There is more to high house prices than constrained supply
economist.com
economist.com
1) person tells bank they'd like a mortgage to buy a house.
2) banker asks for info on income, expenses, etc.
3) banker estimates persons maximum monthly payment.
4) banker figures out max loan amount based on #3
5) buyer is encouraged by everyone to spend the full amount from #4
Everyone - the seller, their agent, your agent, the bank, and maybe some others - want you to spend every penny you can. Everyone benefits from higher prices except the buyer. Even if you're immune to it, there is enough pressure that the market as a whole tends toward the highest prices people can afford.
Now lets see how interest rates play in this. At step 4 above, the amount you can borrow for a given monthly payment is mathematically increased by lower interest rates. For a given amount of debt your payment should be lower if rates are lower - that's true - but they'll make up for it by pushing a larger loan.
Ultimately your payment is determined in step 3 and has nothing to do with interest rates or home prices. You will "pay" the same for your house (total payments) regardless of interest rates. The only thing the interest rate determines is who gets the money - the seller or the bank.
In a services and consumption based economy this is the primary way interest rates drive things. Sure, businesses will do their part too, but they're a smaller part of it.
Incidentally I currently spend 47% of my take-home on rent in London. At 32, buying a property is still out of my reach.
There are statistics on this in this related BBC article https://www.bbc.co.uk/news/business-42179119
The point of the article is supposed to be that the issue isn't supply constraints. If interest rates only raise prices significantly when supply can't respond to higher demand, how is the problem interest rates rather than supply constraints?
The entire market is affected by this. You might spend less on a house, but the price of that house has already been influenced by the overall market. Homes in that price range are still at the maximum for people in some income range.
This presumes a single purchase. You've got to go 'macro economic' to see where this breaks down.
When prices start rising because of increased max loan amounts, you get things like bidding wars. Toronto has been terrible for those in the last 5 years. Both the bank and the seller win when people start paying (and borrowing) twice as much as they would have for the same house 5 years ago. Belief that home values are higher and will rise causes them to do so (bubbles, yay).
Example, personal: I bought my condo for under $600k 3.5 years ago. The neighbour is selling their nearly identical one today for just shy of $1m. (CAD$, but still insane). Interest rates are higher today than they were when I bought.
My new neighbours will pay higher amounts to both the bank and the seller. There's more to prices than just interest rates.
When coupled with an interest rates that are far below the historical median, there is an implication that a buyer can take out more debt than in any other economic conditions.
This is a great resource to understand macroeconomic debt cycles: https://www.youtube.com/watch?v=PHe0bXAIuk0
However in a place like Toronto, I imagine there could be a lots of regional factor that would be more significant than interest rates: - Gentrification - Zoning Restrictions - Increase in Population - Geographic constraints (like bridges, freeways, school districts)
Personally, I suspect you'll do quite well in Toronto but every housing market faces headwinds at some point.
Is it worth $1m? Oh heck no. I don't think it's worth what we paid even, once the market readjusts to reality.
Now is a particularly dangerous time to overextend yourself on a mortgage. For any realistic scenario, interest rates will never be lower than they are now. People ridiculously short terms on their mortgages (like 5 years or less). On top of that they are encouraged to take floating rates to shave a little bit off. If you end up with $1 million in debt and the interest rate jumps up to 5% (or 10%... or like London at the time I was there -- 18%!) what will you do? Of course you will have no choice but to default on your loan. House goes into a fire sale, but nobody can afford it with the higher rates, so it's sold for 10% or 20% or even 30% less than the original mortgage... And now, that's the price of houses -- Virtually everybody is more than $100K underwater at that point meaning that if you miss a payment, personal bankruptcy is probably your only hope.
Of course, it may not happen in our life times. That's the tricky bit.
I thought (could be very wrong) that these had mostly gone the way of the dodo due to exactly what you're describing.
This has interesting properties economically. It's a bit like a floating rate in that it will change, but like a fixed rate in that you don't have to worry about next month having an unexpected high bill. The banks give better rates because they only have to estimate the near-future and not the next 30 years.
Big question: what happens when all the people who could barely afford their mortgage five years ago come to renew with rates higher?
You can roll the dice on increasing interest rates but I locked in on a fixed rate because I knew the rates would be going up 3-4 more times in the next 3 years.
I'd love to see a retrospective analysis on Vancouver's protective measures to see if they did actually help, or if buyers found loopholes, or it wasn't Chinese buyers to begin with.
It brought in some extra money to Vancouver though.
I would say that at this early stage it looks like the new taxes are working precisely as intended.
https://smartasset.com/mortgage/what-is-the-typical-down-pay...
Your max amount changes with interest rates. So if interest rates rise your max amount goes down for the same payment and house prices go down.
That's exactly what I said. inversely means opposite.
You can’t have it both ways.
It seems here like you've forgotten that even though your payment may not vary, what you get will (e.g. will it be further out, smaller, apartment not house, worse neighbourhood)...
Or, ultimately, at the bottom end, your 'maximum monthly payment' isn't enough to buy at all so you rent forever (London, for anyone who isn't in a well paying field).
Consider - you'll probably be working 8 hours a week. For various reasons we settle on roughly that. But some people get paid very well and others don't. That matters regardless of whether everyone works 8 hours a week because most people don't retire early even if they could.
And landlords are willing to get a mortgage that can be paid for by the rent (modulo speculation).
"you'll probably be working 8 hours a week" - what?
The idea that your payment is fixed and so the only thing that varies is the proportion allocated to different external parties makes no sense, because you're not buying the same thing.
People don't look at a house and say "I want that" and buy it. They look within their maximum payment range. What exists within that range is hugely influenced by external factors.
The analogy with an 8h work week would be that everyone 'pays' 8 hours a day for their free time so every other factor is irrelevant. Of course it's not; the particular job you end up with for your 8 hours (influenced both by your personal skill but also the external market) has a massive impact on your QoL.
If the rate was originally 10% like a few decades ago, each rate increment would matter a lot less.
This is true, but I think unlikely ...
All macro trends - especially demographics and birthrates - point to large deflationary headwinds. The little bit of inflation that we experience currently is the result of massive manipulations like quantitative easing and related policies. Just look at the price of oil ... even the peak 2018 price is quite low when compared against the last ten years.[1]
Nobody can know how this will pan out, but I think a reasonable guess is that as QE is allowed to unwind we experience recessionary forces that we are no longer willing to accept or able to withstand - given the increased fragility and interconnectedness of our economies. And so we will see QE3 and QE4 and so on, with related ZIRP[2], until we finally see a deflationary collapse.
That could play out over decades. I don't know how you could shrewdly prepare for such a sequence of events, since the correct way to prepare for deflation is to have liquid, cash assets and those assets would be almost completely idle during the ZIRP period (like the one we are living in).
I suspect the only way we would see real inflation is if political actors made political decisions to massively overshoot the QE (and related) policies. Even then, we would not see high interest rates unless some later actor decided to "correct" that inflation.
[1] https://www.macrotrends.net/1369/crude-oil-price-history-cha...
I agree that we're more likely to struggle with deflation and stagnation, and holding cash is the textbook response.
But in the last 10 years of ZIRP, cash underperformed every major asset class -- stocks, bonds, real estate, fine art, private businesses, precious metals, cryptocurrencies, even rare books [1].
Cash was the worst place to be.
We can blame it on QE, but policymakers will do infinite QE before they'll allow asset prices to fall very far.
So I'm not sure the textbook response is valid in the world we actually inhabit.
[1] https://www.theguardian.com/books/2015/nov/10/index-reveals-...
Yes, that is my point - the correct response to deflation is a very painful experience (and has been, as you note).
Since the deflationary collapse can be delayed be QE3, QE4, QE5, etc., that pain could last a very long time.
I don't know how to properly prepare for / hedge against the scenario I outlined.
It seems like the flaw is in the assumption that QE be required to "unwind" at all.
When the fed creates/destroys money, there are at least two things it can do with it. One is to buy/sell treasury bills, the other is to lend more/less to banks (who use it to make loans to consumers).
We currently have two problems: 1) too many loans to consumers, 2) too many outstanding treasury bills. So why doesn't the Fed set a near-zero interest rate for treasury bills but a higher interest rate for banks? That keeps them from having to destroy the money entirely and cause deflation to get consumer debt back to a rational level, while at the same time removing treasury bills from the market and reducing the interest rate the taxpayer has to pay on the outstanding debt -- solving both problems at the same time.
The result would be for the Fed to hold trillions in treasury bills indefinitely, but so what? The "harm" is that it allows Congress to borrow money more cheaply. That seems like a benefit provided they don't abuse it to the point of causing too much inflation -- which certainly doesn't appear to be happening in practice. The debt numbers would continue to grow on paper, but if it's all just going to be held by the Fed using created money, and the amount of money being created isn't causing hyperinflation, are we not good?
Central banks in practice can print as much or as little money as they want. In the third world, they often do. Well-functioning banks like those we have in the Western world can do better, such as the way Iceland was able to deal with their entire financial system collapsing in one day. But it’s always intrigued me the way people talk about QE as though there’s something artificial. Artificial is exchanging pictures of George Washinton for goods and services. Everything else is an implementation detail.
Remember the uproar over Orbitz (and others) price discrimination based on Mac/iOS usage? [1]
Schools have been doing the same thing in broad daylight for years and years with far greater consequence, basing their price on your parent's income levels.*
And near zero public blowback. It's confusing.
* This is all done through school scholarships, but there's practical difference between that and a more direct price adjustment.
[1] https://www.wsj.com/articles/SB10001424052702304458604577488...
That is literally half my mortgage. For a single child. For years.
It seems like there should be a market opportunity for an above-median school that charges below-median tuition by just charging everyone the same amount, and then picking up slews of high quality middle class students.
I suspect what's preventing it is the state universities. The states with large middle class populations also generally have above-median state schools with below-median tuition for in-state students, so the market is already served and the public universities out-compete the private ones without an existing endowment because they're subsidized with public money.
It's also quite unfortunate because it locks everyone into the university of their own state, so they don't really have to compete with each other and the students in a state with a poor quality state university get the shaft.
What the states could do to improve this is to separate "in-state tuition" from the state university -- if you qualify for in-state tuition then you get that much money toward your tuition no matter which school you attend. It would probably devastate the state universities (because they wouldn't be competitive if people had that choice), but if the replacement would be better and cost less...
Society needs to decide that we want transparency, accountability/accounting, and I believe we need to focus on promoting a unit cost structure, so people can see the full relative cost; what are the different models, what ecosystems/cities are using which model, and how can I "vote" for that system model by spending/buying into the model that I want to be perpetuated?
Property taxes would actually be different. The more you own, the bigger the effort the state has to gear towards you to guarantee you your ownership. Laws, law enforcement, judges, fire department in case it catches fire etc.
Income taxes are the largest most discriminating schemes ever.
It took an entire constitutional amendment before it was adopted in the U.S.
you can damn well bet you will entire degrees built around the limits if they were in place. put it down to this course is worth X per credit and this degree is worth X amount and requires a set of course credits that will have loan money available.
as to the article in question, one variable was missing. buyers won't accept homes and features that they can easily afford but are influenced by TV and other forms of marketing let alone the old keeping up with the Jones
I'm trying to be generous in my response, and assume that you aren't simply trying to justify a philosophical position.
True, prices will also fall when interest rates rise, but it’s been a generation since that’s been practical knowledge.
The lenders that give out these loans therefore have essentially no risk and are highly incentivized to give out loans to any and every person that wants one, regardless of their creditworthiness or future earning potential. Universities have responded to this glut of money and demand by raising prices.
The solution is to allow student loans to be discharged through bankruptcy. Banks will respond by properly evaluating the risk of each loan instead of giving them out like candy. This will result in less students going to college, but that’s a fair price to pay to correct this massive distortion in the market.
No, debt is never inherited. The cases you are thinking of is where the family members are cosigners on the loan. Nobody's child/sibling/parent/grandparent is ever responsible for a loan they didn't sign.
The idea that student loans leads to higher tuition prices has always been a politically motivated talking point from the right as opposed to something based in reality. Going to college or often going to as good a school as you can get into and afford is considered more important than ever before and disposable income and wealth among the upper middle class in the US have been going up significantly, not to mention among the global elites who see US colleges as status goods. On the supply side, prestigious institutions are hardly expanding their capacity for fear of losing prestige and school administrations are becoming increasingly market-savvy and less willing to charge less than below-market prices for otherwise wealthy students and their parents.
Bankrate came to similar conclusions: https://www.bankrate.com/finance/mortgages/rising-rates-lowe...
I think your reasoning is valid, so best I can figure it's because home prices and interest rates are both directly correlated with economic activity. So if the economy is heating up, that might drive up wages and interest rates and inflation, and you see interest rates and home prices go up in parallel.
The model of two simple variables tugging on each other breaks down when you add other factors, hence the weak relationship.
Banks and relators have such a massive conflict of interest in pretending that the inflated prices on housing are normal. Rising interest rates are causing housing sales volumes to plummet to record lows, and after over a year of pretending nothing was wrong, prices are finally starting to come down.
But the people invested in the housing market want to pretend it's anything other than the interest rate, like a child caught with their hand in the cookie jar and making up nonsensical explanations on why it happened.
It's a weird sort of inverted relationship when the variables spend so much time moving in the same direction.
Here's another take:
“If you look at the relationship between [mortgage] rates and [home] sales and home prices, the relationship is almost zero,” said Sam Khater, deputy chief economist at CoreLogic.
https://www.curbed.com/2018/2/20/17029746/interest-rates-ris...
Maybe all these people are biased, or lying about simple numbers, or it's some big conspiracy.
The alternative explanation is just that the economy really has more than two variables.
That second hypothesis doesn't seem so preposterous to me.
All sorts of garbage loans that would have been illegal in the past are now common.
Or are you saying that Bitcoin went up because they printed money and is now falling again as people get used to the increased monetary supply? That doesn't make sense to me either as I've never heard of an effect like that before
> Or are you saying that Bitcoin went up because they printed money and is now falling again as people get used to the increased monetary supply
It's pretty amazing, but it's true. The Fed can alter the countable Dollars in existence ("money supply"). They have a gov granted monopoly on 'em.
There is a good amount of what's posted here about the financial system that is true, and a good bunch isn't.
Bitcoin has gone up thousands of percent in a few years, gold has barely moved. Trying to claim Bitcoin's movement is due to money supply reasons makes zero space.
The fed printing more dollars is done in a way designed to push people into riskier products.
The literal point is so that people put their money into the economy instead of parking it in a savings account. So even though your favorite personal finance guru is having you celebrate 1.75% in an Allied Savings account in exchange for referral commissions, the point is for that to be an unattractive use of your money.
Basically the fed buys things in exchange for dollars that didnt previously exist. Asset goes on the Fed’s balance sheet, the dollars are in the prior owners pockets.
The fed predominantly buys US treasuries, from both the secondary market and directly from the US Treasury.
When you buy these you are picking them up at a higher price than the last person, and this lowers the return you can get from the treasuries. The US government treasury bonds being the safest assets by guarantee of getting your money back. When you cant tolerate that yield anymore, you buy higher yielding assets that are less safe. The fed bought the whole yield curve, pushing people to buy more municipal bonds, corporate bonds, junk bonds, stocks, private equity funding startups, houses
The whole point is to push people to make their money circulate in the economy
Yes the market decided that bitcoin and cryptocurrency would give them ROI, after every socioeconomic class figurd out that houses and stocks are too overpriced to make sense
Why not crypto? Okay now that went further than demand would tolerate
And as risk off mentality comes back, and as other assets lower on the yield & risk curve come back into better lower pricing, people will likely find them attractive again because they are safer and you’ll also get your 5% annually with no work
When you look at tax rates, there’s a direct correlation between home price and taxes in high price states like NY, that correlates tightly with the impact on buying power.
I’d guarantee that if you were looking at the 11% 30-year mortgages with 85% LTV requirements that were typical in the 1980s, prices would be very close to 1980 levels adjusted for inflation.
There is a missing branch in your procedure... step 4b) Banker refuses loan because combination of interest rates and house prices are too high for person to afford with current income:
> In 1991, 67% of British 25- to 34-year-olds owned property; today only 37% do.
I suspect this varying cut-off threshold of a substantial portion of the population is largely responsible in the apparent non-simplistic relationship between the other variables.
While this sounds great to people who love to hate on anything financial, it is entirely wrong. You're basically arguing that more risk (larger loan) is cheaper.
But of course, if you were right, you could point to good data in this. (Remember to properly adjust for credit quality which is probably proportional to housing price.)
It actually is, because it affects what can be done about it. If costs are high because interest rates are high, buyers can lower their costs by paying down principal or taking a shorter mortgage. It's frequently the case that, because most of the payment is taxes, insurance and interest, a 30 year mortgage is e.g. $1500/month whereas a 15 year mortgage is only $1700/month, and the difference between them shrinks as interest rates rise (and original principal amounts fall). Which means more people can afford to stop having a mortgage payment after 15 years rather than 30.
It should also result in less resistance to densification, because people are less worried about home values when they're lower to begin with.
1. I go to banker for mortgage. 2. Banker asks how much I would like to spend and gets financials. 3. Approved 4. I go to real estate agent and say this is what I was approved for.
Never was there any pushback. I was far below my max limit.
http://lenkiefer.com/2017/12/20/state-population-growth-and-...
Here is the graph showing QE vs housing prices.
This is true if all else is equal. In theory, however, the Fed is supposed to raise interest rates when the economy is heating up, which implies buyers are being paid higher salaries, which implies their income (step 2 of your chain) is higher. In theory this could neutralize some or all of the effect of the interest rate increase.
This is definitely an American cultural phenomenon. Taking on massive debt is no trivial matter, and I can't imagine people buckling to peer pressure on something that will affect them so significantly.
It's dumb, financially unsound, and irresponsible. I know for a fact that South Asian/Indian heritage will (generally) never allow themselves to financially shafted like this. (The Indian people I know are usually very shrewd, extremely careful, deliberative, and reflective when it comes to major decisions like this.)
What this sort of poor decision making and buckling to external pressure amounts to is a lack of diligence, and a serious failure to look out for your own self-interest.
Why and how this lack of self-care has become a part of American culture is puzzling/baffling to me, and is probably a good topic for sociological or anthropological study and research.
Perhaps the overflowing abundance of wealth in United States (and other similarly wealthy countries) has made people less careful and more reckless with their money? I'm reminded of an article that appeared on The Atlantic which talked about how many people love paycheck to paycheck (and have very little saved up, even for emergency expenses): https://www.theatlantic.com/magazine/archive/2016/05/my-secr...
But as counter-examples, Germany and Japan are first-world countries where people have a habit of saving quite a lot. So this culture of poor financial decision-making (and generally poor self-care) is seeming more and more like a uniquely American thing.
It was built around 1800, most likely when several people nearby got together and gathered a lot of stones to erect walls, and peat from a nearby bog and oat straw (which was grown locally) to make a roof. Over the subsequent hundred years it had a couple rooms added until it reached its current form.
The original owner almost certainly had no mortgage. How did they do it? Why can't I just gather materials and build my own house? Is it because of the inclosure acts? I'm not sure. It's also possible the house was owned by a wealthy local and used as housing for farm labour.
I suspect a lot of people _need_ mortgages purely because mortgages exist, so you're going to be competing against others who have them. It's slightly reminiscent of the two income trap. When a household wanted a home in the 1950's, they usually were competing with other single-income households. Once two-income households became normal, it was much more difficult for single-income households to compete.
Though this all still seems to relate to there being fewer houses than people would like to own.
In the US, you certainly can, as long as you use approved materials and get the necessary permits and inspections.
If you want to fell trees and gather rocks to build your home, you can also do that, but it becomes much harder to get it registered as a homestead. In either case (assuming you are living outside city limits), you will probably need an approved septic plan.
You can build something that doesn't meet the local building codes, but it may be difficult or impossible to sell it later.
Indeed. This is why discussion of "supply" misses the point.
- Many people would quite happily build their own house in the middle of Central Park. But they cannot, because government intervention prevents them.
- Many homeless people would happily sleep in unused climate-controlled office buildings at night, but cannot, because government intervention prevents them.
- Many people would happily live outside of cities, but can't for financial reasons (effectively, the government coerces them via property law, into moving into cities to do work).
Supply is not the issue. There's plenty of supply already existing or easily created. The issue is that people are violently prevented from using it.
I'm interested in why you put government in quote marks. Do the cops who prevent people engaging in construction in Central Park not work for the government?
I respect property rights, which is why the more I learn the more our current system of selling the right to occupy land that was arbitrarily taken (from Irish and English farmers, from native Americans, or hell, even from Mexico) to be scaffolding designed to hide the fact the land was basically just stolen. Nevermind more recent outrages, like redlining.
Basically, new regulations were created that require home buyers to qualify at prime + 2%, even though mortgage rates might be prime + 0.5%.
This was done because the govt was concerned about how much risk the banks were taking on.
Since it was enacted (earlier this year I think), the brakes were slammed on housing prices and now major markets are starting to see price drops. Of course the stress test wasn’t the only factor.
The reason is that even in a world without mortgages, real estate tends to yield either payments (as an investment) or benefits (as the owner) that are roughly fixed and not entirely based on interest rates. If you consider the value of real estate to roughly equal the sum of discounted cashflows, this means the lower the interest, the higher the value.
Note that in theory, only land prices move this way, not the value of improvements, since the value of improvements is strongly tied to the cost. So if you consider the value of housing theoretically as a sum of land and improvements, only the land portion is subject to interest rates. So some have observed here that empirically the connection between real estate prices and interest rates has been weak - this will be the case in real estate markets dominated by the cost of improvements (most US markets until fairly recently I believe).
The rent itself however is controlled by supply and demand - there needs to be a real person there earning a paycheck and he must have no other options before going for a high rent house. Therefore, the options for keeping rents down are either keeping people out of the city through administrative means, or, realistically, building higher and denser. Good public transport infrastructure is an essential component because it opens for development distant areas that otherwise would not be desirable to people working in the city.
On the other hand, as the city grows, economies of scale bring in more businesses, create more high paying jobs and opportunities, therefore attracting more people - up to the point where rents and commute times increase again and restore equilibrium. A Malthusian catastrophe of sorts, that requires radical new transport solutions and workplace transformations, as opposed to building regulation and financial innovation.
Availability of money in the general lending environment, sure, but surely there's a risk component there.
The low interest rates can only persist as long as a lender has a reasonable expectation that they'll be paid back (e.g. that rents remain high enough to sustain the mortgage over the term).
The real world factors like 'how desirable a place is'/'are good jobs there' and so forth seem to be further back in the causation chain to me.
This is probably why we see the sort of "non-linear growth" that we do. An environment with stable, increasing rents due to increased demand _directly_ increases the price of housing linearly, and then on top of that it's a less risky market as a result so you end up with lower interest rates which drive it even further.
A mortgage at 3% is basically a risk-free rate. Lenders are saying "you can't lose by buying here so go wild".
The only exposure your bank has in terms of losing money is losing the costs associated with starting up the loan when you apply — there is a strong incentive to approve. The government owns the risk on performance.
This was a policy choice, because banks making subjective decisions usually looked a lot like redlining. Nobody would write a loan on a luxury condo in a rehabbed factory in the inner city because it’s a measurably higher risk. Bad schools, high crime, pollution, and risk of the condo board doing dumb things makes that a risk for the bank.
No need to get all complicated, the solution is pretty simple.
I'm not sure what you're asking re: what would remain. Housing as a human right, I guess? There's no good reason for landlords to exist, nor do I understand why you would want housing to be a commodity especially considering we live in a post-2008 world.
Beware of that solution: you have a chance to fight a landlord, you have no chance to fight the state-landlord.
I don't see where you get your conclusion from. For many (most?) people, they really don't have a chance to fight their landlord. Legal expenses, time, energy, etc. are pretty huge deterrents. Not sure why you can't fight a "state-landlord", also.
Are you sure about that. US government spending is 1/3 of GDP, while rents are around 1/10.
> Not sure why you can't fight a "state-landlord"
Because the state has the power to make it illegal to sue the state. You need to win a supreme court case to beat the state into something, and you will be paying taxes to fund your opposition all the way up to the supreme court.
This worked as a baseline, if you had more money or wanted to live in a posh area (or just the countryside) then you could rent elsewhere. Or buy.
Councils could extend their stock of housing and there could be benefits of scale, e.g. replace everyone's windows for double glazed at the same time on the whole street.
In this market there was an anchor on house price inflation as well as market rents. Why pay double to live in somewhere not looked after just to line the pockets of a rent-seeker?
Then Margaret Thatcher came along. Nowadays we don't have council housing. There is some but none is available. Councils aren't allowed to build/buy more. With 'right to buy' the council housing was sold on to rent-seekers, none of whom have any interest at all in the community and only have an interest in making money, not housing people. The rent-seekers have portfolios as bit as large as councils used to have in some instances.
Social mobility is lost now that we have rent-seeker owned properties, you can't just move as easily as was possible with council owned housing. This has been great for the rent seekers as well as their banks. For people wanting to be part of the community, bring up a family and do legit work this has not been so good. Either you are a serf or a rent seeker. There was a time when it was not like that.
The red carpet has been rolled out all the way for the rent seekers, the silly interest rates and notionally low inflation (which does not include rent) means that their capital accumulates, they can leverage and steal more homes from people who deserve to be 'on the ladder'.
Normal working people are forced to pay ever higher sums of money to the rent seekers as they have no choice. So you have two people working to pay for a single bedroom flat, with no money to spare or kids or even cars. You would be really shocked if you saw how some people live in London, people that do service sector stuff have nothing. Pigeons fare better.
People nowadays have no knowledge of how well a stock of council houses serves the community, all they know is the world of the rent seeker. Politicians 'demand' more affordable housing but that doesn't fix the problem, you need capital to deteriorate if invested in property, an anchor in rent prices and for people to be able to live not speculate. It is not hard to get right and not mankind's hardest problem. Apart from anything else having property as the only asset that accumulates is wrong, people should be investing capital in business, old and startup, not forcing the next generation out of their homes.
In the UK, societally, we've decided that we don't value everyone having a decent place to live.
We don't seem to really have a "goal" for our society, I think. Maybe "everyone should have a job". But that's indirect; people want jobs because they (ideally) result in outcomes like feeling like you're contributing and receiving a stable life in response.
"Everyone gets a house if they want" is a really solid goal to aim for that we've just sort of given up on. It's not unviable at all, it's just politically been brushed aside.
Of course the core problem is treating affordability as merely a function of access to loans, without accounting for second / higher order effects.
You’re clearly not proposing that, but it is of course an easy trap for a society to fall into
I think that's just a spin on the real "goal", or at least the feeling behind it; people don't deserve any help when they're down because they could have a job.
1 https://en.m.wikipedia.org/wiki/History_of_taxation_in_the_U...
There's truth to this, but I don't think house prices should simply be (annual rent) / interest_rate. There's a variety of other homeowner costs to consider (property taxes, HOA, maintenance, etc.) and buyers are taking an opportunity cost not being able to invest their paid-down principal (including down payment) in riskier assets.
I have a calculator at https://medium.com/@usaar33/an-up-to-date-buy-or-rent-calcul... to find indifference point on the buyer side. Other huge inputs are future appreciation rates of investment and property. At default values, price moves at about half that of mortgage rate changes: e.g. halving the mortgage rate only raises the house price willing to pay by ~16%; doubling it, cuts price by ~25%.
No, it's not. Folks have got to stop using simplistic remedial high school economics classes to explain complex social problems. They just aren't that simple.
During the 2008 financial implosion, a single investment company called Blackstone Group went on a buying spree around the US. As of this time last year, they owned, through a subsidiary company, fully 1.5% of the entire Sacramento-area rental house market [1]. Blackstone in turn is flush with cash from foreign investors [2].
Foreign cash investment in real estate is a major cause of high rental prices. But the data on this and investment companies like Blackstone Group is spotty and difficult to follow [3], on purpose.
These groups don't set prices according to "the market". They are more than happy to let some percentage of their properties remain empty rather than decreasing rental prices, because they can claim the lost rents -- at the prices they set -- as taxable deductions. It's a net win for them: keep the price high for all their other properties, get a writeoff on their empty properties.
Building more housing is not going to fix this part of the housing problem. There is more than enough foreign capital available to continue to keep housing prices artificially inflated no matter how many new homes are built. These are long-term investments and small fluctuations in available housing are not going to shake them loose.
Much more comprehensive investigation is needed in the actual causes of high housing costs, including the effects of foreign investment and investment firms, and then reform is needed to address those causes.
[1]: https://www.kcra.com/article/this-is-the-largest-owner-of-re...
[2]: https://www.bloomberg.com/news/articles/2018-10-22/how-black...
[3]: https://calmatters.org/articles/data-dig-are-foreign-investo...
How is it that a tax deduction can offset the opportunity cost of leaving a property vacant?
Or does it only offset the cost of what the unit would actually rent for at rates that naturally clear the supply/demand curve?
Could a vacancy tax fix this?
I can't comprehensively answer this, because I'm not in the business and those that are, are tight-lipped about it. But it's definitely a contributing factor to high rates of empty storefronts [1]:
“If these landlords have deep pockets and large property portfolios, it may make more financial sense to claim a tax loss on vacant property than to rent at a non-optimal value.”
I'm assuming here that if this is a model that works in the commercial property investment market, it probably works in the residential property investment market too, as long as the investor has deep enough pockets and a long-enough financial strategy. Smaller, short-term residential property owners -- the individual landlord or small-time property management company -- probably wouldn't get as much of an advantage out of this.
> Or does it only offset the cost of what the unit would actually rent for at rates that naturally clear the supply/demand curve?
I dunno. I think we can make some educated guesses here.
If you own 1,000 single-family dwellings in a high-demand metropolitan area, like Sacramento, you've probably paid for those properties with cash or with foreign investment capital. There's no mortgage payment on it, so your costs for letting it sit empty are relatively low.
So let's say you maintain a 90% occupancy rate at rents that are significantly higher than they would be if you were forced by some regulation to maintain closer to 100%. Instead of rents varying from $2000/mo to $2700/mo for 100% of your properties, you ask for $2800/mo for 90% of your properties, and then your well-heeled mustache-twirling tax advisers find ways to write down the remaining 10% at as close to a $2800/mo loss each as possible. Hey, if anybody complains, you can just blame "the market".
> Could a vacancy tax fix this?
Some people think so, but I haven't seen a deep enough investigative piece to be certain. That's mostly what I wish for: a thorough investigation into this aspect of the housing problem that leads to some smart strategies for fixing it.
Population growth alone just doesn't explain the massive increase in cost of housing.
[1]: https://nypost.com/2018/03/30/de-blasio-eyes-vacancy-tax-for...
The strategy of squatting on vacant property is essentially patience. For it to pay off, you do have to eventually rent it out (or sell it) when you think prices are high enough. For example, if you have deep enough pockets you might move during a recession, but wait until the recession is over to sell your old house, because you get a better price. If you never sell it, you’re tying up capital for no reason. The higher interest rates are, the more you’re losing in opportunity cost by owning a vacant building. Patience has probably been especially abundant in this decade of historically low interest rates.
Since no tax rate is 100%, a writeoff is never as good as a profit. It only softens the blow, which might extend the landlord’s patience in waiting for rents to cycle back up to $2800.
Another thing that happens is the project’s financing is contingent on a certain average rent, but the contract doesn’t factor in $0 rent empty units, just leaves them out of the calculation. This is essentially a bug. It’s one reason landlords give signing bonus concessions instead of just lowering the rent.
In markets seeing runaway costs, vacancy is at historic lows. No one is investigating this too thoroughly because fixing it wouldn’t be very fruitful.
You're positing that the proof supply and demand is not applicable to the housing market is that a private investment company has greatly increased demand beyond what the housing supply can support, which is driving up prices.
And the fact that demand exceeding supply is driving up prices is proof that supply and demand does not apply to the housing market?
That's not true. Zoning is the big problem: https://www.amazon.com/Rent-Too-Damn-High-Matters-ebook/dp/B... or see Zoning Rules! by Fischel.
Blackstone's investments only make sense because of artificial supply limits. Remove those, and their whole strategy is destroyed. The situation really is primarily about supply and demand.
Can you provide a source? This doesn't seem right. A vacant unit produces no revenue, but the "lost rent" doesn't constitute an expense.
Sure there are many factors at play, interacting with each other in strange ways. But there is no amount of complexity that will let you settle 100 families in 10 houses.
> Building more housing is not going to fix this part of the housing problem. There is more than enough foreign capital available to continue to keep housing prices artificially inflated no matter how many new homes are built.
No...that's not how anything works. Foreign capital is not infinite. And foreign capital invests in the US real estate market because it expects a return. If you change the expectation of supply, guess what happens? People don't want to invest in that asset anymore, and the capital dries up.
This is all a lot easier to see if you actually put yourself in the shoes of one of these 'foreign investors'. Don't think about them as an abstraction - think about yourself. If you were a rich Chinese businessman, ya, the SF property market is a great place to park your cash. Because it's supply constrained. But you better believe the moment that supply situation changes you're going to be running for the exit.
Well, okay, I guess. How many houses do you think need to be built to satisfy the investment needs of everyone looking to outperform the S&P 500? For extra credit, realize that this means that every metropolitan market is now an international investment vehicle.
Huh? Let's talk about the rice market, rather than housing. Let's say you dump 1 trillion dollars into rice. What's going to happen? The price of rice rises, dramatically. However, rice farmers the world over see that price rise, and they start growing more rice. If you keep buying 1 trillion dollars worth of rice every year, the rice farmers will grow more rice in response, and the price will start to fall.
You, being a rational rice investor, will see that happening. And unless you're an idiot, will stop dumping your money into the rice market.
The only reason that houses are any different from rice is that housing is supply constrained, whereas rice is not.
> Well, okay, I guess. How many houses do you think need to be built to satisfy the investment needs of everyone looking to outperform the S&P 500? For extra credit, realize that this means that every metropolitan market is now an international investment vehicle.
This question doesn't make any sense. You don't create homes so everyone can outperform the S&P. That's like asking "how many stocks do we need to create for everyone to be an early investor in a decacorn?".
The question you're trying to ask is: How many houses do we need to build until the rate of return on buying property equals the rate of return of the stock market, adjusted by risk. To be precise, you want the number of homes that need to be built for the Sharpe ratio of the residential real estate market to equal the Sharpe ratio of the stock market.
That question is going to vary by geography. Many housing markets already dramatically underperform the S&P. It's only a very small number of them that perform better. In aggregate, housing already does underperform the S&P.
> What's going to happen? The price of rice rises, dramatically.
Yes, which is what has been happening in housing.
> However, rice farmers the world over see that price rise, and they start growing more rice.
And here's where your analogy falls over, because (a) the availability of land for residential real estate is not infinite; (b) it requires a far, far greater capital outlay (and time-to-market) to build housing than to farm rice; (c) developers are incentivized to build expensive housing because that's where they make more money.
That's where my earlier comment came from: the amount of new housing required to satisfy this equation from the supply side would be enormous, as would be the environmental destruction it would cause.
> And unless you're an idiot, will stop dumping your money into the rice market.
Only if there's a better place to park my wealth. That's where all this money is coming from: people with money, who want to make more money, and are dissatisfied with the returns available in a lot of other investment vehicles.
> It's only a very small number of them that perform better. In aggregate, housing already does underperform the S&P.
Oh, c'mon. Deal with me honestly here. We're not talking about BFE, Iowa, yeah? We're talking about housing in metropolitan areas, and I'm pretty sure I've been specific about that in my comments on the subject so far. Y'know, the areas where there is a lot of investment money -- demonstrably -- and where there are ridiculously high housing prices to go along with it.
Well, you're using the word 'availability', but that sounds a lot like 'supply' to me. So, i'm not sure we really disagree here. Though I would add that for the most part, land supply is not the constraining variable in almost all major metropolitan areas (exception for places like Hong Kong).
> Only if there's a better place to park my wealth. That's where all this money is coming from: people with money, who want to make more money, and are dissatisfied with the returns available in a lot of other investment vehicles.
Sure, so they bid it up until its risk-adjusted net-present-value equalizes with other assets. But all that is is restating the fact that these particular plots of land are worth a lot. It doesn't answer the question of why they are worth a lot. For that, you must look to supply constraints and network effects.
> Oh, c'mon. Deal with me honestly here. We're not talking about BFE, Iowa, yeah? We're talking about housing in metropolitan areas, and I'm pretty sure I've been specific about that in my comments on the subject so far. Y'know, the areas where there is a lot of investment money -- demonstrably -- and where there are ridiculously high housing prices to go along with it.
I'm not trying to deal with you dishonestly. I know you are talking about major metro areas. My point in pointing out the heterogeneity was to point out that we only know ex post that the particular areas you're thinking of have done well. If you were an investor in say, 2003, it may not have been such an easy call, and similarly, it may not be such an easy call now.
Let's say you had $10 million to invest. Where would you put it? Would you chuck it into SF real estate in the current market? I'm not sure I would. I think the market is quite high, especially given the rising interest rates, and I think the anti-nimby movement has gained a lot of steam, and the bay area has a lot to lose from that, in terms of property values. If I were trying to park $10 million, I think i'd actually shy away from areas with sky high valuations that are built on such monocultural foundations (tech).
https://www.bloomberg.com/news/articles/2018-11-19/foreign-i...
I bought in 2000 and sold in 2015 for three times what I paid. The main people buying where I lived in East London, were from West London where rents were so high it was effectively cheaper long term to buy in East London. Number 47 on this page. https://www.rightmove.co.uk/house-prices/E10-6QB.html
My son-in-law and his wife had moved back in with us a year or two earlier because rents in East London had gone up. In 2015 a typical 2 bed flat in East London was £1,400 per month, West London around £2,500.
There's a simple reason why house prices and rentals in London have gone up. Demand due to mass migration. Back in 2015 London's population was at an all time high, numbers not since seen 1939 apparently. https://www.trustforlondon.org.uk/data/londons-population-ov... Many properties were bought-to-rent though that got hit by changes in law.
If council tax were unfrozen and allowed to go up this effect would be mitigated and rents might actually go down.
I think you're defining East and West in weird ways in order for this to make sense. Maybe it's because Hyde Park shifts the real "centre" of London off to the left (e.g. Charing Cross is 'sort of' the middle but isn't really.)
If you compare like for like it's much closer. e.g. go 3 miles east and 3 miles west from a 'centre' and compare prices. There's not a 70% difference unless you end up in an outlier (e.g. South Ken).
Last year a 2 bed in Hammersmith was ~1500. I think that would compare fairly well with the other side which would be near Canary Wharf somewhere.
I moved into a flat in 2003 and moved out of it in 2011. The rent barely changed the whole time (~1350/month to ~1450). I've seen the exact same flat for a similar amount. Marylebone.
So yes, less than 4%. A lot less.
>>> (925/650.0) (1.0/20)
1.0177975914387338
Note that 20 years of +1.78% per year does +42% compounded.
>>> 1.0178 20 1.4231442772353857
In real money, the rent for your place has gone down, not up, ignoring the furnishing.
(925/650.0) raised to the power (1/20) is 1.0178
1.0178 raised to the power 20 is 1.42
If loans/debt/financing/mortgages were made illegal, then these artificial high housing prices based on the credit line one can obtain rather than what one can actually afford, prices would come down to fair market value. I know people will claim credit is based on what one can afford but that is mental gymnastics (foreclosures, student loan defaults, car repos, and credit card defaults could all suggest otherwise)and wouldn’t matter if credit were made illegal.
The same is true of student loans. Tuition costs couldn’t continue to exponentially (artificially) increase based on the guarantee of government loans to students to cover these costs, take away a the loans and the prices will meet the new demand.
Another factor is a sort of raise to the bottom arms race among colleges to attract students with shiny new facilities, causing even more debt.
But the systemic problems of indebtedness and lack of access to credit (either bad credit or no credit) would disappear. Your greater point may be right, that leveling of the playing field will be all for not because the still existing wealth divide.
To your point to the costs. I think the home costs are already generally the cheaper part in most real estate purchases (ie the land is worth more than the home). And those costs (like everything in society) are artificially inflated because the pricing is set in a credit based system where price is based on future ability to pay/not what one can pay out of pocket today.
You are correct to point out that the prediction of one's future ability to pay (their future productivity and trustworthiness) is difficult. But I think eliminating credit (at least when used to purchase productive capital) is throwing the baby out with the bath water.
A home sits there and looks pretty (maybe), slowly losing real value. Of course, w/ an increasing population amd limited supply it accrues nominal value (and “real” value in the investment sense).
Yet compared to owning shares in an actual productive company, it’s a very poor value proposition.
Look at studies on credit it results in bias against minorities. It’s one of the reasons behind the deregulation’s leading to 2008 real estate crisis, the fact that these biases were showing up in home ownership and they tried increaseing homeownership amoung minorities.
That “experiment” greatly failed proving your point, that in a credit based system, a credit rating based on factors such as assets, income, existing liabilities is necessary in determining how much to lend and the risk/interest. I definitely don’t dispute the way the system works, just I think it’s a bad system.
For every rich person who benefits with access to capital they can manage and payback, or normal person who gains a house they struggle with paying for 40 years or more; the otherside, is indebtedness an evil of society (put the 1M defaulted student loan people in this category - the will effectively be paying for that house for 40 years only not for an asset that at least historically will appreciate, but a sunken cost) and what I mentioned before which is a statehood of nearly second class citizenship where one will never gain access to banking services much less credit.
I see your point baby/bath water...why get ride of the system instead of fix the problems. I’d say the credit system creates those problems, and that’s definitely not to say the same bias in homeownership rates/percents wouldn’t show up in more of a cash/capital based system with no credit. But at least those unnecessary and IMO evil classes of society (bad credit/no credit) wouldn’t exist. At minimum I’d be curious about two such systems in the US side by side, and with all the talk/interest in startup cities maybe a non credit based city could be tried - though I can’t solve how it could be created fairly within the existing national system of credit.
You are right though, without that extra finance there is no way universities could have expanded the way they have. Traditionally they were always underfunded (in the UK) compared to other parts of the education system.
In the US at least I think there is a case to be made that this is due to the UNDER financialization of housing- if you own a home at want/need to move it is difficult for most families to do anything but sell their current home in order to qualify for a mortgage. This suppresses the rental stock even when it is financially reasonable to rent out a house versus selling. (Yes, there are companies buying SFH housing to let out, but they seem small compared to the overall market right now)
Renting out houses is an occupation, with special skills. You have to navigate the legal situation to avoid being sued, while still doing your best to refuse people who seem like they could be trouble. You can expect damage and non-payment of rent. You can expect the state to make it extremely difficult for you to get rid of destructive people who aren't paying. You can get sued over a lack of repairs, but meanwhile the renters are causing the damage and failing to tell you about it. Renters will ignore water leaks that don't seem to impact them, letting your home rot from the water. Renters will smoke and keep pets, despite any rules to the contrary, and they will fail to control destructive kids. Renters will illegally authorize workers to drill holes to run cables through the walls.
I've known people who tried renting out a house. They ended up with drug dealers, prostitutes, new doorways and other openings being cut, a bloody murder scene, floors and walls rotted out, destroyed cabinets, etc.
Most new homes are in home owner associations that prohibit renting houses out.
1. Cities becoming much wealthier, and lower crime, resulting new generations moving there 2. New immigration wave to Western Countries. (UK esp had population relatively slow growing pop in the 50s, 60s, 70s) 3. A big demographic bulge of baby boomers getting ready for retirement saving as much as possible, looking for investments 4. Lots of money coming out of China looking for investments 5. Two huge stock market crashes leaving most people wary of stocks and seeing property as a safer investment 6. A combination of all factors pushing property even higher into bubble conditions.
But there's a big argument against this that I don't see the answer to. Everything that's mentioned in this article is true for buying a house, but not for renting. Rental prices have also gone through the roof - and the only reason they're able to go through the roof is because people are able and willing to pay the costs asked. But people renting are getting absolutely no return whatsoever on this exchange, and rent is also generally not paid from debt. So how would this explain the willingness of people to pay ever higher prices for rent?
Some googlers got the same idea and slept in the google parking lot!
It does not make sense to purchase expensive properties with the record low interest rates. As soon as they rise again, your property will lose in 10s of thousands of dollars in value and you will be tempted to walk away from it.
When you have 200k+ salaries and you find it appealing to live like a minimum-wage worker with no family, it should raise a red flag.
If you get 90% of your home comfort in a finished conversion van and you save 50% if your wealth, it's a no brainer.
You'll also be avoiding the inevitable housing crash.
Why on god's green earth would an employer care about where you live?
Would you raise a child in a van? Down by the river?
There are other issues but many people have figured it out and there's a vibrant van(life) community that's thriving due to the sky high property prices.
By moving to big cities, value-creating workers are increasingly forced to compete against wealthy owners of capital for the limited supply of real estate. Wealthy owners of capital don't need to work for their money, so they're willing to spend a lot more to buy houses that they don't even need; this drives up house prices for everyone else.
A lot of people don’t have the luxury of paying only 1.25X their salary.
Take Boston for example. You’d need to live more than an hour out of the city or in a city with terrible schools to find a house that cheap.
Lots of people are optimizing for more than just price. Things like quality of education and commute also factor in.
So please realize housing is incredibly complex before judging everyone else as irrational for not making the same life choices as you.
US? Northern Idaho? Thailand? Saudia Arabia? SV??
Where I live the long term average is 6-7x household incomes.
As the "big" properties in London went into the multi millions the original owners moved out one rung, and those owners moved out one and so on. The commuter belt is apparently shored up by billions of dirty money
But now it's drying up. Maybe tougher enforcement, more likely competition from NY / Nevada and Brexit uncertainty but it seems to have tanked the market.
- Tariffs which affect steel and timber
- higher wage costs due to low unemployment (perhaps the most benevolent of the list)
- a construction boom in certain areas (Brooklyn comes to mind) leading to a scarcity of construction professionals being available
I'm sure 'new construction' costs being high affects the prices of second-hand properties, which scale up. Even more so if they're renovations.
It’s cheaper to recycle the existing real estate market.
In the US/Ireland/Spain maybe, in most countries house prices didn't fall - they rose with the low interest rates.
The city blocked new housing religiously for a decade
And several trillion dollars of hot money left China and ended up in the Pacific ring real estate market
I've been saying this since the early 2000s when I saw even lower end new construction getting Corian or granite countertops as standard. Easily available money causes prices to rise.
Low interest rates and innovations in the mortgage market are to blame
You are simply letting a person to buy more of any big, expensive asset. And the thing does gets out of control fast when there is a even minimal expectation of appreciation, and inflation fears.
And that on top of the fact that real estate is the only "investment" possible for an ordinary person without employing an officeload of securities attorneys in many countries.
Chinese housing market is the prime example (2B vacant square metres, with even more in the pipeline)
Certainly the innovations mentioned are part of the issue for most markets, but for some markets there are other impprtant factors:
* The flood of expat money (Vancouver)
* Supply constraints due to geography and/or Nimbyism coupled with net in migration (Bay area)
* Builder hesitation plus in migration (Front range of Colorado)
Hard to paint one picture. However, making mortgages easier to get has a broad effect on demand, which will definitely shift the curve.
That unpaid tax flows straight back into the housing market.
> The flood of expat money (foreign investment)
these two statements are contradictory
It depends on what you understand when OP says "all real estate is local", I assume that it's the thing itself and its customers. It can be seen as inexact because yes, the investors often are not and that is that second statement, but we all know what OP meant, so no need to start nitpicking over nothing. I see no merit in arguing over words whose meaning everybody understands just for the sake of it.
So no - this real estate is not local. It happens to have a physical location, but when you understand how the money associated with it does it best to avoid spreading out into the surroundings, it might as well be built on an uninhabited atoll in the Pacific.
At the low end in London the money went to landlords who bought large portfolios with the financial assistance of buy-to-let loans and tax breaks.
The tax breaks are being removed, and interest rates are drifting upwards. This is killing casual landlords, but isn't a problem for the sharks and the rabbit hutch 10-gig-economy-workers-in-a-room slumlords.
> You are simply letting a person to buy more of any big
True, but that is grossly incomplete. It suggests that single individuals (or agencies) are gobbling up a plurality of real estate. It is also true that many people are each purchasing single houses.
Also constrained inventory appears to be a reality only on the US coasts. In my geography they continue to build thousands more houses every year. Inventory is hardly limited and yet prices and demand are both continually increasing year over year.
Structurally what is happening for the majority?
"In 1991, 67% of British 25- to 34-year-olds owned property; today only 37% do." is the problem. Not how some of those individuals within the 37% came to own their home.