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cletus

So much written about housing is just... Wrong. And I don't mean factually inaccurate. I mean based on false premises.

Owning your own home serves several purposes:

1. Security

2. Stability

3. As a hedge against inflation

4. As a hedge against market forces

That doesn't mean buying is always a good idea. Clearly or isn't. Like don't but in a town where 70% of the adults are employed by the local coal mine, for example.

Here's how I like to think about it: you are never out of the housing market. By not owning you have a large short position in real estate. Given that rents eventually track prices, if prices go down you benefit (you're rent will eventually go down and you didn't lose capital). If prices go up you lose. You missed a gain and your rent will go up.

Given that, you buy your house to remove risk of local changes to your detriment.

View on HN

The idea from the headline should be viewed at a more macro level. A society that views housing as an investment means that we wind up adopting housing policies that lead to people being priced out (i.e. regulatory capture). This eventually means people winding up in subpar situations like moving in with parents, couch surfing or living on the street.

Now your argument about housing on a personal financial level is spot-on, at least points #1 and #2. As for the latter points, the first purpose of a house should be to house people. When we view housing as an investment we start making economically rational (but morally questionable) arguments like, "ban new apartments because they'll lower my home's value."

Right, the problem is NIMBYs are allowed to rent-seek by preventing construction around them. And in San Francisco, Prop 13 / rent control insulates many people from any consequences of rising prices, as long as they don't have to move, which means they make decisions that push up prices for everyone else.

In the economically ideal case we'd have a fair Land Value Tax to encourage as much building as necessary.

So what might happen if California enacted statewide rent control? Capping yearly rent increases at inflation + 3%? There are places where properties have doubled in value in less than a dozen years while wages remain stagnant, leading to rents surging and more %income going to housing. Many low income renters are paying 50% or more of their income on rent, that's not sustainable for the wider economy that relies on low skill labor to function, and the solution is not to have people commute 4h every day to clean an office, teach a class, or fight a fire.

The housing market moves so much faster than wages ever will, and it seems having only some units rent controlled exacerbates the problem for units that aren't, so why not make every unit in the state a rent controlled unit? The landlords are already insulated from the whiplash of the housing market from statewide property tax control in the form of prop 13, why not let renters enjoy that isolation as well?

There are several rent control bills in California right now.

AB 36 will allow cities to enact rent control on older buildings. AB 36 would not apply to new construction, only to buildings older than 10 years. This should help to prevent supply crunches, or at least not make them worse.

AB 1482 would set a state-wide cap on rent increases, for example inflation + 10%. The idea is to stop massive rent increases that lead to evictions. The exact number hasn’t been determined yet, the bill sponsors are trying to figure out a good number that protects tenants and gives landlords a legally guaranteed return on investment.

These bills will face a lot of corporate opposition. It’s important that our electeds here from renters, homeowners and “mom & pop” landlords as they consider these bills.

AB 36 sounds like it would encourage a lot more turnover on older buildings, incentivizing the redevelopment of what is currently affordable housing. New York has similar regulations, and what you end up having happen is that landlords will either redevelop or renovate to whatever the threshold is to get out of the affordable housing requirement.

In California landlords are already allowed to pass through “reasonable” capital costs on rent controlled units, so they can essentially already do this.

This is true in theory but in practice often hard to get approved. For example, in San Francisco you can never apply for a pass through on buildings occupied by the elderly or disabled even if that tenant sublets to non-protected people.

In my experience, pass throughs are a theoretical concession instead of a practical one.

The price of housing is only part of it. The rising prices reflect the rising demand and the relatively static supply. Even if prices were capped, it doesn’t mean more people would be able to get housing. There’s still fewer units than there are people who want them, so people would get units based on some other mechanism beside price such as a lottery.

The unpredictability this would entail would probably be worse than a functioning price mechanism. Imagine you get a job in San Francisco but there’s only a 20% chance you’ll be able to “win” a housing unit where you want. Versus the current reality of for sure being able to find housing given you’re willing to pay enough.

Exactly. It surprises me how many people don't understand the basic economics of scarcity. There has to be some rationing factor. In a free market this is price. If you remove price, it will be something else besides price, such as a lottery, how politically connected you are, or something else. The only real solution that doesn't result in shortages is to increase supply (build more housing).

Or, reduce demand by spreading out jobs to other cities and states where their more needed. (not ideal, i know, but it is a secondary option)

I have seen it argued in gentrifying neighborhoods that we should reject all projects which make those neighborhoods nicer to live in, to discourage new residents. This is a pretty direct way of reducing demand: making your neighborhood shittier.

Invite me to live there, I'll bring down the the tone.

Behold the devaluation kit (German): wife beaters, satellite dishes, discount supermarket plastic bags, ... https://www.esregnetkaviar.de/relaunch/abwertungskit.html

> Or, reduce demand by spreading out jobs to other cities and states where their more needed.

This does not happen, nor is it remotely desirable. Having a life involves much more than having a decent job. It entails living where the person chooses to live according to their personal tastes and desires.

If you force the decision on where to live based on a single constraint that in theory is only a major part of your life so that you can fund your personal life and personal interests then this leads to poor quality of living for all (including spouces, offsprings and immediatr family) just to cater to a company's bottom line.

I'd wager that many more people are moving to the cities that have housing problems for the jobs than because they genuinely want to live there.

It only matters where the people with money want to live, and in my experience they overwhelmingly choose to live in high cost of living cities. The rest have to follow, if they want high paying, upward mobility jobs.

> [people with money] overwhelmingly choose to live in high cost of living cities.

You're confounding your observations. People with money choose to live in areas that maximize their quality of life, and they don't mind paying a premium for that.

Quality of life matters to all, whether rich or poor. Poor people aren't masochists.

You keep thinking people move places and then find jobs. This is not correct in the USA. Also, the quality of life is not higher in these expensive cities.

Rent control prevents people who currently have homes from being displaced. It also limits the degree to which housing is a commodity investors can profit off of & the degree to which they can exploit their tenants. It is obviously not a complete solution to the housing crisis (and no housing advocate claims this) -- a complete solution means rent control and building more housing, especially high quality public housing.

As long as rent control prices existing homes above the cost of new construction, then there won't be a problem. However if rent controls cap the price at below the cost of new construction, nobody is going to build. They would be losing money if they do that.

The state can build housing then if it's not profitable. Housing is a public good and a right, it should not be a product or investment.

> If you remove price, it will be something else besides price, such as a lottery, how politically connected you are, or something else.

The main driver of price is not "demand" imagined as how much people willing to pay for a particular house but demand as how much people are capable of paying, which is mediated by access to debt. If access to debt is clamed down on across the board, then prices will fall accross the board. People will still compete on price but as a society a smaller fraction of income will be spent on housing.

That is true for existing, middle class and below housing for sure. Whenever interest rates go up, we see the exact effect you are describing.

it's not the whole story however. In order to increase Supply, it has to be profitable to build new homes. If building new homes is not profitable, none will be built, and the price of existing homes will be forced upward until it matches the cost of new construction.

So I agree with you that access to debt is a very important factor, but I disagree that it is more important than demand when you look at the whole picture.

But the kind of people who can get an apartment would be normalized. Window cleaners would have a similar chance of getting an apartment as their boss. I think that would be better for the health of the city and a better solution until either demand lowers or supply grows than just excluding low income workers from the city.

Unpredictability is a major cause of economic dysfunction. If no one can reliably/predictably obtain housing even if it’s cheap, I’d be surprised if the economy didn’t go haywire and then those low income workers you speak of will be no-income non-workers.

Rent control doesn't work in the long run.

Sweden has had rent control since the 1940's, and as a result the rental housing market is completely dysfunctional by international standards.

In Stockholm, demand for central inner city apartments is way, way, way higher than supply. The rationing method used is a queue administered by the city, and the queue time for the most sought-after areas is on average 17 years. Even the most remote areas have a queue-time of at least a year.

SEVENTEEN YEARS. GOOD LUCK, COMRADE.

This means that if you want to move to Stockholm from outside the city or outside the country, you will not get a rental apartment, unless you rent one second-hand or third-hand, unless you buy a rental apartment under the table, unless you have "contacts", or unless you buy a condo on the perfectly functional condo market.

Since there's a functioning market for condos, but a dysfunctional market for rental complexes, the ROI on building a condo complex is decent, but the ROI on building a rental complex is abysmal. You're better off setting your pile of money on fire than invest in building rental apartments. No private for-profit company will voluntarily build new rental apartments. So the only actors left that could do that is the city itself. However, the city government changes politically every four years, and even if there's a left-wing majority, there is absolutely no budget to increase supply meaningfully.

In addition, there's political and economical pressure to convert the city's housing stock to condos. Current renters love it, because it means they can realize the value of their rental into cold hard cash, and the city council loves it because they get a temporary cash infusion. It's zero-sum for the housing stock, and the long-term effects are shit, because the rental supply diminishes, making the queues worse.

The net result is that it is incredibly hard for companies to attract outside talent, because finding a place to live if you don't already live in Stockholm, is incredibly hard. If you're a transient worker or simply doesn't want to buy an apartment, and if you don't have a decade of accumulated queue time, you have to rent from the much more expensive second-hand weird market, which means that companies have to pay you much more than they would have to pay a local for the same job.

Compare this with SF, or any other large city with a functional housing market, where every company has to pay their employees a wage that covers the housing market rate, which means that there's no difference between local workers and outside workers, and it means that the city has a much easier time attracting new people who want to come there and live there. Because anyone can live there, if they just show up with enough cash to pay the market rate.

Yes, market rates means you get a host of problems, gentrification most of them, but that's a positive problem compared to all the horrible problems that rent control bring.

> SEVENTEEN YEARS. GOOD LUCK, COMRADE.

You fail to show how that's worse than the version in other places. All you have is an "appeal to anti-communism"(1). Not having to fear that you loose your living space because some investor decided to price you out of it seems valuable and something that should be weighted against the hardships of being able to rent something easily in Stockholm.

(1) Is there a fallacy name for that? I think there should be, it's one of the most popular fallacies here in any financial discussion.

I explicitly talked about how the job market is affected. If your only real options are to buy or to queue for a decade, that requires you to commit to a long-term plan if you want to move to Stockholm for work.

This means you can't grab quick opportunities, you can't move to Stockholm on a whim to try your luck, so local companies and the local economy suffers. Fewer people move to Stockholm than who otherwise would, which means the city misses out on potential growth. It's an inefficient allocation of the work force on a national level.

There might be some social good to artificially restricting the growth of your most important economical urban centers, but I highly doubt it.

The supposed benefit of rent control is that attractive inner-city apartments are cheap. Sure. But since rents are based on utility value instead of location or attractiveness or market value, this means that unattractive apartments two hours from the inner city cost as much to rent as comparable ones in the inner city. It's impossible to save money by renting in a less attractive area. Normal cities have some sort of parity between cost-to-own and cost-to-rent, regardless of area. In Stockholm instead, this parity changes dramatically depending on your distance from the inner city!

Another second-order effect from rent control is that having an attractive rental apartment in Stockholm suddenly has value. This makes people reluctant to let go of an apartment once they have it, which makes them reluctant to move away to pursue other opportunities elsewhere, even if that would be the better choice. Still, if you have one, you can rent it out on the second-hand rental market, so now you've created a class of rentiers, the people that have gone through the Soviet bread-queue can now cash in on that scarcity. But I thought rent control was about fairness?

Anecdotal, but:

When I moved from Stockholm to SF and told my friends, the first question every single one of them asked was "But how will you find somewhere to live?"

Because if you've only ever lived in Sweden and experienced its rent-controlled market, it's really hard to envision a different system, an actual free rent market, so all of my friends were really surprised that my answer was "I'm just gonna open craigslist and pick something."

I don't disagree that the situation is bad. But you can just go on "blocket" and rent an apartment in a similar manner. Software developers are paid at least €3k after taxes, unless you are just out of school. For €1k to €2k you can rent an apartment. That isn't great, but it isn't extremely bad either. Unless you compare it to previous times in Sweden.

In Sweden things are getting deregulated, income taxes are lowered and the social safety net is made less generous. The housing market is now mainly competitive. But for some reason people think they aren't the ones that are going to be affected, (partly because they aren't). If you don't have wealth or are willing to pay up your are a bit fucked, like myself. It is of course hard overstate how bad it is overall, especially for a smaller city. But the market itself isn't uniquely bad. It is mostly like everywhere else.

> But you can just go on "blocket" and rent an apartment in a similar manner.

Yes, but these are not rent-controlled apartments! These are second-hand apartments or houses that you rent from someone who either owns the place, or is already renting it from someone else. You are paying market rates for these, not rent-controlled rates.

Deregulation that allows people to rent out homes they own or rent is what has allowed this market to grow in the past few years, this is the very opposite of rent control!

I started this subthread to argue that rent control is shit, it has shit consequences, it has shit second-order consequences, it has shit third-order consequences. Maybe Stockholm isn't a shining example of how shit it is these days since deregulation and condo-conversions have effectively removed a lot of rent controlled stock, but that just proves my point!

No one should expect the rent controlled part of the Stockholm housing market to work as it is essentially defunct.

1. Subsidies for building rent controlled units were removed. 2. Publicly owned apartments were sold at below market value. Meaning those who already owned apartments got a discount in the market. 3. The profits weren't used to build new apartments, but to lower taxes. 4. Co-ops were favored by keeping deductions for mortgages, creating new ones for renovations. 5. Property taxes were removed for co-ops. 6. Credit remained largely unregulated and was then regulated to a hundred years. 7. Interest rates are being kept low by the central bank. 8. Taxes were lowered in general.

Of course this new market will never be able to produce affordable housing, so the rent controlled market doesn't "work". The whole thing is set to implode though. Already if you bought an apartment ~"two years ago" you have now lost your down payment.

It largely worked until it was dismantled. It is only 17 years because the market largely doesn’t exists. There are maybe a couple of hundred rent controlled apartments being distributed each year in central Stockholm. Which isn’t unique, many countries don’t have a rent controlled market at all.

What is pretty unique is the 100 year mortgages with no default.

> Window cleaners would have a similar chance of getting an apartment as their boss.

No they wouldn't. I lived in an european city with a socialist municipal government who enforced social housing programs which, on the brochure, meant that window cleaners would have a similar chance of getting an apartment as their boss, and when the program was put to practice... Surprise, surprise: the apartments were distributed throught the party's ranks and through minions in the local and national media.

In the end the municipality started dismantling the program due to the backlash and their solution was to sell the apartments to the current tenants at a firesale price (1/5th to 1/10th of the market value) which,again, led to some amusing anecdotes.

Are you kidding? Do you know how much housing is bought but no one is living in it?

Consider the opposite - if San Francisco allowed building. Your charming San Francisco would get demolished in the same way the Pudong in Shanghai did. Housing prices would level out a bit as developers cashed in on the gold rush and the housing supply leveled off with the demand. SF has room to build up but no incentive with rent control and restrictions.

Consider Shanghai as described below. Consider following the link.

"In 1996: After the mayor boasted that 18% of the world’s construction cranes were at work in Shanghai, international media widely reported – and exaggerated – the statistic. Reports described the crane as China’s national bird. The figure on how many cranes were working in Shanghai got rounded up to “a fifth,” “a quarter” and, in more than one publication, “half” the world’s total. "[https://blogs.wsj.com/chinarealtime/2011/12/21/china-shangha...]

That would be fantastic! It would house and employ enormous amounts of people, and eventually turn SF into the world class city it imagines it is!

BTW, people who call SF "charming" have not visited it recently!

If you don't do any land seizures, shouldn't the result of upzoning be more mixed levels of density, according to who sells to developers and who doesn't? I don't see any scenario where SF gets "demolished" without active government redevelopment like what happened to the western addition.

Or you could just landmark a couple charming districts of SF to preserve some of its uniqueness, and let the rest get developed.

You’d lose some neighborhoods composed of endless streets dominated by garage doors at the ground level, and all those surface parking lots, but I think you guys could figure out how to cope.

> So what might happen if California enacted statewide rent control? Capping yearly rent increases at inflation + 3%?

No-one would move, ever. People wouldn't be able to change jobs even for much higher salaries or better conditions. Children would live with their parents forever. Many people would live precariously in illegal sublets with inadequate fire exits etc. Developers would stop building. Landlords would stop doing maintenance and let their buildings rot. Everyone would be miserable.

> Many low income renters are paying 50% or more of their income on rent, that's not sustainable for the wider economy that relies on low skill labor to function, and the solution is not to have people commute 4h every day to clean an office, teach a class, or fight a fire.

Rent control creates longer commutes. To the extent that the economy actually relies on low skill labour, it can pay the actual cost of having that labour where it needs it. In fact by having rent control you artificially depress wages and encourage companies to employ humans in bad jobs rather than finding ways to make things better.

> No-one would move, ever.

I feel like this post should feature at the top of any discussion on housing.

> No-one would move, ever. People wouldn't be able to change jobs even for much higher salaries or better conditions. Children would live with their parents forever. Many people would live precariously in illegal sublets with inadequate fire exits etc.

Why?

Because anyone who's been living in the same place for a while is paying well below-market (by design, otherwise there'd be no point in the rent control). Actually it's worse than that: the market rate rises much faster because landlords have less upside so there's little reason to build, and existing buildings can make more money as offices rather than residential. And when there's a huge gap between what a new tenant would have to pay and what the current tenant pays, that creates a huge incentive to do illegal sublets, and if your sublet is already illegal then why bother spending money complying with fire regulations or any other safety regulations?

This depends how you implement rent control. The UAE market has rent controls - the landlord is only allowed to adjust rents within a % and if the rental index of the area is more than 10-15% higher than what you are currently paying. They are also building plenty of new housing to help keep rents stable. This second part is key - and needs to be there for this to work. Your comments assume a rental market that is not increasing in supply.

I'm assuming a rental market that isn't increasing in supply because that's the case that rent control is designed to address. If you're building enough supply to keep market-level rents low then rent control becomes irrelevant.

Wait: the regulation would not apply to new rentals? Yeah, that creates obvious problems.

If the policy were to apply to all leases, new as well as existing ones, would the problem be somewhat mitigated?

(That's basically how things work here for student housing. Far from perfect, but more sane than housing in the Valley)

Surely the devil us in the detail?

inflation + 3% is an investment that I'd make.

I don't think you could just set the cap and say job done, there's enough money there to ensure everyone benefits though.

That is not how rent-control works in some places. For example here in Zurich Switzerland you cannot raise rents more than x% even when changing tenants, which means that moving is fine as all places are rent controlled together.

It is essentially never how it works. Why would you actively regulate something so people can't move? It is when you abandon rent control that the systems become incompatible and people can't move.

It's not "so people can't move," inflexibility is a side effect of rent control. The "I can't move because I'm locked into a rent-stabilized lease" phenomenon is real, painfully so in NYC.

It's also a problem that's essentially invisible to anyone who bought into the market at a good price, or is wealthy enough to pay market-rate rents. But for the rest of us, it hurts.

As far as I can tell that is exactly because they abandoned rent stabilization making that market incompatible as it now only applies to certain units and triggers rent increases when you move.

Inflation + 3% isn't that bad, though you're right that it's too low. There's a bill in committee right now to enact statewide CPI + 5% rent control, and the landlord lobby is not too upset, because inflation + 5% is really quite a large year-over-year amount. I think I read that inflation + 5% has basically never happened in California's history: times in which housing prices were rapidly rising were also times in which CPI was rising, so the allowable increase would have been high.

The really problematic rent control is in San Francisco, where rent increases are capped at 60% of CPI (well below inflation). This results in massive giveaways to the rich that grow every year.

Oregon just did this statewide, at inflation + 7%. I have no idea what the effect will actually be.

Rent control is worse than useless. Not only does it not address the root cause of the problem, which is lack of supply, but it then skews prices and makes it so people won't move when they normally would.

Exactly. There are few positions that most working economists share, but a disdain for rent control is one of them. It seems to make sense, but creates perverse incentives that lead to urban blight, a shortage of new housing, etc.

As Walter E. Williams said in 1987: "Short of aerial saturation bombing, rent control might be one of the most effective means of destroying a city."

>The housing market moves so much faster than wages ever will

Is that true everywhere? Or are you just focusing on one-off locations like the Bay Area ?

According to Schiller housing has tracked inflation in the US for 100+ years

What is the downside to a land value tax? Or put another way, how can you fairly assess taxes based on the value of the land?

It seems absurd that a vacant parking lot pays basically nothing in property taxes while a hotel of the same size pays tens of thousand a month, but both take up the same amount of space and have the same potential. This kind of tax would certainly lead to better utilization.

most straight forward way is to buy a lot demolish everything on it, then sell it on the open market; voila you have a price point, do it a couple time and you can create a gradient

Actual valuation methods used in real world by countries like Taiwan, Estonia, and Singapore to levy lvt (all countries with 90% plus home ownership) are more sophisticated than that though

Land value tax is all about driving each parcel towards its highest-value, most economically rational use. City planning is all about cultivating low-value, (locally) irrational uses. So think about all the stuff that exists because planners kneecap its better-funded competition: art galleries, theaters, cute mom & pop retail, auto service & repair, manufacturing jobs, etc. Would you miss it? Could the city council get away with losing it?

LVT says the state should not only stop protecting these things, it should do a 180 and actively kill the uses by levying taxes they can't afford. Rather than slowing/blocking the transition to condos and formula retail, accelerate it.

In principle, the new denser buildings could have space for the old low-value uses, but new construction is expensive. The new buildings would have to age a while before those marginal uses could afford them, and in the meantime the tenant organizations would all die. Maybe this could be averted using some central-planning scheme, maybe not. But you can imagine how the electorate might not want to risk it. The trends LVT would tend to accelerate are the ones most residents lament.

I think we should allow sites that are already dead or are transitioning voluntarily to drastically increase density. Letting owners do this forces tenants' hands, which is a sad tradeoff (and to the left-NIMBYs, a dealbreaker). LVT goes even further and forces owners' hands, which I'm less wild about.

> art galleries, theaters, cute mom & pop retail, auto service & repair, manufacturing jobs

> LVT says the state should not only stop protecting these things, it should do a 180 and actively kill the uses by levying taxes they can't afford.

Do all of those things have to be at ground level? Remember space is not taxed (the marginal tax on building up more space vertically is 0), only land. If a theater is on the 5th floor of a larger building, does it stop being a theater?

Over the long run, densification should result in more and cheaper space, but it is not clear whether or how the theater would get that new lease at a rate it can afford (new-construction premium counteracting land efficiency) and how it would survive the transition period. The risk might be worth the reward, but reasonable people could also believe that it isn’t. So little is known about how to create these nice little small-business districts, or whether it’s even possible in this day and age, that there is a strong current towards preserving the ones we have.

> but it is not clear whether or how the theater would get that new lease at a rate it can afford

Can any theater afford a ground level space at current San Francisco prices?

If a theater can only afford to be in San Francisco because of Prop 13 then we should recognize that as a form of taxpayer subsidy for the theater.

If there is the political will for taxpayers to subsidize theaters (why not, art is nice), then why not subsidize a theater's lease on the 5th floor of some building, instead of preventing building up by subsidizing a one storey theater on the ground floor?

But I think there's a good argument to be made that the taxpayer subsidy process should be more transparent and less arbitrary than "whichever theater bought its land longer ago gets a bigger subsidy".

Wrong!

http://markwadsworth.blogspot.com/2019/05/killer-arguments-a...

Emotionally loaded example: woman buys a modest home in the 1970’s in a poor neighborhood from her savings working at the local packaging plant, fast forward to today she is living on a fixed income in a neighborhood that has gentrified around her, with many developers and yuppies moving in and building new homes and apartments.

Your proposal would force this woman from her home as her land value tax rose (As she has no ability to pay for this increasing tax burden)

Genuinely curious, I thought the purpose of LVT was to split the current valuation into land and improvements and move most of it to the land. It is not intended to increase taxes on land that is already being used effectively. I think the bigger issue with LVT is figuring out what the right values are for taxing land vs improvements. As a first pass, I would aim to keep taxes the same just split it more like 80 (land) and 20 (improvements). This at least forces undeveloped property to be turned into a money making project very quickly.

There was a proposal in Chicago to put a cap on how quickly your taxes could go up relative to what you originally paid for your house. The motive was explicitly to protect homeowners in rapidly gentrifying neighborhoods.

I assume there would be limited capacity for abuse just so long as the break only applies to your primary residence.

That's Prop 13, and it's one of the worst public policies in the United States.

The tax break wouldn't be so bad if it only applied to primary residence, was means-tested, and couldn't be passed down to children. Regardless, though, homeowners tend to be more well-off than tenants; they shouldn't be receiving tax breaks in the first place.

California did that 40 years ago and just look at how affordable California housing is now. Also public schools' ratings have tanked due to shrinking property tax revenue.

Prop 13 empowers NIMBYs to vote to kill new construction, strangling supply and pushing prices up, without facing any of the consequences of those rising prices.

The "person forced from home bought 30 years ago by rising taxes" bit must include "and collects a profit from the increase in value of home."

Property taxes pegged to market value are an incentive for liquidity in the real estate market.

Well, this hypothetical woman isn't collecting any profit while she still owns the home. Equity is useless until you sell.

Very true, but in the context of an LVT, it shows a possible downside: if it's high enough, you're taxing away the majority of the site value, and so these people don't even have the silver lining of a big increase in home value to cushion them when they move.

Well by design, LVT discourages having land be the majority of your home's value. E.g. Single Family Homes are fine in the outskirts of the city where land is less valuable, but LVT encourages building up the more valuable parts of the city (e.g. downtown, next to the subway station).

In both cases (SFH on less valuable land, condos on more valuable land) the land shouldn't end up being the majority of the value, since with condos the land value is effectively split among all units in the building.

Yes, I was agreeing with that and pointing out that the defense of "at least they have the gain in home value" wouldn't apply to the high LVT case. Whether it's good for pricing to work like that is a separate question.

This sort of "logic" was used to justify efforts like Prop 13 in California. It creates a massive windfall to incumbents and little more. It also ignores the most basic of solutions to solving this "problem", if it even is a problem:

You can provide land tax subsidies or rebates to targeted individuals (eg the disabled, the retired) without providing massive tax breaks to everyone else.

What's more, this system makes it impossible for, say, retired people to downsize or move because that resets their tax base to a much higher level on their new property (in the Prop 13 case).

IMO it's more efficient to allow a means-tested tax deferral until sale, at a low interest rate.

This is 'The Poor Widow': http://kaalvtn.blogspot.com/2013/01/a-poor-widow-bogey.html (entire site is interesting)

The downside is that evaluating potential versus using sales history or economic revenue is inherently subjective and ultimately disrespects property rights.

Ultimately, why should the owner of a vacant lot be compelled to sell or develop on the basis of the potential value?

And who decides the potential value? Should a 10 story hotel be taxed like a 100 story office tower? Should my $200k home be taxed like half of a 30 unit apartment block?

Simple: unused land and unoccupied buildings ultimately kills the cities that make that land valuable in the first place. This is a classic case of a series of short-term logical decisions ultimately benefitting no one.

Cities are (or should be) for the people in them. Not simply a vehicle for the ultra-wealthy to park wealth.

That's not compatible with how the law or principles of American governance work. Your home is your castle.

Ultra-wealthy aren't laundering money in real estate because property taxes are too low. The situation we have today is a obvious result of fiscal policy made in the 80s, that was predicted then.

I mean, Henry George worked most of this out 150 years ago. There are entire economics programs dedicated to property and land value.

Highly recommend you read Progress and Poverty, it's still very relevant today.

> The downside is that evaluating potential versus using sales history or economic revenue is inherently subjective and ultimately disrespects property rights. Ultimately, why should the owner of a vacant lot be compelled to sell or develop on the basis of the potential value?

Property rights are important, but they aren't the end-all-be-all. Eminent domain, blight laws, zoning laws, tenant rights, and a variety of other property-related laws arguably disrespect property rights, but they have been a staple for hundreds of years. Property rights were never some sacred ground.

In cologne (Germany) there is a law which forbid high buildings. (https://mobil.ksta.de/das-hoehenkonzept-kirchen-und-dom-sind...) you can bet your life, that this law will never leave. Preventing high buildings in the citi..

If you want high buildings go to Frankfurt. The structure of a city is what defines it. People move to a place because of how it is.

Yah both of these points are valid.

I had a good discussion with one of my dad's friends recently (who is a realtor), and mentioned that one of the biggest costs we never talk about is the cost of compliance.

Basically, his argument is that the cost of existing housing is driven by the cost of building new housing, of which places like San Francisco have been very effective at limiting! But as well as that, what are the development fees for example?

When politicians virtue signal about what percentage of a housing development will be below market rate for example, you have to remember that this sort of thing will be factored into the price you pay. Or the endless studies that city governments (again looking square at you San Francisco) commission. The buyer and the renter pay for these.

America actually has relatively cheap housing across the vast majority of the country, so it's not as if the buildings themselves are the major factor in jacking up the prices.

There was a fantastic post on this subject by an architect in the Los Angeles subreddit last year.

The general gist is that building requirements (parking in particular) make anything other than luxury condos financially infeasible.

https://www.reddit.com/r/LosAngeles/comments/6lvwh4/im_an_ar...

> A society that views housing as an investment means that we wind up adopting housing policies that lead to people being priced out (i.e. regulatory capture).

No. Housing that appreciates at exactly the rate of inflation can still be a good investment and a great tool for building wealth.

Homeowners aren't necessarily satisfied with that though, and they have voting power. Prop 13 is basically a voter-approved way of guaranteeing the upside of stratospheric rises in property value without reaping any of the downside (increased tax reflecting said skyrocketing property value).

I agree with you. I think articles like this one contribute to the problem by perpetuating a false sense of what housing prices should do to be a "good investment."

Prices go up because demand is higher than supply. No other reason.

If cities doubled the number of houses built any year the average price went up by 5% or more, this wouldn’t be a problem.

The tax rate could even be negative.

>Prices go up because demand is higher than supply. No other reason.

If the government mandates that the price of something is X, and X is higher than the price is now, prices go up.

Also, remember than nominal price and economic price are distinct. “Price” needs to include all tax subsidies and other incentives/ dicincentives.

No they don’t. See the USSR, real prices were completely removed from what the government set. If SF set the price of a house to 100k, people would just bribe each other the difference.

And voters put people in power who restrict supply and thus guarantee profits for homeowners.

With how small polities are in the Bay Area this leads this to everyone pushing the burden onto someone else. With a large enough polity responsible for zoning (e.g. New York City's five boroughs) the pressure to add housing becomes too large to completely ignore.

Homeowners have no more "voting power" than renters.

True. Although since they are literally more invested in their community, they tend to be more tenacious about it.

I have observed the opposite. Slum lord owns over 50 rental properties, but does not live in the city, and tenants are registered voters of the municipality.

My anecdote for the morning.

I wouldn't normally think of absentee landlords as the central example of a homeowner. Where do you live that the majority of housing units are owned by absentee landlords?

Rural incorporated city with a population of less than 5,000.

Homeownership is generally more correlated with wealth and financial security, which is more correlated with political involvement and having the time and the money to do so.

Short of massively expanding the poor's ability to vote (making Election Day a holiday, putting it on a weekend, mail-in voting) this holds true in American elections.

I came up with a clever solution to the Prop 13 problem: tax the sale of that property with all of the previous savings if they ever sell it for a profit. So sure, you can stay in the house you grew up in, but if you're thinking you can get that million+ dollar pay-day because the land under your tear-down is now worth a boat load...

It might make it sting a bit less buying a single-family home in San Jose for 1.5mil and knowing that you're paying 10x the tax of your next-door neighbors.

This would just trap people in their homes and exacerbate supply problems. Empty nesters would face a huge tax bill for vacating their home even if they sold and went to another state, so they might stay in a house that is way oversized for their current needs and take it away from someone else.

How so?

It costs thousands to buy a house

It costs thousands to sell a house

It costs thousands to maintain a house (I once spent, over $10,000 in one month on repairs)

It costs thousands in property tax and insurance

You pay thousands in interest and maybe PMI.

If the asset doesn't appreciate faster than inflation, where's the wealth building coming from? Sure, I'm not paying rent, but, honestly, it ends up being mostly a wash once you factor in all the expenses I am paying.

I bought a house because I wanted to own a house, not because i thought it would build wealth.

You're paying all the transaction costs and maintainance costs and tax and insurance costs when you rent too. The landlord passes them on to you in your rent.

One thing that can make it better to own (in the US) is that mortgage interest is tax deductible (at the federal level). Rent typically is not (although some states make rent tax deductible because voters naively believe this is a subsidy to renters and not to landlords).

Not always the case because the market sets the rent - not the owners expenses

In CA I might be paying double the tax than my neighbors but I can’t charge more rent than them

Yes, but perennially unprofitable units are going to leave the rental market. So it's not like owners' expenses are not an input into the market price.

Yup. And even if you view housing as an investment and even if you create policies in favor of that, in the long run, you're not going to have greater gains anyways because the growth is not sustainable. Long run, housing always has to revert to a mean increase equivalent to incomes/inflation, even if in the short term you might have a huge run up. In the short term there can be a huge run up causing great pain, but after that it'll come back to it's income/inflation rate increase.

It also encourages people to buy the biggest house they can afford instead of the smallest one they can be comfortable in.

Very few people buy the nicest car or the best TV, because we know those don't have a return. But being bad at math, we can't seem to figure out that we only see 30% of every dollar put into the house (taxes, mortgage, upkeep, improvements) back and we conveniently forget about inflation.

Yeah, if your house doubled in value in 25 years that means you kept pace with inflation. You could have done better with CDs.

Given that, you buy your house to remove risk of local changes to your detriment.

Housing raises your risk; it doesn't lower it.

1. Over time, renting and owning cost similar amounts: https://affordanything.com/is-renting-better-than-buying-sho....

2. You run great risk in terms of the market: look at anyone who bought in Detroit, pretty much ever. Buying in West Coast housing markets may look hot right now, but the minute a big earthquake hits one, a lot of people may be financially wiped out. A serious recession could do the same. Miami? It may be literally underwater. https://www.newyorker.com/news/news-desk/miami-faces-an-unde...

3. The neighborhood may change for the worse.

4. Given birth rates, you should be worried about deflation, not inflation.

If renting and owning cost similar amounts over time, then how does anyone afford to own rental properties?

The article GP posted addressed this (among a lot of other things... It's worth a read.)

>“Rachel’s landlord needs to make money. How could he/she possibly earn a profit under this scenario?”

>Here are many ways Rachel’s landlord could benefit:

>The landlord could purchase the property at a steep discount, such as through a foreclosure auction, short sale, estate sale, or by “driving for dollars” (making direct contact with the owners of distressed property.) This allows him/her to purchase the property significantly below market value.

>The landlord could be holding the property for the sake of inflation-protected wealth preservation, rather than as a cash flow investment. (Don’t assume all landlords share the goal of cash flow. Some simply want to diversify their assets.)

>The landlord could be making a speculative play on potential appreciation. (I don’t recommend this technique, but many landlords do this.)

>The landlord could have inherited the property. The landlord could have purchased the property decades ago, paid off the mortgage, and now enjoys the cash flow. They don’t want to sell/trade into a different property due to the hassle involved, so they let this property ride.

The other secret is, many people, at the end of the day, simply make very little to no money as landlords. My parents were landlords for many years and broke even for all those years thinking that the profit was going to be right around the corner. Never came. The steps to being successful at real estate is not 1) buy house 2) print money like a lot of people think going in.

The other thing is, their calculations take in opportunity costs of having your money in your house vs having it in a better performing asset, which a lot of people simply ignore as "not a cost."

It's also highly dependant on your local market which one is cheaper.

In short: to make money in property, you need to be able to buy at a good price. You make your money when you buy, not when you sell.

Plenty of people buy investment properties generating them 2% a year thinking they're doing great!

This is however generally different to owning a house. If you want to own a house, it shouldn't really be seen as an investment, more as a place to live and put down some roots.

You shouldn't invest in putting the best kitchen in your rental property, but you can do that in your own house if you want to.

> You make your money when you buy, not when you sell.

That's a false dichotomy - we should "buy low, sell high." Obviously both events contribute to your total ROI.

The article the GP posted (which I read in its entirety) is rambling clickbait.

If there's a long list of situations in which owning is less expensive than renting, it is intellectually dishonest to then assert that they cost the same.

The key mental breakthrough for understanding homeownership is that it's just like renting, except you are the landlord as well as the renter. So if you can imagine a bunch of different ways in which a landlord makes money with a rental property, then you can start to imagine situations in which homeownership will be better than renting for you.

You can buy foreclosures, short sales, estate sales, or just contact someone to buy their house.

You can hold property for the benefit of inflation-protected wealth preservation (in fact, this is one of the main ways homeownership helps build wealth).

You can speculate on potential appreciation (in fact, many people do this when selecting where to buy).

You can inherit property, or (more under your control) you can pass property on to your children.

You can hold a piece of property for decades, pay off the mortgage, and enjoy the greater cashflow--in your case, from income that would have gone toward rent.

Etc.

Rental prices are also going to be influenced by the prevailing interest rates when the property was mortgaged. If interest rates have gone up since then, the cost of buying versus renting tips in their favor.

1% may not seem like much, but consider that you only pay 3.33% of the amount owed every year on a 30 year mortgage. Not only are their monthly payments lower, but they pay more principal sooner.

I think there was a citylab article posted a few weeks ago, where they determined the most profitable rental incomes are in low income areas, I believe somewhere in Wisconsin they mentioned.

The article differentiated two different investment strategies:

Low income property with a decent profit over monthly expenses.

High income property with little to no monthly profit, but large appreciation in value over a short time period.

So, instead of buuying one or two high income properties, one could purchase 5 to 10 low income units.

I found it interesting and a new perspective for me.

1. That article makes a number of very important assumptions which make or break the model.

The first is 5% interest. Mortgages can be significantly less interest - mine is 1.08% right now (fixed for 2 years, but those are the most important 2 years for paying down).

The second is that you'd pay the mortgage off over 30 years. It's entirely possible to pay off much quicker - perhaps 15 to 20 years - in which case the total interest paid drops significantly.

2. The article completely misses the other huge value of buying a home - risk mitigation. You can't be evicted suddenly for reasons out of your control, you're not subject to market whims in rent (there's an upside to this, but generally rents are sticky - you need to move house to get a better deal even in a falling market), you have no unexpected moving costs, your kids can stay in the same school. Looking at it purely from a monetary point of view completely misses the point.

Ultimately the benefits of stability are worth a lot, especially as you get older.

Regarding #2, there are quite a few instances of eminent domain, where the government forces the sale of the home, and this is not limited to government infrastructure projects.

We have examples of folks losing their homes to build gas pipelines and shopping malls.

Yes those exist. However they are in general rare events though.

> Regarding #2, there are quite a few instances of eminent domain, where the government forces the sale of the home, and this is not limited to government infrastructure projects.

As renters are also fully exposed to those, the existence of them does not alter the degree of the stability advantage for home ownership over renting.

Do you know of any resources I can use to learn more about 1) why deflation is bad, and 2) why it's happening?

Here is a great short video by Ray Dalio https://youtu.be/PHe0bXAIuk0

If you live somewhere for 30+ years renting is very clearly cheaper. In most large cities the break even if 5-7 years.

To me, all the recent advocates for "renting & owning cost similar amounts" that I've seen have no decent counterargument for building equity, which is the single greatest benefit of owning vs. renting. This article hand-waves it away with "you 'throw away' some other money on top of your mortgage, at least at first," but how is this relevant? No one's saying that ownership = zero money "thrown away," or that ownership always means a lower monthly payment.

In the long run, these two factors tend towards irrelevance, relative to the tens or hundreds of thousands of dollars of wealth you build that you couldn't have built through rent payments.

> Given that, you buy your house to remove risk of local changes to your detriment.

I think the more reasonable complaint is that people don't like thinking about how much of a risk a leveraged, illiquid investment worth >100% of your net worth is, so they have to delude themselves into thinking of housing as unrelated to their finances (incidentally, this is why richer households' net worths recovered so much better from the financial crisis: poorer households' were more likely to have a portfolio tilted ludicrously towards a single, illiquid asset).

That is to say, you're definitely correct that getting equity in the housing market has concrete second-order benefits, financial and otherwise, that don't show up in a simple assessment of the asset classes in your portfolio. But the _amount_ of house people choose seems to be systematically skewed upwards, often for no real reason other than financial illiteracy and an aversion to sitting down and thinking through the purchase decision.

Oh man. They say there are two things you can't discuss over beers, but it's three.

Politics, religion, and whether their house is an investment.

People get pissed at you if you tell them that having all of their money in their house is a bad investment. You'd get less aggression telling your friend you think their wife is cheating on them.

If you are in a lower income bracket than what we used to call middle class (before being middle class meant "up to your eyeballs in credit card debt"), it's likely that the majority of your net worth is the equity the house. That's bad. And that doesn't mean "take out a second mortgage and start playing the stock market", that means you have more house than you can afford long term.

The people for whom it works as an investment are diversified. If less than 30% of your money is in your house you are probably doing it right. If it's 75% and you also don't have a retirement fund, well you're subsidizing those of us who are both more fortunate and better at math.

> Given that, you buy your house to remove risk of local changes to your detriment.

If you own real estate you're buying into local risk. Real estate generally isn't insured against things like acts of war, so if NYC gets nuked or whatever then you lose all your money.

If you're buying real estate right now then you're basically betting against war, automation, AI, climate change, energy price spikes, etc. Even if you don't think that any of those things will happen imminently, do you really want to bet against all of them over the next 30+ years?

What should be more worrying than all that is the correlation between local housing prices and the local labor market. Take Detroit, for example: it had both plummeting real estate prices and mass layoffs from the big automakers in 2007/2008.

And if you're working, you're already exposed to changing conditions in the local labor market. Owning your house exacerbates this in the worst way, just like how the very last company you should own stock in is your employer.

Exactly. I like the idea of owning a house, but the idea of not only investing in the real estate market, but investing where I live is insane.

If I'm in the NYC labor market then I feel like if I were to own real estate then I should be hedging my risk by owning in Austin or something.

Different careers have different amounts of local correlation - I'm planning on waiting on buying a house until I get established as a remote programmer, then buying in a relatively low COL area.

What alternative do you propose that doesn’t involve betting against all of those things? Hoarding gold?

I think betting on the tech industry (minus adtech) is reasonable.

If my house gets nuked, I'm probably dead.

Most scenarios where the U.S. gets nuked are at high altitude just to fry our electronics. If a nuke went off directly over your house you probably wouldn’t even notice for a couple hours if you were sleeping, but you probably wouldn’t be able to live there afterwards either.

I recommend watching the first season of ‘Jericho’ to see how a small town deals with a similar scenario.

The premise of housing depends entirely on how society or more specifically the government or even more specifically banks/business want it to be.

The only true purpose housing serves is shelter. That's it.

Any other purpose is artificial. Housing normally is a depreciating asset, like cars. Normally it shouldn't be a hedge against anything, including inflation. It normally shouldn't be an asset of speculation, no more than tulips or bitcoin. And as for security and stability, you can get that from renting ( especially if you live in rent controlled apartments ).

The idea of a house as an asset or investment is due to government and business policy decisions. Increasing immigration, limiting development via zoning laws, creating tax incentives, advertising pushing home ownership, laws favoring home owners and landlords over renters, etc.

All the premises we believe are premises we are taught. Your premise is just as false as anyone elses. It's entirely artificial. Policy decisions could make renting more favorable than owning. Policy decisions could actually make owning a home near a coal mine more stable than owning a home in silicon valley. Policy decisions could make home prices decline considerably by encouraging overdevelopment so that supply outstrips demand.

Fundamentally, as I stated before, the only purpose of owning a house is shelter. Everything else are "false" premises we've been taught.

Maybe I'm not old enough or it's due to the markets I've worked in, but I've literally never seen rent go down in price.

During the housing crisis, for example, rent went UP because as people became evicted there was higher demand for rentals. I acknowledge this was a black swan event though.

> I acknowledge this was a black swan event though.

How is something that happens regularly a black swan event?

https://www.wikiwand.com/en/List_of_recessions_in_the_United...

Sorry, I could have been more clear. I didn't mean that a recession is a black swan event, but that the specific nature of the housing crisis is considered a black swan.

More concretely, a recession is more predictable and to be expected while the failure of the mortgage-backed security market (and the broader consequences) less so.

Rent has gone down relative to ownership pricing in Seattle, especially lately. Maybe not in an absolute sense, but you have to live somewhere...

FWIW, I've both seen rent stagnant and I've seen it go down. A lot depends on your local markets.

I think a bigger concern with investing in housing WRT alternatives is this:

Rents don't usually go down, but they often stagnate ESPECIALLY in units owned mom n pop landlords. If your rent doesn't change for 5 years, but inflation is 2%, at the end of the period, your rent has effectively declined by about 10% in real terms. Additionally, you have your 20% down that would be paid for a house, but instead you invest in the stock market that returns 6% annually, at the end of 5 years, you have increased your assets by 33%

If you bought a home, and the home price did not increase for 5 years and you pay the normal 20% down mortgage, %6 closing costs, and 1.5% annual property tax, you're looking at some significant loss of net worth when compared to the rent alternative.

If your timeframe is less than 7 years buying a house is almost always a bad idea because of the risks. As you get over 7 years odds start to get good that you are even after the downturn (that is the loss in value during the downturn is just a loss back to what you paid in the first place), at which point your house payment vs rent is the only difference, and the foregone gains from the down payment investment. As you get over about 10 years you start to need to consider the costs of remodeling a house, but your rent would almost certainly gone up so again you are roughly even other than the down payment investments. As your get over 20 years rent has gone up again, but your house payment has not and so you are starting to catch up on the down payment investment. At 30 yours rent has gone up again, but the house payment is gone and you can really work at that down payment investment difference. At 40 years both retire, the renter has still more rent increases which need to be paid for from that down payment investment. AT 55 years both move to assisted living, the renter just sees another rent increase, while the homeowner sells the house and has a big influx of cash that should take care of rent until they die. Ideally both give their last 20 to the taxi outside the hospital 20 minutes before they die. The renter's highest investment balance was higher than the homeowners, but the renter had larger expenses latter in life and so had a bigger draw down of principal.

There are a number of assumptions in the above. Each that is different for you changes the analysis. In particular it assumes disciplined savings such that rent+savings == house payment + house maintenance + savings. It assumes that house maintenance and remodeling is not making the house more luxurious. Its assumes similar levels of luxury (renters are likely to go for a cheaper apartment and spend the difference in housing luxury on travel).

As always, location, location, location. Different areas have different situations that can make one significantly worse than the other.

"During the housing crisis, for example, rent went UP because as people became evicted there was higher demand for rentals."

Went down for at least 1BRs in Silicon Valley. Apartments that were renting for $2000+ in 2007 were going for $1700 in Q4 2008 and $1400 in Q2 2009.

Granted and that's why I made a caveat about the specific markets I've lived in. While I know HN is very Silicon Valley centric, for people who live outside that bubble Silicon Valley is generally viewed more of an anomaly than a market bellwether.

I'd be curious if there's any evidence as to why rent went down in SV. For example, did the lack of credit affect the venture capital necessary for start-ups and ultimately lead to less demand in housing?

Mostly people moving out. Silicon Valley has an unusually high number of transients in the U.S; when there's a downturn and people lose their job, domestic migrants tend to move back to their parents in other states, or at least go somewhere cheaper. A lot of people lost their job in 2009.

This is also why the rental market was more affected than the housing market: people who owned homes (particularly expensive single-family homes) had already put down roots in the area, and if they were foreclosed upon (and many were), they were replaced by other people who wanted to put down roots but had kept their jobs. The lower-end condo market softened significantly, though, because it draws from a similar demographic as the rental market.

I'm from Perth, Western Australia, a city that recently hit 2M population.

There was a massive China-fueled resources boom in the early 2000s that soaked up the available construction capacity (materials and labour) for capital projects like building oil rigs and ports and all the ancillary stuff that entailed.

In 2000 you could buy any number of 1970s houses for <$100k. These were relatively small 3x1s (like 1000-1500 sq ft) but solid. Concrete pad, brick-and-tile (Australia doesn't build timber-framed houses).

By 2006, those same houses now cost $350k. There were articles at the time stating that the cheapest house for sale in the city was $250k.

And all that paled in comparison to what happened at the high end of the market.

Anyway, rents went through the roof.

By 2011, the resources boom had definitely cooled and prices were starting to drop. There were less FIFO (fly-in fly-out) workers and so on. Rents had actually did drop through the middle 2010s, sometimes significantly. I used to rent out a house for $450/week and now I'd be lucky to get $300/week for. Thankfully I'd long since sold it.

So yes, rents can go down.

> Owning your own home serves several purposes: ... 4. As a hedge against market forces

I think the logic of this point is dead wrong: every housing bubble (and its bursting) is a counterexample.

Buying hedges against the market when you intend to live in the house. When the market goes up, your rent will increase, but the price to stay in the house you own is still zero.

I think the point is that it does the complete opposite if the market goes the other way, assuming you're taking out a loan to buy. If you have a net worth of $100k and take out a loan for a $500k property, as little as a 20% drop can wipe out your life's work, assuming the property market doesn't go back up.

I don't see how it's any different to me withdrawing my entire bank account, walking down to the casino and putting it all on black?

> I don't see how it's any different to me withdrawing my entire bank account, walking down to the casino and putting it all on black?

The difference is that you still own a home, even if it is worth less than what you paid for it. If you bet all your money on roulette and lose it, you have nothing left.

30 years from now, when you pay off your mortgage, your cost of living will be very low -- this is very good for retirement. People who are still renting 30 years from now will probably be paying monthly rental bills higher than your mortgage payments, due to inflation if nothing else. The difference over that time might exceed your hypothetical $100k.

> this is very good for retirement.

i can buy a house in detroit for $400 and pay no rent . is it a good retirement?

It's a house and you can live in it. You're isolated from the job market because you receive a pension. It's definitively a good investment assuming you bought it in a good condition back when its price was $200000.

Depends, do you like the neighborhood in Detroit? This is a personal question, don't let anyone else's hate of Detroit tell you different.

exactly. It depends on whether you like it or not. having a house is not a good investment by default.

I still don't get it. If your house is worth less than your mortgage, then you're gambling on an increase in it's value. It's like taking out a loan and gambling with it to try and pay off a debt.

What if you simply can afford to pay off the mortgage? If you can't, then buying the house was a bad idea no matter how the market moves.

You aren't gambling on anything. You continue to pay the price you agreed to when you bought the house. It's unfortunate if it ends up being worth less than you agreed to pay for it, but it's not gambling -- that's what happens when you buy a car, and buying a car is not gambling either.

Yes you're paying the same amount, for an asset that's worth a variable amount. The only time the amount that asset doesn't matter is if you plan to never ever sell it, which isn't realistic for most people (see elsewhere in the thread where someone pointed out that the median ownership time was 15 years or so).

The difference is that you can ride out housing market downturns until home values recover but if you bet it all and lose at the casino, the game is over. Even though the housing market drops 20% in your example, you still have a place to live and your monthly cash flow is unchanged. Just be patient, and you can recover it all.

>you can ride out housing market downturns until home values recover

not if you owned a house in detroit or any number of downturn cities.

Not so fast! Even Detroit is recovering.

https://www.trulia.com/real_estate/Detroit-Michigan/market-t...

Perhaps patience will be rewarded in Detroit too.

https://en.wikipedia.org/wiki/Sunk_cost

why do they have to hold on to some hope of price incrase just because they bought a house. Instead of having the freedom to choose the best investment like everyone else.

Sure hold on to it if you really think its the best investment for your money( i really doubt detroit house is best you can do with your money), not because of some sentimental value.

...assuming you also keep your income. If you lose your job (and job losses and housing downturns are highly correlated), you're looking at foreclosure and losing everything, along with a 7-year blight on your credit report.

Even if you don't own a home you need to continue paying rent, so in either case you can't be jobless longer than your savings allow.

Right, but if you're evicted from a rental your loss is limited to your security deposit. All past rent paid is already a sunk cost, analogous to interest on a mortgage. If you're foreclosed upon you lose any accumulated equity in the house, and have to start again from zero.

It's very similar to margin trading on a stock brokerage, except that margin accounts are generally higher interest and not tax-deductible, while getting margin-called does not affect your credit. In both cases, you forfeit accumulated wealth built up if the market moves against you.

Your security deposit is not a limit on your liability. If you cause more damage, or owe more money than your deposit covers, your landlord can sue you for the remainder and has a good chance of winning.

> When the market goes up, your rent will increase, but the price to stay in the house you own is still zero.

doesn't ur property tax go up with the market value?

> > When the market goes up, your rent will increase, but the price to stay in the house you own is still zero.

> doesn't ur property tax go up with the market value?

The market value of a property is typically not assessed yearly, at least where I live.

Then you aren't paying higher property taxes when the prices go down?

It hedges against housing market forces, but when your employment market changes and you need to move to Houston, the hedge is gone.

> but when your employment market changes and you need to move to Houston, the hedge is gone

That's the other end of the coin that's really easy to miss. I moved to Las Vegas in 2011, when my wife graduated (and where she landed in a nation-wide job search), thinking it'd be easy to find a job in any city with > 500k people (given that I had no trouble finding jobs as a recent CS grad in the relatively small metro of Champaign-Urbana, IL). It wasn't.

It's also easy to miss that "leverage" simply isn't available as an "investment tool" to most people, except with a mortage.

The price to stay in the house you own is almost never close to zero, you still have to pay the bills, the repairs and the property taxes. If the house you live in becomes bigger than your salary can afford (let’s say you built a McMansion when you used to earn $200-300,000 per year) then you’ll have a really, really hard time staying afloat when you suddenly become unemployed and you can’t even find a job for the next 12 months, if not more. The bills will keep piling up, you’d sell the house and move away to greener pastures where they still have decent jobs but you find out that that would entail a 50-to-80% cut on the value of the house (the most probably reason for you losing your job is because the economy sucks, during which time no-one sane will pay close-to-parity money for a house), your marriage will most probably be in the doldrums, too (imho financial-caused stress is one of the biggest reasons for divorce) and you wished that younger you hadn’t put all his eggs in this one big house which right now drives you into the ground.

Owning is the key. If you've got a 30 year mortgage you do not own your home. You only own part of it. Once a home is paid off, the equation changes. I would also make an exception for houses that are very expensive as they will have large price swings if the markets change.

>several purposes

You're thinking of purposes as an investment. The point of the article is precisely that it is not beneficial for it to be seen as an investment, but first and foremost as a practical human necessity.

I don't see a huge difference between #1 and #2, so I'll address them together:

Home ownership as it stands today does not provide financial security / stability because of the degree of leverage required for most Americans to own a home. It is funny how much basic financial advice boils down to "diversify!" but then we turn around and define the "American Dream" as levering up to buy a single asset that is worth several multiples your networth.

Home prices are absolutely not hedged against market forces, and the double whammy of losing your job WHILE owning a house whose value is down significantly from your purchase price is substantially worse than losing your job while merely renting your home.

When your house value is underwater, your only play is to stay and wait it out until prices recover. But if you also get laid off and can't make the mortgage, you can't simply move to a smaller / cheaper home like you could had you been renting. You'd be forced to sell at the bottom, or try to rent out at currently depressed rental rates to make up for your mortgage that was locked in from when your house was worth much more.

To own a home is to be in a state of constant stress over the value of your home, and the more levered up you are, the worse this gets. This source of stress is why I believe NIMBYism is so prevalent.

> To own a home is to be in a state of constant stress over the value of your home, and the more levered up you are, the worse this gets. This source of stress is why I believe NIMBYism is so prevalent.

This is a major argument for living in a low cost-of-living area. While in Silicon Valley, house prices are 10-20x a developer salary, in my location in the midwest, houses are 1-2x developer salary.

If the house is expensive (many years worth of income) and a dominant part of your assets, it's a big source of risk, dwarfing any hedge attributes you may pine for. Even in a normal city with diverse economy.

More importantly, a house is mine (and the bank’s) and I decide all things about it so it’s my home. Renting is always temporary and generally doesn’t work in old age when homeowners are typically mortgage free.

For many people, it's mostly the bank's though, eh? ;)

I think you're joking, but just in case you're not (and for those reading): when you use a mortgage to buy a house, you own the house completely, and the bank owns it not at all. It's your property. That's why you can use it to secure the loan of the mortgage.

If you fail to satisfy your mortgage agreement with the bank, then yes, they can take the house from you in a foreclosure. But until then, it's yours, not theirs.

The point that was attempting to be made, which I agree with, was along the lines of the bank having the power to take it back means that they ultimately have control, regardless of the technical legal terms that indicate that the homeowner owns, well, the home. You REALLY own it after the mortgage is paid off and the bank has no interest in it. Same thing with vehicles. They're leinholders, which the first Google result defined as:

    A lienholder is a lender that legally owns your property (a car, for example) 
    until you pay it off in full. The lender — which can be a bank, financial 
    institution or private party — holds a lien, or legal claim, on the property 
    because they lent you the money to purchase it.

https://www.allstate.com/tr/car-insurance/learning-about-lie...

Edit: legally they DO differ, but they're the same in that they allow the lender to take back the property in the event of non-payment. Therefore, even though you might legally technically own a property with a mortgage, the bank still has the ability to take it away from you, so do you REALLY control it? https://www.quora.com/How-do-a-lien-and-a-mortgage-differ

The bank can't take your property unless you fail to meet your obligations, which means you, not the bank, are in control of the situation.

I understand the point being made. It's a commonly held opinion, and it's fine for inspiring people to get out of debt, but legally it's not correct. Your home is your property, even with a mortgage.

Also, a foreclosure is not the only way to lose your property. Stop paying your taxes and see what happens. Even unpaid unsecured debt (like credit cards) can lead to your home being taken in some situations. Or the government can take your property via eminent domain.

So there is no such thing as REALLY controlling property, in terms of excluding any way it can be taken from you. But you do have specific legal rights to your property, and those apply to mortgages too.

Property tax? Do you really own something that someone else can take away?

And why would renting not work in old age? It works fine, its a value exchange and the money that ive saved for my old age in various investment vehicles will typically outperform most real estate investments.

> Property tax? Do you really own something that someone else can take away?

That applies to literally everything in the world, and therefore is pointless to bring up here.

A lot of things are missed if you just compare hard numbers. A home brings distance from neighbors and size of place means you have privacy and a place to stretch out. Most apts are built on top of one another and price is high per square foot.

I also have an asset I can sell which doesn't exist when renting. Property taxes are generally lower relative to where I could rent and simply don't enter into it.

More important to me, a bought house is my home.

I'm convinced renting is the best thing for old age.

The reason I say that is because 9 times out of 10, from what I observed, old people who own end up living in squalor because they lose the ability (financial or otherwise) to care for their house. Maintenance ends up being deferred indefinitely. At the same time senior apartments are incredibly affordable, at least in my area.

Sure, that's not every old person, but I see it enough that it's concerning.

P+I is just a part of the cost of owning a home.

> Renting...generally doesn’t work in old age

Can you expand on why this is the case?

I think your comment is itself missing the point of the article: to the extent that housing is "affordable" in the sense that most necessities are affordable, it would not satisfy your points 3 and 4. That is, if it fell in price over time like food, and so were affordable in that sense, it would fail to be a hedge against inflation or market forces.

In fact, if you replace "housing" with "food", you see a natural response to your penultimate paragraph: "You're never out of the market for food. Therefore, it makes sense to buy a forward contract that pays out a [predefined] basket of groceries forever." The error in logic is that you expect food to fall in price, and or your tastes to change, so locking in such a contract would probably be a poor use of money, considering what they would charge.

It's less obvious, but the same logic applies to your points 1 and 2 as well. The very reason that a home provides security and stability is because you expect to get priced out of that neighborhood, or difficulty in moving to another nearby, similar home. That's also an artifact of housing being made "a good investment" by policies that make housing more expensive over time!

So, yes, housing does provide those things, but only because current policy picks one branch of the affordable/good investment dichotomy.

Too bad I only own it after paying massive interest for 30 years that is adjusted every 10 years (or unreasonably high). A house costs you a large part of your income for 30 years now and somehow people fail to see this as debt, they just accept it and hope their house grows even faster in value than the others.

After 30 years though... If you are not reasonably able to think 40 years ahead a house is not for you. But renting isn't going to do better either as you need to think 40 years ahead for any investment.

I would also add that buying vs. not is also a lifestyle decision. I've owned and rented for > 10 years each and there are pluses and minuses to both. I consider any financial gain one way or the other to be side issues.

I think I know what you're trying to do and I think it's well intentioned. However, I can already point out to mistakes in your own points.

Security and stability: in what sense? Owning a house explicitly means that you can't be evicted by the landlord, but there isn't any other significant feature that derives from owning the house.

Hedge against inflation or market forces (or "short position in real estate"): you can simply buy into a REIT, and enjoy similar benefits (actually, a much more diversified risk, which in most cases would be positive) compared to owning a single house.

"can't be evicted by the landlord" is a pretty good benefit. Also, if rents go up a lot in your area, renters end up spending more on housing. When you buy, your cost of housing becomes more predictable in the long-term.

Interest rates can change as well but are less volatile than rents, and become less of a concern as you pay off more of your principal.

Although that may be true, if the house is paid for by a loan, you have the additional insecurity that you need to pay $XXXX per month for the next 15-30 years. If something happens and you can't afford it anymore you risk foreclosure.

If a renter could not make the monthly payments it would result in eviction. Both eviction and foreclosure are bad for your credit, and both mean you need to find somewhere else to live.

"If something happens and you can't afford it anymore you risk foreclosure."

That's assuming the home value has gone down in addition to losing your job or whatever. If the home has kept its value, you can probably use a line of credit to bridge while you sell the house.

If something happens with my income I can just pay the interest for some time (several months to a year), which in my case is roughly half my monthly payment.

How is that if I were to rent?

After those 15-30 years are up, you no longer have to pay that $XXXX per month.

In 20ish years, inflation is likely to have significantly reduced the value of $XXXX, it could have as little as half the purchasing power it does today. If renting, the rent is likely to increase (particularly if you move) so that you are still paying $XXXX in today's money. If repaying a mortgage, you are likely to be paying roughly $XXXX in absolute terms (depending on interest rate changes).

So yes, you are tying yourself to a risk that you will lose your house (and any difference between the outstanding loan and its sale value) if you lose your job over a certain period. However, after a certain period you are also reducing the risk that you won't be able to afford your housing costs if you lose your income.

Lenders are also more likely to consider a term extension to enable you to make more realistic payments, than a landlord is to agree to lower your rent.

These are all true, and as a society should we not support (1) and (2) more than the others?

Personally, I invest in REITs, the money I would invest in real estate. These investments cover my rent and more.

shh don't tell everyone about REITs and how you can get into and out of the upsides of housing markets without actually maintaining properties and dealing with tenants!

The thing that really convinced me was when you look at the appreciation of real estate, overall it appreciates by X, but a particular area is not guaranteed to do so. The intention is to have REITs finance my retirement home in the country.

Nothing is ever always a good idea. Real estate is a good investment when the fortunes of the area are on the rise.

A $30k house in 1980 is NYC could be worth $3M today. The same house in Cleveland is probably less than $250k. (Mostly inflation) Even in that situation, the Cleveland house may still have been a good value based on having a fixed expense vs dealing with landlords.

Likewise, when economic policy shifted to favor the south, lots of owners of swampland in Florida and other places became very rich.

I would argue that security, stability and hedge are all perceived and not actual risks. I don't own but have quite a large position in index funds. I am both financially secure and stable in one of the fastest growing city in the world. My rent hasn't increased in 5 years and I pay half of what I would pay in mortgage for the same property. The property market has put up nearly 20% gain in those years.

You sound like you have the rarer, nice landlords with maybe a handful of properties that are being rented out. These are the landlords that as long as you pay their mortgage and provide little fuss, they are happy and not trying to constantly maximize their returns.

I'd imagine your scenario would not be the case with a typical management company. While your scenario is attainable for a small amount of people, it would be difficult to see happenning for the masses.

What city?

Also, does it have any form of rent control?

In terms of investment returns it should be pointed out that depending on country you can't get a lower rate of interest, better tax treatment and leverage than you can with your mortgage.

Lastly, we're in one off the longest bull runs on the stock market in history and the last 2 years in particular have been insane. This should not be treated as representative.

I’ll tell you two cities the OP could be in right now: SF and NYC. Lived in both, tried to buy in both, gave up both times because the numbers were silly.

Neither one makes much sense from a rent/buy perspective. New York is closer, but most properties are still cash-flow negative relative to rent. You have to assume unrealistic rates of appreciation and/or indefinite tax deductions for the numbers to work (and folks are finding out, right now, that those deductions can go away!)

People have been treating homes like investment vehicles for a while now, and there are actually very few big cities in the US where rental rates can cover costs of mortgage, taxes and insurance. Renting literally puts cash in your pocket.

I'm renting in Manhattan right now and this is absolutely the case for me. At the same monthly cost, I'd have to live farther out in a less desirable location. A lot of apartments cost more to own in monthly taxes and fees than my entire monthly rent cost when I first moved here (though admittedly I had roommates). Note, I'm not talking about a mortgage; that'd be way more. I'm just talking about coop fees. You can spend more on them buying an apartment than it costs to rent a bedroom in a shared apartment. And as people like to say about rent, that is also just "throwing money away".

I don’t think it’s fair to compare renting a room to buying an apartment (even a studio), but you don’t need to do that.

Right now, most properties in manhattan rent for less than their monthly carrying costs (including HOA fees). People have traditionally justified it via the mortgage interest and SALT tax deductions, but congress just blew the latter all to hell, and it’s making properties about 30% too expensive...

So many units have priced in the SALT tax deductions! The rent/buy calculation was borderline before, but now it’s just comically bad.

Speaking as someone who lives in Manhattan and owns my apartment, I can say from my example at least that my mortgage payment (plus property taxes), tax-adjusted, is less than what the same apartment would cost me to rent.

Now buying something to rent it out is a different story and I just don't see those numbers making sense from an investment POV if that's your point.

My point is that right now, for most units, it’s financially smarter to rent in Manhattan. It’s not even close.

I’ve been doing a search in Manhattan this spring. On nearly every property I see, mortgage + hoa / taxes + insurance easily exceeds equivalent monthly rent. And not by a little bit, but by hundreds of dollars a month.

Deduct mortgage interest and $10k of SALT, and a few properties (~10%) start to make sense on a 5-10 year timeframe. Most are nowhere close to affordable. Factor in opportunity cost at any reasonable long-term rate of return, and nothing makes sense (You basically have to assume that the stock market will underperform, and the housing market will over-perform to make the numbers work.)

The few properties that make sense on a spreadsheet sell quickly. Most linger. Ask any real estate agent - the market is shifting, and the shift reflects the fact that prices got ahead of fundamentals.

So it depends strongly on when you bought and how rare your deal was, but these days, the vast majority of the Manhattan market is overpriced, and implicitly betting on speculative price appreciation.

Can you live in the same property in 30 years?

Would you feel comfortable installing a new kitchen or bathroom?

>Can you live in the same property in 30 years?

...can you? Even owning a home doesn't guarantee that you'll be able to live comfortably in one place for 3 decades. Median homeownership is usually shorter than 15 years[1]. (Per 2009* - more recent numbers that I've seen indicate that number is decreasing, not going up, but those are usually based on more short-term studies, post 2008.)

And renovations aren't exactly something homeowners are comfortable with, even if they technically can do it.

Source: I work for a homebuilder who aims to sell multiple homes to each customer (from first-time, to trade-up, to retirement.) If the median homeownership-length went up to 30 years, we'd have to reevaluate our entire business model.

[1] https://nahbclassic.org/generic.aspx?genericContentID=194717

People renovate their houses all the time.

SOME people renovate their houses SOME of the time. Our biggest market is trade-up buyers, which is usually viewed as the alternative to remodeling. The housing market has been on an uptick since 2008, which increases the rate of trading-up, as the hope of selling at a profit is one of the reasons people buy homes to begin with.

Median home ownership is not the right metric. If you trade in one house for another you still own a house for the long term.

The remark I was responding to was "can you live in the same property for 30 years". Changing homes is not living in the same property, so I believe I chose the correct metric. Home ownership does not guarantee that you will be in the same place for 30 years.

All of this isn't even to consider the fact that most homeowners don't literally "own" their home in that timespan, as 30-year mortgages are very common. A lot of people buy homes because mortgage payments are oftentimes cheaper than rent payments (there are exceptions, obviously.)

The point is living in 7 different homes for 30 years, means at the end your home is paid off and you have no rent. Of course that is ideal, most people extend their loan terms often.

As you said - that's ideal. The home people trade-up to is usually more expensive than the home they move from (not counting empty-nesters) and - ideally - there will be a myriad of factors that can help one finish paying off their new more-expensive home within the same timespan, like more income or selling at a profit. But those aren't necessarily givens, as they're determined by things like your locale and the state of the housing market.

Sure, I could, if I bought it.

It would be completely within my control (excepting the extremely rare case of eminent domain being applied if the UK wanted to build a railway station or something).

What the median or mean or modal person does is neither here nor there. It's completely irrelevant.

15 years is also a colossal period of time compared to any private rental. The average tenancy length in the UK is about 2-3 years.

Another reason is choice. In my area it is difficult to find a decently updated SFH to rent - the ratio of homes for sale vs for rent is 5 to 1 or greater

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