The systemic problem is that investors are buying up residential property inventory, because there is a massive amount of near 0% cash available to a thin slice of the population.
So even though there are as many people as there were roughly a year ago, there are far fewer homes. Hence purchase prices are rocketing up and rental prices are drifting down.
There is no strong political will to solve this problem, because there are almost the same number of non-homeowner voters as there are homeowner voters. It’s painful for one side because they (we) are being priced out of the property market, and great for the other side who is making a fortune.
Only of interest rates jumped up, or legislation was made to financially penalize capital gains on second and third homes or on residential property funds will home prices return to normal.
For example, in Canada, housing is up 30% YoY. Trudeau's Federal government recently said that even a 10% correction in housing would be unacceptable.
In practice, Canadian housing isn't housing - it's a 30% (or better) government bond that you get to live in or rent out. That's a 30% return guaranteed by a sovereign state that will gladly destroy everything else in the country to prop up housing. There is no investment like it anywhere else in the world, which is why Canada is seeing the largest real estate bubble in the world.
The best part? You can sell your principle residence completely tax free. Not a penny in tax paid from capital appreciation.
I live here in Toronto and it’s an absolute dumpster fire. The country is increasingly becoming hollowed out and residential investments are increasing as a % of total investments. In addition, there is no plan for prosperity. GDP per capita has been stagnant or negative and the productivity numbers are weak. The housing sector is becoming a giant leech sucking the life of out of productive investment. Engineers have quit to become real estate agents and try their hand at selling to foreigners or over-leveraged locals.
Very little hope here from the eyes of a local. Maybe you can study software to get out and go to an American city. America remains relatively industrious. Canada is just becoming a high tax version of Monaco (doesn’t even make sense but still).
I live about four hours due south of you and loved visiting Toronto as a kid. I had seen similar commentary recently about the real-estate market and thought folks were exaggerating. From what I could see, they weren't. Just now I was going to make a joke about the long game being in Nunavut but checked my work first and, uhh, nope. That's some crazy shit. $600k for a (nice) 5br on a half acre in the tundra? No thanks.
I know we look funny from up there but we do love y'all. My sister-in-law is from Guelph and lives in Ohio, we just accidentally bought matching F150's. So feel free to come down any time. The politics suck but the people are fine.
A 30% return on real estate or a 30% depreciation of CAD? That's the interesting question. Though the best one to ask at this point is: crypto or real estate?
> Trudeau's Federal government recently said that even a 10% correction in housing would be unacceptable.
Could you please provide a source? I cannot find anything on the web.
> it's a 30% (or better) government bond
This cannot possibly be true. First of all, 2020 was a special year for asset prices, not just in Canada and not just for real estate, but for all assets all around the world. Second of all, even if the first assertion is correct, there is a world of difference between not allowing prices to decline vs not allowing them to increase any less than 30% YoY. Third, 1.3^27 is 1192. Average home prices in Vancouver is over 1 million CAD. Do you honestly argue in 27 years, the current homeowners could sell off their property and net a sweet >1 billion CAD? That we would have millions of billionaires in Canada in 27 years?
Yes, BetterDwelling is a permabear but Vaughan's comments are legitimate. He said it in an interview with TVO.
On another note, the 30% number seems ridiculous. And, yet, do not be surprised if Canadians seriously believe this. Remember, people have been screaming bubble for a decade, and there has been no such pop yet. Of course, I think this is unsustainable. At 6-12% growth rate you're looking at like low to mid 8 figure values...for the average home. At 15-30% you're looking at hundreds of millions of dollars over 30 years. Ridiculous, isn't it?
Interesting discussion on the Financial Times comments section about young people feeling insecure also highlights this property inflation. Basically, the AngloSphere has decided to inflate assets and forget about industrious activity. In the long run, you just end up with a hollow, low productivity and low social mobility country.
Is this acceptable? Well, Canadians aren't voting against it. Of course, this is because they think they are getting richer. In reality, the country is just heavily indebted and consuming tomorrow's income today. I am keeping most of my savings down south with the Americans and their equity market. If the BoC can keep the bonanza going, so can the Americans.
The primary feature of the real estate market is that the prices change so slowly that margin calls take years to happen. People are trading houses on 400%-2000% (4x-20x) leverage. Whereas with the stock market and other asset classes, you can't generally get that much leverage, and when you do the risk of getting margin called is perpetual and instant.
So although housing prices don't necessarily increase faster than the S&P500, and that there are many local variables in play, the same 7% increase YoY can really be a 140% increase YoY, while you are also renting out the home for more cashflow.
Liquidity of the housing market has vastly improved over the last 5 years, mostly due to new kinds of lenders and underwriters in the market, with the current year being even more liquid than ever.
The downsides of real estate haven't gone away. Like maintenance and physical presence needed, which is difficult for an individual as the portfolio expands. The physical presence demand - or the need to make it economical for there to be someone else maintaining the property - means that it is difficult to come up with the downpayment for real estate in areas you would actually like to live in, but are fully capable of renting in. So the barriers of entry stay where they are.
The margin call only occurs if you can't service the debt. As long as the note is paid, you can drag the debt out to note maturity (assuming fixed rate vs ARM, interest only, etc). If you have enough income from investments, and can service the note until maturity, whether you rent the property or not is immaterial. You can leave it vacant forever. Same if you pay it off and hold.
For this discussion, I'm going to waive away the maintenance costs on a SFH, as they are immaterial for the size of the homes in SF regardless of what the value is determined to be by an arms length transaction.
Yes, and this is true in both markets, real estate or stocks. In the stock market you have up to 5 days to service the debt, and may also get liquidated instantly if the broker feels threatened. In the real estate market you have months upon months and maybe years, before your property is taken away from you.
I agree that the mechanisms are somewhat similar, but also that they are wildly different (unlike a securities margin loan or pledged asset line, your lender can't foreclose if the value of the property declines and you can't meet a margin call; as long as you keep paying the note, the value of the property could plummet to zero and the lender must continue to accept payments and allow you to retain ownership of the parcel).
Conversely, someone like Interactive Brokers is going to liquidate your holdings with extreme prejudice if the securities collateral declines below what their risk management feels comfortable with (other brokers are going to call you and perform a margin call).
You also can get way more leverage with real estate loans versus margin loans or pledged asset lines.
It's good that they can't, but even in the stock market you can get perpetual gradual margin calls that you can continue to meet if you felt like it, as long as they were gradual and not steep then a good broker will not liquidate your position at the lows.
I'm mainly responding to provide helpful context to others. Not for a typical pedantic thread where we are already agreeing with each other but just squabbling over semantics.
I would say this is the primary savings grace for real estate investors and homeowners. They get to build equity in so many scenarios that it works out for them and lets them maintain access to low cost capital, against the equity they build up.
Probably not. The headaches from crappy tenants/contractors/property managers/equipment failures (choose any combination) can easily dissuade even the veteran landlord, let alone a fresh new one.
Mortgages are being given away now that the mortgage rate is about the same as inflation. The mortgage is now the asset and the home is the liability. It is probably you can make more by paying off the mortgage then investing the down payment and try to bring that investment up to the level of the mortgage (plus having enough for capital gains tax).
It may be a unique situation in our lifetime that is only possible because the fed is buying trillions of dollars of mortgage backed securities while the base rates are already bottomed out.
However, the overall value depends a lot on inflation, how much property value will go down in the future in real terms (home prices in many markets are now at levels of the previous housing crises), and how much you have to spend to repair the house in addition to known fixed costs such as home owner's insurance and property tax (actually this rate may go up where state and local governments are insolvent).
I wonder how many weird deflationary forces are acting on this economy. Fed buying mortgages causes people to get into debt for their house, ironically they end up consuming less, which drags down inflation and the cycle repeats endlessly with no hope of inflation going up to justify increasing the interest rates.
In the long-term I think buying a house at a low fixed rate builds wealth and leads to greater consumption and less reliance on government transfer payments (although the mortgage itself could be considered a government transfer payment). As the fixed mortgage payment gets reduced over time due to inflation the homeowner has greater ability to consume if their wages keep up with inflation.
The only thing we know for sure is that the fed buying MBS has a strong inflationary effect on the housing market that can be seen in the record housing prices.
Nine times out of ten, I'd say stocks for the long run. But I think at today's mortgage rates, it's pretty compelling. Let me just run through a toy example.
Say, you're buying a $500 thousand property with 20% down at a 3% mortgage rate. You're paying $1500 a month on your mortgage, and generously round it up to $2500 for taxes, insurance, HOA, and maintenance. There are very few places in America, where a half million dollar property would rent for less than $2000/month. Let's generously round that down to $1500/month for vacancies, turnover, evictions, etc. (And if it's your primary residence, you still "collect rent" by avoiding the expenditure of renting from someone else).
On the face of it, this seems like a terrible deal. Cashflow wise, you're losing $12 thousand a year. However take a closer look at that mortgage payment. Starting from day one, $10k/year is going to principal pay down, which directly increases home equity. Another tailwind: price appreciation. Historically real estate tends to increase at the rate of inflation (currently forecast at 2.3% in the TIPs market). That's another $11.5k/year in home equity appreciation. (This assumes a base case, zero appreciation above inflation. It doesn't even scratch the surface of our current housing shortage and the fact that houses have been appreciating 2-3% above inflation.)
In terms of accounting profits, you're actually making $9.5k/year. It's true you're flushing cash down the toilet, but you're building up home equity to counter it. Then in 5-10 years, you get your money out by either flipping for a big profit, or doing a cash-out refi.
The ROE on that $80,000 down payment is 11.9% annualized. Historically the stock market has averaged 8-10%. And today's CAPE ratios are near historical highs, which would suggest lower long-term returns. This doesn't even get into the tax advantages on the real estate.
All in all, real estate looks pretty compelling from an investment standpoint today. Now, I'm normally an efficient markets guy, so I don't say this lightly. But I believe the major driver is the lopsided nature of the cashflow vs. equity division of real estate returns in a near zero rate environment.
The vast majority of real estate investors think in pure cash flow terms. The idea of buying a negative cash flow property seems ludicrous. So, right now I think the market's leaving a ton of attractive real estate investments underpriced.
if you can easily get a 5x leverage (20% down) for a property investment due to the current lending environment, then yea, a property is going to return more. But comparing like for like - zero leverage - stocks are always going to be better (and correspondingly riskier).
Doesn’t that depend on the age of the building? I thought rent control was 1970s and earlier? That being said, SF is generally very tenant/sub tenant friendly in its laws.
Even still, landlords fear legal repercussions so much that they're willing to let a lot slide. When I moved out of my SF apartment, a plant I had had damaged the floor and my landlord was willing to eat the cost provided we moved out swiftly. Replacing the floors probably set him back a couple grand, but evicting tenants could be far more expensive.
From what I've seen of SF rentals and landlords, that's potentially the most money he had spent on maintenance & renovations in a decade, while collecting some of the most profitable rent in the country.
It makes intuitive sense for San Francisco to be "the most profitable rent in the country" as you claimed, but the surprising and counterintuitive truth is that it's the opposite.
Can you please link me a list of cities with a better buy:rent ratio when comparing 2008-2011 SF to 2021 SF? Assuming you were to buy and rent now, since that's the conversation we're having. I have some friends who would be really interested. I just tried to find some on my own, and I could not.
I don’t think you understood his point. Obviously, those homes have appreciated. His point is that people who own property right now in SF stand to make more money by simply selling their property, and using the proceeds to purchase property in other cities around the country, with better ratios.
Appreciation, by itself, will naturally drive this ratio down because of rent control laws. The value of the home is the denominator in that fraction.
I don’t think you can make a claim and then dismiss counter-claims based on relevance. You decided that relative profitability of rent in different cities was relevant here.
Keeping it empty would remove it from the housing pool, driving rents up.
I think the comment is saying that investors are using cheap loans to buy up properties and rent them out. This increase the supply of rentals and drives rent prices down.
Average property price in Auckland is 1.2M NZD. Property prices rose 20%+ last year in Auckland. So the capital gains quoted aren't really average, the average rate is half of that.
Sure there are outliers; but if your property costs 2.4M NZD (1.7M USD) then those numbers are accurate. Either way, land is the best investment right now and I don't see it crashing any time soon.
"Land can only go up". Even with COVID and closed borders.
> Are you assuming that it's somehow sensible to buy property and leave it empty?
Yes if it has been financed in certain ways.
An empty space is assumed to be rented at the same rate as it was before being empty and that empty rent can normally be tacked onto the end of the financing as it is assumed to be a "temporary" thing.
However, if that space gets occupied for less money, the basis of the real estate adjusts and the financer can call up the owner and demand more cash since the basis changed.
Consequently, I have seen quite a bit of real-estate remain empty for years just to avoid having to adjust the cash basis.
This is one of those stupid-ass financial things that absolutely needs to get blasted in law.
There is no problem if this is just one person or one business. There's no issue with allowing people some time to find the next renter.
The problem is that when everybody leverages to the hilt and the whole area collapses, the rent prices stay high even when there's no one renting--which is bad for renters. And this continues in a gigantic game of chicken until some of the owners finally run out of cash and go bankrupt and everything collapses simultaneously which also isn't good for the end renter.
It's like the 2008 Wall Street crash. Lots of people knew what was going on. However, everybody knew that they were equally screwed whether they were responsible or not. So, they just rode the train and hoped they could cash out to the next sucker before the disaster.
And then we get the joy of everybody wailing that they need a bailout.
Depends why you’re buying the property. If you need to clean it, for example get it out of a country or if you got it from questionable means, property is a great place to park it. Look at all the empty store fronts in NYC before the pandemic. Keep your rent artificially high so it maintains the value and your only cost is property taxes.
> The systemic problem is that investors are buying up residential property inventory, because there is a massive amount of near 0% cash available to a thin slice of the population.
This is absolutely a global problem: New Zealand, Australia, parts of Canada, the UK, are all having the same issues.
Japan doesn’t have this problem because they build housing sufficient to meet demand. Deciding not to build enough housing to meet demand so property owners make money: It’s the Anglo way.
Japan also doesn't have the problem of huge pension funds being able to influence and control housing markets in major metros. They don't exist because there isn't a need for them.
Sure you can. The issues with the Anglo way is that they've gone all the way to the other end with flat, wide buildings. Increasing verticality is a simple way to get more density without sacrificing area. At some point, yes, you'll just have to shrink down to get further density, but the low hanging fruit haven't been picked yet.
Note that "investors" in this case also includes massive pension funds. This isn't the type of entity that most people have in mind, but it's one of the most pervasive in California, especially in San Francisco.
I think the average person thinks of individual investors (flippers, rich foreign buyers) when they hear "investors". Some of the buyers belong to this group, but most don't.
Yes. See the Blackstone Group and its related investments in US residential housing. They reportedly made around $7 billion recently through one of their single-family and multifamily housing investment vehicles, which owns > 80,000 homes. Lots of other investment firms doing the same thing across the country.
I've been looking at REITs recently- "BREIT" is interesting in that it's not traded. According to them, the return rate is 10%, which is really good..
I don't understand how they are making this much off of rent in San Francisco. The price to rent ratio there is like 50:1, which implies a return of 2%. Perhaps their properties are charging much higher then average rents..
Detroit is the opposite extreme: the price to rent ratio is 5:1 (of course this ignores that the property is likely in terrible shape and the vacancy rate is high).
So here is why I have been looking at this: how do the rich maintain their wealth during inflationary periods? Own hard assets that pay rent! Also the relatively stable return you can get from rent indicates how much money you need to retire. Suppose you want $100K a year during retirement. Well with 10% returns, you only need $1M.
Yes the funds are the worst IMO, they do the most damage to the stability of the market and they have the most political power because their $$$’s are concentrated.
Not only is the capital so concentrated, but any threats to these funds are direct threats to the retirement plans, pension funds, and investments of the politicians that serve us as well as their donors/supporters. Firms like balckrock can effectively strong arm Congress into doing whatever black rock damn well pleases because of the economic power they've been allowed to concentrate. Blackrock has $8.68 trillion AUM(2020), the 2019 US GDP was $21.4 trillion. What kind of damage could blackrock, entirely legally, do if they wanted? I'm not saying that BR is extorting anyone, but I'd be thoroughly surprised if BR doesn't have emotionless discussions with powerful people about all the terrible things that will happen if Congress does X or doesn't do Y, which can have the same effect as saying to act in a way or [bad thing] without coming across as Tony Soprano.
Assuming the inflation rates are accurate (low inflation), these guys are getting into a risky proposition with a 1.5% discount (property tax still have to be paid out). I would not call it "free" money. These guys might not be as smart or lucky as they seem to be.
It's a bet on the inflation rates not being accurate, or at least not staying at "low inflation" levels.
Personally I would take their side of the bet. I think that inflation rates are going to be extremely high over the next decade, exceeding the 1970s and potentially flirting with hyperinflation, and that folks who are betting on status-quo inflation are about to get screwed the same way folks who didn't see globalization coming in the 90s or Millenials who bought the "study whatever you want and the money will come" line got screwed. But that's why we have financial markets, so each firm can bet on the version of the future they think is most likely, and ultimately one side makes a lot of money and the other goes bankrupt.
I’m not saying that hyperinflation can’t happen. But if you really believe in that hypothesis, you’d do much better to buy deep OTM call options on TIPs and gold instead of real estate.
Yeah, as someone else mentioned, TIPS are terrible investments for actual hyperinflation. In other instances of hyperinflation, "official" inflation estimates (which is what TIPS are benchmarked on) seriously lag the actual inflation rate on the ground. Most layperson financial assets aren't secure investments in this case, because their value depends only on what you can sell them for and it's far from guaranteed that you'll be able to sell them for anything in a crisis.
Your strategy for preparing for hyperinflation is to lever up on debt and then buy controlling interests in real assets that people need to live - real estate, food suppliers, weapon/ammunition suppliers, energy, utilities. When hyperinflation hits the debt inflates away to nothing and then you can name your price in the black market that inevitably ensues. Then you use the profits from your control over essential supplies to hire mercenaries to protect and enforce your rights to them, because hyperinflation is very frequently followed with a collapse of state control along with lawlessness, anarchy, and civil disorder. (See eg. Russian oligarchs.)
Note that folks who are buying up real estate with debt are following part of this playbook. Folks buying up gold and Bitcoin are following another part of it: their buyers expect that those will be the currencies of choice in the black market. I have no intel on whether gun & ammunition manufacturers are also getting bought up for outsize prices, but would be extremely curious if they are.
Come on, you must be aware that the risk with this strategy. Asset prices could just as well go down, especially if PCE/PCI inflation goes up, which will cause the Fed to stop fighting deflation and then it will start fighting inflation and the tools for fighting inflation have had far better track record than the tools for fighting deflation.
If you must get into debt, then buy assets that net a future return based on productive investments. If you were to buy real estate, you would have to buy it because you are expecting to receive enough rent to pay the mortgage back based on current rents.
If everyone gets into debt and uses it for speculation then we would probably get to see the opposite, an even stronger deflationary wave than what we have had so far.
I would like to see the collapse that you guys are seeing, I'll repeat this over and over again, the economic strength of the US is exceeding what should be possible under current economic conditions. For the last two decades the Fed was trying to "beat up" the US economy to "teach it a lesson" but it never even bothered to wake up as financial nukes were being detonated instead of using an alarm clock. Now we have Godzilla (corona virus) and the US economy is barely responding after it has been bombarded with stimulus checks.
Lots of things were done to "intentionally destroy" the US economy. The only way the US economy can fail from hyperinflation at this point is by physically destroying it and causing the production capacity of the US to go down, which means the US won't be able to meet foreign obligations denominated in foreign currencies.
The reason why I put the Feds actions in quotes is that its mission is not to destroy the economy, merely kick it out of bed.
That relationship - when purchase prices go up rents go down and vice versa has always seemed odd to me. When you think about it, it makes sense but you'd think most people wouldn't have the flexibility to move between renting and owning.
yeah it probably won't swing back as fast if rates go back up. A lot of us who were waiting around for a reason to buy suddenly got a reason to make a move. Anyone who bought a place is probably not going back to renting soon/ever.
You rent places in order to live in them. Owning property is always investment (if you're rational, and real estate middlemen will encourage you not to be.) Owning your own place, if not for the massive state subsidy, is basically renting from yourself for the price you would have paid someone else + maintenance.
Austin is a great example of a place where you may have bought a house in a really cool neighborhood, which 20 years later is in the middle of a shit yuppie neighborhood. You can rent that house to the shit yuppie who will be happiest there (and is loaded and willing to pay a premium) and rent in a cool neighborhood, especially if rents are low. You might not have to work at all.
Investors buy properties and rent them out when they have access to cheap loans. This increases demand on house purchases, but increases supply of rentals.
The article says that rents in SF are down. Housing prices are up. Anecdotally, almost everybody that I know that rents in the City has moved, because they were able to get a better deal.
I don't know about SF, but in the South Bay, house prices may be up, but condo prices are the lowest they've been in years. And that is despite record low interest rates.
I'm paying $2500/month mortgage for a home valued at $1.1m. For the extra $500/month, I get: mortgage interest tax deduction, a house after 30 years, the freedom to modify my home the way I like, the security of knowing I'm not at the mercy of the landlord.
Personally, I think for the extra $500/month, buying is a better choice than renting; at least for me.
Not that I’ve seen. Maybe it’s regional. I’ve always paid my property taxes directly to the county. Once a year when I was in FL, two installments in CA. The lender just takes principal and interest in its payment.
Escrow for property tax is (usually) _optional_ on a mortgage. I don't have escrow on mine because I heard horror stories from coworkers about payments getting screwed up when the mortgage was resold.
From the lender point of view, property tax escrow is slightly less risky than leaving it up to the borrower.
If you work with a mortgage broker and get quotes, ask for the rates with and without escrow. It’s pretty common that there is a slight reduction in rate if you include escrow.
That's not really true. I've had mortgages for most of my adult life and have never paid property tax escrow. Most lenders only require it if you put little down. Not to mention there are some popular tax strategies (e.g. pay taxes for two years in a single calendar year, then nothing for the next year) that make paying escrow a bad idea.
I thought NJ was bad! I pay $18k a year for a 1.1 million house (assessed at $950k though). Sending three kids to public school though so I make out and then I’m outta here!
It's 1-1.1% in most places in CA, and can grow by a max of 2% per year. The parent who deceptively advertised a much lower mortgage payment than would make sense given the current value, is probably paying around $10k/yr.
Buying very well might be a better option for you, but there are downside you aren't listing from owning:
* high transactions costs (if you decide to move after a few years, say goodbye to all of those savings)
* lower liquidity (if you rent, you can just call the landlord and break the lease. if you buy, you have to find an agent, stage the house, and wait for offers)
Most regular non-trivial maintenance is also on your plate as a homeowner. Need a new roof? That's on you, and isn't reflected in the standard monthly payment. If you rent, its on the property owner.
> Personally, I think for the extra $500/month, buying is a better choice than renting; at least for me.
Let's do the math. Nobody is getting a 1.1million mortgage for 3k/mo, so let's pick something conservative but more realistic.
According to zillow, for a 3k/mo payment you can get a 520k loan with a 20% (130k) downpayment, 30 years with an average 3%. You'll be lucky to keep it to 3% for the next 30 years but we'll let that stay. This 3k/mo payment includes estimated property taxes etc., but no home maintenance costs - there's going to be 50k or so of that over the 30 years.
So after 30 years, you've got a 650k house + whatever appreciation it has over that time, minus the 50k expenses. Historically house appreciation is about the same as inflation, so if we stay in today dollars that washes out. After 30 years, you walk away with 600k (todays dollars). If we pretend it won't cost you anything extra, 650k
What if you stayed renting and invest that 130k? Stock market long term average is about 7%, net inflation about 4%. So lets use that, I'm cheating by stating in 2021 dollars and you just keep investing the $500/mo difference.
Take 130k today, invest for 3% with a 500/mo contribution for 30 years.
Result is: $601,000 (again, sticking in today dollars as i've zeroed out inflation)
Do the same thing at 4%: $760k
Base on historic market, you're likely somewhere in between. Looks like it's not a huge difference, which shouldn't surprise you. This means that pretty minor differences in your life circumstances can push you one way or another, but nothing is obviously compelling.
(Ok one thing jurisdictionally dependent I didn't mention, there can be tax implications of this or not, depending on where you live. Ymmv.)
You totally left out property taxes! $1.1 million house in SF has about $6,050 in year property tax, which is another $182k over the life of the mortgage (assuming rates don't change).
Yes but wages are too , so you keep the delta. And the mortgage payment goes up with interest rates. Which aren’t exactly independent events.
It’s not perfect but it’s reasonable. It may free up some other money in the house case , which you could use to make up some of the difference. Or that might get eaten by rates.
US mortgages tend to be fixed. Wages for up, payments on the house stay the same. At 3%, a $1m mortgage would be 2500 interest a month now, and in 2040.
US home maintenance seems high though - roof repairs are a known thing for some reason. In he U.K. I live near an estate of thousands of houses all 50 years old, I can’t ever remember seeing one being repaired.
I think it's because they are mostly wood framed, vs brick in the UK.
But yes, the mortgage rate is fixed in the US, your mortgage payment doesn't change, your wages increase at least with inflation, and relatively speaking the mortgage gets cheaper every year. Rents on the other hand, tend to adjust with inflation. The breakeven point is about 3-5 years as it happens.
Why would you not be able to keep a 30 year fixed rate mortgage at 3% for the next 30 years? Hopefully you're making one extra payment a year to cut it down a few years...
7% long term stock average in the past doesn't mean the future
3 condos I bought in the 2007 downturn are appraised at double today, much higher rate of appreciation than inflation...
3% was left in favour of the house buying but unlikely because the last dozen years or so are very unusual In real estate, so I used middle of the road numbers. You may lock in 3% for 5 years now but nobody is giving you that for 30 - historical averages are all about double . Very good chance that happens again over that time period but of course we don’t know . Assuming it won’t would be irrational though .
Of course past doesn’t imply the future will be the same , but I used long run averages for both stock market and housing market , so it’s fair .
Based on the spelling of favour I am assuming you are not from the US. In the US, fixed rate mortgages for between 15-30 years are very much the norm, with 30 year mortgages much more common than 15. You can absolutely get a 30 year loan up to $550k ($820k in California) for well under 3% these days.
A 5/1 ARM that changes rates after 5 years is a product you can buy, but it would only be used in niche scenarios.
I understand it is not like that in most other countries and I'm not 100% sure why. Something to do with the federal government backstopping most mortgages I think.
>Historically house appreciation is about the same as inflation
If that's your investing thesis then obviously the expensive coastal metros make no sense. These prices reflect a history of excellent returns. It costs a lot more to own than to rent - people are paying to be landlords! Clearly they're doing this in the expectation that appreciation will make up for their losses.
Look obviously the details matter - we can cherry pick cases in either direction that “won” or “lose”.
The point is more that the sentiment in OP is common but wrong, it’s not obvious. One thing I didn’t get into is US specific but often it’s the mortgage tax credit that makes it worthwhile but again, it depends ....
If you had actually needed to pay $1.1M in principal even at 0% interest over 30 years you'd be paying $2777 a month.
Your comment comes across as basically suggesting it is other people's fault for not buying a house when it cost half as much as it does now versus renting a house now.
I bet you bought that house fifteen years ago at least right?
Yeah, I've owned a house for fifteen years. I know how this works. Saying your house is worth $1.1M now and you only have to pay a mortgage of 2500 a month completely ignores that you purchased it at a different price, or at least have put a substantial amount of capital into it so that your mortgage is certainly not covering $1.1M worth of principal.
I'm saying this is deceptive because that is not what people think of when they are comparing renting with buying. You're comparing renting today versus buying over a decade ago and getting lucky about the property value going up and being lucky about being able to afford to get a mortgage in the first place.
It's just not a nice thing to argue. I pay a lower "rent" than my friends who rent. At first I was paying much more than my peers, now I'm paying half as much. But most of them would happily go back in time and do the same versus paying rent now, that's just not possible, not to mention that they're often too young for it to have been financially possible for them to do it when I bought my house.
It is really unreasonable to suggest that someone now magically get themselves into a long term mortgage taken out a decade prior as if that's merely a $500 monthly premium. It's time travel or luck.
Ive noticed that the rentals on the market, while cheaper are generally lower quality. It seems to me that many landlords are opting for airbnb, where you can find 1 fully furnished 1 bedrooms for 2k$ a month rather than lock in a rent controlled tenant at the current prices.
I've noticed this as well - for house rentals in my area, the size seems to scale with price, and there doesn't seem to be anyway to scale up quality (there are some exceptions to this, but it's mostly true).
I'd be really curious to know how San Francisco rental prices are diverging between newer (not rent controlled) buildings and older (rent controlled) buildings. There is historically not as much turnover in the rent controlled buildings, and people pay a premium price at the time of move in because they get protection from rent increases. I would guess that rent controlled unit prices did not slip that much because people realize that San Francisco will be a great place to live at some point in the future. These rental surveys are heavily biased towards larger, newer apartment buildings.
I’ve been apartment hunting in the city for a few months and I’m not sure they are diverging at all. Rent controlled units are way down in price but a lot of the inventory is shit that people are moving out of for nicer places in better locations.
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[ 2.9 ms ] story [ 185 ms ] threadSo even though there are as many people as there were roughly a year ago, there are far fewer homes. Hence purchase prices are rocketing up and rental prices are drifting down.
There is no strong political will to solve this problem, because there are almost the same number of non-homeowner voters as there are homeowner voters. It’s painful for one side because they (we) are being priced out of the property market, and great for the other side who is making a fortune.
Only of interest rates jumped up, or legislation was made to financially penalize capital gains on second and third homes or on residential property funds will home prices return to normal.
Shouldn't the decrease in homes to purchase increase the demand for rentals?
If it's a business, they will leave it empty rather than lowering the rent
For example, in Canada, housing is up 30% YoY. Trudeau's Federal government recently said that even a 10% correction in housing would be unacceptable.
In practice, Canadian housing isn't housing - it's a 30% (or better) government bond that you get to live in or rent out. That's a 30% return guaranteed by a sovereign state that will gladly destroy everything else in the country to prop up housing. There is no investment like it anywhere else in the world, which is why Canada is seeing the largest real estate bubble in the world.
The best part? You can sell your principle residence completely tax free. Not a penny in tax paid from capital appreciation.
Very little hope here from the eyes of a local. Maybe you can study software to get out and go to an American city. America remains relatively industrious. Canada is just becoming a high tax version of Monaco (doesn’t even make sense but still).
I know we look funny from up there but we do love y'all. My sister-in-law is from Guelph and lives in Ohio, we just accidentally bought matching F150's. So feel free to come down any time. The politics suck but the people are fine.
Could you please provide a source? I cannot find anything on the web.
> it's a 30% (or better) government bond
This cannot possibly be true. First of all, 2020 was a special year for asset prices, not just in Canada and not just for real estate, but for all assets all around the world. Second of all, even if the first assertion is correct, there is a world of difference between not allowing prices to decline vs not allowing them to increase any less than 30% YoY. Third, 1.3^27 is 1192. Average home prices in Vancouver is over 1 million CAD. Do you honestly argue in 27 years, the current homeowners could sell off their property and net a sweet >1 billion CAD? That we would have millions of billionaires in Canada in 27 years?
Yes, BetterDwelling is a permabear but Vaughan's comments are legitimate. He said it in an interview with TVO.
On another note, the 30% number seems ridiculous. And, yet, do not be surprised if Canadians seriously believe this. Remember, people have been screaming bubble for a decade, and there has been no such pop yet. Of course, I think this is unsustainable. At 6-12% growth rate you're looking at like low to mid 8 figure values...for the average home. At 15-30% you're looking at hundreds of millions of dollars over 30 years. Ridiculous, isn't it?
Interesting discussion on the Financial Times comments section about young people feeling insecure also highlights this property inflation. Basically, the AngloSphere has decided to inflate assets and forget about industrious activity. In the long run, you just end up with a hollow, low productivity and low social mobility country.
Is this acceptable? Well, Canadians aren't voting against it. Of course, this is because they think they are getting richer. In reality, the country is just heavily indebted and consuming tomorrow's income today. I am keeping most of my savings down south with the Americans and their equity market. If the BoC can keep the bonanza going, so can the Americans.
So although housing prices don't necessarily increase faster than the S&P500, and that there are many local variables in play, the same 7% increase YoY can really be a 140% increase YoY, while you are also renting out the home for more cashflow.
Liquidity of the housing market has vastly improved over the last 5 years, mostly due to new kinds of lenders and underwriters in the market, with the current year being even more liquid than ever.
The downsides of real estate haven't gone away. Like maintenance and physical presence needed, which is difficult for an individual as the portfolio expands. The physical presence demand - or the need to make it economical for there to be someone else maintaining the property - means that it is difficult to come up with the downpayment for real estate in areas you would actually like to live in, but are fully capable of renting in. So the barriers of entry stay where they are.
For this discussion, I'm going to waive away the maintenance costs on a SFH, as they are immaterial for the size of the homes in SF regardless of what the value is determined to be by an arms length transaction.
Conversely, someone like Interactive Brokers is going to liquidate your holdings with extreme prejudice if the securities collateral declines below what their risk management feels comfortable with (other brokers are going to call you and perform a margin call).
You also can get way more leverage with real estate loans versus margin loans or pledged asset lines.
I'm mainly responding to provide helpful context to others. Not for a typical pedantic thread where we are already agreeing with each other but just squabbling over semantics.
I would say this is the primary savings grace for real estate investors and homeowners. They get to build equity in so many scenarios that it works out for them and lets them maintain access to low cost capital, against the equity they build up.
It may be a unique situation in our lifetime that is only possible because the fed is buying trillions of dollars of mortgage backed securities while the base rates are already bottomed out.
However, the overall value depends a lot on inflation, how much property value will go down in the future in real terms (home prices in many markets are now at levels of the previous housing crises), and how much you have to spend to repair the house in addition to known fixed costs such as home owner's insurance and property tax (actually this rate may go up where state and local governments are insolvent).
The only thing we know for sure is that the fed buying MBS has a strong inflationary effect on the housing market that can be seen in the record housing prices.
Say, you're buying a $500 thousand property with 20% down at a 3% mortgage rate. You're paying $1500 a month on your mortgage, and generously round it up to $2500 for taxes, insurance, HOA, and maintenance. There are very few places in America, where a half million dollar property would rent for less than $2000/month. Let's generously round that down to $1500/month for vacancies, turnover, evictions, etc. (And if it's your primary residence, you still "collect rent" by avoiding the expenditure of renting from someone else).
On the face of it, this seems like a terrible deal. Cashflow wise, you're losing $12 thousand a year. However take a closer look at that mortgage payment. Starting from day one, $10k/year is going to principal pay down, which directly increases home equity. Another tailwind: price appreciation. Historically real estate tends to increase at the rate of inflation (currently forecast at 2.3% in the TIPs market). That's another $11.5k/year in home equity appreciation. (This assumes a base case, zero appreciation above inflation. It doesn't even scratch the surface of our current housing shortage and the fact that houses have been appreciating 2-3% above inflation.)
In terms of accounting profits, you're actually making $9.5k/year. It's true you're flushing cash down the toilet, but you're building up home equity to counter it. Then in 5-10 years, you get your money out by either flipping for a big profit, or doing a cash-out refi.
The ROE on that $80,000 down payment is 11.9% annualized. Historically the stock market has averaged 8-10%. And today's CAPE ratios are near historical highs, which would suggest lower long-term returns. This doesn't even get into the tax advantages on the real estate.
All in all, real estate looks pretty compelling from an investment standpoint today. Now, I'm normally an efficient markets guy, so I don't say this lightly. But I believe the major driver is the lopsided nature of the cashflow vs. equity division of real estate returns in a near zero rate environment.
The vast majority of real estate investors think in pure cash flow terms. The idea of buying a negative cash flow property seems ludicrous. So, right now I think the market's leaving a ton of attractive real estate investments underpriced.
Are you assuming that it's somehow sensible to buy property and leave it empty? Owner vs rental doesn't change the number of homes available.
Why? You basically cannot kick evict a renter or raise their rent.
https://smartasset.com/mortgage/price-to-rent-ratio-50-large...
They've made more money from appreciation than from rising rents.
Appreciation, by itself, will naturally drive this ratio down because of rent control laws. The value of the home is the denominator in that fraction.
I think the comment is saying that investors are using cheap loans to buy up properties and rent them out. This increase the supply of rentals and drives rent prices down.
In Auckland, New Zealand, average capital gains exceed $40,000 per month. Land banking is incredibly lucrative.
On what property value?
Sure there are outliers; but if your property costs 2.4M NZD (1.7M USD) then those numbers are accurate. Either way, land is the best investment right now and I don't see it crashing any time soon.
"Land can only go up". Even with COVID and closed borders.
Yes if it has been financed in certain ways.
An empty space is assumed to be rented at the same rate as it was before being empty and that empty rent can normally be tacked onto the end of the financing as it is assumed to be a "temporary" thing.
However, if that space gets occupied for less money, the basis of the real estate adjusts and the financer can call up the owner and demand more cash since the basis changed.
Consequently, I have seen quite a bit of real-estate remain empty for years just to avoid having to adjust the cash basis.
This is one of those stupid-ass financial things that absolutely needs to get blasted in law.
So if they don't care, then why would _I_ care that they don't care?
The problem is that when everybody leverages to the hilt and the whole area collapses, the rent prices stay high even when there's no one renting--which is bad for renters. And this continues in a gigantic game of chicken until some of the owners finally run out of cash and go bankrupt and everything collapses simultaneously which also isn't good for the end renter.
It's like the 2008 Wall Street crash. Lots of people knew what was going on. However, everybody knew that they were equally screwed whether they were responsible or not. So, they just rode the train and hoped they could cash out to the next sucker before the disaster.
And then we get the joy of everybody wailing that they need a bailout.
This is absolutely a global problem: New Zealand, Australia, parts of Canada, the UK, are all having the same issues.
they also accept that in dense Tokyo metro areas, the sizes of places are tiny.
I dont think the Anglo way works - you cannot have both dense, but big apartments.
I think the average person thinks of individual investors (flippers, rich foreign buyers) when they hear "investors". Some of the buyers belong to this group, but most don't.
https://www.housingwire.com/articles/blackstone-gets-back-in...
I don't understand how they are making this much off of rent in San Francisco. The price to rent ratio there is like 50:1, which implies a return of 2%. Perhaps their properties are charging much higher then average rents..
Detroit is the opposite extreme: the price to rent ratio is 5:1 (of course this ignores that the property is likely in terrible shape and the vacancy rate is high).
So here is why I have been looking at this: how do the rich maintain their wealth during inflationary periods? Own hard assets that pay rent! Also the relatively stable return you can get from rent indicates how much money you need to retire. Suppose you want $100K a year during retirement. Well with 10% returns, you only need $1M.
https://www.bloomberg.com/quicktake/rent-wall-street-is-my-l...
https://www.theatlantic.com/technology/archive/2019/02/singl...
Personally I would take their side of the bet. I think that inflation rates are going to be extremely high over the next decade, exceeding the 1970s and potentially flirting with hyperinflation, and that folks who are betting on status-quo inflation are about to get screwed the same way folks who didn't see globalization coming in the 90s or Millenials who bought the "study whatever you want and the money will come" line got screwed. But that's why we have financial markets, so each firm can bet on the version of the future they think is most likely, and ultimately one side makes a lot of money and the other goes bankrupt.
Also, it is far from clear that TIPs would be honored in a hyperinflative scenario. I can easily imagine a "100% windfall profits tax" on TIP gains.
Your strategy for preparing for hyperinflation is to lever up on debt and then buy controlling interests in real assets that people need to live - real estate, food suppliers, weapon/ammunition suppliers, energy, utilities. When hyperinflation hits the debt inflates away to nothing and then you can name your price in the black market that inevitably ensues. Then you use the profits from your control over essential supplies to hire mercenaries to protect and enforce your rights to them, because hyperinflation is very frequently followed with a collapse of state control along with lawlessness, anarchy, and civil disorder. (See eg. Russian oligarchs.)
Note that folks who are buying up real estate with debt are following part of this playbook. Folks buying up gold and Bitcoin are following another part of it: their buyers expect that those will be the currencies of choice in the black market. I have no intel on whether gun & ammunition manufacturers are also getting bought up for outsize prices, but would be extremely curious if they are.
If you must get into debt, then buy assets that net a future return based on productive investments. If you were to buy real estate, you would have to buy it because you are expecting to receive enough rent to pay the mortgage back based on current rents.
If everyone gets into debt and uses it for speculation then we would probably get to see the opposite, an even stronger deflationary wave than what we have had so far.
Lots of things were done to "intentionally destroy" the US economy. The only way the US economy can fail from hyperinflation at this point is by physically destroying it and causing the production capacity of the US to go down, which means the US won't be able to meet foreign obligations denominated in foreign currencies.
The reason why I put the Feds actions in quotes is that its mission is not to destroy the economy, merely kick it out of bed.
Also, here in Austin, TX I know people who rent, who own properties that they rent out to others. It seems odd to me.
Austin is a great example of a place where you may have bought a house in a really cool neighborhood, which 20 years later is in the middle of a shit yuppie neighborhood. You can rent that house to the shit yuppie who will be happiest there (and is loaded and willing to pay a premium) and rent in a cool neighborhood, especially if rents are low. You might not have to work at all.
Home prices go up, rental prices go down.
Personally, I think for the extra $500/month, buying is a better choice than renting; at least for me.
The choice was never between renting and buying a $1m home for a $500/mo difference.
They're not technically part of the mortgage payment, but they're a line-item in your monthly payment to the lender.
If you work with a mortgage broker and get quotes, ask for the rates with and without escrow. It’s pretty common that there is a slight reduction in rate if you include escrow.
* high transactions costs (if you decide to move after a few years, say goodbye to all of those savings)
* lower liquidity (if you rent, you can just call the landlord and break the lease. if you buy, you have to find an agent, stage the house, and wait for offers)
* highly concentrated market risks
Let's do the math. Nobody is getting a 1.1million mortgage for 3k/mo, so let's pick something conservative but more realistic.
According to zillow, for a 3k/mo payment you can get a 520k loan with a 20% (130k) downpayment, 30 years with an average 3%. You'll be lucky to keep it to 3% for the next 30 years but we'll let that stay. This 3k/mo payment includes estimated property taxes etc., but no home maintenance costs - there's going to be 50k or so of that over the 30 years.
So after 30 years, you've got a 650k house + whatever appreciation it has over that time, minus the 50k expenses. Historically house appreciation is about the same as inflation, so if we stay in today dollars that washes out. After 30 years, you walk away with 600k (todays dollars). If we pretend it won't cost you anything extra, 650k
What if you stayed renting and invest that 130k? Stock market long term average is about 7%, net inflation about 4%. So lets use that, I'm cheating by stating in 2021 dollars and you just keep investing the $500/mo difference.
Take 130k today, invest for 3% with a 500/mo contribution for 30 years.
Result is: $601,000 (again, sticking in today dollars as i've zeroed out inflation)
Do the same thing at 4%: $760k
Base on historic market, you're likely somewhere in between. Looks like it's not a huge difference, which shouldn't surprise you. This means that pretty minor differences in your life circumstances can push you one way or another, but nothing is obviously compelling.
(Ok one thing jurisdictionally dependent I didn't mention, there can be tax implications of this or not, depending on where you live. Ymmv.)
It’s not perfect but it’s reasonable. It may free up some other money in the house case , which you could use to make up some of the difference. Or that might get eaten by rates.
US home maintenance seems high though - roof repairs are a known thing for some reason. In he U.K. I live near an estate of thousands of houses all 50 years old, I can’t ever remember seeing one being repaired.
But yes, the mortgage rate is fixed in the US, your mortgage payment doesn't change, your wages increase at least with inflation, and relatively speaking the mortgage gets cheaper every year. Rents on the other hand, tend to adjust with inflation. The breakeven point is about 3-5 years as it happens.
7% long term stock average in the past doesn't mean the future
3 condos I bought in the 2007 downturn are appraised at double today, much higher rate of appreciation than inflation...
Of course past doesn’t imply the future will be the same , but I used long run averages for both stock market and housing market , so it’s fair .
I literally just closed on a condo last month and got a 30 year fixed rate jumbo mortgage at 3%.
A 5/1 ARM that changes rates after 5 years is a product you can buy, but it would only be used in niche scenarios.
I understand it is not like that in most other countries and I'm not 100% sure why. Something to do with the federal government backstopping most mortgages I think.
Just goes to show you have to do the non hand wavy version of this for your actual situation ; my broader point stands though.
If that's your investing thesis then obviously the expensive coastal metros make no sense. These prices reflect a history of excellent returns. It costs a lot more to own than to rent - people are paying to be landlords! Clearly they're doing this in the expectation that appreciation will make up for their losses.
Look obviously the details matter - we can cherry pick cases in either direction that “won” or “lose”.
The point is more that the sentiment in OP is common but wrong, it’s not obvious. One thing I didn’t get into is US specific but often it’s the mortgage tax credit that makes it worthwhile but again, it depends ....
If you had actually needed to pay $1.1M in principal even at 0% interest over 30 years you'd be paying $2777 a month.
Your comment comes across as basically suggesting it is other people's fault for not buying a house when it cost half as much as it does now versus renting a house now.
I bet you bought that house fifteen years ago at least right?
I'm saying this is deceptive because that is not what people think of when they are comparing renting with buying. You're comparing renting today versus buying over a decade ago and getting lucky about the property value going up and being lucky about being able to afford to get a mortgage in the first place.
It's just not a nice thing to argue. I pay a lower "rent" than my friends who rent. At first I was paying much more than my peers, now I'm paying half as much. But most of them would happily go back in time and do the same versus paying rent now, that's just not possible, not to mention that they're often too young for it to have been financially possible for them to do it when I bought my house.
It is really unreasonable to suggest that someone now magically get themselves into a long term mortgage taken out a decade prior as if that's merely a $500 monthly premium. It's time travel or luck.