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Home Price to Income Ratio

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Re: Home Price to Income Ratio

#481

Post by perl4ever »

quantumBerry wrote: post #354
kimburgess wrote: post #345

Earlier quoted context omitted.

While this is accurate, a more concerning secondary impact is the increased deposit. In Australia specifically, house prices are soaring. The most in-demand markets increases are currently ~$1200 per day [1]. For many people their home is a more 'productive' than they are, greatly outpacing their own earning potential. Those who already have wealth can buy in, or continue to buy in and leverage themselves into the ma…

Raw land is cheap. Housing codes are what keep people like myself out of the housing market. If I could just dump a yurt on the land, or a cabin like our forefathers, then housing prices would be a total non issue. But a bunch of selfish NIMBYs are so scared of the poors building a yurt instead of a 2000 sq ft brick house for two people and a dog, they'll never allow it.

Land is cheap within, I don't know, 50 miles of anywhere you live. But not necessarily where you (want to) live.

It has been proposed that since land doesn't respond to supply and demand, but housing does, that property taxes should apply only to land and be increased to remove most of its value. Keyword: Georgism.

Re: Home Price to Income Ratio

#482

Post by firecall »

kimburgess wrote: post #345
game_the0ry wrote: post #284

A more relevant metric to consider - monthly mortgage payment to monthly income ratio. Average interest rates in 2007 were 6.34% vs ~2.80% today. [1] * 6.34% / $2,000 monthly payment / 20% down (~$65k) >> $328,319 price of home * 2.80% / $2,000 monthly payment / 20% down (~$98k) >> $489,794 price of home Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. When…

While this is accurate, a more concerning secondary impact is the increased deposit. In Australia specifically, house prices are soaring. The most in-demand markets increases are currently ~$1200 per day [1]. For many people their home is a more 'productive' than they are, greatly outpacing their own earning potential. Those who already have wealth can buy in, or continue to buy in and leverage themselves into the ma…

Yes, that's the accurate horror of the situation here in Australia!

Even a slight economic advantage is being multiplied if you take advantage of housing and stock markets.

Just having comparable incomes and earning power is no longer enough to give you economic parity with your friends and neighbours. Which is not a good for overall social harmony :-/

Wage stagnation has meant that if you don't have real estate, investments and additional contributions into your super you are going to be in an entirely different wealth class to your peers once you hit your 50s and 60s.

This may not be a fun ride for many over the next 20 years...

Re: Home Price to Income Ratio

#483

Post by throw123123123 »

woofie11 wrote: post #434
joppy wrote: post #393

Earlier quoted context omitted.

Whatever the case, what you end up with is an asset whose actual value is tied to the interest rate (interest goes down, people can afford larger loans with the same repayments, therefore houses are worth more). This is a highly leveraged situation: if you take out a $1m loan and then interest rates go up, you're still liable for the whole $1m even though your actual asset might only be worth $900k now. I think this…

Kinda. If I buy a 1M home at 2.5% interest, I have a $4,000 monthly payment. If rates go to 6%: - Housing prices plummet to $600,000, assuming people are willing to spend the same per month. - My monthly payments are identical to had I bought at $600k at 6%. If I stay there, I'm not much worse off. It's harder to pay off the home quickly. - If I move out, and I rent out my home, it covers monthly payments approximate…

You are a lot worse-off. If you buy at 6%, and then rates go down to 2%, you can refinance and your home is valued at a higher rate. IF you buy at 0%, you bought the house at the peak, and cannot refinance the debt.

Re: Home Price to Income Ratio

#484

Post by akudha »

wffurr wrote: post #477

I never learn anything in these threads. It seems like everyone is just talking past each other with their pet theories and no particular way to tell which if any are correct or useful.

Economics is a weird subject, even economists get predictions wrong all the time. It is easier to talk about logical subjects like Math or programming, vs something like social issues or economics.

I don't know how to have a useful conversation about such topics, I understand your frustration. I suppose everyone has good intentions and is trying to help at the same time by sharing their theories - which could be bad or good, but definitely hard to digest, as a reader

Re: Home Price to Income Ratio

#485

Post by throw123123123 »

fshbbdssbbgdd wrote: post #458
joppy wrote: post #393

Earlier quoted context omitted.

Whatever the case, what you end up with is an asset whose actual value is tied to the interest rate (interest goes down, people can afford larger loans with the same repayments, therefore houses are worth more). This is a highly leveraged situation: if you take out a $1m loan and then interest rates go up, you're still liable for the whole $1m even though your actual asset might only be worth $900k now. I think this…

I have a ~million dollar fixed rate mortgage. If rates go up, I’ll be sad that the value of my house went down. On the other hand, I’ll be very happy to have a large fixed rate loan. Let’s call my mortgage rate X%, and let us assume that rates go to X+5. Then I can invest money to earn at (X+5)%, which means my loan is essentially a $50k/year annuity. My only wish would be that I could make the loan even bigger. On t…

The problem is that in a scenario of rates going up, both houses and general stock investments will go down together. They rarely diverge.

Re: Home Price to Income Ratio

#486

Post by foldingmoney »

jrochkind1 wrote: post #470
xyzzy123 wrote: post #457

Earlier quoted context omitted.

Not sure about the US but fixed-rate term in Australia is about 5 years. Nobody would give you a 30 year fixed rate. You'd eventually have to pay 6% on the $1M.

Damn, I would assume houses must be much cheaper in Australia than in the US? Or only the very very rich can afford to buy their own home? (Or is it amortized over more than 5 years, you just have a balloon you need to refinance?) In the US, where 30-year mortgages are standard, the LARGE majority of homeowners would not be able to afford payments on their home amortized over only 5 years.

>Damn, I would assume houses must be much cheaper in Australia than in the US?

The median home price in Australia is about US$725k. So no.

Re: Home Price to Income Ratio

#487

Post by BirdieNZ »

marvin wrote: post #174
maxsilver wrote: post #136

Earlier quoted context omitted.

Because it doesn't actually work. It helps a tiny little bit, in the places that are actually somewhat constrained (like SF/BayArea specifically). But it's not any kind of significant fix. Housing is an investment asset for stock market folks, it doesn't follow a Econ-101 understanding of "supply" and "demand" in any meaningful way. The Midwest and the South are both way ahead of California on the whole "just build m…

Are you saying that if the housing market has 10 million homes and 7 million people live there, prices will continue to appreciate to stratospheric levels because someone will magically appear to buy the excess 3 million properties and leave them without tenants? That's what it sounds like to me.

That does actually happen; see China, for example.

Re: Home Price to Income Ratio

#488

Post by conductr »

woofie11 wrote: post #434
joppy wrote: post #393

Earlier quoted context omitted.

Whatever the case, what you end up with is an asset whose actual value is tied to the interest rate (interest goes down, people can afford larger loans with the same repayments, therefore houses are worth more). This is a highly leveraged situation: if you take out a $1m loan and then interest rates go up, you're still liable for the whole $1m even though your actual asset might only be worth $900k now. I think this…

Kinda. If I buy a 1M home at 2.5% interest, I have a $4,000 monthly payment. If rates go to 6%: - Housing prices plummet to $600,000, assuming people are willing to spend the same per month. - My monthly payments are identical to had I bought at $600k at 6%. If I stay there, I'm not much worse off. It's harder to pay off the home quickly. - If I move out, and I rent out my home, it covers monthly payments approximate…

> what I expect is actually happening here is people are anticipating high inflation

That's why price to income is an interesting metric. High inflation without income rise just means people feel worse off and a correction will occur. Housing, along with many other things, are competing for people's wallet. Interestingly, covid is causing a labor shortage and income to rise at the low ends. I suspect stagnating in the "middle income" ranges.

Re: Home Price to Income Ratio

#489

Post by civilized »

spywaregorilla wrote: post #391
throwdecro wrote: post #304

Earlier quoted context omitted.

> Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. Which is crazy, right? People max out their "borrowing power" at low interest rates and take on huge loans, without considering that the declining interest rates that fueled past appreciation don't have much room left to move down, and that they'll be underwater on that huge loan if interest rates go up* an…

> without considering that the declining interest rates that fueled past appreciation don't have much room left to move down Negative is inevitable, imo If the value of your home rises, you've effectively taken out a hugely profitable leveraged loan, which is historically pretty common. Which is far from guaranteed of course, but broadly speaking it was an amazingly lucrative move for many many people.

Why would I lend you a million dollars only to be paid back over 30 years and have less than I started with at the end of the 30 years? I'd be better off doing nothing with the money.

Re: Home Price to Income Ratio

#490

Post by throw123123123 »

nostrademons wrote: post #339
thaumasiotes wrote: post #330

Earlier quoted context omitted.

Yes, you can, but it doesn't address the problem mentioned above. >> the declining interest rates that fueled past appreciation don't have much room left to move down, and that they'll be underwater on that huge loan if interest rates go up* and the value of the property declines. The price you can charge for something is related to how much other people can pay for it. If houses are usually bought with loans (which…

In practice, when interest rates went sky high in 1980 the price of home didn't actually drop very much. Instead, liquidity dried up. Nobody bought homes; nobody sold homes. The few people who had to sell their homes got screwed, but in general people rarely have to sell their homes unless they get transferred to a new office and don't have enough to buy a house there in cash (which is very attractive when interest r…

It is common for people that can afford to pay the mortgage/house keep it even in a down market. IT makes housing crisis a lot longer to weather out because the vast amount of capital gets locked in an asset that does not yield its prices.

The bleeding ends up being slow, a decades wait to see any returns while maybe the stock market soars.

I am not very optimistic on homeowners in a downturn, UNLESS the government bails them out.

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