> Those kinds of loans are a huge government subsisdy, contributing quite a bit to the unaffordability of housing.

Not really.

Everyone bids as much as they can afford to pay on interest payments, which means that if you earn less, you miss out to those that can pay more than you. The interest rates and some other factors are mostly irrelevant to affordability. Change the interest rates, house prices move accordingly to just be affordable to those that bid, because people bid as much as they can to get a home. Things work a little differently in the US compared to New Zealand, but the gross mechanics are the same.

The mechanics of the bidding process, means there is a minimum price wall for most of the housing market in New Zealand (almost independent of the “worth” of the property) because there might be 30% of the population who can’t afford the mortgage payments at that price, so there is a lot of unmet demand below the minimum house price.

I also suspect houses are the engine of middle class working hours: buy something you can only just afford, work your butt off, upgrade to something more expensive if you have more money. Paying the principal is also enforced savings. Without those dynamics I am not sure how many people would retire in any form of comfort, or how the economy could get younger people to work so hard to support the number of retirees we have.

I think I follow, but I'm not sure if you're capturing all the factors.

For example, let's say you lived in Canada and bought a house 4 years ago for $300k with a 5 year 3% mortgage. You can't get a 30 year mortgage in Canada, the banks won't underwrite a loan that long. So you will have to enter a new loan next year, and lets say it will be at 6%. Your payments change, going up significantly. You might have to put the house on the market if you can't afford the new payments.

In the U.S. that same person would have had the option for a 30 year fixed rate government backed mortgage at a 3% interest rate, with only 3-5% down. They don't have to refinance in 5 years=, like in other countries. If interest rates go up, and they had nowhere else to go, their mortgage will not increase.

How could these government subsidies not be contributing some amount to an increase in housing costs? Doesn't that make it harder for people coming later to afford housing, since housing has increased in price so much faster than wages?

Sure, in the short term, changes can put individuals under water. But I am actually talking about how the market moves.

Let’s ignore investors (they matter, but that complicates the argument).

If you have 10 houses and 20 people want a house, then the 10th person sets the minimum price, and they bid a price on the house so that they can only just afford a mortgage. 10 people miss out on a house because they are unaffordable, however the minimum house price was set by the 10th buyer who can only just fucking afford their mortgage payments (mostly interest). So minimum house prices depend on the earnings of the marginal buyer that can just afford a house. That marginal buyer is usually somewhere near median wages, so there is a lot of demand just below that price point, and no house will go for much cheaper because for most people it is better to own a shitty house than to rent.

Over the long term, the interest rate is almost irrelevant, because house prices are caused by interest rates.

There are a lot of misconceptions about house pricing - it needs to be looked at as a system - not from an individual’s point of view.

I think that I follow what you are saying, but what happens now that first time buyers have to pay higher interest rates, and can't afford a large enough loan to tempt sellers out of the low-rate 30 year fixed mortgages that they are currently paying?

In Canada everyone has to refinance every 5 years. I assume there will be more liquidity in their housing market over the few couple years than there will be in the U.S., and that their prices are more free to adjust to current conditions.

I have difficulty seeing how government backed mortgages don't distort the market? It's such a high percentage of first time home buyers that receive these subsidies, and then those owners benefit when they can roll that extra equity into their next house at higher prices, while at the same time these higher prices mean that it becomes harder and harder for future first time buyers, especially now that rates are coming off long term historic lows. I've assumed these subsidies are one of the reasons why housing costs have grown so much faster than inflation and wages, helping those who got in a while ago and could ride the wave.

Let’s stick with the model of 10 houses with 20 people that want a house, and add some spherical assumptions: zero deposit, zero maintenance, zero taxes. 10 people above the median wage will get a house, and 10 people below the median wage don’t get a house. Let’s say Bob earns the median wage and Bob can just afford to spend $50k on mortgage costs.

Assuming an interest only mortgage: if mortgage rates are 10% then Bob can bid somewhere around $500k for a house, but if mortgage rates are 4% then Bob can bid somewhere around $1250k. But fundamentally the same 10 people get the 10 houses, and the same other 10 people miss out.

If we add in principal, taxes and maintenance: over a 30 year period Bob pays the same amount because Bob has bid the house price up to what he could only just afford. The amount Bob can only just afford is fixed by Bob’s income, so the amount Bob can afford is the constraint on what the lowest house price becomes due to his bidding.

That result is because the median buyer had to bid as much as they could afford, so house prices are caused by mortgage costs. The other 10 that got houses were bidding against each other, so they also pay as much as they can afford. Interest rates change the mixture of payments, but they don’t make those 10 houses more or less affordable.

If rates double in the long term then house prices should halve in the long term. In the short term with higher mortgage rates, most people stay in the home they have with the mortgage they have, and fewer houses transact.

Is there a housing shortage? Firstly most people are living somewhere, so perhaps there is already enough housing? Alternatively most people want a better place than where they are living, so there can never be enough housing? There are many places in the first world where there is enough housing, so the least wanted house will sell for $0. Yet high demand areas can perhaps never have enough housing? If New York doubled it’s housing tomorrow, how long before it would be back to the same prices?

A higher interest rate environment could possibly help the less well off, because they can save for a bigger deposit quicker?

All the different dynamics require some deeper analysis to determine what is actually happening. There is a lot of misinformation and common wild misunderstandings about how the market dynamics actually affect us.

I will add two real world observations.

Firstly, only a single digit percentage of homes are sold each year, so houses price expectations are set by a relatively small number of house purchases. A few years ago in Christchurch, New Zealand, auctions changed from nobody bidding on most houses to crazy crazy bidding. The economy didn’t really change, so there was a herd problem with housing prices. Certainly the economy didn’t get better by 30%, but house prices changed that much.

Secondly, an anecdote that mortgages drive house prices: I bought a house in Christchurch for less than half price of the equivalent house up the road. In 2010 we had a severe earthquake in Christchurch, which left many houses uninsurable. Some homes were perfectly safe (could be rented) but were uninsurable for technical policy reasons. Genreally you can’t get a mortgage on an uninsurable house, so in Christchurch we could see the situation where two equivalent houses would go for wildly different prices, because house prices are mostly driven by mortgages. The rental yield on my property would theoretically be high so investors should have bid on it, but they didn’t: maybe because small investors had already spent their money buying houses, and maybe corporate investors felt it was a risky market due to earthquake risk?

Thanks for the additional explanation. You seem to be describing how people bid on houses with offers based on the highest mortgage payment they can afford, and this sets the market prices for housing.

I don't argue that this is not a factor. But couldn't government subsidies also be a factor, especially if they are not given evenly to everyone?

In the U.S. we have:

1) Government backed mortgages, allowing borrowers to get mortgage loans below long term bond market rates because the government/taxpayers are taking on the risk of default. Do they have 30 year fixed mortgages in New Zealand? Until last year you could get a 30 years fixed mortgage in the U.S. at a 3% interest rate (which has increased to 7% this year).

2) First time home buyer subsidies, allowing for minimal 1-3% down payments, instead of the normal 20% or 5% or more with the additional expense of private mortgage insurance, there's currently also proposed new legislation for a first time home buyer credit credit worth up to 10% of the home price, or $15k max for a married couple.

3) Tax deductions for the interest portion of mortgage payments (this was made less relevant for the owners of modest homes a few years ago, by giving everyone a larger standard deduction, but these deductions still help those with homes more expensive than the average, and will become much more relevant with the current higher interest rates)

4) Capital gains tax exemption, allowing $250k of profits (double if married) made from sale of a primary residence to be made tax free, unlike other investments that are taxed at 15-28%, encouraging houses to be used as investments (it's possible to make money as a landlord renting a place out for years then live there two years before selling for the large tax break, people do this with vacation/retirement homes all the time)

5) Two large taxpayer bailouts, because banks were writing 30 year mortgages without taking into account the risks, effectively the government and taxpayers ended up on the hook as a cosigner for all the bad loans (the 1980s Saving & Loans bailout, and the 2008 "To Big to Fail" Great Recession)

6) Restrictive zoning, greatly reducing the supply of housing in desirable areas (where the jobs are), which has the effect of maintaining high prices as the population and demand grows (zoning for new housing overwhelmingly favors single-use single-family neighborhoods on the outskirts of town, and the large developers who build them)

I have trouble wrapping my brain around how the above wouldn't have an uneven affect on market prices.

It seems that people who bought before each of these subsidies went into effect (over the last 85 years) would benefit most, as the prices of houses would be bid up as time went by, according to what people can afford with new subsidies in place.

It also seems that people with more income and in higher tax brackets are being strongly encouraged to invest in housing, as opposed to other possibly more socially productive (but unsubsidized) investments. They can also borrow to leverage their housing investments much more than is legal for other investments like stocks. These subsidized investors act to bid up the price of all housing, competing on price with people just trying to put a roof over their heads.

There's other countries like Japan and Austria that have much different regulations around housing and mortgages and have much different outcomes when it comes to affordable housing, so I've assumed that the stuff I'm talking about makes some kind of difference.

Would you disagree, or say that the buyers income is the only factor that matters?

I guess I wasn’t being clear because I agree with all your points, and I agree that government interventions change prices. You originally said:

  > contributing quite a bit to the unaffordability of housing.
  > It's not fair. These government loan guarantees skew the price of housing, negatively impacting people who need a roof over their head and don't have the money to compete with investors who can bid up the aritificially limited supply of housing to make passive income collecting rents.

I was trying to explain why I think the cause-and-effect that you were positing above is incorrect. Where investors come in is harder to understand. But investors are a problem in New Zealand too, and our mortgages are approximately variable rate and are not government backed, so it isn’t clear how much 30 year mortgages cause investors to overbid home-owners. If we want people to own their own homes, then that requires government interventions to make it cheaper for first home owners, and more expensive for investors.

For comparisons of mortgages around the world, read: https://business.sdsu.edu/_resources/files/real-estate/resea...

I wrote a couple of comments about my local housing market that touch on some of your points: https://news.ycombinator.com/item?id=33474588 and https://news.ycombinator.com/item?id=33361273

Does densification solve anything? Well, New York has very high density but that has not made it cheap. One issue is that there is near unlimited demand for popular locations, so there must be some mechanism where some people miss out . . . Missing out will always feel unfair.

(Disclosure: I fully support all reasonable measures to make housing more affordable)

On the contrary, government backed mortgages provide an opportunity for buyers to become homeowners competing against institutional investors and cash buyers.

They are a subsidy, but that’s not a bad thing if desired policy is to encourage home ownership. I would very much like to see your data that these mortgages are what cause unaffordable housing, versus lack of supply, institutional investors buying up residential real estate, restrictive zoning, and most recently, a real estate asset bubble due to Federal Reserve zero interest rate monetary policy (which caused real estate prices to skyrocket when money is cheap).

> Would you wanted to underwrite a 30 year loan for 500k a couple years ago at 3%, knowing that rate could only go higher?

Tangentially, the bond market seems to be a peace with 30 year mortgage terms, probably because the life of a 30 year fixed term mortgage is typically under a decade (while being amortized over said 30 years).

On the one hand, if the government helps to lower mortgage interest rates, which they have, then they are acting to increase the price of housing some amount, given the laws of supply and demand. In Canada and the UK people will have to refinance every few years in this rising interest rate environment, which will put downward pressure on housing prices.

On the other hand I agree with what you said about institutional investors being difficult to compete with. This is the downside of housing being prioritized as an investment. Investors know that supply is constricted, so they are taking advantage. I would address this by taxing investors and making it easier to increase supply, not subsidies that inflating the price for everyone trying to put a roof over their head.

> the bond market seems to be a peace with 30 year mortgage terms

I'd be pretty easy-going about a government backed loan, too. That's a lot less risk. That means the interest rates are lower than they would be if the government was not guaranteeing them.