A lot of people here are playing semantics and ignoring the message of the article just to be "clever". The message of the article is we can't have our "housing values are always increasing" cake and eat our "housing is always affordable" dream too. If we want to keep housing affordable, we'll have to settle for valuations staying pretty much constant in real dollars forever and resign ourselves to be happy with only the savings opportunities everyone here are so cleverly pointing out.
> If we want to keep housing affordable, we'll have to settle for valuations staying pretty much constant in real dollars forever
This is basically the argument for buying into a co-op rather than buying an apartment. You aren't allowed to flip them for a profit, which means they're less expensive because you're giving up optionality. (At least when they actually are implemented as originally intended.)
To me this makes a ton of sense, because there are a lot of benefits to home ownership for both the individual and society, but real estate generally isn't a good place to put investible dollars unless you're super wealthy and just want some (relatively) predictable income from renters.
What we really need though is public housing for the middle class and upper middle class, rather than just for low-income families. Right now public housing is basically just a scam to transfer money from the middle class to the super wealthy by using money from the middle class to subsidize labor at below a living wage, when in reality everyone needs a house so it's a textbook example of a market where there should be a public option.
In Singapore, 90% of the housing stock is public housing -- including plenty of fairly upper-class developments. They public housing in a variety of sizes and styles, and to suit every income bracket, thus ensuring that there is no stigma associated with it. Then they use their control over the housing stock to engage in some completely overt social-engineering -- ensuring that no one neighbourhood becomes too concentrated in a single ethnic, religious, or economic bracket.
This is a very long way from how the West does things, but I've got to say that it works exceedingly well there.
(Disclaimer: not an endorsement of All Things Singapore.)
To relate it to the main article: public housing in Singapore is affordable and an investment.
You can sell it and prices are somewhat market driven but with complicated taxes and limitations to prevent speculation (flipping). It's affordable because, as public housing, there are numerous subsidies, incentives, etc that the government provides to make the initial down payment and subsequent installments as easy as possible.
A friend who is in the Singapore market right now mentionef that his mortgage payments would be nearly the same as his rent, thanks to the incentives the government gives for home ownership
Singapore also has absolutely massive fines for using your home as an AirBnB. In a well-functioning market AirBnB doesn’t matter much, but when supply is artificially constrained via zoning etc, the $150-per-night income from your $1500 per month home is hard to beat.
it still exists, and you avoid it by claiming to be a relative visiting. Just make sure you don't bring large amounts of luggage thru the front lobby, or make a nuisance in the building.
Facilitating a citizen in breaking a not unreasonable local law is not something a responsible tourist ought to consider. As a tourist you are a guest of the country you visit; behave as one.
Besides, Singapore is a nation where you probably don't want to break any laws a foreigner. Abetting fraud often is a punishable offence, and you might just become part of a crack-down on illegal subletting to set an example.
Co ops are just apartments whose land is owned by a corporation. The corporation usually has a perpetual interest only loan on the land. So when you buy a co op you are leasing the land and own a share in the apartment. You tend to give up options but no one really benefits. I don’t know other markets but condos in nyc are prob 30-50% more valuable in part due to these options. It’s cheaper but only because it’s objectively worse as anyone who had to deal with a co op board can attest. You can make things cheaper by making hem less valuable sure, but that’s just destroying value for no reason. Imagine you don’t like how expensive cars are so you make it so that you need a background check and waiting period to buy a car. Will new car prices go down? Probably, but that’s not a good thing
The living arrangements in the video are absolutely co-ops. I'm not sure I get how the context is different, other than that there exists other mediocre (or worse) cohousing co-ops.
“No one benefits” is not an accurate statement at all.
The purpose of a coop is to be able to choose your neighbors in the building.
The reasons for doing so could be indefensible, like keeping out blacks and Jews, or they could be things like ensuring the financial health of the building, blocking people who will engage in endless construction, or avoiding drama by excluding celebrities that draw paparazzi.
In Helsinki each building is owned by a maintenance company - a company that takes fees to cover basic expenses, but which isn't allowed to generate a profit. You don't buy a flat, as such, instead you buy shares in the holding-company.
In short all flats/apartments are cooperatives, but still profit occurs when they're bought and sold. The structure and profit/loss are unrelated.
There isn't really any law that disallows housing cooperative from generating profit per se , but generally there isn't any reason for it to do so. Some very old ones actually do pay dividends and do not ask fees from owners, but that usually requires that the cooperative is debt free and has a way to generate income (i.e. owns some of the apartments/business premises that it rents out) and that it has saved up enough to pay off planned maintenances.
You most definitely are! At least in New York City. There tends to be a flip tax, but that is just a mechanism of funding the corporation, and it's not the reason prices are lower. (Prices are lower because coops tend to be much less flexible about renting. Many forbid it entirely, and those that allow it will have limits like at most two years out of every five. That basically means there's a class of buyer -- real estate investors -- who have no use for coop units. Lower demand at a fixed level of supply leads to lower price.)
But that can take the form of 90% of any increase over the purchase price if you sell within the first five years, which effectively removes any economic reason to purchase for short term speculation.
I’ve been thinking about this a lot lately. I want my children to be able to afford to live near me if they want. I own a house and would gladly relinquish my ability to sell it at a profit if it meant keeping prices affordable for young folks. I’m not sure what the real solution is, though.
Luckily you don't have to do anything to make that happen.
Housing is going to correct in a serious way, and soon.
Quantitative easing artificially keeping lending rates low screwed the housing market. That's in the process of correcting in a major way.
At the same time, the increasing rates are going to hit the stock market in a bad way, decreasing general liquidity for down payments.
The real headline is: "you can't keep high prices and increase mortgage rates amidst stagnant incomes."
A few other considerations:
Baby boomers are a huge population. The generations afterwards simply don't match their numbers. That generation is still primarily homeowners. As they age, that's no longer going to be the case, and the supply constrained market is going to reverse as houses get handed down or put on the market.
New developments and construction/renovation are targeting higher-end buyers, which makes affordable housing hard to find. But as everyone races to chase the higher end buyer, eventually there's going to be an over-supply and the market will tank. This was in part one of the contributing factors to the 2008 crash - new developments ended up as wastelands that eventually ended up as "affordable" housing because the buyers disappeared.
Personally, even though I'm open to buying a house at the moment, I'm staying the heck away from the market. I'm already seeing properties in my area sold a few months ago put back on the market initially for more, but then dropping the price below what they bought at.
We're approaching the cusp of the upward wave, and as rates increase, a lot of people that bought in the past two years are going to be stuck with whatever they bought into for a good while.
The sooner the Baby Boomer stop being consumers, the better, in regards to the rest of society. As a voting block and as a consumer group they've been large enough to completely reset the status quo.
I love my Baby Boomer parents, my aunts and uncles, and their friends -- but from a purely economic standpoint they've had their way for too long (extending to politics and societal-norms) and ultimately have hurt those of us in the later generations more than they've helped us.
That's tantamount to saying that life now is on balance worse than it was in the pre-boomer period. Personally I'm pretty happy the societal and technological advances of the last 50 years have happened. The idea of living in the 1950s doesn't particularly appeal.
Yes and No. The trick is that "as a whole" people change attitudes through life. In general, as you get more wealth, you become more conservative, as you get older, you generally end up with more wealth, so in general people become more conservative as they age.
The trick is that the baby boomers made a lot of progressive changes when they were younger, and we shouldn't take that away from them. However those changes were largely made since they benefitted the younger baby boomers.
As they get older, they are still influencing society in a way that largely benefits them over others, and sine they are wealthier, that tends to be in the direction of wealth creation.
Of course, every generation does this, the baby boomers just have an oversized representation, they have a better ability to "distort" the market/political landscape.
Of course this is all about generalisations, there are plenty of anecdotes that will refute parts of these stories, but anecdotes are not trends.
> Yes and No. The trick is that "as a whole" people change attitudes through life. In general, as you get more wealth, you become more conservative, as you get older, you generally end up with more wealth, so in general people become more conservative as they age.
You make it sound as being conservative is a bad thing. Alternatively, you could phrase it as, people become more conservative as they gain more responsibilities and experiences. Overall, I think it's a good thing, because it means that change happens slowly, which makes it easier to undo bad changes.
I feel the same way. There is a fair amount of stigma that boomers also look down on millennials. As a result, I think there is a bit of a dim view the opposite way: seeing a generation that has been able to take and control so much while resenting the one coming next.
I hope I’m not telling my child they are lazy, entitled, or other generally ignorant statements about their generation and the society I hand down her.
Older generations have always made those same complaints about younger generations since humans first evolved. We like to think that we'll act better than our parents, but in the end it's just human nature.
It’s unusual for one generational cohort to control so much for so long though, so a lot of what we’re seeing with Boomers is new.
Boomers are an unusually large cohort that arrived basically at once. They are a much larger group compared to their parents and children. That alone guarantees economic and political distortions, as it means that an unusually high percentage of the population would be in a very narrow range of ages.
They also lived unusually longer than their parents too, by about 20 years so far. Their parents had to share power with the Boomers because they started to die out, with the Boomers this hasn’t happened at all. This means they took the mantle of power in unusually large numbers, didn’t need to share with their children, and lived so long that they’ve stunted the political and economic growth of younger generations. That Boomers are still clogging up the lower rungs of power is literally stunting the growth of Gen X and Millenials, which will be a problem when that cohort is forced to take over due to mortality.
Under normal circumstances no generation is ever in the majority, and the mortality of their parents and themselves ensures that they cycle into and out of power smoothly. This gives every generation the ability to transfer social and economic power smoothly, as well as maintaining a good worker to retiree ratio. The Boomers however have basically upset that balance by existing in a tight cohort and living unusually long.
So yes, parents shitting on “kids these days” is as old as humanity, but what we’re seeing with Boomers is actually quite new.
Don't forget their most important advantage: they grew up and came of age during the post-WWII boom period, and therefore enjoyed unprecedented rates of wealth and standard of living increases.
You know, in direct contrast to Millennials, whom they enjoy criticizing so much.
> Millenials have also enjoyed a decade of economic boom 2008-2018
Both the expansion after the 2001 recession and the one after the Great Recession were strong in aggregate terms but unimpressive unless you were in a narrow slice at the top when you look at distribution; this is very different from the post-WWII expansion (even the 1980s and 1990s expansions were better distributionally than the later ones, though worse than earlier ones.)
The expansion that centered
the Boomer experience and provides the experiential basis for the belief that effort is sufficient for success was different than anything Millennials (and even, to a lesser extent, Gen X) experienced.
And quite a few of them have had their economic outlook badly damaged by the crash preceding 2008. Millenials who graduated before 2008 still have a lower salary on average than the younger members of their cohort.
In inflation adjusted terms, Millenials are far poorer than their parents for their phase in life on average. The latest number I can find is 20% less earnings than their parents at a comparable age.
Now Forbes argues that that’s because Millenials are extremely educated, their parents were working 4-8 longer than they were in their late 20s, giving Boomers more time to earn wealth.
While that’s certainly part of it, I don’t think it explains it all. The social contract around who gets the spoils of a growing economy seem to have shifted significantly since the 1980s. That an uneducated factory worker Boomer earned more in inflation adjusted money than a colleges educated Millenial indicates that something is up.
Life expectancy in 1946 was 64.4 for men and 69.4 for women for an average of 66.9. Now it’s an averages 78.6, 12 years longer.
And US life expectancy has dropped 1.5 years recently due to opioid deaths. Drop that from the equation and you’re looking at nice even 80.
I’m sure there’s a lot of legitimate quibbling to be done over my numbers. Obviously 20 wasnt the right number, but also obviously the general point stands: Boomers have lived a lot longer than anyone expected them to. If they lived as long as their parents had on average, we would be running out of them already.
As an aside. The above numbers really explain why social security and other pensions are in so much trouble. The greatest generation expected to receive only a few years of benefits on average, 1.4 for men and 4.4 for women. A tiny proportion of a worker’s lifetime wages would be required to cover these costs, better still since multiple workers would exist per retiree. Boomers on the other hand are legally entitled to a solid decade or more worth of benefits, an increase of an order of magnitude in time, not to mention increasing health costs. This combined with the unusually high ratio of retirees to workers, again caused by the unusual size of the Boomers, is a recipe for disaster.
An excellent point. This data was much harder to find, but I finally got it.
You are correct in that infant mortality rates have had a huge impact on life expectancy as a whole. An infant in 1900-1902 could expect 49.24 years, while one born in 2003 can expect 77.4.
But non-infant life expectancy has risen pretty dramatically too. A 20 year old in 1900-1902 could expect to live another 42.79 years, while a 20 year old in 2003 could expect another 58.4 years.
This trend continues the further up the age bracket you go. A 30 year old in 1939 could expect another 39.67 years, while that's up to 48.9 by 2003, a solid gain of 9 years.
Of course, Boomers are not 20 in 2003, they were 20 somewhere between 1966 and 1984. So the gap between the Boomers and their parents is a bit smaller than that (although the gap between Millenials and the Greatest Generation is huge). By my very rough estimate, the gap between the Boomers and their parents life expectancy hovers around 4-7 years, depending on how large the age gap between the Boomer and their parent. The gap appears to get the biggest around middle age, presumably because of improvements to medicine and reductions in Tobacco usage.
I tried to list out the data points I'm looking at, but it just didn't work in sentence form. Instead look at the raw data at [0]. Table 11 is my source, but I was just looking at all races and genders. Presumably one would see different results once you start breaking it down by demographics.
Not at all—morally and with a humanistic-bent—I don’t cheer for the deaths of my loved ones or their peers. But like taxes, death is inevitable.
Economically, I’ll consider it from a Machiavellian perspective:
The sooner limited, choice, resources are freed up for the younger generations the better. The Old were useful because they spawned, and raised, the young. As replacements, knowingly.
I barely got out of the last downturn. I did a very un-HN thing and went and got a 2 year MBA on top of my engr degree. I made my last mortgage payment from across the country and less than 12 months later the housing crash started.
Now, I see the market at a peak again and I'm not going _anywhere near_ this thing. I also contemplate whether I will ever afford a family sized place in a nice location. I am not sure but I wonder if I may have missed the boat on this.
I don't see a social adjustment to housing happening in my lifetime so at this point I'm just hoping that a major downturn happens during a time I'm not having a startup fail but instead on a rise from time off consulting or a successful company.
I wouldn't give up what I've done to have worked corporate for the past decade, but I'm also completely beholden to macro trends in housing with timing that feels completely like luck to me.
Unless if you are quite old, you will live to see the adjustment.
Houses at this point are owned by Boomers, some Gen Xers, and the richest subset of Millenials.
But this is quite an unstable situation. Everyone needs somewhere to live, but vanishingly small parts of the population need two places. As the Boomers either die or move to retirement homes they will need to liquidate their real estate in massive numbers, largely all at once thanks to the tight clustering of the Boomers.
There’s simply no way that this glut of housing will be absorbed by the richest groups of Millenials without sudden and deep price shocks, especially since Boomers appear to prefer suburban homes that the childless Millenials don’t typically want.
What’s interesting to me is what will happen politically. Boomer house owners have been very adept at using local politics to prop up their property values, the only notable failure was 2008. What kind of bailout will they ask for when their home is worth 1/5 what they expected?
While I don't disagree with a lot of your argument, according to some preliminary research it seems like there's about as many millennials as boomers. Like 77 million boomers, 65 million gen x, 75 million gen y.
The count is less important than the buying power.
Millennials, as a group, have significantly less buying power than their Baby Boomer peers at the same point in their lives.
One source, but eye-opening if you can believe/trust the underlying data:
"Only a third of millennials own their own home, compared with almost two-thirds of baby boomers at the same age. It will take a millennial on average 19 years to save for a deposit, compared[0] with three years in the 1980s. A third of millennials will, it is predicted, have a lifetime of renting with less space, poorer conditions, longer commutes and more insecurity than the baby boomers experienced."[1]
I'm a boomer myself, but I absolutely hope that this can be turned around. Higher voter participation from your generation could do much to reverse some of the really bad stuff that my generation has done.
The solution is to get rid of zoning laws. Baring some breakthrough in public choice theory allowing us to break out of this mess, I predict we are stuck with this until the robots take over.
One thing you still need to consider is infrastructure like water, sewer, schools, hospitals, etc. I agree it should be easier (and thus cheaper) for landowners to build what's profitable, but there needs to be a feedback mechanism so that the things necessary for people (apart from housing) is available for them.
Zoning laws get a lot of negative on HN, but I think they serve an important, good purpose.
Here me out.
I work from home. Yay.
I live in a residential area in US, near an elementary school across the street, with an apartment building in the way. I can hear kids out running around and playing in the yard. They get pretty noisy, but I'm fine with it.
Right next to the elementary school is an apartment complex where a guy seems to be running a motorcycle repair business based out of his apartment's garage. The garage faces the street, facing my home.
He tests the loud motorcycle engines about 1 - 2 times running a few minutes each time, about 3 - 5 times a week. One of these days, I'm going to super glue his garage shut so that he can't get the motorcycles in and out of the garage.
Ok, well, just kidding. I will just have to deal with it. But still, it is dang annoying to hear the motorcycle engines revving up as described above. I can't imagine how I can deal with a motorcycle/car repair shop across from my home.
Zoning laws are often used as a tool by people who practice NIMBYism, but the laws were introduced for a reason, and I support zoning laws because it would mean keeping certain types of businesses bit placed away from homes.
Loud motorcycles should be violently taxed and restricted to low density zones of operation. I can't think of any other behavior that is as destructive to the common good for so little benefit to the individual. "I like loud sounds" is not good enough reason to inflict them on everyone else.
I mean, I'm ok with occasional loud motorcycles driving through the neighborhood.
But this case is more than that. So, this particular neighbor is not riding a motorcycle through the neighborhood. Other riders do and I'm ok with that. But this particular neighbor revs the motorcycle engines "while standing still to test them". A few minutes at a time, about 3 - 5 times a week.
Now imagine zoning law was gone. It might mean a user car mechanic moving in to operate a repair business, while leaving numerous unused cars on the street. It could mean someone opening a hair salon a door down from me. Or maybe another person opening a martial arts studio above me.
Zoning laws used as a tool by NIMBYers is not good. But the laws have a valid place in our society.
I agree, wholeheartedly and have a hard time understanding the thought process and worldview of someone who rides a loud motorcycle even five blocks in a dense urban neighborhood at night.
In one neighborhood I lived in... each building was 4 stories, with 5 apartments facing the road. There are two sides of the road. There were four apartment buildings per block.
5 * 4 * 5 * 2 * 4 = 800 homes being affected! Yikes!
Getting rid of zoning laws only works if you have a lot of extra land to sprawl out onto. Otherwise, even if you build up to get more dense ala NYC, HK, Tokyo, or Shanghai, the area will just become more attractive and more people will want to live there. No easy solutions here.
You say that like vastly increasing the productivity of our largest cities is neutral at best. This would create an extraordinary surplus, and other cities that can build out would compete for citizens, just like Texas is doing right now.
> Otherwise, even if you build up to get more dense ala NYC, HK, Tokyo, or Shanghai, the area will just become more attractive and more people will want to live there.
The problem with this theory is that it's zero sum. If density attracts people and prices there rise, those people will have come from some other place. Then the prices in that place will fall and we still serve the goal of giving people an affordable place to live.
You can't increase demand in every place at the same time. It has to come from somewhere. And if you increase density everywhere at once, it also can't move from everywhere to everywhere. If one city increases density it attracts new people from other cities. If every city does it there is no net migration because the benefits accrue everywhere, so the demand in each place stays the same and the greater supply lowers prices.
I don't see how that has anything to do with it. Living costs in rural areas isn't the problem. This seems like a variation of the "luxury apartments are actually good for affordable housing" argument. Which of course is popular on HN, but not particularly true.
> I don't see how that has anything to do with it. Living costs in rural areas isn't the problem.
The people can't come from rural areas because they aren't there to begin with, or because they can't leave (e.g. because they're farmers and that's where the farms are, or they don't have the money). To get a large enough influx for the demand to overcome the increase in supply, it has to come from places that already have a lot of people, i.e. suburbs or other cities. Which is where housing costs are a problem.
> This seems like a variation of the "luxury apartments are actually good for affordable housing" argument. Which of course is popular on HN, but not particularly true.
[citation needed]
If you build more housing then people move into it. Those people used to live somewhere else. The place they used to live opens up for someone else.
If the new place is above-average that means everybody gets to move up -- new supply lowers cost of luxury apartments from $3000/month to $2500, which means the previous $2500 apartments fall to $2200, which means the previous $2200 apartments fall to $2000 etc.
On the one hand, this means the effect on $750 apartments is relatively small because some of the benefit of increased supply is also going to people with $1500 apartments and $2000 apartments. On the other hand, that's actually what we need. It's absurd to have a giant cliff between regulated "affordable housing" and market rate housing. People at the 50th percentile need to be able to afford housing too.
> Population growth can increase demand everywhere at once.
But where is the extra population coming from? If you're talking about any other place, it reduces housing costs in that place. If you're talking about a rise in birthrates, that's theoretically possible (though by no means guaranteed), but the timescale is so long that there is plenty of time to build even more housing by then.
> And affordable housing away from a high demand urban center is no use to anyone and not going to attract anyone if there aren’t good jobs there.
Where do you expect the people to be coming from? If it's another city, that's still an urban center with jobs. If it's the suburbs, people can still live there and work in the city as they do now.
And they can't be from the middle of farm country because there aren't enough people there to be a major source of demand, even before accounting for the fact that they would have to both want to move to the city and be able to afford to.
Birthdates don’t have to rise for population to increase. For instance, our global population is expected to continue to rise for the next couple decades even as birth rates fall because life expectancy is rising. Yes, the US is currently below replacement rate (without immigration), but if birth rates 20 years ago were higher than the current death rate, demand for housing will be increasing.
As for where people are moving from other than farm country, there are plenty of economically struggling cities, towns, and suburbs.
> Birthdates don’t have to rise for population to increase. For instance, our global population is expected to continue to rise for the next couple decades even as birth rates fall because life expectancy is rising. Yes, the US is currently below replacement rate (without immigration), but if birth rates 20 years ago were higher than the current death rate, demand for housing will be increasing.
The relevant numbers are relative to the status quo, not relative to zero. If we are expecting rising housing costs due to rising population, a method of lowering hosting costs is productive even if it only reduces the rate of price growth, since the alternative would be for prices to be even higher.
The only problem is if the method can itself cause population growth, e.g. by short-term lower housing costs allowing more people to afford to start a family. But that's the thing we have plenty of time to stay ahead of by continuing to build more housing.
> As for where people are moving from other than farm country, there are plenty of economically struggling cities, towns, and suburbs.
Except that they're in the same position as farm country. There aren't that many people there anymore -- Detroit has already lost more than 60% of its population since 1950 -- and the people who are there can't afford the cost of living in an expensive urban center.
The people who move into the city center when new housing opens up are predominantly the people who used to live in that city's suburbs.
Your argument would also imply a strong case for "economically struggling cities, towns, and suburbs" to eliminate density restrictions and attract economy-boosting density-preferring people to locations where housing is already more affordable.
> According to the website RealEstate.co.jp, average housing prices throughout Greater Tokyo have actually decreased since 2006. In 2014, the average price of second-hand condos was 27,890,000 yen, or about $232,914. This is above the U.S. median of $187,000, but is a steal when considering that average housing prices in many destination U.S. cities are triple or quadruple this amount.
I heard many many commuters who work in Tokyo actually live pretty far away, commuting via the bullet trains. So the housing market in Tokyo is not in tremendous demand.
> Getting rid of zoning laws only works if you have a lot of extra land to sprawl out onto.
Other way around. Zoning encourages horizontal growth by constraining vertical growth. Once supply has reached horizontal and vertical limits, prices skyrocket to reach equilibrium with demand.
> Otherwise, even if you build up to get more dense ala NYC, HK, Tokyo, or Shanghai, the area will just become more attractive and more people will want to live there.
Density implies noise, pollution, traffic, people, and a certain type of urban lifestyle... all of which decrease attractiveness.
> Density implies noise, pollution, traffic, people, and a certain type of urban lifestyle... all of which decrease attractiveness.
Prices in big dense cities say otherwise, there is plenty of demand to be where all the economic action is, many people also prefer urban lifestyles.
The lack of zoning doesn't encourage density at all, if there is land to build out instead of up, everyone will prefer the former because its cheaper and can provide amenities like free parking. Zoning can prevent that, it can also discourage vertical growth but at the same time discouraging horizontal growth as well.
> Prices in big dense cities say otherwise, there is plenty of demand to be where all the economic action is, many people also prefer urban lifestyles.
Prices just show urban areas are highly valued, there is no proof those areas defy supply and demand.
Density increases attractiveness for some people, but the trade-offs are clearly not for everyone given NIMBYism and higher prices outside some urban areas. Increasing supply may increase demand to a point, but there is still an equilibrium - density is still part of the solution.
> The lack of zoning doesn't encourage density at all, if there is land to build out instead of up, everyone will prefer the former because its cheaper and can provide amenities like free parking. Zoning can prevent that, it can also discourage vertical growth but at the same time discouraging horizontal growth as well.
Moot point, this entire discussion is about urban areas where land has already run out.
> if there is land to build out instead of up, everyone will prefer the former because its cheaper and can provide amenities like free parking.
"Everyone", except people that care about the time cost of commuting and the financial obligation of car ownership.
Prices are very high in low density areas like Los Angeles, Silicon valley, North Virginia, Palm Beach, etc.
Before Manhattan got "nice" 20 years ago, it was dense, and there was cheap real estate to be had. It was the gentrification that drive the price increase, not the density.
Demand isn't infinite. Every person that moves to the attractive city is one less person that wants to move to the attractive city because that person is already there.
The goal isn't lowering the housing price. If one person moves in and the price stays the same that alone is already a success.
> The solution is to get rid of zoning laws. Baring some breakthrough in public choice theory allowing us to break out of this mess, I predict we are stuck with this until the robots take over.
The breakthrough is using higher-level entities to constrain lower-level entities. What creates the problem is that you have a neighborhood zoned only for low density and the only people with a vote to change it are the existing homeowners whose collective voting sentiment is "screw you, got mine."
What's needed is a law at the state or federal level that any given fifty mile radius has to have a certain percentage of area zoned for unrestricted density.
People choose to buy in neighborhoods they like (if they have a choice). It doesn’t make them cynical schemers if they then don’t want the neighborhood to change.
The nature of a NIMBY is to label any change as bad, regardless of the benefits to other people. If that isn't cynical, I don't know what is.
Would you defend segregationists, who tried desperately to preserve the racial makeup of their neighborhoods, schools, and buses?
It's a rhetorical question of course -- I know you would not. My point is just that your logic can be (and is) used to defend any number of despicable causes. There's no reason our civil society has to put up with with this nonsense.
I read your comment as arguing that people who structure their social systems based on conservative principles e.g. we like our neighborhood a certain way so we resist rapid change (barring explicit racism, of course) are a tax on society.
I agree with your example and agree that people wanting an explicitly racially segregated community are cynical and racist. But an similarly conservatively principled person may simply prefer a low-density lifestyle and act in ways that resist change for that reason. There may even be scenarios where we can look back and correlate responsible, well meaning, application of certain principles with undesirable social trends, but I don't think that alone invalidates the principle.
I don't know if I misread your comment, but it was odd to see a broad critique on conservatives and their principles:
> My point is just that your logic can be (and is) used to defend any number of despicable causes.
I could use plenty of sound logic to defend despicable causes, but fact that the cause is despicable does not alone invalidate the logic if the logic is sound. When sound logic argues for despicable things (which it often does) we introduce ethics and morality to judge whether we should actually act on the logical conclusion.
I think a better way to phrase your comment would be, "We shouldn't have to put up with despicable causes, period". I'm being a little pedantic, yes.
Is there another part of the market where you apply this twisted reasoning? I thought 1992 was a pretty good year for Japanese sports cars. I think building new cars after 1992 should have been illegal. We can keep 1992 cars affordable through price controls.
Bad analogy. A 1992 car does not change when new models are released to others. But changes to neighbourhoods from increased density can be negative to quality of life, such as having a quiet road suddenly become a connector road for large amounts of commuter traffic (kids no longer playing outside), or schools get overcrowded, or there is standing-room only on the subway for a long commute into town.
Traffic is a consequence of segregated uses and insufficient density. Densification is how a quiet residential neighborhood might come to support pedestrian life, service its resident’s need without making them get on a collector road, fund additional public transit capacity, etc.
Some mid-rise condos down the block are far better than another suburban subdivision a few miles down the road, as traffic goes.
The problem is that due to the way most property taxes and house prices work those people are getting a free ride off of the prosperity of the city: a tragedy of the commons.
Assuming this quiet neighbourhood is near an urban area with nice jobs/schools/amenities etc, the value of the 'hood is created by the network effects of the city. Growth of the city means growth in the value of that 'hood. The people living there usually aren't doing a lot to increase the value of their properties. But as property assessments lag market values, or the way taxes are structures, those owners can see flat costs for their housing while their values rise. Meanwhile by refusing to add density to their neighbourhood they are driving up the costs for others. When they eventually sell or move they get all of the gains in property value all the while having very low carrying costs.
If they wanted a quiet neighbourhood they could move to a smaller town or further out from the city centre, but I don't think they do. If the market were better organized then their behaviour would be dampened by higher taxes as their property values rise. Owners would then have an economic choice: resist density in your 'hood and pay more for that privilege, move somewhere cheaper, or allow more density which will keep costs flat.
> If they wanted a quiet neighbourhood they could move to a smaller town or further out from the city centre, but I don't think they do.
Well, I did move out to a smaller town, pretty much as far away from the regional megapolis as I could while still being within reach of its metro area. But it seems that demand for "moving out" is such that it turns small towns into big towns pretty quickly, which kinda defeats the purpose. I'm not opposed to paying higher property taxes to keep the neighborhood low-density, but it's not like we even get that option.
Yeah I hope we can eventually find a way to price these kinds of things more accurately. Like a sibling comment says: price in the externalities of low-density living and let those who want to pay them pay them, or else increase the density of the area.
In your case it's sounds like you're paying it to some extent: longer and/or more expensive commute.
We do a terrible job of capturing all the externalities that come from that low density. Low density requires much more infrastructure to serve it, and gets subsidized by the high density areas further in. If all that was captured in the actual costs of living in those low density areas, you might very well decide that low density was too expensive, and that you preferred high density areas instead.
If you can afford to waste land out of your own pocket, go right ahead. But supporting and subsidizing people who want to live an economically inefficient and socially detrimental lifestyle, in part by outlawing efficient and pro-social alternatives, is a terrible use of government power.
I don't think it's even in their own economic interest. I think it's just fear of the unknown and nostalgia. I'd love it if my neighborhood were to become popular enough for someone deciding that they want to build a skyscraper next to my house. It would mean the land value alone would allow me to retire.
I think I misunderstood. Why would having a mortgage make it desirable to stop others from getting one? Surely you want to fill the neighborhood as much as possible and create public services—this increases the value of everything. NIMBY on the other hand is completely irrational.
This is exactly right - infact, because some people might consider housing in Bay Area to be a good investment, we can try to make it affordable for others.
This is the project we’ve been working on for the last month or so: https://zerodown.com/
Given the supply of land is fixed (the old real estate joke about their not making any more) while the population and the economy are both growing, we should expect to see a rise in land values over time in real terms.
Housing land (houses are a deprecating asset) should be an asset class that mirrors population and economic growth.
The supply of land is fixed but it's not full yet, and filling it up with single-story buildings is a practice that can certainly be improved upon.
The obstacle to building new housing is not the availability of land, it is the zoning laws. Even a geographically constrained place like San Francisco, surrounded by water on three sides, could accommodate far more housing units simply by building taller structures.
The car-centric nature is a consequence of filling the land up with single-family homes that have garages. Mass transit is only ever popular when it is more convenient than driving and parking a car.
It makes sense for housing land cost per acre to grow steadily. However, that's fully compatible with a scenario where housing land cost per person is steady or even decreases, as long as you allow for increased density.
Except that governments are free to create arbitrary laws. So there certainly are a number of schemes the government can use to balance these two things, though most people would claim they are "socialist" because many revolve around subsidizing first time homeowners.
Subsidizing homeowners does not hold prices down. It may actually help prices to increase, as everyone knows that they will be able to sell homes at higher prices because the government will continue to help people pay for them.
>> The message of the article is we can't have our "housing values are always increasing" cake and eat our "housing is always affordable" dream too.
Replace housing, with salary and you will see why your argument isn't entirely right.
Should salaries/wages increase over time? yes. Should labor and employees remain affordable to employers? yes. Are both possible? yes.
The right question is who is paying, and what are they paying for.
Plus at the end housing is subject to the same laws of economics. Demand, supply equations, timing, value with regards to location and proximity to city enters, school districts etc.
You can't talk of home prices from one dimension alone.
Replacing housing with salary, it doesn't seem obvious that the answer is yes, though. Quick Google for wage vs inflation came up with this, which appears to show that real wages actually haven't increased when you account for inflation. Maybe I'm missing something, but your point doesn't feel quite as self-evident as you imply.
http://www.pewresearch.org/fact-tank/2018/08/07/for-most-us-...
On the entire average, wages haven't increased. But you can't apply that argument to FAANG employees who are buying expensive homes in Bay Area, CA. Where very clearly salaries have as a matter of fact increased by a large percentage.
The same is the case with housing. Its not like the entire USA has the same housing prices as Bay Area, CA. In fact its not even the whole Bay Area, CA itself.
The thing is there is something always available for everybody. But one might not get what they want. Just like how every one wants to be a employee at Netflix and earn $500K but can't.
I think you're basically saying that for housing to stay affordable, entry level housing should lower in quality over time. If you buy an entry level house today for price X, and you expect it to be worth X*k at some future time, and you expect other people to still buy houses for X at that future time, then those houses have to be lower quality.
If X is adjusted for inflation then the quality can stay the same as long as the supply/demand curve doesn't shift. As population increases, you need to increase supply to achieve that.
> The message of the article is we can't have our "housing values are always increasing" cake and eat our "housing is always affordable" dream too.
Sure you can, as long as you have enough overall economic growth. It won't be a particularly great investment in the sense of growing at a faster pace than the surrounding economy, but it will at least keep pace, and you can live in it meanwhile, and you can borrow money for it, so it's leveraged, unlike most of your investments.
"Net positive" works only as long as it works...until it doesn't.
Overall economic growth may be "real" in the sense that is it growing organically, or it may be a complete fiction based on quantitative easing and manipulated stock prices. It is likely both, but like Bernie Madoff's scheme, the question will be whether you're someone who made a profit during the "good" years or those who took a bath once the scheme unraveled.
The only hard ceiling on real economic growth is Kardashev II at the very least, if not Kardashev III; until then, the material wealth of the human race is either going to continue to grow, or else we will have big enough problems that canned beans and water purification tablets are the only meaningful investments anyway. And those beans and tablets are going to be a lot easier to hold onto if you own a house ;)
That’s brilliant. Can I count you in as a de-anonymized co-founder of the all-important, infinitely-divisible “Strategic Water Purification Tablet Reserves”-backed cryptotoken ICO?
Edit for clarity:
You’re probably right. I thought it would be an apropos time to slip in a blockchain joke. :)
Great, so you made $50k because your $200k house is now worth $250k - a 25% increase.
You now have a family and bigger income and are looking at a bigger house priced $500k. You are really glad that you “made” $50k on your old house.
But wait, if the new house is in the same neighbourhood, it’s price increase was probably also close to 25%. If prices had stayed the same, it would be worth $400k today.
So you just gained $50k on your old house but are paying $100k more on the new one.
This is only beneficial if you move from a large house in a popular area to a smaller house in a less popular area.
If you have kids, they might inherit the wealth gained from your housing “investment” - after splitting with their siblings and after taxes of course. Sounds good, until you realise that they will have to spend it all - and put in extra - on housing because of the price increases.
In a world where housing prices stay the same, or become slightly cheaper year by year, everyone is better of. The prices of common utilities such as food and clothing have gone down spectacularly in the last decades while quality has gone up. No one would rather live in a world where these had instead become more expensive.
It’s time we start thinking about housing in the same way.
The article is dead wrong about the economics of whether buying a house is a good investment. So much so as to be intellectually dishonest.
1. The alternative to buying a home is renting. If the net cost of home ownership is lower than renting, you do not need to make a net profit on the sale of your home for it to be a good decision. The right way to make this decision is to look at all net cash flows, discounted to their present value, such as is done by the New York times rent vs. buy calculator.
2. The article ignores the fact that mortgages, which most people use, amplify the gains of inflation.
3. The inflation hedging properties of a home make for a good way to protect your future self and retired self from cost of living changes in a way that alternative investments cannot.
Many people outside of VHCOL San Francisco have found housing that is both affordable and a good investment.
Here's the core argument of the article, rephrased slightly: housing cannot both outpace inflation and remain affordable indefinitely.
This is not incompatible with some people being able to find affordable housing that is a good investment. All it means is that in the long term - especially when real wages remain relatively constant [1] - these two policy aims are mathematically at odds.
I agree with your rephrasing that housing cannot both outpace inflation and remain affordable indefinitely, but I disagree that it is identical in content to the article's core argument.
> The article is dead wrong about the economics of whether buying a house is a good investment. So much so as to be intellectually dishonest.
What part of the article is that? Because that certainly wasn't my take away. The article is about whether housing can be affordable and a good financial investment, giving large returns, at the same time. Housing as an "investment" in your life, family or security isn't what is meant.
Just an example: the average price per square meter in Berlin has increased up to 4x between 2007-2018[1], and it was possible to buy a 42 m² apartment for 25k EUR in 2006[2].
> If the net cost of home ownership is lower than renting
How do you know the net cost on a 30 year loan? If you can confidently predict decades of interest rates there's far more profitable investment classes for your money.
Most homes are bought with fixed interest rates. If you are buying with a variable rate, 99% chance your credit is shit, and you shouldn't be buying a home, because the bank will own it soon.
Ah yes, you're right, I forgot about that occurring in the States. Everywhere else offers far shorter fixed terms. Struggle to understand how the banks manage it, seems like some risk is offloaded onto either taxpayers or other bank customers.
So let me rephrase then: How do you know the cost of 30 years rent to compare it with?
In a big city, rents almost never go down. Here's my calculations to buy: I will pay somewhere $1700-$2200/month to rent 2+ bedrooms (wife + 2 kids) in LA near where I want to work (5 years ago). $2200 can cover the mortgage on a $600k house, assuming ~3.5% interest (rates were good 5 years ago) and ~20% down payment (pretty common down payment). In the right market conditions in the part of LA I like, $600k of house might be 2-4 bedrooms, 2-4 bath, and 1000-1600 square feet. Now it's just a parameter fitting / optimization problem.
But how does that even pay off? Consider down payment as an investment, and rent / mortgage something you'd have to pay to live wherever as a cost of life or an investment in yourself.
Even if all you got was your original purchase price back in 30 years, that can make the purchase worth it. Doing the math above, saying I paid $2200/month for 30 years on a $600k house, that gets me $792k paid for a $600k house, with $120k required up front. But I get $600k back at the end (even assuming zero market appreciation). So if you had instead invested the $120k somewhere else, rented some place for $2200/month (never to see that money again, like it was burned up), in order to get $600k back in 30 years, you would need to beat 5.5% annual return on that invested $120k.
But if that house increased in price (even by average appreciation)? Then the reality is that your investment of $120k needs to beat 9.2% of annual return in the open market to beat the investment in a house, even if all you did was live there instead of some place else (assuming your house can fit your needs).
Of course things like property tax, HOA dues, etc., can muddy up those calculations, but all of it is easy to drop into a spreadsheet. The hard part is actually earning the money (or at least that's been the hard part for me).
(please note that I paid substantially less than $600k for my home in LA, the numbers above are for reference, and not necessarily valid for current market conditions - especially interest rates and home cost)
Maybe that's true in the US (I don't know), but it's certainly not true elsewhere in the world; such as Australia for example where most home loans are have a variable rate.
No, never massive swings in the short term (GFC caused a 4% drop (7% to 3%) in 2009 for example). I think that even when the cash rate is moving quickly rates don't change more than a percent or two per year.
Re budgeting, I think the relatively slow rate of change makes it mostly a non-issue though I think people at the upper end of their borrowing power struggle with rate rises.
The ARMs (Adjustable-Rate Mortgages) here in the US can jump pretty severely, mostly because they are only given to folks with bad credit. Folks with bad credit push to buy something out of their budget, get behind, rates spike, then lose it all to the bank, continuing the bad credit cycle.
Housing is not independent of other goods, house prices go up because we use inflation to manage the economy. They make people money because they are the one example of large yet safe leverage which most investors have access to, so they are a good hedge against inflation. This is why buying is worthwhile long term. Over a lifetime the gains can be considerable because of the falling value if the debt and the rising value of the asset. Of course a volatile market makes this very risky and is highly undesirable.
Deflation is generally agreed to be a bad thing by economists. I disagree falling housing costs would be good as then no-one would want to buy and quality would fall.
All that said I agree relatively stable housing costs are desirable, and in fact quite achievable as the government controls pricing via planning laws. They are in fact 'making' buildable land all the time, and the supply is tightly constrained and tightly regulated in cities. This is a solvable problem.
> Deflation is generally agreed to be a bad thing by economists. I disagree falling housing costs would be good as then no-one would want to buy and quality would fall.
Is it a bad thing when the prices of mobile phones and large screen TVs fall? Does those falling prices mean no one wants to buy them? Do they imply falling quality?
Taiwan was nearing net deflation for 2 decades while the GDP grew at double digit rates. That saying that is more of a self fulfilling prophecy, than something with fundamental underlying mechanism.
Deflation is the critical component of human progress. Economic cycles and interest rates can make it difficult to see the long term, underlying trends. This becomes very destructive when governments pursue policies which pretend otherwise.
I'm generalizing a great deal without providing examples, because it is such a large topic and economics is filled with misleading theories. In the simplest example, when prices are flat or declining, if you want to do well financially you have to be more productive, produce more and/or better products. When prices just go straight up, borrowing money and buying assets is "profitable."
This stuff is really obvious for those of us who have been in technology a few decades but I can understand why people in other areas are led to believe ideas which aren't very logical.
Yes it is. Or rather, prices rise with inflation but there is another much larger influence on housing prices - interest rates. When rates fall, prices rise and when rates rise prices fall. This may actually be a driver of inflation, as it is the biggest way consumer borrowing changes things.
> Or rather, prices rise with inflation but there is another much larger influence on housing prices - interest rates. When rates fall, prices rise and when rates rise prices fall.
Interest rates have the exact effect you describe on all prices, because they effect consumer credit at all levels (and houses aren't the only thing typically bought on credit), business access to capital (and thereby employment), etc., which drives the demand curve in every sector of the economy.
So, no, that's not a unique effect on housing prices. It's the reason monetary policy is a lever for effecting the economy broadly.
Consumers don't borrow money for most spending. Houses and cars are primarily it. Credit cards are generally at higher interest rates that the Fed doesn't really have control over and that's not a consideration in most buying decisions. I would hypothesize that one of the primary ways Fed interest rate changes influence the economy is through home lending and the resulting consumer spending of that borrowed money.
Withdrawing tax benefits and government backing for long term mortgages would both probably reduce the increases in housing prices.
As would higher price inflation. Because people decide on a monthly payment and more price inflation means higher interest rates. Those interest rates would reduce the size of mortgages that people would enter into.
Could you please describe exactly how could housing get continuously cheaper when there are more people every year and the demand for good locations is increasing?
(Edit: I asked a sincere question. Don't downvote without explanation, please. It's really tiring, anti-discussion and makes it seem like you don't have any good point at all.)
Yes, there are more people every year, but in the US, there aren't a lot more people every year. Population growth is at 0.7% and falling.
On the other hand, I see no reason to think that "demand for good locations is increasing". What counts as a "good location" is in flux, but people always want to live in "good locations". I see no reason that it's more important to live in a "good location" today than 5 years ago, or 50, or 3000.
So what I see is a fairly static number of people who'd like to live all over the place, but a decent chunk wanting to live in large, dense, desirable cities. Which are, not surprisingly, quite expensive.
> how could housing get continuously cheaper
Housing, as opposed to land, is a manufactured good, and we're getting better at manufacturing things every year.
As for land, we can use it more efficiently (higher density, fewer parking lots, more transit, etc.) It's well documented that many cities (Los Angeles is an infamous example) drive up the cost of housing and bias new developments towards luxury units due to building codes that, eg, require very inefficient land use and a large number of parking places.
Alternatively, we can work towards changing what is desirable. In 1920 something like 5% of the entire US population lived in New York City; now things are much more spread out. Today a hefty slice of software engineers live (or want to live) in San Francisco, but that's not an immutable law of nature.
I mean, taken to an extreme, if you build an absurd number of houses in San Francisco without sufficient infrastructure, the combination of massively increased supply (all the new units) and decreased demand (because it's no longer a great place to live) would absolutely lead to house prices dropping. That doesn't sound like a good policy (and is certainly not what the parent comment was suggesting!) but there's no particular reason why house prices can't continuously fall.
In regards to whether or not a good location is more desirable today than 5, 50, or 3000 years ago it definitely is. Reminds me of a story I found about Greyhound going down in my neck of the woods.
"More and more people are leaving rural Canada, and the people who remain are often the ones who are unable to leave.” Since 1950, the rural share of the country’s population has fallen by half."
So while population growth isn't fantastically large, people are flocking to urban areas (for many pretty obvious reasons).
> On the other hand, I see no reason to think that "demand for good locations is increasing".
I think demand pretty clearly is increasing and my hunch is that it's a technological effect. † The internet didn't make place irrelevant, as many thought it would; in fact, it had the opposite effect in that it made it a lot easier to move to the most desirable cities. You can scope out neighborhoods on Street View; shop for new apartments on Street Easy or Craigslist; endlessly research the target city, apply for your new job, and complete the first round of interviews -- all on the internet, from the comfort of wherever you live now.
(And, not for nothing, it's also a lot cheaper to fly back and forth today, once you get to that point in your transition.)
† In some abstract, Platonic sense, San Francisco is probably no more desirable than it might have been in 1971, but, as I try to argue above, a Clevelander then would have had a much, much harder time manifesting that desire than today. And as more and more people realize this desire, the attraction grows as if by accretion.
but its not just house prices themselves if you look at a map of value of farmland in the US you will find that more accurately reflects the current house price upward rise.
Example...in NW Indiana farm land is about $35k per acre which reflects the amount of revenue earned per acre. In California its 3 times that.
Its we are running out of farm land acre to feed the world that is driving up the house price in the US
At significantly higher cost. If you’ll excuse a very broad brushstroke, this is why California — with lots of land — builds so many single-story buildings compared to the UK where there is so little land available for construction. (That the difference is in part due to policy doesn’t change that there is less availability).
I’m looking forward to more automation in construction so that vertical is not significantly more expensive.
Significantly higher building costs, but lower land acquisition costs.
Excerpt from a BuildZoom analysis:
"The high cost of housing in expensive coastal metros is not driven by construction costs. It is driven by the high cost of land which, in turn, reflects a scarcity of zoned units, not a scarcity of land per se."
You can bribe those people. If any new building on your block gives you a tax abatement for 5 years (which is then absorbed into that building's construction costs), then you bring a serious economic incentive to YIMBY. You can tune up the amount of tax benefit until YINBY outvotes NIMBY, and then you're good.
That sounds like a way to make construction more expensive. Transfer money from new buyers to existing owners. This is against the entire premise of the article.
All things being equal, it would, indeed. However, the main driver of the high real estate prices is the artificial scarcity of locations. If you can remove that, you'll see prices collapse all over the country. To remove this scarcity, you need to fight NIMBY.
We currently have a feedback loop where rising prices attracts investors who sink money into real estate, which reduces supply and raises prices, which attracts investors, etc. There are a number of factors that incentivize reduced supply such as reduced incentive to build lots of new buildings because that would increase supply too much and reduce prices and an increased incentive to build a small number of luxury apartments instead, which further raises property values.
If ownership wasn't seen as an investment vehicle, this feedback loop would be broken. People would only buy because they need it, or in the case of landlords, the rents they could secure from rentees would be much lower because of the lower market value of the object and the overall lower rent prices across the entire market.
Of course, sufficient supply has one big condition: Zoning laws are relaxed, allowing enough supply to be built in the first place.
I'd argue the SF Bay Area is not being driven by investors (many investors think it is bad to invest given the very low rent yields), but by supply constraints themselves.
The supply constraints are not so much financial, but being driven by residents who don't want their neighborhood to change. And since they don't suffer (no property tax increases come with the home value increase), there's not much push back other than the moral argument that their children can't afford homes anymore.
I guess, meet and exceed housing demand and improve less affluent areas. This involves government money but most seem happy to let the public take the bill in the form of continuously inflating house prices instead.
You build more houses, supply/demand, etc. There are many, many good locations in the US where affordable housing been be built. You can also replace low density housing with medium/high density housing.
Population growth is very low, the technology to make homes should get cheaper, and old homes degrade and become less desirable as the rich continue to build new homes.
If you don't own a home, you are effectively short the housing market. If you own one home you are neutral: you can't sell it to make a profit because you always need one roof over your head. If you own more than one house, you are a landlord/investor and I don't know why we are giving you special treatment relative to other asset classes.
It would be better for everyone if housing was not an investment.
Except that the amount of housing you need does not stay the same throughout your entire life. Nor do constraints on your proximity to urban job centers.
> If you don't own a home, you are effectively short the housing market.
No, the same way that you aren't short on Tesla if you merely don't own any Tesla shares.
> If you own one home you are neutral
Long, actually.
> you can't sell it to make a profit because you always need one roof over your head.
Yes, you can; you may prefer to have a home, but people do in fact live without them, and, further unless you own the most minimal home allowed by habitability laws in the most inexpensive neighborhood, you can always downgrade while still having a roof over your head.
> If you own more than one house, you are a landlord/investor
That's no more true that it is of “if you own more than the least expensive house possible”; it is quite possible to own multiple homes only for personal use value, viewing them neither as investment for resale or things to rent out.
> It would be better for everyone if housing was not an investment
If it wasn't, how would development happen? It only happens because housing is an investment for the first owners, the one building it.
Many things are created with out them being 'investments.' The builder just needs to be able to sell the home for more than the cost of labor, material, and land. The owner buys it as a place to live and not as an investment.
Much like a car - many things are expensive and not expected to go up in value.
> Many things are created with out them being 'investments.' The builder just needs to be able to sell the home for more than the cost of labor, material, and land.
Spending money on something in th expectation of being able to resell it later for greater than the cost is, exactly, an investment.
> > If you don't own a home, you are effectively short the housing market.
> No, the same way that you aren't short on Tesla if you merely don't own any Tesla shares.
I'm not required to produce Tesla shares every month for the rest of my life. It's not precisely that I need to own "one home" to be "neutral housing", but I need a claim on enough housing for myself (and those I'm responsible for) that I don't have to keep paying market rate for.
That is a very interesting way to think about it, but I am not sure that it works fully. By extending that principle, wouldn't anyone that can't afford to own shares in TSLA or MSFT be short then? In this framework it seems like you can't be "neutral", ie neither short nor long.
No, because you need a home to live. OP is arguing that living in a home you don't own and being exposed to the housing market through your rent costs is equivalent to being 'short'.
Okay that's a fair point. In the housing case, you aren't simply not participating; your money is exposed to the housing market in the form of rent. I buy that.
I don't see how being tied to a particular area is essentially good for the community, especially for big cities, which are used to huge turnovers. For me having the freedom to move wherever I want for my job sounds much more enticing than being forced to find jobs in the same area even though there might be better chances elsewhere/I just want to experience something different.
Also, you don't necessarily have to be tied to that area either. You can still treat the house as an investment and rent it out, while you yourself rent a smaller house. In some places in Europe such practices might even be encouraged by the policy (tax incentives etc.)
> ...its price would need to increase faster than the rate of inflation.
If you don't own a home, you pay rent, and rent increases over time. Even if you never made a dime on selling the home years later, the difference between years of rent vs. the total of your mortgage may still come out ahead. Or, keep the house, and live the rest of your live only having to pay property taxes and utilities. Either way, inflation goes up, rents go up, mortgages go down.
I'm not sure that invalidates the larger points within the article. I just worry about the perspective of treating a home purely as an investment when their primary benefit is to be a roof over your head.
If you’re single or a couple with no dependents who doesn’t mind moving every now and then, renting isn’t so bad. You avoid the risk of dealing with damage to the structure, fixing things, labor markets being disrupted (like factory towns or smaller towns everywhere in the US). Take all that saved up money and put it in a low cost index fund, you very well might come ahead, and be liquid when you need to move because the jobs disappeared. And rents definitely don’t always go up.
There's a wonderful video[1] explaining just that. The TL;DW is that if you compare a renter & a buyer from day 1 to the end of a 25 year mortgage, both the renter and owner will have roughly the same net worth.
My folks always talked about how renting just pissed away money, but never mentioned how mortgages piss away an obscene amount of money on interest payments. (And repairs/tax/insurance/HOA/etc.)
Sure. And you also have to replace the roof when it leaks, the heating if it fails, and the water heater when it goes. You may or may not have had to mow the lawn and other such things.
Owning isn't always a benefit nor is renting always a curse. Either one can be a solid choice for an individual and/or their family.
I totally agree, but you at least need a clear fermi approximation to compare. I don't agree off the cuff that renting and buying have equivalent value.
That’s assuming people purchase assets that increase in value over time. And that most people are fiscally responsible and manage their debt properly. Which isn’t the case for probably 90%+ of Americans.
It’s very easily to live a paycheck-to-paycheck lifestyle (even in higher incomes, people adapt to expensive lifestyles very quickly) and spend a lot of money on vacations, cars, eating out etc... and only consider your living costs as a passive constant that you pay no attention to. I imagine most people think of spending and budget allocation in this way, so for them having a mortgage makes more sense.
Rather if you think of every purchase in terms of your total net worth and you spend a significant amount of your income towards saving, investments, and assets that don’t depreciate, then sure, maybe renting is your better option.
OTOH it can also be argued that fiscally irresponsible people should not be taking on mortgages as they are the more likely to end up with a foreclosure.
Of course there's the problem of being unable to improve a rental- the landlord doesn't reap any reward and the renter doesn't have a stake to be willing to invest- so rental stock tends to be uninsulated, uncomfortable, poorly designed, rarely renovated, etc.
Last summer I spent $900 in materials to build a pergola that I carefully planned as passive solar management. It made a huge difference in comfort and slashed cooling loads. In rentals, I just suffered.
Landlords improve rentals when they think it will allow them to raise the rent enough to make back more than the renovation cost in the long term.
Or when they think it will allow them to attract a “better” type of tenant who’s more likely to pay rent on time and take care of the space instead of damaging it.
Or because the real estate is their nest egg and they want to maintain and increase its value. Or because they live in the building and the improvements will improve their own quality of life.
Every apartment I’ve rented in NYC has been in a building over 75 years old. Even at fairly low rents (by NYC standards), every one had been gut renovated less than 10 years before I moved in.
I know there are scenarios where rentals do get improved. But insulation, efficiency & comfort is really hard to value, and so I've not really seen it happen. This is specifically called out by government & eco groups as a major challenge going forward to improving energy efficiency of the housing stock.
I've known a few families over the years in California who rented detached houses. They rented houses (didn't have the down payment) to get the benefits of more space (ex: 3-bedroom place), yard (well small yard, this is California), garage, and washer/dryer.
Every single one of them had to move out before their kids grew up old enough to go to college. In fact they didn't last more than a few years at each house because every landlord would come around and ask the renters to move out.
The excuses given were:
- I'm selling the house (turned out it wasn't sold years)
- I'm remodeling the house (nope, not true)
Pretty much in all cases, the owner of the house was forcing the renter out so that they could raise up the rent much higher with the next, new renters.
California is obviously an outlier in real estate discussions. Obviously in highly desirable areas, demand will keep going up will cause rents and home prices to keep going up, and of course owning will be better.
NYC/AUS/DEN/SEA/PDX are also forecast to be high demand, but who knows when an earthquake or drought or whatnot can come along and destroy home values. But for most other places not posting double digit growth like Midwest towns or the Northeast with its stagnant high tax suburbs, home values don’t see the rise in value that make it a no brainer to buy.
> They rented houses (didn't have the down payment) to get the benefits of more space
This is just a statement that living beyond your means is bad. Even in markets where renting is cheaper (https://medium.com/@usaar33/why-you-shouldnt-buy-a-home-in-t...), you have to ensure your savings rate is high enough to absorb any reasonable rent appreciation.
Realistically, you might be able to get 20% more house than what you can buy - I imagine your friends were pushing more than that.
But you are assuming they were living beyond their means.
They were really not. They were able to find another place near paying similar rent.
The point is the house owners were basically getting around a local laws meant to protect renters against unreasonable rent increases.
Where I live, there is a law against raising monthly rent substantially on an existing renter. Owner can raise the rent for existing tenant say about 3 - 5%, once a year. I'm not sure about the exact percentage, but it is allowed only once a year for sure, to a specific percentage of the existing rent.
So the house owner gets around this law by periodically forcing out the renter with bogus reasons, so that they can rent out the property to the next renter at a substantially higher rate.
Instead of being able to increase rent from $2500 to $2700 after the renters lived there for first 2 years, property owner can raise the rent from $2500 to $3000 or even $3500. The property owner is basically getting around the local law to protect renters.
> They were able to find another place near paying similar rent.
I'm a bit confused here. I assume the new place was inferior in some way? Otherwise, I don't see why the landlord would try to force them out if they are paying market rent.
Well it seems some owners seem to think they can beat the market and get higher rent by chasing renters out every few years. So they can raise rent by 7- 10% instead of just say 3%.
> If you don't own a home, you pay rent, and rent increases over time.
Rent costs are directly tied to property values. Assuming rents will always increase is based off the same assumption
that property values will always increase as well.
> Rent costs are directly tied to property values.
In the long term, probably. But definitely not in the short or middle term. There can be many years where the ratio deviates from the norm. So "directly" is not definitely not the word I'd use.
You could also argue that Japan's extremely low crime rate makes it a safe place for families to live. But good luck getting the US crime rate down to those levels. Japan is an outlier in so many ways that it's not useful to use the country for comparison. It has a completely unique culture and an almost totally homogenous population, ethnically and culturally.
I have yet to see anyone put forth a realistic proposal for achieving the social harmony of Japan in a country as diverse as the United States.
Well, if different courts were allowed to exist in the same geographical area, with different laws, selling their services (and their laws) to customers, competing for these customers, and negotiating between themselves as to how inter-court disputes should be resolved ... then different cultures living in the same places could live by the laws that best suited them, with maximally-efficient interaction with other cultures/courts, without people having to geographically segregate themselves into multiple homogeneous nations (such a transition being inefficient and outright disgusting).
But that won't happen, because everyone's minds are married to the idea that law must be provided by a monopoly called "government".
Japan also had a negative population growth for quite a while now, which translates to less demand and too much supply.
In that regard, I'm not at all surprised about prices for houses going down, probably plenty of them on the market. Just like flat rents make sense, wouldn't want to lose your tenant due to increasing rent when he has plenty of other options.
Tho don't urban population centers still see rising rents and house prices?
Japan is unique in how housing deprecates over time. Rentals also kind of works like that in the states; with older properties becoming cheaper to rent as newer stock fills the high end.
The real problem is that there hasn’t been any attempt at policy changes to correct this. In order to do so, society needs to chip away at the problem in steps.
Right now, real estate is simply a good investment regardless of everything else because of the tax benefits of transferring properties to heirs. Depreciation and tax bases are reset, essentially making real estate a double whammy of tax benefits for the current owners as well as their heirs. Depreciation means tens of thousands of dollars saved in taxes per year per property. Transfer benefits means never having to pay that back due to generational reset. Take away the transfer and estate benefits first.
Once that first dent is made, the wealthy/NIMBYs will naturally vote for the next correct move, which is to take away policies that make housing unaffordable to their own children. As the law is right now, there is no incentive for land owners to be altruistic to society because their children are sheltered from affordability problems due to transfer benefits.
My wager is that all it would take is removing transfer benefits on commercial properties (e.g. like kind exchange, or enforcing depreciation recapture upon transfers, including 1031) to see the first domino fall on the way to an eventual partial rollback of laws like prop 13 and more property development due to fewer NIMBY incentives. That’s a very small bite to chew that leads to much greater changes down the road because it realigns incentives tremendously.
I say this as someone who has Bay Area real-estate. The strategy to reverse things doesn’t exist at the moment.
This article misses two points that are so basic that I'm shocked.
1) Home prices don't need to go up in order to make it a good investment
2) Banks pay a huge percentage of the cost of buying a house, but the consumer keeps 100% of the profit.
To use the example in the article, if you bought a house for $200,000 and sold it ten years later for $256,000, you didn't only make $56,000. You also paid down your mortgage over that time. A typical mortgage isn't much more than rent, so minus interest, that's more money for you. Also, you only needed to put down $40,000 and the bank paid the other $160k for the house purchase. So for $40k plus the cost of rent, you did pretty well. You also would have done better than renting if the house had only appreciated half as much.
Housing is always going to be expensive in desirable areas. No amount of social justice or zoning reform is going to make mid-town Manhattan or downtown SF easily affordable for anyone who wants to live there. Sure, these areas are culturally vibrant but the real draw of high cost of living areas is the job opportunities. Many people would gladly try out a different area of the country or move back home if only the job prospects were reasonable. I think there's much more bang for the buck in economic revitalization than trying to make every city in America "affordable". Although opposed to government intervention in general, I am much more in favor of proactive, growth-based policies than reactive redistribution-minded reforms.
Most points also apply equally to the Australian housing crisis in Sydney and Melbourne. No mortgage interest tax deduction here for home owners, although there is for investors, among various other incentives. Governments consistently fail to do anything about affordability because they're too worried about "mum and dad" investors (not to mention their own portfolios[1]).
Probably; they're both massive, no doubt about that. Interest rates are low right now, but in general you're probably paying around double the value of a property over a 30 year mortgage, that's a sizeable tax deduction.
This is only a contradiction if the type of housing remains constant, which it does in low-development, high-construction-cost markets like San Francisco where public policy prevents the modification of (almost) any housing to increase density.
Here’s how it would work otherwise: family buys single family home in year A for $100k. Lives there for a while, then sells in year B for $200k. The buyer is a developer, who then constructs a larger building on that same lot consisting of 4 apartments that now each sell for $100k again. Original family gains in wealth, developer makes tidy profit, new families can still buy a place to live for $100k. All numbers inflation-adjusted, you pick A and B to make whatever return you think is reasonable.
This is how densification happened almost everywhere until zoning laws stopped development mid-century.
Note what you don’t get out of this arrangement: a neighborhood that doesn’t change for 40 years; the ability to live in the same type of house your parents did, in the same neighborhood, for the same price. But you could have the same amount of (indoor) space they did, and outdoor space through public parks and the like.
What’s not sustainable is everyone having a suburban style detached single family home without increasing density in perpetuity. That is what leads to this contradiction.
The non-density alternative is sprawl, where prices rise in long-established neighborhoods, and outlying new developments are where you can buy new houses for less — which is what you see all over California.
Surprisingly, no one has discussed the transaction costs of real estate, which takes a large bite out of any potential gains. You don't necessarily come out ahead when you sell, even in a growing market, once commissions and attorney fees are paid.
I tend to move often and only buy real estate if I'm willing to hold it forever. So I buy what I think is a good long term investment and live where I want to live.
While funds for low-income subsidized housing languish, much larger pots of money are set aside for promoting homeownership through subsidies like the mortgage interest deduction and capital gains exemption, most of which goes to upper-middle- or upper-class households.
Looking for reasons why house price increases outpace inflation? These two US tax policies are a big part of the answer.
Commentators bewailing the high price of housing and wealth inequality rarely even discuss these two massive giveaways. Deficit hawks rarely point to the mind-boggling amount of tax revenue left on the table by this federal government dole.
Ending the mortgage deduction and the capital gains exemption would be a very effective and quick way to bring about housing affordability and promote wealth equality.
But any representative proposing such a solution would be committing political suicide today. Still, it's interesting to think about the conditions that might be necessary to force a change in sentiment on the issue.
I once read an article about how in Japan wealth does not accumulate from generation to generation. The article went on talking about housing valuation and how homes devalue instead of appreciating in value of the course of their life. He article made it sound like a terrible thing. Of course, if you look at it from a personal perspective it IS terrible not being able to pass on appreciated properly to your kids. Who doesn’t want their family to be better off from generation to generation?! But if you think about it from affordability and societal perspective, it isn’t so bad to have your property remain the same value or depreciate. Of course there are other issues to debate there such as environmental pollution that comes with wasted resources every time you build and scrap a new home. The upside is having to live in a new house that’s more affordable than in the western nations.
Good point - housing doesn't need to be a good investment. If we increase the supply of housing it will make the economy more efficient and that will mean improved returns in other investment categories.
You'll get ripped off. New homes depreciate quite a bit because of the ongoing cost of maintenance after 7-16 years. (Except in the Bay Area.) The catch is that inflation usually hides the depreciation.
You will find this out if you ever compare the cost of a new home to an older home, or plan to build your own. Where I live, a 15-20 year old home is about 60-80% of the cost of a similar new home.
Yeah I hear you. I'm not speaking of buying a new home in today's world. I'm speaking of a hypothetical world where homes weren't priced as investments, they were priced as products.
> homes weren't priced as investments, they were priced as products
Careful there, you really need to understand the difference between an investment and a product.
I bought a very nice lawn tractor as an "investment" so I wouldn't have to pay someone to mow my lawn.
The land your home is on is always an investment. Land doesn't depreciate like a product does.
But even then, when you use the term investment, I think you conflate "for profit" versus better deal. A home can be an investment as long as you have a tangible benefit over renting. That can be anything from lower long-term cost, to having the exact kind of living space you want.
For example: I owned a home for a little over 3 years before I had to move. We sold it for inflation + cost of some improvements, and at the end it was slightly cheaper than renting... But we enjoyed the house so much more, and the house was in much better condition than a rental. We were able to do things like install an electric car charger and central air conditioning; things that would be much more difficult in a rental situation.
Seems to ignore the idea that as long as supply can increase, and a single house can be converted to a block of 6 units, housing can be both a good investment and affordable. I think the problem is that while development currently benefits house owners, apartment owners have no incentive to increase supply. We need to tax property development and distribute it to all local households. In this way it won't just benefit house owners and it will have much greater support from locals.
Housing is a cost and a necessity. The goal with housing is to minimize both cost and risk.
Renting and ownership both carry their costs and risks. We have not had inflation for a long time, but I remember the Carter years where we had inflation and people who rented were in a world of hurt. Owners had no such problems. The 2008 crash hurt owners, but only if they had to sell. At least where we are, prices are more than fully recovered.
Since you need housing for your whole life, you have to take into account these sorts of historical occurrences. If you are an owner, you can ride out most of these things. If you are a renter, your rent will go up unavoidably.
Ownership is the best approach to avoiding cost/risk, but only if you (a) build up a 20% minimum down payment, (b) attack your mortgage and pay it off early, (c) have a minimum 6 month emergency fund (which you should have whether owning or renting).
If you approach ownership like a rental, only looking at the monthly payment, you are taking a big risk and subjecting yourself to higher cost and risk. The same can be said about renting, though. What will you do if you lose your job and do not have a 6 month fund built up and have to pay rent?
Having a paid off home and not having to worry about rising rents contributes to peace of mind, and opens the door to other life modes, such as early retirement or taking extensive time off.
> We have not had inflation for a long time, but I remember the Carter years where we had inflation and people who rented were in a world of hurt. Owners had no such problems.
I could see how an owner with a mortgage benefits with unexpected inflation, but why our renters hurt? If their incomes rise with inflation, shouldn't it be neutral?
> The 2008 crash hurt owners, but only if they had to sell. At least where we are, prices are more than fully recovered.
You can't ignore opportunity costs. The question is how would an owner on a mortgage performed if instead they were renting, had lower payments, and directed additional savings into the stock market?
What would you do if your rent went up 10% - 20% a year? Rents follow inflation.
As for opportunity, there is immediate opportunity and deferred opportunity. You could chase the stock market now, and have no gains for 10 years, or great gains. If you buy a house and pay it off, you guarantee lower expenses going forward.
If you're the grasshopper, then by all means rent. If you're the ant, then buying probably makes more sense.
> What would you do if your rent went up 10% - 20% a year? Rents follow inflation.
So does my salary expectations.
Not getting the ant/grasshopper metaphor. The trade-off is solely a function of risk ability & willingness (higher risk tolerance pushes toward renting more), not hard work/lazing. In certain markets buying looks bad if you have high enough risk tolerance to handle stocks:
In inflationary times, your rent will likely outstrip any salary increase. I suppose if you work for the federal gov't or something you might get cola, but I wouldn't count on it. The Carter years were hard times.
I didn't mean the metaphor in an negative way. The grasshopper likes the lifestyle of pay as you go. The ant worries more about a possible winter coming.
Well housing is a good investment once you pay it off and stay in that home for an extended period of time. The problem is people just want buy ever larger homes. I mean look at the average square footage of homes in the 1970s which was 1500 sqft and by 2014 its 2,657 sqft (https://247wallst.com/special-report/2016/05/25/the-size-of-...). People are buying way over their means.
I purchased a 1800 sq ft home when I was 22 that I am still living in today (I am 45) with a 15 year fixed mortgage. I paid the mortgage off and have lived rent/mortgage free for the past 8 years. Assuming I live here for another 12 years, that will be 20 years of rent/mortgage free living. And yes I am married and have a 2 year old.
And when I do eventually sell, I will get back all the interest I paid and then some even adjusted for inflation. The problem is people just keep jumping int every larger homes. As soon as they can.
It can be when borrowing terms are artificially loose.
Imagine a world in which you can get a zero-ish percent interest-only loan. The "value" can keep going up even though the monthly cost remains low until the end of the term at which point you sell to someone else for even more money at a zero-ish percent rate.
I don't understand your point at all. It seems to boil down to: "Something can be a good investment while simultaneously increasing in value at the rate of inflation if someone gives you free money to hold it."
Everything is a good investment if you pay nearly zero interest and its value goes up. It's a tautology, and it has no bearing on practical solutions to this problem.
Houses shouldn’t grow in value for well established areas, they should roughly track with the population and inflation. If demand hasn’t changed, why should homes change value?
Aside from homes slowly rotting, that is. In fact that should reduce the value of a home over time.
So one might consider "the original intent" of your home as an investment to be something other than throwing your money at rent. If I put $2000 towards rent in a month, I have a place to live that month. If I instead put $2000 towards a mortgage, I have some of that money in equity (and a place to live for a month). It "builds wealth" in that some of my monthly spend is resulting in value for me beyond the place to live for those 30 or so days. I think if people are generically looking to treat their home like any other financial instrument, they're courting danger.
Gambling using housing as gaming pieces was fun in monopoly. Then late-night TV started encouraging people to do that in real life.
Until there is an affordable HOME for all US citizens who need one, we in the US need to stop thinking of them as HOUSES and stop them being used as gambling chips.
As for public-housing, it needs to be permanently off-limits to speculative investing. Otherwise why should the well-intentioned public agree to investing their tax dollars in public housing? Ownership of these HOMES should only be available to people eligible for public-housing.
Supply and demand in the housing market is not about the supply of houses but about the supply of CREDIT.
As long as the banks are happy to lend large sums at low rates prices will go up, and as soon as the banks become more cautious, either raising rates or restricting how much they will lend, then prices will fall.
I'm sure many will continue to blame immigration but I challenge anyone to come up with any solid data to back up that claim.
We have seen this happen before and that wasn't because millions of people suddenly left the country overnight.
And people still want to pretend that owning a home now is good diversification from the stock market which now is also filled with companies that are utterly dependent on the supply of credit.
The pressure on RE market is already keeling over, not just in the US but around the world (thanks to CB's following largely the same policies for so long in this synchronized "recovery").
I don't know, social housing is a good investment for society. Giving everyone a decent roof over their heads isn't just good for karma but also social and political stability.
We need some big strokes to fix this. Personally I think the long-term solution, at least in CA, is for the state to buy out owners in critical areas, taking land with eminent domain as a last resort, then selling the land back to developers on the condition that density is tripled or quadrupled. That's the only way to move the needle. Doesn't everyone ask you, when visiting from out of state, "why don't you guys just build up?"
Additionally, prop 13 gives landowners every incentive to lobby for policies that restrict development in order to drive up prices instead of fighting for the right to build 4 story apartments on their property.
And then there's the fact that prop 13 transfers wealth from young to old, from poor and middle-class to rich, from black and Latino to white, and from renter to owner (http://www.betterinstitutions.com/blog/2015/07/prop-13-calif...). Making it harder for people to save up in hope of buying one day.
Yes. I understand why prop 13 was passed, it was in a time of high inflation, and the increased valuations meant that property taxes had a huge impact, especially on retired people with fixed incomes.
But all the downstream effects of that have made rather large distortions in the housing market.
The gain on your house will never outpace the interest on your mortgage. Houses as wealth generation (in this simple way, they're still obviously better than nothing and helpful to borrow against) is essentially a scam literally sold by banks. You'll pay $170k on a $100k house over 30 years. If you put that same $70k in Vanguard you'll have over $400k after 30 years (at a modest 6% return).
My counter to this article is that you have to live somewhere. So you either rent a big chunk of money that you can use to buy a house, or you rent housing directly. If the principle, interest, taxes, insurance and maintenance is about the same as renting over the course of a number of years then you are better off buying.
The risk is that you may need to move before you are at the break-even point. And risk is sometimes location dependant (how varied are the industries that provide good employment in your area, etc). And you risk rising costs (I wasn't prepared for property taxes and insurance to outpace inflation 4 to 1, for example).
But the biggest mistake that I feel people make (at least in my case) is getting more house than I needed. I would have been better off getting a much smaller / less desirable property that I could have paid off in 7 years, instead of the 30 year mortgage. Because then after 7 years, if property rates rise, well I can sell and have more money for a down payment on a better house. And if the fall, I can still sell and put the money down on the same better house, which is also much cheaper (assuming similar area / cost of living).
In a conventional mortgage, the proportion of interest you pay is frontloaded so that you're paying much more interest in the beginning of the loan. So in the first 7 years of a 30 year mortgage, you will have paid some principal, but the majority was interest.
A nice economics research article I read a while ago basically showed that housing prices increase with inflation except in cities like San Francisco, New York Manhattan or Vancouver that have strict building rules or physical limitations.
The best thing we can do to have affordable housing used to increase the supply of housing. If we increase the amount of high-density zoning and reduce the amount of permit difficulties, housing will become much more affordable.
Housing in the Bay Area is stupid expensive. I bought my 2900sqft 9 years ago for $129000 and it’s now worth about double. This is a bit better than average for my city. My city is one of the 15 largest in the US.
You're also paying mortgage interest, taxes and maintenance costs. The formula isn't straightforward but owning a home is rarely a better strategy than renting and buying stocks.
Homes appreciate on average 3-5%, where as the money saved on rent - taxes, interest, and maintenance is somewhere between 3-5%.
that's 6-10% (which is about the best you can expect from stocks over the long run)+ the other benefits of owning a home. I for one rented 2/3 of my rooms for an additional 12k$/year income (60k over 5 years).
You're forgetting that most people don't purchase their house in cash. OP received the gain on the value of the house, which is much higher than the actual cash outlay as the down payment. Feel free to ask your stock broker to purchase $125k worth of stocks for only $12.5k cash.
If you're going to count leverage in real estate returns, the equivalent comparison is margin in stock market returns. You absolutely can purchase $125K in stocks for $12.5K cash if you're willing to buy them on margin (subject to margin requirements, which are often 50% for retail brokerages but can be as low as 3% for hedge funds etc.) Mortgage and margin loan interest rates are even comparable.
The reason people don't buy stocks on margin is because there is risk entailed: if the stock goes down, you can get a margin call, get your whole position liquidated, and lose everything. There is an analogous event for mortgages: if you fail to make your mortgage payment, the bank takes possession, liquidates your investment, and you lose everything. This risk is often glossed over with mortgages because it's a socially-acceptable way to purchase a house, but it's still there. Many people who did precisely this in 2004-2007 faced exactly this consequence in 2009-2010, and are still digging out from the wreckage of ruined credit, lost downpayments, and a home that was repossessed.
> You absolutely can purchase $125K in stocks for $12.5K cash [...]
This isn't quite right. You can only get 2x leverage on your margin account for overnight holds (i.e. long-term investment.) The maximum leverage federally allowed is 4x, and you have to liquidate half before the end of the trading day (to go back to 2x) otherwise your broker will automatically liquidate half of your position.
If you buy E-mini S&P 500 futures, your effective overnight leverage can be up to 22x. You could put part of your money in short term bonds to avoid such extreme leverage.
There are also 3x leveraged ETFs you can hold overnight.
Of course, this means you aren't directly owning stocks.
True, but with owning the property I have equity in addition to the value increase.
Where I live monthly leases tend to be more expensive than what I pay per month for mortgage and taxes which would also be a loss. That said there is money to be made mortgaging residential real estate and leasing it out.
The only loss to ownership is that you are less portable. It takes more time and money to relocate.
I don't know about you, but my index funds are purchased through contributions to my tax-free savings account. I can contribute up to $5500 per year and I pay no taxes whatsoever on any capital gains from the equities in the account.
What do you do after you reach the $5500 contribution limit? For many here, that's probably before the calendar turns to February.
You diversify. And real estate may not provide the greatest returns in many circumstances, but it is a diversification, and it has some excellent tax benefits.
Ah yes, and then less than a decade later, if you were lucky enough to still be paying off your multi-decade mortgage, they went down together and those ill-liquid paper gains were wiped out and then some (along with people loosing "their" homes, or now paying a mortgage on house whose value had declined). With our global debt fueled recovery, if turns out be when.
Being in cash, short the market, or UST's would have been better.
My point is that, sure, RE market is a way to diversify ones investments, but it is no longer a good way like everyone has blindly assumed it is because of the underlying conditions influencing risk assets in markets.
If people think de-correlated upside, and correlated long tail downside is a suitable portfolio strategy, then I can't help but take the other-side of that trade… enjoy the slight premium while it lasts, because I'll take it back and then some when it blows up in your face.
Am I reading you correctly? You found a 2,900 sqft property in the bay area, 9 years ago, for 129k? Or is there a zero missing, and you meant to write 1.29M?
Because if it was really 129k, that's a factor of ~20 times cheaper per square foot than current residential real estate around Cambridge, MA right now.[1]
My friend would have paid $40,000 more in taxes this year if he didn't have an a single family rental to depreciate, so perhaps gains vs inflation isn't as straightforward a measuring stick as you would assume.
Your friend will have to repay those taxes when he sells (assuming there is profit above the then-depreciated value). Seems like a lot of people don't know this.
Yes it is true that the tax rate is capped at 25% (which is sometimes less than the normal marginal federal rate you would pay) and there are ways to defer the tax bill further but it's not just like free money that the government gives up on collecting from you.
We have a bunch of rentals around here and we have no plans at all to ever sell. And when we die the tax basis for our kids will be the value of the properties at our time of death. (And I think they can even start using depreciation again.)
A lot of the simplification and rationalization that was the initial selling point for the tax bill somehow got traded in for large tax decreases for the wealthiest before it was signed. In my generous moments I think that they really did intend simplification and were simply bowled over by the other interests.
In my less generous moments I notice that they keep saying that they are doing A, and instead do B. Again and again.
This is part of the regressiveness of the US tax code. That’s a $40,000 transfer of wealth from those who cannot afford to own rental properties to those who can.
Not that I blame your friend for taking the tax break, I would too. It’s very hard to convince people to forgo benefits like that for the sake of society.
You are not wrong in general about the tax code favoring those with certain kinds of housing wealth.
But in particular regarding depreciation, the IRS will demand depreciation recapture at time of sale whether you actually took depreciation at any point in the property history or not. So if you don't want to pay double taxes you have to take the depreciation every year.
Kind of shows that at end of the day, the issue is political and depends on who wants what. We can stop housing price increases and decrease future profits gained for current homeowners.
The major flaw I see in this analysis is believing the only way to build wealth by "investing" in home-ownership is increasing property values. It completely ignores the equity one builds while paying down a mortgage. If one intends on staying put for a while (even just a couple-few years in some cases) then one can build wealth through home ownership without runaway property valuation. Money is "lost" on interest payments, but if you are leasing a home, you're paying someone else's mortgage and interest[0].
[0]: Not necessarily the case, but it works for simplicity's sake.
In an efficient market, you'd only be paying someone else's interest, not their principal. If buying is cheaper than renting, as in your example, then rent would drop due to competitive pressure, until buying isn't cheaper than renting.
Even if prices are stable, what makes it the case that the system works so well for those who own land and creates such problems for those who are landless?
We take it for granted that renting is just a form of having your money stolen by landowners, without realizing that this is a choice we make: we could just as easily administer the market so that absentee ownership ceases to be a smart bet.
Korea has a different system where they don't pay rent, but they pay what's called jeonse (jun-sae). You pay about 33-50-60% the value of the property and live rent free for 2 years. At the end of the 2 years, you get your lump sum back.
The idea is that the landlord makes their money by investing the lump sum, though there seems to be risks where the landlord is unable the cough up the money at the end of the term and needs to find someone else to cough up jeonse money to pay back the original tenants.
Of course many tenants can't come up with 33% of a property, so they are also taking out a loan to come up with the money and making payments on that money to which essentially comes out to rent, but significantly cheaper.
It does seem that rent is becoming far more common in Korea now, so jeonse may be on its way out, but it is a different system, can't say that it's better or worse.
We did that with the American dream of suburban home ownership, which broke the bad old landlords and tenements.
Prices are wacky because the market is wacky. We subsidize loans, subsidize unprofitable commercial property via taxes, restrict supply of higher density housing and set a price floor for housing with subsidy programs like section 8.
That’s a scary idea. There are massive unintended consequences to such a strategy of reducing the benefits of “absentee” ownership. Almost every private rental property in existence is the result of absentee ownership. A move to disrupt that would result in a dramatically reduced supply of rental properties. Not everyone has the resources, credit or responsibility to own their own home. The financial crisis of 2008 was trigger by a whole bunch of people buying when they shouldn’t have. The places where people try to “administer” the market either through aggressive regulation or capping rents through rent control have the most inefficient and expensive markets.
It's interesting that you jump to "aggressive regulation" or "rent control" instead of the solution that has close to full consensus from the economic profession: https://en.wikipedia.org/wiki/Land_value_tax
LVT is a good policy but it doesn't make land ownership a bad investment. It just tends to decrease the price of land, which is not usually a problem because land is not produced by people, unlike other securities.
Yes. Consider the price of any orphan drug that Valeant touched. Syprine went from USD 625 per 100 pills to USD 21000, and despite the combined and very reasonable protestations of Hillary Clinton and Elizabeth Warren, the price still hasn't come down.
Take housing in China. You can buy a place in China, but making money off of it with rent? Good luck.
It’s a common problem that people who can afford to buy a place, can’t rent it for a profit if they are still paying a mortgage.
Why that is, I really don’t know. But the fact is, it can be possible to have cheap rent available, if the owners are willing to not make a profit. But that’s just not how capitalism works.
This isn't true if you are an actual property investor - cheap housing has a better rental yield. If you want to live in a house and have the price shoot up while you do so then fair enough, that only works if prices shoot up.
One component of the problem is that "housing" isn't a free market. More specifically, if you buy a plot of land in nearly any city or town, you aren't free to build whatever you want (e.g. building a duplex or small apartment building). The housing supply is centrally controlled by the local (and possibly other levels of) government, via zoning rules and building codes. Property owners tend to vote more than renters or future residents, so they generally vote for a more controlled supply of property which helps to keep prices on an upwards trend.
What seems to help with this Japan is that zoning and building codes are top down from the highest level of government, so they can adjust supply according to flows of people. E.g. Tokyo builds as many units of housing as people who move into the city. (Among other differences.)
>What seems to help with this Japan is that zoning and building codes are top down from the highest level of government
This is the only way to effect a society where housing is "not an investment". Otherwise you're looking at local governments that are wholly captured by a constituency tilted toward, effectively, cronyist voters furiously determined to keep their property as valuable as possible.
Rents in Tokyo aren’t really that cheap on a square meter basis, just the size of unit you can rent is much smaller. Housing is actually more expensive to buy than many American cities (comparing equivalent sizes).
Fair point, but people tend to demand less space right? Is the average-sized rental affordable for the average income in the city? I've heard the relative affordability is better than most of the Western world.
Incomes kind of suck in Tokyo, so no. The average income is like 325,000 yen/month, the average for an 85 sqm apartment in an average area is 271,000 yen/month. Life is tough, you need to think small or think super long commute.
I think I can see how buying up single family homes, and not living in them can artifically increase housing prices.
But I dont see why we should disincentivize people from buying multi-family homes and renting them out. Being a landlord is not free, and its not a charity. Landlords need an incentive to provide services like maintaining the property, renovating and dealing with the headaches of owning property. If property did not offer any financial return, less people would buy multi family homes or they would put as little effort into maintaining the property.
In Asia, house value is like car value. People want to buy brand new ones, and the minute it's used, it's worthless. People can live in their old house as long as they want to, but young people would prefer a clean new house free of mold (humidity makes it inevitable) and other problems and they can get a new house relatively affordably.
It works very well. The fact house prices in America/many Western countries increase with time is an anomaly that applies to no other item as far as I know, barring the odd historical/valuable antiques. But nobody can predict their value 10 years from now.
>In Asia, house value is like car value. People want to buy brand new ones, and the minute it's used, it's worthless. People can live in their old house as long as they want to, but young people would prefer a clean new house free of mold (humidity makes it inevitable) and other problems and they can get a new house relatively affordably.
Moreover that, in China, there are close to no second hand cars. Second hand market is microscopic.
The same is true witch apartments. It amazes me to see rich Chinese simply abandoning their old apartments when they move to new ones. Personally met a family with 4 apartments, who simply left each of their old apartments collecting dust.
Tear it down and build it over, especially if you're an investor and can buy a bunch of mouldy homes on a block.
Example in the US is smaller suburban houses that happen to be located near commuter rail stations. They are torn down and replaced with new, bigger houses. The neighborhood across the tracks from my house is another example: Doctors and professors have bought and "renovated" all of the smaller houses.
I notice something similar with hotels. My experience in a hotel is 100% proportional to the age of the hotel. The newer the better. Hotel owners rarely renovate unless they are in super prime downtown locations. They just let the hotel deteriorate while lowering their room rates while someone builds a new hotel next door.
In Japan, it's common for the land to be worth a lot of money and the house on the land to be worth nothing. New buyers frequently tear down the house and build a new one.
After a few decades of ownership, it is not unheard of for people to move out of their house, tear it down and replace it with a new one, and then move back in. I guess they rent a place to live while this is happening.
In Japan particularly, this is a legacy of the poor quality of houses built in the early 20th century and the period after WWII when everything was slapped together as quickly as possible. They really were worthless after a decade or two because they were not built to last.
This seriously damages the incentives for maintaining existing homes, because they are going to be worthless in 10 years, why bother?
Housing is a good investment for natural reasons: as population increases, housing near developed communities becomes scarcer.
To tamp down on that concept would be really difficult. You'd probably have to artificially limit the ROI of home sales, which would likely increase the number of renters. Then what? Rent goes up, so you have to artificially limit the price of rent. So how do you choose the limit?
Then once you've chosen the rent limit, will RE firms have an incentive to build?
Free markets work pretty well for settle prices. The problem is that not everyone can participate equally. If we artificially brought people out of poverty instead of artificially fixing housing markets, the housing problem would be a lot less severe.
It's inevitable that land prices in urban areas will go up as populations grow. That doesn't mean that the price of housing has to grow too. You could build more density (build up, build smaller units) to keep rents and prices stable.
And this is the way cities used to work, pre-automobile. Our post war sprawl is a huge cultural experiment, and there are a lot of people who think it is not sustainable.
There's an argument that urban housing is deflationary because of land reclamation and taller buildings. So is farm land because of crop farming efficiency.
> Real estate seems to be the only venue where I can make a return on my value, and provide some value to people.
What kind of value are you providing by purchasing a house, not living in it and not selling it? When you purchase 2+ house where you don’t live - you are basically removing it from the market - thus increasing the demand/offering ratio and inflating the prices?
There is a way you can be of more benefit though; if you're increasing the supply of housing (that is, building new housing) then you're providing benefit. If you can also profit by doing so then go ahead.
Buying stock absolutely provides value. Your cash is transferred to the seller, who then uses it in some way that is valuable to them. Over the big view of the market, some of that cash goes to funding companies through IPOs and later funding rounds, even if you don't participate in them directly.
Why should an investment provide someone ELSE with value? The point is to provide YOURSELF with value. If you want to provide someone else with value, buy some stock and donate the dividends to charity.
Obviously nobody says it should but some people want to participate in win-win scenarios that benefit them and others. If you own a business, you want to make more money as you provide more VALUE to OTHERS. Not because you got lucky, or deceived them.
Being a landlord isn’t win-win. It’s negative value by reducing supply and raising values. Don’t deluded yourself. Those other investment things you mentioned are more valuable to society than taking away housing affordability.
