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Home Price-to-Income Ratios

jchs.harvard.edu

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Re: Home Price-to-Income Ratios

#131

Post by foogazi »

thundergolfer wrote: post #22

In late 1980s Melbourne, Australia my dad and his best friend were accountants and bought their houses for ~$40,000AUD, ~3 times their annual income. According to the best friend, this was considered a lot to pay for a home. In 2020, those houses are around ~$1.8-2M, so ~22.5-25 times the annual income of someone that has their job today. In Melbourne and Sydney generally, housing is 10 and ~13x annual income. Above…

> In late 1980s Melbourne, Australia my dad and his best friend were accountants and bought their houses for ~$40,000AUD, ~3 times their annual income. According to the best friend, this was considered a lot to pay for a home

Something has to have changed since then.

What was the interest rate like back then and what kind of terms did he get for his loan?

(edit spelling)

Re: Home Price-to-Income Ratios

#132

Post by mikeyouse »

cjhopman wrote: post #61
mikeyouse wrote: post #33

Earlier quoted context omitted.

Just out of curiosity, I tried to 'ground' those figures to median income to compare against what's happened in the past few years. Per the US Census[1], median income in 1973 was $10,500, so the price of your parents' home increased by 3x median household income. Looking at a completely unremarkable house in the sunset of SF on Zillow[2]. It sold for $1.725M in Nov of 2019 after selling for $997k in June of 2014. Ho…

That's a bad example, that home was completely remodeled between the two sales.

Fair to a point, it was merely a random click on a recently sold property, but it was a $20,000 kitchen remodel (permit 201608084481), a $7,000 bathroom remodel (permit 201408113562) and a new roof for $7,500. So not sure if it's really a bad example when 5 years + $35,000 in investment adds over $700k in value to a home.

You can review the permits here: https://dbiweb.sfgov.org/dbipts/default.aspx?page=PermitType...

Re: Home Price-to-Income Ratios

#133

Post by thundergolfer »

foogazi wrote: post #131
thundergolfer wrote: post #22

In late 1980s Melbourne, Australia my dad and his best friend were accountants and bought their houses for ~$40,000AUD, ~3 times their annual income. According to the best friend, this was considered a lot to pay for a home. In 2020, those houses are around ~$1.8-2M, so ~22.5-25 times the annual income of someone that has their job today. In Melbourne and Sydney generally, housing is 10 and ~13x annual income. Above…

> In late 1980s Melbourne, Australia my dad and his best friend were accountants and bought their houses for ~$40,000AUD, ~3 times their annual income. According to the best friend, this was considered a lot to pay for a home Something has to have changed since then. What was the interest rate like back then and what kind of terms did he get for his loan? (edit spelling)

> Something has to have changed since then.

In 35 years an awful lot has changed. What are you thinking specifically?

Interest rate wouldn't be too hard to find, though it'd be a lot of trouble to find out the terms of the loan.

One thing I can comfortably say though is that they'd been living at home and saving for a while, so could pay quite a lot of the full housing cost up front. Maybe 30-50%. Nowadays it's a joke to think about doing a 50% down payment on a 1-2 million dollar home.

Re: Home Price-to-Income Ratios

#134

Post by thundergolfer »

gowld wrote: post #82
thundergolfer wrote: post #22

In late 1980s Melbourne, Australia my dad and his best friend were accountants and bought their houses for ~$40,000AUD, ~3 times their annual income. According to the best friend, this was considered a lot to pay for a home. In 2020, those houses are around ~$1.8-2M, so ~22.5-25 times the annual income of someone that has their job today. In Melbourne and Sydney generally, housing is 10 and ~13x annual income. Above…

How is that even possible? At interest rates that's 100% of income. Or it's becoming a rich area and next generation of up and comers needs to find a new frontier like the old generation did

> How is that even possible? At interest rates that's 100% of income.

Can you elaborate on what you're saying here?

> Or it's becoming a rich area and next generation...

Yeah in a sense it has to become a rich area because of housing costs. The "new frontier" where houses (not apartments) are 3x median annual income is 2 hours drive out of the city.

Re: Home Price-to-Income Ratios

#135

Post by leetcrew »

rorykoehler wrote: post #129
leetcrew wrote: post #121

Earlier quoted context omitted.

why? there's nothing inherent about owning a house that protects you from having all your surplus income siphoned away. if most of your wealth is tied up in the house, you are still vulnerable to property tax increases from appreciation on the home. not every state shields you from this to the extent that california does, and even california could change the law at some point in the next several decades. I'd much rat…

You'd rather have both though right? Obviously it depends on the market and california is a pretty bad example as an outlier where renting may make more sense but in most places in the world atm buying is the cheaper and safer (as in less chance of eviction at short notice) option. On the flip side renters only pay for increase in property values and never gain. Real Estate is a major wealth generator for people who…

I would only prefer a house over stocks/bonds if the price-to-rent ratio was very low and I could purchase a house I liked for a small fraction of my net worth.

> Real Estate is a major wealth generator for people who get on the ladder.

ultimately this comes down to luck and how much of your income you spend on housing vs put into investments. there are certain locales where home prices are skyrocketing, but over the long term, average home appreciation is basically flat (but with lots of variance). [0] actively investing in rental properties is a different story, of course, but involves a lot of work, too.

> Finally you can't live in your 300k diversified portfolio if the market crashes.

sure, but rent is only about half of my monthly expenses currently. by the same token, you can't eat your house or fill up your tank with it. if you're worried about a crash and/or losing your source of income, you can always rebalance into bonds.

[0] https://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index

Re: Home Price-to-Income Ratios

#136

Post by sologoub »

bcrosby95 wrote: post #18
sologoub wrote: post #16

Over 8x seems to be a CA thing mostly (one tile in Oregon bordering CA). Wonder if we can thank prop 13 for that? (Frozen property tax that constrains supply and encourages ani-development stance by removing the tax consequences of appreciating property)

I doubt you can lay all the blame on prop 13. It passed because CA home prices went crazy in the 70s. My parents bought a home in 1973 for $34k and sold it for $95k in 1978 (the year prop 13 was enacted). A 3x increase in 5 years.

Looks like 20k of that was just inflation: https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=34000&year1=19...

While still a lot, I’d suspect it’s quite different from today’s situation.

Re: Home Price-to-Income Ratios

#137

Post by sologoub »

mikeyouse wrote: post #132
cjhopman wrote: post #61

Earlier quoted context omitted.

That's a bad example, that home was completely remodeled between the two sales.

Fair to a point, it was merely a random click on a recently sold property, but it was a $20,000 kitchen remodel (permit 201608084481), a $7,000 bathroom remodel (permit 201408113562) and a new roof for $7,500. So not sure if it's really a bad example when 5 years + $35,000 in investment adds over $700k in value to a home. You can review the permits here: https://dbiweb.sfgov.org/dbipts/default.aspx?page=PermitType...

Those are probably tax values. Actual out of pocket is likely a lot more - SF area has a huge shortage of construction labor and prices are really high, with completion rates low.

Re: Home Price-to-Income Ratios

#138

Post by sgc »

leetcrew wrote: post #130
sgc wrote: post #116

Earlier quoted context omitted.

And what happens when people live longer and longer, so that people have lived a longer percentage of their lives without that influx of assets? It is perfectly common for 60+ year olds to still have their parents living. That will stretch to 70 year olds, and so on. There is a demographic concern that needs to be acknowledged in order to develop societal solutions that provide even basic opportunities such as home o…

> One potential contribution to a solution would be to tax investment properties/second homes at a very different rate than primary dwellings (which should be taxed at as close to 0% as is practically possible). as a renter, that doesn't sound like a good solution to me. my landlord would just pass through the "investment property" tax to me, while homeowners in my income bracket would be getting a fat tax break. peo…

I understand the renter dilemma. The goal would be to propel you towards home ownership. If taxes were higher on investment properties purchase prices would get pushed down, thereby reducing the amount your landlord would need to charge for rent. Rent will go up with inflation regardless, since landlords optimize for profit. But all of a sudden there is less of a difference between what rent costs and a mortgage payment. it is easier to jump out of the renter's cycle. And that means less demand and lower rents for those who remain, creating a virtuous cycle. In the medium term (5 years plus) this would keep rents flat or lower, and reduce housing prices at the same time. At the same time there is a basic philosophy I espouse that all people have a right to a home and a piece of land, and unless absolutely necessary to society, they should not be renting from the government.

I agree that there need to be several other programs in place to support lower income individuals, including in respect to primary residences, but that is an expanded conversation in a election year ;).

Re: Home Price-to-Income Ratios

#139

Post by chii »

zik wrote: post #36
mdasen wrote: post #26

Earlier quoted context omitted.

Housing supply has been increasing at far lower levels recently than it has historically. Lots of good jobs have been flooding certain cities and which means people with the money to bid up the existing stock. Since people are coming for the jobs and they have money and there isn't new housing to soak up that demand, those people end up bidding up what supply exists.

I don't think it's as simple as that. In Australia we've had a massive housing boom and consequently the market has been flooded with houses. Strangely this hasn't led to lower house prices. There's a large amount of housing which is purchased and is sitting empty, mostly investment properties which people bought with the intention of re-selling at a much higher price so they're not concerned about renting them out.…

> There's a large amount of housing which is purchased and is sitting empty

is that really true? I keep hearing people who can't find rental properties to rent, or have huge waiting lists.

I suspect that perhaps renters' is a market that has a price expectation, which is not met when the property prices are so high. The "normal" rent is about 5% (p.a.) of the property's market value. However, as bank interest rates dropped, property valuations skyrockets, and rent income cannot keep up. This would lead to landlords who sees tenants as a PITA to just not rent out (saves on any potential damages, low/zero utilities etc, not to mention no inspection, agent fees and other misc).

Re: Home Price-to-Income Ratios

#140

Post by Rury »

ggm wrote: post #73
thundergolfer wrote: post #22

In late 1980s Melbourne, Australia my dad and his best friend were accountants and bought their houses for ~$40,000AUD, ~3 times their annual income. According to the best friend, this was considered a lot to pay for a home. In 2020, those houses are around ~$1.8-2M, so ~22.5-25 times the annual income of someone that has their job today. In Melbourne and Sydney generally, housing is 10 and ~13x annual income. Above…

I'm one of your dad's generation and we like to call this "inter-generational theft" because it kind-of sums it up: the spending patterns we established, are predicated on leaving our kids (and grandkids, probably) worse off. Not because of a debt burden, there is nothing wrong with long term public sector debt financing. The problem is the asset bubble in home ownership prices. We should have 10+ year secured reside…

>Not because of a debt burden, there is nothing wrong with long term public sector debt financing.

To an extent...

>The problem is the asset bubble in home ownership prices.

I just want to point out that these two are, are somewhat tied together as of the recent decade.

A lot of central banks around the world have been doing QE type things, which consists of printing money in exchange for taking assets off the market in (supposedly) equivalent value until they (central banks) are repaid the printed money to destroy. This arguably causes inflation - not in the traditional sense, but in the form of asset price bubbles. The reason they're doing this stuff is because of the lack of liquidity in the market regarding financing debts. In the US in particular, a large part of the FED's balance sheet is composed of mortgage backed securities (houses) and government debt (bonds) which money was printed for...

Anyhow, the point I’m trying to make here, is that the public debt burden we have is a contributing factor to the asset bubbles we see in housing and stocks and other areas...

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