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Why Land and Homes Actually Tend to Be Disappointing Investments

• Overtonwindow 10y ago
  The title is slightly misleading. This is an article dominated by the discussion of buying land, specifically farmland. I don't see a lot of discussion about buying a home has a disappointing investment. With that said, I disagree with the author because he's failed to examine the long term security of buying land. Buying a parcel of land can pay off in ways not completely obvious in the present tense. It can be used as collateral on the purchase of a home. It can be used to build a future home on, or if all else fails, pitch a tent and count your blessings.
  • JumpCrisscross 10y ago
    > It can be used as collateral Registered securities can more readily be used as collateral on account of their liquidity.
    • Overtonwindow 10y ago
      Fair point.
• raintrees 10y ago
  You're doing it wrong? Cashflow? I am slowly making my way to independent wealth BECAUSE of land/home investments. But it is because they are in production of providing good homes to people (multi-family residential), not farming (large part of the short article) nor waiting for the turf itself to appreciate. Even the investment in farmland is not taking the production of the business into account. Wouldn't that be similar to investing in some servers, but letting them sit and hoping they appreciate in value, rather than being involved in what the servers are doing? This article seems so at odds with land/home investment, I am wondering what Schiller's real motivation is with it, or if it is taken out of context... What am I missing?
  • gizmo 10y ago
    Many folks (mostly boomers) believe that land/houses are by themselves a good investment. So they buy a larger house than they need and more land than they need and rationalize it saying it's the smart thing to do because "prices will always go up". Of course if you buy houses and rent them out you can make money. Being a good landlord takes work though, and it's by no means a guaranteed way to riches. Having unused rooms in your house or land that's idle? Lousy investment. Summer home? Lousy investment.
    • analog31 10y ago
      I actually doubt that investment value is primarily what drove boomers to buy bigger houses. They did it because they wanted the comfort of a bigger house, and didn't value some things that they were giving up such as pedestrian neighborhoods. Indeed, being a landlord is work, but I think that being your own landlord and pocketing the tax deductions and "imputed rent" is quite manageable for a family.
  • yaacov 10y ago
    Servers are a bad analogy because they don't come out with new versions of farmland every few years that make the old ones obselete. But I see your point that none of this really applies to homes.
  • ianai 10y ago
    I think You can label the whole article as public outreach.
  • refurb 10y ago
    A few thoughts: - Just because some gets you a positive return, doesn't mean it's an ideal investment. If you can get a 6% return, then an investment getting you 3% isn't that great. - Real estate is local. Schiller is looking at average across the entire country. Areas appreciate at different rates. If you're lucky enough to buy in an area where prices are rapidly appreciating, then it can be a great investment. If you're buying at the top, then it can be a really bad investment.
• ianai 10y ago
  I think this makes the point that real estate is a stock investment. You buy it today to turn it into rental income of some form. But the study did confine itself to farmland. That portion of real estate has always been the slowest to grow and for many reasons. There simply aren't as many people interested in owning (the same tracts of) farmland as there are homeowners in a town/city.
• TrysterosEmp 10y ago
  Wait, wouldn't a trend towards micro-apartments and higher density make urban land more valuable? I suppose the trick is buying urban land in just the right place if things get more dense.
  • 3minus1 10y ago
    Fitting more units in the same space would drive up value, but a large increase in available units would have the opposite affect.
• patall 10y ago
  I honestly do not get it. How can you make any assumptions about an investment when you only consider prices then and now? I mean, this land has produced goods for a hundered years, why aren't those counted to the three times the investment itself has increased in price . This is true for other inverstments too, but still you have to include that in your calculation. An oil field is even worth less after you have extracted the oil, still it might have been a good investment.
  • ianai 10y ago
    Thats the takeaway. People buy farmland for reasons other than property values since property values of farmland basically increase at inflation. It feels very humdrum.
    • Animats 10y ago
      Farmland is a form of industrial capital. It's only worth what you can make with it. Since the prices of agricultural products are flat or declining (agricultural productivity has improved) and transportation gets better over time (so farm location matters less), that exerts downward pressure on farm prices. As population in developed countries levels out and starts to decline, overall property values should decline. That happens, but not in a helpful way. What seems to happen is that population concentrates more. This is very visible in Japan. Tokyo and Osaka are doing fine, while small towns are winding down as young people leave. It's true for parts of the US - Detroit, Cleveland, Youngstown - where the heavy industry left and nothing replaced it.
      • ianai 10y ago
        We are probably not the target audience.
      • patall 10y ago
        I disagree. While the price of agricultural product declines, the production increases. And because transportation gets better, the population change in the developed countries matters less as you get to serve the world market. Also, at least in europe, we get massive subventions that end up as an investment without risk. And also: population is not a good measure for the need of agricultural need. For example, the growing demand for meat in China is said to be of greater impact to the world market than the population increase.
• cloudjacker 10y ago
  This was not insightful at all
  • paulpauper 10y ago
    agree. vague article and sparse evidence
• JumpCrisscross 10y ago
  Most Americans buy homes, not farmland. In that respect, the UK's "Safe as Houses" is worth a read. Summarising many studies on the matter, across countries and over long time horizons, houses appreciate at the cost of inflation. Short-term swings are primarily driven by credit; a bet on house prices rising is a leveraged bet on credit quantity increasing, i.e. rates falling. [1] http://www.newyorker.com/magazine/2006/10/30/safe-as-houses http://www.newyorker.com/magazine/2006/10/30/safe-as-houses
  • brians 10y ago
    Or inflation increasing, no?
    • JumpCrisscross 10y ago
      There are better inflation hedges. Home prices are more volatile than those assets, e.g. gold. Homes are also less portable. If you're worried about runaway inflation you're at risk of political failure. Makes no sense being anchored to the risk you're seeking protection from.
  • runT1ME 10y ago
    Are you unfamiliar with the concept of Leverage? Sure, having an investment keep pace with inflation isn't phenomenal, but in the US it's standard to put 20% down of the house value. So if inflation is 3%, I can realize 15% on my investment.
    • rdmcfee 10y ago
      Except your mortgage interest may also be 3% so you may realize nothing on your investment. Your interest costs will be proportional to your leverage so you need the asset to outperform your interest rate to realize anything.
      • jly 10y ago
        Yes but this is a home, and not some generic investment. I can either live in the home, saving livings costs (rent), or I can rent it out and generate income, which will pay for the interest on the loan.
• deleted 10y ago
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• mandelken 10y ago
  This article misses one crucial point: leverage. People can afford to buy a property many times their current savings with a mortgage based on their income, because the government in effect guaranties the credit risk in the US or subsidies it in other countries. For most citizens this is the only way to obtain wealth. If you are already wealthy then, yes, land might not be your best investment choice, but chances are you aren't (see Piketty).
  • rdmcfee 10y ago
    But you pay interest on your leverage. So if your asset isn't appreciating faster than inflation + your interest rate then I don't think you're actually realizing any gains.
    • petersellers 10y ago
      That's only true if you just let the property sit there without taking advantage of the potential ways it could produce income for you (e.g. rent). On the flip side, you also need to consider property taxes, maintenance, insurance, etc.
    • tcoppi 10y ago
      Not necessarily true because you are covering your need for housing at the same time as paying the mortgage. So even if it appreciated exactly at the same speed as inflation(as one would expect if housing prices were flat) you are only paying the interest rate but gaining an asset at the end of the mortgage. Also, that asset theoretically allows you to cover your housing needs for the rest of your life(with appropriate maintenance), so it should be valued as potential sale price + the value of owner's equivalent rent for the rest of your natural life.
    • lawpoop 10y ago
      This is what is different about real estate from all other investments -- you have you put your money towards it, whether it's an investment or not. You might not realize any gains on a mortgaged property, but it could be a better hold of money than rent.
    • 10y ago
• applecore 10y ago
  What's disappointing about an investment that holds its value for over a century, keeping pace with inflation, and you can live in it and bequeath to your heirs without a forced sale?
• SilasX 10y ago
  Sorry, I've never been able to reconcile these claims. On the one hand, any retirement-investment seminar is going to give the stat that real estate on average has returned just a little above inflation. OTOH, pretty much everyone's social group is full of people who bought a home that has significantly appreciated in value if they've held it 20+ years (and also saved them a ton in housing costs). What gives? - Is there a huge chunk of homes pulling down the average? - Is the home appreciation understating the return, after you account for interest/maintenance/tax costs? - Is our recent experience dominated by anomalously large returns that aren't likely to continue? - Is it an artifact of the calculation, which excludes relevant things like the imputed rental income (and not having to pay current rates)? Does this statistic really translate into "don't worry, you won't be priced out of any booking metro area"?
  • JumpCrisscross 10y ago
    > Is our recent experience dominated by anomalously large returns that aren't likely to continue? Bingo. Homes bought for capital gain are best thought of as leveraged credit bets. Where were interest rates "20+ years" ago? Where are they now? What fraction of the original investment was invested up front, i.e. down? (The last number speaks to leverage.)
  • hjnilsson 10y ago
    It's just the recent trend. And property prices will take a dive sooner or later. An interesting graph to keep in mind is [Amsterdam house prices](http://imgur.com/eGAE3BW http://imgur.com/eGAE3BW) adjusted for purchasing power the last 400 years. As can be seen, we just two years ago passed the all-time which ended with the Dutch Golden Age. The event that will cause the current market to collapse is not clear yet. But it undoubtedly will happen.
  • breischl 10y ago
    The two big reasons are incomplete accounting of holding costs, which you touched on, and ignoring inflation. Note that the article specifically talked about real returns, ie after factoring out inflation. For example, if somebody had bought a house for $100K in 1986, and sold it yesterday for $219K, they would probably be crowing about their great investment on Facebook. But in fact the cost increased by slightly under inflation, and they probably spent tens of thousands on taxes, insurance and repairs in that time. Now, they may have derived enough utility from using it as a home that it was still a good idea. But ignoring that and examining it solely as an investment, it's a money loser.
• lvs 10y ago
  FYI, the author is a Nobel Prize in Economics winner for his work in this area.
  • k2enemy 10y ago
    And yet he misses some obvious things. Would you buy farmland, let it sit barren, then sell it years down the road? Of course not -- you would rent it to farmers. This income would need to be included in the returns to buying the land.
    • pbhjpbhj 10y ago
      Unless you were getting subsidies to leave it barren? Such subsidies haven't been unheard of in the UK under the EU farming system.
      • dmoy 10y ago
        Quite common in the US too
    • lvs 10y ago
      Yes, you're right. The Nobel Prize winner completely misses that the value of an asset is complicated. He only talks about that in half of the piece. Also, many readers seem to miss the fact that Shiller almost certainly did not write that clickbait headline.
    • rythie 10y ago
      Would you buy shares and throw away the dividends?
  • paulpauper 10y ago
    and nobel laureates can't be wrong ?
• deleted 10y ago
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• ronnier 10y ago
  I guess it depends. I have two homes and I rent one out. It's almost paid off and I get $2,550 a month in rent for it. For me it's worthwhile and if I do this a few more times I could potentially be close to financially independence.
  • akavi 10y ago
    The question is what the opportunity cost of your investment is. How much money have you invested and how much time have you spent on the rental property? What would your returns have been had you invested that money and the money gained from using that time at some job in a stock portfolio instead? Now, it's possible, depending on where you are, that you got lucky and your real estate investments outperformed the market. But that's not always going to be the case, and it no more makes real estate a "good investment" than any other undiversified portfolio.
    • 09bjb 10y ago
      Most real estate investors would take issue with "getting lucky" as the main factor in outperforming the market. Unlike knowing whether a stock in the public markets is over- or under-valued, knowing how to increase the value of your rental without breaking the bank doesn't require years of research, insider knowledge, and fair fortune. Real estate will, for the foreseeable future, provide market-beating yields to those that know how to use it and aren't afraid of the extra work it takes to maintain and run (as compared to holding a stock).
      • refurb 10y ago
        Lots of people say this same thing about bonds, stocks, gold. Maybe it's true, but it's rare for anyone to have consistently high returns.
        • 09bjb 10y ago
          No, savvy real estate investors with a lot of hard-won knowledge beat the market and, more importantly, achieve their returns consistently in a variety of economic climates. It's not based on luck but, like using a piece of farmland optimally, requires knowledge of how to best leverage the asset. Unlike traders/mutual fund managers/hedge funds, who have been shown time and again to be charlatans, the regulars in real estate prove the naysayers wrong year after year.
• HappyFunGuy 10y ago
  Why should an industry that has existed for thousands of years have a high premium? Why would you want the houses of the world to cost more, so less people could have them? Low house prices and low land prices allow humans to actually use them. Stop seeing what is good, as bad. Dirty capital class casuals.
  • EpicEng 10y ago
    I'm sure you'll think this way until you eventually grow up and buy some land of your own. Then come back and tell us how much you appreciate a tanking real estate market.
    • HappyFunGuy 10y ago
      I sure you'll think this way, until eventually you grow up and develop some empathy of your own. Then come back and tell us how much you appreciate a world where no man can afford to own his own home, and all homes are owned by banks. Disclaimer, I am a proud member of the capital class.
      • refurb 10y ago
        Home ownership in the US is over 60%. What should it be? 100%?
        • HappyFunGuy 10y ago
          Perhaps by "home ownership", you really mean "owned by the bank that holds your mortgage" is at 60%?
          • refurb 10y ago
            Are you arguing that the only true form of home ownership is a fully paid off home? That's a high bar.
    • wlievens 10y ago
• mabbo 10y ago
  Taxes complicate things. In Canada at least, homes that you live in are not subject to capital gains taxes. So if my home increases in value, it was a tax-free investment. On top of this, I'm reducing my expenses. My rent used to go up every year, following inflation. My mortgage is a fixed amount, and I pay a very stable fixed amount of it every two weeks. Once inflation is factored in, I will pay less and less over time to live where I do. Extra money you earn is taxed. Extra money you save isn't. When taxes are high, this factor is important. Overall, I suspect I could make a bit more money investing and renting- but not all that much more. I consider the difference a little fee I pay to never have to deal with some shitty landlord again.
• known 10y ago
  45% of USA is uninhabited ;)
• tn13 10y ago
  This article has 0 information. The return on investment on a house is not just the cost of the house but also the rent money you have saved by staying in your own home. In fact without that you cant get +ve return even in upscale real estate investment.
• HappyFunGuy 10y ago
  Land and Homes should not suck useful capital out of our economies. Where could you spend more money and benefit less people per dollar? Our capital is better deployed in businesses where many more people benefit from many less dollar input. This is why the SP500 craps on real estate. Because it should. Hell, the only reason real estate has had the peaks it has, is because it was subsidized by the financial sector. And as you can see, that blip of misvaluation did much more harm than good. Business make the world better than houses do. Businesses are where you get people the best benefits. More expensive houses, to the point of unaffordable are the enemy. If you have allocated a huge portion of your assets into a non productive asset (a house), then you are part of what is wrong with the world. Stop expecting your "only benefits you house" to pay the same as "benefits 10x + more people" businesses. P.S. liquidity, capital surplus recycling, less bid/ask spread, less fees, less counterparty risk (eviction, destruction). The capital markets pretty much crap on the real estate markets. And they should.
  • malcolmgreaves 10y ago
    I largely agree with your statements. and especially with your overall tone and thesism. However, everyone needs a home. And it's foolish to believe that only businesses should own homes. How much "useful capital" should one expend on such a critical, life sustaining thing?
    • HappyFunGuy 10y ago
      I agree with you. Which is why we need more affordable houses, and less unaffordable houses. Because many in this world have more than they need, you can get the important, shelter by renting, lucky us! We can affordably live in things that took thousands of man hours of labor, and more capital, for a low monthly fee. One day, when robots build houses, owning can replace renting. Or when everyone stops the cargo cult of HOUSES MUST GO UP IN PRICE OR LIFE SUXORZ!!! It's funny how owning something distorts ones perception. What else in the world MUST GO UP IN PRICE! Notice I say price and not value, for it is truly only the price going up. Their utility remains static, or decreases as the view is blocked by high rises. Paperclips must go up in price! I own some!
• paulsutter 10y ago
  Land is valued according to the surrounding economic activity. Land on average is not valuable (just look down the next time you're on an airplane). Land in fast-growing cities goes up in value quickly. Land in dying cities goes down in value. Investing in land (and any associated cash-producing activities like buildings) is primarily a bet on the outlook for economic activity in the surrounding area. Long term farm prices is a poor proxy for real estate investing generally.
  • F_J_H 10y ago
    My thoughts exactly. If someone is looking to make decent returns with real estate, farms and rural properties are not where they'd likely be focusing. I live in Vancouver,Canada where real estate returns have been substantial. It completely depends on market dynamics.
    • potatolicious 10y ago
      I'd argue that Vancouver is exactly the sort of place where OP's market dynamics have broken down. The real estate market in Vancouver no longer at all - even remotely - represents the present or future expected economic activity in the surrounding area. One of the core issues with real estate is that in an ideal state they are priced to reflect their surrounding conditions, many (if not most) have had their prices divorced from any foundational economic growth expectations. Real estate becomes priced on a benchmark of other real estate, not underlying industrial or commercial activity. If Vancouver's real estate pricing reflected the surrounding economy there should be much cause for celebration - per capita income should be rising by several hundred percent, and the city's economy would be growing by double-digit percentages annually for some time to come!
      • F_J_H 10y ago
        Yes, that is true - the prices make no sense from a local perspective. However, I heard a keynote by an economist/urban planner, who suggested Vancouver needs to be considered within a global context rather than a local one since it is a very desirable city internationally, and draws buyers from all over the world.
• dimva 10y ago
  Counterpoint: 10-year REIT returns: 7.59% annually 10-year US stock market returns: 7.54% annually Looks similar, except that remember: 2006 was the peak of the real estate bubble. This would be like judging 10-year US stock returns by starting at the year 2000 - it'd be negative. Since its inception in 2004, VNQ has returned an annual return of 10.04%, approximately 3% higher annual return than the stock market. I don't think this should be the case - buying property and sitting on it shouldn't give you a higher return than investing in the real economy. But, with our anti-development government policies, this is what ends up happening. Sources: https://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&FundId=0986 https://personal.vanguard.com/us/funds/snapshot?FundIntExt=I... https://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&FundId=0970 https://personal.vanguard.com/us/funds/snapshot?FundIntExt=I...
  • compumike 10y ago
    On one hand, note that holding REITs is pretty different than "buying property and sitting on it"; these companies charge rents to real businesses & apartment-dwellers. They will (on average) generate and distribute profits from that activity even if the underlying property value remains completely flat. I'm not sure how that's different from "investing in the real economy" -- the apartment-dwellers or office-dwellers are happy to hand some profits over to the landlords in exchange for being able to be in a place with access to good jobs/culture/etc, and for the flexibility of not being locked down to that property. On the flip side, there is a "financial economy" side to it too. They're leveraged (as is an individual mortgaged homeowner). If property values do go up, and if interest rates do fall, then yeah, the REITs are going to be extra juiced -- this has happened over the time period you highlighted. But not without risk, too. In 2007-2009, the maximum drawdown (peak to trough) in VNQ was -73%; that's a lot worse than the -55% for VTI.
  • paulpauper 10y ago
    well but the author is a Nobel Prize winner and you're not ..so ...umm.. .counter evidence be damned
  • tuna-piano 10y ago
    Is owning a plot of land in times square really different than owning the Coca-Cola copyright? You own a real income producing, and value creating, asset either way.
• trgn 10y ago
  Does anybody know here when people started to think of their home as an "investment"? I mean, regular people, if that makes sense, ordinary families and such. I feel like it requires somewhat of an intellectual leap to see home ownership as a form of investment.
  • allthetime 10y ago
    When people started getting rich off of their homes. I grew up in Vancouver, BC and when you suddenly see a $500,000 home sell for $2,000,000 a few years later, real estate starts to look like a pretty good investment.
    • c-smile 10y ago
      But if you happened to have home in Richmond, BC, Canada that is in average 2-4 meters below sea level ... surrounded by those toy-dykes ... Just wait for flooding / earthquake to happen. Wondering what those naive Chinese investors would do. Just for the information about Richmond, BC: 10,000 houses are investment properties (stay empty) in the city of 160,000 residents. If to assume that each house is a living place for at least 4 people then it means 25% percent of its population has gone somewhere. 40,000 of Canadians were forced to live somewhere else, down in US presumably.
• paulpauper 10y ago
  Hmmm...let's see....Bay Area real estate has doubled since 2011, and has outpaced the S&P 500, even going back 30 years. So I guess all those people should feel like fools. As they say, 'location location location' , which Shiller ignores, in favor of the quote that fits his thesis, 'they can't make more land'. So tired of the generalizations and lazy thinking that passes for journalism these days, and even NYTs and Nobel Prize Winners are not immune
  • ggggtez 10y ago
    Sure, but the thesis is just that on average it's a bad investment, not that there are never winners.
  • refurb 10y ago
    So your assumption is that the Bay area real estate prices will continue to go up and could never go down? Bay area prices don't invalidate what Schiller said. If you can time the market then of course you can make a ton on real estate. Same thing with the market. Just because someone bought in a market where prices rapidly went up doesn't make them an investing genius.
    • paulpauper 10y ago
      prices did go down in 2006-08, before rocketing higher in 2011-2015. There are many factors that bode well for Silicon Valley real estate - scarcity, floods of capital - both cognitive and financial -in the region.
      • refurb 10y ago
        So you're saying it's different this time?
  • dredmorbius 10y ago
    Detroit. Clinton, IA. Stockton, CA.
• paulpauper 10y ago
  TLDR version: For home prices, a good part of the answer comes from supply and demand. As prices rise, companies build more houses and the supply floods the market, keeping prices down.
• trjordan 10y ago
  Land and homes are the only leveraged asset available to the average American. Even at only 1.1% per year, if you take out a mortgage and put 20% down, you get 5.5% real return. The S&P is something like 7%. It's not insanity if you can fund an investment with close-to-inflation debt and 20% or less deposit.
  • w4 10y ago
    > Land and homes are the only leveraged asset available to the average American. Bingo. This is always what's missing from this conversation. Yes, it's true that real estate is not a great investment when compared to other asset classes. However, for your average American, it's one of the only asset classes where leverage is readily available, which means it's one of the few ways for average people to build real wealth. And of course, I'd be remiss if I didn't also point out that leverage can easily cut the other way as well (it can greatly magnify losses).
• putlake 10y ago
  Entry load of 6% (real estate commissions) 1% penalty every year (property tax) Exit load of 6% (commissions again) That is why real estate tends to be a worse investment long-term compared with the financial sector.
  • w4 10y ago
    >Entry load of 6% (real estate commissions) 1% penalty every year (property tax) Exit load of 6% (commissions again) Whoa whoa whoa, you can't call the commission a cost on both the purchase and sale. Either call it a cost on the sale (seller picks up the tab since seller pays the agent), or call it on the purchase (sellers aren't dumb, and price in the commission). Don't call it a cost on both sides of the transaction, that doesn't make any sense.
  • vonmoltke 10y ago
    You are inaccurately double-counting the commission. There is no "entry load" for residential real estate. Also, your analysis excludes the utility value of having a roof over your head or tenants paying rent. It basically assumes you buy a house and let it stand vacant to cash in on appreciation. Nobody in their right mind does that.
  • bzbarsky 10y ago
    0 capital gains tax for most people. For a long-term investment, just that part can be a huge win, depending on inflation rates.
• mungoid 10y ago
  I can't speak for most people, but I was young and ignorant enough to get talked into buying a home that I couldn't afford during the housing bubble. I managed to make it 5 years before having to foreclose. It was a terrible money pit and I'm in a much worse financial situation now than I was before I bought the house. Before i bought the house everyone talked about how great of an investment homes were, but nobody talked about how expensive home ownership was and how much deeper in debt you need to get in order to fix a house up. The funny thing is that I could buy a house but couldn't get credit or loans to fix the house up. Worst possible situation you can be in. Even though the bank and realtor were liars and pushers, I don't blame anyone but myself for falling for it. I hope you take this in mind before you buy your first home
• tim333 10y ago
  The article is kind of dumb in that it ignores rental income. If the title was "investments where you get no income tend to be disappointing" then he'd have a point. Real estate actually tends to be the best investment for most normal people. It's fairly easy to understand and doesn't go bust like tech stocks. It keeps up with inflation unlike bonds or bank accounts. You can borrow and leverage up without margin calls unlike almost all other investments. I've got a friend in London with a normal job who just bought a few flats for like £90k mortgage, £10k down and the equity in them is now well over £1m. No other regular investment performs like that with little risk.
  • rahimnathwani 10y ago
    "I've got a friend in London with a normal job who just bought a few flats for like £90k mortgage, £10k down and the equity in them is now well over £1m. No other regular investment performs like that with little risk." From the numbers you quoted, I assume (s)he got started in 1999/2000? It seemed less risky then, because: 1) Rental income on a 100k flat (~10k/year) would easily cover the interest cost (5-7k/year, depending on the mortgage deal). 2) Although prices were already higher than historical prices, there was no sign that they were becoming unaffordable. Many people in London earned >=30k or had joint income of >=36k, so they could easily get a 90k mortgage. 3) Management fees on flats were low (less than 10% of the monthly rent). Only (1) is still true today, but could reverse if interest rates go up a little. Today's buyers do not face the same environment your friend did.
    • tim333 10y ago
      I agree with that. I simplified a bit, I think the most recent purchase was around 2007 for ~300 and would be wary of piling in today in London. If the area you are in is reasonably priced and going up though the strategy will still quite likely work.
• mark_l_watson 10y ago
  If I were still young, I probably would not invest much in real estate right now, at least not until a major downturn in prices. It used to be very different. A year after I graduated from college I bought my first home in the mid 1970s, and it is still a good income-generating rental property. Back then, most of my friends and I all had the same goal: own our own home and one or two rental properties. Back then, this was a great strategy. If I were 25 right now, I would probably rent in a beautiful city, probably not own a car, and seek other investments, and keep investing in my own training/education.
• HappyFunGuy 10y ago
  Home building > Home owning Building beats speculating Speculating is only as useful as it modifies builder behavior.
• bane 10y ago
  It's probably best to not think of buying property as an "investment" in the same sense that buying other monetary instruments is. You must pay to live somewhere, and by purchasing the property you live in, you do a more efficient job of capturing and minimizing that expense. In most places, the cost to rent is within spitting distance of the average monthly mortgage. All things being equal, buying parks some of your money until some point in the future when you can recover it, instead of just giving it to somebody else to park. In general, since the population of the Earth is growing, and we're not adding much more land to the planet (in fact, we may be doing the reverse), the inventory of available land shrinks and property is likely to increase in value at at least the rate of inflation, but often slightly higher over decades. Not great if you think of it as investment, but far better than showing it as a raw expense.
  • peckrob 10y ago
    When I bought my first home, my Dad gave me a good piece of advise: "Don't look at it as an investment, look at it as a home." What he meant was, you have to live somewhere NOW. If you make some money at some undefined future point all the better, but right now you need a roof. But even if you lose money selling it later, unless things really go to hell, you'll probably lose less than you would have paid in rent over an equal period of time. And there's intangibles to owning a place that you can say is yours. I don't have to worry about drunken parties above my head, or finding parking, or my neighbor catching the building on fire trying to cook. If stuff breaks I can fix it, not have to wait for maintenance to get there "sometime" (my last apartment before I bought the house, the AC went out. In Alabama. In August. It was 90 degrees inside for 4 days before maintenance finally got around to fixing it).
• tacostakohashi 10y ago
  An excellent, and sobering article from Shiller. It is rather unfortunate that such mythology and conventional wisdom around real estate being a wonderful "investment" has built up, to the extent that it's now challenging to have a sensible discussion with anybody on the topic. Who knows how many young adults have been pressured into real estate by their families, partners, and others, rather than following their passions in other areas. I've bought and sold a number of homes over the years, and I prefer owning to renting, for practical reasons. Still, it's frustrating that everybody encourages one to put much more money that is necessary into a home. Right now, I live in a 50-year old property with an original bathroom and flooring. In talking to architects, contractors, neighbors and the like, nobody really seems to get the concept of renovating these items, bringing them up to modern standards and catching up on deferred maintenance, as opposed to overcapitalizing. The general assumption seems to be that this kind of thing is an "investment", and therefore the more money spent, the better, despite mounds of evidence to the contrary.
• shitgoose 10y ago
  why don't we take period 1971 to 2016 - a brave new world of modern economics (fast forward gold standard, wars and other barbarities). standard and poors grew from 100 to 2,100 (i.e. about 20 times). farm land price grew from 200 to 3,000 (i.e. 15 times) and it grew straight like an arrow, except for a small hump in 1980's. unlike stock market unicorns. nothing disappointing about this! this is a 5 min back of an envelope calculation, correct me if i am missing something.
• rdlecler1 10y ago
  Meanwhile in San Francisco, house prices have increased an average of 6.6% for the past 60 years. https://experimental-geography.blogspot.com/2016/05/employment-construction-and-cost-of-san.html https://experimental-geography.blogspot.com/2016/05/employme... If he's taking the national average, which will include plenty of low-demand areas around America, then his comments are not very enlightening for most of the readers of the NY Times who tend to live in high-demand. Add to that, you still have to pay to live somewhere.
• dsfyu404ed 10y ago
  The popular perception that land is a good investment comes from the wealth of the 1950s allowing tons more people to have fond memories of vacationing somewhere picturesque and then the interstate highway comes along making those areas logistically practical. Even if you have a pile of hazmat sitting on it land that's within a ~20min drive of the ocean is not going down in value. Add to that the tax incentive structure and buying a house that's sitting on a huge chunk of land that can be subdivided years down the road if desired makes good sense for many people.
• uslic001 10y ago
  Real estate has been my best investment sector to date. I bought 33 acres of raw land in rural NC in 1997 and sold it 7 years later for twice what I paid for it. I rolled that money over into another piece of land so the profits would not be taxed and sold it in 2007 for twice what I paid for it. I was heavily into REIT's for a time when I was getting 20% returns for 4 straight years and sold before they tanked. Given all the crashes since 1997 in the stock market my brokerage account has not done nearly as well as my real estate investments. The problem is the right pieces of property are few and far between so they are much harder to find. Timing of when to get into and out of REIT's is also very tricky. I don't have the skills to be a landlord. My personal house has not done nearly as well in regards to appreciation. My business real estate has also not done nearly as well in appreciation. So over all I find it best to be diversified in my investments. It is never good to have too many eggs in one basket.