I think the average person thinks of individual investors (flippers, rich foreign buyers) when they hear "investors". Some of the buyers belong to this group, but most don't.
https://www.bloomberg.com/quicktake/rent-wall-street-is-my-l...
https://www.theatlantic.com/technology/archive/2019/02/singl...
https://www.housingwire.com/articles/blackstone-gets-back-in...
I don't understand how they are making this much off of rent in San Francisco. The price to rent ratio there is like 50:1, which implies a return of 2%. Perhaps their properties are charging much higher then average rents..
Detroit is the opposite extreme: the price to rent ratio is 5:1 (of course this ignores that the property is likely in terrible shape and the vacancy rate is high).
So here is why I have been looking at this: how do the rich maintain their wealth during inflationary periods? Own hard assets that pay rent! Also the relatively stable return you can get from rent indicates how much money you need to retire. Suppose you want $100K a year during retirement. Well with 10% returns, you only need $1M.
The difference this time is its on top of huge increases in home prices and rents. So I think you wouldn't see that large of a correction after this particular run-up, because before it both rent and purchase prices were already extremely high.
Ultimately I see it as only a minor problem on top of the huge problem of the basic affordability of shelter.
Personally, I think for the extra $500/month, buying is a better choice than renting; at least for me.
The choice was never between renting and buying a $1m home for a $500/mo difference.
Let's do the math. Nobody is getting a 1.1million mortgage for 3k/mo, so let's pick something conservative but more realistic.
According to zillow, for a 3k/mo payment you can get a 520k loan with a 20% (130k) downpayment, 30 years with an average 3%. You'll be lucky to keep it to 3% for the next 30 years but we'll let that stay. This 3k/mo payment includes estimated property taxes etc., but no home maintenance costs - there's going to be 50k or so of that over the 30 years.
So after 30 years, you've got a 650k house + whatever appreciation it has over that time, minus the 50k expenses. Historically house appreciation is about the same as inflation, so if we stay in today dollars that washes out. After 30 years, you walk away with 600k (todays dollars). If we pretend it won't cost you anything extra, 650k
What if you stayed renting and invest that 130k? Stock market long term average is about 7%, net inflation about 4%. So lets use that, I'm cheating by stating in 2021 dollars and you just keep investing the $500/mo difference.
Take 130k today, invest for 3% with a 500/mo contribution for 30 years.
Result is: $601,000 (again, sticking in today dollars as i've zeroed out inflation)
Do the same thing at 4%: $760k
Base on historic market, you're likely somewhere in between. Looks like it's not a huge difference, which shouldn't surprise you. This means that pretty minor differences in your life circumstances can push you one way or another, but nothing is obviously compelling.
(Ok one thing jurisdictionally dependent I didn't mention, there can be tax implications of this or not, depending on where you live. Ymmv.)
7% long term stock average in the past doesn't mean the future
3 condos I bought in the 2007 downturn are appraised at double today, much higher rate of appreciation than inflation...
Of course past doesn’t imply the future will be the same , but I used long run averages for both stock market and housing market , so it’s fair .
A 5/1 ARM that changes rates after 5 years is a product you can buy, but it would only be used in niche scenarios.
I understand it is not like that in most other countries and I'm not 100% sure why. Something to do with the federal government backstopping most mortgages I think.
Just goes to show you have to do the non hand wavy version of this for your actual situation ; my broader point stands though.
I literally just closed on a condo last month and got a 30 year fixed rate jumbo mortgage at 3%.
It’s not perfect but it’s reasonable. It may free up some other money in the house case , which you could use to make up some of the difference. Or that might get eaten by rates.
US home maintenance seems high though - roof repairs are a known thing for some reason. In he U.K. I live near an estate of thousands of houses all 50 years old, I can’t ever remember seeing one being repaired.
But yes, the mortgage rate is fixed in the US, your mortgage payment doesn't change, your wages increase at least with inflation, and relatively speaking the mortgage gets cheaper every year. Rents on the other hand, tend to adjust with inflation. The breakeven point is about 3-5 years as it happens.
If that's your investing thesis then obviously the expensive coastal metros make no sense. These prices reflect a history of excellent returns. It costs a lot more to own than to rent - people are paying to be landlords! Clearly they're doing this in the expectation that appreciation will make up for their losses.
Look obviously the details matter - we can cherry pick cases in either direction that “won” or “lose”.
The point is more that the sentiment in OP is common but wrong, it’s not obvious. One thing I didn’t get into is US specific but often it’s the mortgage tax credit that makes it worthwhile but again, it depends ....
If you had actually needed to pay $1.1M in principal even at 0% interest over 30 years you'd be paying $2777 a month.
Your comment comes across as basically suggesting it is other people's fault for not buying a house when it cost half as much as it does now versus renting a house now.
I bet you bought that house fifteen years ago at least right?
I'm saying this is deceptive because that is not what people think of when they are comparing renting with buying. You're comparing renting today versus buying over a decade ago and getting lucky about the property value going up and being lucky about being able to afford to get a mortgage in the first place.
It's just not a nice thing to argue. I pay a lower "rent" than my friends who rent. At first I was paying much more than my peers, now I'm paying half as much. But most of them would happily go back in time and do the same versus paying rent now, that's just not possible, not to mention that they're often too young for it to have been financially possible for them to do it when I bought my house.
It is really unreasonable to suggest that someone now magically get themselves into a long term mortgage taken out a decade prior as if that's merely a $500 monthly premium. It's time travel or luck.
* high transactions costs (if you decide to move after a few years, say goodbye to all of those savings)
* lower liquidity (if you rent, you can just call the landlord and break the lease. if you buy, you have to find an agent, stage the house, and wait for offers)
* highly concentrated market risks
They're not technically part of the mortgage payment, but they're a line-item in your monthly payment to the lender.
If you work with a mortgage broker and get quotes, ask for the rates with and without escrow. It’s pretty common that there is a slight reduction in rate if you include escrow.
Are you assuming that it's somehow sensible to buy property and leave it empty? Owner vs rental doesn't change the number of homes available.
Yes if it has been financed in certain ways.
An empty space is assumed to be rented at the same rate as it was before being empty and that empty rent can normally be tacked onto the end of the financing as it is assumed to be a "temporary" thing.
However, if that space gets occupied for less money, the basis of the real estate adjusts and the financer can call up the owner and demand more cash since the basis changed.
Consequently, I have seen quite a bit of real-estate remain empty for years just to avoid having to adjust the cash basis.
This is one of those stupid-ass financial things that absolutely needs to get blasted in law.
So if they don't care, then why would _I_ care that they don't care?
The problem is that when everybody leverages to the hilt and the whole area collapses, the rent prices stay high even when there's no one renting--which is bad for renters. And this continues in a gigantic game of chicken until some of the owners finally run out of cash and go bankrupt and everything collapses simultaneously which also isn't good for the end renter.
It's like the 2008 Wall Street crash. Lots of people knew what was going on. However, everybody knew that they were equally screwed whether they were responsible or not. So, they just rode the train and hoped they could cash out to the next sucker before the disaster.
And then we get the joy of everybody wailing that they need a bailout.
I think the comment is saying that investors are using cheap loans to buy up properties and rent them out. This increase the supply of rentals and drives rent prices down.
Why? You basically cannot kick evict a renter or raise their rent.
https://smartasset.com/mortgage/price-to-rent-ratio-50-large...
They've made more money from appreciation than from rising rents.
Appreciation, by itself, will naturally drive this ratio down because of rent control laws. The value of the home is the denominator in that fraction.
In Auckland, New Zealand, average capital gains exceed $40,000 per month. Land banking is incredibly lucrative.
On what property value?
Sure there are outliers; but if your property costs 2.4M NZD (1.7M USD) then those numbers are accurate. Either way, land is the best investment right now and I don't see it crashing any time soon.
"Land can only go up". Even with COVID and closed borders.
This is absolutely a global problem: New Zealand, Australia, parts of Canada, the UK, are all having the same issues.
they also accept that in dense Tokyo metro areas, the sizes of places are tiny.
I dont think the Anglo way works - you cannot have both dense, but big apartments.
Personally I would take their side of the bet. I think that inflation rates are going to be extremely high over the next decade, exceeding the 1970s and potentially flirting with hyperinflation, and that folks who are betting on status-quo inflation are about to get screwed the same way folks who didn't see globalization coming in the 90s or Millenials who bought the "study whatever you want and the money will come" line got screwed. But that's why we have financial markets, so each firm can bet on the version of the future they think is most likely, and ultimately one side makes a lot of money and the other goes bankrupt.
Lots of things were done to "intentionally destroy" the US economy. The only way the US economy can fail from hyperinflation at this point is by physically destroying it and causing the production capacity of the US to go down, which means the US won't be able to meet foreign obligations denominated in foreign currencies.
The reason why I put the Feds actions in quotes is that its mission is not to destroy the economy, merely kick it out of bed.
Your strategy for preparing for hyperinflation is to lever up on debt and then buy controlling interests in real assets that people need to live - real estate, food suppliers, weapon/ammunition suppliers, energy, utilities. When hyperinflation hits the debt inflates away to nothing and then you can name your price in the black market that inevitably ensues. Then you use the profits from your control over essential supplies to hire mercenaries to protect and enforce your rights to them, because hyperinflation is very frequently followed with a collapse of state control along with lawlessness, anarchy, and civil disorder. (See eg. Russian oligarchs.)
Note that folks who are buying up real estate with debt are following part of this playbook. Folks buying up gold and Bitcoin are following another part of it: their buyers expect that those will be the currencies of choice in the black market. I have no intel on whether gun & ammunition manufacturers are also getting bought up for outsize prices, but would be extremely curious if they are.
If you must get into debt, then buy assets that net a future return based on productive investments. If you were to buy real estate, you would have to buy it because you are expecting to receive enough rent to pay the mortgage back based on current rents.
If everyone gets into debt and uses it for speculation then we would probably get to see the opposite, an even stronger deflationary wave than what we have had so far.
Also, it is far from clear that TIPs would be honored in a hyperinflative scenario. I can easily imagine a "100% windfall profits tax" on TIP gains.
Shouldn't the decrease in homes to purchase increase the demand for rentals?
If it's a business, they will leave it empty rather than lowering the rent
So although housing prices don't necessarily increase faster than the S&P500, and that there are many local variables in play, the same 7% increase YoY can really be a 140% increase YoY, while you are also renting out the home for more cashflow.
Liquidity of the housing market has vastly improved over the last 5 years, mostly due to new kinds of lenders and underwriters in the market, with the current year being even more liquid than ever.
The downsides of real estate haven't gone away. Like maintenance and physical presence needed, which is difficult for an individual as the portfolio expands. The physical presence demand - or the need to make it economical for there to be someone else maintaining the property - means that it is difficult to come up with the downpayment for real estate in areas you would actually like to live in, but are fully capable of renting in. So the barriers of entry stay where they are.
For this discussion, I'm going to waive away the maintenance costs on a SFH, as they are immaterial for the size of the homes in SF regardless of what the value is determined to be by an arms length transaction.
Conversely, someone like Interactive Brokers is going to liquidate your holdings with extreme prejudice if the securities collateral declines below what their risk management feels comfortable with (other brokers are going to call you and perform a margin call).
You also can get way more leverage with real estate loans versus margin loans or pledged asset lines.
I'm mainly responding to provide helpful context to others. Not for a typical pedantic thread where we are already agreeing with each other but just squabbling over semantics.
I would say this is the primary savings grace for real estate investors and homeowners. They get to build equity in so many scenarios that it works out for them and lets them maintain access to low cost capital, against the equity they build up.
For example, in Canada, housing is up 30% YoY. Trudeau's Federal government recently said that even a 10% correction in housing would be unacceptable.
In practice, Canadian housing isn't housing - it's a 30% (or better) government bond that you get to live in or rent out. That's a 30% return guaranteed by a sovereign state that will gladly destroy everything else in the country to prop up housing. There is no investment like it anywhere else in the world, which is why Canada is seeing the largest real estate bubble in the world.
The best part? You can sell your principle residence completely tax free. Not a penny in tax paid from capital appreciation.
Very little hope here from the eyes of a local. Maybe you can study software to get out and go to an American city. America remains relatively industrious. Canada is just becoming a high tax version of Monaco (doesn’t even make sense but still).
I know we look funny from up there but we do love y'all. My sister-in-law is from Guelph and lives in Ohio, we just accidentally bought matching F150's. So feel free to come down any time. The politics suck but the people are fine.
Could you please provide a source? I cannot find anything on the web.
> it's a 30% (or better) government bond
This cannot possibly be true. First of all, 2020 was a special year for asset prices, not just in Canada and not just for real estate, but for all assets all around the world. Second of all, even if the first assertion is correct, there is a world of difference between not allowing prices to decline vs not allowing them to increase any less than 30% YoY. Third, 1.3^27 is 1192. Average home prices in Vancouver is over 1 million CAD. Do you honestly argue in 27 years, the current homeowners could sell off their property and net a sweet >1 billion CAD? That we would have millions of billionaires in Canada in 27 years?
Yes, BetterDwelling is a permabear but Vaughan's comments are legitimate. He said it in an interview with TVO.
On another note, the 30% number seems ridiculous. And, yet, do not be surprised if Canadians seriously believe this. Remember, people have been screaming bubble for a decade, and there has been no such pop yet. Of course, I think this is unsustainable. At 6-12% growth rate you're looking at like low to mid 8 figure values...for the average home. At 15-30% you're looking at hundreds of millions of dollars over 30 years. Ridiculous, isn't it?
Interesting discussion on the Financial Times comments section about young people feeling insecure also highlights this property inflation. Basically, the AngloSphere has decided to inflate assets and forget about industrious activity. In the long run, you just end up with a hollow, low productivity and low social mobility country.
Is this acceptable? Well, Canadians aren't voting against it. Of course, this is because they think they are getting richer. In reality, the country is just heavily indebted and consuming tomorrow's income today. I am keeping most of my savings down south with the Americans and their equity market. If the BoC can keep the bonanza going, so can the Americans.
It may be a unique situation in our lifetime that is only possible because the fed is buying trillions of dollars of mortgage backed securities while the base rates are already bottomed out.
However, the overall value depends a lot on inflation, how much property value will go down in the future in real terms (home prices in many markets are now at levels of the previous housing crises), and how much you have to spend to repair the house in addition to known fixed costs such as home owner's insurance and property tax (actually this rate may go up where state and local governments are insolvent).
The only thing we know for sure is that the fed buying MBS has a strong inflationary effect on the housing market that can be seen in the record housing prices.
Say, you're buying a $500 thousand property with 20% down at a 3% mortgage rate. You're paying $1500 a month on your mortgage, and generously round it up to $2500 for taxes, insurance, HOA, and maintenance. There are very few places in America, where a half million dollar property would rent for less than $2000/month. Let's generously round that down to $1500/month for vacancies, turnover, evictions, etc. (And if it's your primary residence, you still "collect rent" by avoiding the expenditure of renting from someone else).
On the face of it, this seems like a terrible deal. Cashflow wise, you're losing $12 thousand a year. However take a closer look at that mortgage payment. Starting from day one, $10k/year is going to principal pay down, which directly increases home equity. Another tailwind: price appreciation. Historically real estate tends to increase at the rate of inflation (currently forecast at 2.3% in the TIPs market). That's another $11.5k/year in home equity appreciation. (This assumes a base case, zero appreciation above inflation. It doesn't even scratch the surface of our current housing shortage and the fact that houses have been appreciating 2-3% above inflation.)
In terms of accounting profits, you're actually making $9.5k/year. It's true you're flushing cash down the toilet, but you're building up home equity to counter it. Then in 5-10 years, you get your money out by either flipping for a big profit, or doing a cash-out refi.
The ROE on that $80,000 down payment is 11.9% annualized. Historically the stock market has averaged 8-10%. And today's CAPE ratios are near historical highs, which would suggest lower long-term returns. This doesn't even get into the tax advantages on the real estate.
All in all, real estate looks pretty compelling from an investment standpoint today. Now, I'm normally an efficient markets guy, so I don't say this lightly. But I believe the major driver is the lopsided nature of the cashflow vs. equity division of real estate returns in a near zero rate environment.
The vast majority of real estate investors think in pure cash flow terms. The idea of buying a negative cash flow property seems ludicrous. So, right now I think the market's leaving a ton of attractive real estate investments underpriced.
So even though there are as many people as there were roughly a year ago, there are far fewer homes. Hence purchase prices are rocketing up and rental prices are drifting down.
There is no strong political will to solve this problem, because there are almost the same number of non-homeowner voters as there are homeowner voters. It’s painful for one side because they (we) are being priced out of the property market, and great for the other side who is making a fortune.
Only of interest rates jumped up, or legislation was made to financially penalize capital gains on second and third homes or on residential property funds will home prices return to normal.