4 ms·

>of course the rent will have to be higher to provide the necessary return on capital Rent is set by supply and demand. There's no law - economic or otherwise

>of course the rent will have to be higher to provide the necessary return on capital Rent is set by supply and demand. There's no law - economic or otherwise - saying that it is necessary for landlords or anybody else to yield a return on capital. In reality if the value of a home is falling or flat landlords do often try to raise rents in order to recoup losses and sometimes this leads to even greater losses as tenants leave and it goes unrented. It's a psychological trap caused by a feeling of entitlement to profit. This "nightmare" has kind of faded in to distant memory as most governments around the world have decided to provide indirect wealth transfers to property owners via QE and low interest rates. In the last 10 years even an idiot could probably have made capital gains in most housing markets thanks to the government assistance lavished on them. >Rental units that appreciate fast enough are just held vacant in some markets, so much so that Vancouver had to abundantly tax it to try to stop it. Vancouver is as much about foreign money trying to find a home as it is about capital investments. A Chinese investor is often okay with a depreciation in capital provided they have A) assurances that their capital is not at risk of confiscation by the Chinese state and B) that they have a place to run away to in case some shit goes down in China. The headache of renting out the apartment along with the instinctive desire to own something "brand new and untouched" means that they often leave these gold bar proxies/emergency safe houses empty.

FireBeyond 8y ago
> it is necessary for landlords or anybody else to yield a return on capital. In my town there is a proposal afoot called The Missing Middle,to improve availability of medium density / multi family dwellings. A vocal group is furious. Furor that the economic impact study showed that their current and predicted home values over the next ten years is expected to decrease from an 11% year over year increase, to a 7% year over year increase (still). The very definition of feeling entitled to profits.
- bunderbunder 8y ago
  This also highlights a simple, mathematically inevitable truth: Homes cannot be both affordable and a good investment at the same time.
  - zaroth 8y ago
    If home prices were perfectly stable, adjusted for inflation, they could still be a good “investment” in the sense that rents would be much higher, for the tax benefits, due to artificially low mortgage rates, or as a vehicle for forced savings. I do wonder if the average family could afford to own a home, even at 3.5% interest, if it’s value did not appreciate. And I wonder if the rent had to cover the entire investment return for landlords, what would that do to average rental rates?
zaroth 8y ago
> Rent is set by supply and demand. There's no law - economic or otherwise - saying that it is necessary for landlords or anybody else to yield a return on capital. Investment opportunities are also a market with supply and demand. The demand for a high risk investment with low expected return is approximately zero. If there are more attractive investment opportunities (higher expected return with lower risk) then money will flow there instead. US treasuries provide a backstop for the minimum expected return on capital. It’s throwing away money to invest in something non-liquid with an expected return lower than, say, 1 month T-bills, which are currently about 2.5% APY. Of course it’s possible to lose money renting a particular unit, or over a particular timescale, but we’re talking about the long-term macroeconomics, where this is not the case. Hence expected rate of return, which has an average and variance. In that sense the long-term macroeconomics dictate that yes there is an “economic law” which says rental properties must provide a positive return on capital. Or else there would be no market for rental properties.
- iguy 8y ago
  > rental properties must provide a positive return on capital To new investors. GP's point is that the causality is from rent to sale price. In any year any owner (or agent) more or less tries to charge the rent they can get. If this declines, there's nothing an individual owner can do about it. Badly wanting more doesn't open up any new channels to charge more rent (and may even lead you to play your hand sub-optimally). But a prospective new owner certainly looks at the return, and won't bother to invest if T-bills would pay as well, and hence the sale price will adjust. (And of course buyers may pay for things other than rent, like a belief that prices will rise.)
  - zaroth 8y ago
    I am definitely not saying that it’s impossible to lose money renting. But if you can’t charge enough rent to cover your costs, then eventually you sell and go buy a unit somewhere else that is profitable, or stop renting entirely, or declare bankruptcy, or.... This puts downward pressure on real estate prices in areas which are unprofitable by increasing inventory and decreasing investor demand for rental property. Market equilibrium will tend to drive prices to the point where units can be profitably rented, and rent will be higher in areas that are depreciating rather than appreciating. This is not a law in the sense of a inviolable law of physics, but I believe it is generally accepted macroeconomic theory.

FireBeyond 8y ago

> it is necessary for landlords or anybody else to yield a return on capital. In my town there is a proposal afoot called The Missing Middle,to improve availability of medium density / multi family dwellings. A vocal group is furious. Furor that the economic impact study showed that their current and predicted home values over the next ten years is expected to decrease from an 11% year over year increase, to a 7% year over year increase (still). The very definition of feeling entitled to profits.

bunderbunder 8y ago
This also highlights a simple, mathematically inevitable truth: Homes cannot be both affordable and a good investment at the same time.
- zaroth 8y ago
  If home prices were perfectly stable, adjusted for inflation, they could still be a good “investment” in the sense that rents would be much higher, for the tax benefits, due to artificially low mortgage rates, or as a vehicle for forced savings. I do wonder if the average family could afford to own a home, even at 3.5% interest, if it’s value did not appreciate. And I wonder if the rent had to cover the entire investment return for landlords, what would that do to average rental rates?

zaroth 8y ago

> Rent is set by supply and demand. There's no law - economic or otherwise - saying that it is necessary for landlords or anybody else to yield a return on capital. Investment opportunities are also a market with supply and demand. The demand for a high risk investment with low expected return is approximately zero. If there are more attractive investment opportunities (higher expected return with lower risk) then money will flow there instead. US treasuries provide a backstop for the minimum expected return on capital. It’s throwing away money to invest in something non-liquid with an expected return lower than, say, 1 month T-bills, which are currently about 2.5% APY. Of course it’s possible to lose money renting a particular unit, or over a particular timescale, but we’re talking about the long-term macroeconomics, where this is not the case. Hence expected rate of return, which has an average and variance. In that sense the long-term macroeconomics dictate that yes there is an “economic law” which says rental properties must provide a positive return on capital. Or else there would be no market for rental properties.

iguy 8y ago
> rental properties must provide a positive return on capital To new investors. GP's point is that the causality is from rent to sale price. In any year any owner (or agent) more or less tries to charge the rent they can get. If this declines, there's nothing an individual owner can do about it. Badly wanting more doesn't open up any new channels to charge more rent (and may even lead you to play your hand sub-optimally). But a prospective new owner certainly looks at the return, and won't bother to invest if T-bills would pay as well, and hence the sale price will adjust. (And of course buyers may pay for things other than rent, like a belief that prices will rise.)
- zaroth 8y ago
  I am definitely not saying that it’s impossible to lose money renting. But if you can’t charge enough rent to cover your costs, then eventually you sell and go buy a unit somewhere else that is profitable, or stop renting entirely, or declare bankruptcy, or.... This puts downward pressure on real estate prices in areas which are unprofitable by increasing inventory and decreasing investor demand for rental property. Market equilibrium will tend to drive prices to the point where units can be profitably rented, and rent will be higher in areas that are depreciating rather than appreciating. This is not a law in the sense of a inviolable law of physics, but I believe it is generally accepted macroeconomic theory.