Is it better to buy a home for investment than it is to buy stocks?
So although housing prices don't necessarily increase faster than the S&P500, and that there are many local variables in play, the same 7% increase YoY can really be a 140% increase YoY, while you are also renting out the home for more cashflow.
Liquidity of the housing market has vastly improved over the last 5 years, mostly due to new kinds of lenders and underwriters in the market, with the current year being even more liquid than ever.
The downsides of real estate haven't gone away. Like maintenance and physical presence needed, which is difficult for an individual as the portfolio expands. The physical presence demand - or the need to make it economical for there to be someone else maintaining the property - means that it is difficult to come up with the downpayment for real estate in areas you would actually like to live in, but are fully capable of renting in. So the barriers of entry stay where they are.
For this discussion, I'm going to waive away the maintenance costs on a SFH, as they are immaterial for the size of the homes in SF regardless of what the value is determined to be by an arms length transaction.
Conversely, someone like Interactive Brokers is going to liquidate your holdings with extreme prejudice if the securities collateral declines below what their risk management feels comfortable with (other brokers are going to call you and perform a margin call).
You also can get way more leverage with real estate loans versus margin loans or pledged asset lines.
I'm mainly responding to provide helpful context to others. Not for a typical pedantic thread where we are already agreeing with each other but just squabbling over semantics.
I would say this is the primary savings grace for real estate investors and homeowners. They get to build equity in so many scenarios that it works out for them and lets them maintain access to low cost capital, against the equity they build up.
For example, in Canada, housing is up 30% YoY. Trudeau's Federal government recently said that even a 10% correction in housing would be unacceptable.
In practice, Canadian housing isn't housing - it's a 30% (or better) government bond that you get to live in or rent out. That's a 30% return guaranteed by a sovereign state that will gladly destroy everything else in the country to prop up housing. There is no investment like it anywhere else in the world, which is why Canada is seeing the largest real estate bubble in the world.
The best part? You can sell your principle residence completely tax free. Not a penny in tax paid from capital appreciation.
Very little hope here from the eyes of a local. Maybe you can study software to get out and go to an American city. America remains relatively industrious. Canada is just becoming a high tax version of Monaco (doesn’t even make sense but still).
I know we look funny from up there but we do love y'all. My sister-in-law is from Guelph and lives in Ohio, we just accidentally bought matching F150's. So feel free to come down any time. The politics suck but the people are fine.
Could you please provide a source? I cannot find anything on the web.
> it's a 30% (or better) government bond
This cannot possibly be true. First of all, 2020 was a special year for asset prices, not just in Canada and not just for real estate, but for all assets all around the world. Second of all, even if the first assertion is correct, there is a world of difference between not allowing prices to decline vs not allowing them to increase any less than 30% YoY. Third, 1.3^27 is 1192. Average home prices in Vancouver is over 1 million CAD. Do you honestly argue in 27 years, the current homeowners could sell off their property and net a sweet >1 billion CAD? That we would have millions of billionaires in Canada in 27 years?
Yes, BetterDwelling is a permabear but Vaughan's comments are legitimate. He said it in an interview with TVO.
On another note, the 30% number seems ridiculous. And, yet, do not be surprised if Canadians seriously believe this. Remember, people have been screaming bubble for a decade, and there has been no such pop yet. Of course, I think this is unsustainable. At 6-12% growth rate you're looking at like low to mid 8 figure values...for the average home. At 15-30% you're looking at hundreds of millions of dollars over 30 years. Ridiculous, isn't it?
Interesting discussion on the Financial Times comments section about young people feeling insecure also highlights this property inflation. Basically, the AngloSphere has decided to inflate assets and forget about industrious activity. In the long run, you just end up with a hollow, low productivity and low social mobility country.
Is this acceptable? Well, Canadians aren't voting against it. Of course, this is because they think they are getting richer. In reality, the country is just heavily indebted and consuming tomorrow's income today. I am keeping most of my savings down south with the Americans and their equity market. If the BoC can keep the bonanza going, so can the Americans.
It may be a unique situation in our lifetime that is only possible because the fed is buying trillions of dollars of mortgage backed securities while the base rates are already bottomed out.
However, the overall value depends a lot on inflation, how much property value will go down in the future in real terms (home prices in many markets are now at levels of the previous housing crises), and how much you have to spend to repair the house in addition to known fixed costs such as home owner's insurance and property tax (actually this rate may go up where state and local governments are insolvent).
The only thing we know for sure is that the fed buying MBS has a strong inflationary effect on the housing market that can be seen in the record housing prices.
Say, you're buying a $500 thousand property with 20% down at a 3% mortgage rate. You're paying $1500 a month on your mortgage, and generously round it up to $2500 for taxes, insurance, HOA, and maintenance. There are very few places in America, where a half million dollar property would rent for less than $2000/month. Let's generously round that down to $1500/month for vacancies, turnover, evictions, etc. (And if it's your primary residence, you still "collect rent" by avoiding the expenditure of renting from someone else).
On the face of it, this seems like a terrible deal. Cashflow wise, you're losing $12 thousand a year. However take a closer look at that mortgage payment. Starting from day one, $10k/year is going to principal pay down, which directly increases home equity. Another tailwind: price appreciation. Historically real estate tends to increase at the rate of inflation (currently forecast at 2.3% in the TIPs market). That's another $11.5k/year in home equity appreciation. (This assumes a base case, zero appreciation above inflation. It doesn't even scratch the surface of our current housing shortage and the fact that houses have been appreciating 2-3% above inflation.)
In terms of accounting profits, you're actually making $9.5k/year. It's true you're flushing cash down the toilet, but you're building up home equity to counter it. Then in 5-10 years, you get your money out by either flipping for a big profit, or doing a cash-out refi.
The ROE on that $80,000 down payment is 11.9% annualized. Historically the stock market has averaged 8-10%. And today's CAPE ratios are near historical highs, which would suggest lower long-term returns. This doesn't even get into the tax advantages on the real estate.
All in all, real estate looks pretty compelling from an investment standpoint today. Now, I'm normally an efficient markets guy, so I don't say this lightly. But I believe the major driver is the lopsided nature of the cashflow vs. equity division of real estate returns in a near zero rate environment.
The vast majority of real estate investors think in pure cash flow terms. The idea of buying a negative cash flow property seems ludicrous. So, right now I think the market's leaving a ton of attractive real estate investments underpriced.