26 ms·

When will we learn that a "strong" housing market is not necessarily a good thing? High housing prices are great for those who already owned houses but terrible

When will we learn that a "strong" housing market is not necessarily a good thing? High housing prices are great for those who already owned houses but terrible for everyone else (e.g. the entire generations born after prices became inflated). Not to mention people are greedy and will over leverage themselves when interest rates are good. No country should let the "landed gentry" hold them hostage over interest rates or tax policy so that their assets - many of which they do not even actually own - can appreciate.

maxxxxx 9y ago
Totally agree. It seems one of the factors that helped the US until the 90s was that housing was affordable so people could move around easily. A "strong" housing market seems to indicate that there are no productive places for investing and no wage growth so people need to gamble on houses to rise instead.
- expertentipp 9y ago
  > A "strong" housing market seems to indicate that there are no productive places for investing and no wage growth so people need to gamble on houses to rise instead. You've just summarized the situation in Prague, Czech Republic.
  - jankotek 9y ago
    Prague has problem with supply, new flats are build slowly.
  - Yizahi 9y ago
    Same in Ukraine
    - novalis78 9y ago
      Same in Munich... QE money looking for a 'tangible' home
  - contingencies 9y ago
    Same in China. Same in Australia.
    - marvin 9y ago
      Same in Norway.
      - expertentipp 9y ago
        boooom? https://www.youtube.com/watch?v=TpCb3xjh-Kk#t=04m05s https://www.youtube.com/watch?v=TpCb3xjh-Kk#t=04m05s
  - paganel 9y ago
    Same in Romania. For the first time in my life (I’m 37 now) I heard a couple of acquantainces saying something like “We’re 20,000 Euros reacher now compared to last November, our apparment is now worth 90,000 euros compared to 70,000 euros last November”. This discussion happened this summer, since then I’ve heard at least a couple other different couples saying pretty much the same thing (only the sums were different). Never mind they their investments are a hell of a inliquid ones and that the banking rules can change anytime, just like that (like it happened after 2008), which would send the real estate market collapsing.
    - bobowzki 9y ago
      I hear this almost everyday in Sweden.
- opportune 9y ago
  I think a strong housing market may be the result of lack of productive capital, but I think it has more to do with supply and demand. Most average people pay for a house using a mortgage payment, so when buying a house, they'll be looking for a house that has an affordable mortgage payment. Let's say Joe wants to spend / can afford a $1000/month mortgage payment. If interest rates are 5% and the maximum mortgage period is 30 years, Joe can afford to buy a house worth $190,000. However, if interest rates go down to 2% and Joe can now take a 40 year mortgage, Joe can now buy a house worth about $330,000. Great for Joe! The only problem is that housing supply is relatively inelastic, so the supply of housing didn't magically increase overnight. When Joe buys a house, he's essentially bidding against a bunch of other people for that house. If those other people's mortgage payments were affected the same way, then the actual effect is that what was once a house worth $190,000 is now worth $330,000. This sounds like a problem out of an Econ 101 exercise. Either politicians are stupid, or more likely, they know that "homeowner policy" like this can make them and their other rich buddies even richer.
  - Gustomaximus 9y ago
    Homes are important to people and they tend to buy as good as they can afford. When employment is stable and interest rates are low people will spend more because they can and feel safe doing so. Early movers purchase a higher grade of home than they could have previously. Eventually this shifts the market as a whole as income distribution remains stable. Then people buy the same house they would have previously at a higher price. Now nothing has changed and people are more in debt as the cycle returns to normal, if it ever does. Plus the whole investor (foreign and domestic) vs owner occupier discussions we are seeing plenty of...
    - samsonradu 9y ago
      Isn't it inherently bad to buy "as good as you can afford"? Employment is rarely stable throughout a 30-year period. Shouldn't people be much more careful when maxing out their mortgage relative to 'the good times'?
      - 9y ago
- bmm6o 9y ago
  I don't think it's that there aren't productive places for investing. Housing is unique in that a regular person can get a loan to purchase an asset that normally appreciates, and they can deduct the interest from their taxes. There are a lot of transaction costs, so the market isn't as liquid as some others, but where else can the average person get that kind of leveraged investment?
- api 9y ago
  There's been a number of great bits of research over the past few years arguing that our "strong" housing market is a primary cause of economic stagnation. Let me count the ways: (1) reduced labor force agility as you say (2) high rent and mortgage cost soaks up money that could otherwise fuel consumer spending, creating a demand constrained economy (3) high housing costs in major cities also contribute to poverty elsewhere by preventing people from circulating between high priced urban and lower priced rural areas (4) high housing costs risk actually destroying centers of excellence like the SF Bay Area and New York by making it impractical for new talent to move there
  - eli_gottlieb 9y ago
    Got any reading on that? I'd never thought of it that way, but when you say it, it seems very plausible.
- gsam 9y ago
  I somewhat disagree. The opposite can also occur. Because everyone is gambling on the house market, the amount of productive places for investing diminishes as they are left to be forgotten. This can be obviously self-perpetuating but this is how I would characterize New Zealand.
- erikpukinskis 9y ago
  You are correct, but VR will wreck the housing market within 10 years* , so it’s not a long term concern. * 1st sub-$400 all-in-one with 6dof, face and finger tracking + 5 years
tom_mellior 9y ago
I agree. The article isn't very clear on what the problem would be, though it does mention deflation. Deflation is bad by axiom, and we must be pathologically afraid of it. If housing prices sink enough, that may mean that the overall inflation rate turns negative, which is deflation, and thus bad. Even if this "bad" thing, in this case, would just mean that people could consume, save, and invest more.
- sliverstorm 9y ago
  People don't consume more in a deflationary world, per the economists, because that dollar you've got today is worth more tomorrow, so you put off as many purchases as possible. Fewer people would take out loans as well, because the loan would become harder and harder to repay over it's life (which means fewer opportunities for investors)
  - asabjorn 9y ago
    That doesn’t make sense at all except for with housing. If I want to go vacation I will, if I need a new washing machine I will get it, if I want a cappuccino every morning now I can afford it no matter who I am!
    - sliverstorm 9y ago
      If you want to go on vacation, but you can go on a little bit of a nicer vacation if you wait until next spring... If your old washing machine still mostly works, the new one will be cheaper if you can get the old one to limp along for a while longer... People don't completely stop buying things; life must go on. But people would start to drag out purchases where ever they can. Have you ever put off buying a computer or phone because you know next year's chips will be faster and batteries will last longer?
      - asabjorn 9y ago
        What seems to matter more is that there has been a productive deployment of capital that gives you a reason to buy a new product, and that you have discretionary income after housing cost and other fixed costs are paid. High housing costs are an incredibly unproductive use of capital unless it leads to building new supply and is therefore effectively a temporary incentive for developers to build more. Landlords on the other hand want there to be an undersupply, and don’t fully align with developer interests. Prices for consumer goods have decreased for quite a while and people still buy. And even when computers were improving significantly every year and prices went down people on average still increased their buying of new computers.
ptha 9y ago
In Ireland we had a property bubble during the "Celtic Tiger" years, and suffered a major correction after 2007 [1]. Apartments in Dublin the capital city lost about 62% of their value. 10years later and prices are climbing steadily upwards [2]. It's deja vu all over again. In Ireland we have a national obsession with owning property. [1] https://en.wikipedia.org/wiki/Irish_property_bubble https://en.wikipedia.org/wiki/Irish_property_bubble [2] https://tradingeconomics.com/ireland/housing-index https://tradingeconomics.com/ireland/housing-index
- Supernaut 9y ago
  Your use of the term "obsession" implies a degree of irrationality. Many people, myself included, would contend that the desire to own your own home is eminently sensible.
  - astura 9y ago
    Jeez, nobody said the desire to own your home was irrational, by definition. You can have a rational desire to own a home or you can have an irrational obsession. Irrational obsession would include things like when you prioritize homeownership over financial security and other basic necessities like healthcare or food. For example I know someone who gave up health insurance to buy house - and she readily admits this.
    - GarvielLoken 9y ago
      You don't have to pay for health insurance in Sweden.
      - astura 9y ago
        Of course, it was merely an example of an unhealthy obsession I've personally seen. There are many more. Another would be neglecting to save anything for retirement because you believe your home is your retirement fund.
      - ptaipale 9y ago
walterstucco 9y ago
We house owners pay a lot of taxes on houses in Italy so it's not exactly a paradise, the real problem is selling them. Anyway I bought mine when I was 29 and rates were much higher My friends at the time were richer than me, their families were richer than mine, they just loved spending money on cars and expensive goods in general instead of houses, that they possessed as a family There's a difference, a big one, between an housing bubble and an honest investment I knew the neighborhood in Rome where I bought the house would expand in the next 10 years, I wasn't trying to exploit newer generations (I'm 40 BTW) I was trying to secure my future
IdontRememberIt 9y ago
The older generation could buy at a very low price and refinance during a very long almost nul interest rate era. Guess which generation owns the political and financial power... I am scared that in some high public debt countries they will confiscate value through (increased) inheritance tax... But I am even more scared by the ECB normalizing the interest rates...
teekert 9y ago
High housing prices are also very nice for banks and benks control nations. Essentially all mortgage money is created as dept. Banks can simply say: Here you go ma'am/sir, here is your money, created out of thin air. Now, please sign here to pay for your house twice, 1 time to the original owner and 1 time to us, because we created this money for you out of thin air.
- mnm2 9y ago
  Yes and no: The bank wants 2% as interests, but inflation is 3% --> The Bank effectively loses money
  - icebraining 9y ago
    Isn't that only true for fixed-rate mortgages? At least around here, almost all are variable-rate, so they rise with inflation. I think banks only really lose money on defaults, and that's if the house lost value.
  - yellowbeard 9y ago
    The bank only has to have a very small percentage of the money they loan you. Most of it is created at the time of the loan.
    - teekert 9y ago
      Exactly, the bank is not hurt from money devaluating when they don't have to do anything for it but create a dept in their books. Sure, what you will pay them will be less in 20 years but it more than the nothing they had before...
AznHisoka 9y ago
Shouldn't home prices rise the same rate as inflation? The % of salary people devote to housing shouldn't increase by a large amount each year. And people's salaries don't rise that much year to year either. It rises the same rate as inflation.
- opportune 9y ago
  In this case home prices rose because it became cheaper to make mortgage payments on a house. People were willing to spend the same mortgage payment as before, so the net effect is that housing prices rose. Salaries don't necessarily rise at the same rate as inflation. If they did, there would be 0% real growth in the economy. Inflation is usually measured by watching the prices of a basket of goods: if those goods' prices increased by 5%, then inflation is 5% (in reality it can be more complex than this). Inflation isn't a "real" metric in the sense that it affects all things equally. Housing prices could increase by 50% but the price of a gallon of oil or a bar of soap could decrease by 10%.
  - dragonwriter 9y ago
    > Salaries don't necessarily rise at the same rate as inflation. If they did, there would be 0% real growth in the economy. You are confusing “salaries” with “output”; salaries (or even domestic incomes in total, which involves more than salaries) growing at the rate of inflation can occur with negative or positive real growth. Zero real growth means output growing at the rate of inflation. (National economies aren't closed systems, and some output may produce foreign rather than domestic income, as in returns to overseas investors.)
    - opportune 9y ago
      True, but for practical purposes salaries (or the mean of salaries + returns from investments) closely approximate output. In any case it should be clear that salaries and inflation aren't directly linked. Salaries should (generally) increase slightly more than inflation as productivity increases over time
- 9y ago
eikenberry 9y ago
> High housing prices are great for those who already owned houses... Not unless you are ready to sell, otherwise it kind of sucks to have your property taxes go up 10-20% every year.
- ollebro 9y ago
  We don't have a property tax in sweden. Also no inheritance or gift tax. Very good place to live if you are wealthy and don't make money the peasant way of going to work.
  - ttul 9y ago
    I see your problem right there...
  - jazzyk 9y ago
    Why did a lot of rich people (Bjorn Borg, Ingvar Kamprad (IKEA)) move out of Sweden, then?
    - ptaipale 9y ago
      They moved out earlier, when there were (quite high) property taxes. The tax was abolished in 2007. Ingvar Kamprad moved to Switzerland in 1976; in 2014, when the abolition of 2007 had survived one election cycle, he moved back to Småland. Björn Borg moved out of Sweden already in 1974 at age of 18, perhaps more because on 90% income tax than property taxes.
- christophilus 9y ago
  Yeah. This 100%. It's a broken system for everyone except investors (and maybe even for them, ultimately).
- pjc50 9y ago
  This is very location-dependent. Here in the UK, the nearest thing to a property tax is the "council tax", which is based on the estimated value of the property in 1991. There is also a tax on property transactions which can be considerable.
lisper 9y ago
> High housing prices are great for those who already owned houses Not really. Rising prices (not high prices) are great for people holding houses as investments. But for owner-occupied houses, rising prices are as bad for the owners as they are for everyone else. my wife and I own a house in Northern California, which we bought during the sub-prime crash. Since then it has nearly doubled in price. It is also too big for us, so we'd like to sell it and move to a smaller house. But we can't. Why? Because by the time you factor in: 1. Capital gains tax 2. Real estate agent fees 3. Higher property taxes (even a smaller house costs much more than the prop-13 basis in our current house) we can't afford to move!
- dmode 9y ago
  I am very confused on your reasons not being able to downsize. Capital gains should have no impact, since first 500K is exempt. So you will have at least 500K in cash. Real estate agent fees are everywhere and can be negotiated to 2%. Property taxes are not really high. I live in Union City, and pay 1.2%. I guess you cannot downsize because a smaller home costs a lot of money these days. Which is fair enough, but you can book your profits, invest that cash in other assets and rent for a few years till the market comes down.
  - lisper 9y ago
    That's true, we could do that. But then we'd have to move twice, and at this point in our lives (we're both >50) moving is a non-trivial hassle. It's also not a given that prices will come down, so this strategy carries some risk that we end up stuck in a rental.
- Retric 9y ago
  #3 is real, but more a sign of California's disfunction than an inherent problem with high property values. PS: #1 only consumes a percentage of profits, so it can't make a sale unprofitable.
  - lisper 9y ago
    > #1 only consumes a percentage of profits, sit it can't make a sale unprofitable. Yes, that's true, but it makes a move less efficient. If we sell our house and buy another one of equal value, the higher the price, the more we lose in capital gain tax in the transition. If our house had not appreciated, we would pay zero cap gains. The higher prices go, the more expensive it becomes to move locally.
bogomipz 9y ago
>"No country should let the "landed gentry" hold them hostage over interest rates or tax policy so that their assets - many of which they do not even actually own - can appreciate." Can you elaborate on what you mean here? What would be examples of ways in which people who live in places with strong housing markets hold others hostage via interest rates or tax policy? What policies are the policies that accomplish this specifically?
- opportune 9y ago
  Sure, as a politician you shouldn't be favoring homeowners more than people who don't currently own a home / younger generations. Passing policies that increase home value necessarily makes it harder to own a home than before, and also raises rent prices. Homeowners essentially hold everyone else hostage because they are able to vote and youth/the unborn/many immigrants cannot. So politicians are highly incentivized to pass policies that increase home values. Of course, not everyone who can vote is a homeowner, but politicians and wealthy/connected people disproportionately are. The main way to increase home prices is to make the monthly payments lower than before, by either decreasing interest rates or extending the maximum mortgage loan length. In another one of my posts, I explained why this will actually simply raise the values of the homes without affecting mortgage payments very much. This has the added effect of pricing a lot of people out of home ownership compared to the previous market, because this does increase the down payments that you need to make. Thus the increase in rents. Regarding tax, if you let interest be deductible from your taxes, you are making mortgage payments even lower. Again, this raises home value because mortgage payments will again revert to what they were before.
  - bogomipz 9y ago
    >'The main way to increase home prices is to make the monthly payments lower than before, by either decreasing interest rates or extending the maximum mortgage loan length" >"Regarding tax, if you let interest be deductible from your taxes, you are making mortgage payments even lower. Again, this raises home value because mortgage payments will again revert to what they were before." But these two policies/practices also allow more people to become homeowners and part of the "landed gentry." Isn't this acceleration of home values a side effect of encouraging home ownership rather than a strategic attempt by the segment of homeowners to keep other's out? I think you are making this side effect out to be something conspiratorial and I just don't believe there is any such unified home-owner voting block.
jordanb 9y ago
Rising housing costs used to be considered a public crisis that required intervention. For instance, in the 1960s Sweden responded to a housing crisis with their "Million Houses Program."[0] But after decades of "ownership society" propaganda all we hear about now when there's a shortage of an essential good like housing is the comparatively few winners and their unearned windfalls. The much more numerous victims don't matter and aren't considered. [0] https://en.wikipedia.org/wiki/Million_Programme https://en.wikipedia.org/wiki/Million_Programme
seretogis 9y ago
Agreed. It's odd to hear people boast about housing prices being high, considering that shelter is a basic need just like food. You don't hear praise being thrown about when milk, eggs, and bread reach unaffordable prices as they are in northern Canada. Perhaps basic human needs shouldn't be subject to the same market forces as caviar and champagne are...
cylinder 9y ago
Many healthy countries have been held hostage by others doing ZIRP so they had to cut rates due to their currency being too strong.
- opportune 9y ago
  I don't know much about this. What would have happened if the other countries/currencies didn't cut rates? Is it just capital flight to the lower-interest currency?
dredmorbius 9y ago
There's some indication that Adam Smith was aware of this: The plenty and cheapness of good land, it has already been observed, are the principal causes of the rapid prosperity of new colonies. The engrossing of land, in effect, destroys this plenty and cheapness. The engrossing of uncultivated land, besides, is the greatest obstruction to its improvement. But the labour that is employed in the improvement and cultivation of land affords the greatest and most valuable produce to the society. https://en.m.wikisource.org/wiki/The_Wealth_of_Nations/Book_IV/Chapter_7 https://en.m.wikisource.org/wiki/The_Wealth_of_Nations/Book_... It helps greatly to know that "engross" in this context means "to purchase or control large quantities". Another realisation I've had is that the incentive amongst those who hold valuable assets is to see their value increased. This includes land, money, financial holdings, commodities, licences (think of taxi medallions or professional licenses), education, and the like. And the means of increasing price generally involves restricting the supply, or throwing constraints on the production of more of a thing. Where the underlying asset is itself directly productive or essential, this tends to be tremdously disruptive. https://www.reddit.com/r/dredmorbius/comments/608w97/asset_price_inflation_of_maslovian_and_productive/ https://www.reddit.com/r/dredmorbius/comments/608w97/asset_p...
- opportune 9y ago
  Nice subreddit, I agree with a lot of what you write. In particular I wish more people were looser, as you seem to be, with the assumption that actors within an economy act rationally. It's impossible to act rationally given the huge amount of information asymmetry in the economy, and especially given that others' information asymmetry will cause the economy to not behave rationally regardless of whether you can make rational decisions on it. It's also impossible to rationally determine whether an arbitrary law / policy change will pass at arbitrary point in the future. So with housing, because we aren't guaranteed that interest rates/zoning/taxes will behave predictably, we can't really rationally determine a "true" price for a house in a market where those may change
  - dredmorbius 9y ago
    Thanks. Rational actor theory seems to be crumbling rapidly as behavioural economics progresses, so there's that.
autokad 9y ago
this is short sighted. while its 'nice' to buy when the housing market is going down, essentially what you are saying is that a house should not appreciate in value. but in reality, there is virtually no good reason to own a home unless its an appreciating asset. after owning a home, i have nightmares about water. that was before the city flooded my basement with 3 feet of water (destroyed my washer, dryer, furnace, water heater) and said they have an ordinance that they cant be sued by accidents they cause. you may not get it, but anything that breaks, YOU MUST FIX. it doesn't matter if you had a hard day at work or you have to take your kid to the doctor that day, it has to get done and you need to have money available to do it. the fact that homes ARE appreciating assets is what makes them so good everyone (even if you rent) I think the better question to ask is, when will certain people learn that a continually 'weak' housing market is bad for everyone. dips in the housing market give good opportunities for people to get a home cheap, but they are still bad overall for the economy. its also only an opportunity if the housing market turns around and goes back into its upward trajectory. the city collects taxes on me even though my home is not on the market. when I bought my home, I spent at least 8000$ at home depot, IKEA, etc, plus another 3000$ on a new roof and water heater (because the existing water heater was from the 70s and super energy inefficient). see, even good for the green crowd. although i wish i hadnt, the city was about to destroy it a year later anyways. i digress. and while you think a trashed housing market would be great at lowering your rent, you might be surprised to find out landlords would have no incentive to keep your facilities nice if it was not a profitable endeavor.
- imtringued 9y ago
  I don't understand your argument. $11000 in repairs is basically nothing compared to the cost of a home which even in cheap cities will cost you at least $250000. If the prices double to $500000 then $11000 suddenly becomes such a tiny amount it's not even worth thinking about it.
  - autokad 9y ago
    i live in philadelphia, the median home value is around ~200k I think, but that doesnt really matter based on your comment. the ~11k$ was brought up to mention how that helps the economy. a lot of people were put to work just by me buying a home. it also misses the point that 11,000$ to burn on something that is not going up is a really bad decision.
kamaal 9y ago
>>When will we learn that a "strong" housing market is not necessarily a good thing? Because you can't operate the housing market in isolation. Housing market is basically everything connected to the housing markets. Plumbing to paint, it includes everything. The economy is a whole. Sectors are only for our understanding. Economy works as largely a monolith, so its just free market economy at the end. Only thing that matters in a set up like this is Demand and supply equations.

maxxxxx 9y ago

Totally agree. It seems one of the factors that helped the US until the 90s was that housing was affordable so people could move around easily. A "strong" housing market seems to indicate that there are no productive places for investing and no wage growth so people need to gamble on houses to rise instead.

expertentipp 9y ago
> A "strong" housing market seems to indicate that there are no productive places for investing and no wage growth so people need to gamble on houses to rise instead. You've just summarized the situation in Prague, Czech Republic.
- jankotek 9y ago
  Prague has problem with supply, new flats are build slowly.
- Yizahi 9y ago
  Same in Ukraine
  - novalis78 9y ago
    Same in Munich... QE money looking for a 'tangible' home
- contingencies 9y ago
  Same in China. Same in Australia.
  - marvin 9y ago
    Same in Norway.
    - expertentipp 9y ago
      boooom? https://www.youtube.com/watch?v=TpCb3xjh-Kk#t=04m05s https://www.youtube.com/watch?v=TpCb3xjh-Kk#t=04m05s
- paganel 9y ago
  Same in Romania. For the first time in my life (I’m 37 now) I heard a couple of acquantainces saying something like “We’re 20,000 Euros reacher now compared to last November, our apparment is now worth 90,000 euros compared to 70,000 euros last November”. This discussion happened this summer, since then I’ve heard at least a couple other different couples saying pretty much the same thing (only the sums were different). Never mind they their investments are a hell of a inliquid ones and that the banking rules can change anytime, just like that (like it happened after 2008), which would send the real estate market collapsing.
  - bobowzki 9y ago
    I hear this almost everyday in Sweden.
opportune 9y ago
I think a strong housing market may be the result of lack of productive capital, but I think it has more to do with supply and demand. Most average people pay for a house using a mortgage payment, so when buying a house, they'll be looking for a house that has an affordable mortgage payment. Let's say Joe wants to spend / can afford a $1000/month mortgage payment. If interest rates are 5% and the maximum mortgage period is 30 years, Joe can afford to buy a house worth $190,000. However, if interest rates go down to 2% and Joe can now take a 40 year mortgage, Joe can now buy a house worth about $330,000. Great for Joe! The only problem is that housing supply is relatively inelastic, so the supply of housing didn't magically increase overnight. When Joe buys a house, he's essentially bidding against a bunch of other people for that house. If those other people's mortgage payments were affected the same way, then the actual effect is that what was once a house worth $190,000 is now worth $330,000. This sounds like a problem out of an Econ 101 exercise. Either politicians are stupid, or more likely, they know that "homeowner policy" like this can make them and their other rich buddies even richer.
- Gustomaximus 9y ago
  Homes are important to people and they tend to buy as good as they can afford. When employment is stable and interest rates are low people will spend more because they can and feel safe doing so. Early movers purchase a higher grade of home than they could have previously. Eventually this shifts the market as a whole as income distribution remains stable. Then people buy the same house they would have previously at a higher price. Now nothing has changed and people are more in debt as the cycle returns to normal, if it ever does. Plus the whole investor (foreign and domestic) vs owner occupier discussions we are seeing plenty of...
  - samsonradu 9y ago
    Isn't it inherently bad to buy "as good as you can afford"? Employment is rarely stable throughout a 30-year period. Shouldn't people be much more careful when maxing out their mortgage relative to 'the good times'?
    - 9y ago
bmm6o 9y ago
I don't think it's that there aren't productive places for investing. Housing is unique in that a regular person can get a loan to purchase an asset that normally appreciates, and they can deduct the interest from their taxes. There are a lot of transaction costs, so the market isn't as liquid as some others, but where else can the average person get that kind of leveraged investment?
api 9y ago
There's been a number of great bits of research over the past few years arguing that our "strong" housing market is a primary cause of economic stagnation. Let me count the ways: (1) reduced labor force agility as you say (2) high rent and mortgage cost soaks up money that could otherwise fuel consumer spending, creating a demand constrained economy (3) high housing costs in major cities also contribute to poverty elsewhere by preventing people from circulating between high priced urban and lower priced rural areas (4) high housing costs risk actually destroying centers of excellence like the SF Bay Area and New York by making it impractical for new talent to move there
- eli_gottlieb 9y ago
  Got any reading on that? I'd never thought of it that way, but when you say it, it seems very plausible.
gsam 9y ago
I somewhat disagree. The opposite can also occur. Because everyone is gambling on the house market, the amount of productive places for investing diminishes as they are left to be forgotten. This can be obviously self-perpetuating but this is how I would characterize New Zealand.
erikpukinskis 9y ago
You are correct, but VR will wreck the housing market within 10 years* , so it’s not a long term concern. * 1st sub-$400 all-in-one with 6dof, face and finger tracking + 5 years

tom_mellior 9y ago

I agree. The article isn't very clear on what the problem would be, though it does mention deflation. Deflation is bad by axiom, and we must be pathologically afraid of it. If housing prices sink enough, that may mean that the overall inflation rate turns negative, which is deflation, and thus bad. Even if this "bad" thing, in this case, would just mean that people could consume, save, and invest more.

sliverstorm 9y ago
People don't consume more in a deflationary world, per the economists, because that dollar you've got today is worth more tomorrow, so you put off as many purchases as possible. Fewer people would take out loans as well, because the loan would become harder and harder to repay over it's life (which means fewer opportunities for investors)
- asabjorn 9y ago
  That doesn’t make sense at all except for with housing. If I want to go vacation I will, if I need a new washing machine I will get it, if I want a cappuccino every morning now I can afford it no matter who I am!
  - sliverstorm 9y ago
    If you want to go on vacation, but you can go on a little bit of a nicer vacation if you wait until next spring... If your old washing machine still mostly works, the new one will be cheaper if you can get the old one to limp along for a while longer... People don't completely stop buying things; life must go on. But people would start to drag out purchases where ever they can. Have you ever put off buying a computer or phone because you know next year's chips will be faster and batteries will last longer?
    - asabjorn 9y ago
      What seems to matter more is that there has been a productive deployment of capital that gives you a reason to buy a new product, and that you have discretionary income after housing cost and other fixed costs are paid. High housing costs are an incredibly unproductive use of capital unless it leads to building new supply and is therefore effectively a temporary incentive for developers to build more. Landlords on the other hand want there to be an undersupply, and don’t fully align with developer interests. Prices for consumer goods have decreased for quite a while and people still buy. And even when computers were improving significantly every year and prices went down people on average still increased their buying of new computers.

ptha 9y ago

In Ireland we had a property bubble during the "Celtic Tiger" years, and suffered a major correction after 2007 [1]. Apartments in Dublin the capital city lost about 62% of their value. 10years later and prices are climbing steadily upwards [2]. It's deja vu all over again. In Ireland we have a national obsession with owning property. [1] https://en.wikipedia.org/wiki/Irish_property_bubble https://en.wikipedia.org/wiki/Irish_property_bubble [2] https://tradingeconomics.com/ireland/housing-index https://tradingeconomics.com/ireland/housing-index

Supernaut 9y ago
Your use of the term "obsession" implies a degree of irrationality. Many people, myself included, would contend that the desire to own your own home is eminently sensible.
- astura 9y ago
  Jeez, nobody said the desire to own your home was irrational, by definition. You can have a rational desire to own a home or you can have an irrational obsession. Irrational obsession would include things like when you prioritize homeownership over financial security and other basic necessities like healthcare or food. For example I know someone who gave up health insurance to buy house - and she readily admits this.
  - GarvielLoken 9y ago
    You don't have to pay for health insurance in Sweden.
    - astura 9y ago
      Of course, it was merely an example of an unhealthy obsession I've personally seen. There are many more. Another would be neglecting to save anything for retirement because you believe your home is your retirement fund.
    - ptaipale 9y ago

walterstucco 9y ago

We house owners pay a lot of taxes on houses in Italy so it's not exactly a paradise, the real problem is selling them. Anyway I bought mine when I was 29 and rates were much higher My friends at the time were richer than me, their families were richer than mine, they just loved spending money on cars and expensive goods in general instead of houses, that they possessed as a family There's a difference, a big one, between an housing bubble and an honest investment I knew the neighborhood in Rome where I bought the house would expand in the next 10 years, I wasn't trying to exploit newer generations (I'm 40 BTW) I was trying to secure my future

IdontRememberIt 9y ago

The older generation could buy at a very low price and refinance during a very long almost nul interest rate era. Guess which generation owns the political and financial power... I am scared that in some high public debt countries they will confiscate value through (increased) inheritance tax... But I am even more scared by the ECB normalizing the interest rates...

teekert 9y ago

High housing prices are also very nice for banks and benks control nations. Essentially all mortgage money is created as dept. Banks can simply say: Here you go ma'am/sir, here is your money, created out of thin air. Now, please sign here to pay for your house twice, 1 time to the original owner and 1 time to us, because we created this money for you out of thin air.

mnm2 9y ago
Yes and no: The bank wants 2% as interests, but inflation is 3% --> The Bank effectively loses money
- icebraining 9y ago
  Isn't that only true for fixed-rate mortgages? At least around here, almost all are variable-rate, so they rise with inflation. I think banks only really lose money on defaults, and that's if the house lost value.
- yellowbeard 9y ago
  The bank only has to have a very small percentage of the money they loan you. Most of it is created at the time of the loan.
  - teekert 9y ago
    Exactly, the bank is not hurt from money devaluating when they don't have to do anything for it but create a dept in their books. Sure, what you will pay them will be less in 20 years but it more than the nothing they had before...

AznHisoka 9y ago

Shouldn't home prices rise the same rate as inflation? The % of salary people devote to housing shouldn't increase by a large amount each year. And people's salaries don't rise that much year to year either. It rises the same rate as inflation.

opportune 9y ago
In this case home prices rose because it became cheaper to make mortgage payments on a house. People were willing to spend the same mortgage payment as before, so the net effect is that housing prices rose. Salaries don't necessarily rise at the same rate as inflation. If they did, there would be 0% real growth in the economy. Inflation is usually measured by watching the prices of a basket of goods: if those goods' prices increased by 5%, then inflation is 5% (in reality it can be more complex than this). Inflation isn't a "real" metric in the sense that it affects all things equally. Housing prices could increase by 50% but the price of a gallon of oil or a bar of soap could decrease by 10%.
- dragonwriter 9y ago
  > Salaries don't necessarily rise at the same rate as inflation. If they did, there would be 0% real growth in the economy. You are confusing “salaries” with “output”; salaries (or even domestic incomes in total, which involves more than salaries) growing at the rate of inflation can occur with negative or positive real growth. Zero real growth means output growing at the rate of inflation. (National economies aren't closed systems, and some output may produce foreign rather than domestic income, as in returns to overseas investors.)
  - opportune 9y ago
    True, but for practical purposes salaries (or the mean of salaries + returns from investments) closely approximate output. In any case it should be clear that salaries and inflation aren't directly linked. Salaries should (generally) increase slightly more than inflation as productivity increases over time
9y ago

eikenberry 9y ago

> High housing prices are great for those who already owned houses... Not unless you are ready to sell, otherwise it kind of sucks to have your property taxes go up 10-20% every year.

ollebro 9y ago
We don't have a property tax in sweden. Also no inheritance or gift tax. Very good place to live if you are wealthy and don't make money the peasant way of going to work.
- ttul 9y ago
  I see your problem right there...
- jazzyk 9y ago
  Why did a lot of rich people (Bjorn Borg, Ingvar Kamprad (IKEA)) move out of Sweden, then?
  - ptaipale 9y ago
    They moved out earlier, when there were (quite high) property taxes. The tax was abolished in 2007. Ingvar Kamprad moved to Switzerland in 1976; in 2014, when the abolition of 2007 had survived one election cycle, he moved back to Småland. Björn Borg moved out of Sweden already in 1974 at age of 18, perhaps more because on 90% income tax than property taxes.
christophilus 9y ago
Yeah. This 100%. It's a broken system for everyone except investors (and maybe even for them, ultimately).
pjc50 9y ago
This is very location-dependent. Here in the UK, the nearest thing to a property tax is the "council tax", which is based on the estimated value of the property in 1991. There is also a tax on property transactions which can be considerable.

lisper 9y ago

> High housing prices are great for those who already owned houses Not really. Rising prices (not high prices) are great for people holding houses as investments. But for owner-occupied houses, rising prices are as bad for the owners as they are for everyone else. my wife and I own a house in Northern California, which we bought during the sub-prime crash. Since then it has nearly doubled in price. It is also too big for us, so we'd like to sell it and move to a smaller house. But we can't. Why? Because by the time you factor in: 1. Capital gains tax 2. Real estate agent fees 3. Higher property taxes (even a smaller house costs much more than the prop-13 basis in our current house) we can't afford to move!

dmode 9y ago
I am very confused on your reasons not being able to downsize. Capital gains should have no impact, since first 500K is exempt. So you will have at least 500K in cash. Real estate agent fees are everywhere and can be negotiated to 2%. Property taxes are not really high. I live in Union City, and pay 1.2%. I guess you cannot downsize because a smaller home costs a lot of money these days. Which is fair enough, but you can book your profits, invest that cash in other assets and rent for a few years till the market comes down.
- lisper 9y ago
  That's true, we could do that. But then we'd have to move twice, and at this point in our lives (we're both >50) moving is a non-trivial hassle. It's also not a given that prices will come down, so this strategy carries some risk that we end up stuck in a rental.
Retric 9y ago
#3 is real, but more a sign of California's disfunction than an inherent problem with high property values. PS: #1 only consumes a percentage of profits, so it can't make a sale unprofitable.
- lisper 9y ago
  > #1 only consumes a percentage of profits, sit it can't make a sale unprofitable. Yes, that's true, but it makes a move less efficient. If we sell our house and buy another one of equal value, the higher the price, the more we lose in capital gain tax in the transition. If our house had not appreciated, we would pay zero cap gains. The higher prices go, the more expensive it becomes to move locally.

bogomipz 9y ago

>"No country should let the "landed gentry" hold them hostage over interest rates or tax policy so that their assets - many of which they do not even actually own - can appreciate." Can you elaborate on what you mean here? What would be examples of ways in which people who live in places with strong housing markets hold others hostage via interest rates or tax policy? What policies are the policies that accomplish this specifically?

opportune 9y ago
Sure, as a politician you shouldn't be favoring homeowners more than people who don't currently own a home / younger generations. Passing policies that increase home value necessarily makes it harder to own a home than before, and also raises rent prices. Homeowners essentially hold everyone else hostage because they are able to vote and youth/the unborn/many immigrants cannot. So politicians are highly incentivized to pass policies that increase home values. Of course, not everyone who can vote is a homeowner, but politicians and wealthy/connected people disproportionately are. The main way to increase home prices is to make the monthly payments lower than before, by either decreasing interest rates or extending the maximum mortgage loan length. In another one of my posts, I explained why this will actually simply raise the values of the homes without affecting mortgage payments very much. This has the added effect of pricing a lot of people out of home ownership compared to the previous market, because this does increase the down payments that you need to make. Thus the increase in rents. Regarding tax, if you let interest be deductible from your taxes, you are making mortgage payments even lower. Again, this raises home value because mortgage payments will again revert to what they were before.
- bogomipz 9y ago
  >'The main way to increase home prices is to make the monthly payments lower than before, by either decreasing interest rates or extending the maximum mortgage loan length" >"Regarding tax, if you let interest be deductible from your taxes, you are making mortgage payments even lower. Again, this raises home value because mortgage payments will again revert to what they were before." But these two policies/practices also allow more people to become homeowners and part of the "landed gentry." Isn't this acceleration of home values a side effect of encouraging home ownership rather than a strategic attempt by the segment of homeowners to keep other's out? I think you are making this side effect out to be something conspiratorial and I just don't believe there is any such unified home-owner voting block.

jordanb 9y ago

Rising housing costs used to be considered a public crisis that required intervention. For instance, in the 1960s Sweden responded to a housing crisis with their "Million Houses Program."[0] But after decades of "ownership society" propaganda all we hear about now when there's a shortage of an essential good like housing is the comparatively few winners and their unearned windfalls. The much more numerous victims don't matter and aren't considered. [0] https://en.wikipedia.org/wiki/Million_Programme https://en.wikipedia.org/wiki/Million_Programme

seretogis 9y ago

Agreed. It's odd to hear people boast about housing prices being high, considering that shelter is a basic need just like food. You don't hear praise being thrown about when milk, eggs, and bread reach unaffordable prices as they are in northern Canada. Perhaps basic human needs shouldn't be subject to the same market forces as caviar and champagne are...

cylinder 9y ago

Many healthy countries have been held hostage by others doing ZIRP so they had to cut rates due to their currency being too strong.

opportune 9y ago
I don't know much about this. What would have happened if the other countries/currencies didn't cut rates? Is it just capital flight to the lower-interest currency?

dredmorbius 9y ago

There's some indication that Adam Smith was aware of this: The plenty and cheapness of good land, it has already been observed, are the principal causes of the rapid prosperity of new colonies. The engrossing of land, in effect, destroys this plenty and cheapness. The engrossing of uncultivated land, besides, is the greatest obstruction to its improvement. But the labour that is employed in the improvement and cultivation of land affords the greatest and most valuable produce to the society. https://en.m.wikisource.org/wiki/The_Wealth_of_Nations/Book_IV/Chapter_7 https://en.m.wikisource.org/wiki/The_Wealth_of_Nations/Book_... It helps greatly to know that "engross" in this context means "to purchase or control large quantities". Another realisation I've had is that the incentive amongst those who hold valuable assets is to see their value increased. This includes land, money, financial holdings, commodities, licences (think of taxi medallions or professional licenses), education, and the like. And the means of increasing price generally involves restricting the supply, or throwing constraints on the production of more of a thing. Where the underlying asset is itself directly productive or essential, this tends to be tremdously disruptive. https://www.reddit.com/r/dredmorbius/comments/608w97/asset_price_inflation_of_maslovian_and_productive/ https://www.reddit.com/r/dredmorbius/comments/608w97/asset_p...

opportune 9y ago
Nice subreddit, I agree with a lot of what you write. In particular I wish more people were looser, as you seem to be, with the assumption that actors within an economy act rationally. It's impossible to act rationally given the huge amount of information asymmetry in the economy, and especially given that others' information asymmetry will cause the economy to not behave rationally regardless of whether you can make rational decisions on it. It's also impossible to rationally determine whether an arbitrary law / policy change will pass at arbitrary point in the future. So with housing, because we aren't guaranteed that interest rates/zoning/taxes will behave predictably, we can't really rationally determine a "true" price for a house in a market where those may change
- dredmorbius 9y ago
  Thanks. Rational actor theory seems to be crumbling rapidly as behavioural economics progresses, so there's that.

autokad 9y ago

this is short sighted. while its 'nice' to buy when the housing market is going down, essentially what you are saying is that a house should not appreciate in value. but in reality, there is virtually no good reason to own a home unless its an appreciating asset. after owning a home, i have nightmares about water. that was before the city flooded my basement with 3 feet of water (destroyed my washer, dryer, furnace, water heater) and said they have an ordinance that they cant be sued by accidents they cause. you may not get it, but anything that breaks, YOU MUST FIX. it doesn't matter if you had a hard day at work or you have to take your kid to the doctor that day, it has to get done and you need to have money available to do it. the fact that homes ARE appreciating assets is what makes them so good everyone (even if you rent) I think the better question to ask is, when will certain people learn that a continually 'weak' housing market is bad for everyone. dips in the housing market give good opportunities for people to get a home cheap, but they are still bad overall for the economy. its also only an opportunity if the housing market turns around and goes back into its upward trajectory. the city collects taxes on me even though my home is not on the market. when I bought my home, I spent at least 8000$ at home depot, IKEA, etc, plus another 3000$ on a new roof and water heater (because the existing water heater was from the 70s and super energy inefficient). see, even good for the green crowd. although i wish i hadnt, the city was about to destroy it a year later anyways. i digress. and while you think a trashed housing market would be great at lowering your rent, you might be surprised to find out landlords would have no incentive to keep your facilities nice if it was not a profitable endeavor.

imtringued 9y ago
I don't understand your argument. $11000 in repairs is basically nothing compared to the cost of a home which even in cheap cities will cost you at least $250000. If the prices double to $500000 then $11000 suddenly becomes such a tiny amount it's not even worth thinking about it.
- autokad 9y ago
  i live in philadelphia, the median home value is around ~200k I think, but that doesnt really matter based on your comment. the ~11k$ was brought up to mention how that helps the economy. a lot of people were put to work just by me buying a home. it also misses the point that 11,000$ to burn on something that is not going up is a really bad decision.

kamaal 9y ago

>>When will we learn that a "strong" housing market is not necessarily a good thing? Because you can't operate the housing market in isolation. Housing market is basically everything connected to the housing markets. Plumbing to paint, it includes everything. The economy is a whole. Sectors are only for our understanding. Economy works as largely a monolith, so its just free market economy at the end. Only thing that matters in a set up like this is Demand and supply equations.