The Economist Who Thinks Owning a Home Is a Terrible Investment
theatlanticcities.com
theatlanticcities.com
The government policies to subsidize homeownership are unfortunate in that they are very regressive and they are quite expensive for the meager positive externalizes that possibly flow from widespread ownership.
* Results in citizens that care more about the neighborhood
* Nudges people into saving for retirement
* Allows the average Joe to take advantage of inflation (this is true IMO). House goes up in value, so does their net worth.
A diversified portfolio should also include property which is why I have investments in REITS as well as shares.
Unless you can afford to pay for most or all of the cost of the house upfront, you will often find it easier to increase your net worth by renting after all the opportunity costs and losses are added up.
This is how landlords make their money. If they own a house outright then their cost basis is less than a homeowner with a mortgage and manageable downpayment. In many cities, you are better off renting and saving until you can make a big enough mortgage payment (or pay cash) where the purchase starts to make sense relative to renting.
Even if you do have the capital to buy your house with cash, it's still not a good investment. Basically you are tying up all that capital that could be earning 4% per annum or more in an index fund over the long term.
Use other investment vehicles for growing capital.
If you rent, and are unlucky, you might find yourself priced out of the market for the type of properties you would like to live in, and at the same time become priced out of purchasing.
Where I live, purchase prices and rents have increased 30% or so in the 8 years since I bought, while my repayments are the same. My repayment + interest has been substantially below rental prices since a few months after I bought.
If it had gone the other way, yes it would have been a bad investment, but it would have been a cost I'd still be ok with because of the predictability it gives (and if prices dropped, I'd use it as an opportunity to trade up, still hedging against prices increasing again).
Essentially by purchasing I have locked in an upper limit on the vast majority of my housing costs for the duration I stay in this house, and also reduced the risk of a substantial jump if/when I move, as the value of my current house is likely to move reasonably close to the overall market.
That hedge is worth a lot to me.
Your potential downside is not the difference between a lower rent and the cost of a home. Your potential downside is the entire cost of your home.
This is actually one of Shiller's points about rent vs ownership (mobility).
One thing Europe has that is good is a lot of public housing, even for middle-class people (like typical renting programmers)-- not just US-style "projects". This is great because it keeps the price down on the private market as well. You still need to build enough to avoid scarcity, of course. Otherwise, you end up with hellish queues.
I'm a US citizen with ambitions to one day move to Europe (I'm a DevOps/Sysadmin/Operations guy); how does public housing in Europe work?
This is such an obvious observation, but one most people miss completely. Math doesn't lie.
The prime reason that we purchased a home is because we could not renovate and open our basement for business in a rental property. Overall our net costs of home ownership now are eclipsed by the amount we are making from being able to do the things only home owners can.
The other major reason is that for us, even when factoring in estimated maintenance costs, we would pay less monthly on a mortgage than we would renting. Even if we lose some home value over the period that we are planning on living here (~6 years) we would see the return of some of it rather than none in a rental scenario.
The bottom line is, this whole argument is much much more complex than what the retail value of your home is between the time you buy and the time you sell. As with pretty much everything, the economic costs are not captured in the pricing data.
I really dislike this line of thinking. Renting is not "throwing money away" because you have to live somewhere. Buying gives you the opportunity to capture any upward movement in the housing market and provides a stable payment over the long run but it also exposes you to risk of downward pressure and makes for a very illiquid asset. Renting gives you the ability to relocate on very little notice (in most places, your maximum is a year, assuming you get a better offer within a day of signing a new lease) and shelters you from immediate maintenance costs.
The problem is that primary housing isn't an investment. It's just as much an emotional and financial decision as buying a car (versus, say, going car-free or leasing a car).
Being short on housing seems like doing just that. Not only have they been keeping money dirt cheap, bailing out banks, taking over Fannie & Freddie, but the Fed even went so far as to buy junk mortgages directly.
In a perfect laissez-faire fantasy world, this guy is probably right. In the world we live in, where the US Government and Federal Reserve do everything they can to keep the music playing, perhaps not.
You are lucky to have bought a house that can benefit from high renting prospective. This is not the case everywhere and whereas taxes might go up (whenever the authorities will want more money), the rental profits simply might not. It's not a scenario easy to accept - renters usually have the flexibility to move to other cheaper places or to group together (shrinking the rental market BTW), but the house-owning costs are there to stay. Also, the worst case is when the entire area enters in decline, housing costs plunge and render the entire multiple-house ownership a bad investment.
Investing in the home you live in gives you tax breaks (jurisdiction dependent).
You will look after your own home, instead of having renters with no vested interest.
You need access to a home anyway, why involve a 3rd party (landlord).
The leverage you can get is fantastic, and the interest payments are generally similar to what you'd be paying in rent anyway.
This does no apply to Buy to Let however, the advantages above don't really apply. A second property makes much less financial sense to me.
Having said that, I currently rent. I'm not settled down enough to tie myself to a single location, Australian property is super expensive (I think overpriced, but that's just a gut feel), and I'm keeping my non startup risk profile low to try and balance the risk I take on as an entrepreneur.
Careful.
The interest payments are only one piece of the puzzle, albeit a big one. A renter does not need to pay maintenance/upkeep, taxes, and (sometimes) utilities.
For a single family home, these later items could be in the ballpark of $1000 per month (sometimes less, sometimes more).
First, if you own your home, you can more easily withstand a financial crisis, whether it be a lost job, medical bills, or a totaled car...at least you have somewhere to live. If you can't pay rent and become homeless, it's a lot harder to recover. Second, you can pass it on to your kids so at least they'll have some security. If you rent, you can't give them that.
But both of those only apply once you've paid off the mortgage. With the trends being cost of living increasing while pay rates stagnate or decrease, and cost of real estate having skyrocketed in the last few decades, for a lot of people, even middle class, it becomes an unrealistic dream to actually be able to pay off a mortgage within a single lifetime.
Someone who rents and has, say, $100k in the stock market or bonds is arguably in a better position than someone with a $100k house. The renter can much more easily move to a new location to get a better job. Plus, they can afford to eat and pay other expenses while doing so. You can't eat a house.
Taxes are relatively low where I live (Boulder, CO) and on my property I still have to pay $500 a month in taxes. If I lose my job and my ability to pay, it doesn't matter if I fully own my house as the government can just take it from me if I am delinquent for too long.
I am totally against house ownership unless you have enough money to put up a large down payment and enough to also withstand fluctuations in your ability to pay -- otherwise it really seems like a sucker's bet to me.
There's a huge stigma against renters here.
I've heard people describe renting as "throwing money away" more times than I can count. I don't think I've ever heard anyone say that about not having children...
House prices are fundamentally tied to the income of people living in the area. There can be ups and downs but eventually it all comes back to fundamentals. Labor's share of national income has been in steady decline in all OECD countries since mid 70s. Smaller part of GDP will be available to be spend to housing.
If you're going to have this money there are many better ways you could invest it than taking a 0% return from buying a home (and hopefully also overtake the cost of rent).
That said, I recognize that different cities have different conditions, and what makes sense in one city might not make sense in another.
http://www.nytimes.com/interactive/business/buy-rent-calcula...
While you can theoretically sell your house later. Money put in into maintenance, taxes, association fees, may not ever pay off.
However! I'm also from Ireland where a _lot_ of my friends bought houses in the celtic tiger era and are now, on average, about 100K euro down on their "investments"
My gut feeling is that Christchurch too is a bubble. Sure it's a bubble fuelled by a nasty earthquake reducing the supply... BUT supply will come back up again (and it'll be new housing with things like insulation!)
Tricky things really. Currently my rent is cheaper than a mortgage for an equivalent - but only just. That said, I don' t have to pay rates, fees, hiked insurance etc.
The other option of course is to leave for a while - easy enough to do as a decent developer.
I suspect the biggest problem is simply that houses are very expensive compared to most of the USA. I'm flatting in a really crummy house (as in, cracks in the wall) on a quarter-acre section, yet the property is valued at $500,000.
Hi thesis also probably ignores the the fact that a mortgage is one of the few ways a normal person can use leverage and I most countrys property is a tax efficient way of handing capital to your descendants.
Therefore, renting is cheaper than a mortgage for most properties in my area.
Certainly in the UK a mortgage is way cheaper than the equivalent rent when I looked at it recently.
I'd love to see some numbers on this.
You still got value in the form of shelter for your expenditure in the form of a mortgage just as you would have if you had paid rent.
But if you have to borrow money for that 0% rent, it's not that simple.
1) For a given residential property in a high-demand market, you can reliably extract annual rent equal to 4-5% of the value of the property in a high-demand market.
2) If you just live in the property, your expenditures are reduced by a slightly higher amount because you avoid the inefficiencies of the rental market. Also, income is taxed, but reduced expenditures are not.
3) Homeowner's insurance is usually a much better deal than renter's insurance. This of course varies based on where you live, but on average (in the U.S. anyway) you'll get better rates for equal coverage if you own your home.
It has nothing to do with some insane notion that property values always go up.