When you make housing an investment, by definition, it has to become less affordable in the future.
Until a country decides to stop making policy to support this notion that a basic need should be an appreciating asset and not a depreciating one like food, transportation, etc, this completely unsurprising trend will continue. It is a strange world we live in where we collectively believe that a basic need should increase in price over time.
I think it's not a coincidence that, over in the metaverse threads, there is discussion about creating intentional artificial scarcity in a world of natural abundance, as the basis for a new economy.
Even when there's plenty to go around for everyone, it seems we'd rather not let that happen.
It's not that new idea. See Intellectual Property in its many forms. For some reason, when we try to figure how to manage abundant resources, only solutions we come up with are to make them artificially scarce. Which makes really little sense. But then, economics is a "science"[1] of scarcity, not abundance, and somehow economics is the main science used to solve how the society should be arranged.
[1] I have a strong feeling that economists have missed the memo from Popper regarding what is modern science. There seems to be quite a lot of unfalsifiable assumptions lying at the bottom of economics, starting from the utility maximizing agent.
I think this thread is correct on the artificial nature of the scarcity. I had an epiphany that this is what we are doing in the stock market (via tax codes and retirement plans), and something similar in the housing market via credit schemes (typically govt backed).
In the stock market, there is an evergrowing pool of securities getting sequestered away into pension schemes and RRSPs. You can change what security you are in, but people/funds seldom get out of the market. When you cash our of your retirement (before actual retirement), there are huge tax disincentives to do so. For housing, people generally have a progression as they move to larger houses (as they have more kids, or kids get older). If all houses continue to get expensive, you just always stay in the housing market (well, until you go to a retirement home or expire).
Both seem to remind me of the classic definition of a ponzi scheme, except housing is a basic necessity. We are basically saying there is an evergrowing mountain of wealth - you just can't spend it till you retire.
Isn't it the other way? We're creating artificial abundance (requiring the currency to unboundedly grow) in a system with real and artificial limits (construction capacity, labor capacity, permitting and zoning drag) that forces people into either doing something individually wise but socially stupid (turning a need into an investment) or fall off the devaluation treadmill
As others have said, our entire way of thinking is predicated on lack. Or, as it was said by The Watchowski Sisters in The Matrix:
> Did you know that the first Matrix was designed to be a perfect human world? Where none suffered, where everyone would be happy. It was a disaster. No one would accept the program. Entire crops were lost. Some believed we lacked the programming language to describe your perfect world. But I believe that, as a species, human beings define their reality through suffering and misery. The perfect world was a dream that your primitive cerebrum kept trying to wake up from. Which is why the Matrix was redesigned to this: the peak of your civilization.
> creating intentional artificial scarcity in a world of natural abundance
Which is essentially what Bitcoin does. There is a natural abundance of numbers but crytocurrency protocols make some more scarce/valuable than others.
> over in the metaverse threads, there is discussion about creating intentional artificial scarcity in a world of natural abundance, as the basis for a new economy.
Which isn't new (neither is mistaking a clear case of natural scarcity in an unfamiliar structure for natural abundance; the metaverse is limited by all the traditional dimensions of computing/information capacity—energy, processing capacity, storage, etc.—and it won't take long, if it actually exists in a usable form, before exploiting the superficial abundance results into usage running headlong into the real natural scarcity; artificial scarcity will be superfluous.)
Land, near where the jobs are, isn't in abundance. And were it, resources like freeways will constrain unbounded growth with horrendous traffic patterns.
I don't think anyone is intentionally putting their finger on the scale when it comes to real-estate prices.
Maybe, and this is not from any data I can pull up, it is those with deep pockets buying additional properties as investments/rentals. And now we have huge corporations flipping, building rental homes on a massive scale.... The only solution I can see is to tax the living hell out of 3rd, 4th properties (etc.).
wealth prefers a zero sum game, in order to gain something, you have to take it from someone else. But we've been in a positive sum society since industrialization where each person can add to our collective innovation. Sadly keeping people in squalor keeps wealth happy, where we could be so much farther ahead if people weren't forced into poverty. I say it that way, but we only see a huge growth in everything when more people add to the pot. Like stone soup.
We'd rather not? Or "they'd" rather not? They as in the status quo, their power, and their tools (e.g., waving the carrot as the rats run on the wheel?).
There's plenty of we who want to see change. But not enough of us. There are still too many who buy into the web of the narrative spun by The They.
This is essentially one of the same points Marx made. Capitalism is often really good at dealing with shortages but it will also perpetually create its own unless kept in check by countervailing forces.
Yes you're absolutely right, housing cannot be both a good investment and affordable by definition. Time to give up the narrative. It doesn't make sense.
I've mentioned this before but it's worth saying again: 1 square foot of housing is approximately the same price - adjusted for inflation - as it was in the 1970s, on average. [1] There's a few caveats however.
(1) New houses are 2x bigger on average than they were back then, and the average American family is smaller [1].
(2) City councils, and by extension zoning rules, in major metros preclude construction meaning that supply cannot meet demand. This benefits existing landowners to the detriment of both the next generation and renters. San Francisco is a prime example [2] - SF needed to build 6X as many houses as it did between just 2012 and 2016 just to meet the job growth in the area. This pushes the price per square foot inside metros up way above what they would otherwise be.
(3) Zoning rules outside of major metros, including setback rules and minimum size rules, parking rules, etc, make houses outside metros much bigger. Also, expectations have shifted. This pushes the square footage of suburban homes up - and with it the total price.
(4) This applies mostly in the last few years - but lower interest rates make houses that are more expensive much more affordable on a monthly basis, which is totally fine as most folks end up with a 30 year fixed rate mortgage. A drop from 3% to 2% makes a house about 25% more expensive cost the same amount per month. Yes, it increases down payments, but down payments tend to be up to 20% of the price - so an increase not of 25% but 4%.
So what can we do? Easiest thing is state-wide or federal zoning rules. Build up. Allow smaller homes. [edit](Stop with the mandatory parking.) In Japan, supply and demand meet, and a new 3 bedroom house in Tokyo is like 400K USD [edited for current data] - right around the cost of construction. This is thanks to their federal zoning rules. [3]
SF board of supervisors just voted unanimously against turning an old barely used church into 300 small shared-kitchen studio apartments, because it’s not “family friendly” enough. https://www.sfchronicle.com/bayarea/article/S-F-supes-say-no... (This will of course instead force 300 people who would live in those to awkwardly pair up and live as unrelated roommates in 150 scattered 2-bedroom flats, taking them off the market and contributing to high rents throughout the Bay Area.)
The board also just voted against turning a parking lot into a 500-unit apartment building, citing the recent Florida condo collapse as justification, and worrying that it will “gentrify” the corner of 6th and Market (!). https://www.sfchronicle.com/sf/article/State-investigating-S...
I'm inclined to think a lot of people only live near cities because 1) they work in it and have no choice but to live nearby, otherwise suffer a nightmarish commute and 2) it's the only city near them. Why isn't building new, smaller cities a viable option? Surely building something from scratch also comes with advantages, like being able to plan and build infrastructure optimally from the start, rather than trying to retroactively update ancient infrastructure piecemeal. If we're going to go with a state or federal level approach anyway why funnel the money into existing cities?
> 1 square foot of housing is approximately the same price - adjusted for inflation - as it was in the 1970s, on average.
Average over what, though? I'd assume that 1sq in a dense metropolitan quarter in high demand goes for a lot more than 1sq in a poor neighborhood or in the middle of nowhere.
The global average doesn't really mean anything except "somewhere in the US there is still affordable housing".
Most critics of rising housing prices that I know of aren't arguing that housing is becoming unaffordable everywhere but that it's becoming unaffordable in high-density places where housing would be needed.
You acknowledge this in:
> This pushes the price per square foot inside metros up way above what they would otherwise be.
Also shouldn't actions include at least having a look at building speculation in high-density areas?
> lower interest rates make houses that are more expensive much more affordable on a monthly basis, which is totally fine as most folks end up with a 30 year fixed rate mortgage
Absolutely false in the long term due to feedback, although it is true in the short term.
With lower interest rates, people bid up the price of houses because they can afford to spend more on their mortgage. The amount spent on mortgage repayments trends towards the same figure as always (approximately as much as your wages allow).
I believe houses are a prime mover of the middle class economy, because it is something most people are willing to “invest” a lot of time working to achieve owning the property they want (often status driven).
> In Japan, supply and demand meet, and a new 3 bedroom house in Tokyo is like 400K USD [edited for current data] - right around the cost of construction.
In addition to your points here, I found the hypothesis below very interesting. In a nutshell, American governments are incentivized to zone for expensive land that doesn't require much infrastructure. So we get giant, sparse suburbs and institutional opposition to affordable housing because that reduces the tax base.
'Local German officials, like local leaders everywhere, seek bigger budgets to provide more and better services to their constituents. What’s different about Germany is that the way to get bigger budgets is to increase local populations. And, as Professor Buettner says, “Ultimately, to get people, municipalities will need to support housing.”
The result is a system of incentives that is the opposite of “fiscal zoning”—the US practice of zoning land in ways that maximize local governments’ income and minimize their costs. In places with high sales taxes, such as Washington State, leaders zone more land for shopping centers. In places where residential property taxes are capped, such as California, they zone less land for homes and more for offices. In affluent suburbs, they often zone land for houses on large lots, excluding low-income people.
Maximizing property values is such a central concern of local government in the United States that Dartmouth economist William Fischel developed the notion into an entire political theory. His “homevoter hypothesis” holds that local governments are almost single-mindedly focused on maximizing real estate values, because homeowners typically vote their home values in local elections. German jurisdictions gain financially by maximizing population, not house values, and because renters outnumber homeowners in the country, homevoters are not the dominant electoral force in local German elections. Renters are.'
>> (1) New houses are 2x bigger on average than they were back then, and the average American family is smaller [1].
This is good, because it means people can afford more.
>> (2) City councils, and by extension zoning rules, in major metros preclude construction
This is good because unregulated growth is a net drain on society. No one wants to buy a house if the property next door can be turned into a 30 story apartment building. More people own property now than at any time in history. How about that? Stop making babies, right now, and there will be plenty of space for everyone. I don't have babies, I own a house, everyone who has babies wants not just to pollute the world with their offspring and tax me to pay for their spawn's upbringing, they also think they deserve free property. Just don't have babies and problem solved.
Your (1) and (4) are assuming a direction of causality. Alternatively:
(4) Monthly payments on new mortgages are essentially fixed for any point in time. A drop in interest rates from 3% to 2% makes housing asset prices 25% more expensive, and along with them downpayments, real estate taxes, and the amount required to pay mortgages off early.
(1) In order for a house to keep up with market appreciation, it has to be a desirable to the future "average buyer". Monthly payments are relatively fixed, less bidding competition for land outside of metro areas means that the feedback effect in my (4) isn't as strong, and so a bit more money goes into the structure.
> housing cannot be both a good investment and affordable by definition.
Real estate is the only asset class where this isn’t true. The existence of the mortgage, which is one of the most unique debt instruments available to the general public, means that house price inflation only needs to exceed interest rates about about 0.6% to beat stock market returns.
How do you with prime real estate markets like NYC, Bay Area, LA, etc? I would assume similar highly coveted areas will be exception to the rule.
What about the Japan housing model? Apparently they don't have these property bubbles anymore.
what if some people want a bigger house because they want bigger family though? i guess some areas would have to be zoned for people who plan to have more kids than 2, i couldn't imagine raising a family of 5 in a 2-3 bedroom house, i was raised in a big family. 10 kids. so a bigger house came in handy
I do agree that housing as an asset is a bad idea. I regularly think that if you gave everybody a rent free room, society would be wildly different. People are running around to pay rent doing insane stuff just to get by. It's humanly painful.
That's sort of the point though, isn't it? We're at a point where large capital holders pretend they want competitive forces to keep them in check, yet employ anti-competitive practices and cry regulatory overreach at every opportunity.
Current businesses don't want a competitive labor market in the sense they have to compete for your time, they want drones to do whatever they want and want to pay bottom dollar for it. Just look at the massive outcry right now claiming labor shortages. Maybe there is some shortage but it's a well justified shortage in my opinion.
If you had a labor force with a real basic sense of security, people not worried they may get sick and their entire life's accumulation of assets from work will be washed away in an instant or they may be out on the streets looking for a warm bed, then you have a strong labor force that can negotiate reasonable working conditions. We don't have that.
We largely have a growing precariate class of people that seem to be sweeping in low to lower middle income that seems to be growing into the middle income brackets. A large bit of middle and upper middle are fine but even there, pressure seems to be growing.
A great thought experiment, though not necessarily an entirely fictional one. Social housing schemes, and proposals for 'universal basic services', are common enough and ought to be the positive side to the deflation of the housing market.
Mortgages currently dominate the average person's life.
There are more to this than housing becoming an investment tool. I would argue the endless money printing and negative real rate has made saving pretty much useless. Hard assets are only going to keep going up. And then the government guarantees that housing market should never go down. Here in Canada many politicians have publicly stated they wouldn’t stand housing market going down. And of course they aren’t going to make zoning laws any less stringent.
The solution isn’t that hard. Raise the real rate. Let’s see how many people can keep buying their third and fourth homes once the rates go up by 5%.
Oh but we can’t have that. That will cause the economy cough cough stock market tank. So we have to keep making the bubble bigger.
> politicians have publicly stated they wouldn’t stand housing market going down
This statement is equivalent to saying that rents will never go down. And that's the core problem. Fiddling with interest rates or whatever is fine, but if your broader strategy results in every generation having to pay a larger fraction of their income on housing than the previous one, that is a problem...
> There are more to this than housing becoming an investment tool [...] Hard assets are only going to keep going up. And then the government guarantees that housing market should never go down
It's exactly housing becoming an investment. In your post you precisely explain why it's a profitable investment, why that makes it unafordable, and the solution you propose is to make it an unprofitable investment. I think you and the OP agree completely.
I don't think you understand how the value of these assets is supposed to rise. When you buy a flat in the center of town, it's supposed to increase it's value for being in the center while town is expanding. That means that there are always new housing units creating in the expanding periphery which drives population of town and therefor demand for living in the center.
The issue is that newly created housing is already priced sky high. You can blame quantitative easing which lowers interest rates and drives comodities we usually buy with credit high.
Just add another line to the graph and you'll see it.
Problem is not the market, but the fact someone is tempering with it so bad it inevitably collapses.
> I don't think you understand how the value of these assets is supposed to rise. When you buy a flat in the center of town, it's supposed to increase it's value for being in the center while town is expanding.
Why is it "supposed" to be this way?
It doesn't work this way in a lot of Asia. People don't want old, used homes and they lose value over time. Cities often don't have one specific point in the center (America's zoning is absolutely horrendous and forces this to happen) and so businesses, restaurants, shopping, activities, and so on are fairly equally spread across towns.
When American cities expand, they build more houses farther away but further condense business in the downtown core. But that's a problem that's politically invented and not so much a problem elsewhere.
> When you buy a flat in the center of town, it's supposed to increase it's value for being in the center while town is expanding.
If the town is expanding then the supply of housing goes up along with the demand and prices stay the same, i.e. proportional to the cost of constructing new housing.
Once you reach a certain point you have to build taller buildings which are more expensive to build and then housing prices would reflect the higher construction cost, but this only applies to urban areas and the costs only get really high when the buildings get really tall.
If you converted some of the suburbs to three story buildings that filled the lots, the cost per square foot wouldn't be much higher than it is for single family homes, but there would be ten times more housing per acre. Doing this is prohibited by zoning, which is the real reason why housing is unaffordable.
Desirable living locations are a limited resource, the population is increasing, people haven't stopped wanting houses, so the relative supply is decreasing. Increased prices are more about that than in investment potential. Just look at "manufactured homes". These tend to be less desirable, in less desirable locations. The house itself often depreciates in value. Although the land it's on may appreciate in value.
I think it's much more a matter of negative real interest rates. This inflates the price of all assets, but especially real estate, which is available to be purchased with the cheapest fixed-rate leverage around.
Population increase has essentially stopped in most developed countries, though since household size is also decreasing there is still demand for new dwellings. But household size can't decrease without bound so... will be interesting to see what happens.
I'm sorry, but this is sheer silliness. A "country" doesn't "decide" to make an asset class appreciate or depreciate. It's always been driven by supply and demand.
If the population of this country stopped growing and started shrinking, a lot of real estate would be freed up. Demand for housing in the densest cities would drop, and it would be cheaper to live.
Real estate prices have gone up for the last hundred years because there are more people. This is why it has been an effective and predictable model for businesses like car dealerships to always locate on the outskirts of cities and wait for the city to come to them, sell the land and move further out.
There isn't anything nefarious or even strange about it. It's a natural result of population growth and increasing demand that consistently (so far) outpaces supply. Nor is it inevitable; look at China. Tons of empty apartments, cheap bordering on free to live in. That's what happens when supply outstrips demand.
Countries can easily affect the market in this case and there are incentives to do so.
Things like zoning laws, property taxes, taxes on investing in property all affect overall prices, it's never going to be pure supply and demand.
For example if a region/country wants to keep prices down, heavily tax second/third/fourth homes. Or provide tax incentives to new builds.
Then there's interest rates, one of the reasons that property prices in many countries are increasing is that the interest rates are low, so people looking to invest can't get a good return on their investment in "traditional" locations, so they turn to buying property to rent out.
> A "country" doesn't "decide" to make an asset class appreciate or depreciate. It's always been driven by supply and demand.
But it does. The supply is partially driven by speculators who bet on the prices continuing to grow. Currently, a lot of people are buying more expensive houses than they need
because "house is a good investment". This (the speculators) can be easily stopped with a policy - e.g. tax heavily all profits from real estate sales, incl. primary residences. If taxes make it next to impossible to profit on increase of house value (the profit goes to treasury and not to seller), then the market would significantly cool down.
The fact that we (for example) tax heavily income from work, but not from real estate speculation, is a CHOICE.
Strange to use China's oversupply as a comparison when it too is the result of intentional government action.
Governments can cause oversupply, governments can cause undersupply. Bet you can think of plenty of examples without my help of government policy resulting in supply for some goods decreasing or increasing relative to demand.
Governments can do a lot. Like, they can pretty much dictate what you're allowed to make, how much they're gonna tax you on profits from making something, who you're allowed to sell it to - they can absolutely decide to cause an asset to appreciate.
You are wrong, look what ie France is doing with its housing market. No bubbles since it highly demotivates speculations and corporate mega-investments that move markets.
There are tons of tools any state has to motivate or demotivate markets. Taxes, rules on primary, secondary and investment residence ownership, same goes for rents etc.
I tend to see a clear pattern here, just like in other topics - folks who are profiting from current situation by already owning see nothing wrong - in contrary, market forces in effect etc. The more the better.
The rest not so much, ie younger generation thrown in the world where they probably will never own their residence, which can be pretty infuriating compared t situation say 20 years ago. There aren't that many more people to explain this. But the move to consider housing more and more as a speculative investment rather than commodity is definitely out there, everywhere.
> If the population of this country stopped growing and started shrinking, a lot of real estate would be freed up. Demand for housing in the densest cities would drop, and it would be cheaper to live.
Without a policy to disincentive it, couldn't large asset holders purchase freed up real estate and artificially control the supply?
Just being thorough, but in theory it could be both if there was a steadily more desirable city core where people invested and a large affordable urban fringe where everyone could live. No principle says everyone should be able to live in San Francisco.
And what would be ideal, in a healthy market, is that housing is sometimes a little overbuilt and becomes a bad investment, then becomes very affordable and a good investment. Sitting at some sort of market equilibrium if you will. Investors consistently winning is bad for affordability, and investors always losing means eventually nobody will build houses and people start having to live outside.
A good way to do this (once zoning is fixed to allow new construction) is to provide tax incentives for new construction. Then the price at which new construction is viable goes lower and so does the cost of housing.
Coveted land is a limited resource and will always be an asset to some degree. It’s value depends on social drivers that make the area worth living in.
Policy though can help prevent the asset price from being driven further by speculative investors, using tax penalties that heavily favor owner occupiers. It’s difficult to get right because there’s an argument to allow investors to participate, as it drives investment and effort into new house building.
But right now, 0% rates for businesses has flowed into large scale purchases of residential homes by Zillow, Redfin and others, who used their data positioning to capitalize on the flight to the suburbs due to Covid. That is what has devastated affordability. There’s no broad social benefit there, I hope it stops.
You really think that owner occupiers haven't pushed for policies that inflate the value of their investments at the cost of young people and renters? Having been to community meetings about creating more housing in my area, I'll tell you that there's plenty of people who want to constrain the housing supply who are not hedge fund lobbyists...
> When you make housing an investment, by definition, it has to become less affordable in the future.
Not really. It's fine to "invest" in something that just outperforms holding cash, or bank deposits. Trillions of dollars are invested in treasuries.
You can even invest in something with negative expected returns, if it hedges exactly the risks you will face in the future (eg, the risk of accommodation costs rising is offset by owning a house, because you will always need somewhere to live).
So you can make housing an attractive investment for medium-net-worth individuals, say, that section of the population that can afford to own 1-2 houses over their lifetime, without it becoming less affordable over time. You can use tax incentives to tweak this further: many jurisdictions give you a lot of tax relief on your first home.
So, what causes house prices to rise faster than incomes is not an approach of making housing an investment per se, but a focus on making it an investment competitive with the stock market and attractive to institutional investors seeking outright yield.
> So, what causes house prices to rise faster than incomes is not an approach of making housing an investment per se, but a focus on making it an investment competitive with the stock market and attractive to institutional investors seeking outright yield.
If it is an investment, it has to be competitive by definition. Otherwise your aim is something different than investment, which should be the case for housing ideally.
I'm not clear on when the house as investment began. It seems clear that from the quality of the 50s era construction I live in that housing was though of in more utilitarian terms (ie put up cheaply and quickly). It seems like it was in the 80s in my area that you start to see much more custom and luxurious homes, but I'm not sure if the transition was more a cultural or economic one.
The '50s was a bit of an aberration, because the massive influx of soldiers coming home caused an extreme housing crunch, especially if you consider that there wasn't a whole lot of housing being built in the decade before the war due to the Great Depression. It was also exacerbated by moving from multigenerational living in the 30s to the nuclear family in the 50s.
I don't know when it began but AirBNB weaponized it to a ridiculous degree. The ability to basically automate the process of renting out your house at absurdly inflated prices is actively removing inventory from the housing market in addition to removing customers from the hotel industry.
I've never found agreement when speaking out against renting on HN. Empty houses outnumber the homeless 6 to 1 [0] and yet somehow it's more important that we ensure landlords can protect their effortless investments and waste more and more land on non-dense, temporary housing.
Owning your own property goes back further than our founding. It has to do with staking out your rights.
Quite the opposite of what some comments here suggest, encouraging home ownership keeps life affordable. It is one way to stave off an oligarchy of property owners.
See, for example, Fannie Mae's mission,
> Our mission is to facilitate equitable and sustainable access to homeownership and quality affordable rental housing across America. We continue to innovate and promote a stronger, safer, and more efficient housing finance system to support more opportunities for homebuyers and renters in communities throughout the nation.
Finance people who make loans take issue with this since they have to match prices with a "government-backed" business, although it's only a charter which isn't the same as govt-backed. Plus, tons of businesses were supported by government in 2008 and 2020-2021 so that point is moot.
First off, I don't think a typical investment thesis is: this thing will be less affordable in the future. People invest for many other reasons other than simply capital appreciation. With housing specifically, it might be cheaper for you to buy vs rent.
> country decides to stop making policy
So, yes... US policies towards housing are all centered around the notion of taking out a massive loan for a home. You get paid to do it in some ways, through interest deductions for example. And yes, this policy will never change and this is probably the main reason you need to buy a house with a mortgage if youre in the US.
However, as a counter-example I know handful of countries where mortgages are not easy to get and not a traditional way to finance a home. Yet, home prices in these regions are also skyrocketing. So cheap leverage alone is not a necessary factor for home price appreciation.
Finally: Food and transport can be "replenished" - land cannot. So basic supply and demand concepts would say that land prices will increase, and by proxy so will housing.
If land was treated as the scarce asset it would fix a lot of issues.
Land taxed appropriately would incentivize higher density housing in order for the economics to work.
We’re in a weird incentive trap (in the Bay Area anyway) where owners protected by prop13 have massive wealth and are incentivized to restrict supply. New owners that manage to over pay for a home are further incentivized to restrict supply to keep prices high so they’re not underwater.
This is a bad feedback loop that creates real property scarcity. It’s also arguably a problem of regulation constraining the market’s ability to meet demand appropriately.
It is, but the upthread reference to “housing” actually meant “home ownership”, not the “housing” that is part of inflation (residential rents, actual and imputed).
> When you make housing an investment, by definition, it has to become less affordable in the future.
Sadly this has become a meme response, always repeated in every housing topic. Can we dig deeper? What would it mean?
A house has value, one can live in it, a basic human need. It also takes raw materials and skilled labor to create. Both of those go up over time, so building an identical house in the future will nearly always cost more than today.
Thus, that house can't help but appreciate in value. At a minimum, with inflation. Even that makes it a decent investment with minimal risk.
So you propose a house should depreciate? How, exactly? And would you want to live in those conditions?
One way to have housing depreciate is to have the economy of the region collapse (e.g. Detroit). But clearly that's not a good solution.
Maybe another way is to build houses with such bad quality that they disintegrate before the mortgage is paid off. But that's not an attractive solution either, I don't want to live in such a structure.
The value of a House does depreciate, especially when not taken care of. Even then maintaining comes with significant costs. You have repairs like water heaters, plumbing, roof, painting, hvac l, kitchen, bathrooms, floors, the list goes on.. that are due eventually. Next older homes are much less energy efficient,had to adhere to different building standards or might've been built in a style that does not appeal anymore.
Plenty of reasons why a home should not increase in value,just because. Where this becomes really irksome to me is for rentals. Unfortunately most landlords do the bare minimum with regards to upkeep (financially this just makes the most sense I bet), but they can easily upsell it to the next investor, if they're in a good area.
> When you make housing an investment, by definition, it has to become less affordable in the future.
Why do people keep saying this? No, it doesn't. If house prices went up 1.5% per year they would be a perfectly good investment but would not become less affordable.
If you're talking about a 1.5% nominal price increase, then it's impossible to say whether it's a good or bad investment, from just that information. If inflation is 2%, then your house rising at 1.5% is a terrible investment, compared to a stock market rising at 5%.
Investments are graded based on their expected real rate of return, over time... In simple terms, that would be the increase in the nominal value of the asset, minus inflation. The higher the increase in real value, the better the investment.
If an asset's value increases faster than inflation, then over time the real price of the asset is rising. That means less and less people will be be able to afford it, each year.
Remember, inflation is basically measuring how much purchasing power we have... So if the price of something is rising faster than inflation, by definition that thing is becoming more expensive, which means less people will be able to afford it.
Even though 1.5% real (above inflation) appreciation seems like a small number, the total appreciation will eventually grow quite large after several years... Each year, housing will become affordable to fewer and fewer people. It may take a while to notice, but that's the definition of a rising real asset price.
Yeah, and it has absolutely nothing to do with loose monetary policy/low interest due to rampant public spending and both people and pension funds bringing their money to the housing market due to everything else depreciating; no, not at all.
As much as I’d like to blame NIMBY zoning and the mortgage interest deduction, which are pernicious and ought to go, monetary policy is the only factor with the explanatory power for the global phenomenon we are seeing right now.
Homes are people more important asset and the way the market is (unique items that people choose carefully and bid on) it's quite normal that over time prices would rise in line with wages.
Historically, wages are increasing faster than inflation (people are getting richer), which means house prices have a 'natural' potential to rise faster than inflation, and thus be viable investments.
If prices rise faster than wages across the board there will be a correction at some point: quite simply prices cannot go higher than what people can pay.
Untrue: if dividends rise quicker than wages, you can have house prices rise faster than wages.
And in fact earnings from capital now surpass earnings from work in the world (or is it in the west?). So I suspect house prices will continue to rise faster than wages, until enough people got fed up.
What governmental policies make housing an investment? Are there countries with policies that effectively make it a depreciating asset? What do those policies look like?
> What governmental policies make housing an investment?
Local government (US): Low-density zoning, burdensome review processes on new development, "historical building" preservation, minimum amenity regulations (e.g., parking spaces, "set back"), etc.
Federal government (US): Subsidizing the cost of 30-year mortgages for lenders; subsidizing mortgage interest for homebuyers (mortgage interest deduction) at the expense of all other taxpayers (e.g., renters).
> Are there countries with policies that effectively make it a depreciating asset? What do those policies look like?
I can't speak to the specifics of what other countries do, but many of the obvious steps are to just stop the bleeding that we already know about, mentioned above. Eliminating the federal mortgage interest deduction, removing local government authority to impose arbitrarily burdensome processes on new development, upzoning, deregulating (no minimum parking, reduced minimum setback), etc.
Allowing investors to build/buy housing units and rent them out is a clear one that enables investment. Depreciation wouldn't make it a bad (or non-) investment, as long as returns are good over the unit lifetime. That's the default assumption for non urban housing where land is abundant.
I don’t think this is necessarily true. The value of the land you own can increase over time, but the cost of a square foot of housing decrease, as long as density keeps increasing.
Say I bought a house on a half acre for $500k. Then someone buys it for $750k and builds four houses on eight acre lots and sells them each for $300k. Owner occupied housing as an investment has produced a positive return but the cost of housing has gone down.
Sure, density is a good lever for reducing the cost of housing despite increased demand for land.
In your example, if local government instead forbids that development (via zoning), maybe you can sell your house for $1M instead of $750k, because those 8 prospective buyers are now bidding on the only available property.
Homeowners that view housing as an investment would prefer to see housing costs rise further (beyond benefiting solely from land value increases), and so they advocate their local governments to constrain housing supply via zoning. On the west coast, and particularly in California, they've been very successful.
Note that the price can also go up a bit after accounting from inflation without making it “less affordable”. Median income in the US has increased about 10% more than inflation since 2000.
TL; DR: Sometimes “exit” is your only vote. Consider exiting inflated property value regions.
I bought a house recently. Dealing with the mortgage and properly industry really brought home to me how deeply entrenched the housing as investment mindset is.
When houses were shown to me their likelihood of appreciation was highlighted before qualities of the house like it’s construction or the social health of the neighborhood. It was a bit frustrating because the latter types of things were what I wanted to know about. I bought the house to live in and it all goes well our family plans on staying indefinitely.
IMHO it will never change without a brutal prolonged housing crash and recession that wipes out the savings of millions, and the government will not allow that because homeowners tend to vote at the highest rates. 2008 showed that the government will burn down the rest of the economy to save property prices. The history of this power dynamic is actually quite deep. In many ancient societies and even early America property owners were the only ones with a voice or in some cases were the only true citizens. Civilization has always revolved around property owners at least since the agricultural revolution.
There is only one rational response that I see, especially for younger or lower income people: leave areas with absurdly exploding real estate costs.
The phenomenon is nationwide but it is definitely worse in some areas than others. When we bought our house we took advantage of the virtualization of software and left California for Ohio where we grew up. Now housing is exploding here, but less than it is on the West Coast.
Not everyone can be this mobile but more people probably can than you would think. If you are in a blue collar profession there are good jobs to be had (and sometimes a shortage) in rural and small city areas with industry. Many such areas also have shortages of lots of professions due to the many decade trend of everyone flocking to top tier cities.
Politically America really needs a rural renaissance and this could help drive it. The geographic concentration of wealth is a major driver of our political lunacy.
I am a bit older but if I were starting out I would include the real estate cost constraint in planning my career path. Yes there are great jobs in big cities but the RE cost means that when you want a family you must be either get rich or leave and while you are there all your surplus will go to the landlord.
It would make sense to avoid career paths that shackle you to high cost real estate. For techies that means maybe choosing industrial IT or coding for industrial or mining or farming concerns over Silicon Vallet cloudhipster stuff, or refusing to work for companies that are not remote first.
> There is only one rational response that I see, especially for younger or lower income people: leave areas with absurdly exploding real estate costs.
That's how it ever was and will probably always be.
In the 90s I wanted to live in Manhattan, wanted it so bad it hurt. But never found anything affordable, so it didn't happen. I moved to California instead, which was then still fairly cheap.
They cannot be mass-produced. But they can be produced. What's the newest city you've been to in the USA? When was it founded?
Living in New Hampshire in one of the most desirable historic villages, where in the village house prices are quite high, it is not lost on me that I have seen 20-30 strip malls and innumerable cul de sacs built in my life, but no new villages. Despite everyone agreeing that they are the one of the most desirable places to live.
There are no shortage of coordination problems yet to be solved, here.
I hope fertility rates plummet because of this and population goes downhill fast. I can't see how people are deciding to have kids knowing how unaffordable everything is becoming.
I’m not sure that it’s as simple as that. If you think about the sample metro areas in tfa you see sources of high income potential as corporate headquarters and high paying jobs are centered around those metros. That in effect creates high demand for housing and thereby drives up housing prices.
The increase in housing price is probably a derivative of shifting or shrinking opportunity to earn a high income outside of centers of commerce and population growth x scarcity in metros. The rise in home prices is just a premium on income opportunity.
High demand doesn't mean high prices. You can increase supply - but we don't do this. We don't want more supply! Houses are investments. They're supposed to to go up in value! So we limit supply.
Nonsense. Investments should be profitable, but that profit doesn't have to take the form of capital gains. Plenty of businesses are profitable by using assets rather than by reselling them.
The exception of course is if it's impossible to make a profit using the asset. Rent controls are very effective in this regard: If you ensure that being a landlord yields no operating profit, the only incentive to buy property is if there's hope of future capital gains.
The point is that housing is required to live. Apartments aren't being built at a rate that keeps YoY growth in houses to <5%, which is a lot of growth compared to inflation and wage trends but would be healthier than the growth we're seeing in some regions (eg. Atlanta suburb Lawrenceville, with 27% YoY growth[0]).
Generally return on investment is measured in real dollar terms - not notional terms - meaning after accounting for inflation. It's not a gain if it keeps pace with inflation. Certainly not after you net out maintenance. It needs to appreciate in real dollar terms like 1-2% per year just to break even.
When you reach the point at which the buying/selling of bananas becomes more important than eating bananas, that may be the time at which to consider that something's gone wrong in the economy.
Housing is more "consumption" or "speculation" than "investment", since a house generates a negative cash flow. What defines an investment is generally expected future positive cash flow.
What makes most house buying decisions speculative is how the market price is justified. And today the "residual value" (value of the asset when you sell it) dominates buying decisions. This is defined as speculation (in future market price).
Without residual value, the market for old houses would be like the market for old cars or bicycles.
Imagine if government legislation enabled lenders to lend random amounts with old cars as security: it would put a price floor on second hand cars. Since second hand cars are of limited supply, and ownership of such a car enables you to borrow at minimal rate, therefore the market price of an old car becomes the value of the getting that loan.
>Housing is an investment only if you own more than one.
Every California rental I've lived in for the past five years had the owner residing in it as their primary residence, renting out the spare rooms, while doing one of two things: not declaring any of the rental income while still getting primary residence tax breaks, or declaring it as a full rental (and using another address as their primary address, despite not living there), and writing off the exorbitant Bay Area HOA fees.
I think you got the point. Bananas are a depreciating asset but you can still make a profit around it. House prices should be the same, depreciating. That doesn't mean real estate should not be a profitable business though. But it should probably not be profitable for the end user.
> Until a country decides to stop making policy to support this notion
Which policy? You mean government charters for e.g. Fannie Mae that were established in part to combat behavior like redlining, which excluded certain ethnicities from loans for certain neighborhoods based on the loan applicant's skin color?
>You mean government charters for e.g. Fannie Mae that were established in part to combat behavior like redlining
US government used $200 billion of taxpayers money to revive Fannie Mae and Freddie Mac.
Those money will lower the cost of borrowing and thus push the prices up. A new crisis will come, people will lose their houses, Fannie Mae will lose the tax payers money. The government will give Fannie Mae and Freddie Mac $400 billion this time, thinking that $200 billion was clearly not enough.
Everyone found a workaround for that - price the “undesirables” out instead of banning an accidental aspect. The average well-to-do homeowner is much more concerned about living next to a “poor” of any race or color than living next to a rich.
Realistically only an issue in places like Singapore or Hong Kong.
The scarce asset is not actually land but infrastructure such as roads, water, sewage and electricity. These are usually financed publicly, but the increase in land value usually befalls the lucky house owners. Here is one of the justifications for property tax.
I want to agree with you, but how to draw a line between first housing as a basic need and a second one? Between apartment, condo, townhouse and mansion? We will eventually get to socialism.
This +1. Housing I the US is broken in a fundamental way, it needs to be seen as a bad investment to get better. If we targeted say 2% annual price decreases in housing, the world would be better off.
Owning a house is not a basic need by any definition I’ve ever seen. This premise that having access to housing and owning a house are the same thing is just so plainly wrong, that it undermines the credibility of most housing reform arguments.
I'm not sure I understand this argument. It may be true that housing is a basic need. But that doesn't change the fact that housing is also finite. And unlike food or cars, it's not a depreciating asset; a house rarely breaks down. Even when it does, the land it's built on is still yours. When food goes rotten or a car gets totaled, you have to throw it out.
Housing is finite in the sense that all things on Earth are finite.
But more houses may always be built.
And I do disagree that houses are not depreciating assets. The technology and the style of a house become outdated. And much deteriorates over time. Yes, the land may not depreciate, but that is a separate matter from, or, at best, only a component of the value of the house.
Housing is not necessarily equal to land- We can densify and build more homes per plot of land. Where legally allowed, this actually increases the value of the land as an investment while making housing, the consumable part, cheaper.
Yes, they depreciate, and much faster than you imagine before you have seen it. This can be experienced in buildings in depopulated towns that have been vacant for only a few years. Houses that are not heated/vented/repainted/repaired become complete write-offs in just a few years. (and remodelling bathrooms and kitchens doesn't count.)
Maintaining a house at equilibrium is a negative cash flow that grows over time.
The same is true for infrastructure such as roads, water, sewage, and so on.
I spent a lot of money on my house and I absolutely cannot support any measures that devalue my property. Killing housing values will take money away from hundreds of thousands of people who worked hard for what they have. Why can’t we champion hard work? Why should anyone get anything for free?
I can't tell if you're being facetious or not, because this reads like the standard "pull yourself up by your bootstraps" arguments. I'll answer the questions on the assumption that you're being straightforward, and you can tell me if the joke went over my head.
> Killing housing values will take money away from hundreds of thousands of people who worked hard for what they have.
Making housing more affordable will allow hundreds of thousands of hard-working people to own their own homes, rather than being at the mercy of a rental market that can kick them out on short notice. For context, I consider significant increases of rent to be equivalent to kicking somebody out, and short notice to be anything less than half a year, as moving is a stressful and time-consuming prospect.
> Why can’t we champion hard work?
That's exactly why the housing market needs a correction. Because currently, hard work is not sufficient to get into the housing market.
> Why should anyone get anything for free?
To answer the question at face value, because we are all human, and every human deserves to have their basic needs for food, shelter, clothing, and health-care met. To answer the question in context, that's why propping up the housing market to the benefit of real-estate speculators and homeowners need to stop, because that is given a benefit for free.
I say these as somebody who is in a similar position, having recently purchased a house to live in. What I got out of it is a place to live that I can modify and improve as I want. It isn't an investment opportunity, it's a place to live.
What a shortsighted view. So because one generation already got what it wanted, the following one is to be screwed? You're lucky that it was your generation that decided to ruin it for everyone. Had it been the one before you, you would have been in an entirely different position.
If you believe restrictions construction increases value for your property, why do you think a house in the middle of nowhere is worth so little with such a strong monopoly?
Food is also a "basic need", does that mean we should enslave farmers with regulation? Or just enslave the rest of us in order to pay farmers?
Edit: I'm suggesting that feeding (and housing) yourself is a personal responsibility, not a collective one. And that the instrument we use to enforce basic order and peaceful coexistence (punish noncompliance with imprisonment) is far to blunt for enforcing cooperation (helping each other find food/shelter).
It's not an issue in the US because the Farm Bill continues to subsidize the cost of growing staple crops in the US (in some cases to below the cost of production), and also, SNAP ensures folks at the lower end of the income scale have access to basic nutrition needs. It's socialized at both ends, really.
This would be an interesting topic if food in the US weren't already the cheapest in the entire world. [1]
The US government is fighting to make homes less affordable through subsidizing mortgages with Fanny Mae and Freddie Mac. Subsidizing mortgages just push prices up.
If their intent was to make homes more affordable they would intervene in the offer side not on the demand side.
It would simply have been better to just make a construction company and sell homes at cost.
At it's heart it is an attempt by someone who makes their living selling a thing (real estate) to instill a since of FOMO in order to motivate you to buy something now rather than perhaps later. You can't really fault them, it does tend to work.
I happen to live in the "red hot" Bay Area and twice wince I've been living in my house its value has gone DOWN year over year rather than up. I have never considered it an "investment", rather it is a fixed cost that I have to pay to live indoors. My parents live in Las Vegas, and that housing market, which has been largely unconstrained, demonstrated exactly what that means. Houses in Vegas for a long time depreciated after you bought them, just like cars. They did that because there was so much new housing being built that you could buy a "new" house for the same price as a "used" house. Guess what, people opted for "new" and used houses needed to sell at a discount if they wanted to sell.
One of the truisms for years was the value of a house was intimately tied to its location. This because it was close to jobs, or schools or what not. It is my hope that remote work really takes hold and you can work just as reasonably in a $100,000 house in Missouri as you can in a million dollar house in the Bay Area. That would really create some downward pressure on prices because of simple market dynamics.
The chief effect of remote work appears to be putting upward pressure on less desirable markets, not downward pressure on more desirable ones. I don't really think they have to do much to goose the market at the moment either.
I don't disagree, but will point out that if demand isn't being met in an area, pricing changes won't happen until it is. So there is a LOT of demand for houses in the bay area (for example) that is unmet and people with salaries to pay the really high prices. As people move out it frees up real estate which should, as a trailing indicator, lead to lower prices. It certainly was true during the dot com bust when people moved out in droves.
Remote work doesn't scale to society. It's a thing mostly privileged, educated, or experienced people are capable of.
At some point, someone has to make or do something physical. With very few exceptions, like entertainment, all of our remote jobs eventually tie in to some good being produced. Even pure services jobs ultimately feed some machine that produces physical products, and those will always need to have access to cheap labor and good shipping lanes to succeed. You can be a cloud engineer, but the people buying cloud services are eventually selling something to people making things.
The impact so far has been more people with more money getting to live in places where their previously "city" salaries give them an edge in cheaper areas. It's also been that some companies have started to adjust salaries for remote work downwards, both of which will flatten out the temporary advantage being a remote worker brings to society.
The only answer is basically socialism, and most of us (myself included) don't like that answer because human nature is to compete.
It's true that remote work isn't compatible with every job but I think it'll have more of an impact than you're predicting because those jobs don't all have to be in the same places as they have been historically. We've seen an over-concentration in certain areas where existing major businesses drove demand up stratospherically in places like NYC, SF, etc. I'd predict that remote work will spread things out more by making it more viable to make living decisions based on things like proximity to family or lifestyle amenities which would be completely inconsistent with being in the office in Manhattan at 8:30am every day. That should be good for a lot of those service industry jobs in smaller regional cities where the cost of living is much lower.
Socialism is an interesting angle because that term has a lot of different meanings and it's loaded in the U.S. because Americans try to use it as synonym for communism, despite many counter examples. I wouldn't, for example, consider Europe or Canada devoid of competition and those examples show how much money we could be saving with more socialist policies in ways which actually improve competition. For example, unlinking health coverage from employment removes a significant risk for small businesses, improves job market competition, and significantly lowers one of the factors driving prices up. Similarly, subsidizing childcare both helps parents work — with costs in the $20-30K range per child there are a lot of lower-income people who could work but are unable to make the finances work. I'd prefer to pay that out of general tax revenue than expect every coffeeshop to be able to pay baristas that much more since that's a big expense to spread over a small pool of workers.
Unfortunately the article is extremely sloppy with the numbers and that makes it very hard to understand what is really going on.
Primarily, they keep mentioning "average house-price-to-income ratio" but appear to be using average home price and median income. Both housing price and income distributions are enormously skewed. In the Unites States average income is almost double median income and that difference has been increasing over time. So right there, even if median house price to median income has stayed constant, you would notice the pattern pointed out.
I don't doubt the central premise that housing prices are rising faster than income within household, but unfortunately the article does nothing to show it.
homes cost 5.4x what the average
person earns in one year
Wow, that sounds insanely cheap from a European perspecive.
In Germany, which is the richest country in Europe, the average working person earns €2000 (after taxes) per month, so €24000 per year. Times 5.4 that is €129600. You can only dream about buying a house for that price here. The price of a house is ten times that. Even if it is not in a big city.
German houses are not, on average, 1.2 million euro. There are plenty that are, but it really depends on your area. If you are within an hour of Frankfurt then much of that was driven by the influx of companies that had been preparing for brexit.
There are houses for cheaper, but they tend to be in less desirable locations. Same in America, there just happens to be way more “less desirable” places. Lots of land in the 90 minute commute radius.
In my experience Germans tend to outright dismiss options that are less than ideal, always searching for the eierlegende Wollmilchsau.
It might be skewed a little bit since the average person probably lives in a city (or very close) and the average standalone house is probably not found in a city, so the comparisons are a bit misleading. If you look at the price of homes in cities, the multiplier is likely higher than 5.4x.
Taking Cambridge, MA as an example (though it's certainly more expensive than average) - median house is ~1.4M in 2018 (probably higher now), and median _household_ income is ~75K USD per year - for Cambridge, giving a multiplier of something like 20x (household income, not counting taxes - not individual)
Yes, a few things. For one, Germany isn't the richest in Europe. But that's besides the point.
Typically price to income measures not prices per person, but per household. After all, the average house isn't lived in by one person. particularly homes that are bought (average buyer is a family, or an investor renting to multiple people), leading to an income that's the sum of typically at least two adults.
Second, these figures are virtually always pre-tax.
Third, these figures often reference to price to income of buyers, depending on the study. The average income in the Netherlands for example is about 37k leading, 5.4x would for example get you to 200k. But the average income includes unemployed, students, retirees, disabled etc. The average salary of working individuals (i.e. the home-buying population) is substantially higher, particularly if you filter out the population which is eligible for cheap subsidised social housing (about 1/3rd of all housing stock in the Netherlands). At that point you get to >50k salaries, with families of two earners often bringing in 100k and able to afford 540k homes at price to income levels of 5.4x.
Fourth, interest rates in certain EU countries is substantially lower than in the US. I just bought a house at sub 1.5% rates (Netherlands), about half of what you see in the US. Denmark had negative rates, I believe. This pushes up the max mortgage / home price to higher figures than the US, at the same monthly fees (and thus same affordability). In that sense it's not any cheaper per se, once you figure in that the US has more expensive financing costs than some EU countries, including Germany.
Fifth, the average buyer isn't a 25 year old fresh from college with a new job, but instead actually 45 years old. In fact, the average buyer isn't a first-time buyer, but has bought and sold a home before and has some equity, some savings, a retirement fund, perhaps a small inheritance from his parents, buying with a partner in the same situation. In other words, people are typically bringing in quite a bit of equity and are able to afford more than they can borrow.
In what countries is it not customary to do so? I lived in 4 counties, including 3 in Europe and when talking about income the custom was always to use pre tax income.
A more meaningful difference is what individuals do not have to pay for in Germany.
Well, you're both right. Just because Germany is the richest country in the EU doesn't mean it's citizens are the richest. In fact average wages in Germany are very low when you account for stuff like housing prices.
The problem is that is hard to define/measure "richness" of a country. You can use monthly income or financial wealth as a metric, you have to decide between average and median etc.
For example, in 2018, 45 single super-rich germans possessed the same amount of wealth as the poorest 50% of germans [0]. Using the median of distributed wealth would not express that, and if you cut off outliers by looking at percentiles and then averaging would also not express that.
Switzerland is in Europe, but not in the European Union or the European Economic Area, it is in the Schengen area. So it depends a bit on which list you are taking.
Also, parent said it is the richest in EU which of total value (GDP) is correct, but by GDP per capita isn't. But, Switzerland isn't first on the list either if you take GDP per capita because that spot is taken by Luxemburg. (Which is 27th on the GDP list)
But parents point still stand, on a median income it is really hard to find a proper place in Europe.
And a house in Switzerland will cost you way north of 1mil CHF at average wage of 60k CHF (5 years of which is 300k CHF which doesn't buy you a shed in most cities).
the reason your figures aren't comparable is because the U.S. figures being used :
a. Are not incomes for just a single-wage earner, they include the combined income for a household (of 2.53 people on average)
b. Are referred to in pre-tax figures, not post-tax.
c. Are not just wage income, but include non-wage income like dividends, capital gains, small business income, fed/state/local government transfers, etc.
[1] says median household income is apparently 4.8k€/month, so around 58k€/year (before tax). Average housing prices seem to be between 250k and 400k (couldn't find a good source). That would be 4.3~6.9 ratio. (edit: Quality of this estimate is probably still low.)
Personally, I believe (affordability of) average housing prices to be a very useless statistic, due to the extreme regional and local variation in housing prices (and incomes). But maybe I am wrong about that and it is a good indicator.
You are exaggerating a bit. The awerage wage in Germany after tax is € 2439 [1]
The average house price seems to be € 376 000 [2]
That means 13 years worth of salary which is kind of much.
As to why is this the case I see two reasons but I am sure there are more:
Houses in Europe are built with better standards and built to last more. You can pass the house to your kids, no problem. It will be in very good shape and probably worth more than you've paid for it.
The biggest issue is land. Europe is small and crowded and it becomes more crowded due to increasing migration. So the land is scarce. Also many EUsians like to live in the city, close to center if possible in contrast with USians which might be glad to live in suburbia. US has good roads uniting the suburbs with the city and the price of gas is small.
US is a vast place so land is not exactly a problem.
Another issue is socialist policies (even from the CDU) which means high taxation, resulting in lower incomes and less investments in developing real estate.
The problem is, the average house price is a bit misguiding. The number might be correct over the total of Germany, but you won't be able to find a house at the average price near Munic for example. People with an average job in those regions have zero chance of buying a house.
Land might be somewhat scarce, but that isn't the huge cost driving point. The problem is the process by which land is assigned for building - there is a lot of land which just cannot be used for building. New building areas are sometimes opened, but always trailing the demand, keeping the price up. Also, the density of new buildings could be higher. It is grotesqe that in an area with lacking housing new single homes get approved. Also, why are cities allowed to approve additional office buildings without ensuring that the housing capacity is extended for all those new office workers? Easy way to enforce that would be mixed use buildings, where you have a comparable work and living capacity.
You're right that US isn't as bad as other countries. US though has higher property taxes, in most states 1-2% of the value of the house each year. This makes houses less affordable, and prevents crazy high prices.
In the US we always talk about salaries before tax, not after. If you want to compare affordability ratios, you'd want to use the same strategy for European incomes.
You have to scroll very far down to get to any U.S city. Price-to-income ratios in top Chinese cities are about 40; ratios in top Californian cities are about 8.
Much of this is because of Federal housing policy that's very deliberately designed to subsidize homeowners. America has a cultural belief dating to the immediate post-WW2 period that everybody should be able to own a house; this is unique to this period and country. In most other countries (and time periods throughout history), there is a landlord class and a renter class.
This trend, if not explicitly reversed, has a long way to run.
I live in Vietnam and it is exactly the same here and always has been.
Just go to Wikipedia's page on home ownership by country and you'll see that pretty much every country is the same. People think they should be able to own their own house. It's a human thing.
The US isn't even in the top 40 when it comes to home ownership rates.
I think there's a big difference between home ownership and house ownership, no? The quintessential American Dream usually involves owning a house with a lawn and a garage. This is the type of living with I think is less accessible to the middle class in the rest of the world, even countries with high home (apartments, typically) ownership rates like Romania, but Americans and Canadians like myself grew up believing was expected with a middle class income.
At first I thought this was confusing because it would seemingly be in competition with the stock market, but most of the world doesn't have or only recently gained reliable access to international markets and thus RE has been the primary investment vehicle.
As economist Michael Hudson explains, banks will lends as much as they are able to, and that pushes property prices up. They're now 40-50% of income in places like San Francisco and New York.
Paying more for housing means less for other expenses, so it's a net drain on the economy. If we can lower costs to people the economy could be more competitive.
People that think housing prices can never be solved remind me of the infamous we ‘can’t drill our way to lower gas prices’ quote.
Well.. it didn’t age well, fracking was invented in the context of a policy framework that only exists in the US, and now America has 7x lower gas prices than the EU/APEC and can’t export fast enough due to liquification capacity.
This is to say that there is likely a technology/policy innovation pathway to disrupt this current situation, but people aren’t thinking on a large enough scale yet… and investors, unfortunately, aren’t aligned to fix this because they own existing assets.
This means, the policy framework required to fix this tragedy of the commons looks something like making it profitable for investors to make money by 10x’ing the housing supply, 10xing the manufacturing speed, etc.
The technology aspect is where this analogy breaks down.
The dominant costs in housing are land values, construction costs, which are dominated by labour, and highly regulated (for good reason).
There is little room here for innovations that would cut costs.
There is presumably some inefficiencies and red tape in the building code, but so much of it is safety oriented, efficiency gains are probably limited.
The obvious answer of course lies in building denser, though larger, denser buildings are more complex and costly to build.
This is not to say that people aren't trying. People have been experimenting with prefab homes and such for decades, but it hasn't become any sort of game changer.
If anything the costs of construction have been going dizzyingly upward along with the underlying land values.
In any other industry someone would invent a new widget that makes processes faster and cheaper etc, but it's hard to see how someone makes home development cheaper through technological innovation.
It's not a safety decision to reserve the overwhelming majority of land near population centers for large-lot single family detached housing. Deploying the 100-year-old technologies of the apartment building and the subway, where it is technologically and economically feasible to do so, would have this over with in a heartbeat.
I think websites like Zillow and Redfin play into housing prices because they provide much more transparency to the RE market.
Previously, you had to physically go in to a RE office and look at a binder of homes that are for sale. It was much more difficult to find comps and price houses correctly, resulting in a lot of opportunity to make a living.
Then pre-zillow / post-internet, home buyers still had to talk to a RE agent to get emailed houses.
Now anyone can sign-up, peruse houses and with 1 click, schedule a tour immediately.
A century from now we might be metaphorically drowning in excess energy (e.g. instances of negative energy costs) due for example to the TW Solar installs being planned.
In such a scenario, there are wild things you could imagine from a materials and construction side that could plummet building costs.
Additionally, if 2D agriculture is ever disrupted, we would recover a lot of land (ever driven across me NE?).
Don’t forget, we can fit 2x the global population in a city the size of Texas with a typical city population density.
Do you have a citation on that 7x claim? That’s significantly higher than the <2x for natural gas or <1x for crude oil differences shown on the economic data but it’s closer to what you’d see if you were comparing retail prices without noting the differences in tax rates.
As long as incomes rise faster than inflation, disposable income rises exponentially faster than overall income.
Suppose your disposable income is 10% of your total income of 50k, so you have costs of 45k and 5k to spend. Let's say your total income rises by 10%, but your cost of living rises by 5%. You now earn 55k, and have costs of 47.25k (5% increase on 45k spending).
Your total income went up by 10%, but your disposable income went up from 5k to 7.75k, that's a 55% rise. More than 5x leverage!
I first noticed this early in my working life when a small increase in pay made a dramatic change to my disposable income. This means as your pay and career advances you can devote rapidly increasing resources to the highest priority spending in your life. For a lot of people, especially those with children, that's housing. Since a lot of people have that as a priority, and we're competing for a static or slowly growing housing stock, we're constantly bidding up prices against each other.
Yes there are other factors too, like low interest rates, of course, but I think this is the main dynamic driving it.
All the well paid white collar professionals have dumped a fat pile of money onto the housing market in any given urban area.
Before you needed to be fabulously wealthy to own real property in Manhattan. Now you need to be fabulously wealthy to own real property within an hour of Manhattan (though there's probably a few edge cases)
Readit News
Until a country decides to stop making policy to support this notion that a basic need should be an appreciating asset and not a depreciating one like food, transportation, etc, this completely unsurprising trend will continue. It is a strange world we live in where we collectively believe that a basic need should increase in price over time.
Even when there's plenty to go around for everyone, it seems we'd rather not let that happen.
[1] I have a strong feeling that economists have missed the memo from Popper regarding what is modern science. There seems to be quite a lot of unfalsifiable assumptions lying at the bottom of economics, starting from the utility maximizing agent.
In the stock market, there is an evergrowing pool of securities getting sequestered away into pension schemes and RRSPs. You can change what security you are in, but people/funds seldom get out of the market. When you cash our of your retirement (before actual retirement), there are huge tax disincentives to do so. For housing, people generally have a progression as they move to larger houses (as they have more kids, or kids get older). If all houses continue to get expensive, you just always stay in the housing market (well, until you go to a retirement home or expire).
Both seem to remind me of the classic definition of a ponzi scheme, except housing is a basic necessity. We are basically saying there is an evergrowing mountain of wealth - you just can't spend it till you retire.
> Did you know that the first Matrix was designed to be a perfect human world? Where none suffered, where everyone would be happy. It was a disaster. No one would accept the program. Entire crops were lost. Some believed we lacked the programming language to describe your perfect world. But I believe that, as a species, human beings define their reality through suffering and misery. The perfect world was a dream that your primitive cerebrum kept trying to wake up from. Which is why the Matrix was redesigned to this: the peak of your civilization.
When my kids want Robux I try to explain that they are paying real money to see their screen light up in a certain way and nothing more.
If you have Blackrock and Vanguard buying up 20% of homes in the US at above market rates, that would do it.
Which is essentially what Bitcoin does. There is a natural abundance of numbers but crytocurrency protocols make some more scarce/valuable than others.
Which isn't new (neither is mistaking a clear case of natural scarcity in an unfamiliar structure for natural abundance; the metaverse is limited by all the traditional dimensions of computing/information capacity—energy, processing capacity, storage, etc.—and it won't take long, if it actually exists in a usable form, before exploiting the superficial abundance results into usage running headlong into the real natural scarcity; artificial scarcity will be superfluous.)
I don't think anyone is intentionally putting their finger on the scale when it comes to real-estate prices.
Maybe, and this is not from any data I can pull up, it is those with deep pockets buying additional properties as investments/rentals. And now we have huge corporations flipping, building rental homes on a massive scale.... The only solution I can see is to tax the living hell out of 3rd, 4th properties (etc.).
https://www.gamedeveloper.com/business/digital-real-estate-a...
There's plenty of we who want to see change. But not enough of us. There are still too many who buy into the web of the narrative spun by The They.
I've mentioned this before but it's worth saying again: 1 square foot of housing is approximately the same price - adjusted for inflation - as it was in the 1970s, on average. [1] There's a few caveats however.
(1) New houses are 2x bigger on average than they were back then, and the average American family is smaller [1].
(2) City councils, and by extension zoning rules, in major metros preclude construction meaning that supply cannot meet demand. This benefits existing landowners to the detriment of both the next generation and renters. San Francisco is a prime example [2] - SF needed to build 6X as many houses as it did between just 2012 and 2016 just to meet the job growth in the area. This pushes the price per square foot inside metros up way above what they would otherwise be.
(3) Zoning rules outside of major metros, including setback rules and minimum size rules, parking rules, etc, make houses outside metros much bigger. Also, expectations have shifted. This pushes the square footage of suburban homes up - and with it the total price.
(4) This applies mostly in the last few years - but lower interest rates make houses that are more expensive much more affordable on a monthly basis, which is totally fine as most folks end up with a 30 year fixed rate mortgage. A drop from 3% to 2% makes a house about 25% more expensive cost the same amount per month. Yes, it increases down payments, but down payments tend to be up to 20% of the price - so an increase not of 25% but 4%.
So what can we do? Easiest thing is state-wide or federal zoning rules. Build up. Allow smaller homes. [edit](Stop with the mandatory parking.) In Japan, supply and demand meet, and a new 3 bedroom house in Tokyo is like 400K USD [edited for current data] - right around the cost of construction. This is thanks to their federal zoning rules. [3]
[1] https://fee.org/articles/new-homes-today-have-twice-the-squa...
[2] https://en.wikipedia.org/wiki/San_Francisco_housing_shortage
[3] https://marketurbanism.com/2019/03/19/why-is-japanese-zoning...
The board also just voted against turning a parking lot into a 500-unit apartment building, citing the recent Florida condo collapse as justification, and worrying that it will “gentrify” the corner of 6th and Market (!). https://www.sfchronicle.com/sf/article/State-investigating-S...
Average over what, though? I'd assume that 1sq in a dense metropolitan quarter in high demand goes for a lot more than 1sq in a poor neighborhood or in the middle of nowhere.
The global average doesn't really mean anything except "somewhere in the US there is still affordable housing".
Most critics of rising housing prices that I know of aren't arguing that housing is becoming unaffordable everywhere but that it's becoming unaffordable in high-density places where housing would be needed.
You acknowledge this in:
> This pushes the price per square foot inside metros up way above what they would otherwise be.
Also shouldn't actions include at least having a look at building speculation in high-density areas?
Absolutely false in the long term due to feedback, although it is true in the short term.
With lower interest rates, people bid up the price of houses because they can afford to spend more on their mortgage. The amount spent on mortgage repayments trends towards the same figure as always (approximately as much as your wages allow).
I believe houses are a prime mover of the middle class economy, because it is something most people are willing to “invest” a lot of time working to achieve owning the property they want (often status driven).
Uh uh, apartment, not a house.
There's a huge difference.
'Local German officials, like local leaders everywhere, seek bigger budgets to provide more and better services to their constituents. What’s different about Germany is that the way to get bigger budgets is to increase local populations. And, as Professor Buettner says, “Ultimately, to get people, municipalities will need to support housing.”
The result is a system of incentives that is the opposite of “fiscal zoning”—the US practice of zoning land in ways that maximize local governments’ income and minimize their costs. In places with high sales taxes, such as Washington State, leaders zone more land for shopping centers. In places where residential property taxes are capped, such as California, they zone less land for homes and more for offices. In affluent suburbs, they often zone land for houses on large lots, excluding low-income people.
Maximizing property values is such a central concern of local government in the United States that Dartmouth economist William Fischel developed the notion into an entire political theory. His “homevoter hypothesis” holds that local governments are almost single-mindedly focused on maximizing real estate values, because homeowners typically vote their home values in local elections. German jurisdictions gain financially by maximizing population, not house values, and because renters outnumber homeowners in the country, homevoters are not the dominant electoral force in local German elections. Renters are.'
https://www.sightline.org/2021/05/27/yes-other-countries-do-...
This is good, because it means people can afford more.
>> (2) City councils, and by extension zoning rules, in major metros preclude construction
This is good because unregulated growth is a net drain on society. No one wants to buy a house if the property next door can be turned into a 30 story apartment building. More people own property now than at any time in history. How about that? Stop making babies, right now, and there will be plenty of space for everyone. I don't have babies, I own a house, everyone who has babies wants not just to pollute the world with their offspring and tax me to pay for their spawn's upbringing, they also think they deserve free property. Just don't have babies and problem solved.
(4) Monthly payments on new mortgages are essentially fixed for any point in time. A drop in interest rates from 3% to 2% makes housing asset prices 25% more expensive, and along with them downpayments, real estate taxes, and the amount required to pay mortgages off early.
(1) In order for a house to keep up with market appreciation, it has to be a desirable to the future "average buyer". Monthly payments are relatively fixed, less bidding competition for land outside of metro areas means that the feedback effect in my (4) isn't as strong, and so a bit more money goes into the structure.
Deleted Comment
Real estate is the only asset class where this isn’t true. The existence of the mortgage, which is one of the most unique debt instruments available to the general public, means that house price inflation only needs to exceed interest rates about about 0.6% to beat stock market returns.
Current businesses don't want a competitive labor market in the sense they have to compete for your time, they want drones to do whatever they want and want to pay bottom dollar for it. Just look at the massive outcry right now claiming labor shortages. Maybe there is some shortage but it's a well justified shortage in my opinion.
If you had a labor force with a real basic sense of security, people not worried they may get sick and their entire life's accumulation of assets from work will be washed away in an instant or they may be out on the streets looking for a warm bed, then you have a strong labor force that can negotiate reasonable working conditions. We don't have that.
We largely have a growing precariate class of people that seem to be sweeping in low to lower middle income that seems to be growing into the middle income brackets. A large bit of middle and upper middle are fine but even there, pressure seems to be growing.
Mortgages currently dominate the average person's life.
https://en.wikipedia.org/wiki/Feudalism
The solution isn’t that hard. Raise the real rate. Let’s see how many people can keep buying their third and fourth homes once the rates go up by 5%.
Oh but we can’t have that. That will cause the economy cough cough stock market tank. So we have to keep making the bubble bigger.
This statement is equivalent to saying that rents will never go down. And that's the core problem. Fiddling with interest rates or whatever is fine, but if your broader strategy results in every generation having to pay a larger fraction of their income on housing than the previous one, that is a problem...
It's exactly housing becoming an investment. In your post you precisely explain why it's a profitable investment, why that makes it unafordable, and the solution you propose is to make it an unprofitable investment. I think you and the OP agree completely.
The issue is that newly created housing is already priced sky high. You can blame quantitative easing which lowers interest rates and drives comodities we usually buy with credit high.
Just add another line to the graph and you'll see it.
Problem is not the market, but the fact someone is tempering with it so bad it inevitably collapses.
Why is it "supposed" to be this way?
It doesn't work this way in a lot of Asia. People don't want old, used homes and they lose value over time. Cities often don't have one specific point in the center (America's zoning is absolutely horrendous and forces this to happen) and so businesses, restaurants, shopping, activities, and so on are fairly equally spread across towns.
When American cities expand, they build more houses farther away but further condense business in the downtown core. But that's a problem that's politically invented and not so much a problem elsewhere.
If the town is expanding then the supply of housing goes up along with the demand and prices stay the same, i.e. proportional to the cost of constructing new housing.
Once you reach a certain point you have to build taller buildings which are more expensive to build and then housing prices would reflect the higher construction cost, but this only applies to urban areas and the costs only get really high when the buildings get really tall.
If you converted some of the suburbs to three story buildings that filled the lots, the cost per square foot wouldn't be much higher than it is for single family homes, but there would be ten times more housing per acre. Doing this is prohibited by zoning, which is the real reason why housing is unaffordable.
If the population of this country stopped growing and started shrinking, a lot of real estate would be freed up. Demand for housing in the densest cities would drop, and it would be cheaper to live.
Real estate prices have gone up for the last hundred years because there are more people. This is why it has been an effective and predictable model for businesses like car dealerships to always locate on the outskirts of cities and wait for the city to come to them, sell the land and move further out.
There isn't anything nefarious or even strange about it. It's a natural result of population growth and increasing demand that consistently (so far) outpaces supply. Nor is it inevitable; look at China. Tons of empty apartments, cheap bordering on free to live in. That's what happens when supply outstrips demand.
Things like zoning laws, property taxes, taxes on investing in property all affect overall prices, it's never going to be pure supply and demand.
For example if a region/country wants to keep prices down, heavily tax second/third/fourth homes. Or provide tax incentives to new builds.
Then there's interest rates, one of the reasons that property prices in many countries are increasing is that the interest rates are low, so people looking to invest can't get a good return on their investment in "traditional" locations, so they turn to buying property to rent out.
But it does. The supply is partially driven by speculators who bet on the prices continuing to grow. Currently, a lot of people are buying more expensive houses than they need because "house is a good investment". This (the speculators) can be easily stopped with a policy - e.g. tax heavily all profits from real estate sales, incl. primary residences. If taxes make it next to impossible to profit on increase of house value (the profit goes to treasury and not to seller), then the market would significantly cool down.
The fact that we (for example) tax heavily income from work, but not from real estate speculation, is a CHOICE.
Governments can cause oversupply, governments can cause undersupply. Bet you can think of plenty of examples without my help of government policy resulting in supply for some goods decreasing or increasing relative to demand.
Governments can do a lot. Like, they can pretty much dictate what you're allowed to make, how much they're gonna tax you on profits from making something, who you're allowed to sell it to - they can absolutely decide to cause an asset to appreciate.
There are tons of tools any state has to motivate or demotivate markets. Taxes, rules on primary, secondary and investment residence ownership, same goes for rents etc.
I tend to see a clear pattern here, just like in other topics - folks who are profiting from current situation by already owning see nothing wrong - in contrary, market forces in effect etc. The more the better.
The rest not so much, ie younger generation thrown in the world where they probably will never own their residence, which can be pretty infuriating compared t situation say 20 years ago. There aren't that many more people to explain this. But the move to consider housing more and more as a speculative investment rather than commodity is definitely out there, everywhere.
The relevant unit of supply/demand here is mortgages, which are indeed controlled by government policies.
Housing does not have to be fixed amount resource.
Without a policy to disincentive it, couldn't large asset holders purchase freed up real estate and artificially control the supply?
---
[1] https://en.wikipedia.org/wiki/Georgism
[2] https://en.wikipedia.org/wiki/Geolibertarianism
[3] https://geolib.com/essays/sullivan.dan/royallib.html, and prior HN discussion: https://news.ycombinator.com/item?id=7076632
[4] https://rationalwiki.org/wiki/Vulgar_libertarianism
Look up negative gearing in Australia
In communist regimes they did exactly this.
And what would be ideal, in a healthy market, is that housing is sometimes a little overbuilt and becomes a bad investment, then becomes very affordable and a good investment. Sitting at some sort of market equilibrium if you will. Investors consistently winning is bad for affordability, and investors always losing means eventually nobody will build houses and people start having to live outside.
This. I don't understand why people think that it's their fundamental right to live somewhere where they want.
Policy though can help prevent the asset price from being driven further by speculative investors, using tax penalties that heavily favor owner occupiers. It’s difficult to get right because there’s an argument to allow investors to participate, as it drives investment and effort into new house building.
But right now, 0% rates for businesses has flowed into large scale purchases of residential homes by Zillow, Redfin and others, who used their data positioning to capitalize on the flight to the suburbs due to Covid. That is what has devastated affordability. There’s no broad social benefit there, I hope it stops.
Not really. It's fine to "invest" in something that just outperforms holding cash, or bank deposits. Trillions of dollars are invested in treasuries.
You can even invest in something with negative expected returns, if it hedges exactly the risks you will face in the future (eg, the risk of accommodation costs rising is offset by owning a house, because you will always need somewhere to live).
So you can make housing an attractive investment for medium-net-worth individuals, say, that section of the population that can afford to own 1-2 houses over their lifetime, without it becoming less affordable over time. You can use tax incentives to tweak this further: many jurisdictions give you a lot of tax relief on your first home.
So, what causes house prices to rise faster than incomes is not an approach of making housing an investment per se, but a focus on making it an investment competitive with the stock market and attractive to institutional investors seeking outright yield.
If it is an investment, it has to be competitive by definition. Otherwise your aim is something different than investment, which should be the case for housing ideally.
https://fred.stlouisfed.org/series/OEHRENWBSHNO :)
I've never found agreement when speaking out against renting on HN. Empty houses outnumber the homeless 6 to 1 [0] and yet somehow it's more important that we ensure landlords can protect their effortless investments and waste more and more land on non-dense, temporary housing.
[0]https://www.reddit.com/r/CapitalismVSocialism/comments/agbo4...
Quite the opposite of what some comments here suggest, encouraging home ownership keeps life affordable. It is one way to stave off an oligarchy of property owners.
See, for example, Fannie Mae's mission,
> Our mission is to facilitate equitable and sustainable access to homeownership and quality affordable rental housing across America. We continue to innovate and promote a stronger, safer, and more efficient housing finance system to support more opportunities for homebuyers and renters in communities throughout the nation.
https://www.fanniemae.com/about-us/who-we-are
Finance people who make loans take issue with this since they have to match prices with a "government-backed" business, although it's only a charter which isn't the same as govt-backed. Plus, tons of businesses were supported by government in 2008 and 2020-2021 so that point is moot.
Government subsidised mortgages are the cause of this. The technical implementation varies in different countries.
House prices are "levered" on mortgage interest rates.
It began when boomers entered the housing market. I.e. suddenly a lot more people wanted houses.
Before then, houses depreciated over time, like your car.
First off, I don't think a typical investment thesis is: this thing will be less affordable in the future. People invest for many other reasons other than simply capital appreciation. With housing specifically, it might be cheaper for you to buy vs rent.
> country decides to stop making policy
So, yes... US policies towards housing are all centered around the notion of taking out a massive loan for a home. You get paid to do it in some ways, through interest deductions for example. And yes, this policy will never change and this is probably the main reason you need to buy a house with a mortgage if youre in the US.
However, as a counter-example I know handful of countries where mortgages are not easy to get and not a traditional way to finance a home. Yet, home prices in these regions are also skyrocketing. So cheap leverage alone is not a necessary factor for home price appreciation.
Finally: Food and transport can be "replenished" - land cannot. So basic supply and demand concepts would say that land prices will increase, and by proxy so will housing.
Land taxed appropriately would incentivize higher density housing in order for the economics to work.
We’re in a weird incentive trap (in the Bay Area anyway) where owners protected by prop13 have massive wealth and are incentivized to restrict supply. New owners that manage to over pay for a home are further incentivized to restrict supply to keep prices high so they’re not underwater.
This is a bad feedback loop that creates real property scarcity. It’s also arguably a problem of regulation constraining the market’s ability to meet demand appropriately.
https://www.whitehouse.gov/cea/blog/2021/09/09/housing-price...
It is, but the upthread reference to “housing” actually meant “home ownership”, not the “housing” that is part of inflation (residential rents, actual and imputed).
Sadly this has become a meme response, always repeated in every housing topic. Can we dig deeper? What would it mean?
A house has value, one can live in it, a basic human need. It also takes raw materials and skilled labor to create. Both of those go up over time, so building an identical house in the future will nearly always cost more than today.
Thus, that house can't help but appreciate in value. At a minimum, with inflation. Even that makes it a decent investment with minimal risk.
So you propose a house should depreciate? How, exactly? And would you want to live in those conditions?
One way to have housing depreciate is to have the economy of the region collapse (e.g. Detroit). But clearly that's not a good solution.
Maybe another way is to build houses with such bad quality that they disintegrate before the mortgage is paid off. But that's not an attractive solution either, I don't want to live in such a structure.
So what exactly are you proposing?
Plenty of reasons why a home should not increase in value,just because. Where this becomes really irksome to me is for rentals. Unfortunately most landlords do the bare minimum with regards to upkeep (financially this just makes the most sense I bet), but they can easily upsell it to the next investor, if they're in a good area.
Why do people keep saying this? No, it doesn't. If house prices went up 1.5% per year they would be a perfectly good investment but would not become less affordable.
Investments are graded based on their expected real rate of return, over time... In simple terms, that would be the increase in the nominal value of the asset, minus inflation. The higher the increase in real value, the better the investment.
If an asset's value increases faster than inflation, then over time the real price of the asset is rising. That means less and less people will be be able to afford it, each year.
Remember, inflation is basically measuring how much purchasing power we have... So if the price of something is rising faster than inflation, by definition that thing is becoming more expensive, which means less people will be able to afford it.
Even though 1.5% real (above inflation) appreciation seems like a small number, the total appreciation will eventually grow quite large after several years... Each year, housing will become affordable to fewer and fewer people. It may take a while to notice, but that's the definition of a rising real asset price.
If prices rise faster than wages across the board there will be a correction at some point: quite simply prices cannot go higher than what people can pay.
And in fact earnings from capital now surpass earnings from work in the world (or is it in the west?). So I suspect house prices will continue to rise faster than wages, until enough people got fed up.
Local government (US): Low-density zoning, burdensome review processes on new development, "historical building" preservation, minimum amenity regulations (e.g., parking spaces, "set back"), etc.
Federal government (US): Subsidizing the cost of 30-year mortgages for lenders; subsidizing mortgage interest for homebuyers (mortgage interest deduction) at the expense of all other taxpayers (e.g., renters).
> Are there countries with policies that effectively make it a depreciating asset? What do those policies look like?
I can't speak to the specifics of what other countries do, but many of the obvious steps are to just stop the bleeding that we already know about, mentioned above. Eliminating the federal mortgage interest deduction, removing local government authority to impose arbitrarily burdensome processes on new development, upzoning, deregulating (no minimum parking, reduced minimum setback), etc.
Say I bought a house on a half acre for $500k. Then someone buys it for $750k and builds four houses on eight acre lots and sells them each for $300k. Owner occupied housing as an investment has produced a positive return but the cost of housing has gone down.
In your example, if local government instead forbids that development (via zoning), maybe you can sell your house for $1M instead of $750k, because those 8 prospective buyers are now bidding on the only available property.
Homeowners that view housing as an investment would prefer to see housing costs rise further (beyond benefiting solely from land value increases), and so they advocate their local governments to constrain housing supply via zoning. On the west coast, and particularly in California, they've been very successful.
Whoa. "By definition", investments have to go up after accounting for inflation?
I've never been convinced that any investment can go up faster than inflation forever. But you say they all do?
Also, I'm wondering what the phrase "you make housing an investment" means. Who makes it so? What do they do? How does it ensure it goes up?
I bought a house recently. Dealing with the mortgage and properly industry really brought home to me how deeply entrenched the housing as investment mindset is.
When houses were shown to me their likelihood of appreciation was highlighted before qualities of the house like it’s construction or the social health of the neighborhood. It was a bit frustrating because the latter types of things were what I wanted to know about. I bought the house to live in and it all goes well our family plans on staying indefinitely.
IMHO it will never change without a brutal prolonged housing crash and recession that wipes out the savings of millions, and the government will not allow that because homeowners tend to vote at the highest rates. 2008 showed that the government will burn down the rest of the economy to save property prices. The history of this power dynamic is actually quite deep. In many ancient societies and even early America property owners were the only ones with a voice or in some cases were the only true citizens. Civilization has always revolved around property owners at least since the agricultural revolution.
There is only one rational response that I see, especially for younger or lower income people: leave areas with absurdly exploding real estate costs.
The phenomenon is nationwide but it is definitely worse in some areas than others. When we bought our house we took advantage of the virtualization of software and left California for Ohio where we grew up. Now housing is exploding here, but less than it is on the West Coast.
Not everyone can be this mobile but more people probably can than you would think. If you are in a blue collar profession there are good jobs to be had (and sometimes a shortage) in rural and small city areas with industry. Many such areas also have shortages of lots of professions due to the many decade trend of everyone flocking to top tier cities.
Politically America really needs a rural renaissance and this could help drive it. The geographic concentration of wealth is a major driver of our political lunacy.
I am a bit older but if I were starting out I would include the real estate cost constraint in planning my career path. Yes there are great jobs in big cities but the RE cost means that when you want a family you must be either get rich or leave and while you are there all your surplus will go to the landlord.
It would make sense to avoid career paths that shackle you to high cost real estate. For techies that means maybe choosing industrial IT or coding for industrial or mining or farming concerns over Silicon Vallet cloudhipster stuff, or refusing to work for companies that are not remote first.
That's how it ever was and will probably always be.
In the 90s I wanted to live in Manhattan, wanted it so bad it hurt. But never found anything affordable, so it didn't happen. I moved to California instead, which was then still fairly cheap.
Plenty of areas have seen depreciation in housing but it’s because the entire area is doing so.
Living in New Hampshire in one of the most desirable historic villages, where in the village house prices are quite high, it is not lost on me that I have seen 20-30 strip malls and innumerable cul de sacs built in my life, but no new villages. Despite everyone agreeing that they are the one of the most desirable places to live.
There are no shortage of coordination problems yet to be solved, here.
The increase in housing price is probably a derivative of shifting or shrinking opportunity to earn a high income outside of centers of commerce and population growth x scarcity in metros. The rise in home prices is just a premium on income opportunity.
The exception of course is if it's impossible to make a profit using the asset. Rent controls are very effective in this regard: If you ensure that being a landlord yields no operating profit, the only incentive to buy property is if there's hope of future capital gains.
0: https://www.zillow.com/lawrenceville-ga/home-values/
Also buying anything can be or not an investment. If you buy some bananas expecting to sell them for profit, then it is an investment.
Should countries also stop buying and selling bananas for profit? After all, eating is a basic need, more so than housing.
What makes most house buying decisions speculative is how the market price is justified. And today the "residual value" (value of the asset when you sell it) dominates buying decisions. This is defined as speculation (in future market price).
Without residual value, the market for old houses would be like the market for old cars or bicycles.
Imagine if government legislation enabled lenders to lend random amounts with old cars as security: it would put a price floor on second hand cars. Since second hand cars are of limited supply, and ownership of such a car enables you to borrow at minimal rate, therefore the market price of an old car becomes the value of the getting that loan.
America subsidizes homeownership specifically so now everyone does that, but people’s first and only house is definitely an investment.
Housing is a basic need, homeownership isn’t one, any more than running a farm is a basic human need.
Every California rental I've lived in for the past five years had the owner residing in it as their primary residence, renting out the spare rooms, while doing one of two things: not declaring any of the rental income while still getting primary residence tax breaks, or declaring it as a full rental (and using another address as their primary address, despite not living there), and writing off the exorbitant Bay Area HOA fees.
Which policy? You mean government charters for e.g. Fannie Mae that were established in part to combat behavior like redlining, which excluded certain ethnicities from loans for certain neighborhoods based on the loan applicant's skin color?
US government used $200 billion of taxpayers money to revive Fannie Mae and Freddie Mac.
Those money will lower the cost of borrowing and thus push the prices up. A new crisis will come, people will lose their houses, Fannie Mae will lose the tax payers money. The government will give Fannie Mae and Freddie Mac $400 billion this time, thinking that $200 billion was clearly not enough.
Housing can increase price and also become affordable.
The scarce asset is not actually land but infrastructure such as roads, water, sewage and electricity. These are usually financed publicly, but the increase in land value usually befalls the lucky house owners. Here is one of the justifications for property tax.
What do you propose?
2. Have you never owned a house? Houses break down all the time.
But more houses may always be built.
And I do disagree that houses are not depreciating assets. The technology and the style of a house become outdated. And much deteriorates over time. Yes, the land may not depreciate, but that is a separate matter from, or, at best, only a component of the value of the house.
Yes, they depreciate, and much faster than you imagine before you have seen it. This can be experienced in buildings in depopulated towns that have been vacant for only a few years. Houses that are not heated/vented/repainted/repaired become complete write-offs in just a few years. (and remodelling bathrooms and kitchens doesn't count.)
Maintaining a house at equilibrium is a negative cash flow that grows over time.
The same is true for infrastructure such as roads, water, sewage, and so on.
> Killing housing values will take money away from hundreds of thousands of people who worked hard for what they have.
Making housing more affordable will allow hundreds of thousands of hard-working people to own their own homes, rather than being at the mercy of a rental market that can kick them out on short notice. For context, I consider significant increases of rent to be equivalent to kicking somebody out, and short notice to be anything less than half a year, as moving is a stressful and time-consuming prospect.
> Why can’t we champion hard work?
That's exactly why the housing market needs a correction. Because currently, hard work is not sufficient to get into the housing market.
> Why should anyone get anything for free?
To answer the question at face value, because we are all human, and every human deserves to have their basic needs for food, shelter, clothing, and health-care met. To answer the question in context, that's why propping up the housing market to the benefit of real-estate speculators and homeowners need to stop, because that is given a benefit for free.
I say these as somebody who is in a similar position, having recently purchased a house to live in. What I got out of it is a place to live that I can modify and improve as I want. It isn't an investment opportunity, it's a place to live.
Edit: I'm suggesting that feeding (and housing) yourself is a personal responsibility, not a collective one. And that the instrument we use to enforce basic order and peaceful coexistence (punish noncompliance with imprisonment) is far to blunt for enforcing cooperation (helping each other find food/shelter).
This would be an interesting topic if food in the US weren't already the cheapest in the entire world. [1]
[1] https://www.ecowatch.com/worlds-cheapest-food-is-in-the-u-s-...
If their intent was to make homes more affordable they would intervene in the offer side not on the demand side.
It would simply have been better to just make a construction company and sell homes at cost.
Regardless it's extremely affordable for most people
At it's heart it is an attempt by someone who makes their living selling a thing (real estate) to instill a since of FOMO in order to motivate you to buy something now rather than perhaps later. You can't really fault them, it does tend to work.
I happen to live in the "red hot" Bay Area and twice wince I've been living in my house its value has gone DOWN year over year rather than up. I have never considered it an "investment", rather it is a fixed cost that I have to pay to live indoors. My parents live in Las Vegas, and that housing market, which has been largely unconstrained, demonstrated exactly what that means. Houses in Vegas for a long time depreciated after you bought them, just like cars. They did that because there was so much new housing being built that you could buy a "new" house for the same price as a "used" house. Guess what, people opted for "new" and used houses needed to sell at a discount if they wanted to sell.
One of the truisms for years was the value of a house was intimately tied to its location. This because it was close to jobs, or schools or what not. It is my hope that remote work really takes hold and you can work just as reasonably in a $100,000 house in Missouri as you can in a million dollar house in the Bay Area. That would really create some downward pressure on prices because of simple market dynamics.
At some point, someone has to make or do something physical. With very few exceptions, like entertainment, all of our remote jobs eventually tie in to some good being produced. Even pure services jobs ultimately feed some machine that produces physical products, and those will always need to have access to cheap labor and good shipping lanes to succeed. You can be a cloud engineer, but the people buying cloud services are eventually selling something to people making things.
The impact so far has been more people with more money getting to live in places where their previously "city" salaries give them an edge in cheaper areas. It's also been that some companies have started to adjust salaries for remote work downwards, both of which will flatten out the temporary advantage being a remote worker brings to society.
The only answer is basically socialism, and most of us (myself included) don't like that answer because human nature is to compete.
Do you seriously believe this?
Both cooperation and competition has been advantageous and disadvantageous at different times and in different contexts..
Personally, I’m at least happy that my mum didn’t decide to compete with me for survival…
Socialism is an interesting angle because that term has a lot of different meanings and it's loaded in the U.S. because Americans try to use it as synonym for communism, despite many counter examples. I wouldn't, for example, consider Europe or Canada devoid of competition and those examples show how much money we could be saving with more socialist policies in ways which actually improve competition. For example, unlinking health coverage from employment removes a significant risk for small businesses, improves job market competition, and significantly lowers one of the factors driving prices up. Similarly, subsidizing childcare both helps parents work — with costs in the $20-30K range per child there are a lot of lower-income people who could work but are unable to make the finances work. I'd prefer to pay that out of general tax revenue than expect every coffeeshop to be able to pay baristas that much more since that's a big expense to spread over a small pool of workers.
Prices are down! Buy now to get a great deal!
Hurry up and buy now, in a few months a new crisis can come and we'll lose the opportunity to make nice profits.
Primarily, they keep mentioning "average house-price-to-income ratio" but appear to be using average home price and median income. Both housing price and income distributions are enormously skewed. In the Unites States average income is almost double median income and that difference has been increasing over time. So right there, even if median house price to median income has stayed constant, you would notice the pattern pointed out.
I don't doubt the central premise that housing prices are rising faster than income within household, but unfortunately the article does nothing to show it.
In Germany, which is the richest country in Europe, the average working person earns €2000 (after taxes) per month, so €24000 per year. Times 5.4 that is €129600. You can only dream about buying a house for that price here. The price of a house is ten times that. Even if it is not in a big city.
Am I missing something?
There are houses for cheaper, but they tend to be in less desirable locations. Same in America, there just happens to be way more “less desirable” places. Lots of land in the 90 minute commute radius.
In my experience Germans tend to outright dismiss options that are less than ideal, always searching for the eierlegende Wollmilchsau.
https://www.immobilienscout24.de/Suche/de/baden-wuerttemberg...
Looking at these prices, €1.2M seems like a good ballpark number.
Taking Cambridge, MA as an example (though it's certainly more expensive than average) - median house is ~1.4M in 2018 (probably higher now), and median _household_ income is ~75K USD per year - for Cambridge, giving a multiplier of something like 20x (household income, not counting taxes - not individual)
5.4 times that is about 200k. Avery’s Dutch houses are now 400k (and growing 10%+ y/y). So there’s definitely a gap, but more like 2x than 10x.
This still means the median person can’t afford to live in the city center one of the big cities, but rural areas can be relatively affordable.
Yes, a few things. For one, Germany isn't the richest in Europe. But that's besides the point.
Typically price to income measures not prices per person, but per household. After all, the average house isn't lived in by one person. particularly homes that are bought (average buyer is a family, or an investor renting to multiple people), leading to an income that's the sum of typically at least two adults.
Second, these figures are virtually always pre-tax.
Third, these figures often reference to price to income of buyers, depending on the study. The average income in the Netherlands for example is about 37k leading, 5.4x would for example get you to 200k. But the average income includes unemployed, students, retirees, disabled etc. The average salary of working individuals (i.e. the home-buying population) is substantially higher, particularly if you filter out the population which is eligible for cheap subsidised social housing (about 1/3rd of all housing stock in the Netherlands). At that point you get to >50k salaries, with families of two earners often bringing in 100k and able to afford 540k homes at price to income levels of 5.4x.
Fourth, interest rates in certain EU countries is substantially lower than in the US. I just bought a house at sub 1.5% rates (Netherlands), about half of what you see in the US. Denmark had negative rates, I believe. This pushes up the max mortgage / home price to higher figures than the US, at the same monthly fees (and thus same affordability). In that sense it's not any cheaper per se, once you figure in that the US has more expensive financing costs than some EU countries, including Germany.
Fifth, the average buyer isn't a 25 year old fresh from college with a new job, but instead actually 45 years old. In fact, the average buyer isn't a first-time buyer, but has bought and sold a home before and has some equity, some savings, a retirement fund, perhaps a small inheritance from his parents, buying with a partner in the same situation. In other words, people are typically bringing in quite a bit of equity and are able to afford more than they can borrow.
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A more meaningful difference is what individuals do not have to pay for in Germany.
As of 2019, there were 8 Europan OECD countries with higher average wages.
https://en.wikipedia.org/wiki/List_of_countries_by_average_w...
For example, in 2018, 45 single super-rich germans possessed the same amount of wealth as the poorest 50% of germans [0]. Using the median of distributed wealth would not express that, and if you cut off outliers by looking at percentiles and then averaging would also not express that.
[0]: https://www.spiegel.de/wirtschaft/soziales/vermoegen-45-supe...
But houses there are also very expensive. Basically unaffordable if you don't get help from either a second high income or money from parents etc.
Also, parent said it is the richest in EU which of total value (GDP) is correct, but by GDP per capita isn't. But, Switzerland isn't first on the list either if you take GDP per capita because that spot is taken by Luxemburg. (Which is 27th on the GDP list)
But parents point still stand, on a median income it is really hard to find a proper place in Europe.
Source: https://en.wikipedia.org/wiki/Financial_and_social_rankings_...
So his point kinda stands.
a. Are not incomes for just a single-wage earner, they include the combined income for a household (of 2.53 people on average)
b. Are referred to in pre-tax figures, not post-tax.
c. Are not just wage income, but include non-wage income like dividends, capital gains, small business income, fed/state/local government transfers, etc.
d. Are using the median, not the average (mean).
[1] says median household income is apparently 4.8k€/month, so around 58k€/year (before tax). Average housing prices seem to be between 250k and 400k (couldn't find a good source). That would be 4.3~6.9 ratio. (edit: Quality of this estimate is probably still low.)
Personally, I believe (affordability of) average housing prices to be a very useless statistic, due to the extreme regional and local variation in housing prices (and incomes). But maybe I am wrong about that and it is a good indicator.
[1] https://de.statista.com/statistik/daten/studie/261850/umfrag...
The average house price seems to be € 376 000 [2]
That means 13 years worth of salary which is kind of much.
As to why is this the case I see two reasons but I am sure there are more:
Houses in Europe are built with better standards and built to last more. You can pass the house to your kids, no problem. It will be in very good shape and probably worth more than you've paid for it.
The biggest issue is land. Europe is small and crowded and it becomes more crowded due to increasing migration. So the land is scarce. Also many EUsians like to live in the city, close to center if possible in contrast with USians which might be glad to live in suburbia. US has good roads uniting the suburbs with the city and the price of gas is small. US is a vast place so land is not exactly a problem.
Another issue is socialist policies (even from the CDU) which means high taxation, resulting in lower incomes and less investments in developing real estate.
[1] https://housinganywhere.com/Germany/average-salaries-in-germ...
[2] https://www.iamexpat.de/housing/real-estate-news/where-can-y...
Land might be somewhat scarce, but that isn't the huge cost driving point. The problem is the process by which land is assigned for building - there is a lot of land which just cannot be used for building. New building areas are sometimes opened, but always trailing the demand, keeping the price up. Also, the density of new buildings could be higher. It is grotesqe that in an area with lacking housing new single homes get approved. Also, why are cities allowed to approve additional office buildings without ensuring that the housing capacity is extended for all those new office workers? Easy way to enforce that would be mixed use buildings, where you have a comparable work and living capacity.
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https://www.numbeo.com/property-investment/rankings_by_count...
And by city:
https://www.numbeo.com/property-investment/rankings.jsp
You have to scroll very far down to get to any U.S city. Price-to-income ratios in top Chinese cities are about 40; ratios in top Californian cities are about 8.
Much of this is because of Federal housing policy that's very deliberately designed to subsidize homeowners. America has a cultural belief dating to the immediate post-WW2 period that everybody should be able to own a house; this is unique to this period and country. In most other countries (and time periods throughout history), there is a landlord class and a renter class.
This trend, if not explicitly reversed, has a long way to run.
I live in Vietnam and it is exactly the same here and always has been.
Just go to Wikipedia's page on home ownership by country and you'll see that pretty much every country is the same. People think they should be able to own their own house. It's a human thing.
The US isn't even in the top 40 when it comes to home ownership rates.
And we hope more go the path of land reform, destroying the parasitic landlord class and returning property to the people.
Paying more for housing means less for other expenses, so it's a net drain on the economy. If we can lower costs to people the economy could be more competitive.
Well.. it didn’t age well, fracking was invented in the context of a policy framework that only exists in the US, and now America has 7x lower gas prices than the EU/APEC and can’t export fast enough due to liquification capacity.
This is to say that there is likely a technology/policy innovation pathway to disrupt this current situation, but people aren’t thinking on a large enough scale yet… and investors, unfortunately, aren’t aligned to fix this because they own existing assets.
This means, the policy framework required to fix this tragedy of the commons looks something like making it profitable for investors to make money by 10x’ing the housing supply, 10xing the manufacturing speed, etc.
The dominant costs in housing are land values, construction costs, which are dominated by labour, and highly regulated (for good reason).
There is little room here for innovations that would cut costs.
There is presumably some inefficiencies and red tape in the building code, but so much of it is safety oriented, efficiency gains are probably limited.
The obvious answer of course lies in building denser, though larger, denser buildings are more complex and costly to build.
This is not to say that people aren't trying. People have been experimenting with prefab homes and such for decades, but it hasn't become any sort of game changer.
If anything the costs of construction have been going dizzyingly upward along with the underlying land values.
In any other industry someone would invent a new widget that makes processes faster and cheaper etc, but it's hard to see how someone makes home development cheaper through technological innovation.
Previously, you had to physically go in to a RE office and look at a binder of homes that are for sale. It was much more difficult to find comps and price houses correctly, resulting in a lot of opportunity to make a living.
Then pre-zillow / post-internet, home buyers still had to talk to a RE agent to get emailed houses.
Now anyone can sign-up, peruse houses and with 1 click, schedule a tour immediately.
In such a scenario, there are wild things you could imagine from a materials and construction side that could plummet building costs.
Additionally, if 2D agriculture is ever disrupted, we would recover a lot of land (ever driven across me NE?).
Don’t forget, we can fit 2x the global population in a city the size of Texas with a typical city population density.
Note: I should have said 5x :$ thanks for asking about a citation!
Suppose your disposable income is 10% of your total income of 50k, so you have costs of 45k and 5k to spend. Let's say your total income rises by 10%, but your cost of living rises by 5%. You now earn 55k, and have costs of 47.25k (5% increase on 45k spending).
Your total income went up by 10%, but your disposable income went up from 5k to 7.75k, that's a 55% rise. More than 5x leverage!
I first noticed this early in my working life when a small increase in pay made a dramatic change to my disposable income. This means as your pay and career advances you can devote rapidly increasing resources to the highest priority spending in your life. For a lot of people, especially those with children, that's housing. Since a lot of people have that as a priority, and we're competing for a static or slowly growing housing stock, we're constantly bidding up prices against each other.
Yes there are other factors too, like low interest rates, of course, but I think this is the main dynamic driving it.
All the well paid white collar professionals have dumped a fat pile of money onto the housing market in any given urban area.
Before you needed to be fabulously wealthy to own real property in Manhattan. Now you need to be fabulously wealthy to own real property within an hour of Manhattan (though there's probably a few edge cases)