I don't get it either, and I'm a hedge fund manager. To my mind nothing seems like it's a sensible price in any of the cities I look at. I mean I get that there's a fair few people making good money who can buy a £2M home, but it doesn't make any sense that there are entire swathes of London where every home is like that.

A quick google suggests that a £100K income is in the top 3% in this country, and top 1% is about £176K.

Sure, there's a few hundred football players averaging maybe £3M a year who can thus buy maybe a £15M palace, but if you go on a property site they could each buy one and still have pages and pages of places left on the market.

Similarly there's a bunch of finance/media/law people who've climbed to the top of the greasy pole and could afford a £3M house. But how many can we really be talking about? A few thousand? Ten thousand? Are there really that many MDs and law partners in London?

Average income is still well under 6 figures in this country, and I know a load of doctors who are only just scraping into that category in their 30s. So if you're just scraping into 6 figs as a highly trained and rare specialist, how can there be so many houses that cost 7 figures?

Even if you add parental help, how many people who are splitting inheritance between 2/3 kids is it actually going to help?

I suspect a lot of people have actually drawn on all reserves: found a high income partner, got help from the parents, got a max leveraged mortgage, and possibly some have lied about their income.

I get the feeling it will end badly.

Isn't London housing driven largely by foreign investment? As in, wealthy people from across the world who are parking capital there because it's safe, not because they care particularly about returns.

If brexit didn't end this, then it's probably a pretty stable system. It sucks for locals, but there are far worse places to over extend yourself on housing than in London.

> I get the feeling it will end badly.

Yes, it will. When people get shoved into tiny homes with their parents and children and have zero hope for any future on their own, you will see the people say enough is enough. They will march. They will protest. They will vote. They will clean house.

Being valued at £2M doesn't mean you could sell all of them for that price or that the people living in them paid £2M for them.

The sort of person who could afford a nice house 3+ decades ago and spent the intervening years living in London isn't likely to move to somewhere more rural just because they can realise an investment.

> Being valued at £2M doesn't mean you could sell all of them for that price or that the people living in them paid £2M for them

But in London these houses do sell, normally very quickly (and bullshit apartments in shiny new blocks that are in same price bracket I guess same, generally they do seem to sell, but I assume that's just parking money for tax purposes so not quite same thing).

That's exactly my point. The demand is far higher than the supply.

Ah, sorry, I misread that. GP has fair points though, whole situation in the UK is crazy, infects everything, it's an arms race

>I get the feeling it will end badly.

Agreed.

As to the question of who has that kind of money: you're talking about income from employment, not assets. Maybe there are a lot of people with assets that put them in reach of £2-3M homes. And of course there are foreigners who don't work in the U.K., like Saudis, Russians, and Chinese.

Yes! This has been my nagging question for years too.

I make 5x the median wage in my county and my county has the second highest wage in the US.

I see all these $M houses being sold left and right and I'd never feel comfortable buying a $M plus house. What gives?

I know people living in London where prices are insane who secure a mortgage without ever intending to pay the full term. They buy a property, live very conservatively in the hope the prices go up and use that extra boost to move out of the city.

If prices on an investment rise more than inflation 90% of the time why wouldn't you buy it?

I feel bad for the people renting in London. Most people I know there simply can't afford buying as it is prohibitively expensive (>300k pounds I think?)

That's for England. London is more like >GBP500k.

https://lginform.local.gov.uk/reports/lgastandard?mod-metric...

A ~14 year bull market, interest rates, and the last decade+ of appreciation on real estate. Everyone is flush with cash and borrowing money against a home is free.

If you already own a home that appreciated to $800k+ then trading in to buy at $1M doesn't seem as bad.

Prices seem silly to me here too (Australia) but a lot of it seems to be a combination of the perception that house prices just always go up, so you have to "get on the ladder" as they say and trade your way along. Each step doesn't seem to be a huge investment in itself. If you don't hop on, then you get left behind.

But that means moving all the time. Yes you will trade yourself to the best house in the end and perhaps to a much better neighborhood, but moving can be a bit traumatizing...

One option is to move as you change jobs.

But tax law here also makes loss-making investment properties attractive to people, and borrowing against equity is another thing. Interest-only loans (as interest is a deductible investment expense), plus other expenses (all the better if it's in a nice holiday destination so flights and hotels to "inspect the property" are deductible), resulting in a minor loss on rent, which is offset against your primary salary and other investments.

Negative gearing like this allows people to basically zero out a house on the balance sheet and move on to buying another. Let it appreciate for a few years and you're ahead. Be a major voting base and politicians won't dare ruin your gravy train.

Inflation/printed money + stock market prices going through the roof.

If you don't have significant capital in investments, you're getting hosed.

If the buyers' dogma is that the housing market will always go up, it is a great deal to buy/build very expensive houses. They will always appreciate.

Reality will disagree at some point.

What's confusing me is the seeming lack of location-based price gradient.

According to the estimate-o-matic tools, the house I'm in is worth about 425k. There's basicaly nowhere in this market I could take 425k and get a house meaningfully bigger or better. Not in the new-developed neighbourhoods where the maps say "eventually a grocery store is planned, but until then it's a 10km drive", not in old neighbourhoods where it was built in the 70s and the floorplans top out at 1500 square feet.

I've been trying to sell my family on the Rust Belt, but so far no dice.

Now is the time to begin the discussion on shorting real estate.

Attempting to time the market is a great way to go bankrupt. The market can remain irrational longer than you can remain solvent.

As someone with two realtors in my family, my understanding is most people are living beyond their means and don’t actually have the money. But the rates are low and loans are being handed out like hot cakes. People are carelessly and knowingly going into negative equity right now and will have a big wake up call once this market stabilizes, they’re going to be stuck for quite some time. Some of these people are even tapping out their 401k in their 40s just go buy right now. I don’t know if it’s FOMO or what but it makes zero sense to me.

There are those who sold at a higher price and got spring-boarded into a higher priced house but these are the exceptions.

I'm unsure if that passes the litmus test.

In Australia, we had a royal comission into banking a few years ago, and the outcome was much tighter rules on lending, equity from assets, etc. We also don't allow people to invest in their own or family property from their superannuation (retirement fund). Yet our market has grown and grown, rising 17% or so in the last 12 months and almost 7% this quarter.

Yes we have a very low interest rate currently, however the median wage to house price gap is growing bigger daily. Yet the demand still far outpaces supply.

it worked out so great last time..

I think for a lot of (white collar) people, the last year and a half of covid has been the most lucrative time of their entire lives. Crazy returns across all asset classes.

In terms of my stock portfolio (just 401k/IRA and some shares in an employee stock purchase program), most definitely. I actually feel a bit guilty about that. So many people have struggled financially but I did not. Top that off with seeing so many people jumping to new jobs, and discussion about big bumps in salary due to competition… it’s hard not to see that there’s a huge disparity between the tech sector and everyone else.

my measly half million dollar worth of stocks "only" grew 30%. There's a significant amount of people do that much better than i did? what am i missing?

Congratulations, you're in the top 1%.

There aren't that many people above you, but 1% of the US population is still millions, and they have an outsized influence and visibility.

Property also suffers from "pigeonhole" effects; a few foreign millionaires parking their money in empty properties at the top end causes everyone to move along one.

The threshold to be in the top 1% in the US is 11M. A US citizen needs 4.4M to be in the top 1% globally. More than 8% of US families fall into the millionaire category.

In my opinion, it's more meaningful to look at top X% as a function of age bracket. Any moderately successful American born in 1950 is probably a millionaire today.

A bunch of tech stocks doubled in 2020, and some did significantly better than that.

I mean i know some lucky pickers and gamblers probably did better than me but there cant be that many that theyre all driving housing markets up

If you're anything like me you probably managed to save a whole heap of money as well - less eating out, no commuting costs etc. etc.

I spent 1.1M on a house with my wife of course and am very happy with my purchase. Lots of land and nobody around to tell me what to do.

> with my wife

> nobody around to tell me what to do

The only person this reflects on is you. My life has done nothing but improve since getting married.

> My life has done nothing but improve since getting married.

Presumably you wouldn't both mention her participation and dismiss her presence in the same breath...

Not sure what you're trying to say about this reflecting on me, it's just an amusing contradiction. I think it reflects well on my sense of humor.

Why are you assuming that my wife tells me what to do?

> Why are you assuming that my wife tells me what to do?

Why are you failing so hard at seeing your choice of wording through a humorous lens?

As written, your statement reads like "there's nobody around, and as a result, nobody is here to tell me what to do."

In the same breath you mention there being someone else around, but apparently your wife doesn't count as somebody.

It's funny, and judging from the +27 of my comment illustrating the amusing self-contradiction, I'm not alone in finding the humor.

burn!

LOL

tech stocks, crypto, real estate, etc

people have 6 figure crypto accounts that aren't just already wealthy? this is the norm and they're all buying property and driving up prices?

A lot of extra money was slushed around the economy in the last 2 years. Who has money to spend? Anyone that owns stocks or real estate.

I tend to agree, but the numbers aren’t that crazy. My rent in the Seattle area is $2500/month. I could buy a reasonably-nice house here for around $750k. If you have a $150k down payment (which isn’t unrealistic to amass over ~5 years on a nice tech salary), your mortgage payment will come out to ~$3000/month. That’s not chump-change, and it’s more than my current rent; but you’re getting a lot more for your money. The numbers get a lot nicer if you’re splitting them with a partner.

Am I jumping to make this particular financial decision? Nah. But it’s not wildly out of reach.

What about property taxes? Don't know about WA, but where I am property taxes are nearly half again as much as the principal and interest, so a hypothetical $3k (P+I) could be more like $4-4.5k in some areas.

I bought a $500k home in Pierce county, property taxes are 1.2% here vs .93% in King County. I'm paying about $6k/yr in property taxes and they would pay about the same +/- $1k for their $750k home.

I think people have just increased the fraction of their income they are willing to spend. If people in Austin will spend 50% of income instead of a third prices can go up a lot

Yes, this.

There was a question why people want to move to Munich even though it is the most expensive city in germany.

Answer : because it is a city! Disco, cinema, stuff to do in your free time.

And more and more people are willing to sacrifice 2/3 (or more) of their income just to live in the city. (also part of the first question)

So, i dont see rent going down anytime soon.

And if there will be a recession, even more people are willing to sacrifice everything, just to move to the city.

People over spending is the only thing that makes sense

>If people in Austin will spend 50% of income instead of a third prices can go up a lot

Exactly this. Somewhere along the lines in the past decade or so, it became completely normal to lend people 10x their income to buy a home, when historically that figure was 3.5x.

I've been wondering the same. Apparently, where I live (HCOL) people don't care about ever paying off the full amount, as long as the monthly installment is low. Regulations only require that you paid off 33% of the house value after 15 years.

You do need to start at 20% capitalization though, which at current prices means they need to own assets already (market risk), or have bonkers amounts of currency sitting around (inflation risk). I understand the FOMO some people must have.

I wonder if ultimately there is a cascade happening, where increased valuations lead previous owners to either take new mortgages, or sell their old house, and pay more for a new one. Which creates a cycle of ever increasing prices? I've never read anything though whether such an effect exists.

In HCOL areas of the US, 10% down is becoming more common with private lenders and 5% is even a possibility (or at least was pre-pandemic). Pre-pandemic we had multiple competing banks for a $1MM+ mortgage w/ 10% down.

A monthly payment on a mortgage of $1mm is ~$4k. That’s the same cost to rent a 2-3br in the 1k-1.4k square foot range in much of San Francisco.

Napkin math suggests that it’s a reasonable payment for those >=$170k annual income, which is very common in software in the USA.

there's also insurance, pmi if you didn't do the down payment, hoa seems common, taxes. Thats all more then 50% of my take home. (Im not including my rsu, im hesitant to budget off that theyre so variable) And a million dollar home is cheap at the moment. Looks like the median in sf if 1.5million.

I financed 250,000 of a mortgage last year, and my mortgage payment is about $1200 a month (including taxes and insurance)

Assuming taxes and insurance correspond with a % of home value, a 1 million mortgage would be about $4,800 a month.

Or about $4,000 a month if talking about a $1 million dollar house with 80% financed.

Money is “cheap” and people think in terms of monthly payments only. Done larger builders are pitching things in terms of monthly costs only; they don’t even publish prices, just payment estimates.

Asset managers, banks, property developers, and just general commercial construction are all hiring mostly the same trade professionals as residential. The former are snapping up a lot of homes.

My SO and I are both devs and we make good money. We live in a low CoL area and basically live on one income. We've been tightening our belt even more because everything is so crazy. We paid off our house recently but it was about 14% of our income. There's NO WAY I would move right now and buy a house and have it 30, 40 or 50% of our income. I don't understand how people who make the median are able to stay afloat right now.

they don't have it. they're borrowing it

Mortgage borrowing costs are at historic lows.

its still expensive to borrow $700,000, on top of your current expenses. that's an extra payment of $3300, whos got that laying around to wait for a house to be built

Hang on let me check your other comments in this thread.

You do!

Most people, when they get a mortgage, they're going deep into debt. You have about that much in liquid assets. You can definitely afford it.

Ehh I think it would be irresponsible to use all my savings like that, plus you need to buy the land to build on and pay for your current place

You still end up owning the house, so it's more of a conversion in savings. And you'd probably be paying it off over time, with the help of ongoing income, if the mortgage rate isn't super high.

Land depends on where you go, no comment there, but keeping up payment on your current place during construction just means you end up paying for 21 years of housing on a 20 year mortgage, or 31 years of housing on a 30 year mortgage, not a big deal.

hmm thats an interesting way to think of it.

Nothing wrong with having $1mil in a bank account, $1mil house, $1mil mortgage (yes naive / general example - but I am sure you can get the idea).

If the Fed is committed to propping up equity markets which they asserted in no uncertain terms when markets died in the beginnings of the realization that COVID was going to be much more substantive than SARS or H1N1, it was clear that equity markets would take the "good news" of lockdowns + continued lower interest rates as signs that equity markets were going to continue to rally.

I mean basically where is there yield? Crypto + NFTs (yuck to the latter), real estate and equities. Even just running correlation analysis on these various assets over the last 20 years showed that crypto was super underpriced (despite only 12/13 year track record) while real estate is tremendously overvalued and equities were the only thing to react in a reasonable way to both (1) the initial realization covid was serious and (2) the Fed stepping in with 2 novel revolvers for SMB and for corporate credit. Treasury even threw in a bit into the bowl and performed stimulus. The last 1.5 years likely minted more "wealth" than in the previous 100 years combined (hand waving a bit) - a framework was laid to make much more money than what you put in provided you were looking at what was to come based on what was spoken.

You know, all these people talking about savings being sacred and driving investment. All that stimulus did nothing. It turns out, unlike the cartoon villain depictions of government in various economic ideologies, governments are one of the biggest drivers of investment in an economy and taking money away from them often results in less investment overall. Meanwhile it's the private sector that failed to invest its money.

When people talk more and more about how lower taxes on the rich boost investment you already know that private investment is dead and won't recover no matter what you do.

> Even just running correlation analysis on these various assets over the last 20 years showed that crypto was super underpriced

care to elaborate?

feel free to reach out to me, my emails are available via links on my profile.

Assuming a 4% interest rate and 30 year mortgage that 700k house will also cost you $500k in interest and therefore the financing cost of that house is $1.2 million. The fun part: dropping interest to 0% raises the price of the house to $1.2 million without raising the financing cost.

What dropping interest rates does is not prop up the price of housing, it's increasing the resale value of the housing you already pay for.

So the winners are the people that already own and the losers are those yet to buy?

This sounds familiar…

A down payment is required if not paying cash, usually 10-20%. You’re financing the rest at 2-3% for 30 years, or borrowing against your public securities at ~1% and a reasonable amount of leverage (~%30) dictated by your brokerage.

Stocks only go up

You misspelt Stonks.