>But crucially, the presence of this group of people arguably turns the bubble into something else.
I agree with this, it's not a bubble in the sense of 2008. I said so in the comment you replied to! We're in the same boat here.
By the way: I'm precicely in that demographic. I just turned 30 and do well for myself as an employed consultant, but I wouldn't consider buying the dip, unless the dip is at least ~100% of the current market prices (which I don't see happening, but who knows). Going in debt for 30-40 years has zero appeal for me, it just seems like a terrible move. The counter-argument I hear from people my age group is always the same "but then you'll never own anything!" -- then so be it, whats the point?! Even if someone gave me a million Euros, I wouldn't spend 600k of those on a house and then another 300k on renovations, that seems like a terrible waste of resources. With that kind of money, you can buy three small companies in Germany, or stop worrying about retirement, etc. Buying estate = de facto being in debt for the entire career and then some, plus having to pay all repairs, anything. I don't see how that would ease my life at all. If someone wants to give me a house, nice, but buying a house just for the sake of doing so reminds me of a signature I often read on market-ticker.org -- leave the rats race to the rats.
Buying a house isn't for everyone, sure. But this is a serious misunderstanding of what "going into debt" is. You're not buying a TV you'll throw out in 5 years, you're buying an asset class that has a history of appreciating in value over 100+ years that you can get incredible leverage on. In the US and Canada, at least, buying a house for a decent deal (in "normal" times, not at insane prices) is a no-brainer investment.
You mention buying companies...that's just a different asset class, but the idea is the same. It's not valueless the moment you buy it, you now have an asset.
>Buying estate = de facto being in debt for the entire career and then some, plus having to pay all repairs, anything.
Do you think this is all happening for free as a renter? At what point in your life do you plan on not paying for shelter?
Correction - over a time period of decreasing interest rates. Housing, on its own, is a depreciating asset. It is a consumable like a TV. It deteriorates with time.
"Housing always goes up", without an understanding of why it has been going up, can be a dangerous belief and could be one of the reasons why housing at the moment is so expensive relative to rents.
The interesting thing about these ingredients that decide the multiple, is that they can turn sharply. If interest rates go up, and multiple starts to contract, at some point the belief that house prices always go up will be shaken, and instead of pricing in future house price growth, people will start pricing in future contraction.
Level of rents is a function of the state of local economy (broad salary levels, more or less) and house supply. Can probably broadly be approximated as GDP growth - so fairly low.
So at interest rates at very low levels and arguable on the way up, and growth expectations seemingly very positive, and economic growth looking shaky, it looks as if house prices may have more downside than upside.
1) the house itself (this generally depreciates)
2) land (this generally appreciates)
3) a retirement account with great tax benefits (this value can fluctuate based on local, state, and federal laws)
4) a ticket into a good school district (this value will fluctuate based on the the performance of local schools)
5) a ticket to partake in a thriving local economy (this value will fluctuate with the local economy, and has recently been shaken up by the rise of remote work)
Any speculation on real estate prices and whether or not we're in a bubble has to take these things into account.
I also have a theory that high RE prices are a perfect vehicule for stashing/laundering large sums of money....
Also to what extent isn't it political cronyism with the construction industry that leads to such shitty urbanistic decisions like we have in Romania where people are pawns to short term greed ...
It's worse. It's the land being leased for 70 years. House usually can't last that long anyway. But not owning the land and no guaranteed usufruct after 70 years is big.
You could have looked at interest rates below 3.5% in 2013 and said the exact same thing; that was the lowest interest rate in over 40 years!
This is precisely the problem. It's not just companies buying up homes, it's also private individuals buying up housing to relist on AirBnB or other sites in order to further extract value out of their purchase.
If you look at a country like say, Japan they don't have this issue because housing depreciates and is not treated as an investment.
After all the boomer generation, on average, has over-provisioned for old age, whereas millenials are still underhoused.
Have they over-provisioned? Everything I have read indicates meager savings for the vast majority of the population, who will need to rely on Medicaid and Social Security to eek out the remainder of their living costs.
Nursing home care is especially costly in the event one does not die quickly, and the government can and I assume will seek to reimburse itself from the estate once the elder dies.
A large number of poorer elder people will be in dire financial straits, forced to work beyond their ability to do so and unable to pay for health care.
However there are also a smaller number of extremely rich baby boomers and a very large number of comfortable middle-class ones. The former will obviously pass on large amounts of wealth. The latter have been forced to save large amounts for their old age, because they have known since middle age that the state would not provide for them very well.
In some cases they have decent final salary based pensions and other very good retirement benefits, no longer available to younger generations. In other cases, they have invested significant sums over the last decades and also made large investment gains.
This group has tended to save for the 'worst case' scenario - a long retirement of leisure spending, followed by drawn out old age with significant care needs. Most of them will not need all this capital - they'll either die younger than expected, or have better health into their 80s and 90s than they feared. The excess will be handed on to their children - and will be a significant source of intra-generational inequality in the future.
Remember also that middle-class baby boomers remain an electoral 500-lb gorilla. Governments have been very reluctant to claw back their benefits and care provisions as fast as has happened to other groups. In some cases they will be provided for better than expected when they planned for retirement.
Sure sounds like this group would have had happier, more rewarding life experiences, and at a macro level made a more appropriate investment of effort, had they been able to trust a social safety net.
https://dqydj.com/net-worth-by-age-calculator-united-states/
75th percentile gets to only $800k by age 70, and that is including the equity in their home. Maybe the beneficiaries of the 70% to 90% households will end up with real estate worth a few hundred thousand, but I do not see much wealth being passed down beyond that.
Labor is only going to get more expensive as greater proportions of the population age out of the workforce and become labor buyers rather than suppliers. Unless many start dying younger than anticipated without using a lot of medical and nursing home care, I would not expect much if I was their descendant.
Note that the upper quartile having $800k includes $500k which isn't in their primary residence. Older people tend to own cheaper houses than you might think, since they are more likely to live in more rural areas.
If you're 70 and have a house you might be able to live quite a few years on half a million. In practice, you have a decent chance of dying before you spend all your capital.
Going into debt at the lowest interest rate you'll ever be offered to buy a leveraged asset that's likely to increase in price and reduce the overhead you pay on your largest expense, housing, and hedge against the risk of rent increases and security against the whims of landlords?
> Germany
Oh, Germany. Somehow Germany has escaped the constantly increasing house price effect, as has Japan.
If you owned a house in London its annual value increases would almost certainly out-earn your salary. And you don't have to pay tax on that.
Look, if I had enough money around, I'd maybe consider the gamble. But I don't want to buy property to sell it later, I just want to live somewhere. I'm not interested in placing bets on my salary, and I'm not interested in financial longterm-obligations. Maybe in 10 years I want a year off? What then? Maybe I want to change careers to something less intellectually demanding. Maybe I want to spend 50 hours a week with my kids. None of those are feasible if I need the salary. "No debt" is synonymous to freedom on so many levels in life design. The choice is not even close to me.
I make enough money not to worry about rent, even if it should substantially increase, which I don't see happening anyway, simply because then most people wouldn't be able to afford it and political change would become opportune in election-based systems.
>If you owned a house in London
Whats the point of even thinking about owning a house in London? Seriously. I come from uneducated parents that left me €0 and completely unprepared for life, so in my 20s, I first had to dig myself out of that crap. Now I make a good living, but I'm not rich, or filthy rich, or even wealthy. I have to actually make the money to pay that thing. Look at the development of real estate prices in the last 20 years and tell me that's a reasonable choice if I don't even intend to sell the property later (just to be stuck in the same situation again, with more cash, but in the same dilemma). It's pointless. I don't treat my lifetime-expenses as a game of assets, I opt for quality of life, which I don't achieve by giving it all to some property-owning entity who sells it to me at 3 times the price they paid a couple decades ago. I mean, you can justify doing so, but I don't see me being able to justify it.
That's exactly what you already do if you're renting: you're betting that you will be able to work and earn enough salary to afford the rent, with your adjusted expenses. That's "pfft easy" when you're in 20's, easy in your 30's, okay in your 40's (kids need money, yo), doable in your 50's, oh shit when you're 52 because surprise! economic downturn / medical emergency / anything else that might happen. And now you don't have a place to live in and spending your retirement money to rent one, or take a dip in your quality of life.
If you're not paying for your mortgage, you're likely paying for one of your landlord.
As you say, keeping up with rent is easy (not necessarily, but for those in professional careers) early in life, but as your income plateaus later in your career it starts to become harder to keep up with relentless rent increases.
But then it's in retirement that a lifetime of renting really hurts. Suddenly you have no income anymore other than whatever small retirement benefits if any, but rents keep going up.
That assumes that the mortgage (+tax, +maintenance, +etc) is the same cost or less than renting is. That almost certainly isnt the case at first - at least in the area I live, I see houses renting for far less than just the interest on the mortgage would be (if purchased today, presumably the owners bought at lower prices and/or lower interest rates).
Agreed, at first the monthly cost of ownership is likely higher than rent. But my quoted comment was about retirement age, which is at the tail end, not at first.
It doesn't take long for rent to catch up and from there on rent will forever go up while the mortgage will either stay fixed or only go down via refinances. Even if refinancing doesn't work (in a rising rate market like right now) the mortgage is effectively going down via inflation while rents keep up with inflation.
In my case the first year of ownership was fairly painful as the cost was much higher than previous rent (although for a nicer place). By the second year was able to refinance so it wasn't bad anymore. By the third year, with rents rising, my mortgage was already about par with local rents.
Ever since then, rents have gone up massively (about 4x-5x) and my mortgage has only gone down (today about 30% of the inital monthly payment in absolute dollars, or effectively only about 15% considering inflation).
Most importantly, it will be paid off before I retire so once I'm on a limited fixed income that's one monthly cost I won't have to worry about. Having seen some forever-renter extended family reach retirement age with rising rents, it's a sad and painful situation.
My advice to anyone is that unless you hate your future self, buy a house in your 30s if at all possible.
Since 1980, in the US, rents have increased 9% per year. In 20 years, the rent will be 2-4x, whereas my mortgage will remain the same (modulo a lowered interest deduction).
Even if it's about as financially efficient (which I doubt), it's a very powerful feeling to have locked down a fixed cost of housing for as long as I want to live in California.
Same. Which is exactly why I bought a house in 2011. In hindsight it was the perfect time, but at the time the market was still bumpy. At the end of the day, I had a stable job and needed to live somewhere.
> I make enough money not to worry about rent, even if it should substantially increase
The house next door to me rents for 2.5x my mortgage.
My salary has continued to go up, while my cost to live has continued to go down (I refied at the rate bottom). If I want to take a year off I can either rent out my house or just carry the cost at this point. Buying this house gave my wife and I more flexibility because with some decent certainty (+/- small amounts for taxes/insurance fluctuations) I can tell you what my cost to live will be next month or 24 months from now.
Finally, buying a house with a mortgage is best way for a normal person to protect against inflation. Housing is typically a families #1 or #2 expense, and being able to mostly lock that cost is a huge win 3-5-10 years out.
And you were more likely to be able to because it was 2011. Fewer people can do the same today, at least at a similar comfort level of cost of house to income ratio.
Also, 2011 was still very uncertain. Would the market continue to go down, and would I keep my job were all real questions.
Is today a questionable time to buy? Probably, but what type of correction is needed in a ~7% inflationary environment for it to shift into an ok time to buy? 10%? 20%?
The point is there is always uncertainty and only in hindsight did 2011 look like a great time.
I didn't buy because it was a step onto the property ladder. I bought because it was less of a gamble than renting. I ended up staying in my first house for 17 years, whereas my record under a single landlord was 3.
> Maybe in 10 years I want a year off? What then? Maybe I want to change careers to something less intellectually demanding. Maybe I want to spend 50 hours a week with my kids. None of those are feasible if I need the salary.
During those 17 years I took at least two pay cuts, and multiple 2-6 month breaks between jobs, all affordable because I owned rather than rented. Lower outgoings made it possible to save more, plus my mortgage provider offers payment holidays. No landlord ever did!
> I opt for quality of life, which I don't achieve by giving it all to some property-owning entity who sells it to me at 3 times the price they paid a couple decades ago.
I mean, isn't "paying rent to a private landlord" doing just that? Except "sells it to me" is actually "allows me to live there, until they decide not to" and all the money you spent is gone.
† I lucked out with a lump sum/windfall through my employer; I'm making no claims that getting a deposit is easy/attainable
Indeed! I've taken a long break from working to be with my child, which I could afford to do only because I'd bought a home years earlier. If I'd been renting with ever-increasing rents I never could have done that.
Stange argument, all rights are legal contructs - how do I know my employer will pay me for work done, or my neighbour won't rob be in my sleep and slit my neck?
If we don't trust legal constructs, we can't have a civilisation.
Regardless, ownership is a useful legal construct the benefits of which seem to outweigh those of being a tenant.
[0] https://landlordknowledge.co.uk/ground-rents-banned-under-ne...
Property taxes in the USA go towards local government services like garbage collection and street maintenance, just like council rates. So I believe property tax and council rates are still analogous.
I don't know how things work where you are, but here in the US if you are renting, you are essentially helping someone else pay their debt. And they can kick you out when they please. The main benefit is that you can stop paying on a much shorter time scale (1yr lease contract?) or take time off, but if you don't rent you should require a smaller cash flow which should be possible to save up for.
One last thing, don't forget that you can sell the property in the future (or even rent it out, hence letting someone else pay YOUR debt). That should factor in your cost/benefit calculations. Even if it does not appreciate at crazy rates like the current insane market has led us to expect, it will very likely be a lot more than zero.
Renting vs buying comparisons need to account for lot more than those two numbers but that's all I see posted most of the time.
"Realtor costs" are again different some estate agents in the UK charge a % of the sale price others a minimal fixed cost.
I'm sure that these things differ massively in different countries as well so it's hard to put an average number on that.
In terms of opportunity cost of the money again it depends on how you would invest that money you could put it in something very high risk and show a huge imbalance in buying a home vs investing in crypto or something like that. In the UK most low risk savings accounts will track lower than inflation on a property only the stock market will track higher but again that's higher risk and so not comparable. Also most savings accounts in the UK are capped at a max amount that can be saved per year.
As I said though if you try to compare mortgage vs something like stock market it's not really comparable. Also to note the large index funds in the USA track much higher on average than most other countries.
I've seen people use the S&P as an example that house prices don't track to the same amount and that you can compound any gains to make large sums of money. What's interesting about this is that the reason you make so much money with that model is that compound interest is non-linear in growth which means over say 40 years you make most of the growth at the end of the period (Literally in the last 20%). This also means that if the end of your growth curve ends on a bad few years for the S&P you'll do much worse than the average so the risk is still very high on even index funds.
Overall though my current mortgage cost is 2.5 x lower than rent for a comparable property. So you'd have to factor in the opportunity cost of that extra per month I save not paying into rent into your equation as well.
Not always, in some EU countries, some rental agreements have the tenant pay for certain maintenance, plus insurance.
The big unpredictable element is home repair costs.
This is generally true because prices generally go up. My brother almost bought a $200K condo in SF 30 years ago but it was slightly out of reach on his $60K Sun micro income, and his $500 room for rent was cheaper. The condo has gone up about 8X and rent (assuming market rate, it was under rent control) 5X. So as expensive as it is to rent in SF, it’s relatively more expensive to buy. It’s unknown if that trend will continue. It doesn’t seem rational but the city seems intent on continuing to severely restrict supply.
The rent/but dichotomy really comes down to what axis of “freedom” you want to optimize for, and if you want to stay in the house and area more than 10 years.
He can rent out the house and travel. And probably make money.
Aibnb or estate agents, managed properties, whatever.
No debt is indeed great freedom in general.
But housing is different. Do you plan to live somewhere? You still have to pay for it. For as long as you live you'll need to live somewhere and that means paying for it. Whether you call it rent or mortgage, you're still paying, there's no escape.
So, within those constraints, it is better to invest in a house than to enrich someone else for the rest of your life.
I hope that was sarcasm since housing in Germany has gotten super expensive.
To a large extent house prices are sensitive to interest rates. A bank will look to your income and say you can make a monthly payment of $X. At historically low interest rates that’s gonna mean a bigger loan. As everyone’s ability to borrow goes up, so do the prices. As rates rise, for the $X dollar payment, the ability to borrow declines, and that puts a down draft on house prices.
Oh boi. When you buy this you are giving all this benefit to the seller that takes these into account. You are not making a profit off of it unless the value increases more than the market expectation for it.
So its a leveraged bet that it will be better than expected by the market, and if it goes the other way you are toast.
The suggestion that 'the return will take longer than it has in the past' is a prediction with no evidential basis.
Lack of flexibility at precisely the right time?
Owning in any large city + servicing debt during the pandemic when you must move elsewhwre that is sane (and less risky to your health) would seem to have a premium attached to it
If you somehow bought a house at a reasonable earnings multiple, say 4x earnings, then your house has appreciated essentially what you earned over the last 5 years. This is just math.
https://www.bloomberg.com/graphics/property-prices/london/ shows the median as having gone up around 6% in total since 2017. Trying a mix of neighbourhoods in that tool, I can't see any which are close to 100% up.
We looked at a home that sold for £415K in 2017 for example and we were outbid. It went for 865K
Flats aren't so hot, that's for sure, but there's been masses of price growth over the last 5 years on houses. There's a stunning lack of stock on the market.
The situation is so bad that there isn't even housing stock available. You are generally better off moving out or buying whatever you can.
[0] https://www.savills.co.uk/research_articles/229130/323909-0
12 Years underwater... optimistically given that its already not looking great for their 8% prediction for 2022
You wouldn't buy a house unless it was essentially free? A dip of ~100% means prices at ~0% their current level.
> Going in debt for 30-40 years has zero appeal for me, it just seems like a terrible move.
Debt on its own doesn't matter so much. You already know that you will need to live somewhere for the rest of your life, so that expense is unavoidable. The question is whether you want the amount of that expense to fluctuate according to the market, or if you want to lock in a steadily-decreasing expense with a 30-year fixed rate mortgage (steadily decreasing in real terms, because $100 in 30 years will be worth $50–60; yes, property taxes are likely to increase, and maintenance will move with the market, but mortgage interest and principal will decrease in real terms).
> Even if someone gave me a million Euros, I wouldn't spend 600k of those on a house and then another 300k on renovations, that seems like a terrible waste of resources. With that kind of money, you can buy three small companies in Germany, or stop worrying about retirement, etc.
$1.05 million is hardly enough to live on. That's just $35,000 per annum. It's not nothing, and I surely wouldn't sneer at a gift of $1.05 million, but it wouldn't let me retire today.
So is $1mi. For a lot of countries, this is money you could retire on.
I somewhat agree with your argument. Housing costs more than other assets compared to its economic value, exactly because people have an emotional reaction to the idea of owning it - or the idea of not owning it.
However I have seen middle-class people overextend themselves to 'buy the dip', while their equally wealthy peers sit it out, for over 15 years now. Many of the people who did the former now consider themselves to have got a bargain, while many of the latter changed their minds and ended up buying several years later and at much higher prices.
I'm definitely not arguing that this makes buying right and renting wrong! Just that so far, this is how that choice played out.
I am curious what you guys think of this statement. I think the idea is if the potential rent you get out of your investment is too much under one percent, you might be better off investing in something else?
Now imagine a smallish 4 bed, 2 bath, 1,638 sqft built home on a 5,861 sqft lot in Longmont, Colorado (so not exactly a city but my preference because municipal fiber) that has a sticker price of USD 499,900. I can't imagine paying USD 4,999 every month in rent for this house at the moment. What gives? Is rent too low? My instinct is home prices are way too high but it can't just be "dumb money" keeping prices high, right? Eventually, there should be more supply causing prices to drop? Is something preventing this correction? If so, how do we fix it?
The rule of thumb is now obsolete, and 30-40 times rent is perfectly common in lots of places.
The newsletter is quite a lot more aggressive than even the rule of thumb from the 'good old days' when interest rates were much higher.
I used to pay around 0.2% of the market price of my apartment per month. The landlord was a professional property management company, and this situation persisted through several new contracts.
Actual rental revenue received can be significantly lower than calculated if there are vacancies, etc. It’s much easier to do on an apartment building with many units.
Does this have all taxes(property,rent,etc) included in the cost?
That's not the best way to look at it.
Unless you plan on being homeless, you're already inevitably committed to a monthly housing payment for most of your life.
So the decision becomes, do you pay someone else to enrich them and commmit to having to pay for the rest of your life? Or do you invest in something where you partly pay yourself and there is an end (even if far) to the payments, so when you're old you no longer have those monthly payments?
What are the closing costs of purchasing a whole company? How much would you pay for an accountant to go over the books and a lawyer to go over the forms?
I don't know how much homes cost in Germany, but surely if people have 600k to spend, they would buy companies too, would they not? Why do they buy homes instead?
"Higher rates will make current prices unsustainable. As soon as they correct to the point where monthly payments are back to what they were last year, there will be buyers, only too happy to overextend themselves to get out of renting."
So, higher rates are effectively a transfer of wealth from homeowners to banks? How does this serve to combat the current inflation issue?
Regardless of high or low rates, banks borrow low and lend high, and live on the difference.
High rates, if you want to express yourself in those terms, a transfer of wealth from people with debt to people with assets.
With the housing shortage and unmet demand, we are at the margins whereby the ones buying are well-off.
The question to ask is if the rate of new housing and the rate of capable buyers will diverge.
As long as supply is low enough that the supply of capable buyers keep outbidding each other, housing prices will keep rising or at least plateau.
Higher rates will have an affect on diminishing the rate of capable buyers entering the market, but if supply is still low and the demand for home ownership remains high, I don't foresee anything drastic happening to the housing market.
Yet another case of how society would be better off if people practiced what they preached.
As housing became more and more expensive to young professionals, some people in this group have worked harder and harder to buy property, even to the point where it no longer seems rational. For example, parents taking a lot of wealth out of their retirement savings or their own homes to assist children in buying. Professionals are working more than otherwise makes sense for their stage in life (young families with two full-time parents). They are committing a large share of their monthly budget, often right until the start of retirement.
They do this because they believe in the importance of owning property - beyond any reasonable narrow economic justification.
Of course, there is an inequality aspect to this - not everyone's parents have capital, not everyone can command a high enough wage.
But crucially, the presence of this group of people arguably turns the bubble into something else. These buyers put a floor on the market. If prices drop even a little, or something else changes to make mortgages slightly more affordable, they rush in and buy the dip. By doing this, they sustain the high prices for everyone else in the market.
This will probably happen now. Higher rates will make current prices unsustainable. As soon as they correct to the point where monthly payments are back to what they were last year, there will be buyers, only too happy to overextend themselves to get out of renting.
It's inaccurate to characterize these people as likely to default. They are actually very good mortgage risks - they have already shown themselves to be very committed to ownership. And the resources which got them into a position to buy mean they will keep on paying short of a disaster. The truly unrealistic borrowers of pre-2008 have never been let back into the market.