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Comment by projectramo | Hacker News Reader

That is an excellent point.

TL;DR: A good investment has to grow in value over inflation, and if housing grows in value at even a decent rate, it compounds out of affordability. As an example, housing in San Fran has grown at 2.5% over inflation.

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>A good investment has to grow in value over inflation

Housing is the exception to this rule. Yes you want your investments to beat inflation, but unlike an index fund, or a stock, or a commodity, you need housing (you have to live somewhere). You have to either rent or buy (or live off the land in the woods, which can be illegal many places). When you rent you are throwing your money away, you will never see that money again, period. The one other alternative is to purchase, even if you lost a small percentage on your "investment" buying a home, isn't that better than just throwing your money in the trash and losing 100% of it? An investment that isn't great is still better than an investment that absolutely sucks.

That's not how ROI works. You can show that in San Francisco, IF you live in a rent controlled apartment, it's very possible that you get a better economic ROI from renting than owning. The factor you are forgetting is that owning a house requires a down payment and there's an opportunity cost of not investing that down payment in alternative investments (stocks average 6-8% ) which could generate a return that's significantly better than your house.

I've actually done a 10 year DCF analysis for SF and in many scenarios, a rent controlled apartment whose rent becomes cheaper over time (since SF rent controls are at 1% while inflation is 3%) can be a significantly better (and less risky) investment than owning.

There is this false concept that rent is "throwing money away" but that's not true in many cases; there's an opportunity cost of your down payment, property taxes, etc. with house ownership. NYTimes has a nice web calculator to help figure it out for you: http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...

Key reasons why renting could make sense 1 house ownership is incredible risky due to high down payments 2) rent control laws makes renting actually cheaper over time

Fellow SF renter here.

I've also done the DCF analysis and found that it's about a wash assuming a 10% discount rate and 10-year rent vs. buy-then-sell-with-payoff.

One problem with your analysis is that I think anti-rent control sentiment is growing in SF as the city's politics moderate overall. You could very well get Ellised out of your place and then the entire analysis goes out the window (though I suppose you could probabalistically factor this in, including the Ellis payment, but then, you really should work on Wall Street building option and mortgage payout models, shouldn't you)

A few interesting observations from the DCF:

(1) In expensive markets like SF, the mortgage interest break is a huge deal. Consider that most buyers will be in a pretty high marginal bracket, CA has obscenely high taxes, and you'll be paying a ton of mortgage interest on a $1MM+ loan.

(2) Not surprising, but your inflation/growth estimates for price vs. rent are the most important parameters. I don't think anyone could've foreseen the 10% year-over-year growth we've had for the better part of the last 5 years in rent. You just can't foresee everything in a model. (And to be perfectly honest, I can't stand the smugness of the luck-masquerading-as-skill crowd these days. Because sure, you "just knew" Google was going to be huge when you worked at some random startup back in 1998. And you "just knew" housing would go up like it has.)

(3) I really buy the "forced savings" argument. Sure, you could theoretically do better running a "lean" operation and investing, but do most people have the discipline to do it? I might, and I certainly am now, but I'm not sure. Getting locked-in with a payment you know you MUST make is a powerful psychological anchor that might change behavior around, say, buying a new car, or a vacation, vs some abstract and sort of arbitrary savings goal.

You are forgetting that people don't buy houses alone, those houses come with mortgages, also known as "renting money", throwing money way, you will never see that money again, period. Those houses also come with excise taxes, property taxes, insurance premiums, and agent fees.

For the U.S., you have these "rent or buy" calculators:

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...

http://www.wsj.com/articles/SB100014240527023039481045795342...

Buying seems to be better in most cases but not all.

Edit: relevant MrMoneyMustache article, saying how in a very expensive city (Toronto) it's better to rent:

http://www.mrmoneymustache.com/2015/07/27/rent-vs-buy/

For my country (Uruguay), for almost all houses barring mansions or waterfront properties, if you plan to stay more than a few years, it's better to buy. The rent vs mortgage relationship is ridiculous (and investors love it).

Another alternative: https://news.ycombinator.com/item?id=12122503

It's not desirable for house prices to grow faster than inflation. It just means that younger generations have to pay a larger and larger share of their income.

It is for the house-as-investment. If you don't expect the value of your home to outpace inflation, then it has an opportunity cost compared to investing capital in investments that will.

> A good investment has to grow in value over inflation

Only if you consider both the asset value plus value extracted (e.g., in the case of stocks, both market value and aggregate value of dividends.)

In the case of housing, this means that the market value plus the aggregate of the value derived from owning the homes (the utility of living in it, rents derived from it, etc.) must, in total, grow faster than inflation.

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