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Comment by AnthonyMouse | Hacker News Reader

> Housing can be affordable or it can be a good investment. Not both. Not for long.

This isn't really true.

Suppose that housing is extremely affordable. Cost is only the construction cost, no scarcity component, and construction costs haven't been bureaucratically inflated. You get a house for $25,000. Then local rents are low, but they're not zero, because they'd still have to yield a return consistent with a $25,000 investment.

Rents in that case are a lot lower than they would be if they had to yield a return consistent with a $500,000 investment, but the ROI is the same. It's just that if you invest $500,000 in housing you'd get 20 units and then e.g. rent them each for $250 (so $5000 in total) instead of paying the same amount for one unit and renting the one unit out for $5000.

And it's not different if you live in it because living in it is an opportunity cost. In fact, the higher price is worse for you if you live in it, because then you're losing the much higher value of the imputed rent. Suppose you can get a loan for $500,000 and you want to invest that in housing. If that's the price of one unit and you live in it, you have to pay the whole mortgage out of your pocket and get $0 in rental income. If that's the price of 20 units, you live in one (which costs you $250/mo in opportunity cost) and then rent out the other 19 and get $4750 in rent every month you get to stick in your pocket.

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Housing as an investment here references the idea of owning the home you live in being a great source of capital gains. This depends wholely on appreciating value, which is orthogonal to affordability.

The reason people care about this type of 'housing as an investment' is that it helps sell people on high mortgages, so more people can own rather than rent. It doesn't quite work out well, except for the banks and pre-existing home owners. And it's a plausible enough story. They might believe it themselves.

> Housing as an investment here references the idea of owning the home you live in being a great source of capital gains.

But why would you even want that?

Possibility 1: You want to invest $500k in housing, and live in one unit. You get one unit, pay the entire $500k plus interest yourself, receive no rent other than imputed rent, and then can't sell at the end because even if your property is now with $1M if you sell you get a huge capital gains tax bill while still needing somewhere to live, so your "investment" has left you stuck in a place where you can't afford to move because the capital gains tax would prevent you from selling your house and buying an equivalent one, or even selling it for a smaller one at a profit because the difference in their values is lost to tax.

Possibility 2: You invest $500k in housing, get multiple units for that price, live in one of them, receive rents from other tenants that compensate for a lack of capital gains while holding an asset with a stable value, can easily move out of your own unit because you're not trapped by capital gains tax.

Possibility 3: You have $500k to invest, put $25k into a house for yourself and receive the small imputed rent, put the other $475k into an ordinary investment fund because you don't actually like investing all your assets solely in real estate. You now have a more diversified investment portfolio that isn't heavily exposed to volatility in the local housing market, are still getting the market rate of return, are getting actual returns from the ordinary market instead of paying a huge amount in imputed rent and once again aren't trapped by capital gains tax if you ever want to move house.

The first one is clearly the worst one.

> The reason people care about this type of 'housing as an investment' is that it helps sell people on high mortgages, so more people can own rather than rent.

High mortgages are the counterargument. If you were taking out a $25,000 mortgage, that could be a good investment even if the value never goes up, because you get a place to live, and are insulated from (and indeed benefit from) potential increases in local real estate if there were any. If you're taking out a $500,000 mortgage for one unit, the imputed rent could be the same percentage of the investment if local rents are high, but now the potential upside is blunted and replaced with risk of value loss because you're buying high instead of buying low. That's a bad investment -- you're getting the same percentage ROI in terms of imputed rent while exposing yourself to the risk of a housing crash with a disproportionate share of your net worth in an undiversified investment, and further increases in value are long-term unsupportable by local wages.

And if you're talking about a matter of policy (we want to encourage home ownership) then there are obviously more people who would qualify for a $25,000 or $100,000 mortgage than a $500,000 one. Even for the smaller number of people who could make the payments on $500k, you don't have to convince them to take out a huge mortgage if you can supply them with the same house with a smaller mortgage.

People who are trying to buy a house may or may not want it, but people who currently own who are beneficiaries of this stand to lose a lot if their house lost its value, which they have undoubtedly financially planned around.

It doesn’t help that the move to 401ks from pensions was generally not good for beneficiaries and Social Security is facing a shortfall even before you consider current shenanigans.

> People who are trying to buy a house may or may not want it, but people who currently own who are beneficiaries of this stand to lose a lot if their house lost its value, which they have undoubtedly financially planned around.

So you've given the actual reason here, but now the original description is wrong.

It's not that people want housing to be an investment, it's that people want the housing they already own to remain expensive instead of becoming affordable.

That is, of course, directly in opposition to housing being affordable. But the problem isn't that you need the number to go up, it's that people don't want it to go down. Which isn't a problem if it starts off low and stays there, but is currently a problem because the price is already unsustainably high and needs to go down.

That problem only has one solution and the existing homeowners aren't going to love it.

> It doesn’t help that the move to 401ks from pensions was generally not good for beneficiaries and Social Security is facing a shortfall even before you consider current shenanigans.

People have not been better off for having invested in real estate rather than e.g. stocks:

https://www.investopedia.com/ask/answers/052015/which-has-pe...

The Social Security "shortfall" is also entirely fictional in the sense that it has already happened. The Social Security Administration, today, is already paying out more in benefits than it collects in social security taxes. It used to do the opposite, so it gave the extra money to Congress to immediately spend. As a result the government has government bonds on its own books, which is a no-op. Today Social Security sells those bonds to cover the existing shortfall, which is equivalent to deficit spending. Social Security started out by paying benefits to people who never paid in, which is why it will "run out" but is also why the "trust fund" is a sham and nothing magic happens when the bonds run out except that Congress has to pass a law that says "no that's not any good" and change how the accounting works to not be so ridiculous. What they should do is eliminate both the "trust fund" and the social security tax and just fold the program into the general budget with a corresponding adjustment to the general income tax.

It's not orthogonal to affordability, it's in opposition to it.

"Housing is a good investment" means the price of the land and house increases over time compared to SPX or treasuries or whatever.

"Housing is a good investment" means that the total returns from investing in housing are competitive with the risk-adjusted returns of the overall market.

The returns from an investment include both capital gains and dividends. For example, there are stocks that never pay dividends, but might still be a good investment if the stock price increases. There are other stocks that only hold their value, but pay higher dividends, and those could have the exact same total returns.

In the case of housing, rent or imputed rent is a dividend. If you get $250/mo in [imputed] rent on a $25,000 investment, or $5000/mo on a $500,000 investment, that's 12% annually. That's a good investment even if the sale value of the property remains flat.

The sale value won't stay flat unless you tax land (or use leasehold like Singapore), because typically incomes rise, and in most places the rate of building new housing has an equilibrium lower than the rate of demand, because profit is needed for private developments to go ahead.

This results in a) higher incomes, and b) higher rents, because landlords can extract some of the increase in income, because tenants don't have enough alternatives to keep the rents low.

Capital value of property is a function of rents, so increases in rents result in increases in sale value of the property.

> The sale value won't stay flat unless you tax land (or use leasehold like Singapore), because typically incomes rise, and in most places the rate of building new housing has an equilibrium lower than the rate of demand, because profit is needed for private developments to go ahead.

Developments can be profitable without the price per unit significantly increasing.

Suppose that an existing unit is $50,000 and it costs $150,000 in construction costs including profit to replace one unit with four. Then you have a stable equilibrium; a construction company could buy one unit for $50,000, convert it into four, sell them for $50,000 each and net $150,000 which covers their costs and profit. They'll stop doing this if the price per unit falls to $45,000. They'll start doing it again if the price per unit rises to $60,000 and keep doing it until it gets back down below $50,000. Therefore, the price per unit remains stable at ~$50,000, even if demand increases, because that just triggers more construction as the price temporarily gets slightly above the breakeven point.

This is why zoning restrictions cause housing costs to increase. If you declare that 95% of the land is zoned exclusively for single-family homes, you can't replace one unit with four or even two in any of those areas. Then the remaining 5% of the land already has a 20-unit complex on it and in order to add units, you have to replace it with a 30-unit complex. Taller buildings require more expensive materials, you've had to demolish 20 units instead of one and only increased the number of units by 50% instead of 300% and land on which you can even do this at all is now more scarce so you're paying even more per unit for the ones you're going to demolish. Now the breakeven price for new construction is $500,000/unit and if growth continues it has to rise to the level that can cover the cost of demolishing a 30-unit building to build a 40-unit one, even though 95% of the local land is still single family homes.

I have tried to explain the sense of "good investment" that is meant by policymakers and voters and the cliche above. You have tried to explain that there is another sensible definition available. I don't disagree, but I think it is beside the point.

I feel like it is the point. The claim being made is incorrect.

If you have to invest a significant amount of capital to own housing and it isn't a good investment then people won't want to do it. But there are reasons we want to encourage home ownership, so if it actually wasn't a good investment then that would be bad. People would stop doing it. So it's important that the claim actually is incorrect; it can still be a good investment even if the value never goes up, because it avoids you needing to pay rent. If keeping the values flat would result in lower home ownership then doing that might actually be a problem, but it isn't.

The real problem -- the thing people actually care about -- isn't that the value has to go up. It's that they don't want the value to go down. If they paid $500,000 for something which is only worth $100,000 they're going to be pissed. But that's also what needs to happen, hence the impasse.

Why do we want people to buy houses? It incurs transaction costs and makes it difficult for people to relocate to be near their jobs and such. It seems like we should optimize solely for the cost of meeting people's needs - either by paying rent or by owning - compared to the sale value of their labor.

Renting contains a lot of inefficiencies. If you don't like your bathroom faucet and you own your home, you go to Home Depot and buy a new faucet. If you rent, that's not yours to change and now you have to negotiate with the landlord or live with it. Also, you might not want to put money into a building you don't own, but the landlord wouldn't want to put money into a building they don't live in. There are a lot of perverse incentives and transaction costs.

That doesn't mean renting should be prohibited -- if you'll only be somewhere temporarily or you can't afford to buy then you still need somewhere to live -- but in general it's something we'd want policies not to encourage.

Housing services aren't the problem, capital gains are. You know this. You are nitpicking. But if you ever find a portal to the alternate dimension you describe, please give me a ping, I'd love to live there.

> Housing services aren't the problem, capital gains are. You know this. You are nitpicking.

Rents and imputed rents are definitely part of investment returns, and you can have a "good investment" where the returns are entirely in the form of [imputed] rents/dividends and not at all in the form of capital gains.

Your example is nonsensical. This is not how the real world works, living in hypotheticals doesn’t help anybody.

Also quite literally the meaning of a good investment is “it goes up and to the right” and anything that goes up and to the right in perpetuity is bound to become unaffordable if the wages or wealth of the buyers doesn’t increase at the same rate as the asset.

The housing market is a Ponzi scheme propped up by governments. But that’s a topic for another conversation.

> Also quite literally the meaning of a good investment is “it goes up and to the right” and anything that goes up and to the right in perpetuity is bound to become unaffordable if the wages or wealth of the buyers doesn’t increase at the same rate as the asset.

I feel like you're just not understanding the math.

Suppose you want to invest in real estate, but property values are low and stable, zero capital gains. You invest $500,000 in twenty $25,000 units, rent them out and receive $250/mo each in net profit, $3000/year in gains/unit, 20 units, $60,000/year in total gains. Then you invest the $60,000 back into real estate, so now you have $560,000 in housing and next year you collect $67,200/year in gains from renting them, which you invest back into real estate, so then you have $627k in assets.

Number chart goes up and to the right, even though the price per unit hasn't moved.

It's not different for homeowners. If you buy a house -- it doesn't matter if it's $25,000 or $500,000 -- you no longer have to pay rent to somebody else. Whatever you used to be paying in rent, now you get to keep. You can invest that in more real estate or in stocks or whatever you want, but by buying a house to live in, you have a return in terms of imputed rent regardless of whether the value of the house goes up.

The difference you’re not accounting for is that when someone buys a house, in practice they value it as an asset that must increase in value, not simply as a way to offset rent costs, which is effectively what you’re saying.

Thats the real problem. People believe their 500K house must go up in value and not fluctuate in value like any other marketplace of goods would see, and therefore are in opposition to anything that reduces the value of the home in which they live.

That’s why homeowners routinely bend over backwards to maintain home values. The general consensus society has is it’s one of the primary nest egg assets, and for many it’s their biggest one and they act in that self interest.

Real estate lacks the functioning market dynamics you see in every other area of economic activity, in part because we have collectively as a society decided long ago to adopt policies that would enshrine protecting home values above other concerns.

Edit: This also captures capital in an unproductive manner because real estate doesn’t have functioning market dynamics.

Imagine instead of having ever increasing real estate costs (the reality of todays world) which benefit only a finite fraction of economic investment but make up a huge total of the average persons expenses, that productivity gains could instead be captured by other investments like stocks. You’d have more people able to invest in companies, meaning there well could be more companies to invest in, increasing the health of other markets in turn. People will put their money somewhere and naturally a productive business is one such place afterall

Instead, one of life’s biggest overall expenses not only increases over time in aggregate but the value is captured by an fraction of the population of that increase, which is really a net loss to economic activity more broadly

Your growth rate of 560k to 627k is 11.9% (r - the rate of return on capital). This outpaces wage growth - let's assume generous non-inflation corrected 5 % (g - a proxy for the growth rate of the economy)

Your assets after 50 years: 267x Your wages after 50 years: 11.4x Your new ratio of assets to wages: 23.4

This calc works with any number where r > g (source: capital in the 21st century by piketty). The end result of asset growth outpacing wages is complete divergence and the end game of Monopoly where 1 guy owns everything. Usually by then the system has cracked and the society has burned down.

> Your growth rate of 560k to 627k is 11.9%

These are hypothetical numbers. The point is that you can receive a return without any capital gain, not what the exact percentage is.

> This outpaces wage growth

So does the S&P 500. The big problem here is that real wage growth has stagnated, of which a major contributor is... high real estate costs.

> The end result of asset growth outpacing wages is complete divergence and the end game of Monopoly where 1 guy owns everything.

This is obviously untrue. Example: Jeff Bezos and Elon Musk get into a bidding war over real estate on Mars. The Martian real estate market is now worth a hundred trillion dollars, even though nobody lives there. The owners of Martian real estate now have a net worth of trillions, but it's all locked up in Martian real estate. The rest of the economy is unaffected.

Asset price inflation only affects ordinary people if the inflated assets are something they have to buy.

Which gets us back to real estate, which is such a thing. Suppose Bezos wants to buy Earth real estate in order to rent it out and turn a profit. He buys units that cost $25,000, makes not just 12% but 25% annual returns, uses all the money to buy more units.

If construction is constrained, housing costs are going up with higher demand, which is the problem in the existing market. But suppose we're not doing that; it still costs $25,000 to add a new unit of housing and anyone proposing regulations to make construction more expensive shall hang from the neck until dead in the gallows on main street.

If Bezos wants to use his profits to buy more housing and he tries to buy the existing housing, demand increases, so the price goes up to $26,000/unit, so construction companies build more units until it falls back below $25,000/unit again. Then Bezos goes to rent out his new units and finds that rents have gone down because there are now more units on the market. But a 21% return still great so he keeps at it and then goes to buy more units with the profits again, which causes more to be built, which further lowers rents/returns by increasing supply.

The ultimate result of this, then, is that r falls below g. Unless you constrain construction.

I think you present an idealized version of market economies that is not in line with my experience (I live in Sydney Australia our housing system has collapsed). Our disagreement seems predicated on our beliefs around r > g. Have you read Piketty?

I'm familiar with it. The obvious question to ask in response is, why is r > g? What can be done about it?

Piketty's answer is more or less "do socialism", but that's not obviously correct. For example, a lot of government spending programs tend to funnel money into well-connected industries, which are the things already accumulating capital. Likewise, transfer payments to individuals can be absorbed by monopolists if the monopolies are allowed to persist.

And that, really, is the true cause of it. Market consolidation. Regulatory capture. If there is more competition, the competition lowers margins, and then more of the surplus goes to the consumer instead of the investor. If the incumbents capture the government (or the government is careless about creating market barriers to entry) then competition is reduced, margins increase and more returns go to capital. The latter is clearly what's happening in the housing market.

I vaguely remember some research that suggested the [old] media is deeply enough into real estate investment to make it a political no fly zone.

Putting aside rent (which should be illegal IMO outside of rent to own—it just makes no sense as a social construct if you want to fight poverty instead of create it) the idea of an affordable investment is just bonkers. Any investment market necessarily precludes the idea of affordable entry or they wouldn't make good investments—the longer term you look at, the more this is true.

We also can't force developers to build. This is a major problem in cities: they budget for housing that's supposed to come online but there's no (general, broad, accepted) way to penalize developers for failing to follow through.

Public housing or bust, IMO. The housing market has failed this country for too many decades to trust it to suddenly start irrationally acting in our best collective interests with older generations selflessly sacrificing their retirements to not fuck over their grandchildren.

> Putting aside rent (which should be illegal IMO outside of rent to own—it just makes no sense as a social construct

I understand the sentiment.

But many people at many stages of their lives do not want to be owning g property, so some rental properties make plenty of sense as a social construct

But. The current situation where the poorest third give most of their income to the richest third of the population is manifestly unjust and is a blight on our society

It is enough to give capitalism a bad name

Hell, I don't want to own property right now as I'm in a transitional form in my life. I pay too much for what I get out of my current apartment and I'm looking to downsize/chuck amenities away. Trust me, I'm happy to not have to maintain my plumbing or HVAC and while the ikea-quality hardware is ugly and cheap feeling, it's not my problem. It hurts, but I know that I'm not up to the task of maintaining a house and it would cost me more than rent to hire someone else to do it for me + property taxes + mortgage + actual material costs of maintenance.

But if you want to solve homelessness, like actually try to remove it as a necessary reality of modern life (as many other capitalist AND socialist countries have successfully achieved), we fundamentally can't get there through mortgages and rents. I'm happy that people are more literate about housing policy than ever, but I think we can aim for more than marginally more affordable housing—we can completely defeat homelessness if we have the will to do so and don't have a dogmatic fear of subsidized housing destroying the value of the asset you'll leverage to retire on (if you're lucky).

Sadly, I suspect we'll see a lot more homelessness before people who legitimately have any of their interests at heart enter power.

We cannot solve homelessness with market mechanisms, I believe

We are in agreement, I think.

> Hell, I don't want to own property right now

You need some place to live where the organisation of the capital is somebody else's problem.

You need to rent.

That does not mean you need to be exploited to the limits of your vulnerabilities. Which is the market model

Why wouldn't you? The only reason I don't want to own a home is that it's very expensive. I own a lot of other things, because they are not too expensive. And there's an argument that if everyone had to own their home, it would bring prices down, until they'd still be expensive, but no so expensive they couldn't be afforded.

> Putting aside rent (which should be illegal IMO outside of rent to own—it just makes no sense as a social construct if you want to fight poverty instead of create it)

Suppose housing is less than it is now, but a house is still e.g. $100,000. There will obviously be people who can't get a $100,000 loan, so where are they supposed to live? "Rent to own" is just another name for a mortgage, except that you have to pay more for the right to give back the property at any time instead of needing to find another buyer yourself.

Suppose you take a two year contract job in a city where you're only going to live for the term of the contract. Should you be required to buy a house there? Why?

> the idea of an affordable investment is just bonkers. Any investment market necessarily precludes the idea of affordable entry or they wouldn't make good investments—the longer term you look at, the more this is true.

You can go to a brokerage right now and buy a share of stock for $10. This is clearly affordable, so now explain why it is inherently a bad investment.

> We also can't force developers to build.

Developers want to build. It's how they make money. The problem is we keep prohibiting them from building through single family zoning etc.

> Rent to own" is just another name for a mortgage, except that you have to pay more for the right to give back the property at any time instead of needing to find another buyer yourself.

That's not necessarily a bad thing. You can leverage whatever you're mortgagibg as an asset (or in this case, whatever portion of the property you now own). You can't leverage your rental property despite almost certainly paying more than the equivalent mortgage.

As you point out, rent makes sense for transitional or temporary living. I just think you should get ownership over some portion of the assets you are de-facto paying for.

> Developers want to build

Well, stalled developments are a problem across basically every metro market in the country. They don't make their money by building, they make their money by waiting for the labor & materials market to make an eventual sale profitable. In some metro areas with labor-this may be sufficient for some markets, but others (like the bay area) it's clearly not going to provide the housing people expect yimby zoning policy to deliver. Like yes zoning is a major issue in the city, but it's only one of many, and it's not sufficient to explain dysfunction where development was already zoned and approved years ago.

One really great way to encourage developers to perform the role they're allegedly already serving is by having public-sector competition (zero- or negative-margin development/property management) to give them an incentive to be realistic about costs and timeframe. Or just straight fine them for wasting city property on zero-or-arguably-negative-value use.

> That's not necessarily a bad thing. You can leverage whatever you're mortgagibg as an asset (or in this case, whatever portion of the property you now own).

"Not necessarily a bad thing" is the argument that it could have benefits under some circumstances. It's the argument that it should be allowed, not that its alternative should be prohibited.

The obvious cost is that you're paying more per month. Essentially, if you want a place to live, you're required to pay more in order to invest in real estate, even if you don't have any surplus to invest or you would rather invest in something else.

> I just think you should get ownership over some portion of the assets you are de-facto paying for.

When you rent, the landlord is covering the interest on the mortgage loan, property tax, maintenance, etc. The rent covers their costs and some profit to make it worth their trouble, which they often use to start paying off the mortgage. If there is no profit, there is no landlord to pay to build the building and either you can afford to buy it outright or you're homeless. So if you want to build capital, the money that goes to that capital is additional money on top of the rent, i.e. you'd be paying more per month because you'd be getting something you don't get when you rent. You're basically saying you think poor people should have higher expenses so the extra money can be used to force them to invest in real estate.

> Well, stalled developments are a problem across basically every metro market in the country. They don't make their money by building, they make their money by waiting for the labor market to make an eventual sale profitable.

They still make their money by building, you've just passed regulations that make building so expensive that it isn't profitable until rents are unreasonably high, e.g. by requiring them to knock down an existing multi-story building in order to add housing because most of the land is zoned exclusively for single family homes.

> you've just passed regulations that make building so expensive that it isn't profitable until rents are unreasonably high

This is just demonstrably false, though. Regulation does cause large overhead especially crossing municipal boundaries, but developers aren't building even where they've been approved to build. Either they accepted the work they knew they couldn't deliver under the current regulatory burden (essentially, committing fraud) or the bottleneck isn't regulations at all, but the other costs that dominate building.

Anyway, you can either pay off your investment or you can turn a profit. Doing both is just antisocial (ie malicious and harmful) behavior. If you're turning a profit, I better also get an equitable return. That would actually make sense.

Of course the world doesn't work like that, but nothing you're explaining helps me understand why this behavior is legal and people don't murder more landlords. This is simply not a reasonable way to divvy up resources in a community.

> developers aren't building even where they've been approved to build.

Suppose it costs $100,000 to add each additional housing unit if you could build them in areas that are currently zoned exclusively for single family homes, but they can't because the zoning doesn't allow it. By contrast, in the areas "where they've been approved to build", it would cost $800,000 for each additional unit, and the current market price is $750,000.

They're going to sit there and do nothing until the market price gets above $800,000 because otherwise they'd be losing money. If you want to change it you need to make it cost less to add housing units.

> Anyway, you can either pay off your investment or you can turn a profit.

These are not alternatives to each other. If there is any net profit, it would eventually cause the mortgage to be paid off. If there isn't any, why would anyone pay to build an apartment building?

If renting is illegal, moving without a buyer should be illegal. Wanna go land that cool new job in SV? Before you give them a start date you better find a buyer for your flat. Otherwise you're stuck. It's illegal to make someone else foot the bill when you decide to go somewhere else.

I believe the model is just like renting but the rent is a percentage of the value of the home. When you leave the landlord has to return part of the "rent".

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