Houses are assets, not goods
bankunderground.co.uk
bankunderground.co.uk
I find the clinical discussion of asset values and such in the context of a bizarre market which leaves local families on modest incomes priced out of owning properties in their neighborhood (in extreme cases like London often owned by dubious foreign organisations) and the disruptive ("dynamic") trend to transience of others' communities in pursuit of the individual's bank balance distasteful and anti-social.
Problem is that the real root of the issue is the lack of stability in people’s incomes, due to jobs being outsourced to poorer countries and automation, for which there is no undoing, and would require redistributing wealth.
Leaving everything to the mercy of international markets is not an inherent feature of reality. Many countries had, and have, limits on foreign ownership of real-estate (and media), as well as reduced taxes on people's main residences, and this can make houses more valuable as homes than financial instruments. They are not 'ignoring reality' by adopting these policies.
It seems we have two worlds: first the world of the well-known monetary value but also the perhaps even more important world of the — let me entertain this notion — reverential value.
After this insight I understand many weird things a lot better and also why many economists, business people and leaders fail if they don't consider the second world.
But with respect to raising children you can see economics in action. In first world countries, the opportunity cost of raising kids has gone way up. Kids cost more, and having kids requires you to give up more consumption. So people have many fewer kids.
In the book there is a story about a girl helping a man (diving for a lost anchor in a Greek harbour), and when the man offered payment, the girl was offended.
This gives trouble to people who believe that everything can be traded.
One could simply argue that you’re lowering the value by setting a dollar amount because it lowers the value you were getting from feeling warm and fuzzy from helping the needy since now that’s been voided with a transactional payment for your service.
This is not far off from reality for the majority of the world (outside the industrialised bubble): Parents raise children as a means to retire one day and have someone look after them. It's very common in many countries that the son will live with his wife and children in his parents' house, together with the parents. The parents have not only raised their own children, but will also help raise the grandchildren. In return the son's wife cooks for the entire family and the son will look after his parents long after they've retired until the end of days. It's ingrained in our human nature and therefore we don't think this way, but it's essentially just a form of business transaction.
Then when the child came of age it could make student debt look like a rounding error.
In the 夷堅志, a collection of fables from 12th-century China, there is a whole large genre of stories like the following:
- A man was wealthy, but refused to support his parents in their old age. The man was struck by lightning and died.
- A man who didn't listen to his mother or support her in her old age died, and he was sentenced to hell.
- An official who was traveling home to pick up his mother to bring her with him to the city was attacked by a tiger. He begged with the tiger for his life, saying he needed to support his mother. The tiger knew that his intentions were good, and left without eating him. Later, when the man's mother died [no longer needing support], the tiger came back and ate him.
A lot of the stories in that book are alien to us, but the message in these is pretty clear.
>healthspan or health-outcomes
>access to edible food and drinkable water
>literacy
>net pollution
>net resources (e.g. soils, forests, drinking water, etc.)
I think it's important to optimize all these factors and I have noticed that under capitalism it is very easy to mask the massive failure to do so. Capitalists just point at their increasing capital and say "Look! All is well! We're gaining capital!"
For people who want a slower paced life or are downsizing.
This makes zero sense, but regularly happens. Also property is not fungible as no two properties or areas are the same.
You would also need to factor in costs like landlords’ insurance, letting agents’ fees, the risk of non-payment of rent, etc.
A family in a house is more likely to treat it as a home than someone in a flat who expects to move in 12 months.
The context of the article is whole economy at macro level. They specially mention how they ignore even regional differences.
Not really. In aggregate you get the same discrepancy between rental prices and purchase prices in many ways including different areas. https://smartasset.com/mortgage/price-to-rent-ratio-in-us-ci.... That exists because renters and buyers have measurably different desires, for example buyers want more space than renters as transaction costs are higher. This is often true when it’s the same person is considering buying vs renting.
Ignoring those differences does not smooth them out, it just ignores them.
Can you explain how these differences are relevant to the subject of the article?
The markets responds differently to price drops. Land lords care about occupancy and generally respond more quickly than people selling their homes who will wait longer.
They talk about aggregate house prices in national level and only there. Their asset pricing model seems to explain prices in in England and Wales much better than traditional dividend discount model. Real house prices for last 20 years be explained almost entirely by lower interest rates.
I think there's good money in renting and flipping, but in the long term there's a lot of costs involved, even if you're quite the handyman that can fix most things yourself.
Also, I don’t see why a bathroom needs to be renovated every 10 to 15 years. Cast iron tub and porcelain toilets and sinks don’t go bad.
Yes, that struck me as crazy, too. Some minor maintenance and redecorating from time to time, sure. But a multi-thousand-pound renovation every decade? Not if it was built decently in the first place, and cared for sensibly through the years.
It makes a lot of sense in many ways. A house would yield higher rents and be profitable just as easily if demand was similar. But not too many people are willing or able to pay such high rents, regardless of whether it's deserved or not. Try to do the same with a very large flat or penthouse, yields will also be lower than for your council flat.
I'm 30, single, a software engineer working remotely, making ~100k a year, saved around 70k so far. I'm not very interested in investing it in any kind of active business. So I see 2 options:
- buy stock ( some kind of index)
- put a downpayment on an apartment(house)
Both have pros and cons. I lean towards getting an apartment. Something around ~350-400k with low HOA and taxes should get me into something nice, having smaller mortgage payment than if I'd rent it. Say we're talking about San Diego or Austin. After crunching some numbers ( in a very primitive way ) I feel having to pay amount that is less than I would typically pay for rent and most of that payment going towards my saving is a very good situation to be in.
Can somebody run some sort of calculation with above variables and tell me something I don't know/think of?
For example if you don't like paying rent to a landlord every month and not being able to decorate the walls, maybe you'd be happier if you owned a house. (This may not apply to you, it's only an example)
I would agree, but: you can also invest in things that thrive in a downturn (e.g. gold is considered to be a safe asset, some would say Bitcoin as well), or simply invest in risk-free assets (e.g. govt bonds), or in savings accounts that pay you 1.5-2% annual interests.
Safe investments in a downturn include REITs that invest in apartments.
Pretty wrong. I personally know several people that do, and most of them compare it to "digital" gold.
REITs can go down as much as stocks, or more, in a downturn.
> Everything is a terrible investment at the moment.
"The best time to plant a tree was 20 years ago. The second best time is now." comes to mind. But I agree with you, in this case right moment is very important.
> So, don't take risks, but do whatever will make you happier.
Does this mean it makes sense to wait for a few years, if so, how many? and what to look for?
> For example if you don't like paying rent to a landlord....
I'd like to take the most efficient steps that would yield best result over 20-30 years. I'm pretty flexible in terms of "wall colors"
Does it make sense to wait till marriage before getting yourself into home-owning situation?
You don’t know this, no one knows it, and to speak in absolutes like this is to imply that you can predict the market. If that was the case, you’d have all the money in the world. This reminds me of all the “experts” in 2008 who said dismal 2-4% returns were “the new normal”. Those “experts” were dismally wrong and is a great example that anyone who “knows” what the market will do in the future is someone not to be listened to.
For the first several years at least, most of the mortgage payment goes to interest and taxes, not principal, and is "wasted" in much the same way rent is.
I'll try my best to give you a short one:
1) Most advice on money is never great.
2) Most advice on money can be applied in general, but many people have specific needs or desires (e.g. some people WANT to own a house for psychological reasons, irrespective of whether it is a good investment or not). More here [0].
3) Your simple options with that 70k are: invest in stocks (probably an index fund, invest and forget), invest in a REIT (the equivalent of real estate investing, without the hassle), or invest in a house.
Alternatively, invest in your own education (degree, or one-year sabbatical, or else).
4) If you still want to invest in a house, it will be your first time - you will be the least experienced investor in that market. Do it at your own risk. Timing the market is hard. Knowing how to strike a good deal is hard. Etc.
[0]: https://medium.com/fabrica/the-rent-versus-buy-dilemma-12-im...
I know, right! :) It's not an easy thing to answer, hence me struggling.
I think the best/simplest advice on money for me personally comes from 'rich dad, poor dad" and 'the richest man in babylon'
- understand the difference between things that bring money and things that take(spend) money - pay yourself 10% first.
Served me well so far.
> Alternatively, invest in your own education (degree, or one-year sabbatical, or else).
This is really good advice that I think I already put to use, 5 years ago when used my saved 10k to take time off of work and teach myself how to code, and went form unskilled worker to a web developer. I understand I'm not a real engineer, just a guy who "makes buttons', but I enjoy it and it pays handsomely.
> some people WANT to own a house for psychological reasons
This makes sense and, I guess, part of me feels that way. But I'm definitely not controlled by it. I've lived pretty frugally my entire life (10 years that I've been an adult) and at this point looking for an upgrade in a lifestyle. I don't want to be in my 30's living with roommates. So new place is going to be much better/more expensive. I understand that I'm gonna be losing money on it. So the question is, do you pay ~2k/month for rent, or you pay ~2.5k/month for a mortgage? I understand none of it will make me better financially, so if framing it as "which will lose less?" - I'm fine with it.
Haven't read the article yet, will do shortly.
You can calculate the rent you could have to pay over the course of a tenancy.
You can calculate the cost of your bought house/apartment over the same period (the estimated value of your property at the end of the period minus the rent payments and interest and any outstanding loan)
You can calculate the estimated return on investments.
It turns out for me that it makes sense to buy a house with a mortgage (it's pretty large, we're a family of 4, UK), pay the minimal amount off on our low interest mortgage (rather than over pay) and invest anything spare.
Given that in the UK (the places I've looked) rent has always been more than the mortgage payment on an equivalent property buying has always made sense.
What about fluctuations in house prices? I can imagine a small crash would easily make up for the difference between paying off a mortgage and renting, plus it gives you more options and freedom since it's far more costly to buy and sell than it is to rent and move.
I know little about the housing market but from what I briefly read about the UK and a few graphs it does look like we are at a rather large and long peak right now.
This also isn't merely about trying to save more money, but also what you can buy, inflated prices generally mean you are forced to buy something smaller, worse, in a less preferable area, and all for the same price.
You defeinitely have more ability to move if you're renting, and I'm sure that's of concern to some people, but not all.
In terms of buying in a more or less prefereable area, rental prices (IME) tend to track the cost to buy so if you can't afford £n00/month mortgage in a certain area then you are likely going to see £(n00 + y)/month rents you also can't afford.
[0] edit Also, remember that when you finally finish paying off the house, it's yours, an asset. You can live in it or sell it. Rent has to go down quite a lot to 1. initially be lower than mortgage payments on an equivalent house and 2. to still end up costing less after you've factored in the sale price of your house at the end.
Before you decide to go with a HOA, you might want to read these:
theHOAPrimer: http://www.thehoaprimer.org/index.htm
The Tyranny of Homeowners Associations: https://www.citylab.com/equity/2013/02/tyranny-homeowners-as...
And then make up your mind after considering what is there.
Or, in many cities, on the end of many sales chains is a Chinese or Saudi who is trying to get wealth away from an oppressive regime.
The building is an asset, but you also pay property taxes on it, and in the US, about 60% of "home owners" have a mortgage on which they are paying interest and principle. Furthermore, it is a deteriorating asset that must be maintained and updated in order to hold value, and that has continuing operating costs such as sewer, water, electric, etc. that may otherwise be bundled into rents.
Complicating the economics is the fact that lots and houses are very non-standard and hard to value and the fact that when selling it the transaction costs will be about 10% of the selling price. Consequently if your mortgage is 60% of the selling price, you will lose 25% of your equity.
Psychologically, homes are more like jewelry, since people have strong likes and dislikes which depend on fashion, and people get attached to the pieces that they have.
I think if your time horizons are longer than 5 years the certainty of owning would also provide some value. I have been a tenant, am a landlord for 4 units, and a home owner.
All properties are partnerships which makes it easier to deal with operations and maintenance.
We bought a house for a lot of reasons, but one was an inflation hedge. We don’t have to worry about our home prices increasing except for property taxes and insurance.
How would that work? The idea is that people would sell assets that have below-market returns and buy assets that have above-market returns. Asset prices will adjust accordingly and so will the respective returns which are a function of price. And this will go on until return rates equalise across all assets.
This is the theory, but it's hard to imagine that in most circumstances a house can be traded for another asset. Why? Because having a place to live is a pre-requisite for being a functioning member of society. If tulips are under-performing sure I can sell my stock of tulips. If houses are under-performing I don't care. I'm not going to sell my house and buy something else, because I need a house. Thus I'm sceptical that the theory will work in the case of the housing market.
Suppose you need a new house, and you want to own rather than rent. You will be willing to buy a more expensive house if the mortgage interest rate is 1% than if it's 10%, because the amount you actually have to pay is lower when the mortgage rate is lower. Mortgage rates vary along with other interest rates. So when interest rates are lower, mortgage rates are lower, and people can and do pay more for houses.
> If they fall to 5%, the value of that same stream of flowers doubles to £2,000
-- and asked "how would that work?" about, wasn't about how buying and selling houses affects the prices or rates-of-return of other assets, it was about how prevailing interest rates affect the prices of houses. Which is what my comment addressed.
Incidentally, it's very rare to "trade a house for another house". You buy houses for money, and sell houses for money. (You often do those two things together, but often the house you buy is quite different in price from the house you sell, and in any case the buyer and the seller are different people, so this still isn't equivalent to trading one house for another.) This isn't just nitpickery; it's because houses are bought and sold for money that could be used for other things that their prices can interact with the prices of other things.
(Whether he means interest rates specifically, or rates of return on other assets like equities, I'm not certain, but those things have some tendency to vary together and I would expect all of them to influence house prices in a similar way.)
https://medium.com/iipp-blog/why-cant-you-afford-a-home-9c5c...
I also can’t help but wonder whether the change in house prices has been a factor in the rise of populist politicians. It feels impossible to prove or disprove, but in places like the UK and US, a high cultural value is placed on home ownership. And at the same time, housing is unaffordable. In that gap dissatisfaction grows. And a more obvious target of blame is immigration than cost and availability of credit.
I emphasize, the above is an hypothesis. I look for evidence to either prove or disprove.
Depreciating asset !== liability.
Where?
Any data to support this average 7 years?
(it seems to me a lot shorter time than what I would expect)
In a non-main city the cost of a newly built house is basically the cost of the land + the cost of construction (done at a more industrial level, i.e. let's say a lot of 16 houses or a building with 30-40 flats is built with costs that are some 20-30% lower than those to re-build a single house/flat) + the margin of the builder/developer (which often is not exceeding 15 or 20%).
I will give you some real world costs for my area (Italy, Tuscany, non-main-city):
Plot/land (incidence on built surface) 500 Euro/m2
Building costs 1200-1400 Euro/m2
Projects/Taxes/permits/financial costs 500 Euro/m2
Final sale price 2800-3000 Euro/m2
Same in the nearest "main" city , Florence:
Plot/land (incidence on built surface[1][2]) 1500-2000 Euro/m2
Building (re-building) costs 1300-1500 Euro/m2
Projects/Taxes/permits/financial costs 800 Euro/m2
Final sale price 4000-6000 Euro/m2[2]
[1] largely this is about buying, (partially) demolishing and rebuilding an existing building as there are very few possibilites of a completely new building on a "virgin" land plot
[2] of course this depends a lot on the exact location
If you're paying for the housing service you wouldn't expect your rent to fall in that way. The value of the asset should be based on what someone is willing to pay, so age is in many ways irrelevant.
I have a house from 1960s which was modified in 2000s and it is quite funny to see the parts originally built in 1960 are in a much better shape than the ones added around 2007. Actually nothing bad happens to the old parts, and if no hurricane, flood, fire or war happens I'm quite sure it will last for the next 100 years or more.
The supply curve is dictated by zoning mostly, but generally, it’s very easy to modify an existing house or rebuild it compared to getting approval to build a house where there wasn’t one before.
Hence, the component in least supply is land, and since more people who have more disposable income want to live in fewer areas, their competition to purchase that land drives up its price.
Home prices are not going up everywhere, not even keeping up with inflation in some places. It’s the places with many high paying jobs, or the places where those with high paying jobs like to vacation, that are going up.
Edit: In the US, also affecting the demand curve is people’s desire to live near other high earners, since where you live determines where your child goes to school. Everyone wants their child to rub shoulders with other children who have parents that are highly educated and/or earners, and so you end up with various income bands grouping up in areas around job centers, roughly approximated by how much of their future income they can give up to purchase a home in the “right” school district.
Leasing housing - i.e. rent-to-own - could solve the need to save for a large down-payment.
Why isn't there a competitive and fair marketplace there ?
It's a hugely inefficient process that results in poor build quality and high costs.
Build-to-rent is an option that mass-housebuilders are catching on to (maybe 15 years too late) but there is still resistance to changing existing business models.
I believe the real problem is that people like to own the house they live in and will pay any price to achieve this. In a bubble of ever increasing house prices though, who can blame them?
I like capitalism for most things, but if left unregulated, it really dehumanizes us.
I’ve come to see it as just a sad human instinct: some people get a kick out of talking/thinking about others as (their) tools. Capitalism probably keeps this instinct at bay better than most other systems, as it seems to me a fine way of destroying capital.
[start up] —- [enterprise]
where you don’t know everyone who works with you nor does everyone know you. Everyone is a cog in a wheel (even if they don’t fully appreciate it). Everything is a system and human capital is just one of many inputs that the business _should_ optimize.
Companies that are too fat get replaced by ones that are lean, etc.
For me, there is some comfort in knowing that I’m as replaceable as anyone else. It helps me deal more humanely with others when you have to fire/lay-off/reduce hours. And it helps remind me that my professional work isn’t the essence of my life; it’s just one component of my own personal system. It has to be optimized alongside family commitments, volunteer work, and my own faith-based pursuits.
There is no benevolence in a system, but that doesn’t mean we shouldn’t act benevolently towards each other.
It might sound crass, but you are unlikely to retire from your current job. And nor will your boss. In fact, one of my main focuses as a manager is to remind people of that fact along with this advice: when they start to feel the itch to move on, let me know if I can help them get experiences that will position them for the future.
TLDR; the business doesn’t care about you, but hopefully as an executive those that report to me always feel that I have treated them with human empathy.
Also, I strongly encourage you to build up your non-professional circles. Most of my closest friends are previously coworkers that I stay in touch with after one or the other inevitably moves on.
We’re way past the point in time where the system is designed for pensions and 50 yr watches.
You can argue that a house and housing are two separate goods, but they are still goods.
Everyone needs housing. But people also seek houses to provide themselves with housing or to generate rental income.