or expensive to be put up quickly, helping keyworkers to live near their work and at the same time maintaining precious parking spaces.
>“We are working with key partners to create a development model that allows Local Authorities and others to create communities of affordable houses at almost zero capital outlay.”
One thing I noted from this article, was this is pretty much the most affordable you can get and they are being aimed at employed keyworkers. Given the market insists on having 'range' for marketing segment purposes, if the plan is for vital keyworkers to be living in these, what exactly is the plan for people lower down the social ladder?
For those intrested in digging into dusty nooks of this topic, and away from the current Sturm und Drang, I recommend taking a look at Richard T. Ely, founder of the American Economic Association and scholar of land value economics:
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[ 3.9 ms ] story [ 287 ms ] threadMost people I talk to are more concerned with eventually renting out their homes they bought decades ago and using that to buy another house, though. I'm really inclined to believe renting homes shouldn't be legal, perhaps, because eventually you wind up with a situation where no one even has the option of buying their own house.
Am I missing something?
[Edit: I mean, I can see that renting being illegal is a restriction on use of property. That's a long distance from private property itself being illegal, though, and I don't see any reason to suppose that would be the end result - either the desired end result or the actual one.]
The key to solving it is to make sure everyone is focused on affordable housing.
Once you got a impactful part of society focused on something else, for example extracting rent - you've lost.
That's why Germany managed to create a working, affordable housing system after ww2.
And that's why Israel, in it's early years, managed to do the same, and offer affordable housing to everyone,while working under dire economic situation.
However this info may be out of date / incorrect.
In exchange for my illusory benefit of paying "only" a few thousand every month, I get:
- To keep the remaining 30% of my salary (as ever rising rents creep past 70% of take-home).
- Enjoy the 10% yearly rent raise.
- No security, can be kicked out any time (it happens every few years, sometimes a week before Christmas).
- No permission to paint anything.
- Forbidden to have pets of any kind. Could move, but can't find anywhere within commuting distance that allows pets and is in the same price bracket.
- Can't change anything structural, like a window for a nicer one.
- Can't change the locks to something I'd like.
- Can't try out the fancy new home control tech (Nest etc)
- Can't fit solar panels, even if subsidised by a power company, as the offer is only to homeowners.
- Forbidden to "run a business" from home (it says in the contract), and forbidden to register a company at my home address.
- No guests allowed to stay over longer than X days.
- When I hit retirement age and soon after that run out of money, I'll be evicted and homeless, because pension isn't enough to pay the rent, and rent is rising faster than inflation anyway. State benefits exist for pensioners, but the housing component intended to cover rent is widely known to be less than real rents.
So fair enough, I avoid buying somewhere with a million in capital.
Instead I spend more than a million in rent over a working lifetime. Sure would have been nice to live in a stable home during it, to enjoy the freedom to do what I want in the home, and to stay there at the end.
So I don't think that's true.
My experiences are in various places, all outside the US, and some of them in "ordinary" towns that don't have unusually high prices.
Besides, where I am, renting is often more expensive than buying, at current mortgage rates. (It was the other way around when I looked into it about 17 years ago).
House prices are going up for buying and renting in tandem, with some lag either way depending on area. Do renters get a better deal as a result of those rising prices? I don't think so.
Why not buy then, you say? The gatekeeper for most people is limited access to mortgages, not the cost, because perversely they pay more in rent than they would on a mortgage for the same place, and to rub salt in the wound, the money they pay in rent consistently for years is ignored for the purpose of assessing their creditworthiness and affordability.
Not that opening that gate would help for long, because prices would adjust upwards if more people obtained access to mortgages, but it is still perverse when we describe buying as an unreasonable aspiration in an area, when people are paying more in rent than the cost of buying.
also, the landlord has NO right to enter the property unless there is an emergency, and even then they may have to break the lock to do it because the lock may be changed, and the landlord may not have any keys.
we also did replace windows in one place we lived, and completely rewired the electricity (which included putting new pipes into the walls to hold the wires). it was an old building, and the change was made in consultation with the landlord, but there is no reason it can't be done.
apart from that any change that doesn't change the structure and stability of the house is possible, and any change that an easily be reversed in most cases doesn't even need permission of the landlord.
in another apartment we added a hardwood floor on top of the floor that was there. a sheet of foam and the hardwood on top. for the first room we paid a contractor, for the others we did it ourselves.
if my pension is not enough the government will chip in with housing allowance to make sure i can pay my rent. at worst they will ask me to move into a smaller home if i happen to occupy a place large enough for all my kids who have long moved out and no longer need the space.
i won't be living on the street and i enjoy the freedom to move whenever i like without being tied to a particular location.
also, being a landlord and renting out your property in germany is so onerous that it's not worth it unless you are doing it as a full time business.
that adds a further point in favor of renting because you can't just buy a property and rent it out without putting a major effort into maintenance and paying for upkeep.
finally, as long as you own property you generally don't qualify for financial support, should you ever need it
it's all a matter of perspective.
How did you make it do this conclusion? Renting is legal all over the place and that scenario has happened literally nowhere.
I'm supporting the point pathseeker was arguing against.
The externalities have come back to bite society at large in numerous forms. The unmanageable maintenance debt on the infrastructure to support them. The dependence on private enterprise storefronts to supply developments that can close up shop at any point and leave whole regions without access to a proper grocery store. The ongoing maintenance cost upkeeping all the land and structures. The time lost commuting around areas of extraordinarily low population density. The structural macroeconomic expenses in building supply chains to support such a spread out population. The social isolation and resulting depression that plagues the society as people silo themselves off behind their picket fences.
The broader trend must be towards density. That doesn't mean to compromise privacy, or even necessarily individual usable space - but it does mean a move away from stick houses with 4 lanes in between towards 4+ stories with bus and train access.
Terraced housing as seen all over Europe could house single families without issue. London is full of these things.
100sqm is really quite a decently sized home with gardens front and back. That's already a 10x density improvement.
Not everyone wants to live in an apartment surrounded by other people on all sides with no control over the place they live in (because it's all outsourced to a "management company" e.g. nonsense bureaucracy).
As far as I can tell all you're going to do by building tons of flats is entrench some sort of class system. Outside of elite city center locations only proles will be living in apartments.
Either own a home or be homeless. That's more humane. /s
Which makes it all the more important that you correctly identify and apply the mechanisms that push a place towards one end or the other.
>Everyone needs it, and we all have incentive to reduce costs—except landlords.
64% of housing units are owner-occupied [0]. These households are not landlords, yet they are incentivized to raise property values.
[0] https://www.census.gov/quickfacts/fact/table/US/VET605217
One system that is being tried in some region in China is you buy your house from the government and sell it back. This keeps things democratic and market free. Landlords should be cast into the dustbin of history.
Requirements: - be a citizen - get married
The government will then build a flat for you and hand you the keys 5 years later for about a fourth of the private market price.
Of course you need an economy that can pay for all this, so it won't be universally applicable
EDIT: I thought that was a meme and it's not—i'm referring to the growth of the middle class and multi-room houses.
I think everyone in Hong Kong would happily live with their parents for 5 years if it means they can buy their own flat afterwards.
Renting is awesome!
Why do you want to force me to buy a house? I don't want to do that. I want to rent one.
They should feel free to purchase and house whoever they want with their tax dollars.
As long as we are taking stuff from people, what makes the most sense is to so it equally through taxes, and compensate people fairly by purchasing houses.
Or even better, the government could pay money to build more houses.
An unconditional human right... where? Does everyone have a right to housing in the uber popular San Francisco? Does everyone have a right to beachfront property in Hawaii? Or if you don't have a house are you provided one in North Dakota?
More people want to live in San Francisco than there are houses. There's going to be winners and losers. I would love to radically increase the number of immigrants we let into the country. Where do they have a right to housing? If that housing doesn't exist who is obligated to build it to give away?
We also have similar discussions around many negative rights. E.g., in the US 4th Amendment rights are subject to all sorts of practical limitations.
That rights are complicated to implement doesn't mean that they shoudn't be rights.
The solution is, to give a plot of land to every human being that turns 18. there's enough land to do this. In most cases they wont want to live exactly in that spot. but, they can sell it or rent it out and use that money to move somewhere else. That's right folks, this is one of those situations where we can actually create wealth out of thin air, just by using up all that land that's been locked up for so long.
Wedging that initiative is a very uphill battle.
I don't think you know what a commodity is: https://en.wikipedia.org/wiki/Commodity
In fact, I think it would make more sense to say, "As a practical matter, housing could only be made available as an unconditional human right if there is [at least a subset of all] housing which IS a commodity."
In strictest terms, real estate can never be a commodity because it is all unique. Commodities have to have "full or substantial fungibility", which can't exist when housing occupies a fixed physical location, which is unique. (So perhaps some housing could be a "commodity" even in a strict sense if it could be moved around. . . Think mobile homes.)
If I move for a job, should I immediately buy a house? On the other hand what if I know I don’t plan to be in an area for long? Should I buy a house for a year or two? What happens when I am ready to move and can’t find a seller?
>"The property developer behind the conversion of central London’s Centre Point office skyscraper into multimillion-pound luxury apartments has given up trying to sell the flats after receiving too many “detached from reality” lowball offers.
>Mike Hussey, chief executive of the developer Almacantar, said the company had decided to halt formal sales of the flats in the 1960s brutalist tower, now called Centre Point Residences, rather than slash prices.
>The company said concerns about Brexit and possible tax increases on overseas investors were encouraging potential buyers to make offers well below the asking price. The reception at the redeveloped Centre Point building in London’s West End.
>The decision to halt sales means about half of the tower’s 82 flats, which range from £1.8m for a small one-bedroom apartment to £55m for the two-storey five-bedroom penthouse, will now lie empty, adding to a glut of unsold ultra-luxury property across London."
https://www.theguardian.com/business/2018/oct/31/brutalist-m...
>"The building is 117 m (385 ft) high, has 34 floors and 27,180 m2 (292,563 sq ft) of floor space. Constructed from 1963 to 1966, it was one of the first skyscrapers in London and as of 2009 is the city's joint 27th tallest building. It stood empty from its completion until 1975, and was briefly occupied by housing activists in 1974. Since 1995 it has been a Grade II listed building. In 2015 it was converted from office space to luxury flats."
https://en.wikipedia.org/wiki/Centre_Point
My point is that properties, even rental houses, turn over at some point and there is typically enough turnover that it's probably not going to tie up affect the long term percentage of homes for sale.
As I've written elsewhere, a housing market has much in common with a traffic jam or a crowded bus. Everyone takes up space, so everyone is part of the problem, based on how much space they take up. The only way to fix it is to make more space or convince people to go elsewhere.
I disagree. Home renting has all sorts of societal benefits and allows folks to be mobile when needed. Perhaps you are just going to be in the area for a couple of years, yet would like to have space for your dog to run, for example. Or need to divide your large, old house up so you don't have to move. It also means young folks can move out of the house and that everyone gets the choice of sharing walls with a neighbor.
Money and income is a much bigger indicator of whether or not someone can buy a house. If slews of people cannot save up money for a down payment, these folks cannot do such a thing. Bad zoning laws and other such things naturally influence it as well.
On subsequent turns, the property has either gone up by more than the average player is able to save (making it less affordable to those players who don't own it, while simultaneously making it a good investment for those who do) or it has not.
If it's to remain a good investment (as we've preached, observed, and generally sought to support), housing affordability is a seemingly inevitable casualty of it. Some would say "the solution is to build much more housing" (which I agree with in general). Those policies, in general, make housing more affordable (the explicit intent), which naturally makes existing housing a worse investment than if that additional housing was not built.
remember that the rate of return in property investment has two components: the rent, offsets against tax for the maintenance of costs, and the capital gain. the show isn't over until the deal is done and like gambling you have to know when to hold 'em and know when to fold them into somebody else's property portfolio.
also, social housing is "good" for reasons which can go to longer term investment outcome. What if holding cheap housing stock in your portfolio also prevents competition setting up closer to your other valuable investment?
The point I was trying to head to, is that rent doesn't have to rise, simply because people think rental investment has to return some arbitrary ROI for the capital invested in it. Lots of forms of investment exist, some of which return less than others, and we have a mix of investments for a mix of reasons.
In Brisbane (where I live, and co-own a house I live in which I do not regard as an investment in that sense), rents fell last year due to oversupply. Prices fell too, but the two were somewhat de-coupled. Supply of affordable housing fell too. Some people think there is a nexus, I think the fall in affordable housing is down to lack of rent controls, long term tenancies, and state and federal convergeance on housing policy.
(Unlikely third option: Wages begin to represent a smaller portion of total income)
5% annual return is significantly higher than wage growth.
https://en.wikipedia.org/wiki/Land_value_tax
That aside, the reason why people have been using housing as an investment vehicle is because there really aren't that many good investment opportunities over the long term. You have stuff like gold and stocks, but they have their own problems. Housing has the additional utility of the ability to live in it.
I suspect that the reason housing/real estate wouldn't be considered such a great investment if there were a better store of value.
Housing investment doesn't really have the ability to live in it. If you don't rent out your house, you're losing investment returns. Plenty of property investors depend on rents, not just price rises for their profit. As long as you live in a house in the free market, you're paying for that privilege, whether you own it or not. What it does provide over renting is you can't be kicked out so easily. I think that could be the main reason families prefer to buy houses instead of rent.
CA voters thought they could prevent people from coming here by reducing housing and boy were they ever wrong. It's too bad this lesson took 50 years to play out and awareness is only now slowly starting to arise.
https://sanfrancisco.cbslocal.com/2016/08/30/palo-alto-mayor...
No fundamental change in their utility? Gentrification goes hand in hand with reduced crime rates, better education, increase in available public spaces/restaurants/bars. It's a feedback loop based off of people's tolerances. In one common model, for example, it begins with more desperate braver artists starting to congregate in an area because it's what they can afford. Their presence alone will typically change the dynamics of an area to a certain degree that is enough to create a tolerable pocket for the more adventurous that are better off (think software engineers opting to live in Mission/Oakland 5-10 years ago for the cultural element of the neighborhood). More tax money starts coming in, policing goes up and is partly responsible for crime going down, which also goes down due to demographic shift to wealthier people who are less likely to feel as though they must engage in crime. The children of these people can create a large enough community of kids that are culturally primed to take education seriously that the critical mass of a classroom can shift from boisterous and unruly to more manageable, further stabilizing the education situation for those that come after.
The point is, very little of this is just some arbitrary decision with no impact on the function of neighborhoods. Over the course of gentrification, neighborhoods change dramatically in ways other than demographic shift.
You do nothing, rich people move in around you, value increases.
You do nothing, rich people move out around you, value decreases.
The direct utility of the property is unchanged. The owner has made, net, an insignificant contribution to the surrounding community. And yet value accrues (or diminishes) all the same.
Housing and real estate internalise the net community utility changes. The pathological cases are where the owners or investors are outside the community and strip-mine the resulting wealth.
Land value taxes both dampen wild valuation swings and internalise value gains to the community to provide infrastructure, institutions, and services.
Land value tax would take money from people who don't need those community services and give it to different people who happen to live nearby. That's not really fair. It's still a kind of rent seeking that also happens to give the rent to charity but not back to the original payers in proportion to what they paid. But it does sound more reasonable than the luck of the draw that property owners get.
It's the assetification of an essential economic input that seems to be the root of the problem. Bernhard J. Stern commented on this in the 1930s in several works I've submitted (to no traction) in recent weeks.
https://doi.org/10.1177%2F000271623820000104
https://archive.org/details/technologicaltre1937unitrich/pag...
Colonization is a fine word for it.
Without fundamentals like that, then it is arbitrary decision which neighborhoods have high prices and which have low. It becomes an accident of recent history that could flip the other way over a period of decades and ruin people's investments.
Yes. A given neighborhood might change, but a common, if not fundamental, characteristic of gentrification is that the associated demographic shifts constitute a commensurate shift in the location of community-related amenities, e.g., good schools, lower crime, public and private investment in public spaces. In other words, gentrification doesn't create more affluent communities, it simply shifts them, to places ready for new development as older communities become less desirable ultimately as a simple function of their age.
There is also the necessity of addressing the role of race and class anxiety in how, why, and when we invest in communities.
Housing, though, is the only place where you can get leverage with literally 0% down.
Real Estate is also MUCH less volatile than the stock market, which (I think) makes it seem less risky (and maybe factually is, but I don't know for sure).
Typically if you don't have a house, you can't get a big bank loan either.
For example, that term, "rent savings," is an assumption in and of itself. In the real estate market I live in, a house can easily offer negative rent savings. Based on the figures I've seen in my area, I'd estimate that the point at which my hypothetical lifetime expenditure on owning a house drops below my hypothetical lifetime expenditure on renting would come a decade or so after the point at which I can expect to die.
That said, I don't want to imply that buying a house is a bad idea, even in my market. Lately I've been getting more interested in doing it, myself. But, at least to me, this is right in line with how the clothing and food that I buy have also changed over the past couple decades: The more money I have, the more I can afford to spend it on having nice things.
Can you share some of the numbers you used to get to that conclusion? I've done similar estimates in my (high cost-of-living) city, and even with pretty conservative estimates of property value growth the payoff is much sooner. Yes, the mortgage payments are more than rent for a comparable home, but the interest (plus estimated taxes, maintenance, etc) is somewhat less than rent.
I'd guess one of the following is true:
* you are assuming stock market returns will significantly outstrip growth in your housing market, even considering leverage
* you don't have access to tax breaks on mortgage payments
* you are much older than 30
* you live in an area where home prices are wildly inflated beyond what rents would predict
From there I just looked at the money I would never see again - interest, taxes, maintenance, fees, assessments (if a condo), etc.
What’s wrong with the market as a long (emphasis) term investment vehicle? ~7% average yearly returns for the past 150 years is pretty solid. Yea you have to insulate yourself from market fluctuations, but that’s also true of the housing market (see the collapse of the US housing market 10 years ago). Barring a complete collapse of the US economic system, in which case Americans will have other things to worry about, how is housing superior than some boring-old Vanguard market tracking ETFs/Mutual Funds? Better returns?
To avoid cherry-picking, if we go out to 20 years housing has an average annual return of 4%, and the S&P 500 is at 6%. Go out 30 years and housing hits 5% while the S&P is at 10%.
PS, I really appreciate the Case-Schiller index used above for housing prices. It's methodology specifically targets the change in value of a house, instead of capturing overall price increases caused by house flipping, the expanding size of houses over time, etc.
For the 10 largest metro areas (https://fred.stlouisfed.org/series/SPCS10RSA), the annual returns are the following. Interesting to note that nationally home values are over their 2006 peak values, but that in the 10 largest metro areas home values are only about even with the previous peak.
Alternatively, if you look at just San Francisco (https://fred.stlouisfed.org/series/SFXRSA):As an investment housing does much better when compared to equities than we thought until recently and it’s less risky. If the Communists come you’re screwed no matter what but if there’s regime change there’s a decent chance you can keep real property, especially if it’s local.
> The authors of the aforementioned study — Òscar Jordà, Moritz Schularick and Alan M. Taylor — have constructed a new database for the U.S. and 15 other advanced economies, ranging from 1870 through the present. Their striking finding is that housing returns are about equal to equity returns, and furthermore housing as an investment is significantly less risky than equities.
> In their full sample, equities average a 6.7 percent return per annum, and housing 6.9 percent. For the U.S. alone, equities return 8.5 percent and housing 6.1 percent, the latter figure being lower but still quite respectable. The standard deviation of housing returns, one measure of risk, is less than half of that for equities, whether for the cross-country data or for the U.S. alone. Another measure of risk, the covariance of housing returns with private consumption levels, also shows real estate to be a safer investment than equities, again on average.
https://www.bloomberg.com/opinion/articles/2019-03-21/buy-a-...
A gram of dirt from my backyard is completely unique from any other gram (at a molecular level) and is therefore incredibly scarce - if you want exactly THAT gram and no other. I’d also sell it for almost nothing, so it’s affordable.
I don't need to pay someone 5% of the value to sell my gold investments.
Here in Norway there's also some significant tax benefits which factors into it. For one the tax value of your primary home is one quarter the market value (higher for secondary homes). So you pay a lot less tax having your money tied up in your home than in the bank.
In addition you can deduct quite a lot based on the interest you pay on your loan.
Together they make it quite attractive to own rather than rent a home.
I don't think this is true at all. Even the nature of "desirable" land has changed drastically over the last few hundred years. There's no reason to think that change won't continue to happen. Especially given the rise of internet, climate change, and the necessary decarbonization of our economy, what's "desirable", it's ridiculous to think where people want to live is fixed.
1. Cheap shipping via navigable rivers 2. Deep water ports 3. Not subject to periodic flooding 4. Flatness (not a huge deal, but it does make construction cheaper) 5. Soil suitability for construction (especially relevant is where the bedrock is, and what kind of soil lies atop it)
Granted, a lot of this is merely the reason why network effects got started where they did. But they are still highly relevant considerations that add completely natural value to land, regardless of what people would decide to do with it.
Note also that your "uhh" is something many people find objectionable. E.g. https://web.archive.org/web/20070105163441/http://www.televi... with more discussion here: http://languagelog.ldc.upenn.edu/nll/?p=28802
Granted, the risk-free rate doesn't have to be above-inflation, but the real interest rate currently is positive in the US.
Of course, others I know have also lost substantial value at times.
Places can become more or less desirable to live in - all this talk about matching inflation rates etc. is about the housing market as a whole - average. If you bought in a bad neighborhood and suddenly the neighborhood gets renovated and richer people start moving in - your property can increase in value multiple times over what you paid for it initially. If your area has excellent job offers and limited housing supply you will see housing prices increase because more people with more income will come to that area to work there. The problem happens when the local job market hits a slump and you assumed the demand increase will fuel the growth to cover your investments.
inflation or wages within the pool of people eligible and willing to buy said housing. So you get weird distortion when housing is bought up by folks not actually living in them (foreign ownership, and kind of speculative buying)
Every step of that is awful, of course, but nothing disallows it from happening. And indeed, if you compare trends in wages[1] and home prices[2] you'll see two lines that don't look like they know each other.
(I pulled the first two graphs I found, if someone wants to go get wages and home prices and index them by the same inflation metric that'd be awesome.)
[1] https://en.wikipedia.org/wiki/Household_income_in_the_United... [2] https://commons.wikimedia.org/wiki/File:Median_and_Average_S...
Now ROI and asymptotic analysis are both mathematical niceties the belie real world limitations, but that's how people talk.
Now, I can imagine an exponentially distopian world where 4 families are forced to live in a single house. In such a world, housing prices could rise faster than wages/inflation for quite some time, but not forever. There's only a finite amount of space inside a house. And at some point, you will run out of cubic feet of space (if disease and pestillence doesn't kill you first). In the infinite long run, those prices will only be able to increase as much as wages as long as wages remain the primary source of money.
Have you seen Hong Kong cage homes? You're right that there is a limit, but we're far from close to it.
I don't think this is true at all. Prices can outstrip wages easily when there's a large influx of new inhabitants, either through a high birth rate or through migration. See London over the last decade for an example. It's less common to see this effect in entire countries because it would take a vast number of people, but I do think it could happen.
Prices can continue to rise if mortgages become cheaper to service: as we've seen over the last thirty years, declining interest rates and lengthening mortgage terms push up the price of houses.
Prices can also rise if there is sustained outside investment - for example wealthy people outside the country looking for somewhere safe to stash their money (see London again).
OF course, all of this is contingent on what exactly you mean by "the long term". But the UK has seen a sustained boom in property prices for a generation. That seems pretty long term to me.
This assumes the lack of a bubble created by anti-competitive regulation, like SV's cap on new development.
That national government could however put a lot of pressure on the states and local governments by banning federally guaranteed housing loans in areas where zoning laws were not to their liking. This would have a temporary effect (while it was being battled out) of smashing the property values of the little guy homeowners (whose next buyer will likely be taking a federal-supported loan), while leaving the jumbo loan market relatively untouched, so it's a pretty nuclear option to try to accomplish in any kind of a rapid fashion.
These are the kinds of people who get wiped out in real estate declines.
The only way to change the zoning laws is to convince the majority of voters that they need to be changed. A nonprofit would have just as much luck doing this as a VC-backed startup.
This is a problem because essentially all current consumption is created by current workers, and retirees aren't working. The transfer from workers to retirees happens in one of two ways: either through taxation ("Pay As You Go" systems like Social Security), or in exchange for transferring a financial claim from retirees to workers. So as the retiree ratio increases, a combination of several things have to happen to balance the flows of goods and services:
1. Retiree consumption decreases.
2. Worker productivity goes up.
3. Taxes go up.
4. Workers spend more of their money on financial claims.
If you look at what happens when the first three are relatively fixed, what does the last one happening look like? The only household budget items big enough to swing the needle are things like paying back student loan debt, their rent or mortgage (basically equivalent here), 401k contributions and other retirement investments, and to a lesser extent automobile financing and other consumer debt.
Note that this is more like an energy-based physics analysis than a force-based ones - it illustrates the overall tradeoffs that have to get made somewhere, but doesn't specify causal mechanisms. The actual causal path is something like the increase in saving pushing down interest rates, which makes financing desirable long-term goods (housing, education) more affordable on a monthly cash flow basis, which drives up prices until the market clears once more. In other words, college and housing became more expensive because the aging population needs to loan more money to the next generation to fund their retirement.
Also, the demographic that's currently getting squeezed the hardest by all this isn't Millennials. It's middle-aged folks stuck in the awful gap of having aging parents and maturing children. After all, "retiree consumption decreases" is a really bland euphemism for what goes on at the ground level - retirees not having enough food to eat or being unable to afford medical care. And on the other end, it's getting harder for children to afford to take the steps required to become independent, so this unfortunate demographic also has to set aside more housing and other resources for their children than before.
I really don't have good ideas for any sort of practical action to resolve these tensions. It's extraordinarily depressing. Personally, I'm expecting these trends to continue, and for this all to result in lower per-capita retiree consumption when I'm of the appropriate age, so I'm saving at a higher clip now to compensate. All this does is, though, is increase current retiree consumption and improve my rank-ordering in my retirement cohort; saving more doesn't fix the problems my cohort will end up facing.
Increased taxation is not required to support a growing population of retirees, increased production is.
Taxation is neither here nor there: it is required as an inflation control and to give value to the currency but the limits on spending at the federal level (where social security/pensions SHOULD reside instead of in privately held pension funds) are total spending this year, not tax receipts last year.
Tax receipts extinguish a liability that was created when the federal government spent the money into existence in the first place.
It's not true that current consumption is created by current workers. Retirees spend. What's true is that we have an incredibly inefficient means of funding their retirement through property as an asset class which sucks money out of the current working population via private financial institutions and hands it to retirees, some of whom support their kids in purchasing exorbitantly priced property, placing them in a very precarious financial position which lowers birth rates and further exacerbates the problem down the line.
Property isn't required as an asset class, it's just a convenient thing most people understand and governments worldwide have been able to conveniently take their hands off the wheel.
If you track the real goods and services involved, nations are essentially incapable of saving for the future. Ignore the financial claims and just look at the goods involved - today's retirees are consuming the fruit of today's labor, essentially. They're not making a car in 1980 so that they can drive it around today.
>Increased taxation is not required to support a growing population of retirees, increased production is.
Increased productivity definitely helps (see point 2 above). It has to grow in excess of the rate of growth of the gross retiree consumption, though, or else you're just facing a less intense version of the prior dilemma.
>Taxation is neither here nor there: it is required as an inflation control
Saying you don't have to tax workers and can allow inflation to rise instead is solving the problem through point 1: reducing the consumption of retirees (by inflating away their purchasing power).
> It's not true that current consumption is created by current workers.
Apologies for saying things in an unclear way - I probably should have used "produced" instead of "created", because I was getting at the physical act of producing goods and services for consumption, rather than the desire and means to consume goods and services.
Buying a home is generally a good idea even if the “asset” isn’t growing very rapidly. There are a lot of socioeconomic benefits to ownership, which I won’t rehash - google is your friend there.
For the financial benefits, provided interest rates make sense and the buy vs rent trade-off is sane (in SF it may not be), a mortgage essentially acts as a forced savings account, while providing you with a place to live.
Say you take out a 30 year loan, in 10 years, roughly 19% of the principle have been paid down. Assuming the house roughly stays with inflation and you made ZERO real profit on it, you are still wealthier.
Now, if the market moved significantly down or you had major repairs, it could still be a crappy savings account. However, all else being equal, it’s generally better than the exactly equivalent rent.
In the end, everyone’s situation is different - do your research and talk to professional advisors (the ones that are fiduciaries and not just sales people).
Really, the opposite of the headline is true: If prices go too high, real estate stops becoming a good investment, because you can get better ROI elsewhere.
Hernando de Soto on Capital is recommended, specifically as regards Latin America.
https://www.worldcat.org/title/mystery-of-capital-why-capita...
https://en.wikipedia.org/wiki/Hernando_de_Soto_Polar#Main_th...
I don't get OP's argument at all. You're never going to get housing costs anywhere close to zero unless you're grifting off someone else or living on the street.
From Nobel Prize winner Robert Shiller
https://awealthofcommonsense.com/2013/04/robert-shiller-on-r...
A modest $300k home would have a tax of only $3000. And your maintenance is not going to be anywhere close to 10s of thousands, and it's extremely unlikely you'll even average 10k a year over 5 plus years.
I think that depends on your definition of good. If you put the money you would have used for your down payment and what you would save by renting vs owning towards the s&p500 by the end of the 30 years your investment's yearly growth is more than your yearly rent.
Of course, lowering your expenses is less risky than growing your investments while keeping expenses the same so it's not a completely objective decision.
The biggest problem with this strategy is that most people end up having lifestyle creep and do not save as much if they rent vs being forced to save via a mortgage.
Retiring in a (privately) rented property is so impractical in the UK that I would feel fairly comfortable in calling it impossible.
I would be extremely surprised to hear of more than a few token examples in London who have been privately renting the same property for the past 20 years, for example.
From the council, with secure tenure and at below-market rents? Sure.
Performing anything other than basic improvements to a rented property is also fairly pointless, so your options are to live in a cookie-cutter new build, a run down conversion, or if you're lucky an ex-family home.
I tend to think that this effect causes prices to skyrocket far beyond what they normally would do because there's such an enormous gulf between renting and ownership far beyond the basic financial calculations.
Why can't you negotiate improvements with your landlord?
Often what happens is one of (a) they don't like it so you can't - "I think no, let's stick with white for the walls so the next tenants won't be put off".
Or (b) it's a disruptive improvement with no obvious benefit to them while you're there - "no, let's keep the useless and ugly blocked-up fireplace that nobody can use but takes up a wall, I agree it's in the way but the next tenant might like it". Or "I'm not going to invest in solar panels, this is a business not a charity, and it's you paying electricity bills not me".
Or (c) it's a genuine improvement they go for, which makes the property more valuable to rent. So they kick you out at the next renewal (no reason given), and raise the rent by 30% when they advertise next.
Sometimes you're lucky. Most times, you're lucky to have working facilities and no mould, be grateful scum etc. I once had a wall knocked down onto my bed by builders while I was away. When I got back there was rubble on my bed, big chunks of wall on the floor throughout the house, old plaster dust in the food in the kitchen, and my bike which was kept indoors was making a grinding noise. The landlord's representative turned up and said they saw nothing wrong with the place, what was I complaining about... It was cleaned up eventually, but the cockroaches remained. Did I mention my friend whose landlord-provided bathroom has no floor, only broken-up rough crumbly concrete, no hot water, mould throughout the house, no door on the bedroom, etc... And my other friend who moved out of one place and into another, only to be told after getting there that she would need to "stay away at the weekends because we use your room to 'have girls over'"; we had to move her stuff out and get her to safe, temporary accomodation very quickly. Then there was that time I was about to fly home for Christmas, and my landlord told me he had sold the flat and I had 2 weeks to find somewhere else, which of course was impossible.
Such landlords do not budge when it comes to improvements, unless they think it will make them money.
I personally live in a nice enough place these days. But honestly, in 30 years of renting about 15 different places, negotiating anything but negligable improvements has been unrealistic most of the time. Even with the nicest landlords, who can be very kind, negotiating is usually limited to minor, cosmetic things. I've known some exceptions, but it's rare.
Curiously, commercial landlords (business rentals) are different. They will do all sorts of major works as part of a deal with the tenant.
But I have decided not to pay it off yet, because the return on keeping my capital in equities is much higher than my mortgage rate.
I'm not sure what things are like in America, but when I lived in the UK I paid off my mortgage earlier than expected by paying more than the minimum monthly mortgage payments.
Once the mortgage was paid off I received the deeds to the property, and in this case it was a bundle of documents about an inch thick recording the details of the property and every single person who'd owned it since it was built in 1893 or so.
The first few owners lived there for 10+ years each, then later you'd see a couple of long stretches where one family had it for 20 years, before it came to the 80s and it seemed to change hands every 1-3 years.
The initial sale price was around £100, and it gradually jumped up to when I bought it for £97,500 and then sold it for £162,000.
Fascinating reading, I wish I'd scanned the documents before I passed them back when I sold the place. The only time I've ever owned a property outright, though I'm getting close to having paid off a place here in Helsinki now so I'll be curious to see what I receive, if anything, when I've done so.
Maybe you will get lucky, and you wont have a true expense due to appreciation, but it's not something you should bank on. Houses take a lot of money to maintain, time to manage and sometimes just your mental capacity...be careful where you spread your effort.
If housing was protected from market forces, then increases in productivity would actually be realized instead of spending all the gains we make over time as a society back into ever-increasing housing prices.
Capitalism is supposed to make things cheaper over time. It does not with housing, because housing cannot be "produced" more efficiently and is in somewhat limited supply. Because housing is also necessary (unless you find living in a van sufficient), then I believe it makes sense for all apartments, condos, duplexes, etc that are 4br or less to be municipally-owned.
We should reap the rewards of our gains in productivity, not increase our spending to match our income.
EDIT: As an addendum, we should also start trying to stabilize our population. The Earth ain't gettin any bigger.
If housing was significantly cheaper there would be no need for it to be a good investment because you could use the money you would have spent on more expensive housing and put it into an actual investment.
Owning your own home serves several purposes:
1. Security
2. Stability
3. As a hedge against inflation
4. As a hedge against market forces
That doesn't mean buying is always a good idea. Clearly or isn't. Like don't but in a town where 70% of the adults are employed by the local coal mine, for example.
Here's how I like to think about it: you are never out of the housing market. By not owning you have a large short position in real estate. Given that rents eventually track prices, if prices go down you benefit (you're rent will eventually go down and you didn't lose capital). If prices go up you lose. You missed a gain and your rent will go up.
Given that, you buy your house to remove risk of local changes to your detriment.
Now your argument about housing on a personal financial level is spot-on, at least points #1 and #2. As for the latter points, the first purpose of a house should be to house people. When we view housing as an investment we start making economically rational (but morally questionable) arguments like, "ban new apartments because they'll lower my home's value."
In the economically ideal case we'd have a fair Land Value Tax to encourage as much building as necessary.
The housing market moves so much faster than wages ever will, and it seems having only some units rent controlled exacerbates the problem for units that aren't, so why not make every unit in the state a rent controlled unit? The landlords are already insulated from the whiplash of the housing market from statewide property tax control in the form of prop 13, why not let renters enjoy that isolation as well?
AB 36 will allow cities to enact rent control on older buildings. AB 36 would not apply to new construction, only to buildings older than 10 years. This should help to prevent supply crunches, or at least not make them worse.
AB 1482 would set a state-wide cap on rent increases, for example inflation + 10%. The idea is to stop massive rent increases that lead to evictions. The exact number hasn’t been determined yet, the bill sponsors are trying to figure out a good number that protects tenants and gives landlords a legally guaranteed return on investment.
These bills will face a lot of corporate opposition. It’s important that our electeds here from renters, homeowners and “mom & pop” landlords as they consider these bills.
In my experience, pass throughs are a theoretical concession instead of a practical one.
The unpredictability this would entail would probably be worse than a functioning price mechanism. Imagine you get a job in San Francisco but there’s only a 20% chance you’ll be able to “win” a housing unit where you want. Versus the current reality of for sure being able to find housing given you’re willing to pay enough.
This does not happen, nor is it remotely desirable. Having a life involves much more than having a decent job. It entails living where the person chooses to live according to their personal tastes and desires.
If you force the decision on where to live based on a single constraint that in theory is only a major part of your life so that you can fund your personal life and personal interests then this leads to poor quality of living for all (including spouces, offsprings and immediatr family) just to cater to a company's bottom line.
You're confounding your observations. People with money choose to live in areas that maximize their quality of life, and they don't mind paying a premium for that.
Quality of life matters to all, whether rich or poor. Poor people aren't masochists.
The main driver of price is not "demand" imagined as how much people willing to pay for a particular house but demand as how much people are capable of paying, which is mediated by access to debt. If access to debt is clamed down on across the board, then prices will fall accross the board. People will still compete on price but as a society a smaller fraction of income will be spent on housing.
it's not the whole story however. In order to increase Supply, it has to be profitable to build new homes. If building new homes is not profitable, none will be built, and the price of existing homes will be forced upward until it matches the cost of new construction.
So I agree with you that access to debt is a very important factor, but I disagree that it is more important than demand when you look at the whole picture.
Sweden has had rent control since the 1940's, and as a result the rental housing market is completely dysfunctional by international standards.
In Stockholm, demand for central inner city apartments is way, way, way higher than supply. The rationing method used is a queue administered by the city, and the queue time for the most sought-after areas is on average 17 years. Even the most remote areas have a queue-time of at least a year.
SEVENTEEN YEARS. GOOD LUCK, COMRADE.
This means that if you want to move to Stockholm from outside the city or outside the country, you will not get a rental apartment, unless you rent one second-hand or third-hand, unless you buy a rental apartment under the table, unless you have "contacts", or unless you buy a condo on the perfectly functional condo market.
Since there's a functioning market for condos, but a dysfunctional market for rental complexes, the ROI on building a condo complex is decent, but the ROI on building a rental complex is abysmal. You're better off setting your pile of money on fire than invest in building rental apartments. No private for-profit company will voluntarily build new rental apartments. So the only actors left that could do that is the city itself. However, the city government changes politically every four years, and even if there's a left-wing majority, there is absolutely no budget to increase supply meaningfully.
In addition, there's political and economical pressure to convert the city's housing stock to condos. Current renters love it, because it means they can realize the value of their rental into cold hard cash, and the city council loves it because they get a temporary cash infusion. It's zero-sum for the housing stock, and the long-term effects are shit, because the rental supply diminishes, making the queues worse.
The net result is that it is incredibly hard for companies to attract outside talent, because finding a place to live if you don't already live in Stockholm, is incredibly hard. If you're a transient worker or simply doesn't want to buy an apartment, and if you don't have a decade of accumulated queue time, you have to rent from the much more expensive second-hand weird market, which means that companies have to pay you much more than they would have to pay a local for the same job.
Compare this with SF, or any other large city with a functional housing market, where every company has to pay their employees a wage that covers the housing market rate, which means that there's no difference between local workers and outside workers, and it means that the city has a much easier time attracting new people who want to come there and live there. Because anyone can live there, if they just show up with enough cash to pay the market rate.
Yes, market rates means you get a host of problems, gentrification most of them, but that's a positive problem compared to all the horrible problems that rent control bring.
You fail to show how that's worse than the version in other places. All you have is an "appeal to anti-communism"(1). Not having to fear that you loose your living space because some investor decided to price you out of it seems valuable and something that should be weighted against the hardships of being able to rent something easily in Stockholm.
(1) Is there a fallacy name for that? I think there should be, it's one of the most popular fallacies here in any financial discussion.
This means you can't grab quick opportunities, you can't move to Stockholm on a whim to try your luck, so local companies and the local economy suffers. Fewer people move to Stockholm than who otherwise would, which means the city misses out on potential growth. It's an inefficient allocation of the work force on a national level.
There might be some social good to artificially restricting the growth of your most important economical urban centers, but I highly doubt it.
The supposed benefit of rent control is that attractive inner-city apartments are cheap. Sure. But since rents are based on utility value instead of location or attractiveness or market value, this means that unattractive apartments two hours from the inner city cost as much to rent as comparable ones in the inner city. It's impossible to save money by renting in a less attractive area. Normal cities have some sort of parity between cost-to-own and cost-to-rent, regardless of area. In Stockholm instead, this parity changes dramatically depending on your distance from the inner city!
Another second-order effect from rent control is that having an attractive rental apartment in Stockholm suddenly has value. This makes people reluctant to let go of an apartment once they have it, which makes them reluctant to move away to pursue other opportunities elsewhere, even if that would be the better choice. Still, if you have one, you can rent it out on the second-hand rental market, so now you've created a class of rentiers, the people that have gone through the Soviet bread-queue can now cash in on that scarcity. But I thought rent control was about fairness?
When I moved from Stockholm to SF and told my friends, the first question every single one of them asked was "But how will you find somewhere to live?"
Because if you've only ever lived in Sweden and experienced its rent-controlled market, it's really hard to envision a different system, an actual free rent market, so all of my friends were really surprised that my answer was "I'm just gonna open craigslist and pick something."
In Sweden things are getting deregulated, income taxes are lowered and the social safety net is made less generous. The housing market is now mainly competitive. But for some reason people think they aren't the ones that are going to be affected, (partly because they aren't). If you don't have wealth or are willing to pay up your are a bit fucked, like myself. It is of course hard overstate how bad it is overall, especially for a smaller city. But the market itself isn't uniquely bad. It is mostly like everywhere else.
Yes, but these are not rent-controlled apartments! These are second-hand apartments or houses that you rent from someone who either owns the place, or is already renting it from someone else. You are paying market rates for these, not rent-controlled rates.
Deregulation that allows people to rent out homes they own or rent is what has allowed this market to grow in the past few years, this is the very opposite of rent control!
I started this subthread to argue that rent control is shit, it has shit consequences, it has shit second-order consequences, it has shit third-order consequences. Maybe Stockholm isn't a shining example of how shit it is these days since deregulation and condo-conversions have effectively removed a lot of rent controlled stock, but that just proves my point!
1. Subsidies for building rent controlled units were removed. 2. Publicly owned apartments were sold at below market value. Meaning those who already owned apartments got a discount in the market. 3. The profits weren't used to build new apartments, but to lower taxes. 4. Co-ops were favored by keeping deductions for mortgages, creating new ones for renovations. 5. Property taxes were removed for co-ops. 6. Credit remained largely unregulated and was then regulated to a hundred years. 7. Interest rates are being kept low by the central bank. 8. Taxes were lowered in general.
Of course this new market will never be able to produce affordable housing, so the rent controlled market doesn't "work". The whole thing is set to implode though. Already if you bought an apartment ~"two years ago" you have now lost your down payment.
What is pretty unique is the 100 year mortgages with no default.
No they wouldn't. I lived in an european city with a socialist municipal government who enforced social housing programs which, on the brochure, meant that window cleaners would have a similar chance of getting an apartment as their boss, and when the program was put to practice... Surprise, surprise: the apartments were distributed throught the party's ranks and through minions in the local and national media.
In the end the municipality started dismantling the program due to the backlash and their solution was to sell the apartments to the current tenants at a firesale price (1/5th to 1/10th of the market value) which,again, led to some amusing anecdotes.
Consider Shanghai as described below. Consider following the link.
"In 1996: After the mayor boasted that 18% of the world’s construction cranes were at work in Shanghai, international media widely reported – and exaggerated – the statistic. Reports described the crane as China’s national bird. The figure on how many cranes were working in Shanghai got rounded up to “a fifth,” “a quarter” and, in more than one publication, “half” the world’s total. "[https://blogs.wsj.com/chinarealtime/2011/12/21/china-shangha...]
BTW, people who call SF "charming" have not visited it recently!
You’d lose some neighborhoods composed of endless streets dominated by garage doors at the ground level, and all those surface parking lots, but I think you guys could figure out how to cope.
No-one would move, ever. People wouldn't be able to change jobs even for much higher salaries or better conditions. Children would live with their parents forever. Many people would live precariously in illegal sublets with inadequate fire exits etc. Developers would stop building. Landlords would stop doing maintenance and let their buildings rot. Everyone would be miserable.
> Many low income renters are paying 50% or more of their income on rent, that's not sustainable for the wider economy that relies on low skill labor to function, and the solution is not to have people commute 4h every day to clean an office, teach a class, or fight a fire.
Rent control creates longer commutes. To the extent that the economy actually relies on low skill labour, it can pay the actual cost of having that labour where it needs it. In fact by having rent control you artificially depress wages and encourage companies to employ humans in bad jobs rather than finding ways to make things better.
I feel like this post should feature at the top of any discussion on housing.
Why?
If the policy were to apply to all leases, new as well as existing ones, would the problem be somewhat mitigated?
(That's basically how things work here for student housing. Far from perfect, but more sane than housing in the Valley)
inflation + 3% is an investment that I'd make.
I don't think you could just set the cap and say job done, there's enough money there to ensure everyone benefits though.
It's also a problem that's essentially invisible to anyone who bought into the market at a good price, or is wealthy enough to pay market-rate rents. But for the rest of us, it hurts.
The really problematic rent control is in San Francisco, where rent increases are capped at 60% of CPI (well below inflation). This results in massive giveaways to the rich that grow every year.
As Walter E. Williams said in 1987: "Short of aerial saturation bombing, rent control might be one of the most effective means of destroying a city."
Is that true everywhere? Or are you just focusing on one-off locations like the Bay Area ?
According to Schiller housing has tracked inflation in the US for 100+ years
It seems absurd that a vacant parking lot pays basically nothing in property taxes while a hotel of the same size pays tens of thousand a month, but both take up the same amount of space and have the same potential. This kind of tax would certainly lead to better utilization.
Actual valuation methods used in real world by countries like Taiwan, Estonia, and Singapore to levy lvt (all countries with 90% plus home ownership) are more sophisticated than that though
LVT says the state should not only stop protecting these things, it should do a 180 and actively kill the uses by levying taxes they can't afford. Rather than slowing/blocking the transition to condos and formula retail, accelerate it.
In principle, the new denser buildings could have space for the old low-value uses, but new construction is expensive. The new buildings would have to age a while before those marginal uses could afford them, and in the meantime the tenant organizations would all die. Maybe this could be averted using some central-planning scheme, maybe not. But you can imagine how the electorate might not want to risk it. The trends LVT would tend to accelerate are the ones most residents lament.
I think we should allow sites that are already dead or are transitioning voluntarily to drastically increase density. Letting owners do this forces tenants' hands, which is a sad tradeoff (and to the left-NIMBYs, a dealbreaker). LVT goes even further and forces owners' hands, which I'm less wild about.
> LVT says the state should not only stop protecting these things, it should do a 180 and actively kill the uses by levying taxes they can't afford.
Do all of those things have to be at ground level? Remember space is not taxed (the marginal tax on building up more space vertically is 0), only land. If a theater is on the 5th floor of a larger building, does it stop being a theater?
Can any theater afford a ground level space at current San Francisco prices?
If a theater can only afford to be in San Francisco because of Prop 13 then we should recognize that as a form of taxpayer subsidy for the theater.
If there is the political will for taxpayers to subsidize theaters (why not, art is nice), then why not subsidize a theater's lease on the 5th floor of some building, instead of preventing building up by subsidizing a one storey theater on the ground floor?
But I think there's a good argument to be made that the taxpayer subsidy process should be more transparent and less arbitrary than "whichever theater bought its land longer ago gets a bigger subsidy".
http://markwadsworth.blogspot.com/2019/05/killer-arguments-a...
Your proposal would force this woman from her home as her land value tax rose (As she has no ability to pay for this increasing tax burden)
I assume there would be limited capacity for abuse just so long as the break only applies to your primary residence.
The tax break wouldn't be so bad if it only applied to primary residence, was means-tested, and couldn't be passed down to children. Regardless, though, homeowners tend to be more well-off than tenants; they shouldn't be receiving tax breaks in the first place.
Prop 13 empowers NIMBYs to vote to kill new construction, strangling supply and pushing prices up, without facing any of the consequences of those rising prices.
Property taxes pegged to market value are an incentive for liquidity in the real estate market.
In both cases (SFH on less valuable land, condos on more valuable land) the land shouldn't end up being the majority of the value, since with condos the land value is effectively split among all units in the building.
You can provide land tax subsidies or rebates to targeted individuals (eg the disabled, the retired) without providing massive tax breaks to everyone else.
What's more, this system makes it impossible for, say, retired people to downsize or move because that resets their tax base to a much higher level on their new property (in the Prop 13 case).
Ultimately, why should the owner of a vacant lot be compelled to sell or develop on the basis of the potential value?
And who decides the potential value? Should a 10 story hotel be taxed like a 100 story office tower? Should my $200k home be taxed like half of a 30 unit apartment block?
Cities are (or should be) for the people in them. Not simply a vehicle for the ultra-wealthy to park wealth.
Ultra-wealthy aren't laundering money in real estate because property taxes are too low. The situation we have today is a obvious result of fiscal policy made in the 80s, that was predicted then.
Highly recommend you read Progress and Poverty, it's still very relevant today.
Property rights are important, but they aren't the end-all-be-all. Eminent domain, blight laws, zoning laws, tenant rights, and a variety of other property-related laws arguably disrespect property rights, but they have been a staple for hundreds of years. Property rights were never some sacred ground.
I had a good discussion with one of my dad's friends recently (who is a realtor), and mentioned that one of the biggest costs we never talk about is the cost of compliance.
Basically, his argument is that the cost of existing housing is driven by the cost of building new housing, of which places like San Francisco have been very effective at limiting! But as well as that, what are the development fees for example?
When politicians virtue signal about what percentage of a housing development will be below market rate for example, you have to remember that this sort of thing will be factored into the price you pay. Or the endless studies that city governments (again looking square at you San Francisco) commission. The buyer and the renter pay for these.
America actually has relatively cheap housing across the vast majority of the country, so it's not as if the buildings themselves are the major factor in jacking up the prices.
The general gist is that building requirements (parking in particular) make anything other than luxury condos financially infeasible.
https://www.reddit.com/r/LosAngeles/comments/6lvwh4/im_an_ar...
No. Housing that appreciates at exactly the rate of inflation can still be a good investment and a great tool for building wealth.
If cities doubled the number of houses built any year the average price went up by 5% or more, this wouldn’t be a problem.
The tax rate could even be negative.
If the government mandates that the price of something is X, and X is higher than the price is now, prices go up.
Also, remember than nominal price and economic price are distinct. “Price” needs to include all tax subsidies and other incentives/ dicincentives.
With how small polities are in the Bay Area this leads this to everyone pushing the burden onto someone else. With a large enough polity responsible for zoning (e.g. New York City's five boroughs) the pressure to add housing becomes too large to completely ignore.
My anecdote for the morning.
Short of massively expanding the poor's ability to vote (making Election Day a holiday, putting it on a weekend, mail-in voting) this holds true in American elections.
It might make it sting a bit less buying a single-family home in San Jose for 1.5mil and knowing that you're paying 10x the tax of your next-door neighbors.
It costs thousands to buy a house
It costs thousands to sell a house
It costs thousands to maintain a house (I once spent, over $10,000 in one month on repairs)
It costs thousands in property tax and insurance
You pay thousands in interest and maybe PMI.
If the asset doesn't appreciate faster than inflation, where's the wealth building coming from? Sure, I'm not paying rent, but, honestly, it ends up being mostly a wash once you factor in all the expenses I am paying.
I bought a house because I wanted to own a house, not because i thought it would build wealth.
One thing that can make it better to own (in the US) is that mortgage interest is tax deductible (at the federal level). Rent typically is not (although some states make rent tax deductible because voters naively believe this is a subsidy to renters and not to landlords).
In CA I might be paying double the tax than my neighbors but I can’t charge more rent than them
Very few people buy the nicest car or the best TV, because we know those don't have a return. But being bad at math, we can't seem to figure out that we only see 30% of every dollar put into the house (taxes, mortgage, upkeep, improvements) back and we conveniently forget about inflation.
Yeah, if your house doubled in value in 25 years that means you kept pace with inflation. You could have done better with CDs.
I'd imagine your scenario would not be the case with a typical management company. While your scenario is attainable for a small amount of people, it would be difficult to see happenning for the masses.
Also, does it have any form of rent control?
In terms of investment returns it should be pointed out that depending on country you can't get a lower rate of interest, better tax treatment and leverage than you can with your mortgage.
Lastly, we're in one off the longest bull runs on the stock market in history and the last 2 years in particular have been insane. This should not be treated as representative.
Neither one makes much sense from a rent/buy perspective. New York is closer, but most properties are still cash-flow negative relative to rent. You have to assume unrealistic rates of appreciation and/or indefinite tax deductions for the numbers to work (and folks are finding out, right now, that those deductions can go away!)
People have been treating homes like investment vehicles for a while now, and there are actually very few big cities in the US where rental rates can cover costs of mortgage, taxes and insurance. Renting literally puts cash in your pocket.
Right now, most properties in manhattan rent for less than their monthly carrying costs (including HOA fees). People have traditionally justified it via the mortgage interest and SALT tax deductions, but congress just blew the latter all to hell, and it’s making properties about 30% too expensive...
So many units have priced in the SALT tax deductions! The rent/buy calculation was borderline before, but now it’s just comically bad.
Now buying something to rent it out is a different story and I just don't see those numbers making sense from an investment POV if that's your point.
I’ve been doing a search in Manhattan this spring. On nearly every property I see, mortgage + hoa / taxes + insurance easily exceeds equivalent monthly rent. And not by a little bit, but by hundreds of dollars a month.
Deduct mortgage interest and $10k of SALT, and a few properties (~10%) start to make sense on a 5-10 year timeframe. Most are nowhere close to affordable. Factor in opportunity cost at any reasonable long-term rate of return, and nothing makes sense (You basically have to assume that the stock market will underperform, and the housing market will over-perform to make the numbers work.)
The few properties that make sense on a spreadsheet sell quickly. Most linger. Ask any real estate agent - the market is shifting, and the shift reflects the fact that prices got ahead of fundamentals.
So it depends strongly on when you bought and how rare your deal was, but these days, the vast majority of the Manhattan market is overpriced, and implicitly betting on speculative price appreciation.
Would you feel comfortable installing a new kitchen or bathroom?
...can you? Even owning a home doesn't guarantee that you'll be able to live comfortably in one place for 3 decades. Median homeownership is usually shorter than 15 years[1]. (Per 2009* - more recent numbers that I've seen indicate that number is decreasing, not going up, but those are usually based on more short-term studies, post 2008.)
And renovations aren't exactly something homeowners are comfortable with, even if they technically can do it.
Source: I work for a homebuilder who aims to sell multiple homes to each customer (from first-time, to trade-up, to retirement.) If the median homeownership-length went up to 30 years, we'd have to reevaluate our entire business model.
[1] https://nahbclassic.org/generic.aspx?genericContentID=194717
All of this isn't even to consider the fact that most homeowners don't literally "own" their home in that timespan, as 30-year mortgages are very common. A lot of people buy homes because mortgage payments are oftentimes cheaper than rent payments (there are exceptions, obviously.)
It would be completely within my control (excepting the extremely rare case of eminent domain being applied if the UK wanted to build a railway station or something).
What the median or mean or modal person does is neither here nor there. It's completely irrelevant.
15 years is also a colossal period of time compared to any private rental. The average tenancy length in the UK is about 2-3 years.
Personally, I invest in REITs, the money I would invest in real estate. These investments cover my rent and more.
If you fail to satisfy your mortgage agreement with the bank, then yes, they can take the house from you in a foreclosure. But until then, it's yours, not theirs.
Edit: legally they DO differ, but they're the same in that they allow the lender to take back the property in the event of non-payment. Therefore, even though you might legally technically own a property with a mortgage, the bank still has the ability to take it away from you, so do you REALLY control it? https://www.quora.com/How-do-a-lien-and-a-mortgage-differ
I understand the point being made. It's a commonly held opinion, and it's fine for inspiring people to get out of debt, but legally it's not correct. Your home is your property, even with a mortgage.
Also, a foreclosure is not the only way to lose your property. Stop paying your taxes and see what happens. Even unpaid unsecured debt (like credit cards) can lead to your home being taken in some situations. Or the government can take your property via eminent domain.
So there is no such thing as REALLY controlling property, in terms of excluding any way it can be taken from you. But you do have specific legal rights to your property, and those apply to mortgages too.
And why would renting not work in old age? It works fine, its a value exchange and the money that ive saved for my old age in various investment vehicles will typically outperform most real estate investments.
That applies to literally everything in the world, and therefore is pointless to bring up here.
I also have an asset I can sell which doesn't exist when renting. Property taxes are generally lower relative to where I could rent and simply don't enter into it.
More important to me, a bought house is my home.
The reason I say that is because 9 times out of 10, from what I observed, old people who own end up living in squalor because they lose the ability (financial or otherwise) to care for their house. Maintenance ends up being deferred indefinitely. At the same time senior apartments are incredibly affordable, at least in my area.
Sure, that's not every old person, but I see it enough that it's concerning.
P+I is just a part of the cost of owning a home.
Can you expand on why this is the case?
I think the logic of this point is dead wrong: every housing bubble (and its bursting) is a counterexample.
I don't see how it's any different to me withdrawing my entire bank account, walking down to the casino and putting it all on black?
The difference is that you still own a home, even if it is worth less than what you paid for it. If you bet all your money on roulette and lose it, you have nothing left.
30 years from now, when you pay off your mortgage, your cost of living will be very low -- this is very good for retirement. People who are still renting 30 years from now will probably be paying monthly rental bills higher than your mortgage payments, due to inflation if nothing else. The difference over that time might exceed your hypothetical $100k.
i can buy a house in detroit for $400 and pay no rent . is it a good retirement?
not if you owned a house in detroit or any number of downturn cities.
https://www.trulia.com/real_estate/Detroit-Michigan/market-t...
Perhaps patience will be rewarded in Detroit too.
why do they have to hold on to some hope of price incrase just because they bought a house. Instead of having the freedom to choose the best investment like everyone else.
Sure hold on to it if you really think its the best investment for your money( i really doubt detroit house is best you can do with your money), not because of some sentimental value.
It's very similar to margin trading on a stock brokerage, except that margin accounts are generally higher interest and not tax-deductible, while getting margin-called does not affect your credit. In both cases, you forfeit accumulated wealth built up if the market moves against you.
doesn't ur property tax go up with the market value?
> doesn't ur property tax go up with the market value?
The market value of a property is typically not assessed yearly, at least where I live.
That's the other end of the coin that's really easy to miss. I moved to Las Vegas in 2011, when my wife graduated (and where she landed in a nation-wide job search), thinking it'd be easy to find a job in any city with > 500k people (given that I had no trouble finding jobs as a recent CS grad in the relatively small metro of Champaign-Urbana, IL). It wasn't.
It's also easy to miss that "leverage" simply isn't available as an "investment tool" to most people, except with a mortage.
Security and stability: in what sense? Owning a house explicitly means that you can't be evicted by the landlord, but there isn't any other significant feature that derives from owning the house.
Hedge against inflation or market forces (or "short position in real estate"): you can simply buy into a REIT, and enjoy similar benefits (actually, a much more diversified risk, which in most cases would be positive) compared to owning a single house.
Interest rates can change as well but are less volatile than rents, and become less of a concern as you pay off more of your principal.
That's assuming the home value has gone down in addition to losing your job or whatever. If the home has kept its value, you can probably use a line of credit to bridge while you sell the house.
How is that if I were to rent?
In 20ish years, inflation is likely to have significantly reduced the value of $XXXX, it could have as little as half the purchasing power it does today. If renting, the rent is likely to increase (particularly if you move) so that you are still paying $XXXX in today's money. If repaying a mortgage, you are likely to be paying roughly $XXXX in absolute terms (depending on interest rate changes).
So yes, you are tying yourself to a risk that you will lose your house (and any difference between the outstanding loan and its sale value) if you lose your job over a certain period. However, after a certain period you are also reducing the risk that you won't be able to afford your housing costs if you lose your income.
Lenders are also more likely to consider a term extension to enable you to make more realistic payments, than a landlord is to agree to lower your rent.
If you own real estate you're buying into local risk. Real estate generally isn't insured against things like acts of war, so if NYC gets nuked or whatever then you lose all your money.
If you're buying real estate right now then you're basically betting against war, automation, AI, climate change, energy price spikes, etc. Even if you don't think that any of those things will happen imminently, do you really want to bet against all of them over the next 30+ years?
And if you're working, you're already exposed to changing conditions in the local labor market. Owning your house exacerbates this in the worst way, just like how the very last company you should own stock in is your employer.
If I'm in the NYC labor market then I feel like if I were to own real estate then I should be hedging my risk by owning in Austin or something.
You're thinking of purposes as an investment. The point of the article is precisely that it is not beneficial for it to be seen as an investment, but first and foremost as a practical human necessity.
During the housing crisis, for example, rent went UP because as people became evicted there was higher demand for rentals. I acknowledge this was a black swan event though.
How is something that happens regularly a black swan event?
https://www.wikiwand.com/en/List_of_recessions_in_the_United...
More concretely, a recession is more predictable and to be expected while the failure of the mortgage-backed security market (and the broader consequences) less so.
Rents don't usually go down, but they often stagnate ESPECIALLY in units owned mom n pop landlords. If your rent doesn't change for 5 years, but inflation is 2%, at the end of the period, your rent has effectively declined by about 10% in real terms. Additionally, you have your 20% down that would be paid for a house, but instead you invest in the stock market that returns 6% annually, at the end of 5 years, you have increased your assets by 33%
If you bought a home, and the home price did not increase for 5 years and you pay the normal 20% down mortgage, %6 closing costs, and 1.5% annual property tax, you're looking at some significant loss of net worth when compared to the rent alternative.
There are a number of assumptions in the above. Each that is different for you changes the analysis. In particular it assumes disciplined savings such that rent+savings == house payment + house maintenance + savings. It assumes that house maintenance and remodeling is not making the house more luxurious. Its assumes similar levels of luxury (renters are likely to go for a cheaper apartment and spend the difference in housing luxury on travel).
As always, location, location, location. Different areas have different situations that can make one significantly worse than the other.
Went down for at least 1BRs in Silicon Valley. Apartments that were renting for $2000+ in 2007 were going for $1700 in Q4 2008 and $1400 in Q2 2009.
I'd be curious if there's any evidence as to why rent went down in SV. For example, did the lack of credit affect the venture capital necessary for start-ups and ultimately lead to less demand in housing?
This is also why the rental market was more affected than the housing market: people who owned homes (particularly expensive single-family homes) had already put down roots in the area, and if they were foreclosed upon (and many were), they were replaced by other people who wanted to put down roots but had kept their jobs. The lower-end condo market softened significantly, though, because it draws from a similar demographic as the rental market.
There was a massive China-fueled resources boom in the early 2000s that soaked up the available construction capacity (materials and labour) for capital projects like building oil rigs and ports and all the ancillary stuff that entailed.
In 2000 you could buy any number of 1970s houses for <$100k. These were relatively small 3x1s (like 1000-1500 sq ft) but solid. Concrete pad, brick-and-tile (Australia doesn't build timber-framed houses).
By 2006, those same houses now cost $350k. There were articles at the time stating that the cheapest house for sale in the city was $250k.
And all that paled in comparison to what happened at the high end of the market.
Anyway, rents went through the roof.
By 2011, the resources boom had definitely cooled and prices were starting to drop. There were less FIFO (fly-in fly-out) workers and so on. Rents had actually did drop through the middle 2010s, sometimes significantly. I used to rent out a house for $450/week and now I'd be lucky to get $300/week for. Thankfully I'd long since sold it.
So yes, rents can go down.
Housing raises your risk; it doesn't lower it.
1. Over time, renting and owning cost similar amounts: https://affordanything.com/is-renting-better-than-buying-sho....
2. You run great risk in terms of the market: look at anyone who bought in Detroit, pretty much ever. Buying in West Coast housing markets may look hot right now, but the minute a big earthquake hits one, a lot of people may be financially wiped out. A serious recession could do the same. Miami? It may be literally underwater. https://www.newyorker.com/news/news-desk/miami-faces-an-unde...
3. The neighborhood may change for the worse.
4. Given birth rates, you should be worried about deflation, not inflation.
>“Rachel’s landlord needs to make money. How could he/she possibly earn a profit under this scenario?”
>Here are many ways Rachel’s landlord could benefit:
>The landlord could purchase the property at a steep discount, such as through a foreclosure auction, short sale, estate sale, or by “driving for dollars” (making direct contact with the owners of distressed property.) This allows him/her to purchase the property significantly below market value.
>The landlord could be holding the property for the sake of inflation-protected wealth preservation, rather than as a cash flow investment. (Don’t assume all landlords share the goal of cash flow. Some simply want to diversify their assets.)
>The landlord could be making a speculative play on potential appreciation. (I don’t recommend this technique, but many landlords do this.)
>The landlord could have inherited the property. The landlord could have purchased the property decades ago, paid off the mortgage, and now enjoys the cash flow. They don’t want to sell/trade into a different property due to the hassle involved, so they let this property ride.
The other secret is, many people, at the end of the day, simply make very little to no money as landlords. My parents were landlords for many years and broke even for all those years thinking that the profit was going to be right around the corner. Never came. The steps to being successful at real estate is not 1) buy house 2) print money like a lot of people think going in.
The other thing is, their calculations take in opportunity costs of having your money in your house vs having it in a better performing asset, which a lot of people simply ignore as "not a cost."
It's also highly dependant on your local market which one is cheaper.
Plenty of people buy investment properties generating them 2% a year thinking they're doing great!
This is however generally different to owning a house. If you want to own a house, it shouldn't really be seen as an investment, more as a place to live and put down some roots.
You shouldn't invest in putting the best kitchen in your rental property, but you can do that in your own house if you want to.
That's a false dichotomy - we should "buy low, sell high." Obviously both events contribute to your total ROI.
If there's a long list of situations in which owning is less expensive than renting, it is intellectually dishonest to then assert that they cost the same.
The key mental breakthrough for understanding homeownership is that it's just like renting, except you are the landlord as well as the renter. So if you can imagine a bunch of different ways in which a landlord makes money with a rental property, then you can start to imagine situations in which homeownership will be better than renting for you.
You can buy foreclosures, short sales, estate sales, or just contact someone to buy their house.
You can hold property for the benefit of inflation-protected wealth preservation (in fact, this is one of the main ways homeownership helps build wealth).
You can speculate on potential appreciation (in fact, many people do this when selecting where to buy).
You can inherit property, or (more under your control) you can pass property on to your children.
You can hold a piece of property for decades, pay off the mortgage, and enjoy the greater cashflow--in your case, from income that would have gone toward rent.
Etc.
1% may not seem like much, but consider that you only pay 3.33% of the amount owed every year on a 30 year mortgage. Not only are their monthly payments lower, but they pay more principal sooner.
The article differentiated two different investment strategies:
Low income property with a decent profit over monthly expenses.
High income property with little to no monthly profit, but large appreciation in value over a short time period.
So, instead of buuying one or two high income properties, one could purchase 5 to 10 low income units.
I found it interesting and a new perspective for me.
The first is 5% interest. Mortgages can be significantly less interest - mine is 1.08% right now (fixed for 2 years, but those are the most important 2 years for paying down).
The second is that you'd pay the mortgage off over 30 years. It's entirely possible to pay off much quicker - perhaps 15 to 20 years - in which case the total interest paid drops significantly.
2. The article completely misses the other huge value of buying a home - risk mitigation. You can't be evicted suddenly for reasons out of your control, you're not subject to market whims in rent (there's an upside to this, but generally rents are sticky - you need to move house to get a better deal even in a falling market), you have no unexpected moving costs, your kids can stay in the same school. Looking at it purely from a monetary point of view completely misses the point.
Ultimately the benefits of stability are worth a lot, especially as you get older.
We have examples of folks losing their homes to build gas pipelines and shopping malls.
As renters are also fully exposed to those, the existence of them does not alter the degree of the stability advantage for home ownership over renting.
In the long run, these two factors tend towards irrelevance, relative to the tens or hundreds of thousands of dollars of wealth you build that you couldn't have built through rent payments.
I think the more reasonable complaint is that people don't like thinking about how much of a risk a leveraged, illiquid investment worth >100% of your net worth is, so they have to delude themselves into thinking of housing as unrelated to their finances (incidentally, this is why richer households' net worths recovered so much better from the financial crisis: poorer households' were more likely to have a portfolio tilted ludicrously towards a single, illiquid asset).
That is to say, you're definitely correct that getting equity in the housing market has concrete second-order benefits, financial and otherwise, that don't show up in a simple assessment of the asset classes in your portfolio. But the _amount_ of house people choose seems to be systematically skewed upwards, often for no real reason other than financial illiteracy and an aversion to sitting down and thinking through the purchase decision.
Politics, religion, and whether their house is an investment.
People get pissed at you if you tell them that having all of their money in their house is a bad investment. You'd get less aggression telling your friend you think their wife is cheating on them.
If you are in a lower income bracket than what we used to call middle class (before being middle class meant "up to your eyeballs in credit card debt"), it's likely that the majority of your net worth is the equity the house. That's bad. And that doesn't mean "take out a second mortgage and start playing the stock market", that means you have more house than you can afford long term.
The people for whom it works as an investment are diversified. If less than 30% of your money is in your house you are probably doing it right. If it's 75% and you also don't have a retirement fund, well you're subsidizing those of us who are both more fortunate and better at math.
The only true purpose housing serves is shelter. That's it.
Any other purpose is artificial. Housing normally is a depreciating asset, like cars. Normally it shouldn't be a hedge against anything, including inflation. It normally shouldn't be an asset of speculation, no more than tulips or bitcoin. And as for security and stability, you can get that from renting ( especially if you live in rent controlled apartments ).
The idea of a house as an asset or investment is due to government and business policy decisions. Increasing immigration, limiting development via zoning laws, creating tax incentives, advertising pushing home ownership, laws favoring home owners and landlords over renters, etc.
All the premises we believe are premises we are taught. Your premise is just as false as anyone elses. It's entirely artificial. Policy decisions could make renting more favorable than owning. Policy decisions could actually make owning a home near a coal mine more stable than owning a home in silicon valley. Policy decisions could make home prices decline considerably by encouraging overdevelopment so that supply outstrips demand.
Fundamentally, as I stated before, the only purpose of owning a house is shelter. Everything else are "false" premises we've been taught.
A house should ideally be a stable investment: the value should keep pace with inflation.
Most people pay more for house maintenance than required (updating a perfectly good kitchen...). That is an investment in quality of life.
https://news.ycombinator.com/newsguidelines.html
A $30k house in 1980 is NYC could be worth $3M today. The same house in Cleveland is probably less than $250k. (Mostly inflation) Even in that situation, the Cleveland house may still have been a good value based on having a fixed expense vs dealing with landlords.
Likewise, when economic policy shifted to favor the south, lots of owners of swampland in Florida and other places became very rich.
In fact, if you replace "housing" with "food", you see a natural response to your penultimate paragraph: "You're never out of the market for food. Therefore, it makes sense to buy a forward contract that pays out a [predefined] basket of groceries forever." The error in logic is that you expect food to fall in price, and or your tastes to change, so locking in such a contract would probably be a poor use of money, considering what they would charge.
It's less obvious, but the same logic applies to your points 1 and 2 as well. The very reason that a home provides security and stability is because you expect to get priced out of that neighborhood, or difficulty in moving to another nearby, similar home. That's also an artifact of housing being made "a good investment" by policies that make housing more expensive over time!
So, yes, housing does provide those things, but only because current policy picks one branch of the affordable/good investment dichotomy.
Home ownership as it stands today does not provide financial security / stability because of the degree of leverage required for most Americans to own a home. It is funny how much basic financial advice boils down to "diversify!" but then we turn around and define the "American Dream" as levering up to buy a single asset that is worth several multiples your networth.
Home prices are absolutely not hedged against market forces, and the double whammy of losing your job WHILE owning a house whose value is down significantly from your purchase price is substantially worse than losing your job while merely renting your home.
When your house value is underwater, your only play is to stay and wait it out until prices recover. But if you also get laid off and can't make the mortgage, you can't simply move to a smaller / cheaper home like you could had you been renting. You'd be forced to sell at the bottom, or try to rent out at currently depressed rental rates to make up for your mortgage that was locked in from when your house was worth much more.
To own a home is to be in a state of constant stress over the value of your home, and the more levered up you are, the worse this gets. This source of stress is why I believe NIMBYism is so prevalent.
This is a major argument for living in a low cost-of-living area. While in Silicon Valley, house prices are 10-20x a developer salary, in my location in the midwest, houses are 1-2x developer salary.
>...Each pod has its own front door, balcony, kitchen and TV. The small, but perfectly formed units also feature a mezzanine floor with a desk, doubled bed, bathroom and storage space.
>The units cost between £80,000 and £120,000 to build and install depending on the specification.
>Designer of the pods, Bill Dunster, believes the homes are perfect for packed cities with little land space as the units can be built above existing structures such as car parks.
>“Importantly the ZEDPod concept decouples housing provision from land prices using air rights over car parks,” Mr Dunster said.
>“This enables affordable, quality city homes where land is scarce or expensive to be put up quickly, helping keyworkers to live near their work and at the same time maintaining precious parking spaces.
>“We are working with key partners to create a development model that allows Local Authorities and others to create communities of affordable houses at almost zero capital outlay.”
https://www.bristolpost.co.uk/news/bristol-news/pre-built-ho...
One thing I noted from this article, was this is pretty much the most affordable you can get and they are being aimed at employed keyworkers. Given the market insists on having 'range' for marketing segment purposes, if the plan is for vital keyworkers to be living in these, what exactly is the plan for people lower down the social ladder?
https://en.wikipedia.org/wiki/Richard_T._Ely
Elements Of Land Economics (1926)
https://archive.org/details/in.ernet.dli.2015.13745/page/n7
Property And Contract In Their Relations To The Distribution Of Wealth
Vol 1: https://archive.org/details/propertycontract01elyr
Vol 2: https://archive.org/details/in.ernet.dli.2015.241476