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There's a kind of interesting way to think about this, especially in the UK. Because people don't automatically think in terms of opportunity cost and don't kno

There's a kind of interesting way to think about this, especially in the UK. Because people don't automatically think in terms of opportunity cost and don't know eg. that the long term equity return is X, there's a disconnect between reality and how people think of it. People in the UK think of rent as "wasted" money. In an efficient market, it wouldn't be wasted at all because the saving from lower rent vs mortgage could be put into eg. equity/bonds. Someone will reply that there is no saving but that itself is a symptom of the way we run housing. But because people think that, and think that no-one would ever want to rent, we tolerate super weird policies like a residency house being exempt from capital gains tax, poor protection for renters, government tax transfers (in the UK they will literally give you money to buy your first house, the government is so committed to the your-house-is-your-bank philosophy). All these distortions then actually CREATE the conditions which mean that you're consistently losing money if you rent, because the government is effectively taxing you much more. So our misunderstanding of economics creates an economic system which conforms to our mistaken beliefs, it's kind of amazing.

claydavisss 8y ago
Who are these people who intentionally seek a lower rent over a higher mortgage so as to invest in stocks? I've yet to meet one. Renters are just as likely to give in to vanity purchases, dumb spending habits etc... And why are stocks such an awesome alternative? A stock can go to zero...even foreclosed homes have some value. Stocks are optional - shelter isn't. Since you must commit some of your earnings to shelter, it makes sense over the long run to fix the costs and find a way to profit. On a subjective level, home owners have better finances, more say in guiding their communities, and many other advantages. Of course we can turn your argument back...why does society make so many accommodations for people who just buy and sell pieces of paper?
- zimablue 8y ago
  What you're saying, which is a good point, when you say that shelter isn't optional, you can phrase that more precisely as "owning property is a hedge against variable property prices". It's true but there are other ways to hedge this, eg. Long term rental contracts, limited rent controls or owning specific derivatives all reduce this risk. There are societies that run like that, eg. Germany. Some stocks can go to zero, some are very unlikely to and most portfolios have things that are very unlikely to flatline like govt bonds. Well i don't mortgage although i could, and I do save so hello you've met your first. The idea that we need a bank threatening to throw us out of our houses to enforce responsible saving is infantile and grotesque. General criticism of the finance sector is a bit too off topic for me to engage with.
  - jsight 8y ago
    "owning property is a hedge against variable property prices" One of the best pieces of financial advice that I've ever heard centers on this. "The purpose of owning a house is to fix the cost of housing." Its brilliant in its simplicity and I had never thought about it until hearing it a few dozen times. :) Unfortunately, it is also a vastly different mindset from many home buyers (and, for various reasons, sellers).
- wh0knows 8y ago
  Take a look at the FIRE community, or anybody who is interested in a self-funded retirement. Most people who are the ones renting and investing large amount are not buying single stocks, they are buying broad index funds that encompass the entire market and are rebalanced to keep an even representation. These broad index funds going to zero is not a very likely scenario outside of total anarchy. It would mean all publicly traded companies becoming worthless and you would be much more worried about acquiring water, shelter, food, and protecting yourself from looters than anything else (in this scenario I would imagine the piece of paper saying your house is yours would not be worth very much either). Now think of the much more likely scenario of a local real-estate market collapsing, uninsured natural disaster destroying your house, or climate change making your area unliveable, and you can see which proposition is really the riskier one. If you don't sell your house you don't profit you only pay more in property taxes. The thing is it doesn't, that's the point. If I want to rent to keep flexibility and invest my money in stocks in order to retire I am at a decided disadvantage than somebody who buys a house and has it appreciate to double its initial value. In the vast majority of countries this appreciation is free from capital gains tax, or the house's value is not taken into account in the wealth tax. So why is the house owner rewarded for saving and putting money in a mortgage and the renter penalised by capital gains/wealth taxes?
- dionidium 8y ago
  > even foreclosed homes have some value. Homes can go to zero. Homes can go to below zero, which is why there are land banks all across the Rust Belt with thousands of properties they have trouble giving away. > On a subjective level, home owners have better finances, more say in guiding their communities, and many other advantages. Of course, because we live in a society in which nearly everyone is convinced that it's better to own a house, so anybody with enough resources to own a house chooses to own a house. And because most of those folks have an even dimmer view of apartment-dwellers than you've displayed here, they use zoning to literally separate themselves from those lower classes, to fairly predictable outcomes.
  - AnimalMuppet 8y ago
    > Homes can go to zero. Homes can go to below zero, which is why there are land banks all across the Rust Belt with thousands of properties they have trouble giving away. Could you give some reference(s) on this? I'd love to see a bank that was trying to give away property, and to find out why they couldn't (and to see if I could find a way where the property would have positive value to me).
    - dionidium 8y ago
      The Land Reutilization Authority in St. Louis holds about 12,000 unwanted properties: https://www.stltoday.com/news/local/metro/lra-owns-the-st-louis-properties-no-one-wants-and/article_d2323d80-30c1-5ecf-a255-f2edda3443f0.html https://www.stltoday.com/news/local/metro/lra-owns-the-st-lo... The LRA usually ends up with these properties when they fail to receive any bids at the regular tax auctions. Fewer are falling into their hands, recently, because the hot housing market is driving folks to look at things they previously wouldn't have, but properties still routinely go unwanted: https://www.stltoday.com/news/local/govt-and-politics/fewer-properties-go-unwanted-at-city-tax-auctions/article_143fd702-5df8-575b-9268-85be135caff2.html https://www.stltoday.com/news/local/govt-and-politics/fewer-... St. Louis is the market I'm most familiar with, but similar land banks exist in cities all across the country.
- thescriptkiddie 8y ago
  > A stock can go to zero...even foreclosed homes have some value. It's possible for a foreclosed home to have negative value, because the unpaid property tax bill is more than the value of the property. On the other hand, a total stock market index fund like VTSAX can only go to zero it something catastrophic happened.
baybal2 8y ago
>in the UK they will literally give you money to buy your first house, the government is so committed to the your-house-is-your-bank philosophy No wonder, banks were lobbying the state for generations. House is a purchase like any other, having to pay your tax money for somebody's else default on his McMansion is stupid. I myself have zero reservations about renting till I kick the bucket. My dumbest decision in life was to listen to parents who were coaxing me day and night for a few years into buying a house in my hellhole hometown in Russia with like 75% of my lifetime savings. Yes, I spent ~$80k just to make my parents to fuck off. That was when I was 23, in 2014. To some extend, I admit, the decision had in part an intention to teach them a lesson, of what a disservice they were making me with their "expert advise," but I could not have imagined just how wrong the things can go...
- restalis 8y ago
  Wow! First, is Vladivostok that bad to be called "a hellhole" (that is, if you're referring to it, of course), and second, if it was only to make your parents shut up, couldn't you somehow done it with much, much less (say, a village house somewhere)?
  - baybal2 8y ago
    My hometown is Blagoveschensk, a city much more further inland than Vladivostok.
leoedin 8y ago
When people talk about the opportunity cost of buying, they very rarely take into account leverage. A typical house buyer might have somewhere between 2 and 9x leverage on their deposit (ie a 66-90% loan to value). Once you take that into account the returns, even if you don't take into account capital appreciation (essentially the saved cost of renting minus maintenance costs) rise significantly, becoming competitive with the long term returns on an index fund. Nobody's going to lend you significant money to invest in an index fund at anywhere close to mortgage rates. As an example, a flat which costs £400k might have a rental value of £1.4k/month, or 4.6% annually. However, if you bought that flat with a 75% LTV at an interest rate of 2% you'd have invested £100k and have an effective return of £16800/year less £6k/year of interest. That means an annual return of 10.8%. The long term S&P 500 average return is around 12.11%[1] It doesn't take much price inflation to tip you into better returns than the index fund. House prices since 1952 have risen by an average of 7.9%[2]. [1]: https://ycharts.com/indicators/sandp_500_total_return_annual https://ycharts.com/indicators/sandp_500_total_return_annual [2 - XLS]: https://www.nationwide.co.uk/-/media/MainSite/documents/about/house-price-index/downloads/uk-house-price-since-1952.xls https://www.nationwide.co.uk/-/media/MainSite/documents/abou...
- ThrustVectoring 8y ago
  Also a 30 year fixed mortgage effectively shorts long-term bonds with an embedded call option (via refinancing) to further reduce the risk of the position. It's an incredibly valuable consideration that's not super obvious.
  - a008t 8y ago
    One can get a 30-year fixed rate mortgage?
    - ThrustVectoring 8y ago
      In the US they're standard.
- GreeniFi 8y ago
stevenwoo 8y ago
There's some other mechanism at work in the UK as far as I can tell from just reading the news - a recent case mentions that UK real estate is claimed to be a haven for laundering money. https://www.theguardian.com/uk-news/2018/oct/03/bankers-wife-may-lose-property-worth-millions-after-uk-court-ruling https://www.theguardian.com/uk-news/2018/oct/03/bankers-wife...

claydavisss 8y ago

Who are these people who intentionally seek a lower rent over a higher mortgage so as to invest in stocks? I've yet to meet one. Renters are just as likely to give in to vanity purchases, dumb spending habits etc... And why are stocks such an awesome alternative? A stock can go to zero...even foreclosed homes have some value. Stocks are optional - shelter isn't. Since you must commit some of your earnings to shelter, it makes sense over the long run to fix the costs and find a way to profit. On a subjective level, home owners have better finances, more say in guiding their communities, and many other advantages. Of course we can turn your argument back...why does society make so many accommodations for people who just buy and sell pieces of paper?

zimablue 8y ago
What you're saying, which is a good point, when you say that shelter isn't optional, you can phrase that more precisely as "owning property is a hedge against variable property prices". It's true but there are other ways to hedge this, eg. Long term rental contracts, limited rent controls or owning specific derivatives all reduce this risk. There are societies that run like that, eg. Germany. Some stocks can go to zero, some are very unlikely to and most portfolios have things that are very unlikely to flatline like govt bonds. Well i don't mortgage although i could, and I do save so hello you've met your first. The idea that we need a bank threatening to throw us out of our houses to enforce responsible saving is infantile and grotesque. General criticism of the finance sector is a bit too off topic for me to engage with.
- jsight 8y ago
  "owning property is a hedge against variable property prices" One of the best pieces of financial advice that I've ever heard centers on this. "The purpose of owning a house is to fix the cost of housing." Its brilliant in its simplicity and I had never thought about it until hearing it a few dozen times. :) Unfortunately, it is also a vastly different mindset from many home buyers (and, for various reasons, sellers).
wh0knows 8y ago
Take a look at the FIRE community, or anybody who is interested in a self-funded retirement. Most people who are the ones renting and investing large amount are not buying single stocks, they are buying broad index funds that encompass the entire market and are rebalanced to keep an even representation. These broad index funds going to zero is not a very likely scenario outside of total anarchy. It would mean all publicly traded companies becoming worthless and you would be much more worried about acquiring water, shelter, food, and protecting yourself from looters than anything else (in this scenario I would imagine the piece of paper saying your house is yours would not be worth very much either). Now think of the much more likely scenario of a local real-estate market collapsing, uninsured natural disaster destroying your house, or climate change making your area unliveable, and you can see which proposition is really the riskier one. If you don't sell your house you don't profit you only pay more in property taxes. The thing is it doesn't, that's the point. If I want to rent to keep flexibility and invest my money in stocks in order to retire I am at a decided disadvantage than somebody who buys a house and has it appreciate to double its initial value. In the vast majority of countries this appreciation is free from capital gains tax, or the house's value is not taken into account in the wealth tax. So why is the house owner rewarded for saving and putting money in a mortgage and the renter penalised by capital gains/wealth taxes?
dionidium 8y ago
> even foreclosed homes have some value. Homes can go to zero. Homes can go to below zero, which is why there are land banks all across the Rust Belt with thousands of properties they have trouble giving away. > On a subjective level, home owners have better finances, more say in guiding their communities, and many other advantages. Of course, because we live in a society in which nearly everyone is convinced that it's better to own a house, so anybody with enough resources to own a house chooses to own a house. And because most of those folks have an even dimmer view of apartment-dwellers than you've displayed here, they use zoning to literally separate themselves from those lower classes, to fairly predictable outcomes.
- AnimalMuppet 8y ago
  > Homes can go to zero. Homes can go to below zero, which is why there are land banks all across the Rust Belt with thousands of properties they have trouble giving away. Could you give some reference(s) on this? I'd love to see a bank that was trying to give away property, and to find out why they couldn't (and to see if I could find a way where the property would have positive value to me).
  - dionidium 8y ago
    The Land Reutilization Authority in St. Louis holds about 12,000 unwanted properties: https://www.stltoday.com/news/local/metro/lra-owns-the-st-louis-properties-no-one-wants-and/article_d2323d80-30c1-5ecf-a255-f2edda3443f0.html https://www.stltoday.com/news/local/metro/lra-owns-the-st-lo... The LRA usually ends up with these properties when they fail to receive any bids at the regular tax auctions. Fewer are falling into their hands, recently, because the hot housing market is driving folks to look at things they previously wouldn't have, but properties still routinely go unwanted: https://www.stltoday.com/news/local/govt-and-politics/fewer-properties-go-unwanted-at-city-tax-auctions/article_143fd702-5df8-575b-9268-85be135caff2.html https://www.stltoday.com/news/local/govt-and-politics/fewer-... St. Louis is the market I'm most familiar with, but similar land banks exist in cities all across the country.
thescriptkiddie 8y ago
> A stock can go to zero...even foreclosed homes have some value. It's possible for a foreclosed home to have negative value, because the unpaid property tax bill is more than the value of the property. On the other hand, a total stock market index fund like VTSAX can only go to zero it something catastrophic happened.

baybal2 8y ago

>in the UK they will literally give you money to buy your first house, the government is so committed to the your-house-is-your-bank philosophy No wonder, banks were lobbying the state for generations. House is a purchase like any other, having to pay your tax money for somebody's else default on his McMansion is stupid. I myself have zero reservations about renting till I kick the bucket. My dumbest decision in life was to listen to parents who were coaxing me day and night for a few years into buying a house in my hellhole hometown in Russia with like 75% of my lifetime savings. Yes, I spent ~$80k just to make my parents to fuck off. That was when I was 23, in 2014. To some extend, I admit, the decision had in part an intention to teach them a lesson, of what a disservice they were making me with their "expert advise," but I could not have imagined just how wrong the things can go...

restalis 8y ago
Wow! First, is Vladivostok that bad to be called "a hellhole" (that is, if you're referring to it, of course), and second, if it was only to make your parents shut up, couldn't you somehow done it with much, much less (say, a village house somewhere)?
- baybal2 8y ago
  My hometown is Blagoveschensk, a city much more further inland than Vladivostok.

leoedin 8y ago

When people talk about the opportunity cost of buying, they very rarely take into account leverage. A typical house buyer might have somewhere between 2 and 9x leverage on their deposit (ie a 66-90% loan to value). Once you take that into account the returns, even if you don't take into account capital appreciation (essentially the saved cost of renting minus maintenance costs) rise significantly, becoming competitive with the long term returns on an index fund. Nobody's going to lend you significant money to invest in an index fund at anywhere close to mortgage rates. As an example, a flat which costs £400k might have a rental value of £1.4k/month, or 4.6% annually. However, if you bought that flat with a 75% LTV at an interest rate of 2% you'd have invested £100k and have an effective return of £16800/year less £6k/year of interest. That means an annual return of 10.8%. The long term S&P 500 average return is around 12.11%[1] It doesn't take much price inflation to tip you into better returns than the index fund. House prices since 1952 have risen by an average of 7.9%[2]. [1]: https://ycharts.com/indicators/sandp_500_total_return_annual https://ycharts.com/indicators/sandp_500_total_return_annual [2 - XLS]: https://www.nationwide.co.uk/-/media/MainSite/documents/about/house-price-index/downloads/uk-house-price-since-1952.xls https://www.nationwide.co.uk/-/media/MainSite/documents/abou...

ThrustVectoring 8y ago
Also a 30 year fixed mortgage effectively shorts long-term bonds with an embedded call option (via refinancing) to further reduce the risk of the position. It's an incredibly valuable consideration that's not super obvious.
- a008t 8y ago
  One can get a 30-year fixed rate mortgage?
  - ThrustVectoring 8y ago
    In the US they're standard.
GreeniFi 8y ago

stevenwoo 8y ago

There's some other mechanism at work in the UK as far as I can tell from just reading the news - a recent case mentions that UK real estate is claimed to be a haven for laundering money. https://www.theguardian.com/uk-news/2018/oct/03/bankers-wife-may-lose-property-worth-millions-after-uk-court-ruling https://www.theguardian.com/uk-news/2018/oct/03/bankers-wife...