Shelter has changed from a base need to a commodity that's traded in a rigged system and the societal implications of this are frankly terrifying.
[1] https://www.abc.net.au/news/2021-08-26/fact-check-are-house-...
Even a slight economic advantage is being multiplied if you take advantage of housing and stock markets.
Just having comparable incomes and earning power is no longer enough to give you economic parity with your friends and neighbours. Which is not a good for overall social harmony :-/
Wage stagnation has meant that if you don't have real estate, investments and additional contributions into your super you are going to be in an entirely different wealth class to your peers once you hit your 50s and 60s.
This may not be a fun ride for many over the next 20 years...
1) It's tiny
2) There's no water
3) It's not buildable given current zoning
4) Utilities are miles away / cost to attain utilities is prohibitive
Even in my area, where we still have lots of open acreage, the cost of bare land has jumped considerably in part due to zoning - yes we have land, but local authorities aren't going to let you start carving up farm land for subdivisions. There's a middle ground here and I'm glad that's the case rather than it being 100% preserve or 100% build.
2) Is only a barrier in rural areas, otherwise hauling in water into a tank is still a lot better than being homeless / having all your wealth extracted by a landlord.
3) is merely an artificial restriction created by the government. We shouldn't be restricting property owners from building a residence.
4) If you're already ok with living far from anything you can already find a few counties in the US with virtually unrestricted building codes and zoning, so this is a non issue.
I have found some land that only suffers from (1) and (2) and (4), that is close to a city, and has no building codes in a western state. It's been a long haul getting there because there are so few places in the US that allows it, and this is the only county in the country next to jobs I've been able to find it. Believe me, I understand, and truly lament how much we hate for people to freely build their homes here. We'll probably move there within the next 5 years, but it would have been a hell of a lot easier if everywhere was like that so I didn't have to slowly acquire jobs and contacts closer and closer to the one area like this. And now that I've _finally_ acquired the contacts in this area, and a job reasonably close, and my partner has obtained all the credentials to work in the area, they are talking about closing off the option of self certification of meeting code here! So we will be back to square one. This is how people get locked out of every owning a home, because frankly my family can scarcely afford to even rent a badly run down home in a bad part of town where we live currently.
You watch property prices rise and rise, the number of places allow bypassing codes dwindle. And then some asshole comes around saying "Well the codes and zoning are there to keep you safe!" What about all the years lost working to buy that "safe" house? It's better to risk a 1/20 death in a horrible house fire than it is the certainty I'll lose 1/10th of my life completely if I slave away to buy a slightly safer house. And these people also don't seem to realize I have an incentive to not kill myself or anyone else, code or no code.
[1] https://www.realtor.com/realestateandhomes-detail/55-Panoram...
the problem is that in our desirable cities, where people want to live (as evidenced by high prices per sq ft) we have more or less stopped the natural progression of single family houses into low-rise buildings, low-rise into mid-rise, and mid into high-rise.
I know some guy in Manhattan is going to tell me "but it cost 0.5M for a 1000 sq ft plot here, and only 0.4M for a condo" Which may be correct, but for the many of us living in lower density cities that still have tons of jobs like Kansas City, Dallas, or Omaha there's still a huge delta between the value of a small plot of land + 10k to build yurt/cabin and the price of a condo. That reflects the economic efficiency of the owner built small structure vs the condo in these areas.
Living out in the sticks has the same economic problem as you either have to be rich, retired, or score a very rare lucrative job to come out ahead. The economic cost is as high or higher than the new high-rise condo, it's just hidden behind opportunity cost.
I really challenge you to find the percent of population living in an area where raw land enough for a small structure is more expensive than a condo. It's a very small percent.
Building codes, or zoning requirements? Building codes typically cover things like fire protection, means of egress, ventilation, sanitary plumbing requirements, etc. While the requirement for indoor plumbing adds a small amount of cost to a dwelling, the zoning requirements (min, max square footage, setbacks, parking requirements, etc) are a substantially larger impact I think.
I'm pretty far on the personal liberty scale, but I don't think it's reasonable to allow outhouses or permanent portajohns in a high population density area.
>Building codes typically cover things like fire protection, means of egress, ventilation, sanitary plumbing requirements, etc.
Yes these things are all should be tossed out. If I'm a 60 pound midget I don't need the same means of egress as you; if I haul in water I may not need plumbing at all and maybe I only clean out the cat litter box with the water that is plumbed in . Maybe I don't cook inside the house; that reduces the risk of fire by half so maybe my risk of fire looks as good or better than my up to code neighbor who has a standard up to code house but cooks with grease all day, falls asleep with a cigarette in their mouth, and leaves their lighters out for their toddler to play with. These are all neat requirements "in the name of safety" that could of course save lives, but at the expense of massive loss of life for people working years (lost life) and possible homelessness to avoid the insane requirements. If my option is to absolutely slave away for 7 years to buy a house to code, or build my own shack in one year, then the opportunity cost is about 1/12th of a life lost to build the house. Is there a 1/12 chance somebody is gonna die in my tin shack? Remember I'm still criminally negligible if they do, there isn't some gotcha that you get to do something that kills someone else because the code doesn't mention it.
Outhouses and portajohns are what appear when the alternative is public urination/defecation. If the poor are zoned and coded out of a home, they're going to be urinating and deficating in your park rather than in an outhouse, sound better? Visit San Francisco to see the excellent results! By the way, the city has installed long term portajohns in a number of high density cities. I've seen them in Minneapolis and Seattle, as well as absolutely permanent ones in a certain city in Ohio.
It has been proposed that since land doesn't respond to supply and demand, but housing does, that property taxes should apply only to land and be increased to remove most of its value. Keyword: Georgism.
https://www.newyorker.com/magazine/2021/03/15/what-happens-w...
This is happening right now, here in North Carolina. The worst part? Who do you think makes up the largest part of trailer park residents here? Yep. That's right. Separated or retired military veterans, retail workers and domestic servants. They don't need to watch Masterpiece Theater to experience the wealth inequality and exploitation of the Gilded Age: they're living it every day (although our popular culture won't allow them to question it).
Oh, and one more thing: although some elitist s.o.b.'s may disagree, trailer park people are no more unlikable that McMansion neighborhood residents. In fact, I usually find the former a lot more pleasant to deal with.
Definitely don't get a mortgage to buy a home in a trailer park. Its the worst abuses of both the mortgage and rental markets. No matter what your at the mercy of the landlord raising prices (and selling to someone who raises prices to drive everyone off), while frequently ending up underwater in the trailer itself. For people who are this low on the income ladder the ability to _move_ the trailer is mostly non-existent since it generally starts at a few thousand $$, and goes from there. So, people lose the trailers, and their investment when they can't pay the rent. Then there is the problem that even the worst built house is better quality than what you find from any of the mobile home builders which have to basically use plastic/vinyl/particleboard glued together to keep weight down with the occasional staple to hold things together while the glue is drying. Most of the homes cannot be moved after a couple years because they would fall apart when presented with road speed winds and vibration. So, often not only to they lose the home, they end up owning the trailer park mgmt for removing the trailer.
So, its bad. When people put mobile homes on land they own, they tend to build houses around them over time by adding covered decks, screen rooms, additions, new roofs, etc. Basically turning them into prefab cores of frequently reasonably nice houses/cabins after they rip out the crummy plastic bathrooms and put in actual porcelain toilets, real stoves, fridges, tile, countertops, etc. None of that really happens in your average mobile home community because people maintain the fiction that they can move the trailer even when its rotting in place.
Bottom line, I would live in a car/truck before I considered living in a trailer in a trailer park. People with children are probably better just finding another family to share a rental with and packing bunk beds in.
Even in Adelaide metro and suburban areas, land is not cheap anymore!
- Housing prices plummet to $600,000, assuming people are willing to spend the same per month.
- My monthly payments are identical to had I bought at $600k at 6%. If I stay there, I'm not much worse off. It's harder to pay off the home quickly.
- If I move out, and I rent out my home, it covers monthly payments approximately exactly.
The only time the owner is in danger is if:
1) They need to move.
2) They can't rent out the original property.
Rent works out since while the home is a liability, with 6% interest rates, the 2.5% loan is an asset.
As a footnote, what I expect is actually happening here is people are anticipating high inflation. If that happens, this isn't a bubble. Real housing prices might be fixed, at least looking out a few years.
That's not actually sustainable. You have repairs you're going to need to do, sometimes unexpectedly large ones. You have tenants that move out, and then marketing expenses and/or vacancies. If you're unlucky you have bad tenants that do damage or don't pay or need to be evicted after not paying.
It can work temporarily (unless you are unlucky), waiting for a better time to sell. But most people who need to move don't really want to be in the landlord business, and it is a business with financial risk and headaches.
You are a lot worse-off. If you buy at 6%, and then rates go down to 2%, you can refinance and your home is valued at a higher rate. IF you buy at 0%, you bought the house at the peak, and cannot refinance the debt.
You cannot borrow for rent, so rents follow income growth more closely. So in some expensive real estate markets, if no income growth, rent might not cover your mortgage repayments.
You make s great point as to the reason for this. Rental rates are completely detached from current interest rates.
But at the end, there's a decent shot you have full ownership of a house worth even more than you paid, and even if it loses most of its value you still own a place you can live in perpetuity paying only maintenance and property taxes. The renters don't get that, so it does kind of seem fair if they do not, in fact, cover your mortgage for you.
1) I am one year closer to owning the home. Yay!
2) Inflation. Rents next year might be lower, but rents in 10 years will be higher.
You'd eventually have to pay 6% on the $1M.
I moved to the US from the UK, where mortgages look more like Australia’s, and I still find it amazing you can fix such a low rate for so long here.
Before the creation of the enormous state-owned insurance corporations and government programs to drive down those fixed rate mortgage costs, American mortgages were usually short-term, with giant balloon payments. Those short-term, balloon-payment mortgages went bust in huge numbers during the Great Depression, creating pressure on the government to "do something."
Say what you will about American housing policy, but those 15- and 30-year mortgage arrangements are very stable.
Adjustable-rate mortgages are not.
I look my cost of funds, tack on my spread and that is the price you pay.
In the US, where 30-year mortgages are standard, the LARGE majority of homeowners would not be able to afford payments on their home amortized over only 5 years.
But I can say that prices are rising rapidly here in Australia.
The already expensive Sydney market rose on average ~$1200 a day over the last quarter!
Melbourne isn't far behind!
We too have low interest rates!
Whats not clear is how people are paying for the houses. Where is the money for deposits coming from, and how are they servicing such huge loans?
Dual incomes and parents assisting would account for a lot of it. But what happens if/when the parents need the money back and the DINKies decide to have children and either lose the dual income or get slugged with child care fees!
https://www.theguardian.com/business/grogonomics/2021/sep/16...
That is, the interest rate is guaranteed for five years and then it periodically adjusts.
(Australian housing markets in major cities are some of the most expensive in the world.)
The median home price in Australia is about US$725k. So no.
Also, if this is accurate, Australia is more of a nation of homeowners than of renters.
https://www.abs.gov.au/statistics/people/housing/housing-occ...
"66% of Australian households owned their own home with or without a mortgage.
32% of households rented their home.
Average weekly housing costs were: $484 for owners with a mortgage; $53 for owners without a mortgage; and $366 for renters."
484 AUD/week = 1500 USD/month 366 AUD/week = 1150 USD/month
It also says housing costs for renters have increased 51% in 20 years (to 2018) which is an average of 2% annually.
"housing costs are defined as the sum of rent payments; rate payments (water and general); and mortgage or unsecured loan payments (if the initial purpose of the loan was primarily to buy, add, or alter the dwelling)"
Sydney and to a lesser extent Melbourne are both completely unaffordable (A$1m+) to new home owners on an average income unless you're prepared to live in a unit or commute 2 hours a day to the CBD. Brisbane, Adelaide and Perth on the other hand are significantly cheaper and one could still afford a nice family home.
Also worth noting is that the huge boom in prices only really started in the early 2000s. People who bought prior to that period make up a disproportionate number of owner occupiers.
> The nation's median property price lifted by 1.5 per cent last month (to $666,514)
https://www.abc.net.au/news/2021-09-01/property-housing-core...
That's a >50% increase over ~3 years and from the article 20% over the last year.
This appears to be a data provider oriented towards entities with large real estate portfolios, and they specifically say on their website that their "hedonic" index is not meant for affordability calculations, for what that's worth.
It's difficult for me to tell which index is in the article, but the note about the missing data under the chart implies to me that the article is (inappropriately) using the hedonic index. I wonder how much difference it makes.
'this month's figures from CoreLogic did not include Perth or regional Western Australia "pending the resolution of a divergence from other housing market measures in WA" '
"Rather than relying solely on transacted sale prices to provide a measure of housing market conditions, the CoreLogic Daily Home Value Index is based on a ‘hedonic’ methodology which includes the attributes of properties that are transacting as part of the analysis."
https://www.corelogic.com.au/research/monthly-indices
"The fact that median or other percentile based series cannot be used to track changes in value of a market portfolio does not make them wrong: it is simply that they have different applications than hedonic indices. For example, median price series are useful in answering economic policy questions relating to housing affordability."
A more up to date government source has the following;
> Weighted average (mean) of the eight capital cities Residential Property Price Index... rose 16.8% over the last twelve months.
We could go on forever trying to work out the exact numbers. The main thing I want to do is show non-australians how quickly our prices have risen and are rising!
https://www.abs.gov.au/statistics/economy/price-indexes-and-...
See https://www.google.com/amp/s/amp.abc.net.au/article/10042389...
AUD$955,927 national median and AUD$1.4m Sydney median.
The difference every time I bought a house was about 1%
Ya, my dad in Canada keeps encouraging me to buy property given the mortgages. Has its downsides, but over all its brilliant.
>- If I move out, and I rent out my home, it covers monthly payments approximately exactly.
In any situation where interest rates go to 6%, there will probably also be some upheaval that affects your earnings and ability to rent it out at the present rental rate. The risks are correlated.
I'm not sure how it works in the US, but where I live, you have a fixed interest rate for a couple of years max, after that you pay the market rate.
So in your case, if you had a fixed interest rate for 3-5 years, after those years pass, you'd have also a massive increase in mortgage payment, plus your house severely depreciating.
If interest rates rise to 6% and you've got 2.5%, the advantage would last that long. However, I know interest is front-loaded to the first few amortization periods, so maybe it would be more significant.
That's why price to income is an interesting metric. High inflation without income rise just means people feel worse off and a correction will occur. Housing, along with many other things, are competing for people's wallet. Interestingly, covid is causing a labor shortage and income to rise at the low ends. I suspect stagnating in the "middle income" ranges.
The fact that spending and price are decoupled make the inflation idea stupid.
That's going to be a nasty wake-up call for a lot of people.
On the other hand, if the fed decides to allow inflation instead of raising rates, then the value of my loan will melt away and my home’s price will keep going up (that’s what has happened so far).
Im not sure I see the point in finding higher yielding bonds. Also they will have higher risk, its not "free" to have higher rates.
https://www.thebalance.com/treasury-note-and-mortgage-rate-r...
US Treasuries also are considered among the safest, least risky assets out there. This is true globally and has been for a very, very long time.
This is all succinctly explained in the link I posted above.
Lastly bond prices have an inverse relationship with interest rates, which means that as interest rates rise, bond prices go down. So no, when rates go up to x+5 you will never be able to find bonds that pay x+5.
Indeed, interest rates are inversely related to bond prices. And bond prices are inversely related to yields. Yields and rates are highly correlated. In fact, the way banks finance mortgages is by selling bonds. The market rate they can get on those bonds determines the rate they can offer to homeowners. So of course these rates move in tandem.
What? If the current rate is x, this means that this is the rate a bond being issued right now is paying. If the rate goes up to whatever, it means that bonds being issued right now are paying whatever.
https://www.investopedia.com/ask/answers/why-interest-rates-...
Anyway, the thing is if the spot rate is x% you will certainly be able to find bonds in the market that pay x% interest (=yield), regardless of the fact that a bond's yield and price are negatively correlated (an irrelevant fact, for the purposes of this discussion).
My hypothesis is that if there is a shortage of housing, then dual income households will bid the price up and this causes the appearance of unaffordable housing when the underlying cause is that there is a shortage. This effect does not happen when there is a housing surplus.
There’s also a very clear distinction between the idea of housing and home ownership. People need a place to live, they don’t need to have a property investment. You and I need healthcare, but neither of us need to own a hospital.
You could always walk away. Better to be under water on a mortgage than own it outright. This is called a strategic default. Lenders know this which is why they require a substantial down payment (typically 20% in the US)
Most people wouldn't do it if they're slightly under water. But eventually many people would consider walking away and taking a hit on their credit score, which get totally wiped out after 7 years anyway.
[1] https://www.lexingtonlaw.com/education/how-to-remove-bankrup...
Even with a fixed interest rate, you still owe the entirety of your borrowed amount on the $1m purchase to the lender, but your property value may drop if the interest rates go up because, assuming the market value is tied to the interest rate, new buyers won't be able or willing to borrow $1m to buy your place at a rate higher than what you borrowed your $1m at. For the same monthly payment as you have now, a new buyer may only be able to borrow enough to afford a $900k home.
Someone with the same income and monthly expense limit as you wouldn't be able to afford your home, assuming rates went up, which is why the value might drop - fewer buyers.
New homes are built rapidly and supply is plentiful. When we say home, it almost always mean condominium.
Yet, the house price is rising in Japan.
I can think of a few reasons for that, like mere fact that home loans are available to virtually anyone who is employed and recieve average wage, old homes quickly lose value in Japan or people ditched the countrysides and concentrate to a few major cities.
I think home loan interest rate just reflect the inflation rate of the currency in that country. House price goes up simply because anyone can loan a money for.
So long as the credit is available, house price stays the maximum amount of money average people can loan for and it's increasing.
If rate goes up, it just mean the inflation rate goes up.
The house price goes down when
1. No demand. People don't want to live that place anymore.
2. Loan is not available.
3. The government turns into Communism and give all citizen a same house for free.
I think something like that could work to reduce housing costs in the USA, but it would likely require a brand new city to be the guinea pig to prove the concept here. Something like those self-contained retirement towns that spring up, but maybe when the residents die, they rebuild them? Macabre, but interesting!
In Japan, the land is scarce and fragile, humidity weather, constantly facing earth quakes, typhoons. So the house will be damaged faster than the typical western countries.
Each time we face the massive earthquakes, the house building regulation will be updated to mandate new and improved earthquake resistant structure so building built with old regulation lose market values. The same goes for all disasters like tsunami, flooding, land slide and all.
You must also consider the fact that air conditioning wasn't popular 30 years ago. The houses built before that era were optimized for the natural ventilation. it's totally inefficient for the air conditioner.
Old houses also has the Internet issues. Most of the house in Japan are massive condominium. The optical fiber was a thing after 2000s. It takes a lot of money to wire optical cable inside the existing building. So most of the buildings in Tokyo are still using VDSL.
Other infrastructures like power line, water and gas starting to rust so it must be replaced. The cost of doing that to existing house is expensive in Japan and it doesn't increase the value of house that much. Especially for old houses that need replacing because it had gotten so much damage from humidity, earthquakes, typhoons and remember, it was built before the current housing regulation for the resistance for these. So it's more reasonable to just scrap it and rebuild it.
I am living in a standalone old house in Tokyo unlike most of the people. Then, I realized the value of condominium in Tokyo. It works as a gated community, the segregation based on income. We are implicitly achieving the segregation by the condominium.
Which is crazy, right? People max out their "borrowing power" at low interest rates and take on huge loans, without considering that the declining interest rates that fueled past appreciation don't have much room left to move down, and that they'll be underwater on that huge loan if interest rates go up* and the value of the property declines.
*EDIT: To be clear, I mean interest rates on new loans being higher than they were before, not that the loan is variable-rate.
No, because this is not accurate:
> Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price.
Homebuyers make their purchasing decisions based on the options available to them. They are not paying $x because they can afford $x+1, they are paying $x because that is how much they are willing to spend on that specific house in that specific location. The latter portion of that statement is important because implicit in it is the competitive nature of humans, and so it manifests as people competing to purchase land and being willing to pay as much as they can afford in exchange for the utility from that specific house in that specific location.
That utility can be in the form of access to income opportunities to lower future volatility of income, access to other people of similar or higher income so your kids can go to school with their kids, access to airports, downtowns, outdoor recreation, etc.
If you are projecting increased demand during your entire lifetime for the piece of land you are purchasing, then it makes sense to pay as much as you can afford, as it will only get more expensive. If you are projecting a receding economy and/or decreased demand for the land you are buying, then it does not make sense to pay as much as you can afford, but rather scale it to some measure of what utility you will get out of it.
I think this is the above commenter's concern; homebuyers are not adequately pricing the risk of rising interest rates. If interest rates go up, demand falls and you're left in a highly leveraged position that amplifies your losses. Monthly mortgage payments don't make the leverage apparent. Sticker price does.
> If interest rates go up, demand falls and you're left in a highly leveraged position that amplifies your losses.
There is a reason why debt is called “leverage” - it leveraged investment returns up when your the exit works out.
But it also leverages return losses down when the exit doesn’t work out.
This is similar to how increases in local incomes are actually captured by landlords rather than workers. If housing is scarce and people need it to live, owners of that housing have the bargaining power to raise prices to capture available income.
And their neighbors will have already found out they had to sell for lower amounts, resulting in some others walking away instead of bringing money to the table at a sale. At thus begins the downward cycle.
If people bet on the resale value of housing to go up they also necessarily bet on lower interest rates.
Those rates are for 20% down, good credit primary residences purchases. Rates for investment or vacation properties are generally about 1-2 percentage points higher.
Mortgage rates in the US are indirectly and directly subsidized by the government across a huge spectrum of programs- See FHA loans, VA loans, etc. However one of the biggest contributors to low 30 year prices are the government backed corporations like Fannie Mae and Freddie Mac that purchase mortgage debt and repackage it into mortgage backed securities. Way too much the go into here, but a lot of the 2008 financial crisis has its roots in the policies that created Fannie Mae and Freddy Mac. Regardless, they have proven a fairly effective way to keep mortgage rates low.
But are lower shorter term fixes also available? Presumably the 30y fix is a pretty stable rate, and just acts as an upper bound? So why not go with anything available that's lower, with that as a worst case fallback that's unlikely to be materially different after x years?
As to why go for a 30 year loan instead of a lower interest rate 15 year the answer is basically cash flow and opportunity cost. A 15 year loan may result in paying less interest, but the monthly interest + principal payments are more. Your average borrower will qualify for a larger 30 year loan because the analysis is based on their ability to afford the monthly payments based on their current income.
Even people who can easily afford a 15 year loan will choose a 30 year because the 0.5-1% interest rate is lower than the expected returns of something like stocks, so it makes sense to stay leveraged. There are also tax benefits to paying interest (but not principal) on loans, but these are way less important since the trump tax reforms.
And I just reread your question, and I think you are asking about 5/1 loans. The reason there is that a) interest rates so fluctuate, a lot- they were above 9% in 1991. With a 30 year, you can choose when you refinance (there is no penalty to paying off a home loan early in the US) whereas with a 5/1 you might find yourself getting forced into a higher interest rate- potentially much higher to the point it’s unaffordable. 5/1s also actually have a higher interest rate than 15 years currently, as they aren’t considered “conforming” to various US government programs.
Here a normal thing to do is something like 30 year loan on a 1/2/3/5 year fixed rate, after which it would be some relatively horrendous variable rate [^] - but you don't pay that, you just switch to a new fixed rate at the same or other provider (technically remortgaging).
So you're leveraged for the full 30 (or whatever) year term regardless, but you make some decision about how 'good' you think the rates are at the moment and what direction they're moving in (and pretend your adversary isn't a massive bank with a lot more information and smart people behind it) and fix for accordingly many years (more costing a slightly worse rate of course).
[^] - you could also just choose a variable rate to begin with, but that's not really relevant here, I just mean I think typically the rate you'd drop to after the end of the fixed rate would be worse than that, as in you're going to pay more spread over whatever it's tracking.
On the other hand, it probably reduces risk to take the 15 year loan if you can afford the payments, in order to more aggressively build home equity and shield yourself from a sudden shock/downturn. If rates shoot up after, say, 5 years (and home values drop 20%), someone who's made 5 years of payments on a 30 year loan will be way underwater, whereas someone who's made 5 years of payments on a 15 year loan still has positive equity.
A primary residence even makes a good component of diversified portfolio so long as it is not the sole or dominant aspect of that portfolio.
I understand your point about it being a "forced savings plan", but with 5-10x leverage on most loans even a housing market that appreciates at inflation can provide significant returns (or losses) in the long run.
"FRMs are dominant in Belgium, France, Germany and the Netherlands, while ARMs are prevailing in Austria, Greece, Italy, Portugal and Spain"
UK is also ARM but not included as not in euro zone.
Note that at least in the NL market which is the only one I know personally, lots of people do get shorter term fixes compared to the US where almost every mortgage is fixed for its lifetime.
The government can't guarantee real estate, because any 99.9% risk-free investment with 10% annual growth can be levered into a 99% risk-free investment with 100% annual growth, and that's going to absorb all available capital like a black hole. The more the government acts to reduce risk without offsetting that by reducing returns or increasing the cost of debt, the bigger that black hole will grow.
At some point, it might be worth biting the bullet and incentivizing investments into sectors of the Canadian economy that aren't housing. If workers can see housing appreciating by multiples of the median salary, and entrepreneurs clue in to the fact that they'd earn more as a real estate agent than by building a tech company, "the Canadian economy depends on housing" becomes a self-fulfilling property. A few more doublings and then there's no point bothering to do anything else like growing food and assembling cars. Then you end up with a Zimbabwe situation where, yes, your house is worth a trillion dollars and rising, but it's not... good.
But maybe if we keep pouring enough gasoline on it, we'll be able to put out this fire?
Negative is inevitable, imo
If the value of your home rises, you've effectively taken out a hugely profitable leveraged loan, which is historically pretty common. Which is far from guaranteed of course, but broadly speaking it was an amazingly lucrative move for many many people.
No, that's my point. A home that cost $100k when Alice bought hers, now costs $1M, therefore if Alice sells her home for $1M and buys another one for $1M, she makes a profit of $0.
You can downsize, rent, or relocate to realize profit.
Inflation is going up because of a mix of supply shocks and fiscal stimulus. Not necessarily a bad thing but it's out of the realm of monetary stimulus.
Low interest rates in Japan failed to drive inflation. Ask any Austrian economist and they would tell you that low interest rates are guaranteed lead to malinvestment, an artificial business boom and high inflation. You know, if it was that easy then central banks would have raised interest rates a long time ago. Probably shortly after 2008. Whatever is going on is way beyond what monetary policy can do.
At 0%, monetary policy simply stops. Game over for monetary policy. Central banks do not matter anymore.
The Fed attempted to raise rates in 2011 which lead to the so-called "Taper Tantrum" where stocks plunged. The Fed either got scared, or received a phonecall, and promptly held off on increasing rates.
Not sure that's a healthy point for the government or the economy to get to, but with politics the way they are these days it doesn't sound that farfetched of an outcome...
https://www.investopedia.com/articles/personal-finance/05141...
Although if the reason the government is doing negative interest rates is to prop up home prices forever and ever, I guess I better put my money into housing.
I don't like the feeling of a market where trying to be a rational actor barely helps.
>> the declining interest rates that fueled past appreciation don't have much room left to move down, and that they'll be underwater on that huge loan if interest rates go up* and the value of the property declines.
The price you can charge for something is related to how much other people can pay for it. If houses are usually bought with loans (which they are), then the availability of loan funding is a major influence on the price of a house. When funding is plentiful -- another way to say this is that interest rates are low -- the price of a house will be high. When funding is hard to find -- or interest rates are high -- the price of a house must drop to compensate for that.
The bleeding ends up being slow, a decades wait to see any returns while maybe the stock market soars.
I am not very optimistic on homeowners in a downturn, UNLESS the government bails them out.
There are some other options out there for veterans or first time buyers, but those are the normal options.
https://www.rocketmortgage.com/learn/30-year-fixed-mortgage-...
If central banks are GUARANTEEING asset inflation of >2% - that's an 10% return on 5:1 leverage - that beats the S&P.
If you can get an interest only loan, and be cash-flow neutral - as long as central banks keep a mandate for assets to appreciate >2% (spoiler, they have to or irresponsible governments fail) - housing is a good investment.
It sucks that they've manipulated the market so much. But when >50% of the economy is debt and the cost of debt is price fixed, that's a lot of manipulation...
Interest rates are irrelevant when you need 20% down and it will take you a decade to save that up while renting, because of said multiple.
This is such a weird home buying myth and I don't understand how it sticks around.
...and less than 1% of recent mortgage completions are with 5% deposits (the minimum here)[0]
There is one big reason deposit size matters: affordability and risk. PMI doesn't exist in the UK, it's built in to the rate. When you're stretching what you're borrowing to the maximum (thanks to these high price/income multiples) every 1% on a mortgage can be the difference between relative comfort, and being 'House Poor' and living with constant anxiety about rates rising before you can refinance.
At the moment with 10% down:
- 25 year fix: 4.64%
- 5 year fix: 2.50%
- 2 year fix: 2.10%
With 20% down:
- 25 year fix: 3.80%
- 5 year fix: 1.70%
- 2 year fix: 1.40%
The other thing, that some other commenters have mentioned is that most lenders won't lend at high LTVs on high value properties, or on certain property types, like flats (minimum deposits of 20% on flats are common, which is particularly problematic given that they tend to be the most affordable properties).
[0] https://www.financialreporter.co.uk/mortgages/95-ltv-mortgag...
You end up paying more in the long run when you add on PMI. I think they are internally conflating "should be avoided" with "can't." I do that with personal things all the time when I tell myself I can't do something that I shouldn't, but actually can do.
Putting down 20% doesn't make sense in my case, since home prices continuing to increase and me adding home improvements that increase the value of my home I will be able to refinance my loan in a little over 2 years to get rid of the PMI, and still have spent way less than the 20% down would have cost me.
I waited in order to save the traditional 20% down payment, and, in hindsight, that was a dumb financial move. Investment returns would have outpaced what I was paying in PMI by 10x each year, and the place appreciated enough in two years that I could have refinanced with no PMI without putting any additional money in.
Other major metropolitan areas do OK, though. I put 5% down on my first house just outside of Boston and 10% at my current home (voluntarily, my mortgage broker asked for 6.5%).
- PMI is really not as expensive as you might think. I pay ~$150/mo extra and all told my mortgage is just over $2k/mo
- PMI rate depends on a LOT of factors, including your lender's terms, your own credit history, and even the amount you put down. Your PMI gets re-evaluated yearly and the closer you are to the 20% equity on the house, the less PMI you pay. You can actually even get PMI waived as early as 18% sometimes, if you remember to ask them.
Also, the original submission noted that median homes cost 7x median income right now. That does not equate to 10 years of savings from responsible people.
Also, 5:1 leverage is extremely generous, and in a free market they would never happen because it’s insanely risky to the lender. That’s ignoring the fact that 20:1 is pretty common these days anyway. The only reason you can get such a generous loan is because the US government is responsible for it, and they’re the most inept financial institution on Earth.
People with big piles of capital have a great time during times of low rates, whereas the cash poor working class (even those on high incomes) still get squeezed out by lending criteria and price inflation.
> That does not equate to 10 years of savings from responsible people.
I don't agree with this. If you're putting 40% of your take home in to rent and property taxes then saving only 20% of your take home (say 12% of your gross) per year is a reasonable approximation. Saving a whole gross income (the 20% deposit if the remaining 80% equates to 4x income) is going to take you ~8 years. And most people suck at saving. And in 8 years property prices can easy go up 50-70%.
Depending on your income and where you live, saving 50% is totally doable. And since you’re into fanatical scenarios where home prices go up 50-70%, you should also apply the appreciation of the stock market to your savings (usually double or triple real estate).
> Only homeowners pay property taxes.
I pay almost $300 USD/mo in local taxes (for local services) here in the UK. This amount is linked directly to the value and occupancy of the home that I rent from my landlord.
> since you’re into fanatical scenarios where home prices go up 50-70%
The fantasy that just happened?
The national average house price index in the UK is currently at 450. In 2013 it was ~280. That's a 60% increase over 8 years, which is exactly what I said.
Regionally it's worse. London property prices have essentially matched the total return of the global stock market over the last 20 years.
And the UK is NOT special. Property is up 150% over the last 10 years in the US as well:
https://www.thisismoney.co.uk/money/mortgageshome/article-10...
https://fred.stlouisfed.org/series/csushpinsa
So, sure during the greatest bull run in home price history, prices have gone up significantly over 10 years. But it is fanatical to quote the largest bull run in history as a thing that will likely happen in the future.
And I said if you wanted to quote the fanatical scenario, then you needed to apply the equally fanatical scenario that your saving will appreciate with the market appreciation of said fanatical scenario. On Sep 1 2011, the SPY ETF adjusted for dividends was 92.69. Right now, it is 444. That's a 379% increase. 17% annually. That compares to the 6% annual appreciation of homes.
https://finance.yahoo.com/quote/SPY/history?period1=72826560...
Now, I don't know about the UK for property taxes. In the US, it's charged to the owner. Fine. But you can always choose to live inexpensively. I know people who earn six figures and spend $700/mo on rent because they live with roommates in unfashionable areas. These people save upwards of 75% of their take home. But if you insist it's impossible to save 50% of take home, then I don't know what to tell you. My friends must not exist.
But I'll give you some benefit of the doubt and assume 30% is the absolute most you can save. Then if you earn 100k and want to buy a 700k house, if you put away 30k each year, it will appreciate to 154k in 4 years. The house that increases at 6% will now be 833k, and you damn near have a down payment (18.5%) in 4 years.
This scales to any income, so don't tell me I'm out of touch with my income assumptions.
https://www.calculatedriskblog.com/2021/09/urban-institute-m...
Today's House Prices Are Over 40 Percent More Affordable Than The Housing Boom Peak:
https://blog.firstam.com/economics/todays-house-prices-are-o...
>"The affordability gain from increased house-buying power, however, was offset by the third component of the RHPI, nominal house price appreciation, which reached a record 19 percent compared with a year ago, eclipsing the record for price appreciation of 17.5 percent set in 2005."
I'm pretty debt averse, so that resulted in me buying "less" house than the banks were willing to fund, but it was in the area I wanted, relatively new, styled to my taste, and from a reputable local builder, so from my POV I couldn't figure out why I'd buy MORE house.
I still live there, 21 years later.
That's right, interest rates cannot go up, or else these people will be screwed.
The same for stock market.
Ok, so we bail out these people/investors at the cost of catastrophic failure in the future.
Because money/markets are irrelevant, all that matters is access to cheap money and access to central bank bailouts.
What I wonder is - is there any way out of this curse of growth with all the money spent into those inflated prices at this point that does not mean complete economic collapse?
> at some point the ECB will have to face up to the fact that the low interest policy doesn't work.
And repeal the zero lower bound or what? Face up to what? Interest rates will be low as long as supply of labor outstrips demand for labor.
The only growth that is observed is businesses which are serving the bubble. Eg. construction industry having a boom as well as cryptocurrency startups.
I find this attitude baffling. If you bought a car or a phone and paid in monthly installments, you would want to know for how long you'll be paying, not just the monthly amount. Why is a mortgage different?
Is it the duration, where your brain sees 20-30 years, and substitutes that with "forever"? How would you feel if, after 30 years, when you thought you finally paid off your mortgage, the bank would say "Oh actually you have to keep paying for another 30 years"?
I personally know multiple people that do this and like you I can't fathom why but they do. '"Need" a new couch? How much does it cost me per month? Oh yeah I can afford that.' Nevermind that the couch they don't really need (but want) costs them way more and they will very probably need/want a new one before this one is paid off. Same with cars and many many other items. Sellers perpetuate this, especially on bigger ticket items. I suppose it's a "natural progression". People can't afford the item they want. Sellers have no more buyers. But if you sell it to them with a loan and a small monthly payment, suddenly the buyers can afford it. How do you think 96 month car loans came about?
Pretty much all home buying decisions are normalized on a 30 year fixed mortgage. When figuring out what you can spend its easier to figure out what you can afford per month ans extrapolate your purchase price from there.
For that matter most car buying decisions are done the same way based on a five year loan (maybe seven these days).
In both of OP's examples the hypothetical borrower pays the same amount per month, for the same number of months. A lower interest rate does not affect the duration of the loan. In neither case can the bank simply extend the duration of your loan.
You can do this with all your purchases though: anytime you buy anything, don't look at the sticker price - figure out the equivalent monthly cost for the expected lifetime of the item. This can have a dramatic impact on your purchasing habits.
-The purchase price of an item (that happens to be paid in monthly installments)
-The monthly cost of owning an item, expressed as price/lifetime (looking only at purchase price, and ignoring maintenance etc.)
For example, if you pay for a car in 96 monthly payments, that does not mean the car will last 96 months. And the car definitely won't last longer if the number of payments is increased to 192.
Replacing affordable price and decent wages with cheap credit makes banks and companies happy but is a very bad deal for the little guy.
That isn't entirely true. For most people, the amount you need for a down payment is a pretty important consideration as well, especially for a first home where you don't have any equity in an existing home that can be used to purchase your new home.
I've known people who saved up for years to buy a home, then interest rates dropped and prices went up. The mortgage might be roughly the same with the same percentage of down payment, but they don't have enough cash to make the necessary down payment.
Then low down payment loans introduce distortions if their own.
No, because not everybody is so risky to get a mortgage.
The prime majority of rational people don't buy such major life assets with debt.
Average interest rates in 2007 were 6.34% vs ~2.80% today. [1]
* 6.34% / $2,000 monthly payment / 20% down (~$65k) >> $328,319 price of home
* 2.80% / $2,000 monthly payment / 20% down (~$98k) >> $489,794 price of home
Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price.
When interest rates fall, the home's price goes up but the monthly payment can stay the same. Therefore, increases in home (and other asset, since lower bowering costs can drive institutional investment in assets higher and non-linearly) prices can be driven higher without any change in supply / demand dynamics.
Some hypotheticals to consider:
* as rates approach and touch 0, what will drive up home prices then?
* what happens when rates go up?
[1] http://www.freddiemac.com/pmms/pmms30.html