Bob's first house wasn't an investment. He was covering his short position. Bob was born short.

Bob's N+1th house is an investment.

While I like this comment since it’s concise and pretty accurate in some way, I’d like to point out that you don’t have to buy a house to cover your „short“ (a roof over your head). You can rent it instead.

When buying a house, bob becomes heavily invested.

> You can rent it instead.

Now you're paying a form of interest to borrow someone else's house on a floating rate. The price of the underlying asset continues to increase, which applies upward pressure on the cost to borrow the asset.

When the market is overinflated, that's exactly what you should do. And the underlying asset doesn't necessarily increase. Further, the price of the house (underlying asset) doesn't raise rent (apply pressure on the cost to borrow the asset) unless the demand is already present. There are many real estate markets where rent is a bargain compared to home ownership.

> When the market is overinflated, [taking a short position] is exactly what you should do.

Now we're talking. Related: how do you feel about shorting TSLA? Or GOOG? If you think its appropriate to do so, what fraction of your net income or worth are you willing to place on that bet? I'm pretty sure they're overpriced, but I'm not kilobucks/month sure.

This exactly sums up my position on housing. I bought 3 years ago in a major metro at exactly the cost of my rent. Somehow prices and rents have continued rising at 8% per year, if the market crashed 50% I’d be under water - otherwise I’m still up. Regardless I’ll have a house 27 years from now.

Now the real crux of it is that I do not have unlimited cash flow to pay peak rent. The previous rental I moved out of has somehow gone up by 85%, a number which would push me into savings or have me calling my boss for a raise.

Shorting housing by renting risks you burning savings or moving to stay out of the bubble. Buying when the market is high is a hedge against the market going higher.

> Now the real crux of it is that I do not have unlimited cash flow to pay peak rent.

Yeah. But you only look at it from the perspective at staying at one place. What if you want or have to move somewhere else, but in the meantime your house lost its value ("marked crashed"). Now you have to pay both rent in the new place as well as your mortgage (that his now way to high for what you have).

In other words: you can't afford to move anywhere anymore, because of your high mortagage. If you had just rented, you would still be flexible and could move whereever your current pay allows.

Don't fall for survivorship bias. Prices rise for a longer time, but in the short times when they fall, they fall much faster.

Mumbai is a good example of rental yield not following property price.

I use the yield to determine if a given property market is speculative or not because rent represents real utility (“yes I would like to live there at that price”)

Beijing rental yield is 1.5% - 2% now officially, it is probably less in reality. Shanghai is around 3%.

China and India probably share similar low rent yields in cities with more speculative real estate markets.

Interesting, I thought yields should be 7% of capital allocated. Otherwise put it in the stock market. This might mean that 2% yield means leverage, if you borrowed 83.34% of purchase price to buy a property and put in 16.66% of your own money then I guess an allowed 2% yield translates I to 7% yield on the capital you deployed. Provided interest on the loan was 1%...this no doubt contributes to Evergrande potential defaulting.

The Chinese stock market has way too much insider trading for it to be considered a reliable source of investment, unless you have inside information. Your only option to wealth building is to start a company or buy a house.

Rental yield in Mumbai: 2-3%

https://www.commonfloor.com/guide/price-rent-ratio-grows-in-...

This is interesting. Can you elaborate about Mumbai?

I don't know about Bob, but I can explain my case.

10 years ago my first real job was a research assistant position in Copenhagen. Housing was very reasonably priced, and I could buy an apartment in the suburbs with just 3 years of salary. I rented a nice place with 1/4 of my salary. It was great.

I then moved to Cambridge, and while the university is cool, real estate took most of my free income. It was a nightmare. More than 1/2 of my salary went to renting a small flat in the middle of nowhere. During the course of several years, my I had to move houses six times because landlords wanted more money, or because agents wanted to generate fees and the house actually sat empty without a tenant for pretty long.

Now, looking back at Copenhagen, and mostly anywhere else in the EU, is a nightmare. Salaries paid by the government have barely increased because inflation is said to have been really low. But buying or renting is easily 2.5x more money. If you live alone, it's hard to make both ends meet.

> buy an apartment in the suburbs with just 3 years of salary. I rented a nice place with 1/4 of my salary

these numbers aren't directly comparable.

The rent should be compared with the interest cost of the mortgage plus the capital cost of the deposit (which at minimum is the risk-free rate).

So if you paid 1/4th of your salary as rent, but the apartment costs 3x of your salary, this means you're paying 1/12th of the cost of the apartment as rent, aka, an 8% rental yield. This is an amazingly good yield - greater than the stock market expected yield (of 7%-ish). No wonder investors would want to buy.

The general consensus is that if the rental cost is greater than 5% of the property, you're better off paying the mortgage (and conversely, if the rental cost is less than 5%, then rent is cheaper, and invest the difference would yield more financial returns).

This. If you rent a place for $1000/month that would sell for $1 million (the case usually in Beijing), a 1.2% yield (assuming no other costs, which isn't likely), things are really out of whack. Buying in Beijing never made sense, but landlords weren't banking on rents to make money anyways.

Until recently, renter rights in big Chinese cities have been miserable. Even though this had been artificial, it provided enough incentive / premium to tip the scales towards buying, even at unrealistic leverage.

That was more of a problem at the low end than the higher end of the market. I never personally had a problem with a landlord, and never heard of any other foreigner that did.

From what I have heard denmark has a land value tax that prevents speculation.

It does, but flat rentals have skyrocketed anyway.

> You can rent it instead.

and then the landlord can increase the rent by any amount and then Bob has to look for a house again.

I lived in Beijing for 9 years and never thought "hey, my rent is too expensive!". I started paying 4000 RMB in 2007 and ended at 9,500 RMB in 2016 (on a slightly bigger place, in between I was at 6500-9000 on a much bigger place than what I ended at). Rental yields in Beijing are horrible (1-2%, the home I was paying 9000RMB a month on maybe would have gone for 7-8 million RMB at the time I was paying the rent), but most landlords didn't buy at current market prices.

the landlord would only increase if they know that the market can bear that price - aka, you cannot find an equivalent (or at least very similar) place for cheaper.

This does ignore the fact that rents are also, in fact, going up. Before the interest rate rose most people could not afford their own place in most cities on minimum wage. In SF we've been living with roommates well into our 30s. Lovely but not exactly how it used to be generally.

At the same time some of us salaried folks have gotten small windfalls this year, but most jobs haven't seen a comparable rise in salaries.

All of this leads me to be on team taxation.

I think it's all well and good to have discussions about taxation and interest rates, but as a fellow San Franciscan, I can't ignore the fact that I no longer find it unusual to learn that more than a few of my neighbors are making multiple millions of dollars per year. "Normal" jobs, even as a senior software engineer, can't compete with the wealth gap, regardless of the tax rate. I don't pretend to believe that there is a solution to this reality.

I‘m from Europe and never been to SF, but imo taxation isn’t necessarily needed. Instead the „american dream“ should be adjusted. Not every human needs their own family home. Build more apartment complexes.

I’ve recently seen in a youtube video by the NYT that there are actual lobbies against changing low density housing zones to high density housing zones: https://youtu.be/hNDgcjVGHIw?t=253

I’d recommend to give it a watch :)

Imo the soviet apartment complexes are a good idea. I live in one as well (Germany), and I can afford rent without hassle.

I also live in Germany and pay low rent, but keep in mind this is because the contract isn't new and rent/tenants rights are highly regulated in Germany. If you tried to rent a new apartment in Berlin/Hamburg/Munich/any of the attractive cities with jobs today you'd pay a lot more in rent than you do on an old contract.

One must want to live in Soviet apartment complex. I saw them in ex Soviet Union states, I saw them and lived there in Germany. They were in better shape in Germany. But personally I like wealthier neighborhoods with more Germans living there.

To be clear: the lobby against such high density buildings is the neighborhood itself.

"You can rent it instead"

That's a form of participating "in an inflated housing market". There us no difference, you just introduced landlord as a middlemab.

the only way to opt out is living in a cave

It participates, but you’re still short the house, so essentially it’s a bear on house price. In this analogy rent is borrowing fees.

You could squat

Landlords provide housing opportunities, much like ticket scalpers provide concert experiences.

Landlords and scalpers seem very much not equivalent. I would compare scalpers to property flippers. Someone who sees an asset for sale for less than its market value and purchases it with the intent to sell it very soon after.

Landlords provide flexibility to the market. They take on the risks of owning. In a fully healthy system, it would still be very good to have landlords and rental properties, people would just pick them because they are the best option, rather than the only option.

Bob only became heavily invested because the scummy landlords he rents from jack up the cost of his housing arbitrarily every year.

That would be equivalent to making the interest payments on the share loan you took out to enter the short position, not covering the short.

Bob’s first power plant wasn’t an investment. He was covering his short position. Boh was born short.

Why do you think people need to own everything they use, lest they be short?

If Bob is renting, then when the situation changes he risk losing a house over his head. That could be: 1. if the landlords decide no longer to rent the property (e.g. if they retire or move abroad); 2. if he is priced out of the current area due to increased rent; 3. if he retires and no longer has the monthly income to sustain paying rent; 4. if he gets a girlfriend or boyfriend and they want a bigger place, or if he has a child; 5. if he wants to modify the house in some way (e.g. change a room into a child's bedroom, or redo the kitchen/laundry area to add a new device, or replace the shower or boiler with a more eco/environmentally friendly one).

Or are you saying that he should become homeless?

> If Bob is renting, then when the situation changes he risk losing a house over his head

I hope you don't want to claim here that buying a house means that you cannot ever "lose a house over your head"? Because that would be plain wrong. And if you just wanted to say that it reduces the chance, then you should have some good arguments.

Also, some of your points are strange:

> 4. if he gets a girlfriend or boyfriend and they want a bigger place

Well then it's much easier to move to a different place, rather than buying a new house and selling the current one, don't you agree?

And bob will have the same house. No one will take any rooms.

Ehhhh like I get where you’re coming from but it would be fantastically bad policy for a nation to treat housing like this. A person’s primary residence needs to play by different rules if you’re gonna crash the market semi purposely.

When the forces that cause the market to crash are the feds monetary policy it’s a tough sell that it’s actually a free market. To first order individuals should be able to purchase shelter assured that it’s fairly priced. The concerns should be like “the foundation is cracked” not “JP Morgan is pumping house prices.”

If you cause Bob's house to go back to being $200k then it only screws the Bobs. It doesn't screw the Mary's who bought at or below $200k. Your logic is what gets us into these messes, because it removes moral hazard by telling speculators that housing is special and therefore immune to risk.

Of course it's not a free market. Has America ever had a free market? When is the last time that the real estate market hasn't been manipulated in some way?

How could housing be a free market if no-one produces land?

Land is a zero sum game, you can't pretend same laws apply to it and iPhones

This would make sense if we were running out of land, or if we were anywhere near housing density limits, but we are not. Housing can be created by running utilities and roads to land without it or building higher on land with it.

Markets for a fixed number of goods work fine in general; concert tickets, limited edition shoes, rare antiques. The housing market is heavily absolutely distorted but not because land is a fixed quantity.

"concert tickets, limited edition shoes, rare antiques"

What have you measured to determine that these markets 'work fine'? These are terrible markets, speculation is higher than productivity, fraud is endemic, prices are volatile and liquidity is low. Antiques and arts are infamous for fraud and enabling tax evasion.

People don't need limited edition shoes to survive, so we can just ignore the problem.

> The housing market is heavily absolutely distorted

i still don't understand what these distortions being claimed are. "artificially low" interest rates isn't a distortion - it affects everything, and the rates may not be that low, compared to the growth. As for taxation, real estate isn't treated too differently from any other forms of investment.

The 30-year fixed-rate mortgage is pretty unique to real estate.

Ability of third parties (politicians, bureocracy, NIMBY groups) to block or retard production of new assets. From what i heard from developers, getting permissions for a new appartment complex takes many years, several times longer than actually building the complex.

Inability of third party to capture value they create - an apartment complex in the middle of the forest is worthless.

It needs utilities, shopping centre, major metro line, highway, arts, jobs, good schools, and general 'nice area' vibes created by artists on the verge of bankruptcy. None of those things area created by the construction company.

In fact randomly building houses leads to congestion, lack of places in schools and other facilities, and miserable living conditions.

Not if the market does not offer rental properties. Unless you're in the big city, the rental market can get very small.

> He is not compelled by any force to participate in an inflated housing market.

But he _is_ forced to participate in that market, even if he doesn't know it; whether that's by renting or buying is another question. Renting is less risky but it's still a bet, no?

I'm not sure.