I'll leave out the moralistic component. When it comes to value, some other considerations are the low interest rates we experience, the fixed 30-year loan, in the U.S. that is, and interest tax deductions. So one isn't pummeling 1M in investment that could otherwise go into a business. One is putting in 200k, even less with an FHA loan, and deducting the price of the loan.
Now we get more advanced. Buy a multi-family property, and you get rental income. This rental income is balanced against depreciation of the house, so your personal income bracket isn't affected. When you combine the tax credits, the low cost of loans, the increasing rents, the principal you're getting back, when the dust has settled you're light years ahead of those folks who rented and pumped their money into some seesaw investment vehicle like the stock market.
I pay out of pocket less than the price of a studio, and own a standalone house in one of the country's top three rental markets.
It gets better, because you can sell the property to purchase another, and defer all tax payments on the profit of the sale. 1031 exchange.
As someone else said, it's pointless to generalize nationally. We live in a big country, assuming you are US-based. I bet there's a similar dynamic in the UK or Canada, both of which have noises of a bubble.
I do agree with what you say though. With all the incentives that are in place, we shouldn't overgeneralize since housing can be a good investment.
Homeowners subsequently hire contractors for maintenance and upkeep which spreads that choice around vs firm ownership which will negotiate a single contract and extract price concessions from their position.
As it is impractical to have land ownership be a public good (centrally owned (or not owned depending on your take on the whole land ownership issue) distributing ownership appears to have the best effect on overall use.
It's the lack of banking competition, not mortgage.
Offer a tax deduction on mortgage interest and people can afford a higher price so competition drives prices up and everyone ends up in the same place. Same with lower interest rates, etc.
One could argue there is a period where housing is easier to purchase once a new subsidy is created, but shortly after that, the market reaches equilibrium and we're back in the same place.
Just imagine if there were no housing subsidies. Housing prices would be mich lower. And yes, I know that's a gross oversimplification, but I think the effect is still there.
Exactly: it's a tax subsidy to sales agents (and others whose income depends on the transaction price). Homeowners don't get anything out of it except that their house has a larger $ on their list of assets. It doesn't help them buy a better house (since everyone in the same income bracket can afford the same house).
It's pitched as a middle class benefit though, so simplifying the system would be greeted with howls of dismay.
It does screw those of us who pay cash for our houses BTW.
Furthermore, land is one of the few intrinsic assets of a sovereign state. With their intervention, they can enable diversified, private ownership of land, rather than a widely-recognized concentration of the state's land in a few hands.
The moralising started well before HappyFunGuy2's comment.
Actually, I don't read his comment at moralising at all -- that's a tone argument, and is frequently nonconstructive. He's parried it well, that's rare.
Addressing your low interest rates: the question is why that should have driven massive investments in investment-class assets (including real estate) rather than productive capital. Secular declines in productive return on capital investment beginning in the 1960s suggest exeptionally deep structural issues in the real, nonfinancial economy, as many have been arguing, including increasingly economists and economic analysts (see Robert Gordon's The Rise and Fall of American Growth, or Deloitte's "Shift Index").
The world needs more houses with more people in them. That requires lower house prices, or richer people. I do not like the attitude home owners have that their future must be paid for by the pain of others not being able to afford homes. And that the profit they make on that low production asset subsidises their leisure lifestyle. Building is better than speculating, for speculating is 1 layer removed from production.
Really? Is it impossible to have a fun and healthy society without a rising population? That sounds like a pyramid scheme.
Despite that, many projections of human population expect a peak this century: https://en.wikipedia.org/wiki/Projections_of_population_grow...
What with "thousand year" projects turning dictatorial and even "hundred year plans" looking obsolete and becoming laughing stock a few decades after they were devised.
I don't see how one can purport to be the judge on how future generations should live for them, and what the end goal should be millions of years ahead.
Besides, the Sun's death is a really minor issue. It's avoiding the heat death of the universe that will take really good planning...
Which planets and moons in our solar system could support human life? Apart from the Earth, the answer is none. We may be able to build small colonies on Mars and/or Europa but the difficulty in building sizeable colonies in/on these places would be huge (cost of transport, cost of base building and maintenance, differences in gravity, decreased sunlight, transforming local resources into forms we can more easily use, etc...), the effort would be much better spent securing the life-support mechanisms of our own planet.
IMO, until savers max out tax advantaged retirement savings options, mortgaging a primary residence isn't close to a sound investment. And that's really what this article is about: your home is not an investment, and you'd be better off renting one (or taking out an interest only loan) and investing the principle payments you would be making into the broader market.
I'm guessing what you meant to say was, all things being equal, investing principal payments is worse than some tax-deferred savings account.
But I'm not really sure that's ever really the tradeoff for most people? Like I stated above, I pay out of pocket for my primary residence, after tax deductions of interest, principal payments (which come back to me), and rental income from the portion of my home I rent out, LESS than what I would be paying for a tiny studio in a bad neighborhood. If I were a renter, and renting the portion of the house I live in now, I'd be paying more than triple, to some landlord who is taking advantage of these benefits. I prefer to pay myself.
Is it fair that there are all these tax deductions? I didn't even mention that improvements to the house can be factored in, and part of my utilities.
The following is a tangent. I regularly come across people who are huge proponents of savings for retirement as a priority 1. I'm in my 30's and am on my path towards independence already (though I have a way to go). The idea that I should defer risk and investment today, so that I can reap the benefits when I'm 67, is beyond comprehension to me, but it must be a personality thing.
Correct.
> But I'm not really sure that's ever really the tradeoff for most people?
It's a lot harder to separate out rent from the various home owner expenses involved in a 30 year mortgage than anyone, including myself is willing to engage in in this thread. And it's rare that you'll find enough chances to either rent or buy the exact same property to come up with a solid formula for which side is better.
> The following is a tangent. I regularly come across people who are huge proponents of savings for retirement as a priority 1. I'm in my 30's and am on my path towards independence already (though I have a way to go). The idea that I should defer risk and investment today, so that I can reap the benefits when I'm 67, is beyond comprehension to me, but it must be a personality thing.
You're assuming a retirement date of 67. My spreadsheet projection suggests my investments will be earning more at age 40 than I currently live on, and at age 47 will be earning more than I currently make gross. To get there I actually have to take defer some pleasures and take risk today -- high exposure to equities volatility, etc. I personally view buying a home as the "normal," "safe" option.
The important thing to me is that the money is liquid; it's not locked in a house where transaction fees are 6 percent of the asset. I can pull a chunk of money out of my Roth IRA for anything I want at any time, and the earnings are also lootable for a downpayment should the math turn in my favor. I can also take out loans against my 403b, for down payments or for a variety of causes. My 457b is doesn't have a minimum age for distribution, I just have to employed elsewhere, providing early retirement access.
How do I invest the principal payments in the market when I need that money to pay my rent?
places where your mortgage payments are a bit cheaper than your rent would be
If I rented out my units and moved out, I'd make 2K a month over and above my mortgage payment and taxes. I regard the negativity towards housing above with a lot of amusement. I could withstand a housing crash, a job loss, and a lot more now. I am much more worried about a fire, or crime in my neighborhood, or construction next door.
Celebrating high housing prices is the civilizational equivalent of giving a toast as you sit down to a banquet of your seed corn.
One day, when robots build houses, owning can replace renting. Or when everyone stops the cargo cult of HOUSES MUST GO UP IN PRICE OR LIFE SUXORZ!!!
It's funny how owning something distorts ones perception. What else in the world MUST GO UP IN PRICE! Notice I say price and not value, for it is truly only the price going up. Their utility remains static, or decreases as the view is blocked by high rises.
Paperclips must go up in price! I own some!
Here in the UK, at least in the south/east where the jobs are, monthly rents tend to be the same order of magnitude as monthly mortgage payments on a 25-year loan for a home of the same size in the same location.
The choice therefore is not between low rent or high purchase cost; it's between making about the same payment for 25 years then never again, or making it for your whole life (while your landlord keeps it for their nest egg).
Since you have to live somewhere, if you are able to get a loan at all, and barring expectation of massive disaster, buying seems to be a no-brainer.
Two things could change that equation. We could add vast numbers of rental properties to the market, enough that the competition forces down rent prices by a very significant amount. The private sector is certainly not going to shoot itself in the foot in this way, and conservative UK governments have been pushing hard in the other direction, so this seems unlikely.
The other alternative would be to reduce the need for homes in expensive places by having more people live together, in cheaper areas. We're seeing this happen by default now as young people are priced out of the market, but widespread telecommuting has the potential to make this a plausible deliberate choice rather than a forced decision.
No idea how the US situation compares, natch
> No idea how the US situation compares, natch
Speaking as a US citizen in a small midwest city, it's basically the same in most areas.
I can rent a 2bed/1car/700sqft apartment for (X) dollars per month. Or I can own a 4bed/2car/1800sqft single-family home for the same (X) dollars per month, on a fixed 30yr mortgage.
The main difference (besides the tons of extra space) is that the apartment is guaranteed to cost 5-15% more every single year for life. But the house mortgage payment only rises maybe 1% each year.
If I leave an apartment, I have to pay them one or two thousand dollars (on top of any rent owed). If I leave my house, it's equity usually covers any realtor listing fee and gives me a few thousand to cover moving expenses.
I hate home ownership, and no one really does condos in my state, so renting is the only other option. But I can do basic math. Even if we move every four years, it's still much cheaper to own rather than buy, in most situations.
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Every single person and organization in the entire nation, is doing everything possible to inflate housing costs as high as possible, in literally every market. Owning is the only way I know of to keep my head above water -- otherwise, I'd be fighting the entire national economy every day, for life.
It tackles two problems in one go. First of all, many more people would be in a position to buy a home without taking on a mortgage. They would then be in a better place to save their money in order to move to a bigger place (if they so wished). Secondly, because mortgages would no longer be as great a requirement to purchase a house, mortgage lenders would be incentivised to offer people attractive mortgage rates in order to encourage people to borrow money.
In addition, microhomes need not result in large compromises. There are some great microhome designs on the market that offer attractive features whilst still coming in at a lower price than most existing UK houses. I quite like the Dwelle designs, but there are plenty of other options available.
As a side note, I have a book on economics called 'The Grip of Death'. The title of the book comes from the meaning of the word mortgage, which I found interesting... Mort = Death, Gage = Pledge ('Grip' is accurate if the pledge becomes an obligation). I personally believe long term mortgage arrangements to have a tendency to damage personal enjoyment of life, so the name seems apt.
That said, in parts of the world (cough Japan) it is expected that you demolish the old building and build your own when you buy a property (and you build cheap and light, accordingly), so perhaps this is another UK-centric concern.
Another UK consideration: we have a tendency here to build housing outwards rather than upwards. In a country with relatively little land, if we're considering alternatives, IMO it's well worth considering more high-rise buildings in place of low-density sprawl - not only do they not carry the stigma elsewhere in the world that they do in the UK, but they're even now losing it in the UK; check out the "luxury apartment" blocks going up like mushrooms in the London docklands and around rail stations in sleeper towns.
The bulk of the cost of buying a house in the UK seems to be land price. In fact, those microhomes are _more_ expensive buildings than a traditional build - from this calculator (http://www.jewson.co.uk/working-with-you/for-self-builders/p...) the price of a 100m2 build might be ~112k, compared to the microhome 70m2 'lifetime' model.
Microhomes are a nice idea, but they wouldn't help me in East of England.
Sure, this hasn't bitten anyone for the last 20 years, but it happened in the 80s.
Separately, I'm not sure I understand your point about price vs. value. In SF or London, apartments have high value (evidenced by people willing to pay high rent to live in them). Maybe in some places (Beijing?) apartment prices are hard to justify based on rental yield. But what makes you think home prices in general are divorced from home 'values'? What would make prices go down that would not also not decrease whatever measure of 'value' you're using?
Interesting observation, does make sense. I suspect a strong relationship to the land the house is built on. The value of the house itself should go down indeed, because the house deteriorates from the moment it is built.
However, the house makes that land usable and the land underneath it might become more valuable, because more people want it in dense areas.
Accordingly, house prices fall in less desired areas.
Pretty much everything. The stagnation and zero inflation of many economies is a problem.
Bad thing 2 is that they cop an attitude, and affect legislation which causes their "investment" in owning a home to rise in price. Executed by preventing competition (zoning laws) and being more costly for everyone else to buy, because they demand and fight for it. *Homestead tax exemption, etc. Their choice to own a home makes them want others to have a harder time to get what they themselves have, through the vehicle of higher prices, and tax benefits to the capital class.
Thus intelligent, useful people, become cockblockers. Houses must become more and more unaffordable for everyone else, because they happen to own one. :( How selfish. Sadly, the idea that high house prices screw over more people than they benenfit is undermarketed, and its impossible to teach a man a thing he profits by not understanding... We end up in a world where no young person can afford to own the home they live in. And if you try to build some new supply, the local captured regulatory agency, vetos you. The zoning board of people who already have nice houses, cock blocks you. Not in my backyard!
Stop cock blocking. Stop expecting your future to be paid for by your non productive, benefits only you "asset." Go forth and benefit others at scale if you desire riches.
In particular as secondly, house ownership means I'll save on rent, rather than to pump money into someone else's pocket I'm accumulating the value. It's a simple calculation that this is in most cases in my benefit if I expect to be in the same spot for 5+ years. Real house value could even decrease over time, the rental costs I'm saving could still make it a good investment.
Thirdly, first house owners are unlikely to try to influence policy just to increase house value. Not sure how you can have such an idea, for most owners this would be unlikely to be worth the time& effort required just to increase house value 1℅ or so. But you can be sure they will fight for their quality of life (think parks, no planes, etc). That coincides with house value but for most average citizens the only (conscious/driving) reason to affect local policy is quality of life.
And lastly I think you're somehow too far from reality if you argue it is in an individual's interest to serve the wider economy. I'm not going to use my money just to benefit an imaginary wider economy - what is the benefit then for me? Why be rich if life sucks (and why risk all my money just to start a company if I have already a good income & life?) Do I live just to nudge Gdp up by 0.00001℅ over my lifetime? Or do I want a healthy life, a garden for my kids to play, etc.
Buying a house is a very rational decision and I"m not sure what you can see as selfish (in particular considering point 1). Your argument really is somewhat absurd and I find it hard to believe you make all your life decisions or buying decisions with such an approach (leasing your laptop? Living in a polygamous commune as keeping an attractive partner to yourself would keep potential value from the rest of humanity?).
I want more people to own homes.
my distates for homeowners
Home owning is passing the buck around.
How could I invest the equity elsewhere, other than the down payment? I have a monthly payment for housing either way, and with rent it will be larger unless the local market is crashing.
> plus you are spending money on maintenance, which you don't fully recoup when you sell
Owners and renters both pay maintenance and taxes. The difference is that owners pay those bills directly and renters pay them indirectly. The idea that owners pay things renters don't is a fallacy.
If that was the case the landlord would be taking a loss on the property, since rent is the only appreciable form of revenue the landlord gets for the property. How do you think the landlord can avoid passing on the full cost of maintenance and still make money? Don't forget that the landlord still has to pay some amount of maintenance even when the property is unoccupied.
> Yes, the downpayment. The downpayment could be invested in a diversified basket of assets instead.
So it really depends on how much the down payment is then, and how much the down payment reduces the cost of housing. You can't make a blanket statement either way.
There is no fallacy here. For all maintenance done, either the renters cover the costs of the maintenance or the landlord loses money on the property. Trying to avoid performing the maintenance in the first place doesn't change that.
The normal background trend is for home prices to rise at about the rate of inflation. We don't really have a special name for this other than "appreciating asset".
This is a limited view. For this one needs to include debt opportunity and tax. Try and get a $1mil loan at 95% LVR on shares. Good luck with that. With property this is often fine. Property lets you work at high leverage points due to its safer nature. In this way your $100k of shares might have a higher return but once you leverage to a $1mil house at that capital level, the smaller percentage return pays more overall.
Also in many countries you dont pay tax on residential property you live in which adds 15%-40% value as you take profits.
Completely agree on the heavy deployment of capital in many of today's property markets. The business and society cost of high house pricing is not discussed enough. I feel its a great way to stagnate an economy if we continue this.
Entrepreneurship has a 90-95% chance of failure...Bay Area homes have doubled since 2011..the choice seems obvious to me (provided you have enough money to buy a Bay Area home).
Business make the world better than houses do.
You're comparing apples an oranges here. Businesses very often lease real estate..guess who ends up making most of the money in that deal..
More expensive houses, to the point of unaffordable are the enemy.
Where is the incentive to invest in urban development if there is no return. If a private equity firms wants to buy a bunch of blighted homes and improve them, why should they not profit from the land value?
They don't. The money you invest in them doesn't disappear into a Scrooge McDuck cash vault. The seller then spends or invests it.
Also, an asset that servers as collateral for a loan serves to creates the money for the loan.
I agree that homes don't make for great investments for many reasons, but they aren't a drag on the economy.
Consider my Tiny House project. I estimate it shall cost me 50-70k. The average house price in my area is quarter of a million euros and the total life long cost of a loan brings that up to half a million euros.
Instead of working for an employer to obtain either 180k (if I save) or 450k (if I borrow) I can begin my own business instead.
Lets flip this around...if two people came to Palo Alto in 2009 with a $2 million fund, one doing a starup and the other buying a home...the one doing a startup would have a 90% chance of failure with a 0.1% chance of tripling their money...the other who purchased a home would have had a 99% chance of at least doubling their money, and a 100% chance of making at least a 25% gain. Who is the smart one?
The difference between consumption and investment?
I want a nice shelter, not a 3 bedroom house I don't need or want on the off chance I'll sell at a profit some day. I'm not interested in that.
> Lets flip this around...if two people came to Palo Alto in 2009 with a $2 million fund, one doing a starup and the other buying a home...the one doing a startup would have a 90% chance of failure with a 0.1% chance of tripling their money...the other who purchased a home would have had a 99% chance of at least doubling their money, and a 100% chance of making at least a 25% gain. Who is the smart one?
I could give a similar example of literally any class of assets.
Investing is not arithmetic. These things aren't baked in like Newton's Laws of Thermodynamics. Corelations can look solid for decades and then totally disappear.
I can tell you for free though, that my generation and the ones behind it cannot afford your houses.
I don't live in a city, everybody around me already uses private means to obtain water, sewerage, waste disposal and even power and I'll be doing the same.
Not every solution has to be scalable. In fact the majority are not.
Just don't kid yourself that it's an 'investment', don't sink in more money than you need to.
Remember, we are all born with short position of one residence, and buying a single residence takes us back to being flat. Buying any more than we need to is going long on housing as an asset class, which may not be the best idea.
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...
Unfortunately, if you play around with it, you will see that future appreciation is one of the most sensitive variables in the equation. My guess is that housing will decline in price, potentially quite seriously, but no one has a crystal ball.
I own right now, but I would not buy right now. If it were convenient, I would sell.
EDIT: Wow. I have just used the NYT's calculator with numbers to the best of my knowledge (assuming 0% house price growth). Per them, I should rent. I'm paying $840 in mortgage plus about $180-200 in utilities etc. Their estimate is that I should rent if I can rent a house for less than $1800 a month. That's definitely possible here. Way to make me rethink my investment!
If I assume a 3% growth in house prices, I should definitely buy, by a 300$ margin.
What are these business needs that will be met if I reallocate my capital? Do we need another car company? Can Amazon.com not raise enough capital to grow AWS? etc etc
People who invest in homes in good markets understand supply and demand pretty well.
For most people, a home is an investment they understand which delivers utility every day they live in it and augments their retirement when they downsize. It isn't very complicated.
I think the subtext here, for better or for worse, is that regular folks have made a lot of money off of real estate since the 2009 crash. Startup people like to think of themselves as smart, and it bothers many of them that regular folks have actually done quite well while they are rolling the dice. Smart people are supposed to have better outcomes than regular folk, apparently.
This is why the SP500 craps on real estate. Because it should. Hell, the only reason real estate has had the peaks it has, is because it was subsidized by the financial sector. And as you can see, that blip of misvaluation did much more harm than good.
Business make the world better than houses do. Businesses are where you get people the best benefits. More expensive houses, to the point of unaffordable are the enemy. If you have allocated a huge portion of your assets into a non productive asset (a house), then you are part of what is wrong with the world. Stop expecting your "only benefits you house" to pay the same as "benefits 10x + more people" businesses.
P.S. liquidity, capital surplus recycling, less bid/ask spread, less fees, less counterparty risk (eviction, destruction). The capital markets pretty much crap on the real estate markets. And they should.