You could if you wanted to, though for whatever reason people are much more comfortable with leveraging 5x to purchase a home than they are with leveraging 5x to invest in a brokerage account.

Nah, it is indeed much easier to invest in real estate on 5-10x leverage than doing the same with stocks or ETFs, because the banks are usually much more comfortable lending you the money in the first case.

I think it's because of the mind trickery that makes the first thing a solid "buying a house" investment and the second thing a "gambling on the stock market" game. You can easily see that trickery at work: just confront someone who bought a house on credit with the fact that he just put all his money into a highly leveraged single investment, which combines two of the usual "don'ts" from the "Investment for Dummies" book. You will usually earn blank stares.

Not saying that doing such an investment doesn't make sense in certain circumstances (use the house yourself and plan on staying there for decades), but one should be very clear about the risk profile of it.

This seems to be the benefit to me as well. The average person won't get a £100,000+ loan from a bank so easily for anything else.

Want to start a business with that money? Better have a rock solid business plan. Investing elsewhere? No chance, a bank won't lone that money for you to play with on the stock market, and the rate you would get would wipe out any gains from something safer like a tracker fund.

For anyone that is not content living in the same area for the rest of their life buying is a poor decision. But it is the only way most people can access a loan that size and leverage in that way.

I've resigned myself to the fact you have to buy (in my country at least), and I will just make sure it can be rented easily when I want to move.

Some European countries are much more renter friendly and I would consider renting exclusively there. Germany and Berlin seem more appealing in that regard with the rent control that was put into place recently.

The thing is housing almost comes with a rock solid business plan and as a basic need is somewhat resistant to radical decreases in price (it is almost impossible that your house would depreciate by 100% - company stock/your own business investments could).

With the way the market is it is likely that mortgage principal + interest + maintenance is actually less than rent...

Lots of things can drag down the value of a home to zero. Lack of maintenance or a natural disaster are two big ones, but also the neighborhood could turn to crap or an infrastructure crisis that isn't resolved.

Add to that property taxes continue to accumulate on buildings. There are quite a few ways to drive a house to worthless. I used to live in a region where houses were <$10k because they were condemned shells in crime-ridden areas.

It still wouldn’t be 0. There’s land value and even in depressed areas like Detroit you see price rebound because you get good value for money.

I see it a bit differently.

A house provides a basic human necessity (shelter) and can be insured. It stands to reason that it can be mostly financed with very long-term, cheap, debt capital. Other than mass-scale depopulation, not much will cause a house to dramatically lose value, especially to a first-lien lender.

Stocks are a different animal. Even assuming a company performs well, which it may or may not, there are all sorts of crazy things -- trade tensions, interest rates, valuation changes, investor sentiment for/against various sectors, completely leaving aside rational changes in value due to company performance -- which cause price swings far detached from company fundamentals. US equity markets went up ~30% in the past year. They could fall as well. If anything like this happened in housing, you'd literally get riots in the streets.

I don't think it's an accident that the financial system provides so much credit for housing. Yes, it should probably be a little more expensive (thank Fannie and Freddie for that) and yes, maybe we could use a little more equity, 20%, or 30%. But suggesting houses should be 100% equity-financed like most stock purchases? Doesn't make sense.

Well you can live in a house... Can you live in an ETF if things go south?

If "south" is a sudden and extreme loss of value, then you might be just as screwed with a house as well: think of a flooding of an area, having a catastrophic wildfire nearby, or a sudden increase of crime in your neighborhood (technically leaving you able to live in the house, but maybe you don't want to do that for your dear life).

Well home insurance is a thing that most people have to protect against those possibilities. I don't think something similar exists for ETFs. Also, if an ETF loses 90% of its value, it's pretty much worthless. If a home loses 90% of its value... you can still live in it!

You probably can't, because there must be a reason for it to have lost 90% of its value, and that reason probably has to do with the house somehow (I named a few examples, but there are more possibilities) losing its capability to "house" people, because after all, that is the only value proposition of a house - that capability literally gives it its value.

> You probably can't [live in a home that loses 90% of its value], because there must be a reason for it to have lost 90% of its value

I agree 90% is extreme. However, the nice thing about owning a home is that even if it loses value, more often than not, other homes will also lose their value.

Say you buy a 1 bedroom place for 500k, and 5 years later you have 2 children and need a 3 bedroom place, but your home lost value and is now only worth 400k. The good news is that the 3 bedroom place also probably lost value. So even though your home decreased 20% in dollar value, the 3-bedrooms also did too, so your house (as far as in-kind value) is worth the same.

In fact, in some cases you could go further and say it's good if your real-estate loses money. Suppose that you bought that 500k place, and had 100k left in your bank account afterwards. Now 5 years later the real-estate market sinks 20% and your home is worth 400k. Suppose you didn't invest your 100k and it's still all cash. When the housing market sinks 20%, your in-kind trade value plus your existing cash is actually worth more than if the real-estate market did the opposite.

For the above reasons, it's better to think about your primary residence as planting a flag in the area that you want to live rather than a financial investment.

you cannot live in that house if everything goes "south" and cannot pay your 1% property tax (that's 10k a year for a 1M$ home, not easy if everything goes "south"), Let's also not forget HOA and maintenance.

Owning a house is expensive, even after your mortgage is fully paid off. People like to simplify the model so they can feel good about owning a "paid" piece of land.

A housing loan is far less risky than a 5x margin position as they are structurally different types of loans:

* The housing loan is non-recourse (you can't lose more than your home), while brokerage is not.

* A housing loan's collateral value is only determined at purchase, not hourly. You can't get "margin called" on your house if its value declines.

All said, I'll give you that people are oddly leverage-adverse when it comes to brokerages and actually take on more risk (to achieve a given expected return) than they need to if they were willing to use light (10-20%) leverage.

5x? Amateur.

I put 3% down when I bought my house. That's 30x leverage.

The difference is that my lender wouldn't call the note on my house if the value of the home dropped below the principal still owed. Not if they want to see the money, anyway.

Real estate isn't a very volatile asset class. Using leverage in more volatile asset classes, like FOREX, is where people run into big problems very quickly. Your bank will also make you buy insurance if you're getting a mortgage with more than 5x leverage. Good luck finding anyone that would insure your stock picking at 10x leverage.

> Real estate isn't a very volatile asset class.

This conventional wisdom has been increasingly getting less true over the last decade. Valuation increases of 5-10% per year on a regular basis are also "volatility".

My home will not depreciate much relative to other homes I could have bought. Yes I'm forced to sell during a downturn it's not good, but once the market picks up it's almost certain my home will increase in value as well.

Harder to have the same confidence that the stocks I picked will survive a downturn as well as my home.

All your arguments of safety are even more applicable to index funds since you actually own a slice of the entire market rather than just being merely correlated as you are with your house.

> You could if you wanted to

Not really. There are no margin accounts with terms as favorable as the typical mortgage loans. (Some examples of terms mortgages have that margin loans don't: the absence of margin calls, the low interest rates, the relative diversity and transparency of rates from potential lenders, etc.)

You can get margin rates as low as a mortgage or even substantially lower[1]. If you don't want to switch brokers you can also ask your current broker for a discounted margin rate. I've heard anywhere from $250k to $1m total assets is enough for them to consider discounts. However, margin calls are a lot more terrifying than foreclosure proceedings, that's for sure. As such, it's virtually imperative to appropriately hedge and that should be factored into the cost of borrowing.

[1] https://www.interactivebrokers.com/en/index.php?f=18069

I was unaware that IB's rates are so low. From reading about it, it looks like they make the money back on other fees, including inactivity fees and commissions. So the real rate is not really as low as what it says, although I suppose on large accounts those fixed fees would make up only a small fraction of the total value. Either way, I was wrong about there being "no" options with interest terms as favorable as mortgages. There is plainly at least one. Your point about hedging is well-taken, also.

Margin calls are the primary difference. (InteractiveBrokers and Robinhood have pretty good margin rates: <=3.05% and ~5% respectively) Being forced to sell at during a temporary low is the major threat, whereas most people who kept their house during 2008-2009 are doing fine today.

That's true for the US market, but what I learned is a "margin call" is a potential scenario in Canada.

Unlike the US, mortgages typically have 5 year terms (can range from 1 to 10). The amortization period is still 25 years (on average), but you refinance every 5 years.

If you put 20% down on a house, which then loses 10% of it's value, you can't refinance without coughing up enough cash to have the loan be 80% of the appraisal.

As you said, at least in the US you can choose to ride out a crash if you have a 30 year fixed mortgage.

During the housing crisis in the US a lot of mortgages were ARMs, which are basically the same thing as your describing.

https://www.cbsnews.com/news/adjustable-rate-mortgages-make-...

You don’t get margin calls with a house. You just have to make the mortgage payments.

a margin call is the same as a foreclosure. You prevent margin calls if you put in your own money (to boost the margin). A broker margin calls you because they no longer accept the raised risk, but it's the same concept.

A margin call is not the same as a foreclosure. It’s quite different. You have a fixed payment with a mortgage. If the value of your house declined precipitously, that fixed payment stays the same. You enter foreclosure proceedings only if you cannot make that payment, and depending on the state, this takes some time. You might be living in your house for a year or more without making a payment while in foreclosure.

On the other hand, with a leveraged position in the market, if the value of your portfolio falls to a certain level, you either need to post more capital or your position is liquidated. If you are capital constrained, there is literally nothing you can do in the case of a leveraged position - your broker forces you out.

Regardless, if you keep making your payments, there is no way for a bank to force you out of your mortgage or call for additional capital due to a decline in value. This is the big difference.

> if you keep making your payments, there is no way for a bank to force you out of your mortgage or call for additional capital due to a decline in value.

it's the same coin, you're just looking at it from a different angle. The timeframes are certainly different between foreclosure and margin calls, but the concept is the same - the lender sees you as more risky than they originally intended, and chooses to liquidate you. In a foreclosure, you "prevent it" by constantly paying the interest. In a margin call, you are not paying until you hit the drop in valuation, and you have to pay to top it back up.

This cannot be understated. You can conceivably get a house with 5% down. There is no other instrument that allows a retail investor to get 20X leverage - especially at that price. Even leveraged ETFs are basically capped at 3X because anything else is too volatile and was deemed a market hazard.

Now imagine a 20X ETF that invests in a single property, with high maintenance costs, extremely low liquidity, zero diversification, and high transaction costs. That is basically what some of these mortgages are.

It is absolutely intoxicating when the asset price goes up and I am not surprised in the least that people love it as an investment. Even if it explodes, you walk away and your losses are minimal. You only risked 5% of the price and sure you made some payments along the way, but the risk asymmetry completely rewards being as reckless as possible.

Completely agree with this. Homeowner usually understand very little about investing. As you said it is intoxicating when it goes up a 5 or 10% a year but pretty much invisible if it goes down or stays flat (since the mortgage is seen as an alternative to rent).

Because housing is typically such a bad investment, it actually only makes sense in some cases because you get your mortgage on margin.

I see this argument all the time but once you do the math, it comes down close to the same with the house being leveraged and index funds without leverage (also known as the 5% rule)

If it’s close why complicate things?