8 ms·

The price of houses is driven by market rents compounded with access to financing. If lenders are willing to finance an investment with 3% yield, then house pri

by yholio 8y ago

The price of houses is driven by market rents compounded with access to financing. If lenders are willing to finance an investment with 3% yield, then house prices will jump to 33x their annual rent value - it goes without saying that's only possible in low interest markets. The rent itself however is controlled by supply and demand - there needs to be a real person there earning a paycheck and he must have no other options before going for a high rent house. Therefore, the options for keeping rents down are either keeping people out of the city through administrative means, or, realistically, building higher and denser. Good public transport infrastructure is an essential component because it opens for development distant areas that otherwise would not be desirable to people working in the city. On the other hand, as the city grows, economies of scale bring in more businesses, create more high paying jobs and opportunities, therefore attracting more people - up to the point where rents and commute times increase again and restore equilibrium. A Malthusian catastrophe of sorts, that requires radical new transport solutions and workplace transformations, as opposed to building regulation and financial innovation.

esotericn 8y ago
What influences the willingness of a lender? Availability of money in the general lending environment, sure, but surely there's a risk component there. The low interest rates can only persist as long as a lender has a reasonable expectation that they'll be paid back (e.g. that rents remain high enough to sustain the mortgage over the term). The real world factors like 'how desirable a place is'/'are good jobs there' and so forth seem to be further back in the causation chain to me. This is probably why we see the sort of "non-linear growth" that we do. An environment with stable, increasing rents due to increased demand _directly_ increases the price of housing linearly, and then on top of that it's a less risky market as a result so you end up with lower interest rates which drive it even further. A mortgage at 3% is basically a risk-free rate. Lenders are saying "you can't lose by buying here so go wild".
- bradleyjg 8y ago
  The lender on a very percentage of loans made in the United States since 2008 is directly or indirectly the federal government. The federal government is not constrained by the reasonable expectation of being paid back or market discipline.
- Spooky23 8y ago
  A: Closing the deal. The only exposure your bank has in terms of losing money is losing the costs associated with starting up the loan when you apply — there is a strong incentive to approve. The government owns the risk on performance. This was a policy choice, because banks making subjective decisions usually looked a lot like redlining. Nobody would write a loan on a luxury condo in a rehabbed factory in the inner city because it’s a measurably higher risk. Bad schools, high crime, pollution, and risk of the condo board doing dumb things makes that a risk for the bank.
  - commaone 8y ago
    I think it's also worth mentioning that these local banks are still bundling and selling mortgages as securities,therefore removing the risk of long term price and payment instability. I find it odd that no one has even mentioned this, given we have just been through the largest financial crisis in generations because of it.
s4vi0r 8y ago
Or just destroying the entire cancerous concept of landlordism and housing as a commodity. No need to get all complicated, the solution is pretty simple.
- mmirate 8y ago
  What exactly would remain after this "destruction" of yours?
  - tonyedgecombe 8y ago
    Presumably what the government in the UK is already doing, gradually adjusting taxes to make the rentier economy less viable over time.
  - s4vi0r 8y ago
    Not sure why, but I couldn't respond to your comment for quite some time. I'm not sure what you're asking re: what would remain. Housing as a human right, I guess? There's no good reason for landlords to exist, nor do I understand why you would want housing to be a commodity especially considering we live in a post-2008 world.
    - conanbatt 8y ago
      There can't be "no landlords". Someone owns the land, even if its the State. Beware of that solution: you have a chance to fight a landlord, you have no chance to fight the state-landlord.
      - s4vi0r 8y ago
        Yes, but the state isn't leeching off of the people. My point is wrt landlords in the sense of people who do nothing, provide no value, and make money solely by virtue of "I/my ancestor was here first I/they bought this when there was less people so gimme money". I don't see where you get your conclusion from. For many (most?) people, they really don't have a chance to fight their landlord. Legal expenses, time, energy, etc. are pretty huge deterrents. Not sure why you can't fight a "state-landlord", also.
Theodores 8y ago
Years ago in the UK there was a considerable quantity of council owned properties, these were nice places to live with nice rents to pay. There was no shame in living in a council house, but you wouldn't be buying it, so it was not yours. You wouldn't be evicted either or forced to pay through the nose. This worked as a baseline, if you had more money or wanted to live in a posh area (or just the countryside) then you could rent elsewhere. Or buy. Councils could extend their stock of housing and there could be benefits of scale, e.g. replace everyone's windows for double glazed at the same time on the whole street. In this market there was an anchor on house price inflation as well as market rents. Why pay double to live in somewhere not looked after just to line the pockets of a rent-seeker? Then Margaret Thatcher came along. Nowadays we don't have council housing. There is some but none is available. Councils aren't allowed to build/buy more. With 'right to buy' the council housing was sold on to rent-seekers, none of whom have any interest at all in the community and only have an interest in making money, not housing people. The rent-seekers have portfolios as bit as large as councils used to have in some instances. Social mobility is lost now that we have rent-seeker owned properties, you can't just move as easily as was possible with council owned housing. This has been great for the rent seekers as well as their banks. For people wanting to be part of the community, bring up a family and do legit work this has not been so good. Either you are a serf or a rent seeker. There was a time when it was not like that. The red carpet has been rolled out all the way for the rent seekers, the silly interest rates and notionally low inflation (which does not include rent) means that their capital accumulates, they can leverage and steal more homes from people who deserve to be 'on the ladder'. Normal working people are forced to pay ever higher sums of money to the rent seekers as they have no choice. So you have two people working to pay for a single bedroom flat, with no money to spare or kids or even cars. You would be really shocked if you saw how some people live in London, people that do service sector stuff have nothing. Pigeons fare better. People nowadays have no knowledge of how well a stock of council houses serves the community, all they know is the world of the rent seeker. Politicians 'demand' more affordable housing but that doesn't fix the problem, you need capital to deteriorate if invested in property, an anchor in rent prices and for people to be able to live not speculate. It is not hard to get right and not mankind's hardest problem. Apart from anything else having property as the only asset that accumulates is wrong, people should be investing capital in business, old and startup, not forcing the next generation out of their homes.
usaar333 8y ago
> If lenders are willing to finance an investment with 3% yield, then house prices will jump to 33x their annual rent value - it goes without saying that's only possible in low interest markets. There's truth to this, but I don't think house prices should simply be (annual rent) / interest_rate. There's a variety of other homeowner costs to consider (property taxes, HOA, maintenance, etc.) and buyers are taking an opportunity cost not being able to invest their paid-down principal (including down payment) in riskier assets. I have a calculator at https://medium.com/@usaar33/an-up-to-date-buy-or-rent-calculator-22d0bf9bbbb5 https://medium.com/@usaar33/an-up-to-date-buy-or-rent-calcul... to find indifference point on the buyer side. Other huge inputs are future appreciation rates of investment and property. At default values, price moves at about half that of mortgage rate changes: e.g. halving the mortgage rate only raises the house price willing to pay by ~16%; doubling it, cuts price by ~25%.
thaumaturgy 8y ago
> The rent itself however is controlled by supply and demand No, it's not. Folks have got to stop using simplistic remedial high school economics classes to explain complex social problems. They just aren't that simple. During the 2008 financial implosion, a single investment company called Blackstone Group went on a buying spree around the US. As of this time last year, they owned, through a subsidiary company, fully 1.5% of the entire Sacramento-area rental house market [1]. Blackstone in turn is flush with cash from foreign investors [2]. Foreign cash investment in real estate is a major cause of high rental prices. But the data on this and investment companies like Blackstone Group is spotty and difficult to follow [3], on purpose. These groups don't set prices according to "the market". They are more than happy to let some percentage of their properties remain empty rather than decreasing rental prices, because they can claim the lost rents -- at the prices they set -- as taxable deductions. It's a net win for them: keep the price high for all their other properties, get a writeoff on their empty properties. Building more housing is not going to fix this part of the housing problem. There is more than enough foreign capital available to continue to keep housing prices artificially inflated no matter how many new homes are built. These are long-term investments and small fluctuations in available housing are not going to shake them loose. Much more comprehensive investigation is needed in the actual causes of high housing costs, including the effects of foreign investment and investment firms, and then reform is needed to address those causes. [1]: https://www.kcra.com/article/this-is-the-largest-owner-of-rental-homes-in-the-sacramento-area/13520555 https://www.kcra.com/article/this-is-the-largest-owner-of-re... [2]: https://www.bloomberg.com/news/articles/2018-10-22/how-blackstone-landed-20-billion-from-saudis-for-infrastructure https://www.bloomberg.com/news/articles/2018-10-22/how-black... [3]: https://calmatters.org/articles/data-dig-are-foreign-investors-driving-up-real-estate-in-your-california-neighborhood/ https://calmatters.org/articles/data-dig-are-foreign-investo...
- wwweston 8y ago
  > They are more than happy to let some percentage of their properties remain empty rather than decreasing rental prices, because they can claim the lost rents -- at the prices they set -- as taxable deductions. How is it that a tax deduction can offset the opportunity cost of leaving a property vacant? Or does it only offset the cost of what the unit would actually rent for at rates that naturally clear the supply/demand curve? Could a vacancy tax fix this?
pizzazzaro 8y ago
You are neglecting the hidden sources of consumer-side competition, and their effect of driving up prices: https://www.bloomberg.com/news/articles/2018-11-19/foreign-investors-find-trophy-assets-in-unlikely-u-s-gold-mines https://www.bloomberg.com/news/articles/2018-11-19/foreign-i...

by yholio 8y ago

esotericn 8y ago

What influences the willingness of a lender? Availability of money in the general lending environment, sure, but surely there's a risk component there. The low interest rates can only persist as long as a lender has a reasonable expectation that they'll be paid back (e.g. that rents remain high enough to sustain the mortgage over the term). The real world factors like 'how desirable a place is'/'are good jobs there' and so forth seem to be further back in the causation chain to me. This is probably why we see the sort of "non-linear growth" that we do. An environment with stable, increasing rents due to increased demand _directly_ increases the price of housing linearly, and then on top of that it's a less risky market as a result so you end up with lower interest rates which drive it even further. A mortgage at 3% is basically a risk-free rate. Lenders are saying "you can't lose by buying here so go wild".

bradleyjg 8y ago
The lender on a very percentage of loans made in the United States since 2008 is directly or indirectly the federal government. The federal government is not constrained by the reasonable expectation of being paid back or market discipline.
Spooky23 8y ago
A: Closing the deal. The only exposure your bank has in terms of losing money is losing the costs associated with starting up the loan when you apply — there is a strong incentive to approve. The government owns the risk on performance. This was a policy choice, because banks making subjective decisions usually looked a lot like redlining. Nobody would write a loan on a luxury condo in a rehabbed factory in the inner city because it’s a measurably higher risk. Bad schools, high crime, pollution, and risk of the condo board doing dumb things makes that a risk for the bank.
- commaone 8y ago
  I think it's also worth mentioning that these local banks are still bundling and selling mortgages as securities,therefore removing the risk of long term price and payment instability. I find it odd that no one has even mentioned this, given we have just been through the largest financial crisis in generations because of it.

s4vi0r 8y ago

Or just destroying the entire cancerous concept of landlordism and housing as a commodity. No need to get all complicated, the solution is pretty simple.

mmirate 8y ago
What exactly would remain after this "destruction" of yours?
- tonyedgecombe 8y ago
  Presumably what the government in the UK is already doing, gradually adjusting taxes to make the rentier economy less viable over time.
- s4vi0r 8y ago
  Not sure why, but I couldn't respond to your comment for quite some time. I'm not sure what you're asking re: what would remain. Housing as a human right, I guess? There's no good reason for landlords to exist, nor do I understand why you would want housing to be a commodity especially considering we live in a post-2008 world.
  - conanbatt 8y ago
    There can't be "no landlords". Someone owns the land, even if its the State. Beware of that solution: you have a chance to fight a landlord, you have no chance to fight the state-landlord.
    - s4vi0r 8y ago
      Yes, but the state isn't leeching off of the people. My point is wrt landlords in the sense of people who do nothing, provide no value, and make money solely by virtue of "I/my ancestor was here first I/they bought this when there was less people so gimme money". I don't see where you get your conclusion from. For many (most?) people, they really don't have a chance to fight their landlord. Legal expenses, time, energy, etc. are pretty huge deterrents. Not sure why you can't fight a "state-landlord", also.

Theodores 8y ago

Years ago in the UK there was a considerable quantity of council owned properties, these were nice places to live with nice rents to pay. There was no shame in living in a council house, but you wouldn't be buying it, so it was not yours. You wouldn't be evicted either or forced to pay through the nose. This worked as a baseline, if you had more money or wanted to live in a posh area (or just the countryside) then you could rent elsewhere. Or buy. Councils could extend their stock of housing and there could be benefits of scale, e.g. replace everyone's windows for double glazed at the same time on the whole street. In this market there was an anchor on house price inflation as well as market rents. Why pay double to live in somewhere not looked after just to line the pockets of a rent-seeker? Then Margaret Thatcher came along. Nowadays we don't have council housing. There is some but none is available. Councils aren't allowed to build/buy more. With 'right to buy' the council housing was sold on to rent-seekers, none of whom have any interest at all in the community and only have an interest in making money, not housing people. The rent-seekers have portfolios as bit as large as councils used to have in some instances. Social mobility is lost now that we have rent-seeker owned properties, you can't just move as easily as was possible with council owned housing. This has been great for the rent seekers as well as their banks. For people wanting to be part of the community, bring up a family and do legit work this has not been so good. Either you are a serf or a rent seeker. There was a time when it was not like that. The red carpet has been rolled out all the way for the rent seekers, the silly interest rates and notionally low inflation (which does not include rent) means that their capital accumulates, they can leverage and steal more homes from people who deserve to be 'on the ladder'. Normal working people are forced to pay ever higher sums of money to the rent seekers as they have no choice. So you have two people working to pay for a single bedroom flat, with no money to spare or kids or even cars. You would be really shocked if you saw how some people live in London, people that do service sector stuff have nothing. Pigeons fare better. People nowadays have no knowledge of how well a stock of council houses serves the community, all they know is the world of the rent seeker. Politicians 'demand' more affordable housing but that doesn't fix the problem, you need capital to deteriorate if invested in property, an anchor in rent prices and for people to be able to live not speculate. It is not hard to get right and not mankind's hardest problem. Apart from anything else having property as the only asset that accumulates is wrong, people should be investing capital in business, old and startup, not forcing the next generation out of their homes.

usaar333 8y ago

> If lenders are willing to finance an investment with 3% yield, then house prices will jump to 33x their annual rent value - it goes without saying that's only possible in low interest markets. There's truth to this, but I don't think house prices should simply be (annual rent) / interest_rate. There's a variety of other homeowner costs to consider (property taxes, HOA, maintenance, etc.) and buyers are taking an opportunity cost not being able to invest their paid-down principal (including down payment) in riskier assets. I have a calculator at https://medium.com/@usaar33/an-up-to-date-buy-or-rent-calculator-22d0bf9bbbb5 https://medium.com/@usaar33/an-up-to-date-buy-or-rent-calcul... to find indifference point on the buyer side. Other huge inputs are future appreciation rates of investment and property. At default values, price moves at about half that of mortgage rate changes: e.g. halving the mortgage rate only raises the house price willing to pay by ~16%; doubling it, cuts price by ~25%.

thaumaturgy 8y ago

> The rent itself however is controlled by supply and demand No, it's not. Folks have got to stop using simplistic remedial high school economics classes to explain complex social problems. They just aren't that simple. During the 2008 financial implosion, a single investment company called Blackstone Group went on a buying spree around the US. As of this time last year, they owned, through a subsidiary company, fully 1.5% of the entire Sacramento-area rental house market [1]. Blackstone in turn is flush with cash from foreign investors [2]. Foreign cash investment in real estate is a major cause of high rental prices. But the data on this and investment companies like Blackstone Group is spotty and difficult to follow [3], on purpose. These groups don't set prices according to "the market". They are more than happy to let some percentage of their properties remain empty rather than decreasing rental prices, because they can claim the lost rents -- at the prices they set -- as taxable deductions. It's a net win for them: keep the price high for all their other properties, get a writeoff on their empty properties. Building more housing is not going to fix this part of the housing problem. There is more than enough foreign capital available to continue to keep housing prices artificially inflated no matter how many new homes are built. These are long-term investments and small fluctuations in available housing are not going to shake them loose. Much more comprehensive investigation is needed in the actual causes of high housing costs, including the effects of foreign investment and investment firms, and then reform is needed to address those causes. [1]: https://www.kcra.com/article/this-is-the-largest-owner-of-rental-homes-in-the-sacramento-area/13520555 https://www.kcra.com/article/this-is-the-largest-owner-of-re... [2]: https://www.bloomberg.com/news/articles/2018-10-22/how-blackstone-landed-20-billion-from-saudis-for-infrastructure https://www.bloomberg.com/news/articles/2018-10-22/how-black... [3]: https://calmatters.org/articles/data-dig-are-foreign-investors-driving-up-real-estate-in-your-california-neighborhood/ https://calmatters.org/articles/data-dig-are-foreign-investo...

wwweston 8y ago
> They are more than happy to let some percentage of their properties remain empty rather than decreasing rental prices, because they can claim the lost rents -- at the prices they set -- as taxable deductions. How is it that a tax deduction can offset the opportunity cost of leaving a property vacant? Or does it only offset the cost of what the unit would actually rent for at rates that naturally clear the supply/demand curve? Could a vacancy tax fix this?

pizzazzaro 8y ago

You are neglecting the hidden sources of consumer-side competition, and their effect of driving up prices: https://www.bloomberg.com/news/articles/2018-11-19/foreign-investors-find-trophy-assets-in-unlikely-u-s-gold-mines https://www.bloomberg.com/news/articles/2018-11-19/foreign-i...