Ever-increasing home values are a Ponzi scheme | Hacker News Reader

Ever-increasing home values are a Ponzi scheme

theweek.com

101 pointstolbish172 comments

Housing can either be affordable, or profitable, not both. Affordable means that the price of a house remains stable relative to inflation or wages. Profitable means it has to grow faster than inflation or wages. Everyone needs somewhere to live, therefore housing should not be profitable. You shouldn’t be able to make a tonne of money by just buying a house and sitting on it. Investing in housing should mean improving existing housing or building new housing.

Here in Australia the government is talking about letting young people access our equivalent of their 401k to afford a deposit on a house. Without changing the supply of housing how is this anything other than another attempt from boomers to steal more wealth from their children so they can line their coffins with more gold.

The answer to this particular problem is Georgism and a Land Value Tax.

It strongly disincenctivises speculation and incenctivises productive use. It ensures that a person claiming ownership of land makes more productive use of it than the cost of depriving society of use of that land. As a cherry on top, the income from LVT can be used to reduce taxes on labour, or simply to be given back as a citizen's dividend.

I wonder if there's a good way to sell such a concept onto a political landscape. Anyone who already owns anything would want to keep things as they are. Feels like a very central political problem.

Those that have accumulated wealth and power it would be in their interest to increase rather than decrease the scheme-ines of the political system.

This concept has to have a name?

> Anyone who already owns anything would want to keep things as they are. Feels like a very central political problem.

Indeed, jt is perhaps the most central political problem: how does a class that doesn't have power wrestle it from those who already have power?

As for the name, how about "human history"? :)

I think regulatory capture applies here (https://en.wikipedia.org/wiki/Regulatory_capture)

What you are describing is status quo bias I believe. This political structure is also oligarchy.

Would an idea like this but applied at increasingly higher rates as you own more homes work? For example, owning a single home, you pay a certain amount, if any. Want to buy a vacation house? Start paying n% LVT. A third vacation house? n*1.2% LVT etc. Are you a pension fund buying up 80,000 single family homes? Tax should be so high on owning this many homes you wouldn’t want to do it.

In my state we already have this, it's called a homestead exemption, however it only applies to the first house.

It would only do this if LVT were significantly higher than property taxes. Because property taxes already includes the value of the land.

E.g. my "house" is valued at 700k. But the appraisal puts that at $280k structure and $420k land. 1% of 700k is 7k, but 1% of 420k is 4.2k.

Indeed, the idea of LVT/Georgism is to charge, if not 100%, then close to that amount of the rent commanded by the (unimproved) land. The very idea of the whole thing is that, in order to claim a piece of land for your own usufruct, you need to compensate the public for taking that piece of the commons for yourself and walling it off and preventing the rest of the community from using it, i.e., you owe the community a market rent for that piece of land.

We can fiddle around the edges, e.g. the tax being 50% of market rent rather than 100%. But the principle remains the same.

Note also that houses used as main dwellings would be exempt or pay a heavily reduced rate.

EDIT: So taking that example, let's say your house rents for 1000$ (I've no idea if this is reasonable or not). Land according to your appraisal is 60% of the property value, so land rent, that is, what you owe as LVT, is 600$/mo or 7200$/yr.

> Note also that houses used as main dwellings would be exempt or pay a heavily reduced rate.

This isn't usually part of LVT proposals, and for good reason. LVT should apply to all land everywhere, or else it becomes much less effective.

And the way to keep this reasonably neutral (ie not dump a massive tax out of nowhere on people), is that LVT replaces at least a portion of say, income tax. That makes it politically viable as well.

I would imagine this would have a weird effect on land values if enacted. People couldn't afford such a large tax, so prices would generally go down. Since the value of the structure won't go down (because that's based upon cost to build) loss of value would 100% go to the land, which would lower the LVT. But the price to rent wouldn't necessarily go down, since the total ownership cost wouldn't go down.

It obviously would hit an equilibrium at some point but I'm not sure where.

A secondary point of something like an LVT is to encourage density, since you get %0 taxation on the building itself, so it can afford to be more expensive. What uses less land, less energy and requires less miles of pipe, wiring and roads to service? A high rise with mass transit train service. A 50 story building on the same size of land next door to a 5 story building will have an approx 10x overall lower tax rate per sqft.

Land developers and people would naturally become economically incentivized to live in apartments as a result, unless they live somewhere somewhat rural already.

As a Canadian who now lives in Australia, I'm astounded by the levers the Australian gov't will pull in order to keep the housing market "booming".

In my 10 years here I've seen them split them make it difficult for foreigners to buy existing houses, but easy to buy off-plan https://treasury.gov.au/sites/default/files/2019-03/Stronger...

I've seen them restrict the amount of money retirement plans can use to invest in equities, promoting the use of more funds going to real estate (this was my understanding of the changes) - https://en.wikipedia.org/wiki/Superannuation_in_Australia

And now including your housing as part of your superannuation, which I wasn't aware of.

Every time I think they've run out of levers to pull, they find another one.

When I arrived here in 2011, I thought real estate was cheap compared to rents, that equation has completely flipped.

> When I arrived here in 2011, I thought real estate was cheap compared to rents, that equation has completely flipped.

As long as it's possible to negatively gear unrelated income while building up a property portfolio it makes sense that people will be happy to lose money on rents in order to take advantage of capital gains discounts down the track.

> I've seen them restrict the amount of money retirement plans can use to invest in equities, promoting the use of more funds going to real estate (this was my understanding of the changes)

I don't believe this is the case and haven't seen any coverage indicating a change like this.

> And now including your housing as part of your superannuation, which I wasn't aware of.

No, it's the opposite. You can withdraw part of any voluntary contributions to buy your first house. See https://www.abc.net.au/news/2021-05-13/budget-superannuation...

> Here in Australia the government is talking about letting young people access our equivalent of their 401k to afford a deposit on a house.

Which will have the effect of pushing housing prices even further. It’s like the government providing ever increasing student loans, if you don’t change the supply curve it just increases demand which pushes prices higher.

> Here in Australia the government is talking about letting young people access our equivalent of their 401k to afford a deposit on a house.

We do that in Canada. I don't think it has helped with the affordability issue at all.

https://www.canada.ca/en/revenue-agency/services/tax/individ...

Why would the expectation be that it helps affordability? On an individual basis, having access to more money means you may be able to afford a home that would not have been within your means.

In aggregate, everyone having more access to more money means inflation.

Access to more money for a specific good or service means inflation concentrated in that category. See: college tuition and home prices in the U.S.

> Access to more money for a specific good or service means inflation concentrated in that category. See: college tuition and home prices in the U.S.

100x this. Financial policy giving everyone access to cheap mortgages has got to be one of the stupidest things governments have done in the last 30 years.

Of course not; it encourages home prices to keep going up, because people have access to another source to fund home purchases. The problem is, of course, that tapping your 401k-equiavalent is a long-term bad move unless you have a way to quickly put that money back without skimping on other things.

It worked out pretty well for many of my friends' parents, who bought houses in the American West, raised their kids, and then sold their now incredibly valuable homes to retire to small towns.

Doesn't work so well when houses are expensive.

The problem with that is it only allows a maximum of $25K, which in Toronto's market barely makes an impact on the downpayment.

It's $35k now.

That's better, but still far away from a significant useful amount. When I bought my first place in 1999, my downpayment was $12K which fit nicely in the allowed amount. Not so much anymore.

The reason this doesn't work is that people want to live in very specific places. If you aggregate at the national level, the cost of land or housing hasn't gone up all that much in America over the last century. For every San Francisco there is a Detroit to balance things out.

Having looked around a bit lately, it seems to me that if you don't buy in a major metro area, and you buy a house that was built in the 1950s, you pay something that, inflation-adjusted, would look reasonable to someone in the 1950s.

But lots of people don't want to live in houses that small. Well, if you want more, you pay more.

And maybe the comparison isn't fair. In the 1950s, those houses weren't 70 years old, but they are now...

Housing can be both affordable and profitable with a organized system of infill development. eg: You buy a single family home in an inner ring suburb in 1990 for $150K. You sell it in 2021 to a developer for $2.1M (9% RoR), the developer tears it down and spends $1.5M to build 12 apartments on the same footprint of land that sell for $350K each (~400K profit net transaction costs). People in 2021 are paying the same amount for housing as you did in 1990 but you also made a good return on your investment.

Right, and then you subdivide again and sell to squirrels, and then subdivide and sell to ants, and so on until you are selling to subatomic particles. What then?

This is just uncreative thinking. Diversify outside of the physical world. Ideas live rent free! Are you seriously going to sit there and tell me that that's acceptable?

Time And Relative Dimensions In Space

You build up and down.

Have a look at Hong Kong - it's amazing seeing the 1960s building, the 1980s building and the more recent buildings next to each other and the height increase.

An alternate progression could involve exponential height growth, leading to every suburb eventually looking like a cluster of space elevators (and beyond).

So what you're saying is housing was affordable in the 1990, but not you're paying twice as much for a much smaller space.

It is also worth noting that in the example above (assuming we accept the 150k as normal and that growth as typical) that 150k was a solid amount of money.

In 1990 the median income for someone with a a high school diploma was 26k. For someone with a masters degree it was still 50k. An educational attainment was lower across the board.

So if you didn't have 150k then I guess you're screwed since they weren't going to let apartments to be built for so long? The only situation where you'd get that ROI is if the supply of houses had been constrained strictly for so long - which almost by definition means that rents grew at that rate too.

The critical thing is that this also requires a growing population - which is not guaranteed in all places/timeframes!

I think your calculation includes a yearly inflation rate of 9% for property, and also it includes an inflation rate for housing of about 34% if you consider that 1 apartment may equate to perhaps 1/8th of a single family home on the same plot of land.

Apartments are not family homes.

That’s funny because I see lots of families in my apartment building.

It seems like many westerners aren’t aware that there are high quality 3-4 bedroom apartments available with easy access to schools, parks, everything else.

The parent is displaying typical American thinking, i.e., a family requires a suburban house with grass lawn and two cars to go anywhere.

There is so much ignorance about apartments in Australia as well. I moved in to one recently after living in the suburbs my whole life and knowing no one in an apartment. Basically everyone tried to tell me it was a horrible idea and it would be super noisy, annoying neighbors, "shoebox", etc.

I did it anyway and I can't believe how everything I was told was wrong. With the high quality construction and double glazed windows, I have never heard such a level of silence. I keep the windows open because its so quiet you would go insane. It was a month before I even worked out the neighboring apartment was even occupied when I saw them exit at the same time as me. I have never heard a single sound from them.

And the best part is how liberating it is to live without needing a car. I have just walked everywhere and only use the car to visit my parents but I will likely get rid of it soon and have them come here instead.

Two? More like one for each member age 16 and up. That's how it was in my family. I'm glad these days to live in a human scale city and car free.

> The parent is displaying typical American thinking

The parent has lived in a country house than decades in multiple apartments. The joy of having neighbors next wall, ceiling or floor. The lack of air conditioning if you're in a country where it's not usual and you have to fight to get the authorization to install it. The sound of cars, bars etc.

This is absolutely 100% wrong, and I don't know where it comes from.

That sounds like it is affordable and profitable if you are in the top half of incomes.

In that situation - a renter who made ~40k a year (in today's dollars - probably 30k in 1990 dollars) in 1990 could not afford a single family home and had to deal with expensive rents (because the city didn't allowed apartments buildings where there was demand).

> You shouldn’t be able to make a tonne of money by just buying a house and sitting on it.

But humans occupy physical space. Almost everyone would prefer more privacy and space to less. Hence if the human population keeps growing, the price of having physical privacy and space will also keep growing. It’s just the bitter reality of it.

In addition, often times the architecture or established land use patterns of certain neighborhoods act as an upper limit on population density. It really grinds my gears when people advocate for essentially paving over these crucial neighborhood characteristics. This effectively destroys local culture in the name of “inclusivity”. Granted, there are definitely more neighborhoods without any unique character than not, and it’s hard to feel any sympathy for paving them over. But there are certainly quite a few neighborhoods globally that are quite special, and in these places inclusivity tends to be a tragedy of the commons scenario.

I think that is to say that land needs to be taxed quite heavily. If you're taking up a lot of space, you're keeping important resources tied up in nothinh

Sounds like you want to significantly increase the price of housing to do…?

I'm definitely sympathetic to this argument, however, considered in the limit, it does become pretty absurd. How long do you want to maintain the character of the neighbourhood for? 10 years? 20? 50? 100? 500? 1000? 10,000? Such a 'character' may be a grotesque luxury that future generations simply cannot afford to keep around.

Then we’re essentially debating what the value is of preserving our ability to experience beauty. And what’s life without beauty?

Why the downvotes? This is a very useful viewpoint IMHO. The generations alive have clearly prioritized growth over many other factors.

It’s hypocrisy to want to “keep the character of the neighborhood” and have more than the bare replacement number of children, since you’re creating a change in the demands on the neighborhood.

Most writeups of population growth rates and the economy focus on the economic benefits of more children, not the quality of life for the future generations. Future generations will not miss a Monarch butterfly or any species of tortoise or rhino just like we don’t miss the passenger pigeon or herds of a million bison, or being able to see a Milky Way we’ve only heard about. They might, however, be a bit put off by the water quality we’ve left behind, and let’s face it, we’re not all going to see an unspoiled wilderness because there’s relatively little left. Night sky is already abuzz with satellites.

How do you define a neighborhood characteristic? Usually it's nothing but an arbitrary snapshot in time that some folks decided is ideal and should be frozen. Curiously it tends to correlate with the date they moved in to the said neighborhood.

> How do you define a neighborhood characteristic? Usually it's nothing but an arbitrary snapshot in time that some folks decided is ideal and should be frozen.

Usually so, but sometimes not. What are the characteristics of Gion Kyoto, for example?

> You shouldn’t be able to make a tonne of money by just buying a house and sitting on it.

Maybe you should instead think of it as sitting on a piece of _land_, not a house. Twenty years ago you bought a house in the middle of nowhere, now because of people moving to the area it’s desirable and thus worth a lot more. Whose fault is that?

One could argue that if the community expanding over a couple of decades is what made a house more valuable then it would be appropriate for the community to receive the profit, and not the home owner who just sat there.

The problem in Australia in particular is that you're running out of land. The four major cities are surrounded by water and nature preserves. As population increases, demand runs up against a very inelastic supply. The only policy solution would be to strongly emphasize dense high-rise development.

Australia is definitely not running out of land. Sydney continues to grow further and further west, and there are now multiple Sydney cities including CBD, North Sydney, Chatswood, Paramatta is undergoing huge development, and Penrith is next on the cards. I fully expect to see Woolongong and further south continue to boom as well as central coast and Newcastle over the next 20 years.

My understanding is Melbourne is seeing a similar result with people and companies continuing to move out toward Geelong, but I'm not there, so don't know.

I was in Brisbane last week, and that is an amazing city, and it also seems to have lots of room to grow.

Perth is quite a small city, and I believe could easily grow.

I'm not sure Australia has a land problem in general, population density is quite low (I understand that a lot of the land doesn't support high density living). They have an issue in that their major cities have some constraints on perpetual outwards growth. Maybe this will help encourage remote work and relocation of offices to places that aren't the core downtown area of Melbourne and Sydney?

There is very limited land in places where you want to be. There is endless land in the middle of nowhere but that isn’t very useful for most people.

This comes up often in these discussions but, barring any indigenous lands, there's nothing especially inhospitable about central aus. Las Vegas is in the middle of a damn desert, and Arizona/New Mexico are both extreme climates compared to much of the US but they are still livable and many people actually prefer it. I can't see why this would be any different in Australia...

It’s not about how possible it is to live, it’s about places people actually want to live. There is virtually unlimited land with good climate. But people don’t want to live there because it’s far from everything. Most people have picked paying more to live closer to events, jobs, stores and friends.

Australia doesn’t have the population to start a new major city in the center. There are still multiple cities like Adelaide which could grow instead.

> The only policy solution would be to strongly emphasize dense high-rise development.

We don't need more high rises, we need more medium density 3-6 story buildings, that gets you more density far cheaper than high rises. Melbourne in particular has a lot of areas that are still single family houses with good public transport walking distance from the CBD, unfortunatley NIMBY's across the full political spectrum don't want this increased density.

At the federal level they want high immigration, but at the local level they don't want immigrants to have anywhere to live in their suburb. Until local and federal policies align one way or the other housing prices will continue to increase.

> Profitable means it has to grow faster than inflation or wages.

That is not what profitable means. Returns on investment in housing consist of: 1. rental yields, and 2. capital gains (i.e. change in price).

You cannot say whether housing is profitable or not (or affordable, for that matter) only by considering number 2.

Sure, but only 2 (i.e. estimating rental yield as zero) is a lower bound on profitability. Housing has been profitable in that sense in many places over the last decade.

That’s true, I didn’t figure in rental yields at all. Consider it a first order approximation. Would anyone rent if it was more affordable to buy?

Over a long enough term, it’s cheaper to not piss away all your money on rent. Early-2000’s real estate mania aside, crashes in price are not all that common. Building equity is preferable to building nothing at all. Plus you don’t have a landlord telling you what you can’t do.

I’d still have rented while in college. I’d still have rented for my first two or three places after college. After that, I bought a place, lived in it for a while, then moved and rented in the city in two places (including one with a girlfriend which seems like a bad idea to jump right into home ownership), then bought the house I live in now.

There’s plenty of beneficial flexibility afforded by renting, even if you can afford to do either one.

Plus, if housing doesn’t go up in value like an investment, why would you want to tie up a downpayment and tie yourself down, losing money all the while? You’d have more incentive to rent and invest your down payment money.

Building equity isn’t “losing” money. It is tying it up, sure. If you have enough free cash so that investing beyond rent gives you a decent rate of return, great. In high-rent parts of the country, rent sucks enough you don’t have that. And, your landlord can kick you out in the middle of a school year if your lease is up.

Tying money up in a vehicle that grows more slowly than its likely substitute investment is “losing money” in one’s total financial picture. If it grew more slowly than inflation, it could remain affordable to others but terrible for the present owners.

I’m pro owner-occupied housing. I think it’s good for families and good for the community/society. But in the hypothetical where it grows more slowly than inflation, renting starts to look a lot better than it does currently.

Rentals should always be more expensive than buying then, no? You're gaining a service overtop of the place to live. Not to mention, you should be able to leave atyhe drop of a hat, rather than be required to have a 1 year lease

Renting hotel rooms is more expensive than a month-to-month lease is more expensive than a year-long lease, so that all checks out to agree with your premise.

Whether renting or buying is more expensive depends on your market’s outlook for property prices. But in an environment where they don’t go up, I’d definitely expect renting to cost more.

Not sure this generational divide argument holds water much. The children of boomers, who grew up in relatively nice houses with backyards, similarly want nice houses. Increasing supply in an urban planning context involves increasing high density dwellings in the inner city. This is a hard pill to swallow for adults who remember playing cricket in the backyard with their Dad or whatever idyllic notion they are left with from their wonderful childhoods (not a joke, Australian kids have great childhoods by any metric). The boomer parents also want the same thing for their adult children, and help fund the acquisition. As boomers die off and the wealth passes to their kids, they will invariably spend it on houses (or second houses) as well.

I also think different cities in Austrlia have differnet issues. Adelaide has a very old demographic and little migration, and has the problem that their health care costs are going to greatly exceed their revenue. Melbourne has had too much migration, which tends to just make the economy look fine but causes a lot of strain on infrastructure. Melbourne and Sydney also suffer from being gravity wells for migration, so that people don't leave for better paying work elsewhere or cheaper housing. They choose to suffer underemployment in very competitive and saturated labour markets with unaffordable housing. I include myself here.

Housing affordability is not going to improve. There is no way prices are going to correct by the 30% - 40% in desirable places to live to get into the realm of affordability. Increasing urban density is neither attractive to people nor likely to happen. It's done and dusted. The only thing to hope for is that the rate of change will slow down, and wages will improve so that at some point in 30 years time affordability will be better. That means there will be a generation of people who don't own their homes, and the comparison to the previous generation will be highly unfavourable. Being an elderly renter is a greatly inferior experience, and the government outlay for housing the elderly will simply increase more and more.

The 'solution' to my mind is to strongly encourage people to move to places with more affordable housing and good living conditions.

> Melbourne and Sydney also suffer from being gravity wells for migration, so that people don't leave for better paying work elsewhere or cheaper housing.

This is exactly it, I'd love to leave Sydney to live somewhere else but until remote working is ingrained in our culture, it's just too risky for my partner and I to move away to a smaller city/town incase our current employment changes.

I've been amazed to hear of so many people who, as soon as they started working from home because of the pandemic, bought a house 2.5 hours away from their office. You're one bosses decision away from having a very miserable daily life.

There is definitely a serious intergenerational fairness issue here. One of the best expositions of the problem I've seen is this talk by Tory peer (and boomer!) Lord David Willetts.

https://www.youtube.com/watch?v=ZuXzvjBYW8A

It's very clear that our (Strayan) government will sacrifice anything on the altar of the housing bubble, because that's what the boomers demand, and they're still in charge for some reason. The rest of us get the shaft.

It's because half the population has their retirement based on housing values so if you crush that, you have a generation of boomers with no retirement money.

...so instead we have gen x and younger with mostly no retirement money and mostly no houses either. Great plan.

Keeping the housing price expensive seems less efficient than just paying the boomers retirement money.

All kinds of people get to profit off of the high housing prices that could otherwise be part of the retirement money

Profitable means we get more and more houses being built.

If homes are a profit-seeking investment then supply and demand would incentivize lower supply. If new houses cannot be built, but the demand is the same or increasing, then prices must rise. The profit motive directly leads some people to fight against new housing.

Quite frankly I don't think any of you in this thread have any idea what you're talking about

That’s true! I’m not an economist or a policy expert. I don’t claim to have any answers. I’m just pointing out that profitability and affordability are mutually exclusive goals for housing prices. I leave it to people much smarter than myself to figure out if anything can or should be done.

You would think so. But once again, how can housing continue to be profitable i.e. grow faster than wages, and people still afford to buy houses? Doesn’t it collapse at some point? Isn’t that the joke about only economists think that exponential growth can continue forever?

Most of my peers are either completely priced out of the market, or taking on 40yr or interest only loans. It seems like the market is currently a game of chicken of who’s willing to sign away more of their life. An interest only loan is literally admitting you can’t afford this house and the only hope you ever have of paying it off is if it increases in value without you doing anything.

> Most of my peers are either completely priced out of the market, or taking on 40yr or interest only loans.

These interest only are the reason my parents lived in a house 2x what they could afford - they took out an interest only mortgage in 2002, paid less on the mortgage than I was paying in rent for a room in an apartment last year, and sold at a 2.5x gain (to someone in my generation who is now mortgaged to the hilt), and bought a smaller home in cash from the proceeds after retirement. It's insanely unfair that the solution to irresponsible lending to my parents generation is to protect their investments and make sure I can pay back what they won't be able to repay.

Profitable by owning and sitting on an asset != Profitable for a builder to buy land and build a house. You can have one without the other.

Totally agree. The government should have a policy goal of keeping house prices stable relative to inflation. But when multiple generations have locked up most of their wealth into housing, it’s unclear how to untangle the whole mess without collapsing the economy.

Also without losing votes from the people with property equity (i.e. the majority of the electorate).

Exponential growth can continue forever if you shrink the universe of things you're measuring and declare the losers out-of-scope.

Europe, by the 1500s, was running out of land and resources. So they found a whole new continent, genocided the native inhabitants, and suddenly there's plenty of land & resources to support anyone who comes over to the New World. America by about 1880 was about out of land for westward expansion, so invented steel, concrete, elevators, skyscrapers, trains, and urbanized, making land irrelevant. The industrial revolution had largely run its course by 1914, but then we had 2 world wars that devastated Europe and made America the engine of rebuilding. We got to keep our exponential growth, but a lot of folks just...died.

Single-family homes are likely to become a luxury good. Not everyone is going to have them, and prices will keep increasing as they move up the income spectrum. What happens to everyone else depends on whether you believe the world will end in fire (war) or ice (dystopia).

Malthusian conditions keep me up at night.

Most countries birth rate falls off as they become more developed. There’s estimates that the world population will stabilise around 11 billion. I don’t think there’s any theoretical reason why high quality affordable high density housing is impossible.

It won't be SFHs though, and it remains to be seen whether Americans will accept that without conflict.

A condo/apartment future is actually pretty likely, and achievable. NYC and most of the non-US world went that way in the 50s, and a lot of Silicon Valley cities (which were previously all suburban sprawl) have been constructing those 4-over-1 condos like crazy over the last 10 years. Even notoriously anti-development SF Peninsula cities have gotten in on it.

But that's largely not where the real estate feeding frenzy is - condo prices are up, but nowhere near as much as SFHs. Turns out a large proportion of Millennials still want a detached house with a yard in a good school district, the same thing that the past several generations wanted, but that dream is increasingly unrealistic.

The way to make them affordable rather than profitable would be to build many more than are currently being built. As long as the quality is decent, you then drive the prices down through a simple increase in supply.

You probably still need some tweaks to disincentivise use of property as a financial vehicle, but you're 70% there just by building more.

Unless something still manipulates the price, as in the diamond market.

Profitable to build != profitable to hold.

I assume you are saying this to claim that if housing is "merely" affordable, no one will be incentivized to build houses.

That's not really how it works. Developers can make a profit when building new housing on vacant land, or on improving existing housing. That does not preclude the resulting housing from being affordable, though.

This is an unfortunate overloading of terms, but "profitable" in this sense doesn't mean just the usual "get more money out than you put in". It refers to the practice of land/housing speculation, and buying housing with the intent to hold and then sell at a profit without doing anything meaningful with it.

Except due to insane zoning rules and an ever greater push for exurban housing, which is insanely expensive due to the infrastructure required, we are not getting nearly enough housing.

Nimbys don’t allow it.

housing is most profitable when there is the least new construction.

When examining crypto and equity investments, I first started understanding the "store of value" investments, and that was my first introduction to the poor fit of real estate to be an investment.

I know a few people who are mortgage rich, and cash poor (or house rich? I don't know the saying). They are essentially stuck. They can't sell the house and move into a new property because relative to everything else, all real estate has essentially moved at a similar rate. They can't sell their bathroom if they needed to. They have to keep investing in the house to keep it in good condition, so it costs money to keep the investment.

If they want to sell their house, they have to find somebody who wants THEIR house, not the one next door, not one in a different town, but their exact house.

This is in contrast to other investments, gold, stocks, crypto, where you can sell to anyone, you can make money (dividends) if the business is doing well, you can sell any portion of your investment and buy another investment with it. There is no cost to you to hold on to the investment, etc etc.

The only argument I see for owning a house is the "I'm paying myself my mortgage, so it is like investing in myself", but if your money can do better in another investment, I feel you're better off renting and making money in other ways.

The two big questions I think we have are 1) if we suffer population collapse - which is a possibility - what will happen to house prices 2) will millenials, or whoever comes next want to own houses? We thought it was crazy that somebody wouldn't want to own a car, I think it's crazy that any of them would want to have a University degree. We're seeing digital nomads as a fringe atm, but perhaps that becomes more mainstream. What happens to housing?

> The only argument I see for owning a house is…

Landlords and property management firms are also often miserable to deal with.

Landlords and property managers need to get job-level accountability the way cab drivers did when Uber and Lyft showed up.

It does no help to complain about a past landlord because you often need them as a reference.

This is an asymmetric power dynamic and landlords take advantage of this.

There are some rules but mostly it seems like only the most egregiously bad landlording gets paid any attention.

Even when a landlord unlawfully evicts people it can tie up renters in courts for years.

Landlords and property managers need to get job-level accountability the way cab drivers did when Uber and Lyft showed up.

There is a lot of rental regulations, and jurisdictions are rated on how renter or landlord friendly it is. Rental regulations are old, and you happen to live in a place where its landlord slanted. In places like SF, you can stop paying your rent and tie up your landlord for YEARS and not get evicted. Rent control ensures your rent goes up at a rate way below inflation, something like %0.5, and so on and so forth.

You were not talking about people who are not paying the rent. You were talking about people who could potentially buy a house.

What you are failing to account for are unaccounted for costs of being a “good” renter.

A great deal of Landlords do not promptly take care of problems.

They don’t take care of the property. And in general they don’t act professionally.

I managed an apartment building in Oakland several years ago. The landlords for an older couple that cut corners all of the time.

Their posture was that the people living there did not care if the place was nice. So it was not worth investing money in trying to make it nice.

Except their idea of investment was just normal maintenance other than the least possible expense to comply with the law.

They hired their kid to paint the building even though it was obviously done very poorly.

All of the windows had paint splattered all of them. Electrical work would include stapling over extension cord wires.

Even in hiring me to manage the place they did it primarily to comply not because they wanted professional management.

I’ve seen this in two other rentals I’ve been in.

Even when the rent is higher than market, landlords too often cut corners to squeeze as much money out of properties as possible.

From what I can tell, they do it because they’re either greedy or they see housing as a business instead of a need.

Like I said, most of the focus is on eviction. But it is the day-to-day apathy of landlords that creates costs for renters that go unaccounted.

> if your money can do better in another investment, I feel you're better off renting and making money in other ways.

This can be true, but the math is complicated - it depends on the differential between a mortgage payment and what rent in the area would be, as well as expected maintenance costs.

If you assume a mortgage runs 3% (which seems to be approximately correct this month in Canada), housing appreciates 5%/year, we're looking at a 500k house over 25 years, and you can invest cash at 8%:

- Annual mortgage is 28,395, or 2,366/mo

- Total mortgage payments are 710k

- Home value is 1,693k

- ROI is 983k

- Matching that ROI at 8% needs almost exactly $1510/mo

- So naively you'd need to find rent at $856/mo to come out ahead renting

- But now adjust for property taxes and maintenance (over 25 years you probably need a new roof, maybe new siding, furnace, hot water tank...). Like I said, it gets complicated.

The other reason people buy homes is stability and control - you can't be evicted from a home you own other than for non-payment (no risk of the landlord wanting to move in), and you also have the freedom to renovate to suit your changing needs.

Many jurisdictions also have generous tax incentives for property ownership.

In Australia, for example, there's no CGT payable on your primary residence which means paying down a giant mortgage and then downsizing at retirement is a cost effective investment strategy for building a nest egg.

That doesn't make much sense in areas where the market is really moving, though. Most people when they upgrade houses don't sell their house for x and buy another one for x. They sell for x which is well above what they paid, which gives them a fat down payment on a mortgage with record low rates which allows them to get quite a bit of property for not a bad monthly payment.

We already are at a demographic cliff as older boomers begin to pass and younger boomers are retiring. Baby boomers are the largest generation in human history and it's looking like Millennials and Gen Z will not have nearly as many kids as their parents and grandparents. So even if they do want to own houses as much as boomers did, there's going to be a lot less of them to absorb the supply of housing on the market over time.

>A land with a house on it does not somehow increase in productivity to produce more housing, like a share of Apple generally does with smartphones. It's just a pile of concrete, steel, wood, bricks, and so forth that slowly falls apart over time. Buying a house ought to be roughly analogous to buying a car — a thing that (with rare exceptions) decreases in value over time, because it wears out.

Funny, this is the opposite of what I've heard from pretty much anyone bullish on real estate. "You can always live in your investments" is the rebuttal whenever I mention that a share of AAPL could generate more return. Don't forget "land is a finite resource."

On a related note, housing seems like a "bigger sucker" situation right now. A 1100 sq ft living area, 5000 sq ft lot SFH next to me just sold for 50% ($500K) over asking price. If we go with the mantra that "house prices always goes up", who on earth is going to pay for a small house in the millions, let alone where is that money coming from?

Housing prices don’t always go up.

At some point an over leveraged market will deleverage and it will suck for everyone. Remember 2008?

Sometimes a neighborhood goes to shit because jobs leave, or natural resources are depleted or you have a shit government.

House prices don’t always go up and don’t let anyone tell you otherwise.

I totally agree, a Vegas Airbnb I stayed at was a prime example. It was purchased for $500K in 2005 and Redfin estimated its value in 2018 at $220K.

Cities like Detroit or Pittsburgh (until recently) are also examples. Large cities along the west coast could probably be too new to suffer a collapse in prices yet.

It's all relative and cyclical.

Even SF was it by the 2008 crisis. If you bought in 2008 and had to sell any time prior to 2014, between carrying costs and transaction costs you most likely lost money.

By the same token, I bought a house 2 years ago on the East Coast and made bank selling it this Spring.

Only time will tell what buyers in this market are going to experience.

Over time, incomes grow. Also, housing costs as a share of income can grow. Combine these effects together and a price that was insane in the past could be normal in the future.

There's a finite number of shares. You can look up the market capitalization, divide by the price, and get the number of outstanding shares, though it's also a reported statistic on its own.

Companies can always issue new shares to dilute you (or in Apple's case, buy them back to reduce the number of shares)

Correct, but the number of shares outstanding isn't infinite: it's always a fixed number. Just like there's a fixed number of square miles of land. And you can make and remove land. Lots of dredging along coastlines is done to make land. It isn't a great analogy and investment decisions should not be based on the concept.

It's been going on in New Zealand for decades now. Median house price is now $590,000 USD. And the quality is abysmal. Insulation and double glazing are considered opulent luxuries, most properties do not have them. A big proportion of them don't even have baths. They're closer to American barns than they are to American houses.

This is true for houses built more than 20 years ago. But houses built in the last 18 years or so almost all have insluation, baths, better joinery, and many with double glazing. We are also starting to see more ducted heat pumps, polished concrete floors, and architectural features like vaulted ceilings, but still playing catch-up with America. While the quality has improved, so has the price.

What always mystifies me is why someone would buy one of these crappy >20 year old homes at $700,000 or more just because of it's location. I'd much rather live on a small farm with a brand new house at the same price.

Most houses that people can afford are built more than 20 years ago though.

Many Americans rely on home equity as a part of their retirement funding (sometimes through necessity - running out of retirement funds and having to use home equity to live on either through selling, or getting a reverse mortgage), so anything that changes home price appreciation is going to affect many people's retirement plans.

As much as I agree that things need to change, it’s also not fair to pull the rug out on these people. They made the safest choice to secure their retirement and should somehow be compensated or taken care of if things are changed.

> it’s also not fair to pull the rug out on these people.

But what if they voted for policies that prevented subsequent generations from ever even owning a rug? The choice they made to secure their retirement is only "safest" if they can convince the non-retired people to treat them better than these retirees have treated everyone else.

Sure, cover retirement for everyone everywhere.

We are humans. Old people should not have to suffer.

This is liberal idealism divorced from reality. Reality says that we (the U.S.) already spend a third of our budget on social security and that's before the Baby Boomers start drawing from SS. SS is obviously not even enough to afford a shack in the SFBA now so you'd have to 3-4x the payments. Even if you doubled taxes we wouldn't be able to pay for what you're proposing (nevermind the massive market impact a huge number of elderly getting paid the median US salary by the government would have on rent prices).

Reminder that the richest American got tax credits for his kids.

We don't have a money problem. Stop lying to yourself.

Reminder that math still exists, and even if you taxed all of Jeff Bezos's $100B wealth you still wouldn't be able to pay for even a quarter of a single year of Social Security. The US government operates at a _staggering_ scale. And somehow you want to 3x Social Security?

You can't just tax and regulate your way out of people not being productive. The market _always_ wins in the end, even if it takes decades. See: European+Canadian brain drain due to high taxes and regulations, US college tuition and housing costs driven by government subsidized loans, the Soviet Union's trade deficits, mass withdrawal of kids to charter schools in areas where public schools suck, housing costs where minimum wage is high going up, CA Prop 13 skyrocketing housing prices, etc. In economics terms, no price floor and no price ceiling is perfect since there is always an imperfect substitute for what you're trying to regulate. Over the long term that destroys the effectiveness of any regulation attempt. The U.S. could regulate in the 60s because it was the dominant superpower and there was no substitute for U.S. labor. Now? China, India, and LatAm are rising fast and getting ever closer to being a good substitute.

lmao market always wins in the end. Guess thats why the market needed the backing of the worlds biggest military force to go fuck over their people in many countries.

I don't see Europe getting "fucked over" by the US military and they're definitely experiencing massive brain drain, been going on for over 20 years now.

> Most Americans take it for granted that home prices should generally go up. But if you think about it for a moment, there is no inherent reason to expect this.

This is a goofy, naive statement; population is ever increasing, so when you buy a home or even just a plot, your "share" of the earth in terms of land is constantly growing if you amortize it over the population.

I say this without a stance on the morality of it, but just the math.

The annual population growth in the US in the last 40 years is around 1%, and is diminishing (latest numbers show 0.5%).

The average annual growth in house prices since 1992 in the US is 5.3%.

> The annual population growth in the US in the last 40 years is around 1%, and is diminishing (latest numbers show 0.5%).

Population growth isn’t evenly distributed over the entire country.

And how is that relevant?

> population is ever increasing

That doesn't make sense. Population didn't grow in the order of hundreds of percents in the recent years.

you're saying housing prices should increase because land is finite and therefore scarce. but there is so much land in the US and more empty houses than homeless; even in expensive neighborhoods a lot of housing scarcity is artificially created by zoning policies for upper middle class residents with a vested interest in keeping their house valuable. and that's not even mentioning that the physical house itself (as distinct from the land) should generally depreciate in value as it ages and requires more maintenance and stuff replaced. same logic as a car

Furthermore, real estate prices anyway always raise due to inflation.

In the US, we've under-built for more than a decade following the 2008 crash, and that undersupply is running into millennials entering the key home-buying years, further exacerbated by the pandemic. It's not a Ponzi scheme, it's supply and demand. Absent a recession, I expect prices to keep going up.

The article author seems to be falling into the trap of only thinking the few huge cities of NY/LA are all there is to the USA. Why are home prices *in major cities* rapidly rising in cost? Because every 3rd rate blogger has aspirations to live in NY, which has limited supply.

If all the value is how much land you have, like the author claims, then people would just build a mansion in South Dakota.

There was always an argument to go to an up and coming city like Austin or even Pittsburgh. Now, the prices in Pittsburgh are skyrocketing.

It's not just LA, NYC, and San Francisco anymore. Home values are rapidly increasing in places with declining population (Pittsburgh metro, e.g.)

It's not just major cities. This current housing mania is happening in smaller cities too. Like cities with only ~60k population and over two and a half hours away from any major city, in the Midwest.

Like where my parents live. There are several people they know that are selling there just because their homes have shot up so much the past year and are renting until the market cools down.

Our house isn't on the market, but the Zillow estimate has gone up 26% in the three years since we bought it, most of that in the past year, and we're not in a major city (far suburbs of one, though).

It's not people aspiring to have some vain dream. It's people looking for work and thats where they end up employed. I've read recently that since the recession, LA has added 5 jobs for every new unit of housing built. That is a recipe for tenement conditions and we are seeing that play out with how the working poor are currently living in these cities.

Increased housing supply will solve the problem of expensive housing.

But increasing supply in cities could be difficult (all the challenges that come with increased population density).

Building out was historically an issue due to commute time to city centers but we have an opportunity here with the new work from home environment.

We need more micro towns, that geographically don’t have to be near a major metro (2+ hours out), and that can sustain a decent economy based on the WFH population. In turn new business will open (grabbing lunch locally versus near the old office).

Exactly this - I am trying to think through the implication for me personally. There aren't quite micro-towns where I am yet so maybe just a place outside of the city centre?

If you can work from home, why not. Having lived in a city before and now in a suburb, I miss the energy of the city but the suburban quality of life outweighs the urban energy.

So, there are things I disagree with inside the article (rent control and government-built housing have both been tried, in many places, and have not gone well), but the basic thought in the title is spot-on. We have learned nothing from (and fixed nothing since) the 2008 Fiscal Crisis. We are headed for a new one.

Is the government incentivizing subprime mortgages which are being bundled into mortgage backed securities and resold again?

If so, could you point me to official documentation of this policy or practice continuing to take place?

Inflation = asset price increases = house price increases. All assets have gone up, new cars, used cars, new houses, old houses, stocks, risk assets literally everything.

It is mostly a result of fed reserve policy not any of the programs they list. Fundamentally none of those programs have any impact on $5m brownstones in Brooklyn NY, or $100m penthouses ok 57th street in Manhattan.

Japan as a comparison is not really fair, it’s population has been declining for a decade and well under 1% for the last 40 years.

They also have amazing mass transit making living outside of Tokyo much more palatable.

Additionally, the apartments they do build are smaller (750sq ft vs 866 sq ft)

But none of that matters that much because shockingly prices in Tokyo do actually increase.

Home values show the costs people are willing pay to be home owners in desirable areas. There is no Ponzi system here (there are some markets which are, mind you, but not all)

Having said this, the US government's insistence on tax subsidies for home ownership is bull. It restricts geographic mobility, encourages people to get mortgages they cannot afford, creates unnecessary pollution, and creates a delusion that being a home owner is an aspiration. It's another case of the government trying to help and hurting people instead. As the author mentioned, if you want to help the housing situation, stop subsidizing at the federal level.

If you stop the owner-occupied mortgage interest deduction and property tax deduction (both of which have been nerfed a bit in the last few years), you put commercial landlords at an advantage relative to owner-occupants (as commercial landlords are taxed on profits not revenues, like any other business). I personally think that’s a bad policy balance in its own way.

That shouldn't necessarily be a consideration. Apartment units are owned by commercial landlords and there is no harm in that.

To answer the title: They aren't make more land, but they are making more people. And people like to live where it's nice and they can get jobs. I don't think land values are a Ponzi scheme. From a supply and demand perspective, it does seem like a good investment.

The rest of the article is meh.

Unless:

- you can work remotely,

- it’s nice where there are no other people,

- there’s really a lot of land, eg. if you split Europe into 1000 square meter parcels it will fit over 10 billion people,

- the nicer the place the faster population declines (somehow).

Not sure why you got downvoted -- land is cheap, you can easily find land for sale for $500 and acre or even less.

But buildable land with utility access (whether municipal utilities or septic/well) that's in a place where people want to live is harder to find and that makes it valuable.

Hmm. What about buildable land without utility access? You need water, but you could have a purification system and a septic system. You need electricity, but you could have a solar system and a backup generator. You need heat, but it could be electric or propane.

Seems to me someone could make a fair amount of money by creating the package to make it reasonable (not just possible) to live on "unusable" land. Oh, and this is a site that has a lot of people looking for startup ideas...

Electric seems like the easiest problem to solve, a solar+battery system will work pretty much anywhere.

A purification system only helps if you have access to water somewhere. If you have to spend $30,000 drilling a well, and your poor soil means your septic system costs another $20,000, And you've got to build a $30,000 solar battery system on top of that, well then your "cheap" land is not so cheap and you could have just spent more money on the land in the first place.

Even if you have groundwater on your property, don't assume that you'll be allowed to use it, the water rights may belong to someone downstream. In some areas, you can't even harvest rainwater on your own property.

Lots of people solve these problems and live in undeveloped areas without utilities, but I'm not sure there's huge demand for living full time so far from civilization that there's not even electricity available. And many of the people that do live there, are happen doing the work themselves, and putting up with the limitations.

The people that want to buy a package system are probably the people that want all the comforts of home in their off-grid cabin, which means it's going to be expensive, just getting a well driller to drive 10 miles up a curvy unpaved mountain road is going to be expensive if they can do it at all.

I don't remember a baby boom or a population increase of 500% in the last few years.

It doesn't take a 500% increase in demand to result in a 500% increase in prices.

Which is the point of the article, that it's not based on a simple increase in demand.

Is there a housing market that has has 5x’d in the last few years?

https://globalnews.ca/news/2531266/one-chart-shows-how-unpre...

Once lumber prices correct, I think we'll see a housing market correction in urban areas.

The combination of covid adaptation to remote work and Starlink rural broadband has the potential to be a major market force.

In DFW, we're already seeing a lot of this as more and more people move out of the city to rural farmland where their money goes a lot farther.

Ugh. This is even stupider than calling bitcoin a ponzi scheme.

A bubble is not a ponzi scheme.

Is this payback for the crypto Ponzi scheme posts?

OK, asset appreciation without value creation is a Ponzi scheme. Let's stop rehashing, and move on to novel discussion angles.

I’m going to ignore the first sentence since it’s just snark, but in response to your second: if there’s a problem that needs to be addressed, surely the first step is acknowledging its existence?

Mis-naming it doesn't help address it, though.

So here's the thing: if housing prices crash you still have a house.

When Bernie Madoff crashed, how much stock did anyone have?

Didn't everyone who didn't sell have the same amount of stock they had before the crash?

Not that it helps since you can't live in a share, or a bitcoin, but I don't know how being able to live in something makes the market around it a ponzi scheme or not.

They never owned the stock, is the point of the Madoff scheme. If investing in Bernie Madoff's Ponzi scheme bought actual units of shares, then it wouldn't have been a Ponzi scheme.

The point of a Ponzi scheme is that the current value is being supported by keeping the influx of new investors greater then those withdrawing their money.

The only way Madoff's investment scheme was worth anything was if he kept new investors coming in to cover withdrawals and siphoned off the capital base to support himself.

So here's the thing: if housing prices crash you still have a house.

Maybe. Generally the economic turmoil around a housing crash means many people will lose their jobs, so they may or may not be able to afford to continue to own their house. Which is why so many houses end up getting foreclosed during a housing crash - people can't afford to make the payments, and they can't sell and pay off the loan.

Which is irrelevant to the incorrect idea that housing market appreciation is a Ponzi scheme.

The point of a Ponzi scheme is that the underlying asset was only valuable if you could resell it to someone else for more then you bought it. Housing, by definition, doesn't meet that since it's still housing.

Whereas Madoff investment credits or whatever are worth literally nothing now, because they never represented any underlying asset.

but it's relevant when you're trying to convince someone "well at least you still have a house" after the market crashes and the bank kicks them out because they can't pay the mortgage. And unlike a stock where they only lose the value of the stock, the house could be so far underwater that they owe money to the bank even after the house is sold.

No one loses their house because the market crashes, they lose their house if interest rates are raised heavily and they have a variable rate mortgage, or if the subsequent economic turmoil wipes out their job.

This line of discussion has got a lot of weird perceptions on what a housing crash actually means. But unless you're holding investment property, then you can't lose your house in a crash without somthing else happening (and in 2008 plenty of people just defaulted on their loans, then rebought their houses at the true market value and ate the credit rating problem as the better option).

That's not to say their aren't significant follow on effects, but to reiterate the core point: it's not a Ponzi scheme if you own as a result of the transaction a physical product with utility (and plenty of people do in fact own their house's outright: no housing crash will make the title deed be magically not yours, the corruption and incompetence of the US banking and court system notwithstanding - again see foreclosures in 2008).

Its not necessarily the payments either.if the bank can't afford to have that debt, they also need to foreclose

This doesn't happen. And can't happen, because if it could, banks would do this all the time to take advantage of reselling the property and the mortgage to a new buyer for a higher price when the market was favorable.

> So here's the thing: if housing prices crash you still have a house.

Until your financial circumstances change and you suddenly can't afford your mortgage. Housing price crashes aren't going to happen in isolation from the rest of the economy.

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