Housing wealth is meaningless, destructive and fundamentally changing society
theguardian.com
theguardian.com
And I've always wondered whether it isn't a bit of a scam, really. Not a deliberate scam, just one that we've all fallen in to. [0]
People buy a house for $1m and then they're pleased as punch when a few years later it's 'worth' $1.5m.
But what's the point of it being worth $1.5m? Because now if you want to move, the house that you have to buy is worth proportionally more.
So at what point does anyone get to keep the money?! The only ones that win are the banks.
[0]: Except me, because I never bought a house, and now I'm 46 and I rent. :-/
You get to keep the money when you move to a less expensive area. Or you retire and downsize.
I live in a satellite township to one of the poorest suburbs in Melbourne, Australia. My house is tiny, too small for the four of us, and has cost us nearly $100k just to make it weather-tight (also with $10k of solar panels). So, in total, we have spent nearly $800k for a small home that is too small for our needs.
If I were to move somewhere less expensive I would not be able to do my job. As it is I have to spend 3 hours a day (minimum, some days it can be up to 5 hours if there are train issues) commuting to my place of work.
Australia is a huge country with a handful of large cities with amenities and only hundreds of small towns which do not. The only places where housing is on par with US towns (i.e. 150k-300k) may be in the middle of the outback, 10 hours drive from the nearest city, and be so ramshackle and run-down as to be unlivable.
I talked to a friend of mine and pointed out that if they sold their house in the city they could move to the inexpensive part of the country where I live and basically retire and live off investment returns.
But it didn't even register as an option.
I'm not against people moving around, I would love to go live in Portugal eventually, but the Portuguese at the moment are quite angry at the cost of their housing.
Remember that rent is never 100% of your expenses
The biggest problem with retiring abroad is Medicare doesn’t transfer, so you have to fund your own medical care (and family you can’t see as often).
When someone from SF sells their $2.5 million dollar home to retire to Orlando, it doesn’t really matter if Orlando median prices recently doubled from $200k to $400k.
Someone in Orlando who bought a house at $200k might feel excited that their house is worth $400k but it’s irrelevant because if they wanted to move house then wherever they might like to move has also increased in price.
I was at a drop-in health centre the other week. There was an old guy - 80s - who had come in from country NSW to have his wounded leg looked at.
While we were waiting he told me that there were no doctors in his local hospital. None.
His son lives in Canberra and he'd told him to drive in to be able to see someone.
People very frequently sell out of high real estate markets like the Bay Area and move to places in Arizona and Florida that have much better elderly healthcare.
Setting that aside, it’s not a Ponzi scheme when anyone can sell their security. You’re probably thinking of the Greater Fool Theory.
Either way, it’s still not correct because making money isn’t the primary reason everyone is buying homes in the Bay Area at least. They need a place to live and don’t want rent to go up in perpetuity.
Because you own the house via loan, house prices going up 20% could easily mean your equity going up 100-200%. That’s the key thing that means you’re in a better position than the static house price environment.
I bought a house at the end of 2020 for $430k with a loan of $337k.
I can't borrow more than that now, my real income hasn't increased, I still have the same sorts of liabilities and expenditures that I had then.
So even though my house is now worth maybe $700k, if I want to move, I have to find a house that I can buy for $700k.
I have paid off something like $20k, so maybe I could find a house for $720k and move into it.
Thus the only way I can move into a bigger/better house is to move somewhere that $720k gets you something bigger/better than in my current location.
But guess what? House prices are up everywhere. You might be able to find some lucky arbitrage opportunity, but you're not going to get any sort of noticeable increase in quality and size.
The advantage of owning a house versus renting is therefore not that you benefit from the rising price of houses, but that your buying power moves with the market and your "rent" is limited to the interest you pay on your loan (because you're paying down the principal as well).
When you're renting, you're flushing your money down the toilet plus trying to save enough for a deposit relative to a market price that accelerates well beyond almost everyone's capacity to save.
The "because you're paying down the principal as well" seems like a red herring, no?
If you bought a house for $10.00 and paid $100.00/month, it'd still be worth it even if none of that went to the principal. Heck, even if your house became worthless too, it'd still be worth it!
> When you're renting, you're flushing your money down the toilet plus trying to save enough for a deposit relative to a market price that accelerates well beyond almost everyone's capacity to save.
How do people make such a broad generalization without looking at any numbers? Shouldn't the costs and benefits of this depend on factors like the mortgage/interest rates? Is there a reason to believe that it's a net benefit regardless of the interest rate?
Paying off an interest only loan on a property may well be better than renting but it’s more like renting than paying principal + interest.
When you pay off an interest only loan your “rent” costs are your entire mortgage payment.
When you’re paying principal + interest the “rent” is still only the interest portion of your payment.
In both cases you keep pace with the market better than if you’re renting.
If the only way you could avoid renting were to get an interest only loan then that’s certainly a better option.
> Is there a reason to believe that it's a net benefit regardless of the interest rate?
Yes renting is objectively the worst possible financial situation regardless of interest rate (definitely true in Australia, possibly true elsewhere as well).
Continually "upgrading" your primary place of residence is not something that anyone does. Unless you live in the ACT you would be forced to pay stamp duty again too.
I think maybe the “use equity to buy investment properties” advice was popular when lending was super loose prior to the GFC and maybe some dodgy brothers mortgage brokers are still getting them through but without an increase in income you can’t just ratchet up your leverage (at least not anymore, I know 10-15 years ago everyone said that you could do this but I didn’t own a house at the time so I don’t know if it’s actually true or just hype sold by investment gurus flogging overpriced Gold Coast apartments).
However, there are a few other factors that can increase borrowing capacity significantly. First, personal incomes tend to increase over the course of your lifetime as you get promotions. Second, when in a falling interest rate environment your borrowing capacity is increasing at the same time property prices are being pumped up. This is exactly the time when people tap into that equity. Third, you can get a slightly better rate at lower LVRs, which can help a little bit as well. Finally, a lot of the people who use this strategy have very high incomes to begin with and their borrowing is constrained by their available capital, not their incomes. This is why every neurosurgeon has a negatively geared property by the time they reach 30.
The reason this has been a popular strategy for a long time is that interest rates have been falling for the last 30 years. It's not so attractive right now as interest rates are increasing.
People seem to think they will downsize and cash out their gains, but very few do. Australian cities are at a minimum 1000km apart, if you actually want a good price differential you are going to Perth, that's over 5000km away (NY to London) so you are a long way away from any friends and family you might have.
But if you move to a cheaper area, say because you now work from home, or for whatever reason you don't need to be in the expensive one anymore, the difference has also proportionately increased.
I also think the situation is crazy (specifically in France, where I live, too). But I don't see an easy way out. Regular people owe way too much to their banks to be able to accept a drastic decline in prices.
By creating systemic housing shortages that enable rampant speculation and incentivize hoarding and "investment" in non-productive real estate ownership, we are deciding that real estate owners deserve a bigger share of the output of our labor.
When a majority of the voters in a country have most of their wealth in housing assets, this is merely those with the greatest vote deciding to use regulatory capture to enrich themselves, directly at the expense of those who do not own.
Land is expensive for sure, but why isn't building dirt cheap? You could wax about the market, but does that matter if we as a society are this terrible at building homes for our citizens? There is a perversion of the economics, and society suffers for it, but it is still a social problem to solve. Something we could write policy to fix. But we are slaves to the dollar so we won't do anything until the market breaks entirely.
It's very counter-intuitive, but in essence labor is reallocated to its most productive applications, so if a certain type of labor does not get more productive while others do, labor is moved to other applications (unless you are willing to pay more for less)
Houses aren't like this: they're still made with the same primitive construction processes used centuries ago, by people who are all semi-independent contractors and not an organized labor force.
If houses were made in factories the way cars are, you wouldn't be complaining so much about construction costs. Sears tried addressing this problem over a century ago with their famous kit homes, to an extent (by standardizing and factory-izing much of the carpentry work and then delivering the parts to the site to be assembled more quickly by local labor), but those are gone now for whatever reason and the industry returned to doing all the labor on-site.
Hopefully 3d printing could put pressure on housing labour pricing. This is probably our best hope.
That's not surprising. Distributing the cars to the customers from that centralized assembly line is easy.
Houses, not so much. Mobile homes can be built and distributed that way, but that's the hard size limit since you have to transport them via roads.
With mass-produced houses they do put together cookie-cutter sections of walls and roof structures at the assembly line and truck those in to the site where they get assembled together. But you'll always face a hard size limit since no section can be larger than what can be trucked in. Even a tiny house is far larger than what a wide-load truck can take on the road.
Another not insignificant problem that people are aware of is that all the zoning/permitting also adds significant hidden cost to the process because builders have a lot of downtime waiting for that. There's also the hidden cost of improved safety standards & the compliance checks that come with it - 100 years ago you probably didn't have to have someone from the city come out & certify all the work was done to code. Sure the cost of the inspector is a direct cost, but the need for the inspector in the first place adds random delays for the contractor work & they then need to budget cost into their estimate because the person paying is paying a roughly fixed cost for the work to get done.
What's the policy you want to write that would fix things?
The cost of the home without appliances is also much higher. And it’s not just compared to the 50s, it’s also compared to the ‘00s and ‘10s where we had more or less the same appliances we have today.
Sometimes they are sold with the house as part of a bundle, but that would be called a “conveyance” as it’s not considered “real” property (in the legal sense) and is usually a separate line item or form in a house sale contract.
Let's go through them.
> Well, a brick and mortar home isn't as well insulated.
Brick is actually a pretty good insulator. They don't use it because it costs more than what they do use, so that can't be the reason.
> You've also got major appliances that weren't common place a century ago (fridges, washer, dryer, dishwasher, etc), waaaay more lighting, HVAC systems, etc.
Houses literally have had appliances and HVAC systems for a hundred years, and largely modern ones for at least half that long. This doesn't explain why construction costs so much more than it did in the mid-20th century.
> Another not insignificant problem that people are aware of is that all the zoning/permitting also adds significant hidden cost to the process because builders have a lot of downtime waiting for that.
This is where you get into a real issue, but it also has a real solution: Have combined permitting and combined inspections. Don't require separate permits for every part of a new house, have a single permit application for "building a new house" with a single approval.
Also, comb through the regulations and remove the ones that are effectively micromanaging minor trade-offs. Legal prohibitions should be for major safety hazards, not to legally mandate every marginal improvement anybody can come up with for anything which then has to be individually evaluated, inspected and signed off on in every new construction project.
Put all of the marginal improvements into an optional certificate builders can get if buyers demand it -- and if buyers rarely find it to be worth the expense then reevaluate the cost effectiveness of what it takes to get it. The goal is to make sensible trade offs rather than to raise construction costs, right? (Note: The goal may previously have been to intentionally raise construction costs.)
> Houses literally have had appliances and HVAC systems for a hundred years, and largely modern ones for at least half that long
Just so we’re on the same page 100 years ago is 1923.
The first AC unit was installed in 1914. The first room AC was in 1931 for the “affordable” price of $10k-50k. There was not mass adoption of HVAC systems until much much later and homes weren’t design for central air until like the 50s or maybe even after that.
Same goes for fridges and washing machines. 1950s was when that stuff became a bit more common place. But the first fridges started trickling out in 1913. Freon came in the 1920s and fridges became more common place by the 1930s. Freezers came later in the 1940s but before that it was ice boxes if you were on the wealthier side. Same goes for dishwashers and laundry. It hasn’t been a hundred years yet and those innovations really became commonplace only after WWII because America became super wealthy (only major power not massively impacted by WWII) and was heavily industrialized for the war effort and those factories and manufacturing expertise could be repurposed for non war production making goods like this cheap.
Not really, but 10-20% of the price is not small.
> The first AC unit was installed in 1914. The first room AC was in 1931 for the “affordable” price of $10k-50k. There was not mass adoption of HVAC systems until much much later and homes weren’t design for central air until like the 50s or maybe even after that.
The air conditioning part of HVAC isn't a necessary part of housing construction even today. There are plenty of new homes sold in the colder parts of the country without central air.
Some kind of furnace or heating stove has been a common part of home construction since long before 1923.
> Freon came in the 1920s and fridges became more common place by the 1930s.
Does it really matter if it was 1923 or 1933 if the rise in construction costs wasn't until decades later than either of them?
Not really, no. The R-value is barely better than a sheet of drywall. It's better than many types of siding, but siding isn't for insulation either.
Anyway, I don't think walls are the main cost here, it's probably the frame itself. Where timber framing is not used they build fewer and bigger concrete columns using "formwork". I don't know if it would be cheaper in North America, though.
These are methods of reducing heat transfer since neither the brick nor the concrete are good insulators.
I don't get how "reducing heat transfer" is not "insulating" though.
Another plus of bricks I left out is soundproofing.
Sure, with some exotic materials and fancy tricks you can get something possibly approaching mediocre with bricks. This is fairly niche and not part of the general calculation. I'm happy to revise my opinion if you show a type of brick that is readily available and commonly used for building that has a useful R-value. As far as I'm aware, that doesn't exist outside a few niche products.
> I don't get how "reducing heat transfer" is not "insulating" though.
I never said that.
> Another plus of bricks I left out is soundproofing.
Sure. There are many advantages. I only and specifically took issue with your claim that brick is a good insulator, because in the general case it is not.
[0] - https://bfi.uchicago.edu/insight/research-summary/the-strang...
The thing that satisfies both of them is regulations that increase the cost of construction. The builders get to put the money in their pocket (bill for more hours on the same house) while raising the price and so discouraging more housing from being built (so the landlords get to keep collecting high rents).
I believe a more major cause is that people in general are not handy anymore. They don't do their cars and don't build their homes.
Comparing housing prices today with the 50s is like comparing restaurant pricing to a home dinner.
Regulations are probably not to blame (except zoning).
Like with spray foam insulation. If it is done at the right time, lower skill labor can install that better product a lot faster than carpenters can install batting.
If you can accomplish a few deals, wind and dine local (and I mean local local) investors and banks - money flows and you have a name for yourself.
Since 2019, construction costs are up 50%.
https://thoughtleadership.rbc.com/proof-point-soaring-constr...
IIRC construction costs are then split 40-50% labor and 50-60% material. So labor is roughly 24-30% of the overall cost.
[0] https://www.nahb.org/blog/2023/03/60-percent-of-home-sales-p...
The other problem is that since land is expensive, you have to build as large as possible to optimize resale value.
You don't really own your house the way you can own a car or a bicycle: the government treats you as a temporary custodian of its property and you must pay it dearly.
Also the same about an unfinished house. How about finishing one "floor", moving in and then finishing the rest?
You brought up the exterior needs to be finished. Do you expect to move in with just the frame? It seems fair to me to have requirements of basic livability and safety.
You could move in with things like some of the bathrooms unfinished, a kitchen unfinished if you have a kitchenette elsewhere, extra bedrooms unfinished, etc.
I wanted to move some non-load-bearing walls. To grant a permit, the city required I provide full blueprints for the entire house including the slab and foundation; documents they themselves didn't have when the house was actually built from the ground in 1950 nor when it gained a new floor in the 1960s.
Every time you open a permit, everything you touch has to be brought up to that year's code. You installed wiring in 2011 under the first permit but by 2020 they have new requirements and so you have to redo it because you want to add one outlet to the end that would have been considered perfectly safe in 2011 (and still is under any reasonable cost-benefit analysis).
Layers and layers of regulatory capture and revenue generation have made it financially infeasible to build houses gradually while compliant with the law. My city has somebody driving around trying to catch you working without a permit.
The only time when I encountered something even remotely similar here was when my parents lived in a big apartment building and they wanted to remodel a 4 bedroom flat into a 5 bedroom flat. We did need to get all kinds of permits, submit various certified drawings (mainly due to planned installation of the extra window on the outside), the permit was for 2 years, but it could be extended. I remember permits weren't expensive, but it took a lot of beaurocracy.
They needed all these permits, because it's an apartment building, also it's owned by a local version of a coop/housing association. It's a peculiar ownership structure I suppose common to ex-communist countries. Each member owns shares in the coop and the coop owns all the land, the buildings etc, it evolved from the communist times. It let people keep their flats without having to buy them fully. My parents couldn't buy more than a 5% stake in the flat and they paid rent for the remaining 95% (in addition to all the maintenance etc).
Many years later when I was building my house. The actual permit to build cost me $30 in fees. Of course I had to hire an architect, a building site manager, a land surveyor which amounted to around $3k if I remember correctly just for them to create all the paperwork, put their stamps on it and certify what I'm about to build is not going to fall on someone's head a decade later. Once I finished the house I had to submit a notice of finishing with 12 pieces of paper if I remember correctly that ranged from my electrician and plumber statements with their respective qualification numbers, to my well water lab analysis results, the ventilation survey, the energy efficiency survey and more. Most of these cost me money paid to individuals that did the checks, but not to the city. The notice was free to submit (well, it's cost was included in the $30 for the permit).
I'd say the whole thing is a failure on legislators' behalf. Capital gains tax discounts (up to 100% if you've lived a year in each of your houses), unquarantined tax deductions for interest and upkeep, low land taxes, probably many more. All that while importing ridiculous quantities of low-pay workers.
But hey, how good is GDP growth.
Karl Marx showed us exactly how the scam works over 150 years ago and his analysis on the accumulation of capital has never been disputed.
Within a Malthusian, i.e. zero or close to zero real growth, economy. And assuming no wealth transfers, e.g. welfare and taxation. Or bankruptcies and recessions, i.e. where accumulated "fake" capital is destroyed. Or limits to economies of scale, i.e. where "the larger capitals beat the smaller" [1], e.g. diminishing marginal returns or even antitrust.
[1] https://en.wikipedia.org/wiki/Capital_accumulation#Marxist_c...
Overaccumulation ("when the rate of profit is greater than the rate of new profitable investment outlets in the economy") is analogous to starvation (population growth > food supply growth).
It turns out we were able to both increase food supply more than Malthus expected and the profitable investment outlets more than Marx expected. (We're also better at moderating population growth and destroying surplus capital than either expected. Both predicted proximate doom where it didn't appear.)
Malthusianism and Marxism are also both discredited (albeit not useless) economic models from empirical and theoretical perspectives.
You haven't even answered my question. Why would I waste my time?
That said, Marx was a 19th century economist. Just like every other 19th century economist, he did not have a time machine and did not predict neoliberalism or modern financialized economies, which are still in their first test run. Hold your horses, sweetheart.
What do you think it's about? Because I'm quoting from his work and its relevant Wikipedia article.
A better question is why’d you’d try to waste other peoples time with your silly irrelevant responses?
> Marx's analysis on the accumulation of capital has nothing to do with Malthus.
Just as (well less to be fair) it’s only tangentially related to the issues we’re facing.
The interplay between social relations and economic relations are the entire point of the body of work and are entirely separate from any particular conceptualization of economics.
It's a much more mature and honest stance to say, yeah, he was wrong about this minutia, but right on these other things.
I totally agree. And in a technical sense, his work is correct. If we didn't do wealth transfers or antitrust enforcement and had prolonged low or zero real growth, what he predicts would happen. (Same with Malthus.)
The point is those minutiae matter. Which is why, as a philosophy, Marxism holds its own. As an economic theory, it doesn't. Calling his theories on capital accumulation undisputed is simply wrong.
His later parts of Capital Part 3 on the class of landowners was good, but he never finished it. The first directive of the Communicst Manifesto, confiscating and redistributing land rents, was something that would have actually helped capitalism quite a bit to be more productive and improve everyone's life.
Calling this a "weakness" is just laughable. What other 19th century thinkers are you holding to the standards of a God?
We're smack in the middle of countries that measure and report homeownership [1].
[1] https://en.wikipedia.org/wiki/List_of_countries_by_home_owne...
There are more than two countries on that list. Most aren’t in the Americas.
Laos, Romania, Kazakhstan, Slovakia, Hungary, Croatia, Macedonia, Vietnam, China, Serbia, Lithuania, Russia, Singapore, Poland, India, Myanmar, Nepal, Bulgaria, Indonesia, Taiwan, Latvia, Oman, Estonia, Malta, Norway, Thailand, Czechia, Portugal, Malaysia, Slovenia, Spain, Egypt, Kenya, Italy, Iceland, Greece, Belgium, Luxembourg, the Netherlands, Ireland, the EU as a whole, Cyprus, South Africa, Finland and Australia each have higher homeownership rates than the United States.
Belgium for instance which has been one of the most intensively economically developed areas over the last 700 years higher he ownership and interestingly both one of the highest median wealth per capita AND lowest(!) wealth inequality in the developed world.
That’s pretty much the opposite of what you’d expect (of course you won’t reply to this comment now).
The rest is history. People were flipping homes and making bank until the financial sector melted down, and then they couldn't. These days prices still haven't recovered to their peak level. People might not be getting those mind boggling ROI buying homes, but in general is more affordable to do so, and many people seem happy about it.
> The phrase "Kobayashi Maru" has entered the popular lexicon as a reference to a no-win scenario. The term is also sometimes used to invoke Kirk's decision to "change the conditions of the test."
When they retire and downsize. The housing market is a scheme designed to funnel money from the young to the old. That’s why they keep voting for policies which keep house prices high. It’s not uncommon in many countries for the older generations, who bought their first homes for peanuts, to own multiple homes. They’re doing really well out of this chaos. All while young people are having to delay families because they can’t afford rent, let alone an apartment or home.
You buy a house. It grows in value. You then use that value as a down payment on a bigger better house that you now pay as much as rent for monthly. And you multiplied your wealth and have a wonderful place to live.
When you retire you sell that house, buy your kids a down payment, and yourself a place in a low cost of living area. And now you enjoy the fruits of your life's labor till you die.
But this all relies on population growth and a lack of better housing options. A. K. A. House prices generally always go up.
Now, you just about manage to buy a tiny starter home in your late 30s or 40s. You just about pay it off by the time you retire if you're lucky. You could never afford to get a bigger house.
Or you're in a shared ownership scheme because you could never buy the whole small flat you "purchased"...
It is a horrible spiral, and I have no idea what I can do about it, other than get richer parents.
"Just move" has been a very challenging outlook for me to combat :(
Apparently human psychology works in such a way that people tend to feel richer if their house goes up in value and they spend more as a consequence. People are weird...
I’m 38 and I rent.
I was ready to buy a house last year, but I got cold feet. It seemed like everyone selling was stuck going to where they wanted, depending on a buyer to relieve them of their commitment.
I think we mistake “buying” with “loaning”. I don’t have anywhere near 100% of a home’s cost in cash.
Do I want tax exemption for committing to paying debt for a decade or two? Sure! Do I want to be stuck living somewhere that is either insanely priced and easy to sell, or affordable and hard to sell? Nope!
I’ll buy a property when I’m ready to go Minecraft on the sucker.
For those with one house… your point is very valid. A lot of stress for a questionable return.
The system by design or “a good turn of fortune for bankers” by nature concentrates actual wealth.
If the rental prices are really low relative to buying the units outright, then you put the proceeds in an investment account, and pay a portion of the returns to rent.
Is there a single growing democracy that has been able to avoid this trap?
The entire western world shares the same problem, you'd think there would be exceptions if it was just politics.
1) The mortgage interest tax deduction directly incentivizes people to buy rather than rent.
2) Property tax instead of land value tax removes incentives to build higher-density housing on valuable land.
3) Most importantly, local zoning regulations outright prohibit dense development of land in desirable areas.
4) Regional acts like California's absolutely insane Proposition 13 (enacted by the people themselves) massively distort markets and act as giant ladder pulling mechanisms against future generations.
5) Additional tax incentives exist for capital gains on the sale of houses, again incentivizing "house prices must go up" thinking.
When your core voter base is Boomers who enjoy the benefits of all of these actions and no one cares about future generations because staying in office means campaigning for the next term, it creates a feedback loop between the voters who "got theirs" and the politicians who help them do it. It takes radical action, like Gov. Newsom unilaterally ending single-family zoning, to make any change.
This is too simplistic, in order to criticize Prop 13 it is important to understand why it came to be.
Not everyone can live in the same house, so there's always going to be winners (who get to live there) and losers (who want to but can't). Who should laws favor? Who should the law kick to the curb (methaphorically, or sometimes literally)?
One argument is that the richest person should always win and whoever can't keep up on the wealth race, is out.
But that argument doesn't sit well with a lot of society, turns out. If there's a big IPO in town and we suddenly have a few hundred new gazillionaires around, should they be able to kick out all the middle class people that called that neighborhood home for decades?
If you call Prop 13 a "giant ladder pulling mechanisms against future generations" (and you're not entirely wrong), it is important to realize that the lack of something like Prop 13 is equally a giant ladder pulling mechanisms against current residents.
Should the richest newcomer always win? Maybe? But it's not clear cut, so it's a complex issue.
Wouldn’t metaphorically they’d be already on top of wherever they were climbing using ladder?
Also even with readjusted taxes they’d still be in a significantly better position because instead being “kicked to the curb” (which is nonsense) they be able to buy a house somewhere else with the significant payout they’d get after selling to those gazzilionaries.
At the end of the day in situations you’re describing you’d want more/higher density housing which prop 13 (amongst other things) directly discourages.
If real estate values in a given area increase significantly while it wouldn’t be fair from the perspective of the individual for the society as the whole it would be optimal for the inhabitants to sell their low-density homes and later rebuy apartments/etc. built on top of the same land.
Yes, after being forced out by the increased taxes they can move somewhere else and buy there.
That's the debate right there. Should we as a society favor the rich newcomer and push out the long-term resident who now has to move somewhere else? Maybe they didn't want to move.
Or should we favor the long-term resident to stay even that means the rich newcomer maybe can't find a place?
Who is more important?
It is disingenuous to simply rant against Prop 13 without acknowledging that there will be winners and losers both with and without Prop 13. It's just different people who get favored.
I’d focus on the high vs low density part of the argument which you entirely ignored.
> rant
I’m not
It's that a bunch of middle class people in the post-war auto-boom bought up extremely valuable property adjacent to the ocean, and then when everyone could afford a car, they didn't want to redevelop their own land.
There's no reason that justifies Prop 13 beyond NIMBYism. America decided it wanted suburbia instead of incremental development, so it banned multifamily housing. Then California realized that doing that would (obviously) force people out of their homes when property taxes started skyrocketing... so they just voted in a fucking seniority system. It was selfish, bad policy then, and it's selfish, bad policy today.
No, not at all. This is what I mean about misunderstanding where it came from.
It was middle class and lower middle class people who bought up cheap property in undesirable (at the time) places. Only later the area becomes desirable and rich people move in driving the prices sky high and consequently the property taxes sky high.
Those low/middle class people who have been living there for a long time are mostly still low/middle class and can't afford those taxes. People tend to be protective of their homes so this makes a lot of people very angry and those people vote.
> There's no reason that justifies Prop 13 beyond NIMBYism.
Of course there is a reason, I just explained it above.
You may not agree it is a reason you like, perhaps you feel the free market should simply allow prices and taxes to fluctuate wherever they go. That's a valid take as well, one that produces different outcomes: worse for some, better for some.
Property taxes are the one tax that anyone by definition can pay. My point, the point that you seem to be ignoring or just ignorant of, is what a low-to-middle class person who owns a $1.5M property isn’t lower or middle class. They have a net worth in the top percentiles of wealth in the US.
> In 2023, $192,084 was the median household net worth in the United States.
Don’t tell me lower class folks are being forced from their homes when the are wealthier than I am.
This is clearly and obviously not true, why would you say that?
If your property tax rises to a level that your income is not enough to pay it (along with other basic necessities like food), then you can't afford to pay it. This can and does happen in areas where property taxes can rise without any limit.
> a low-to-middle class person who owns a $1.5M property isn’t lower or middle class
I'm guessing (maybe I guess wrong) that your argument is that this low-to-middle class person should just sell the property and use those proceeds to pay the property tax. Is that what you mean by "by definition can pay"?
Sure, they can pay it that way. Of course then they don't have a home anymore, they got forced to sell it! Now what do you expect them to do? Someone else upthread said they just need to go and move somewhere else (specifically, somewhere else that is cheaper).
So, we circle back to the original premise. If property taxes are allowed to grow without limitations, it forces long-term low-to-middle class residents out of their homes because they can't afford to pay the property taxes. So they must sell and uproot their life by moving somewhere else that is cheaper.
This isn't debatable, it is simple math.
What is debatable is whether this is overall a good or a bad thing. Should society favor keeping long-term residents in their homes, or should society favor the richer newcomer to take over the place? That's the argument that leads to Prop 13.
The way they can stay in their homes is to use their equity to add revenue generating additions to their home and take on a renter.
This is how it has worked for hundreds of years until the exact same folks who passed prop 13 passed anti-density zoning legislation a few years before hand.
Pretending people are being “forced from their homes” in exchange for literally millions of dollars is and absurd framing of a huge windfall.
There's no need to put “forced from their homes” in scare quotes, that is literally what happens when property taxes are allowed rise uncontrollably.
Not everything in the world is a financial transaction. It is wrong to look at homes as a share of investment to be sold to the highest bidder. The people who bought homes very cheap who are now worth a lot are necessarily very old (because it takes a long time). These people may have been poor when they bought it because it was a cheap house in an undesirable area back then. They may have had low-income jobs all their lives so they are still poor in terms of income.
It is not by any stretch a windfall for people in their 80s/90s to be forced to sell the home of a lifetime and have to move to some faraway cheap city.
Arguments against Prop 13 are in the end about classism. The idea is that as soon as an area becomes wealthy, poor people need to be removed (through rising property taxes) and sent off to live in some cheap area, so that more rich people can take their place. This does not sound fair. Rich people already have all the benefits, so Prop 13 provides a small counterbalance by allowing lower income people to stay in their lifelong homes even as the area gentrifies.
>Not everything in the world is a financial transaction. It is wrong to look at homes as a share of investment to be sold to the highest bidder.
I can't disagree with you more. Whether we like it or not, value will effect the greater populace. I'm fine with some delay to taxable on value, because these thing really do have value, but effectively eliminating it has terrible repercussions.
>and have to move to some faraway cheap city.
This is literally only something that exists in California because of Prop 13. People in other states just move to a cheaper neighborhood or downsize. The reason is because property taxes really force a balance between value and utilized property.
>Arguments against Prop 13 are in the end about classism.
Arguments against Prop 13 are about sustainability. If cities were in amber and never grew, then it wouldn't be a problem. Currently the children of the folks that passed this law have nowhere to live in their parents' cities... the reason why is because they've built cities where nobody is forced to increase density, because there is no sensible property taxes.
>The idea is that as soon as an area becomes wealthy, poor people need to be removed (through rising property taxes) and sent off to live in some cheap area, so that more rich people can take their place.
Again, for the last time... the people "sent off" have become literal millionaires in some of the highest percentiles of net worth in the nation.
>Rich people already have all the benefits, so Prop 13 provides a small counterbalance
Prop 13 is literally designed to help rich people... not poor people.
The basic math of who pays or doesn't pay or can't pay is just numbers though, I'm confused why that can be seen as debatable. They are what they are. If a low-income person can't pay their property taxes because the cash flow does not exist for them, they're out of their house. You think that's good, I think that's cruel. But either way, it is a fact.
> Again, for the last time... the people "sent off" have become literal millionaires in some of the highest percentiles of net worth in the nation.
It does not matter. Uprooting old people from their lifelong homes and sending them off to some other cheap city is very traumatic. There is research on the mental health problems caused by having to move in old age. Let alone having to move forcibly due to taxes.
Note that it is only old people who would get hurt, since it takes many decades of growth under same ownership for the Prop 13 valuation to become significantly different from market valuation, so any people in that circumstance are going to be pretty old.
> Prop 13 is literally designed to help rich people... not poor people.
This is again factually false. If Prop 13 were to disappear overnight, rich people whould whine but they can absorb the increase and keep living in their house so they'll be fine.
It's only the poor people who would get displaced. This is basic math (if taxes > income --> displaced) so it's not debatable.
I disagree with you on many points, but this one the most. I don’t think you realize how much wealth is hoarded in CA via property, especially property tied up in corporations.
Los Angeles Country Club, for example, sits on some of the most valuable real estate in the world. They pay a pittance every year in taxes mostly because of prop 13. It would likely be infeasible to exist without its tax breaks.
I would be fine with prop 13 if it only applied to retirees. It doesn’t. It mostly effects commercial properties and inherited properties. The reason someone would have to move to another town (which pretty much would happen anywhere else in the country) is that the only way you can be priced out of an entire region is if you completely detach value from the tax rate for decades. In an area with normal property taxes, you’d really only have to move to a different neighborhood.
Sounds like we agree that Prop 13 must not apply to corporations. That never made any sense and should not be. The idea of Prop 13 is to protect poor people from being pushed out of their lifelong home by taxes. It's insane to allow corporations to benefit from Prop 13.
> I would be fine with prop 13 if it only applied to retirees.
In the realm of actual humans (not corporations), in practice the main beneficiary is only retirees. Sure, applies to everyone, but it takes a very very long time for the tax delta to become meaningful.
I've owned my home for ~25 years and the delta between property taxes under prop 13 and if I bought the property today is less than 2K so basically nothing so I don't much care.
But give it 30 more years of growth and I suspect the delta will be substantial and by then I'll be scraping along trying to survive on a fixed social security income, so the delta will, I suspect, be absolutely key in being able to stay home instead of trying to scramble at that age to find some cheap property in some faraway place I've never been to.
Most US locations outside of the Big cities. Even some big cities like Houston.
I'm an Australian living in Asia. My rent hasn't gone up in 5 years. The state I'm in is growing about 7% annualised and hit 13% GDP growth this year. It accounts for over 30% of the nations export value despite being 8% of the population.
Friends back home have been getting 10-20% annual rises in that time, for houses that are falling apart and they are terrified to speak up for fear of eviction, it's gone completely out of control.
The main difference I can spot is the sheer amount of supply that comes online here despite equivalent population growth. If developers want to build a 45 storey apartment block they can, under the caveat that 20% of apartments must be for low-income earners.
In Australia if you tried to build the same building even a km from the CBD of Sydney people would be up in arms, politicians would be leading rallies to halt development and it would eventually have to go through the courts dragging the process out for years until the builder goes broke from legal fees. It's a tried and true method across the country.
Not entirely sure but seems you want to go down that path also and start arguing about how it's "not actually a good place" when my lived experience is the opposite.
I've had it happen far too many times and simply don't bother now, people in Australia get strangely defensive about anyone who leaves, and clamour to tear holes in the idea while never once having set foot in the country, let alone spent even a month there, it's an odd phenomena.
But to answer your question, yes it's definitely a democracy and that growth rate is real.
I live completely surrounded by nature, with ocean views, ten minutes from my office in the city while working remotely for western companies. In the end I'm happy, that's all that matters.
would that this were true. In the UK at least, that wealth is often needed to pay for end-of-life care. The government will only pay for care once your own wealth including property wealth has been spent.
Toilets may not circulate in the opposite direction in Australia compared to the Northern Hemisphere, but their Georgists seem to have very opposite views on whether there needs to be enough housing for people, and whether that housing should be allowed to be built in urban areas or if it should be constrained to sprawl.
(Edit: however there are some really astute housing economists in Australia, I can't recommend the book "The Asset Economy" enough)
https://www.sealionpress.co.uk/post/other-ideologies-ii-geor...
Australia’s geography and climate plays into the housing crisis. We have concentrated our population density in only a dozen or so locations (ie; major cities like Melbourne, Sydney, Brisbane) as Australia is only habitable at scale along the coast.
Australia has also doubled in population size over the last 40 years without corresponding investment, putting significant pressure on the housing market.
The population centres crystallized around gold mining and other non-urban activities back in a day, you can't just will another Melbourne into existence.
What? North American is more than 3x the size of Australia.
24,709,000 km^2
A generously loose interpretation of the original claim is that the continental US, rather than North America, is about the same size as Australia. Which is true.
I don’t think that’s true. Certainly not relative to inflation/nominal income growth.
I think I get the idea that its an expensive thing to buy, and paying a bank significantly more money that you actually borrow makes you feel like you need to be making money on the investment. But no other object I buy for regular use and functionality would I expect to increase in value. So why should we feel the same way about a house?
Honestly I think if people were less obsessed with their house increasing in value they would see that the terms of a mortgage are crazy, and would refuse to play the banks games.
Population growth whilst land does not grow, homes being more advanced, and the 1950s not being a very reasonable comparison. The single breadwinner rich middle class was a blip in history, a temporary post-WW2 effect.
But still if you account for all of that, something is surely off. And as so many countries face this problem, I'm quite sure that you can't solve it with the simple stroke of a pen.
I don't think it's useful to say "a house is for living". Most home owners do use their house to live in, the value appreciation is a side effect of a market that fails to address supply.
Heavy government intervention into private rent markets and project construction so far tend to have the opposite effect. Landlords and development companies simply pull out.
One often suggested approach is to build lots of very high rise apartment towers. Even then I'd expect a price decrease of say 30% only, for a type of living most will not be very fond of. It's a big cultural change. You'll still pay quite a lot, for something that sucks.
My less practical idea is about geographic distribution. Western Europe as an example, some parts incredibly dense. Where we think the "solution" is to endlessly make them even more dense. Whilst Eastern Europe is 80% empty.
I know, there's reasons for it, but when you think about it this way, you'll understand why there's no solution to our current problem. Because we're not solving a problem, we're increasing the size of the problem. I would advocate for fresh thinking in redistributing population pressure.
If you remove "rich", larger proportion of people's income will go to pay for foodstuffs, clothing etc basics, and they will have much less left to pay for mortgages, and housing prices will fall. Problem "solved".
If you remove "democratic", there will be no NIMBYsm because no one will give a damn what people living in the area want - developers will built as much housing as people will be willing to buy, flooding the market, and prices will fall. Problem "solved".
What are other solutions? I can't think of any.
What are rich, democratic countries that do not have that problem? Only one i can think of is Japan, but they largely fixed "rich" (their GDP is stagnant over 30+ years while it more than doubled in both US and Australia. They are also dying out very quickly and have no immigration to replace dying out people. They are also only nominally democratic. This is certainly not the outcome anyone in their sane mind would like to replicate.
Democracy is the solution to NIMBYism, not the cause.
"Democratic" is only a problem under a given set of structural incentives. The problem is those incentives are prevalent.
An example of how to fix this would be to classify zoning restrictions as a taking under the 5th Amendment in the US. So if the government wants to institute a zoning restriction (e.g. on building height), they'd have to pay you the fair market value of the expected rental profits from the extra floors you're not allowed to build but could have if they hadn't taken your right to build them. A democratic government could still enact the restriction, but it would be expensive and therefore rare.
(And it should be expensive because the economic cost is actually that high.)
Yes, if the developers were allowed to come in and put up some high density something somewhere, those prices would ease back down under $3000/month (if only a little below), and the sort that's well into the six figures in six figure incomes would rejoice.
But we wouldn't see any difference anywhere else in the US (or, for those of you in other high cost of living countries, I dunno, London maybe?). No one living in Terra Haute, Indiana would be better off. No one in Boise, no one in Richmond, Virginia.
Nor is some nationwide laissez-faire policy going to do the trick. The flip-side of "housing costs too much" is "oh shit, the builders built way too much" and then the economy craters when that does more than just cool, but freezes over for a decade. If you wanted the blue collar folk to howl in agony, just wait til that happens. Or, just maybe, you think you have some special insight where you could perfectly regulate just how much construction occurs, so that there's no excess at all.
What if we've somehow gotten ourselves into a mess where there are no solutions at all? Like, mathematically. Like, if we had an extra century to work out the problem, we could prove there is no solution? What if there are too many people who need goods (homes, of course, but other things too), but who can't ever have viable livelihoods no matter how much low-quality education we stamp on their foreheads with C+ grades? What if UBI doesn't work, because in the part of the economy that is actually worthwhile, there's just not enough excess to tax away and send to them as welfare? What if we're still 150 years away from the technology that would give you your Star Trek post-scarcity utopia?
What would that look like? Could it look something like this? Like some really bad imbalances that, with a naive-enough outlook, seem as if they might still be re-balanced if someone were brave enough to make the hard decision?
A long time ago, before even some of you reading this comment were born (and for the rest, we were all still in school), someone decided that the United States was not going to make things anymore. We'd all be manicurists and day traders and lawyers and hip-hop recording artists. This is the result. Nor was it a good thing for places like China, where that's all they do, they're about to hit a wall too, and it's no longer clear Winnie can postpone that either. I don't think cannibalism will be widespread, but a few years from now you may wake up to realize that you haven't heard a dog barking for several summers at that point.
Why not? They have zoning restrictions there too. Nobody would be building skyscrapers there, but they would be building multi-family homes instead of single-family homes.
The only places it wouldn't matter is where land is really not scarce, i.e. rural areas or cities with long-term negative population growth. But those are the places with the cheapest housing at present -- that's not where the problem is.
> The flip-side of "housing costs too much" is "oh shit, the builders built way too much" and then the economy craters when that does more than just cool, but freezes over for a decade.
What was the date of the last housing crash in the US caused by overproduction of housing?
> What if there are too many people who need goods (homes, of course, but other things too), but who can't ever have viable livelihoods no matter how much low-quality education we stamp on their foreheads with C+ grades? What if UBI doesn't work, because in the part of the economy that is actually worthwhile, there's just not enough excess to tax away and send to them as welfare? What if we're still 150 years away from the technology that would give you your Star Trek post-scarcity utopia?
These things are two sides of a coin. Absent some supervillain extracting the surplus to store in an evil supervillain mattress, automation technology that eliminates jobs also lowers the cost of living.
If things aren't very automated then there is plenty of work to do and plenty of jobs available. If things are very automated then automated production results in cheap goods which allows people to make a living by working fewer hours.
It can even be both at once, because rather than working for fewer hours, people generally prefer to keep working their existing hours and then use the extra money to buy more stuff. Which increases demand, which requires more labor to produce the additional stuff, which creates new jobs. Notice how we've already automated many things that used to be manual and the unemployment rate is still very low.
It will hopefully self-correct as we reach a stage where more than 50% of the voting population can't afford to own a home, which is happening now in the UK. Going to be unpleasant for the people holding the bag when the bubble pops though.
> If you remove "democratic", there will be no NIMBYsm because no one will give a damn what people living in the area want - developers will built as much housing as people will be willing to buy, flooding the market, and prices will fall. Problem "solved".
I don't see NIMBYism as a truly democratic result - rather it's an artifact of our imperfect democracy where only those who can afford to have a registered address in a particular region get to vote there, regardless of how much time they spend there or how much tax they're paying that's spent in that region. There have got to be better ways to get accountability than local vetoes.
But we know the very vocal opposers don’t represent the true majority because of polling on the issue. For example most people in the Bay Area want to see more construction. And the younger people are and the more they rent, the more in favor they are of it.
In suburbs, yes. In cities, it's often misinformed tenants.
And yes, zoning and NIMBYsm exists only as long as (slightly) more than 50% of people are satisfied with their housing situation (and thus want prices to grow to fund their retirement), as slightly less than 50% are not (and thus want prices to fall to be able to afford to buy). This equilibrium will of course, self-preserve because zoning rules are not national but change based on locality, so there won't be a single nationwide crash anywhere.
Lifespans are increasing, and people expect/insist on living alone more. And while population may not be "skyrocketing", it's increasing.
> This equilibrium will of course, self-preserve because zoning rules are not national but change based on locality, so there won't be a single nationwide crash anywhere.
A big enough change in a local area will become a national crash easily enough - we've seen that before (particularly in the UK where London alone is something like 20% of the housing market by value). Couple that with the fact that the same demographic changes are happening in most places - housing prices have been rising since the '50s and it's going to boil over at a similar time everywhere. And since policies and politics move slowly, we can't count on a smooth transition - more likely there will be an overhang and increasing pressure to do something (indeed there already have been - but the current generation of short-termist politicians naturally responded with misguided policies like "affordable housing" requirements that have only reduced housing affordability) until the problem can't be ignored, and then a crash and perhaps even an overcorrection.
Your first proposed solution will do the trick just fine. For a long time, NIMBYS pretended that increases in supply of housing would have no effect on rising prices (or worse, somehow raise them!) by labeling it “gentrification”. Now that that argument is defeated, they warn of a crash. But realistically aggressive zoning would probably just slow the rise of prices and modestly decrease them rather than cause a dramatic crash. We know this from the examples of Auckland, New Zealand and Minneapolis.
For us to get off this mindless hamster wheel of greed, some sort of climate catastrophe has to happen. Something like The Day After Tomorrow will have to affect the world for people to finally sit up and say, wow we let greedy corporations destroy the world we live in. Let's not live like this anymore.
I hate how cynical this sounds but I agree with you - I don't see a positive way out of this anymore.
The biggest problem is that we're doubling down and adding more and more, and optimizing and squeezing everything to a limit. Of course it'll be catastrophic when it breaks. It'll be hell and war and chopping blocks, unfortunately. And at that point the army will come out and people will just sadly die; democracy my ass.
I think I get what you mean but keep in mind that Japanese cities are severely overpopulated. Their country is returning to a more normal population level. It's ok to not have Bangladesh levels of overpopulation, and they don't need to be "replaced" by immigration in order to maintain the current population density. Also housing in Japan is not cheap outside of the cities (where no one lives) so your point doesn't really begin in the first place.
Therefore "rich" can't be the problem to solve for, it's fairness and equality. Culturally "a fair go" used to be the equivalent of the American Dream, and I think it's fair to say both are dead to most of the unlanded classes.
I've also spent a lot of time in Japan, and in many ways culturally they at 10-20 years ahead. For many life became unfordable there for different reasons, and I buy into that this contributed to the plummeting birthrates.
Societies come under evolutionary pressure, just as life does. It's entirely possible that unsustainable societies will simply die a quiet death while others take over.
Essentially, the way society view housing is different - buildings are more akin to consumer goods like cars. Housing value is tied to the standards of the steucture and the cost of maintenance in addition to its location, etc. As building codes improve and new buildings become more robust to earthquakes and other natural disasters, older buildings drop in value. In some cases the house would have no value beyond the value of the land.
In large population centres like Tokyo, the effect is not as drastic but it's still evident as housing prices in Tokyo is pretty affordable for an Alpha+ global city.
Like, if you ask them if you can do X by Y they'll often push back and say it can't be done, even though it can be done but it's just a lot of work to do and they see that as a genuine obstacle to doing it. So they were saying you often have to push and be persistent to convince them to do stuff in the first place.
But yeah, the housing situation here is genuinely scary.
If you sell your house the only option is to re-enter the housing market through a different, equally expensive, door. You can't repurpose the money for any other purpose.
The only time it becomes "wealth" is when parents die, leaving their children with a suddenly valuable asset.
The home owner can always sell, move to a smaller home, or, shudder, start renting.
The options of somebody with a massive amount of housing wealth are so much better than those without the housing wealth.
The main benefit is to individuals who have a high income but not a lot of capital. Generally this benefits early or mid career professionals who are high earners but may not have come from really wealthy backgrounds.
Property has irrefutable value from location, size, features, condition and a certain je-ne-sais-quoi… by extension a limited supply and increasing demand of this commoditised necessity would naturally push prices up…
… but if you look at the past 30 years, something has broken. Population sizes haven't exploded in the same way that housing has. Jobs haven't centralised. All to say: demand is not that much higher.
You can only levy a small amount of this on more complex materials and inflation. Some on demand.
Do we blame the rest on lenders? If we couldn't afford to borrow, we wouldn't buy the houses we have and therefore wouldn't be competing for more expensive houses, so they wouldn't be as expensive. Lenders have changed how much they lend you in relation to your income. It was x3 when we bought our first house, then x4 when we bought our second and x6 most recently. I thought this was a reaction to house prices, but have I had this the wrong way round?
Do we need to strangle the market and get mortgages back to the "gross x2" that was common in the 90s? What happens to the people that own property now? Why should we pay for the banks' greed again?
I presume you mean population sizes haven't exploded like house prices have. True, but I would not expect that. What we see is the marginal cost of house prices increasing. Maybe that's the wrong term, but I mean the people being hurt are people entering the housing market. If you owned a house 20 years ago, you are sitting on top of a rising tide. All it takes to make a house cost 7.5 times the average wage is a couple of decades of demand outstripping supply.
And on that topic here are some copy & pastes from: https://www.macrobusiness.com.au/2023/07/australias-housing-...
Australia has had one of the highest rates of housing construction in the developed world
We also have one of the highest numbers of construction workers per capita in the OECD
Australia also ramped-up housing construction to record levels last decade
However, this surge in construction was swamped by the unprecedented jump in net overseas migration from 2005, which is projected to run even higher over the next five years
Notice how the uplift in the graph reflects the uplift in in house prices. It started with John Howard era, and I suspect it was a deliberate "Big Australia" policy from his government. As an aside I will forever remain impressed by Howard pumping Australia full of immigrants, while at the same time winning elections based on his efforts at stopping immigration ("the boats"). The big Australia policy was then enthusiastically continued by federal governments of both colours in the 2 decades since. It's taken 20 years to bite as hard as it has.
It looks like the media is finally waking up to what is really driving house prices, hospital ramping, clogged roads and a myriad of other problems. I base that on seeing the commercial TV news shows ascribing those problems to population growth rather than state government / airbnb / speculators ... (pick any plausible sounding thought bubble to spout as "news") in the 2nd half of this year. This in turn is driving the blame for those outcomes to the federal government (where it belongs, because they control immigration intakes). The current mob seems to waking up to the fact that "big Australia" might be turning into electoral poison.
But it took 20 years of big immigration to create the current situation, even if they fixed it tomorrow I doubt sane house prices will return for at least another decade.
I see that Australia has a monthly repayment stress test threshold of 30%, but I can't see anything about limiting the principal. My theory is that banks started offering higher principal loans, with less security to unshackle prices. If more people can suddenly "afford" a $1m house, demand pushes the price up to $1.2m. Bigger loans. Bigger profits. If you're only looking at repayments in a time of low interest, that's going to cause a lot of irresponsible lending, and a lot of price inflation.
And in Australia this is particularly true because they're not just filling up with immigrants, they're deliberately poaching skilled workers who immediately hit the mid-to-higher-end house market, without the multi-generational lag of typically poorer, asylum-seeking immigrants. It's made everyone with property rich. It's made everyone with developable land insanely rich. And the economy there bubbles on with that cyclic investment. But what happens when you reach the cap and the lower working class can no longer afford to live there?
Immigration has only been so high because people can afford to move there. This keeps coming back to the money. All these problems are caused by finance.
Plenty of people will happily raise a family in a smaller but more central apartment with better services rather than a SFH in the suburbs. And worst case upzoning doesn't mean we have to use that zoning capacity - if it turns out people would rather build SFHs (and are willing to pay what they cost) then they can still do that.
But yeah, if they were better quality I imagine people would move into them.
Poorly-regulated lending means that it's the banks who are willing to lend the money. Home owners pay what they have to out of necessity, not willingness.
(speaking as someone who owns a house in Sydney)
It boils down to how sure people feel they can keep paying the huge loan over the next 30 years.
If you bring down the new build cost, supply will explode and prices will come down. Of course this would also crash the property market and ruin a lot of boomers' retirement plans so don't expect that to happen any time soon.
My favourite Real Estate investment analyst Chris Bedingfield said it because when he said that Australia isn't in a "Housing Bubble" any more than it's in a "Cigarette Bubble". The reason that both houses and cigarettes in Australia are so comparatively expensive is that they're heavily taxed.
Further, Australia is operating an EXTREMELY aggressive population expansion policy. This can and should be reduced significantly.
The solution is some mix of your suggestion and mine. Unfortunately most Australians own or live in an owned property. They won’t vote for this. In a few decades they will be in the minority, and life-long renters will be in charge. When that happens we can expect some wild policy swings. Similar patterns are developing all over the Western world.
The fundamental cause is taxation policy changes around 2000.
The solution is further policy changes, but the wicked problem is that the democratic majority do not want these changes; or can be easily persuaded these changes are likely harmful for them.
So Australia socially and economically exists in a death spiral; where wealth channeled into real estate is not consistent with its productive utility.
Why do we assume rational actors when we keep proving to ourselves people are not acting rationally?
I imagine the price of the house would fluctuate with the price of construction costs, so if you bought a home when construction cost $300k, and now it costs $250k to construct the same home, you'd be underwater if you tried to sell it. So either people would be stuck in the same home forever (which won't work for some people) or the home could be sold at the value that the owner originally paid. Which would mean the home would cost the same... forever... which would lead to homes that are more expensive than new construction. I suppose that would then cause new construction to increase, until new construction is more than the cost of existing homes, in which case the market would get tighter as new construction slows. I can't think of the other potential ramifications, but it does seem like it would get complicated and might not be the solution I'd like (assuming people would ever go along with it to begin with, which they wouldn't...)
Airbnb very efficient at extracting value from housing too..
NZ is getting micromanaged in a similar way... Lots of big building projects extract masses of value from govt, similar to roadworks are a mind boggling exercise where they seem to find one good part of the road to "fix" every day with massive costs to the taxpayer.
There should be Some kind of a real simple solution like container style mass produced homes, but the home has become a status symbol and we are left with growing disparity.
I lived in Sydney there for a while which was crazy to see how visually bad the inequality in homes can get with these huge evacuated concrete cancer skyscrapers in Parramatta vs the opulent East coast homes
IMO the inflation target should be 0%. I don't agree with arguments about artificially inflating the currency. We don't need to use psychological tricks to make people consume more. We should aim for stable prices. This would reduce the value of housing as an inflation hedge for the common man. Right now it's like a quasi-bank.
It’s not a psychological trick, when prices are increasing at a stable and predictable rate it’s perfectly rational to spend more instead of saving. Which is good for economic growth.
In many way the economy has been inherently deflationary over the past several decades. Due to growing productivity the cost of certain goods and services has been going down consistently. The outcome being that in sectors which this doesn’t happen due to scarcity or other reasons like housing prices have been going up at significantly higher pace.
I’m not sure reducing inflation to 0% would helpful for that considering the context. Price growth might slow down at the cost of slower real GDP growth but that’s probably not ideal either.
I found that line interesting as he was making the point that they paid 3.5 times their salaries for their house in 1980 just like his parents in 1951 on one salary.
I wish he'd explained in what way he felt better off with needing two salaries to buy the same thing as his parents. I'd guess the house he bought was larger than his parents, but I didn't see those details.
However, “creating new wealth” is kind of a weird way to judge the validity of investments - many companies we invest in are not profitable due to wealth creation, they’re vehicles for growing wealth because of speculation, and for a lack of better options.
A lot of this boils down to inflation and the need to keep debt prices low to fuel growth. Countries can’t really unwind the ball of noodles that neoliberalism has cooked up, the transition from a moderate growth economy to a high growth, low risk environment necessitated low interest rates and low inflation, and the rest of the market has followed suit.
In light of all of that, it’s still true that unless the world’s government change course to disincentivize real estate speculation, owning your own house will create wealth by the basic fact that they allow you to lock in a fixed cost essentially forever while everything else gets more expensive. I will pay the same amount on my mortgage for many years while salaries gradually increase, to the point where 40 years from now my $2000/mo payment will look to us like the $200/month payment of 1980. In the past few years, I’ve seen several friends go from paying $700/month for rent to well over $1000, with some renting smaller places for prices that massively exceed my mortgage. At some point, something will have to change - whether that means new development in smaller communities, rent regulation, negative speculation incentives, or something else. As a homeowner, I personally don’t care, because I bought my house to live in, and trust that whatever happens, it will first need to affect flippers and speculators over people who actually utilize their real estate.
https://www.theguardian.com/australia-news/audio/2023/nov/25...
Cannot be stressed enough how much of a pernicious and destructive force housing policy is in Australia.
I am working class background and my boomer parents have not been as fortunate as some of their peers with housing driven wealth creation. I am lucky enough to own a home. All my siblings will probably never ever own a home.
It won’t stop for years, and nothing fundamental will change until supposedly middle class families are forced out onto the street. Then, maybe, we will see the political will to change this insane, cruel, predatory and hateful housing policy change.
To everyone who owns property, YOU are complicit. Either deliberately evil or willfully ignorant, there is nothing else.
They absolutely do in a democracy in which they (home-owning baby boomers) represent the biggest demographic voting block.
In Ireland, investing in Housing/Land is largely one of the best investment assets you can own due to the lack of Capital Gains or Deemed Disposal rules.
But the tide is starting to turn, and in a lot of state/provinces you are starting to see real change it last. British Columbia will soon up zone province-wide for example. And slowly you are starting to see some good initiatives passing in California.
We also have very unusual tax laws around owning a rental called negative gearing- if you're a landlord and your rental property earns less than it costs to run it, you can subtract the difference from your taxable income and pay less tax, as if having a tenant pay off most of your mortgage wasn't enough of a free lunch.
A political contest vowing to get rid of this nonsense was annihilated when we tried it one election cycle around a decade ago.
Afaik, everywhere in the world taxes on businesses are applied to profits not revenue. Subtracting your loss is completely normal. It's personal taxes that applies to your salary aka revenue that is weird and modern day serfdom.
That’s what the tax office call it.
https://www.ato.gov.au/individuals-and-families/investments-...
Not really, though. Businesses have inherent incentives to minimize their costs. Individuals don’t, in fact it’s closer to being the opposite.
So the “revenue” tax approach is perfectly rational and reasonable (relatively to taxing personal “net income”)
> businesses are applied to profits not revenue
Yes, if your rental business was a separate entity it would make perfect sense. Subtracting your business costs from personal income isn’t quite that though
Further, the cost of development has gone up rather drastically. In some cases, 10x in as many years, making building low cost homes financially impossible.
Then there's the issue with tax collectors (politicians) preferring to have expensive homes built instead of low cost housing so they can collect vastly more tax to spend on themselves.
The problem with this reasoning is that housing has gotten so expensive in many cities that anything that costs less than $750,000 can be considered "low end".
Polls show that most people want more housing built. The problem is homeowners don't want it built in their neighborhood. Everyone wants to pass the buck to somewhere else.
That's why it's no longer possible for residential zoning to be determined on a neighborhood-by-neighborhood basis. States have to step up and come up with minimum zoning that reflects the state's larger interests rather than letting every block fight to "preserve" a historic gas station etc.
Housing (or rather, land) is unproductive investment, and should be treated as piggy banks, not as a place where wealth grows like investments do.
If so, that doesn't solve the problem for anyone who has the problem.
No, they're bog-standard Treasuries and, if you're particularly paranoid about inflation, TIPS [1].
Modern currencies segregate the store of value and medium of exchange functions. For the dollar, that means Treasuries and deposits.
[1] https://en.wikipedia.org/wiki/United_States_Treasury_securit...
You seem to know things, is that arbitrage hustle still producing?
I don't have a good source of inflation swap prices, but I would assume it's persisted. It's not an easy trade to do leveraged, since your assets are marked to market. And there are natural buyers of vanilla Treasuries for collateral purposes.
People also invest in real estate mostly for the land, not the housing. Land is a scarce resource in growing cities. Demand goes up, supply stays the same. Building high density housing actually makes property more expensive, as it can command higher prices from developers.
If they just wanted to escape inflation on a pure cash investment, real estate isn’t a great way to do that.
This is true in the US but it's not true in other Anglophone nations with high real estate prices such as the UK or Australia.
It was definitely true until very recently. Interest rates of 1-2% weren't unheard of. Many of my friends had to really tighten up their finances when their interest rate from 1.2% to 5%.
For the housing market: the cause is high borrowing and the effect is high house prices - not vice versa.
From article:
Six per cent compound annual growth in the value of houses over the past 23 years versus 3% annual growth in average incomes has meant that household debt has had to increase from half to twice average disposable income
The original Ponzi scheme. Fucks people that don't have a good enough income to borrow the market clearing price for houses (mostly neither can they save enough for a deposit).
I'm in New Zealand where our previous lefty government made some positive steps towards making access fairer. Unfortunately our new government will probably undo those changes: giving an advantage to the wealthier.
I saw a lot of strange pricing edge cases in my city after the earthquake in 2010 because years later there were houses that could not get a mortgage. There were as-is houses you could buy cheaply for cash, compared to a similar property with a mortgage costing a lot more.
We are now seeing in Australia the very same accelerated rising trend that New Zealand went through prior to 2022. Beginning with a slight but distinct feeling of public discontent at unaffordable prices, and soon morphing into actual panic, as entire (younger) generations (and their disgruntled, voting parents) realise that they've firmly entered the Never Own-your-own-home Zone.
If NZ is any future omen for what will happen next in Australia, then the fact NZ peaked and then retraced somewhat over the past 2 years - firmly assisted by a very fast rise in mortgage interest rates - may well inform what is coming up for Australia's next few years. Once they reach a certain point, which, given the above-linked rhetoric, can't be too far away...
(quiet-P.S.-while-trying-not-to-start-a-political-argument : commiserations on the regressive new government!)
And, while I am not an economist by any means, the above is interesting in light of the fact that Australian banks own most of New Zealands financial market. One might almost think NZ were being used as the guinea-pig beta testing service for its larger neighbour!
Which initiated our booming prices 3 years ago. Prices have fallen back a little but saying they have dropped is not correct IMHO. I saw the panic with first home buyers beginning from a very dead market because I was buying just as the boom was starting and I have been trying to help friends buy over the last three years.
> If NZ is any future omen for what will happen next in Australia, then the fact NZ peaked and then retraced somewhat over the past 2 years
I wouldn't say that is what happened.
There was very little stock on the market in Christchurch a few months ago and numbers of houses sold per month deeply dropped - so market price was set by very few sales.
Property prices are back on the way up again - the market turned a few months ago I feel (I was trying to invest again so I was watching my market carefully).
It is actually difficult comparing the two countries because factors vary so much.
Above opinions are based on what I saw in Christchurch.
+41% over 19 months, then -20% over the next 16 months, taking us to mid-2023. The main trend-change vertices I am referencing (see the source's graph) :
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"Average House Price", Source: https://www.qv.co.nz/price-index/
June 2020 = NZ$750,000
[then, +41% over 19 months, to: ]
[then, -20% over 16 months, to: ]
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While the retrace has levelled off since then, and even shown signs of a slight bounce back, I think we should avoid assuming that the previous uptrend will simply resume, with anything like the strength it had during the Covid FOMO period. It just isn't viable, too much economic squeeze from other directions (read: 'ain't nobody got money for dat shit').
From https://www.opespartners.co.nz/property-markets/christchurch
Christchurch property prices peaked in February 2022. Prices are currently 7.28% below the peak (REINZ, October 2023)I guess that I am talking about the leading indicators that I read when I am in the market, versus the lagging statistical figures. Also sentiment matters - at the "low" a few months ago there were very few transactions and auction room was very very quiet.
There are now adverts for 5% down mortgages. And I feel we have lost the doom sentiment that existed a few months back.
Also I believe that using "peak" for any price comparison or analysis will usually mislead (shares and crypto too).
In my opinion - and this is firmly a subjective opinion, upon which nobody should act - the NZ housing market will stay relatively flat for the time-being. Sentiment is ok, but affordability is still at the edge. Should mortgage rates drop significantly, then the price-go-up-party can continue, but there is little reason to think we're going to see 2-3% fixed rates anytime soon, i.e. the next 5+ years, and therefore the macro economic conditions to support significant price uplifts may not be there. There's nothing to suggest that NZs average wage will proportionally increase (except by the usual inflation, and modest annual growth) in the foreseeable future.
And the modest ongoing demand resurgence may well (or not!) prevent further drops. Hence perhaps keeping the market relatively stable for awhile, after the partial retracement we had.