Housing bubbles are universally destructive • Hacker News Board

Re: Housing bubbles are universally destructive

#81

Post by bobthepanda » Tue, Oct 02, 2018, 9:22 PM UTC

mistermann wrote: post #77

bobthepanda wrote: post #32

Earlier quoted context omitted.

Housing markets are only overheated if supply is not keeping up. There are scenarios where an overheated market leads to oversupply of housing; but there is a few years' lag between investing in construction and the units coming online due to the time it takes to finance and construct housing.

> Housing markets are only(!) overheated if supply is not keeping up. Would this imply that there was a tulip shortage in Holland in the 1630's, or am I being excessively pedantic and should have assumed a prefix of "In the long run...."? https://en.wikipedia.org/wiki/Tulip_mania Or another way of putting it is: is there evidence that all markets are perfectly balanced at all times, always and everywhere? Is the mark…

If supply were able to keep up with demand, then the tulip price could've stayed the same. Of course, we live in the real world, where you can only ramp up production of good so quickly. But no one said the demand is rational.

There are places which manage to build housing without massive price appreciation, like Tokyo. But once the market's too overheated because of supply mismatch you basically can't cool it down only using construction, because construction time takes so long.

Re: Housing bubbles are universally destructive

#82

Post by nostrademons » Tue, Oct 02, 2018, 10:17 PM UTC

leoedin wrote: post #62

zimablue wrote: post #42

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…

When people talk about the opportunity cost of buying, they very rarely take into account leverage. A typical house buyer might have somewhere between 2 and 9x leverage on their deposit (ie a 66-90% loan to value). Once you take that into account the returns, even if you don't take into account capital appreciation (essentially the saved cost of renting minus maintenance costs) rise significantly, becoming competitiv…

Leverage isn't free: what you gain in returns you lose in risk. For housing, this is the risk that the bank can foreclose and take the house if you miss a payment, or that you can end up underwater and trapped in a location with no jobs if the housing market declines under your equity.

You can leverage up the same with stocks, just by buying them on margin. The risks are effectively the same: if the stock declines, the bank sells it off and seizes the collateral to cover your debt. The rates are also not that different: 5.25% vs. about 4.75% for mortgages now. People are rightfully skeptical about the risks of buying stocks on margin, but they never think much of the risk of foreclosure when buying houses on mortgage.

Re: Housing bubbles are universally destructive

#83

Post by mistermann » Tue, Oct 02, 2018, 10:18 PM UTC

bobthepanda wrote: post #81

mistermann wrote: post #77

Earlier quoted context omitted.

> Housing markets are only(!) overheated if supply is not keeping up. Would this imply that there was a tulip shortage in Holland in the 1630's, or am I being excessively pedantic and should have assumed a prefix of "In the long run...."? https://en.wikipedia.org/wiki/Tulip_mania Or another way of putting it is: is there evidence that all markets are perfectly balanced at all times, always and everywhere? Is the mark…

If supply were able to keep up with demand, then the tulip price could've stayed the same. Of course, we live in the real world, where you can only ramp up production of good so quickly. But no one said the demand is rational. There are places which manage to build housing without massive price appreciation, like Tokyo. But once the market's too overheated because of supply mismatch you basically can't cool it down o…

> But no one said the demand is rational.

If the demand isn't rational (for example, actual need for physical shelter), it doesn't require a lack of supply for a market to become overheated.

Markets can be very strongly affected by greed and mass delusion, an actual lack of supply is not required to drive prices up significantly. You could have a fun pedantic argument over that last statement if you don't want to differentiate on the different kinds of demand, but my point is that demand can vary dramatically with little change in underlying fundamentals - human emotion is more than enough.

Re: Housing bubbles are universally destructive

#84

Post by _ea1k » Tue, Oct 02, 2018, 10:55 PM UTC

zimablue wrote: post #49

claydavisss wrote: post #47

Earlier quoted context omitted.

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,…

What you're saying, which is a good point, when you say that shelter isn't optional, you can phrase that more precisely as "owning property is a hedge against variable property prices". It's true but there are other ways to hedge this, eg. Long term rental contracts, limited rent controls or owning specific derivatives all reduce this risk. There are societies that run like that, eg. Germany. Some stocks can go to ze…

"owning property is a hedge against variable property prices"

One of the best pieces of financial advice that I've ever heard centers on this. "The purpose of owning a house is to fix the cost of housing." Its brilliant in its simplicity and I had never thought about it until hearing it a few dozen times. :)

Unfortunately, it is also a vastly different mindset from many home buyers (and, for various reasons, sellers).

Re: Housing bubbles are universally destructive

#85

Post by baybal2 » Wed, Oct 03, 2018, 8:19 AM UTC

restalis wrote: post #70

baybal2 wrote: post #50

Earlier quoted context omitted.

>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 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…

Wow! First, is Vladivostok that bad to be called "a hellhole" (that is, if you're referring to it, of course), and second, if it was only to make your parents shut up, couldn't you somehow done it with much, much less (say, a village house somewhere)?

My hometown is Blagoveschensk, a city much more further inland than Vladivostok.

Re: Housing bubbles are universally destructive

#86

Post by a008t » Wed, Oct 03, 2018, 8:33 AM UTC

sct202 wrote: post #71

a008t wrote: post #61

Earlier quoted context omitted.

Why would interest rates "normalize" though?

US Federal Reserve rates have been increasing so banks get loans at higher prices which means consumer interest rates will also increase.

But the Fed cannot just arbitrarily set rates, presumably? There is some "real" rate in the economy, which is determined by supply/demand of capital at different maturities. If the Fed goes significantly below or above that, you should get price inflation or deflation.

Some people argue that interest rates are objectively low because we are in secular stagnation - there are loads of savings, but real economy growth is sluggish which means there are few investment opportunities, leading to low interest rates (e.g. https://www.morganstanley.com/pub/content/dam/msdotcom/ideas... - may not be the best link, I have seen the ideas elsewhere).

Re: Housing bubbles are universally destructive

#87

Post by a008t » Wed, Oct 03, 2018, 8:53 AM UTC

ThrustVectoring wrote: post #67

leoedin wrote: post #62

Earlier quoted context omitted.

When people talk about the opportunity cost of buying, they very rarely take into account leverage. A typical house buyer might have somewhere between 2 and 9x leverage on their deposit (ie a 66-90% loan to value). Once you take that into account the returns, even if you don't take into account capital appreciation (essentially the saved cost of renting minus maintenance costs) rise significantly, becoming competitiv…

Also a 30 year fixed mortgage effectively shorts long-term bonds with an embedded call option (via refinancing) to further reduce the risk of the position. It's an incredibly valuable consideration that's not super obvious.

One can get a 30-year fixed rate mortgage?

Re: Housing bubbles are universally destructive

#88

Post by zimablue » Wed, Oct 03, 2018, 9:45 AM UTC

GreeniFi wrote: post #79

leoedin wrote: post #62

Earlier quoted context omitted.

When people talk about the opportunity cost of buying, they very rarely take into account leverage. A typical house buyer might have somewhere between 2 and 9x leverage on their deposit (ie a 66-90% loan to value). Once you take that into account the returns, even if you don't take into account capital appreciation (essentially the saved cost of renting minus maintenance costs) rise significantly, becoming competitiv…

I find it distinctly odd that arguably the central organizing feature of the British economy and culture is a massive state-sanctioned pyramid scheme, which as the author points out, is wrecking Britain, as populist governments invesnt ever more ludicrous tricks to inflate prices further to win political support. I truly wonder how the Millenial generation might disrupt this idiocy and would welcome suggestions here.…

My manifesto, roughly. I've never heard of this suggestion as inflation as a remedy, but that seems a bit like chemo, quite a wide-ranging medication:

1. Replace stamp duty with a progressive wealth tax (this is the hardest one politically I think. Really you'd need coordination with other EU states, this is discussed in Capital by Picketty) 2. Light rent controls (just can't be raised by more than X% over 1 year 2 years, to prevent people getting spiked) 3. Expand renter protection - whatever the agency there currently is we triple it in size and give it teeth 4. Include all houses in capital gains, at the same rates or higher than you'd get on stocks. I guess you have a rolling exemption so that people aren't totally blindsided. This would hopefully be counterbalanced by removing stamp duty. 5. Specific tax pn land banking by builders 6. A small land value tax 7. No school catchment areas, open application and decision by ballot. 8. There have to be more details on how we change the rules about who can build what where. It's very heavily regulated (down to minimum sizes of bedrooms, amount of space for leisure etc). I dunno if the point is to remove the regulations, more like shine more light on them and maybe reconsider some of them and add others. For example, I've spent 10 years in London in rooms that were below the minimum room size allowed for new developments and so have most people that I know, so that one should be removed.

Re: Housing bubbles are universally destructive

#89

Post by saint_abroad » Wed, Oct 03, 2018, 11:28 AM UTC

a008t wrote: post #86

sct202 wrote: post #71

Earlier quoted context omitted.

US Federal Reserve rates have been increasing so banks get loans at higher prices which means consumer interest rates will also increase.

But the Fed cannot just arbitrarily set rates, presumably? There is some "real" rate in the economy, which is determined by supply/demand of capital at different maturities. If the Fed goes significantly below or above that, you should get price inflation or deflation. Some people argue that interest rates are objectively low because we are in secular stagnation - there are loads of savings, but real economy growth i…

> But the Fed cannot just arbitrarily set rates, presumably?

They absolutely can, by quantitative easing (aka large-scale asset purchases) buying $4 trillion of bonds priced to keep yields in range. This market can remain irrational longer than anyone can remain solvent.

By price-fixing this market they stimulate liquidity. Institutions (such as pensions) that would normally buy safe bonds are forced to invest elsewhere at marginal yields (ie. corporate bonds and MBS). Other, more risky, investors chase growth stocks with marginal yields.

> you should get price inflation or deflation.

Indeed there has been, though currently visible only through asset prices such as bonds, stocks, securities and housing. Who can complain?

The danger comes when the tide goes out and yields go up [1]. All that extra liquidity washes from assets into yields, thereby driving inflation on produce.

[1] And up yields must, to determine how much have been swimming naked.

Re: Housing bubbles are universally destructive

#90

Post by ThrustVectoring » Wed, Oct 03, 2018, 4:08 PM UTC

a008t wrote: post #87

ThrustVectoring wrote: post #67

Earlier quoted context omitted.

Also a 30 year fixed mortgage effectively shorts long-term bonds with an embedded call option (via refinancing) to further reduce the risk of the position. It's an incredibly valuable consideration that's not super obvious.

One can get a 30-year fixed rate mortgage?

In the US they're standard.