Housing can’t both be a good investment and be affordable
cityobservatory.org
cityobservatory.org
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.
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.)
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.
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.
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 short all flats/apartments are cooperatives, but still profit occurs when they're bought and sold. The structure and profit/loss are unrelated.
(I suspect I'm going to find out a lot more about this stuff soon, as I own a studio which is due for some pipe-work .. Joy!)
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.
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.
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.
To make your comment explicit, you are cheering on the death and decrepitude of millions of people. I hope your children are kinder to you.
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.
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?
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]
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[0] https://www.resolutionfoundation.org/publications/home-impro...
[1] https://www.theguardian.com/society/2018/apr/29/millennials-....
That feedback mechanism is called a market and it coordinates via price signals and a desire to achieve equilibrium.
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.
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.
https://marketurbanismreport.com/tokyos-affordable-housing-s...
> 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.
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.
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 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.
The only solution I see is state level zoning standardization around pro-density zoning and limitations on NIMBY power.
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.
EDIT: clarification
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Housing land (houses are a deprecating asset) should be an asset class that mirrors population and economic growth.
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.
Or if we love constantly increasing prices so much, why not have it on food, computers and everything else?
We do have that, via inflation.
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.
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.
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.
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.
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.
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.
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.
Now I'm just picking nits I suppose.
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.
[1] https://guthmann-estate.com/marketreport/real-estate-report/
[2] https://www.toytowngermany.com/forum/topic/48094-advice-on-b...
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.
This will vary a lot by the rate you get but I think it’s in the ball park.
https://budgeting.thenest.com/end-up-paying-house-once-paid-...
So let me rephrase then: How do you know the cost of 30 years rent to compare it with?
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)
How often do the rates change? Anything crazy like 2-3% swings? Doesn't that make budgeting tough?
2. True.., but the era of net negative rate mortgages, a minutes hike in rate will trigger a wave of defaults
3. That's only thanks that in the west that "unique inflation hedging property" is a result of decades old self fulfilling prophecy
Housing market in US is, I believe, the best examples of "ECON 101" vs common sense and reality.
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.
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?
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.
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.
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.
(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.)
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.
https://www.theguardian.com/world/2018/oct/29/canada-greyhou...
Relevant bit:
"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).
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.
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
I’m looking forward to more automation in construction so that vertical is not significantly more expensive.
The trouble is, lots of people will lose money...
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 think you made a good argument here against fiat currency and Keynessian economics in general. Let's have gold standard and deflation again.
It would be better for everyone if housing was not an investment.
If you don't own a home you are not hedged against the housing market.
That's different from being short.
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.
Much like a car - many things are expensive and not expected to go up in value.
Spending money on something in th expectation of being able to resell it later for greater than the cost is, exactly, an investment.
> 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.
Housing as an investment and friction around moving keeps you tied to a particular area, which can be argued is better for a community.
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.)
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.
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.)
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
https://www.investopedia.com/terms/p/price-to-rent-ratio.asp
That's not necessarily true. I live in Japan. While the price of land may raise, the price of houses only goes down. As for rent, it looks flat.
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.
But that won't happen, because everyone's minds are married to the idea that law must be provided by a monopoly called "government".
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?
A calculator: https://medium.com/@usaar33/an-up-to-date-buy-or-rent-calcul...
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.
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.
In this scenario the bank just creates the money out of thin air. And then they get to keep all of the interest payments.
So, yeah, it's good for the home owner, but it's great for the bank -- so long as most people keep paying back their loans.
[1] https://www.businessinsider.com.au/australias-federal-politi... "Australia's 226 federal politicians own a staggering 524 properties ..."
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.
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.
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 just don't need or want an investment like that.
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.
And I do appreciate why it doesn't work that way.
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.
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.
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?
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.
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:
https://medium.com/@usaar33/why-you-shouldnt-buy-a-home-in-t...
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.
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.
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.
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.
Aside from homes slowly rotting, that is. In fact that should reduce the value of a home over time.
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.
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").
Not cheap though.
Because land isn't taxed based on it's current value landowners have little incentive to develop their land in order to get the most out of it. They simply bank land as much as possible as it's the most surefire way to turn a profit. It's why we have golf courses (https://www.planetizen.com/node/93284/la-country-clubs-takin...) in city centers, dilapidated shacks (https://www.theguardian.com/technology/2016/dec/15/google-ca...) next to Google's global HQ, and empty lots (https://www.zillow.com/homedetails/811-Pelton-Ave-Santa-Cruz...) right on the beach in Santa Cruz.
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.
Impact fees are too high because cities can't rely on property tax. This stops all but the most luxurious developments: https://lao.ca.gov/publications/report/3497#Did_Proposition....
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.
But all the downstream effects of that have made rather large distortions in the housing market.
[1] https://medium.com/yimby/why-a-healthy-housing-market-is-bad...
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).
I will concede that the downside risk is higher with the (initially) higher priced property.
Nothing to do with investment, all about getting money out of dubious places in the world. Anonymous LLC and Done.
Imagine if they plowed all those dollars into Bitcoin instead.
Edit: I don’t live in CA.
Let's say your 100k house is now 200k. Your initial down payment is 20k. When you sell your getting much more than 8% compound interest
My house was and still is very affordable and it was one of the best investments I have done.
they are not mutually exclusive objectives once you consider everything.
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).
Both housing and market returns have been abnormally high.
(obviously ignoring all selling costs, realtor fees, stamp/transfer taxes, interest payments, etc.)
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.
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.
http://www.finra.org/investors/day-trading-margin-requiremen...
There are also 3x leveraged ETFs you can hold overnight.
Of course, this means you aren't directly owning stocks.
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.
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.
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]
[1] https://www.trulia.com/real_estate/Cambridge-Massachusetts/
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.)
The new tax law that was passed I thought might eliminate that loophole, but the proposal was nixed in the final bill.
In my less generous moments I notice that they keep saying that they are doing A, and instead do B. Again and again.
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.
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.
[0]: Not necessarily the case, but it works for simplicity's sake.
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.
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.
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.
If these land rents are instead paid towards a tax, how wouldn't this make land less of a good investment?
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.
It seems fundamentally problematic, but is there any alternative workable system that wouldn't have unintended consequences?
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.)
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.
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.
But given the way my mom still talks up real estate there's probably some more room for tamping down.
Maybe what happened with Detroit helped too.
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.
Many of the houses near me are torn down and replaced after being purchased, so the price is more reflective of the cost to acquire the land.
The mold issue isn't unique to Asia. Parts of the southern US have a preference for new homes due to mold, termites and storm damage.
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.
Also is brand new outweigh renovated?
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.
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?
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.
The stock market? But I'm not exactly providing any value when I invest in a stock as my money doesn't go to any company that needs funding.
Bitcoin? But that wastes energy and again, doesn't provide much value to society, if any.
Gold? But again that doesn't seem to provide much value to society.
Real estate seems to be the only venue where I can make a return on my value, and provide some value to people.
And now, some people want to take that away.
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?
Some supply of rental property is required, but much less so when housing markets are not out of control.
The rest is talk. Go ask folks in a nursing home how much those dollars, houses and stocks are worth, if no one ever comes to visit.