41–50 of 91 posts
Another practical reason is that if borrow $1 million for a house, and it is now worth $800,000 you just keep paying off the mortgage and hope prices go up again. Selling it would require you pay in some cash to pay off the loan. All this is provided you keep you job and can afford the loan.
But because people think that, and think that no-one would ever want to rent, we tolerate super weird policies like a residency house being exempt from capital gains tax, poor protection for renters, government tax transfers (in the UK they will literally give you money to buy your first house, the government is so committed to the your-house-is-your-bank philosophy). All these distortions then actually CREATE the conditions which mean that you're consistently losing money if you rent, because the government is effectively taxing you much more.
So our misunderstanding of economics creates an economic system which conforms to our mistaken beliefs, it's kind of amazing.
Real estate bubbles rarely burst unless there is accompanying unemployment. The reason is psychological, people hate realizing a loss. Another practical reason is that if borrow $1 million for a house, and it is now worth $800,000 you just keep paying off the mortgage and hope prices go up again. Selling it would require you pay in some cash to pay off the loan. All this is provided you keep you job and can afford th…
You're right that there's a keel keeping real estate from tipping. The reason isn't just psychological (although there is a strong sentimental sense of attachment you have to your house); real estate is also less liquid than almost everything else. Other factors, including proximity to work, children's schools, etc. make it a last resort in terms of liquidating. You're right -- as long as someone can keep up the mortgage payments, they'll do so.
The problem is that the bigger the bubble, the more unlikely someone can maintain those payments if suddenly unemployed or underemployed. The crash of 2008 wasn't so much averted as postponed. Subprime mortgages became 'nonprime mortgages'. The practices are still there. The artificially low interest rates are still there. The bicycle is going a thousand miles an hour and when it really crashes, look out.
It is true that housing prices in urban areas have risen astronomically in many regions of the world, and while we may well see a correction, I wonder if these these areas have simply become way more valuable than they used to be. People thought that the internet would make location irrelevant, but it seems that the opposite has happened. I can think of many armchair theories as to why, but it's not a simple question…
I think it would be very wrong to think of increasing house prices as a direct reflection of intrinsic value. In the UK the economic model of the past forty years has been based on a conscious policy of asset price inflation. Thatcher stripped away most of the social housing in this country and put it into the market. Few have been built since. The recentering of the economy in financial services has led to a massive…
Catchment areas for schools are also a significant factor, mandatory ballots for school entry would make a massive difference but our government has been going in precisely the opposite direction, privatising the education system and leading to an expulsion crisis which is having knock on effects in crime.
Also London specifically is one of the lowest density major capital cities, the centre is often old and beautiful but we could stand to build a bit higher.
Earlier quoted context omitted.
> But who wants to pay a million dollars, which you either have to pay interest on (if borrowed) or can't collect interest on (if not), when it's only going to be worth the same amount of money in 30 years? People who want to live somewhere? House prices tend to be what people can afford to live. People tend to budget x% of their household income on housing. With lower interest rates, it means houses are more expensi…
Are you comparing inflation adjusted house prices against unadjusted income? The % of take home pay people are putting, on average, in to housing here in the UK (ok, different economy) has gone from something like 20-25% in the 1950s to something like 40-50% now. I myself live in London and put 47% of my take home pay in to rent. That's without property related tax. I'm in the top 5% of earners in the land and can on…
Two earners on median £27k take home about £44k. 25% would be £900 a month, which is more than enough to rent a house.
This house is half an hour out of Manchester, 40 minutes out of Leeds: https://www.rightmove.co.uk/property-to-rent/property-372566...
£625pcm rent.
There's a kind of interesting way to think about this, especially in the UK. Because people don't automatically think in terms of opportunity cost and don't know eg. that the long term equity return is X, there's a disconnect between reality and how people think of it. People in the UK think of rent as "wasted" money. In an efficient market, it wouldn't be wasted at all because the saving from lower rent vs mortgage…
And why are stocks such an awesome alternative? A stock can go to zero...even foreclosed homes have some value.
Stocks are optional - shelter isn't. Since you must commit some of your earnings to shelter, it makes sense over the long run to fix the costs and find a way to profit.
On a subjective level, home owners have better finances, more say in guiding their communities, and many other advantages.
Of course we can turn your argument back...why does society make so many accommodations for people who just buy and sell pieces of paper?
Earlier quoted context omitted.
> It is true that housing prices in urban areas have risen astronomically in many regions of the world, and while we may well see a correction, I wonder if these these areas have simply become way more valuable than they used to be. They are, in the short-term. The problem is that high housing costs have a slow, long-term corrosive effect on a city. Companies have to pay higher wages for workers to achieve the same s…
> It's almost impossible to avoid this once the values are already ridiculous, but what the article suggests can mitigate it somewhat: Sustained moderate inflation combined with a large increase in the housing supply, so that real values come down even though nominal values are stable. I'm having trouble understanding what inflation means in this context. From the article: > There is a way out, but it’s not a pleasan…
There's a kind of interesting way to think about this, especially in the UK. Because people don't automatically think in terms of opportunity cost and don't know eg. that the long term equity return is X, there's a disconnect between reality and how people think of it. People in the UK think of rent as "wasted" money. In an efficient market, it wouldn't be wasted at all because the saving from lower rent vs mortgage…
Who are these people who intentionally seek a lower rent over a higher mortgage so as to invest in stocks? I've yet to meet one. Renters are just as likely to give in to vanity purchases, dumb spending habits etc... And why are stocks such an awesome alternative? A stock can go to zero...even foreclosed homes have some value. Stocks are optional - shelter isn't. Since you must commit some of your earnings to shelter,…
Some stocks can go to zero, some are very unlikely to and most portfolios have things that are very unlikely to flatline like govt bonds. Well i don't mortgage although i could, and I do save so hello you've met your first. The idea that we need a bank threatening to throw us out of our houses to enforce responsible saving is infantile and grotesque.
General criticism of the finance sector is a bit too off topic for me to engage with.
There's a kind of interesting way to think about this, especially in the UK. Because people don't automatically think in terms of opportunity cost and don't know eg. that the long term equity return is X, there's a disconnect between reality and how people think of it. People in the UK think of rent as "wasted" money. In an efficient market, it wouldn't be wasted at all because the saving from lower rent vs mortgage…
No wonder, banks were lobbying the state for generations. House is a purchase like any other, having to pay your tax money for somebody's else default on his McMansion is stupid.
I myself have zero reservations about renting till I kick the bucket. My dumbest decision in life was to listen to parents who were coaxing me day and night for a few years into buying a house in my hellhole hometown in Russia with like 75% of my lifetime savings. Yes, I spent ~$80k just to make my parents to fuck off. That was when I was 23, in 2014.
To some extend, I admit, the decision had in part an intention to teach them a lesson, of what a disservice they were making me with their "expert advise," but I could not have imagined just how wrong the things can go...