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Comment by hans1729 | Hacker News Reader

I mean, it's not really a burst, we're just hearing the hissing noise of the obvious leak.

The true demand from people with the intend to actually live in the estates has been constantly decreasing since around 2000; the real salarys dropped since then, so did the buying power.

The only reasons people found buyers at x3-x10 (!) prices were

a) that there is a class of people wealthy enough to still afford the purchase, even at those completely-out-of-touch prices, and

b) that people were given loans they should either never have gotten (2008) or that they shouldn't have asked for (because it's dumb to buy estates where the price is set by people and institutions that have n times your own income/net worth)

When 90 (?) percent of people simply lack the buying power to participate in the real estate market, but the other 10% happily sell each other estates, that's not a bubble, the real estate market just stopped interfacing with the vast majority of the population.

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I think you have missed a source of demand, and I think it's important.

As housing became more and more expensive to young professionals, some people in this group have worked harder and harder to buy property, even to the point where it no longer seems rational. For example, parents taking a lot of wealth out of their retirement savings or their own homes to assist children in buying. Professionals are working more than otherwise makes sense for their stage in life (young families with two full-time parents). They are committing a large share of their monthly budget, often right until the start of retirement.

They do this because they believe in the importance of owning property - beyond any reasonable narrow economic justification.

Of course, there is an inequality aspect to this - not everyone's parents have capital, not everyone can command a high enough wage.

But crucially, the presence of this group of people arguably turns the bubble into something else. These buyers put a floor on the market. If prices drop even a little, or something else changes to make mortgages slightly more affordable, they rush in and buy the dip. By doing this, they sustain the high prices for everyone else in the market.

This will probably happen now. Higher rates will make current prices unsustainable. As soon as they correct to the point where monthly payments are back to what they were last year, there will be buyers, only too happy to overextend themselves to get out of renting.

It's inaccurate to characterize these people as likely to default. They are actually very good mortgage risks - they have already shown themselves to be very committed to ownership. And the resources which got them into a position to buy mean they will keep on paying short of a disaster. The truly unrealistic borrowers of pre-2008 have never been let back into the market.

I did not miss those people, but my wording was loaded and so the point got lost in translation. I implicitly captured them under b) "[...] it's dumb to buy estates where the price is set by people and institutions that have n times your own income/net worth", where dumb is a loaded term for your >"to the point where it no longer seems rational".

>But crucially, the presence of this group of people arguably turns the bubble into something else.

I agree with this, it's not a bubble in the sense of 2008. I said so in the comment you replied to! We're in the same boat here.

By the way: I'm precicely in that demographic. I just turned 30 and do well for myself as an employed consultant, but I wouldn't consider buying the dip, unless the dip is at least ~100% of the current market prices (which I don't see happening, but who knows). Going in debt for 30-40 years has zero appeal for me, it just seems like a terrible move. The counter-argument I hear from people my age group is always the same "but then you'll never own anything!" -- then so be it, whats the point?! Even if someone gave me a million Euros, I wouldn't spend 600k of those on a house and then another 300k on renovations, that seems like a terrible waste of resources. With that kind of money, you can buy three small companies in Germany, or stop worrying about retirement, etc. Buying estate = de facto being in debt for the entire career and then some, plus having to pay all repairs, anything. I don't see how that would ease my life at all. If someone wants to give me a house, nice, but buying a house just for the sake of doing so reminds me of a signature I often read on market-ticker.org -- leave the rats race to the rats.

This is fair, you didn't miss those people. But I think it was worth me highlighting them because they are, as I argued, very important.

I somewhat agree with your argument. Housing costs more than other assets compared to its economic value, exactly because people have an emotional reaction to the idea of owning it - or the idea of not owning it.

However I have seen middle-class people overextend themselves to 'buy the dip', while their equally wealthy peers sit it out, for over 15 years now. Many of the people who did the former now consider themselves to have got a bargain, while many of the latter changed their minds and ended up buying several years later and at much higher prices.

I'm definitely not arguing that this makes buying right and renting wrong! Just that so far, this is how that choice played out.

A real estate investment newsletter suggests that for a successful real estate investment, as a rule of thumb you should be able to charge almost one percent of the cost of the house as rent because a rational investor shouldn't count on the value of the house going up.

I am curious what you guys think of this statement. I think the idea is if the potential rent you get out of your investment is too much under one percent, you might be better off investing in something else?

Now imagine a smallish 4 bed, 2 bath, 1,638 sqft built home on a 5,861 sqft lot in Longmont, Colorado (so not exactly a city but my preference because municipal fiber) that has a sticker price of USD 499,900. I can't imagine paying USD 4,999 every month in rent for this house at the moment. What gives? Is rent too low? My instinct is home prices are way too high but it can't just be "dumb money" keeping prices high, right? Eventually, there should be more supply causing prices to drop? Is something preventing this correction? If so, how do we fix it?

An old rule of thumb was 'buy at 10, sell at 20'. That's the ratio of price to annual rent. So if you could get 0.86% of the house price in monthly rent, it was a big bargain. If you couldn't get more than 0.43%, then it wasn't worth owning.

The rule of thumb is now obsolete, and 30-40 times rent is perfectly common in lots of places.

The newsletter is quite a lot more aggressive than even the rule of thumb from the 'good old days' when interest rates were much higher.

I used to pay around 0.2% of the market price of my apartment per month. The landlord was a professional property management company, and this situation persisted through several new contracts.

> A real estate investment newsletter suggests that for a successful real estate investment, as a rule of thumb you should be able to charge almost one percent of the cost of the house as rent because a rational investor shouldn't count on the value of the house going up.

Does this have all taxes(property,rent,etc) included in the cost?

As far as I remember, no. This is just the sticker price. This is a conservative estimate for people who are not real estate professionals, probably looking to buy a house to rent for the first time. Based on the other comment reply, it sounds very conservative to dissuade people from making stupid decisions.

House prices are kind of attached to rent, but not entirely - especially in areas where there are few rentals, or lots of them.

Actual rental revenue received can be significantly lower than calculated if there are vacancies, etc. It’s much easier to do on an apartment building with many units.

> Going in debt for 30-40 years has zero appeal for me

Going into debt at the lowest interest rate you'll ever be offered to buy a leveraged asset that's likely to increase in price and reduce the overhead you pay on your largest expense, housing, and hedge against the risk of rent increases and security against the whims of landlords?

> Germany

Oh, Germany. Somehow Germany has escaped the constantly increasing house price effect, as has Japan.

If you owned a house in London its annual value increases would almost certainly out-earn your salary. And you don't have to pay tax on that.

I own a house in London. Its total value increase since I bought it 5 years ago is much less than my salary.

You bought near the peak of the market then. Definitely been some downward pressure on prices since covid as people sold up in London, took that premium price and moved to larger properties elsewhere. Not saying it was a bad investment, just that the return will take longer than it has in the past.

It doesn't matter where I bought. If I haven't made much money in the last 5 years, nor has anyone else (on average), regardless of how long they've owned their property.

The suggestion that 'the return will take longer than it has in the past' is a prediction with no evidential basis.

Isnt that exactly the scenario that op is describing?

Lack of flexibility at precisely the right time?

Owning in any large city + servicing debt during the pandemic when you must move elsewhwre that is sane (and less risky to your health) would seem to have a premium attached to it

Then I guess your salary is amazing, because many house prices across London have doubled in 5 years.

If you somehow bought a house at a reasonable earnings multiple, say 4x earnings, then your house has appreciated essentially what you earned over the last 5 years. This is just math.

Can you tell me an area where average house prices have doubled in the last 5 years? I can't think of one. Most expensive areas have gone sideways since Brexit, and risen a bit since the pandemic. Most cheap areas have grown slowly since Brexit.

https://www.bloomberg.com/graphics/property-prices/london/ shows the median as having gone up around 6% in total since 2017. Trying a mix of neighbourhoods in that tool, I can't see any which are close to 100% up.

Berlin prices has been growing at crazy speeds, it might have doubled the last 5 years. Even with a lot government intervention(rent raises cap etc).

The situation is so bad that there isn't even housing stock available. You are generally better off moving out or buying whatever you can.

Me and my partner are looking for a house in zone 3-4 right now, and I can tell you that every single home we've looked at is on for an asking price (and they're selling) of between 50-100% more than they last sold for 5 years ago.

We looked at a home that sold for £415K in 2017 for example and we were outbid. It went for 865K

Flats aren't so hot, that's for sure, but there's been masses of price growth over the last 5 years on houses. There's a stunning lack of stock on the market.

London Prime Property: Our forecast for growth of 24% in the five years to 2026 means that by the end of the period, values will return to their previous 2014 peak level for the first time. [0]

[0] https://www.savills.co.uk/research_articles/229130/323909-0

12 Years underwater... optimistically given that its already not looking great for their 8% prediction for 2022

I mean the folks that bought homes in Detroit in 1960 probably feel a bit different in 1980.

>Going into debt at the lowest interest rate you'll ever be offered to buy a leveraged asset that's likely to increase in price and reduce the overhead you pay on your largest expense, housing, and hedge against the risk of rent increases and security against the whims of landlords?

Look, if I had enough money around, I'd maybe consider the gamble. But I don't want to buy property to sell it later, I just want to live somewhere. I'm not interested in placing bets on my salary, and I'm not interested in financial longterm-obligations. Maybe in 10 years I want a year off? What then? Maybe I want to change careers to something less intellectually demanding. Maybe I want to spend 50 hours a week with my kids. None of those are feasible if I need the salary. "No debt" is synonymous to freedom on so many levels in life design. The choice is not even close to me.

I make enough money not to worry about rent, even if it should substantially increase, which I don't see happening anyway, simply because then most people wouldn't be able to afford it and political change would become opportune in election-based systems.

>If you owned a house in London

Whats the point of even thinking about owning a house in London? Seriously. I come from uneducated parents that left me €0 and completely unprepared for life, so in my 20s, I first had to dig myself out of that crap. Now I make a good living, but I'm not rich, or filthy rich, or even wealthy. I have to actually make the money to pay that thing. Look at the development of real estate prices in the last 20 years and tell me that's a reasonable choice if I don't even intend to sell the property later (just to be stuck in the same situation again, with more cash, but in the same dilemma). It's pointless. I don't treat my lifetime-expenses as a game of assets, I opt for quality of life, which I don't achieve by giving it all to some property-owning entity who sells it to me at 3 times the price they paid a couple decades ago. I mean, you can justify doing so, but I don't see me being able to justify it.

If in 10 years you want a year off is your landlord going to give you one?

I think he’s saying that in ten years he can stop renting and shove everything into a storage unit and go travel.

The rent/but dichotomy really comes down to what axis of “freedom” you want to optimize for, and if you want to stay in the house and area more than 10 years.

"think he’s saying that in ten years he can stop renting and shove everything into a storage unit and go travel."

He can rent out the house and travel. And probably make money.

Aibnb or estate agents, managed properties, whatever.

Around here, monthly rent is as high as or higher than mortgage payments. With mortgage payments, you accrue ownership (for the "standard" mortgages around here). If you expect house prices to remain stable or increase during your residency in a property, ownership financially makes more sense.

Why do people compare monthly mortgage amount and rent? It misses several big elements to housing costs: taxes, maintenance, closing costs, realtor costs, and opportunity cost of the money tied up.

Renting vs buying comparisons need to account for lot more than those two numbers but that's all I see posted most of the time.

Maintenance is a big one. When you pay for an apartment, you're also paying for the landlord to fix plumbing/electrical/whatever issues.

>When you pay for an apartment, you're also paying for the landlord to fix plumbing/electrical/whatever issues.

Not always, in some EU countries, some rental agreements have the tenant pay for certain maintenance, plus insurance.

You can write off a good chunk of the interest paid on a mortgage come tax season. Saved me thousands of dollars in taxes this year.

Many banks set up blended payments so your mortgage payments include property tax. Closing costs occur at the time of purchase and are one-time fees, not recurring. As for the opportunity cost, it's only relevant if your mortgage+taxes are higher than what you were paying in rent.

The big unpredictable element is home repair costs.

It's very hard to compare some of those things as they differ from home to home and country to country. Here in the UK most landlords will do extreme minimal maintenance and taxes on the house are paid directly by the tenant and not included in your rent.

"Realtor costs" are again different some estate agents in the UK charge a % of the sale price others a minimal fixed cost.

I'm sure that these things differ massively in different countries as well so it's hard to put an average number on that.

In terms of opportunity cost of the money again it depends on how you would invest that money you could put it in something very high risk and show a huge imbalance in buying a home vs investing in crypto or something like that. In the UK most low risk savings accounts will track lower than inflation on a property only the stock market will track higher but again that's higher risk and so not comparable. Also most savings accounts in the UK are capped at a max amount that can be saved per year.

As I said though if you try to compare mortgage vs something like stock market it's not really comparable. Also to note the large index funds in the USA track much higher on average than most other countries.

I've seen people use the S&P as an example that house prices don't track to the same amount and that you can compound any gains to make large sums of money. What's interesting about this is that the reason you make so much money with that model is that compound interest is non-linear in growth which means over say 40 years you make most of the growth at the end of the period (Literally in the last 20%). This also means that if the end of your growth curve ends on a bad few years for the S&P you'll do much worse than the average so the risk is still very high on even index funds.

Overall though my current mortgage cost is 2.5 x lower than rent for a comparable property. So you'd have to factor in the opportunity cost of that extra per month I save not paying into rent into your equation as well.

Most places in the US, a mortgage from 5-10+ years ago will be less than renting an equivalent place, but a recent mortgage will be higher because prices have gone up so much.

This is generally true because prices generally go up. My brother almost bought a $200K condo in SF 30 years ago but it was slightly out of reach on his $60K Sun micro income, and his $500 room for rent was cheaper. The condo has gone up about 8X and rent (assuming market rate, it was under rent control) 5X. So as expensive as it is to rent in SF, it’s relatively more expensive to buy. It’s unknown if that trend will continue. It doesn’t seem rational but the city seems intent on continuing to severely restrict supply.

Where do you live? Mortgage rates are over 5% now, which means >$5k/year per $100k mortage just in interest.

> I'm not interested in placing bets on my salary

That's exactly what you already do if you're renting: you're betting that you will be able to work and earn enough salary to afford the rent, with your adjusted expenses. That's "pfft easy" when you're in 20's, easy in your 30's, okay in your 40's (kids need money, yo), doable in your 50's, oh shit when you're 52 because surprise! economic downturn / medical emergency / anything else that might happen. And now you don't have a place to live in and spending your retirement money to rent one, or take a dip in your quality of life.

If you're not paying for your mortgage, you're likely paying for one of your landlord.

> And now you don't have a place to live in and spending your retirement money to rent one, or take a dip in your quality of life.

As you say, keeping up with rent is easy (not necessarily, but for those in professional careers) early in life, but as your income plateaus later in your career it starts to become harder to keep up with relentless rent increases.

But then it's in retirement that a lifetime of renting really hurts. Suddenly you have no income anymore other than whatever small retirement benefits if any, but rents keep going up.

> But then it's in retirement that a lifetime of renting really hurts.

That assumes that the mortgage (+tax, +maintenance, +etc) is the same cost or less than renting is. That almost certainly isnt the case at first - at least in the area I live, I see houses renting for far less than just the interest on the mortgage would be (if purchased today, presumably the owners bought at lower prices and/or lower interest rates).

> That almost certainly isnt the case at first

Agreed, at first the monthly cost of ownership is likely higher than rent. But my quoted comment was about retirement age, which is at the tail end, not at first.

It doesn't take long for rent to catch up and from there on rent will forever go up while the mortgage will either stay fixed or only go down via refinances. Even if refinancing doesn't work (in a rising rate market like right now) the mortgage is effectively going down via inflation while rents keep up with inflation.

In my case the first year of ownership was fairly painful as the cost was much higher than previous rent (although for a nicer place). By the second year was able to refinance so it wasn't bad anymore. By the third year, with rents rising, my mortgage was already about par with local rents.

Ever since then, rents have gone up massively (about 4x-5x) and my mortgage has only gone down (today about 30% of the inital monthly payment in absolute dollars, or effectively only about 15% considering inflation).

Most importantly, it will be paid off before I retire so once I'm on a limited fixed income that's one monthly cost I won't have to worry about. Having seen some forever-renter extended family reach retirement age with rising rents, it's a sad and painful situation.

My advice to anyone is that unless you hate your future self, buy a house in your 30s if at all possible.

Rent rises, your mortgage doesn't. I have locked in $3500/month current cost to have a home, which is about what rent would be (once you account for gains from investing the down payment to offset the rent).

Since 1980, in the US, rents have increased 9% per year. In 20 years, the rent will be 2-4x, whereas my mortgage will remain the same (modulo a lowered interest deduction).

Even if it's about as financially efficient (which I doubt), it's a very powerful feeling to have locked down a fixed cost of housing for as long as I want to live in California.

I spent most of my 20s thinking, man, fuck home ownership, I'm gonna rent forever (to my knowledge, no-one in my family had ever owned; I grew up in charity housing and inherited nothing at all). Then I got booted out of a place because the landlord wanted to sell. They offered it to me first, but I had no savings for a deposit. The same story played out amongst my friends, repeatedly, and it totally changed my mind. It wasn't rent increases that were worrisome or painful, it was being forced to move. I wanted to find somewhere I liked and bloody stay there, a literal impossibility all the while I rented. But if I could get a deposit together† then ownership would do it - plus it was revelatory to me that my mortgage payments would be less than the rents I'd been paying AND I could have them fixed for 10 whole years.

I didn't buy because it was a step onto the property ladder. I bought because it was less of a gamble than renting. I ended up staying in my first house for 17 years, whereas my record under a single landlord was 3.

> Maybe in 10 years I want a year off? What then? Maybe I want to change careers to something less intellectually demanding. Maybe I want to spend 50 hours a week with my kids. None of those are feasible if I need the salary.

During those 17 years I took at least two pay cuts, and multiple 2-6 month breaks between jobs, all affordable because I owned rather than rented. Lower outgoings made it possible to save more, plus my mortgage provider offers payment holidays. No landlord ever did!

> I opt for quality of life, which I don't achieve by giving it all to some property-owning entity who sells it to me at 3 times the price they paid a couple decades ago.

I mean, isn't "paying rent to a private landlord" doing just that? Except "sells it to me" is actually "allows me to live there, until they decide not to" and all the money you spent is gone.

† I lucked out with a lump sum/windfall through my employer; I'm making no claims that getting a deposit is easy/attainable

> and multiple 2-6 month breaks between jobs, all affordable because I owned rather than rented

Indeed! I've taken a long break from working to be with my child, which I could afford to do only because I'd bought a home years earlier. If I'd been renting with ever-increasing rents I never could have done that.

house ownership is just a legal construct. you don't really own the house, even when it's paid off. even if you own, and pay off the entire house, you'll still have to pay "rent" in the form of property taxes, an unfortunate reality.

I'm in the UK. AFAIK we don't have any ongoing property taxes to pay, at least not if I have bought the freehold. Leaseholders may have to pay ground rent, but that's often a peppercorn and anything above that is being legislated into oblivion this year[0].

Regardless, ownership is a useful legal construct the benefits of which seem to outweigh those of being a tenant.

[0] https://landlordknowledge.co.uk/ground-rents-banned-under-ne...

Do you pay council rates? That’s what are called property taxes in the USA.

Ah yes, there’s council tax - but tenants pay that too, so it’s not a difference between the scenarios. Also I wouldn’t want or expect to stop contributing to local services just because I don’t have a mortgage!

Tenants in the USA do not pay it directly but do so effectively by proxy, because they pay rent to the landlord and the landlord pays property taxes to local government.

Property taxes in the USA go towards local government services like garbage collection and street maintenance, just like council rates. So I believe property tax and council rates are still analogous.

In some places that can be a lot of money. Like New York, I hear property taxes are close to half your mortgage. In places like Washington, property taxes amount to a few thousand dollars a year on a modest house. I'll pay that over $2000/mo in rent any time.

About a third of my mortgage payment here in chicago is for escrow.

> house ownership is just a legal construct

Stange argument, all rights are legal contructs - how do I know my employer will pay me for work done, or my neighbour won't rob be in my sleep and slit my neck?

If we don't trust legal constructs, we can't have a civilisation.

You can trust them, that's not the point. the point is, you can keep your pen or your calculator without having to pay rent on them. You can't keep your land/house unless you pay rent on it to the govt. Considering that all humans require shelter to continue living (surprising: the homeless in the US die 30 yrs younger than the average), a case can be made that property taxes for a minimum amount of land necessary to live are unreasonable. otherwise it's a tax on life

That case doesn't work because the property taxes mostly fund essential local services that are also necessary to live and have a functioning society - there are many locales in the US where the property taxes are zero but there are no improvements or people around you.

> I just want to live somewhere

Same. Which is exactly why I bought a house in 2011. In hindsight it was the perfect time, but at the time the market was still bumpy. At the end of the day, I had a stable job and needed to live somewhere.

> I make enough money not to worry about rent, even if it should substantially increase

The house next door to me rents for 2.5x my mortgage.

My salary has continued to go up, while my cost to live has continued to go down (I refied at the rate bottom). If I want to take a year off I can either rent out my house or just carry the cost at this point. Buying this house gave my wife and I more flexibility because with some decent certainty (+/- small amounts for taxes/insurance fluctuations) I can tell you what my cost to live will be next month or 24 months from now.

Finally, buying a house with a mortgage is best way for a normal person to protect against inflation. Housing is typically a families #1 or #2 expense, and being able to mostly lock that cost is a huge win 3-5-10 years out.

>Same. Which is exactly why I bought a house in 2011. In hindsight it was the perfect time, but at the time the market was still bumpy. At the end of the day, I had a stable job and needed to live somewhere.

And you were more likely to be able to because it was 2011. Fewer people can do the same today, at least at a similar comfort level of cost of house to income ratio.

Sure, but what about 1-2-3 years ago? The person I responded to said they never saw the point of taking on 30 years of debt, so my response was in more general terms.

Also, 2011 was still very uncertain. Would the market continue to go down, and would I keep my job were all real questions.

Is today a questionable time to buy? Probably, but what type of correction is needed in a ~7% inflationary environment for it to shift into an ok time to buy? 10%? 20%?

The point is there is always uncertainty and only in hindsight did 2011 look like a great time.

You seem like an engineer, so you should be able to start up a spreadsheet, put down a bunch of reasonable numbers, and project forward 20-30-40 years and see what makes sense for you. If a loan is involved, read up on the IPMT Excel/Google Sheets function! [1]

I don't know how things work where you are, but here in the US if you are renting, you are essentially helping someone else pay their debt. And they can kick you out when they please. The main benefit is that you can stop paying on a much shorter time scale (1yr lease contract?) or take time off, but if you don't rent you should require a smaller cash flow which should be possible to save up for.

One last thing, don't forget that you can sell the property in the future (or even rent it out, hence letting someone else pay YOUR debt). That should factor in your cost/benefit calculations. Even if it does not appreciate at crazy rates like the current insane market has led us to expect, it will very likely be a lot more than zero.

[1] https://support.google.com/docs/answer/3093175?hl=en

> "No debt" is synonymous to freedom on so many levels in life design.

No debt is indeed great freedom in general.

But housing is different. Do you plan to live somewhere? You still have to pay for it. For as long as you live you'll need to live somewhere and that means paying for it. Whether you call it rent or mortgage, you're still paying, there's no escape.

So, within those constraints, it is better to invest in a house than to enrich someone else for the rest of your life.

I just wanted to say that I agree 100% with your worldview. It's hard to explain it here often. Maybe it's a Protestant thing? From Estonia here.

Japan I think is a bit different. Over there, housing is seen as a real commodity. In Tokyo, housing is torn down and replaced with newer stock all the time, often without any additional occupancy. Houses in Japan do not appreciate the way they do in the rest of the Western world.

>Oh, Germany. Somehow Germany has escaped the constantly increasing house price effect

I hope that was sarcasm since housing in Germany has gotten super expensive.

> Going into debt at the lowest interest rate you'll ever be offered to buy a leveraged asset that's likely to increase in price

To a large extent house prices are sensitive to interest rates. A bank will look to your income and say you can make a monthly payment of $X. At historically low interest rates that’s gonna mean a bigger loan. As everyone’s ability to borrow goes up, so do the prices. As rates rise, for the $X dollar payment, the ability to borrow declines, and that puts a down draft on house prices.

> buy a leveraged asset that's likely to increase in price and reduce the overhead you pay on your largest expense

Oh boi. When you buy this you are giving all this benefit to the seller that takes these into account. You are not making a profit off of it unless the value increases more than the market expectation for it.

So its a leveraged bet that it will be better than expected by the market, and if it goes the other way you are toast.

>Going in debt for 30-40 years has zero appeal for me, it just seems like a terrible move.

Buying a house isn't for everyone, sure. But this is a serious misunderstanding of what "going into debt" is. You're not buying a TV you'll throw out in 5 years, you're buying an asset class that has a history of appreciating in value over 100+ years that you can get incredible leverage on. In the US and Canada, at least, buying a house for a decent deal (in "normal" times, not at insane prices) is a no-brainer investment.

You mention buying companies...that's just a different asset class, but the idea is the same. It's not valueless the moment you buy it, you now have an asset.

>Buying estate = de facto being in debt for the entire career and then some, plus having to pay all repairs, anything.

Do you think this is all happening for free as a renter? At what point in your life do you plan on not paying for shelter?

>buying an asset class that has a history of appreciating in value

Correction - over a time period of decreasing interest rates. Housing, on its own, is a depreciating asset. It is a consumable like a TV. It deteriorates with time.

"Housing always goes up", without an understanding of why it has been going up, can be a dangerous belief and could be one of the reasons why housing at the moment is so expensive relative to rents.

housing might depreciate, but the same is not generally true for the real estate it sits on

Land values can turn around, especially if desirability of the area changes.

Is this also true for places like Detroit, small inner towns in the mid ? West... my impression was that once banks got involved lending money the prices took off, I was under the impression that getting a house loan directly contributes to the amount of money in circulation...thereby increasing ? inflation.... another myth?) I heard was that in China houses are leased for x years (80?) thereby leading to a lot of Chinese buying foreign Real Estate.... if RE has the reputation of accruing value surely it'd be a good thing to put the brakes on companies from investing in it? I mean seeing endless same housing is kind of mind numbing....

I also have a theory that high RE prices are a perfect vehicule for stashing/laundering large sums of money....

Also to what extent isn't it political cronyism with the construction industry that leads to such shitty urbanistic decisions like we have in Romania where people are pawns to short term greed ...

> in China houses are leased for x years (80?)

It's worse. It's the land being leased for 70 years. House usually can't last that long anyway. But not owning the land and no guaranteed usufruct after 70 years is big.

Thank you for teaching me a new word, "usufruct": https://en.wikipedia.org/wiki/Usufruct

Exactly. I believe interest rates bottomed sometime in 2020-2021. Those rates are not going to be seen for another few decades. It remains to be seen what this will do to house prices. What happened to most speculative tech stocks since 2021 can also happen to other asset classes.

It seems pretty premature to say that mortgage interest rates that happened barely over a year ago won't happen for a few decades.

You could have looked at interest rates below 3.5% in 2013 and said the exact same thing; that was the lowest interest rate in over 40 years!

I am absolutely sure. Look at inflation, for one. We haven't seen these inflation numbers since the 1980s, and this is in just 2 years since the biggest central banks opened the money spigots. I'm a millenial so I don't relish it, but "you ain't seen nothin' yet."

Most of the housing bubble is actually a land price bubble. Land is only a long-term depreciating asset in shrinking cities, because demand for the land is decreasing.

Simply put, house price is a function of rents for similar houses and the multiple of annual rent that houses sell for. The multiple is primarily a function of interest rates, and a significant proportion of house price increases in recent decades has been the increase in multiple. It is also a function of expected future house price growth - the higher the expectation, the higher the multiple, which is where psychology and FOMO comes into play.

The interesting thing about these ingredients that decide the multiple, is that they can turn sharply. If interest rates go up, and multiple starts to contract, at some point the belief that house prices always go up will be shaken, and instead of pricing in future house price growth, people will start pricing in future contraction.

Level of rents is a function of the state of local economy (broad salary levels, more or less) and house supply. Can probably broadly be approximated as GDP growth - so fairly low.

So at interest rates at very low levels and arguable on the way up, and growth expectations seemingly very positive, and economic growth looking shaky, it looks as if house prices may have more downside than upside.

Housing [land] prices have been grinding higher long before the Great Decline in interest rates

https://fred.stlouisfed.org/graph/?g=kYEb

That chart seems to only go back to 1987, which is after the decline in interest rates started: https://fred.stlouisfed.org/series/REAINTRATREARAT10Y

Here you go https://observationsandnotes.blogspot.com/2011/07/housing-pr...

According to this, home prices were mostly flat from 1900 up until the 1970s. The proves the opposite of the point you are trying to make.

This is adjusted for inflation

Residential real estate valuations haven't been based on the house itself for a while. Prices are based on:

1) the house itself (this generally depreciates)

2) land (this generally appreciates)

3) a retirement account with great tax benefits (this value can fluctuate based on local, state, and federal laws)

4) a ticket into a good school district (this value will fluctuate based on the the performance of local schools)

5) a ticket to partake in a thriving local economy (this value will fluctuate with the local economy, and has recently been shaken up by the rise of remote work)

Any speculation on real estate prices and whether or not we're in a bubble has to take these things into account.

Interest rates for mortgages follow 30 yr treasuries which won't get very high. The Fed will come in with full on yield curve control at some point. 30yr treasuries are at almost 3%, already. I can't imagine they'll get higher than 4 or 5%, at least for not too long. The world is way too addicted to low rates. if interest rates rise for any long period, something will break, really badly, there will be a fear filled crash and the fed WILL come in: you can bet on that.

Not sure I want to leverage up on housing through the boomer die-off. Plus, there are way better investments.

Doesn't the boomer die-off mean that the boomers' children will be inheriting, not just homes, but piles and piles of liquid assets, much of which they will use to get into the housing market?

After all the boomer generation, on average, has over-provisioned for old age, whereas millenials are still underhoused.

>After all the boomer generation, on average, has over-provisioned for old age, whereas millenials are still underhoused.

Have they over-provisioned? Everything I have read indicates meager savings for the vast majority of the population, who will need to rely on Medicaid and Social Security to eek out the remainder of their living costs.

Nursing home care is especially costly in the event one does not die quickly, and the government can and I assume will seek to reimburse itself from the estate once the elder dies.

I think the reality is more subtle.

A large number of poorer elder people will be in dire financial straits, forced to work beyond their ability to do so and unable to pay for health care.

However there are also a smaller number of extremely rich baby boomers and a very large number of comfortable middle-class ones. The former will obviously pass on large amounts of wealth. The latter have been forced to save large amounts for their old age, because they have known since middle age that the state would not provide for them very well.

In some cases they have decent final salary based pensions and other very good retirement benefits, no longer available to younger generations. In other cases, they have invested significant sums over the last decades and also made large investment gains.

This group has tended to save for the 'worst case' scenario - a long retirement of leisure spending, followed by drawn out old age with significant care needs. Most of them will not need all this capital - they'll either die younger than expected, or have better health into their 80s and 90s than they feared. The excess will be handed on to their children - and will be a significant source of intra-generational inequality in the future.

Remember also that middle-class baby boomers remain an electoral 500-lb gorilla. Governments have been very reluctant to claw back their benefits and care provisions as fast as has happened to other groups. In some cases they will be provided for better than expected when they planned for retirement.

I think you might be referring to top 10% of households.

https://dqydj.com/net-worth-by-age-calculator-united-states/

75th percentile gets to only $800k by age 70, and that is including the equity in their home. Maybe the beneficiaries of the 70% to 90% households will end up with real estate worth a few hundred thousand, but I do not see much wealth being passed down beyond that.

Labor is only going to get more expensive as greater proportions of the population age out of the workforce and become labor buyers rather than suppliers. Unless many start dying younger than anticipated without using a lot of medical and nursing home care, I would not expect much if I was their descendant.

A 'few hundred thousand' is a lot of money to inherit, and for lots of middle-aged people and young families it will go straight back into the housing market, typically in areas that are already quite hot.

Note that the upper quartile having $800k includes $500k which isn't in their primary residence. Older people tend to own cheaper houses than you might think, since they are more likely to live in more rural areas.

If you're 70 and have a house you might be able to live quite a few years on half a million. In practice, you have a decent chance of dying before you spend all your capital.

> This group has tended to save for the 'worst case' scenario - a long retirement of leisure spending, followed by drawn out old age with significant care needs. Most of them will not need all this capital [...]

Sure sounds like this group would have had happier, more rewarding life experiences, and at a macro level made a more appropriate investment of effort, had they been able to trust a social safety net.

I believe the Boomer generation overspent. It's their parents that over saved (habits learned during the depression).

>you're buying an asset class that has a history of appreciating in value over 100+ years that you can get incredible leverage on

This is precisely the problem. It's not just companies buying up homes, it's also private individuals buying up housing to relist on AirBnB or other sites in order to further extract value out of their purchase.

If you look at a country like say, Japan they don't have this issue because housing depreciates and is not treated as an investment.

> I just turned 30 and do well for myself as an employed consultant, but I wouldn't consider buying the dip, unless the dip is at least ~100% of the current market prices (which I don't see happening, but who knows).

You wouldn't buy a house unless it was essentially free? A dip of ~100% means prices at ~0% their current level.

> Going in debt for 30-40 years has zero appeal for me, it just seems like a terrible move.

Debt on its own doesn't matter so much. You already know that you will need to live somewhere for the rest of your life, so that expense is unavoidable. The question is whether you want the amount of that expense to fluctuate according to the market, or if you want to lock in a steadily-decreasing expense with a 30-year fixed rate mortgage (steadily decreasing in real terms, because $100 in 30 years will be worth $50–60; yes, property taxes are likely to increase, and maintenance will move with the market, but mortgage interest and principal will decrease in real terms).

> Even if someone gave me a million Euros, I wouldn't spend 600k of those on a house and then another 300k on renovations, that seems like a terrible waste of resources. With that kind of money, you can buy three small companies in Germany, or stop worrying about retirement, etc.

$1.05 million is hardly enough to live on. That's just $35,000 per annum. It's not nothing, and I surely wouldn't sneer at a gift of $1.05 million, but it wouldn't let me retire today.

35K year is a lot of money. It is close to the average yearly salary in Germany, the country he has mentioned, and this is not including taxes etc.

So is $1mi. For a lot of countries, this is money you could retire on.

> Going in debt for 30-40 years has zero appeal for me, it just seems like a terrible move.

That's not the best way to look at it.

Unless you plan on being homeless, you're already inevitably committed to a monthly housing payment for most of your life.

So the decision becomes, do you pay someone else to enrich them and commmit to having to pay for the rest of your life? Or do you invest in something where you partly pay yourself and there is an end (even if far) to the payments, so when you're old you no longer have those monthly payments?

> With that kind of money, you can buy three small companies in Germany, or stop worrying about retirement, etc.

What are the closing costs of purchasing a whole company? How much would you pay for an accountant to go over the books and a lawyer to go over the forms?

I don't know how much homes cost in Germany, but surely if people have 600k to spend, they would buy companies too, would they not? Why do they buy homes instead?

The real irony is that these people putting a floor on the market are mostly the same demographics screeching about how housing shouldn't be an investment.

Yet another case of how society would be better off if people practiced what they preached.

Thank you for your comment. I think this is interesting:

"Higher rates will make current prices unsustainable. As soon as they correct to the point where monthly payments are back to what they were last year, there will be buyers, only too happy to overextend themselves to get out of renting."

So, higher rates are effectively a transfer of wealth from homeowners to banks? How does this serve to combat the current inflation issue?

I don't understand how you draw this conclusion from what I said.

Regardless of high or low rates, banks borrow low and lend high, and live on the difference.

High rates, if you want to express yourself in those terms, a transfer of wealth from people with debt to people with assets.

This captures my assessment on the matter.

With the housing shortage and unmet demand, we are at the margins whereby the ones buying are well-off.

The question to ask is if the rate of new housing and the rate of capable buyers will diverge.

As long as supply is low enough that the supply of capable buyers keep outbidding each other, housing prices will keep rising or at least plateau.

Higher rates will have an affect on diminishing the rate of capable buyers entering the market, but if supply is still low and the demand for home ownership remains high, I don't foresee anything drastic happening to the housing market.

> The true demand from people with the intend to actually live in the estates has been constantly decreasing since around 2000; the real salarys dropped since then, so did the buying power.

> When 90 (?) percent of people simply lack the buying power to participate in the real estate market, but the other 10% happily sell each other estates, that's not a bubble, the real estate market just stopped interfacing with the vast majority of the population.

Nonsense. The home ownership rate is 65%, in-line with the long term average and the same as it was in the year 2000

https://fred.stlouisfed.org/series/RHORUSQ156N

I’d disagree in the sense that the home ownership population differs from those that have been buying or selling in the last few years.

If millennials were not buying homes at similar rates to their parents, the home ownership rate would be declining

There is no need for hypotheticals, we know for a fact they are not buying homws at a similar rate as their parents

Home ownership rates for people under 35 is the same as it was in the mid-90’s and only a few % lower than it was at the peak of the housing bubble

People still talk about millennials as if they are still in their 20s, but the oldest millennials are now 40. I'd guess that age of first home purchase has been trending up for a while.

More people are investing in real-estate, and less millenials are buying.

Millennials made up 43% of home-buyers in 2021, the largest of any generation. That's up from 37% in 2020.

https://www.nar.realtor/newsroom/nar-report-shows-share-of-m...

>Nonsense. The home ownership rate is 65%, in-line with the long term average and the same as it was in the year 2000

The homeownership rate is counted in terms of households, no? So it can be kept artificially high just by having 20-somethings no longer move out of their parents' houses.

That wouldn't count against it, but it wouldn't count for it either.

The Baby-Boomer generation in the US is increasingly deciding to "age in place" rather than downsize and/or move to assisted living facilities. This is certainly a factor in the ownership figure you are quoting. There has been lots of coverage in this trend the last few years as well. See:

https://www.nytimes.com/2021/07/08/realestate/baby-boomers-r...

and

https://archive.ph/0LXQu

> that people were given loans they should either never have gotten (2008) or that they shouldn't have asked for

I bought my house in early 2007 and mortgages were indeed crazy back then. My analysis said that at the mortgage rates for a 30 year fixed mortgage back then (a tad over 6%) said that my ideal home financially would be around $H or less, that I could go up to 1.25 $H without house payments being high enough to crimp my currently lifestyle, and maybe I could push it to 1.5 $H if the house and location were really great.

When I went to get a mortgage from the now infamous Countrywide Financial they looked at the same data I had and pre approved my for a loan of around 3 $H.

That was an absolutely ridiculous amount. I had the analysis to prove that, so just laughed and went back to looking at homes in the under 1.5 $H range [1].

A lot of people who didn't know how to do their own analysis thought that the mortgage companies would only approve them up to what they could reasonably afford, and so getting a pre approval for much higher made them think they could actually afford way more expensive houses than they actually could.

[1] In case anyone is curious, I found a house that was almost perfect as far as size, layout, and location for 0.9 $H and almost bought it, but then found that its water source was a well owned and shared by a group of 4 houses. I could not get satisfactory information on how maintenance and repair of the well was handled. I ended up with a place a little bigger, in a better location, but without quite as nice a layout for 1.16 $H.

Not familiar with this topic. What does $H mean? Annual gross salary?

Just a number he made up for a story.

$H is the price of the house in OPs post.

I figured it was $100,000 but I could be wrong.

I'd like to provide some context around the approved amount. Countrywide (and other originators) get their rates from Fannie Mae and Freddie Mac. These two have guidelines set to approve X monthly payment based on your income (for instance, you can spend 28% of your income on your primary house).

These guidelines are set for BROAD populations - specifically very poor and "normal" people have the same guidelines. For poor people, a high threshold is important to "get them in a house" - they might genuenly need to spend 30% of their income on rent or mortgage. For "normal" people, that same percent is "way too much money" for "way too much house".

The result is that normal people get approved for a big fat mortgage. But we don't want a big fat house, we try and buy a normal house, but we really want it so we pay "just a little more than it is actually worth" and drive the price up "just a little".

Of note, FNMA and FDMC adjust their guidelines for high COL areas and some other guidelines. And also, their guidelines have moved over time. Also, it is a generally accepted "fact" that home ownership is good, and poor people should be encouraged to buy a house.

Imagine if billionaires used the 28% rule.

Important to compare like renting a modest Apartment. If that payment that works for you is X, maybe 3X is too much house? Houses also take a lot of repair, and need things like new roofs and HVAC.

Billionaires buy houses by the thousands and then rent them out.

There are a few areas of the country where you basically cannot rent from a private party anymore. 90%+ are one of a handful of mega rental corps.

> Also, it is a generally accepted "fact" that home ownership is good, and poor people should be encouraged to buy a house.

Which has the undesirable effect that it makes it difficult for workers to move to where the good jobs are, so now you have situations where workers are stuck in place A, doing job 1 for $X even though they should probably go to place B, and do job 2 for $Y -- because to move from A to B they'd have to buy a house in place B, and sell their house in place A, which is both annoying and relatively expensive.

This varies culturally, IIRC Poland and Germany - despite being neighbours - have different cultural assumptions about whether it's "normal" to buy a home rather than renting.

Maybe a shift to more Work From Home reduces the problem by allowing workers to take more jobs in place B despite actually living in place A.

> But we don't want a big fat house, we try and buy a normal house, but we really want it so we pay "just a little more than it is actually worth" and drive the price up "just a little".

The problem here is really with the supply of homes. If there was a good supply, issues like this would never arise, or would rarely arise, because there is always a house just as good down the street that you don't have to overpay for.

Part of the problem is the supply chain but I bet alot can be done by the govt to get out of the way. Of course the other side of the coin is activists that scream both: "We need more housing" and "how dare you build more housing" in the same sentence.

Out of curiosity, would a new well have been possible for less than 0.26 $H?

(to separate the house from the group, not a maintenance hedge)

Figure a well can be drilled for a few thousand. Depends very much on the area though, some locations you can get plenty of water from a small hole not very deep (you can pound a pipe into the ground - with a hammer, put a pump on top and get plenty of water). Other places you have to go very very deep to get water and even then you have to be careful not to use too much. And there is all kinds of in between. Worse, sometimes one side of the lot will have plenty off water and the other will not. Then you have to watch for local issues, keep the well far from the septic system (including your neighbors).

Almost certainly-if any new well were allowed at all.

Could also have assumed that a well problem would entirely fall on you (worst case) and budget accordingly.

Good luck rolling that into your mortgage

Good question. It didn't occur to me to check. A bit of Googling suggests that in my state a new well would indeed have been less that 0.26 $H. At the high end of depth for this area maybe 1/3 of that.

I have no idea if it would have actually been possible, though. Wells aren't allowed to be too close to septic tanks and septic drain fields, and there are other spacing constraints too. From what I recall of the way the house was placed on the lot and where the septic tank and drain field were there may not have been anyplace on the lot acceptable for a new well.

This. And it was not only happening in the housing market, but also in a few other markets such as arts and certain jewelry. What happened during the last ~10 years is that the huge loads of money pumped into the financial system by central banks ended up with only a select group of people, who just got richer and richer and were looking for ways to spend or invest their excess money. And that caused an inflation in the markets where they liked to spend it.

I think the bulk of the inflation we’re seeing is from the pandemic where we shut off production by making everyone stay home but then dramatically increased demand by writing everyone checks.

maybe one more interesting detail worth noting:

c) private equity firms are buying up insane amounts of real estate, being able to outbid regular home buyers and (don’t quote me on this b/c I’m not 100% sure) pay cash for the properties they buy.

Which they only did because they ran out of stuff to invest in (while still attracting so much other capital to invest at all), and the valuations of everything else was already stretched. not suggesting these firms were trying to do anyone favors by allowing people to afford homes the rest of the time, its more so that the math temporarily made sense with that much liquidity in the market so they jumped into real estate

(And yeah people would rather pay the government than invest in your startup so lets not pretend investing in main street was a real option)

Too much cash chasing too few decent investment opportunities is exactly the problem. The more cautious end of institutional investors have nowhere to go. Blue chip shares are at incredibly high valuations and bonds are returning next to nothing. Interest rates needs to be at about 3 - 4% to make government bonds broadly attractive, which will then make residential property uninteresting to this kind of investor without putting too much strain on the regular home buyer.

There have been a lot of headlines about this, and in the handful of markets I’m sure this has a price effect, but in the us market as a whole, they are $10b-$100b? of a ~25T market, it just doesn’t move the needle

It doesn’t need to be spread out to have an effect. If the investments are concentrated in cities, that raises the price of housing in the surrounding areas as there is more demand for rural properties from city residents trying to escape the higher prices.

Anecdotally, I’m seeing crazy numbers for “average” houses in the small towns surrounding the DFW metroplex. Hell, the house my parents built in 2006 for $140k is now selling for $350k. 1200 sqft mass produced trac home.

But it’s an hour drive to downtown Dallas (less if no traffic) so plenty of people are commuting but making city salaries. It’s the same in every city across America.

There are 950k homes for sale in the us today (down from 1.05m a year ago)…if I sold $50b of homes tomorrow @ $430k median price = 120k that would bring inventory levels back to where they were a year ago and represent 2% increase in annual home sales (on ~5.8m), by your logic national home prices would drop…I don’t think that’s a large enough number for that to happen… maybe if I sold $0.5T?

You're forgetting a.2) the "wealthy" people usually have high incomes, and the x10 houses are usually in high tax states, and housing is a huge tax break.

~20% or my housing "cost" is paid for by a tax break for owning a house. Another ~20% is principal.

When you also factor in that the Fed guarantees to devalue money at AT LEAST ~3% per year, and you have 5x leverage (or more) - that's another ~15% effectively subsidized by the government.

So when you have sufficient cash flow - it's easy to look at your housing "cost" as only ~40% of the actual payment.

Compared to rents, this is a steal.

With the SALT cap at $10k and the mortgage interest deduction cap limited to $750k property value, the ultra-wealthy are not really benefitting from this as much as you are saying.

Someone with a $750-$1M home is getting roughly the maximum tax break available, and someone with a $5M home is paying for everything above that first $1M themselves* without any extra tax incentives.

*Except in California due to prop 13 many of them are paying a tiny fraction of the property tax they should be paying, but that's a separate issue.

Most "wealthy" people, by definition, are not "ultra wealthy". That's where the majority of the wealth is - but there's far better schemes to avoid taxes for that group.

Home buyers buying these x10 houses are pretty much limited to the top 10% in income - the vast majority of them are not ultra wealthy.

Its really not that bad in the US especially compared to its peers https://awealthofcommonsense.com/wp-content/uploads/2021/09/...

And it will probably stay a leak, even if it grows. People keep expecting another collapse like 2008 but that does not seem likely to me. People need houses to live in, so demand will always be there. And unlike 2008, banks aren't handing out sketchy loans en masse to people who cannot reasonably afford them.

Due to QE central bank bought stock from private equity - and private equity used thia money to buy homes.

What you wrote is complete nonsense

So where did the QE money go?

It causes bubble after bubble while central bank holds the bag.

Housing legislation is something that few politicians have been talking about in the last decade. We have spent a lot more time talking about healthcare, and student debt, but not the number one financial factor which is housing. You really can’t leave it alone with legislation every 20 something years, you sort of have to keep evaluating and reevaluating it. Otherwise while we let the current systems in place fester, what you get is side effects that we simply can’t address until decades later (e.g Canada banning foreign buyers, ok great, the damage has already been done).

Many of the investor class had the first mover advantage where they simply bought a house before everyone else and can now leverage those gains into more investment/rental income property. Couple that with foreign investment. Couple that with home equity and margin loans. Couple that with the private sector collecting houses. Couple that with mortgage fraud where people don’t pay investor taxes and continuously buy homes as a first time home owner. Couple that with with all kinds of things. I know a home owner that owns multiple homes, stopped paying taxes on one and had a tax lien discharge. They go on to sell that other home at profit and pay off the IRS. They never took the hit on their first home in any way. Multiple ownership is a problem, period.

We finally end up to where we are today and the only powerful entity that modulates this is the Fed, but not a single politician is taking up the battle over the fact that the multiple home ownership is killing our society at the moment.

Couldn’t agree more. Another issue: home owners are incentivized to see their assets appreciate.

Makes passing meaningful legislation hard, especially if it will actively hurt a substantial number of voters (and every politician).

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