Comment by jrnvs | Hacker News Reader

Comment by jrnvs | Hacker News Reader

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.

1. No: housing bubble crashes, and the 10+ years of your life crashes and burns with it. That's your good investment decision

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.

> 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].

[1] https://guthmann-estate.com/marketreport/real-estate-report/

[2] https://www.toytowngermany.com/forum/topic/48094-advice-on-b...

That’s a single data point. Extend that rate of growth relative to inflation for the next 10,000 years and you reach absurdity.

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.

[1] https://en.wikipedia.org/wiki/Real_wages

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.

Now I'm just picking nits I suppose.

For others not in the loop, VHCOL seems to mean "very high cost of living".

> 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.

Fixed interest loan?

I thought that with most mortgages you end up paying for the house twice. Once in principle and once in interest.

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-...

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.

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.

Good point, US-centrism bit me.

How often do the rates change? Anything crazy like 2-3% swings? Doesn't that make budgeting tough?

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.

Good to hear that they aren't so bad.

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.

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)

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.

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.

> 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.

>> Housing is not independent of other goods...

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.

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.)

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.

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.

It depends where you are.

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.

You're right. I just didn't want to write an essay. There are a number of incentives that motivate owners to prefer supply constraints.

Build more. Better transport. Encourage remote working. Allow denser construction. Relax ridiculous laws that push up construction costs.

The trouble is, lots of people will lose money...

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.

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.

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).

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

Is this some special case? I can’t find sources listing it that high.

Housing can be built vertically.

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.

==At significantly higher cost.==

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."

https://www.buildzoom.com/blog/paying-for-dirt-where-have-ho...

==That the difference is in part due to policy doesn’t change that there is less availability==

Except the current policy explicitly limits the availability, they are one in the same.

> 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.

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.

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.

>> In a world where housing prices stay the same, or become slightly cheaper year by year, everyone is better of.

I think you made a good argument here against fiat currency and Keynessian economics in general. Let's have gold standard and deflation again.

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