10 ms·

Houses are assets, not goods

69 points by AndrewDucker 7y ago

xanipher 7y ago
"But at the end of each sales chain is either another landlord or someone who was previously renting." Or, in many cities, on the end of many sales chains is a Chinese or Saudi who is trying to get wealth away from an oppressive regime.
- blub 7y ago
  Or they are part of the oppressive regime and want to launder their money.
  - std_throwaway 7y ago
    Both, they benefit from the regime but don't want their children to grow up under the circumstances they helped to create.
progre 7y ago
A house is a liability. Land is an asset
- taneq 7y ago
  Precisely. Houses depreciate, the land they're built on (typically) appreciates.
  - ben_w 7y ago
    Yes, though the buildings on the land can be a multiplier that makes up for the cost. I own the leasehold of a flat, and I’m collecting more rent than the freeholder (landholders? I forget the terminology) of the land it’s on is collecting from me as ground rent.
    - taneq 7y ago
      Oh sure, but you have to pay for upkeep. I can rent out a car, that doesn't make it an appreciating asset.
- newnewpdro 7y ago
  There's substantial value in a legally constructed, code complying, permitted residence. Especially in areas where development is costly and/or frequently difficult to impossible like desirable parts of CA.
- danhak 7y ago
  Nah, a house is an asset. A depreciating asset but an asset nonetheless. Depreciating asset !== liability.
  - tonyedgecombe 7y ago
    It can be both, an asset because it is a store of value, a liability because you need to maintain it.
- heyflyguy 7y ago
  I totally agree with you, unless the house is a rental.
test6554 7y ago
Good: a product or service which can command a price when sold. You can argue that a house and housing are two separate goods, but they are still goods. Everyone needs housing. But people also seek houses to provide themselves with housing or to generate rental income.
andy_ppp 7y ago
The problem I see with this article and arguably all classical economics is that housing as a market is lead by irrational concerns (feelings), you could list many of them... for example I’ve bought a 1960 absolutely disgusting council flat for probably too much money but once renovations are done up I should be able to rent the rooms for near £2800 while the mortgage is £1600 per month. A Victorian house in the same area barely rents for more (£3400-600) but the mortgage with a 10% deposit would lose you money renting it out. This makes zero sense, but regularly happens. Also property is not fungible as no two properties or areas are the same.
- djmobley 7y ago
  Is that £1,600/month the cost of a buy-to-let mortgage, which you would need if you planned to rent out the property? You would also need to factor in costs like landlords’ insurance, letting agents’ fees, the risk of non-payment of rent, etc.
  - andy_ppp 7y ago
    Sure but those costs are applied on top of both properties. I doubt you could get a buy to let mortgage on a Victorian house in London unless you had a 60% deposit.
- tonyedgecombe 7y ago
  Some of that will be down to the clients, margins get higher the further down market you go. A family in a house is more likely to treat it as a home than someone in a flat who expects to move in 12 months.
- nabla9 7y ago
  Economists talk about aggregates. Layman thinks individual houses and their differences. The differences in individual houses smooth over in large scale. The context of the article is whole economy at macro level. They specially mention how they ignore even regional differences.
  - 7y ago
imtringued 7y ago
I don't understand why house prices should rise. Buildings have a limited lifespan. If a modern reinforced concrete building only lasts 80 years then it should lose 1% or more of its value every year.
- dvdbloc 7y ago
  I don’t believe you could apply linear depreciation to most buildings in a realistic sense when most homeowners live on average in their homes around 7 years.
  - jaclaz 7y ago
    >I don’t believe you could apply linear depreciation to most buildings in a realistic sense when most homeowners live on average in their homes around 7 years. Where? Any data to support this average 7 years? (it seems to me a lot shorter time than what I would expect)
- barrkel 7y ago
  The value of a house is normally a fraction (in my case in London, about 20%) of the value of the plot. Rebuild cost is something you see on your home insurance, and is normally much lower than market value.
  - jaclaz 7y ago
    Any "prominent" city and particularly London are not good examples. In a non-main city the cost of a newly built house is basically the cost of the land + the cost of construction (done at a more industrial level, i.e. let's say a lot of 16 houses or a building with 30-40 flats is built with costs that are some 20-30% lower than those to re-build a single house/flat) + the margin of the builder/developer (which often is not exceeding 15 or 20%). I will give you some real world costs for my area (Italy, Tuscany, non-main-city): Plot/land (incidence on built surface) 500 Euro/m2 Building costs 1200-1400 Euro/m2 Projects/Taxes/permits/financial costs 500 Euro/m2 Final sale price 2800-3000 Euro/m2 Same in the nearest "main" city , Florence: Plot/land (incidence on built surface[1][2]) 1500-2000 Euro/m2 Building (re-building) costs 1300-1500 Euro/m2 Projects/Taxes/permits/financial costs 800 Euro/m2 Final sale price 4000-6000 Euro/m2[2] [1] largely this is about buying, (partially) demolishing and rebuilding an existing building as there are very few possibilites of a completely new building on a "virgin" land plot [2] of course this depends a lot on the exact location
petra 7y ago
Cars are expensive purchases. So there's a competitive marketplace around leasing them. Leasing housing - i.e. rent-to-own - could solve the need to save for a large down-payment. Why isn't there a competitive and fair marketplace there ?
- ummonk 7y ago
  Something like this? https://zerodown.com https://zerodown.com
- dazc 7y ago
  Here in the UK where 'rent to own' is a concept that exists but has never quite taken off, the traditional business model is to borrow money to build houses and then sell as soon as possible to recoup the investment. Often the buyers will then rent out the house to someone else at a premium. It's a hugely inefficient process that results in poor build quality and high costs. Build-to-rent is an option that mass-housebuilders are catching on to (maybe 15 years too late) but there is still resistance to changing existing business models. I believe the real problem is that people like to own the house they live in and will pay any price to achieve this. In a bubble of ever increasing house prices though, who can blame them?
mellosouls 7y ago
I guess this is one of the reasons I'll never be rich, but to some of us houses are homes, not just figures on a balance sheet. I find the clinical discussion of asset values and such in the context of a bizarre market which leaves local families on modest incomes priced out of owning properties in their neighborhood (in extreme cases like London often owned by dubious foreign organisations) and the disruptive ("dynamic") trend to transience of others' communities in pursuit of the individual's bank balance distasteful and anti-social.
- lotsofpulp 7y ago
  Ignoring the reality won’t change things. Once we understand the hows and why, which have to do with decreasing job security requiring life near urban areas, huge sums of cash looking for returns on investment, etc, we can then try to fix the issue. Problem is that the real root of the issue is the lack of stability in people’s incomes, due to jobs being outsourced to poorer countries and automation, for which there is no undoing, and would require redistributing wealth.
  - deogeo 7y ago
    > Ignoring the reality Leaving everything to the mercy of international markets is not an inherent feature of reality. Many countries had, and have, limits on foreign ownership of real-estate (and media), as well as reduced taxes on people's main residences, and this can make houses more valuable as homes than financial instruments. They are not 'ignoring reality' by adopting these policies.
- _nalply 7y ago
  I have come to realize that not everything in our lives can be modeled as a monetary value after reading Varoufakis' book «Talking to My Daughter About the Economy». One example is the work done by parents to raise children. If we really were fixated on the monetary value of things, then parents would only raise children if they got a salary for the work. It seems we have two worlds: first the world of the well-known monetary value but also the perhaps even more important world of the — let me entertain this notion — reverential value. After this insight I understand many weird things a lot better and also why many economists, business people and leaders fail if they don't consider the second world.
nickthemagicman 7y ago
Capitalism has bled into every aspect of our lives. Employees are 'resources', houses are 'assets', etc. I like capitalism for most things, but if left unregulated, it really dehumanizes us.
- bjornsing 7y ago
  I wouldn’t pin that “employees are resources” thing on capitalism though. In my experience this view is not imposed by owners, but rather by power hungry mediocre project managers and the like lower down the org chart. I’ve come to see it as just a sad human instinct: some people get a kick out of talking/thinking about others as (their) tools. Capitalism probably keeps this instinct at bay better than most other systems, as it seems to me a fine way of destroying capital.
- Ididntdothis 7y ago
  In my company they started calling people ”resources” maybe two or three years ago. This felt always really dehumanizing to me but now almost everybody does it.
  - sturgill 7y ago
    I don’t know the particulars of your company but this got me thinking. There is a necessary shift somewhere in the spectrum: [start up] —- [enterprise] where you don’t know everyone who works with you nor does everyone know you. Everyone is a cog in a wheel (even if they don’t fully appreciate it). Everything is a system and human capital is just one of many inputs that the business _should_ optimize. Companies that are too fat get replaced by ones that are lean, etc. For me, there is some comfort in knowing that I’m as replaceable as anyone else. It helps me deal more humanely with others when you have to fire/lay-off/reduce hours. And it helps remind me that my professional work isn’t the essence of my life; it’s just one component of my own personal system. It has to be optimized alongside family commitments, volunteer work, and my own faith-based pursuits. There is no benevolence in a system, but that doesn’t mean we shouldn’t act benevolently towards each other. It might sound crass, but you are unlikely to retire from your current job. And nor will your boss. In fact, one of my main focuses as a manager is to remind people of that fact along with this advice: when they start to feel the itch to move on, let me know if I can help them get experiences that will position them for the future. TLDR; the business doesn’t care about you, but hopefully as an executive those that report to me always feel that I have treated them with human empathy. Also, I strongly encourage you to build up your non-professional circles. Most of my closest friends are previously coworkers that I stay in touch with after one or the other inevitably moves on. We’re way past the point in time where the system is designed for pensions and 50 yr watches.
lottin 7y ago
"If they fall to 5%, the value of that same stream of flowers doubles to £2,000." How would that work? The idea is that people would sell assets that have below-market returns and buy assets that have above-market returns. Asset prices will adjust accordingly and so will the respective returns which are a function of price. And this will go on until return rates equalise across all assets. This is the theory, but it's hard to imagine that in most circumstances a house can be traded for another asset. Why? Because having a place to live is a pre-requisite for being a functioning member of society. If tulips are under-performing sure I can sell my stock of tulips. If houses are under-performing I don't care. I'm not going to sell my house and buy something else, because I need a house. Thus I'm sceptical that the theory will work in the case of the housing market.
- gjm11 7y ago
  You need a house but you don't necessarily need exactly that particular house. More importantly, this also applies to anyone who's moving house right now. Suppose you need a new house, and you want to own rather than rent. You will be willing to buy a more expensive house if the mortgage interest rate is 1% than if it's 10%, because the amount you actually have to pay is lower when the mortgage rate is lower. Mortgage rates vary along with other interest rates. So when interest rates are lower, mortgage rates are lower, and people can and do pay more for houses.
  - lottin 7y ago
    Trading a house for another house has no effect on the prices of other assets (i.e. non-housing assets) or their rate of return, which was what the original argument was about.
    - gjm11 7y ago
      Was it? I thought the original argument was mostly about how interest rates affect housing prices. The particular bit you quoted -- > If they fall to 5%, the value of that same stream of flowers doubles to £2,000 -- and asked "how would that work?" about, wasn't about how buying and selling houses affects the prices or rates-of-return of other assets, it was about how prevailing interest rates affect the prices of houses. Which is what my comment addressed. Incidentally, it's very rare to "trade a house for another house". You buy houses for money, and sell houses for money. (You often do those two things together, but often the house you buy is quite different in price from the house you sell, and in any case the buyer and the seller are different people, so this still isn't equivalent to trading one house for another.) This isn't just nitpickery; it's because houses are bought and sold for money that could be used for other things that their prices can interact with the prices of other things.
GreeniFi 7y ago
I found this a more helpful explanation of the rise in house prices. https://medium.com/iipp-blog/why-cant-you-afford-a-home-9c5cf009be21 https://medium.com/iipp-blog/why-cant-you-afford-a-home-9c5c... I also can’t help but wonder whether the change in house prices has been a factor in the rise of populist politicians. It feels impossible to prove or disprove, but in places like the UK and US, a high cultural value is placed on home ownership. And at the same time, housing is unaffordable. In that gap dissatisfaction grows. And a more obvious target of blame is immigration than cost and availability of credit. I emphasize, the above is an hypothesis. I look for evidence to either prove or disprove.
occamrazor 7y ago
Second post in the series at https://bankunderground.co.uk/2019/09/06/houses-are-assets-not-goods-taking-the-theory-to-the-uk-data/ https://bankunderground.co.uk/2019/09/06/houses-are-assets-n... with data from the UK market.
Merrill 7y ago
Land is an asset, but if there's a house on it, it is an unproductive asset that you pay property taxes on. The building is an asset, but you also pay property taxes on it, and in the US, about 60% of "home owners" have a mortgage on which they are paying interest and principle. Furthermore, it is a deteriorating asset that must be maintained and updated in order to hold value, and that has continuing operating costs such as sewer, water, electric, etc. that may otherwise be bundled into rents. Complicating the economics is the fact that lots and houses are very non-standard and hard to value and the fact that when selling it the transaction costs will be about 10% of the selling price. Consequently if your mortgage is 60% of the selling price, you will lose 25% of your equity. Psychologically, homes are more like jewelry, since people have strong likes and dislikes which depend on fashion, and people get attached to the pieces that they have.
- pcmaffey 7y ago
  Except this doesn’t factor in the utility they provide.
  - Merrill 7y ago
    True, but the practical utility of owning versus renting a house is pretty equal. Owning a house has the added utilities of allowing for social signalling through personalized home improvements and selective social group membership, also associated with educational opportunities for the children.
    - generatorguy 7y ago
      Also control of your life and certainty in your Costs. Landlords can kick tenants out via renovictions etc, raise rents as much as they can, and never improve the space. If you are renting are you sure you can stay there for 5 years, 10 years, 25 years? I think if your time horizons are longer than 5 years the certainty of owning would also provide some value. I have been a tenant, am a landlord for 4 units, and a home owner. All properties are partnerships which makes it easier to deal with operations and maintenance.
amoitnga 7y ago
Can somebody try to answer a real question for me, please? I'm 30, single, a software engineer working remotely, making ~100k a year, saved around 70k so far. I'm not very interested in investing it in any kind of active business. So I see 2 options: - buy stock ( some kind of index) - put a downpayment on an apartment(house) Both have pros and cons. I lean towards getting an apartment. Something around ~350-400k with low HOA and taxes should get me into something nice, having smaller mortgage payment than if I'd rent it. Say we're talking about San Diego or Austin. After crunching some numbers ( in a very primitive way ) I feel having to pay amount that is less than I would typically pay for rent and most of that payment going towards my saving is a very good situation to be in. Can somebody run some sort of calculation with above variables and tell me something I don't know/think of?
- rwmj 7y ago
  I had a longer answer, but I think this short answer suffices: Everything is a terrible investment at the moment. Everything is overpriced. Everyone is expecting a recession imminently. Therefore whatever you do you will lose money, and lots of it. So, don't take risks, but do whatever will make you happier. For example if you don't like paying rent to a landlord every month and not being able to decorate the walls, maybe you'd be happier if you owned a house. (This may not apply to you, it's only an example)
  - simonebrunozzi 7y ago
    > Everything is a terrible investment at the moment I would agree, but: you can also invest in things that thrive in a downturn (e.g. gold is considered to be a safe asset, some would say Bitcoin as well), or simply invest in risk-free assets (e.g. govt bonds), or in savings accounts that pay you 1.5-2% annual interests.
    - bluedevil2k 7y ago
      No one would consider Bitcoin to be a safe asset Safe investments in a downturn include REITs that invest in apartments.
deleted 7y ago
[deleted]
GoodJokes 7y ago
Which is the ENTIRE problem. Housing should be a human right, not a financial instrument. Just like healthcare. Just like food.

69 points by AndrewDucker 7y ago

"But at the end of each sales chain is either another landlord or someone who was previously renting." Or, in many cities, on the end of many sales chains is a Chinese or Saudi who is trying to get wealth away from an oppressive regime.

blub 7y ago
Or they are part of the oppressive regime and want to launder their money.
- std_throwaway 7y ago
  Both, they benefit from the regime but don't want their children to grow up under the circumstances they helped to create.

progre 7y ago

A house is a liability. Land is an asset

taneq 7y ago
Precisely. Houses depreciate, the land they're built on (typically) appreciates.
- ben_w 7y ago
  Yes, though the buildings on the land can be a multiplier that makes up for the cost. I own the leasehold of a flat, and I’m collecting more rent than the freeholder (landholders? I forget the terminology) of the land it’s on is collecting from me as ground rent.
  - taneq 7y ago
    Oh sure, but you have to pay for upkeep. I can rent out a car, that doesn't make it an appreciating asset.
newnewpdro 7y ago
There's substantial value in a legally constructed, code complying, permitted residence. Especially in areas where development is costly and/or frequently difficult to impossible like desirable parts of CA.
danhak 7y ago
Nah, a house is an asset. A depreciating asset but an asset nonetheless. Depreciating asset !== liability.
- tonyedgecombe 7y ago
  It can be both, an asset because it is a store of value, a liability because you need to maintain it.
heyflyguy 7y ago
I totally agree with you, unless the house is a rental.

test6554 7y ago

Good: a product or service which can command a price when sold. You can argue that a house and housing are two separate goods, but they are still goods. Everyone needs housing. But people also seek houses to provide themselves with housing or to generate rental income.

andy_ppp 7y ago

The problem I see with this article and arguably all classical economics is that housing as a market is lead by irrational concerns (feelings), you could list many of them... for example I’ve bought a 1960 absolutely disgusting council flat for probably too much money but once renovations are done up I should be able to rent the rooms for near £2800 while the mortgage is £1600 per month. A Victorian house in the same area barely rents for more (£3400-600) but the mortgage with a 10% deposit would lose you money renting it out. This makes zero sense, but regularly happens. Also property is not fungible as no two properties or areas are the same.

djmobley 7y ago
Is that £1,600/month the cost of a buy-to-let mortgage, which you would need if you planned to rent out the property? You would also need to factor in costs like landlords’ insurance, letting agents’ fees, the risk of non-payment of rent, etc.
- andy_ppp 7y ago
  Sure but those costs are applied on top of both properties. I doubt you could get a buy to let mortgage on a Victorian house in London unless you had a 60% deposit.
tonyedgecombe 7y ago
Some of that will be down to the clients, margins get higher the further down market you go. A family in a house is more likely to treat it as a home than someone in a flat who expects to move in 12 months.
nabla9 7y ago
Economists talk about aggregates. Layman thinks individual houses and their differences. The differences in individual houses smooth over in large scale. The context of the article is whole economy at macro level. They specially mention how they ignore even regional differences.
- 7y ago

imtringued 7y ago

I don't understand why house prices should rise. Buildings have a limited lifespan. If a modern reinforced concrete building only lasts 80 years then it should lose 1% or more of its value every year.

dvdbloc 7y ago
I don’t believe you could apply linear depreciation to most buildings in a realistic sense when most homeowners live on average in their homes around 7 years.
- jaclaz 7y ago
  >I don’t believe you could apply linear depreciation to most buildings in a realistic sense when most homeowners live on average in their homes around 7 years. Where? Any data to support this average 7 years? (it seems to me a lot shorter time than what I would expect)
barrkel 7y ago
The value of a house is normally a fraction (in my case in London, about 20%) of the value of the plot. Rebuild cost is something you see on your home insurance, and is normally much lower than market value.
- jaclaz 7y ago
  Any "prominent" city and particularly London are not good examples. In a non-main city the cost of a newly built house is basically the cost of the land + the cost of construction (done at a more industrial level, i.e. let's say a lot of 16 houses or a building with 30-40 flats is built with costs that are some 20-30% lower than those to re-build a single house/flat) + the margin of the builder/developer (which often is not exceeding 15 or 20%). I will give you some real world costs for my area (Italy, Tuscany, non-main-city): Plot/land (incidence on built surface) 500 Euro/m2 Building costs 1200-1400 Euro/m2 Projects/Taxes/permits/financial costs 500 Euro/m2 Final sale price 2800-3000 Euro/m2 Same in the nearest "main" city , Florence: Plot/land (incidence on built surface[1][2]) 1500-2000 Euro/m2 Building (re-building) costs 1300-1500 Euro/m2 Projects/Taxes/permits/financial costs 800 Euro/m2 Final sale price 4000-6000 Euro/m2[2] [1] largely this is about buying, (partially) demolishing and rebuilding an existing building as there are very few possibilites of a completely new building on a "virgin" land plot [2] of course this depends a lot on the exact location

petra 7y ago

Cars are expensive purchases. So there's a competitive marketplace around leasing them. Leasing housing - i.e. rent-to-own - could solve the need to save for a large down-payment. Why isn't there a competitive and fair marketplace there ?

ummonk 7y ago
Something like this? https://zerodown.com https://zerodown.com
dazc 7y ago
Here in the UK where 'rent to own' is a concept that exists but has never quite taken off, the traditional business model is to borrow money to build houses and then sell as soon as possible to recoup the investment. Often the buyers will then rent out the house to someone else at a premium. It's a hugely inefficient process that results in poor build quality and high costs. Build-to-rent is an option that mass-housebuilders are catching on to (maybe 15 years too late) but there is still resistance to changing existing business models. I believe the real problem is that people like to own the house they live in and will pay any price to achieve this. In a bubble of ever increasing house prices though, who can blame them?

mellosouls 7y ago

I guess this is one of the reasons I'll never be rich, but to some of us houses are homes, not just figures on a balance sheet. I find the clinical discussion of asset values and such in the context of a bizarre market which leaves local families on modest incomes priced out of owning properties in their neighborhood (in extreme cases like London often owned by dubious foreign organisations) and the disruptive ("dynamic") trend to transience of others' communities in pursuit of the individual's bank balance distasteful and anti-social.

lotsofpulp 7y ago
Ignoring the reality won’t change things. Once we understand the hows and why, which have to do with decreasing job security requiring life near urban areas, huge sums of cash looking for returns on investment, etc, we can then try to fix the issue. Problem is that the real root of the issue is the lack of stability in people’s incomes, due to jobs being outsourced to poorer countries and automation, for which there is no undoing, and would require redistributing wealth.
- deogeo 7y ago
  > Ignoring the reality Leaving everything to the mercy of international markets is not an inherent feature of reality. Many countries had, and have, limits on foreign ownership of real-estate (and media), as well as reduced taxes on people's main residences, and this can make houses more valuable as homes than financial instruments. They are not 'ignoring reality' by adopting these policies.
_nalply 7y ago
I have come to realize that not everything in our lives can be modeled as a monetary value after reading Varoufakis' book «Talking to My Daughter About the Economy». One example is the work done by parents to raise children. If we really were fixated on the monetary value of things, then parents would only raise children if they got a salary for the work. It seems we have two worlds: first the world of the well-known monetary value but also the perhaps even more important world of the — let me entertain this notion — reverential value. After this insight I understand many weird things a lot better and also why many economists, business people and leaders fail if they don't consider the second world.

nickthemagicman 7y ago

Capitalism has bled into every aspect of our lives. Employees are 'resources', houses are 'assets', etc. I like capitalism for most things, but if left unregulated, it really dehumanizes us.

bjornsing 7y ago
I wouldn’t pin that “employees are resources” thing on capitalism though. In my experience this view is not imposed by owners, but rather by power hungry mediocre project managers and the like lower down the org chart. I’ve come to see it as just a sad human instinct: some people get a kick out of talking/thinking about others as (their) tools. Capitalism probably keeps this instinct at bay better than most other systems, as it seems to me a fine way of destroying capital.
Ididntdothis 7y ago
In my company they started calling people ”resources” maybe two or three years ago. This felt always really dehumanizing to me but now almost everybody does it.
- sturgill 7y ago
  I don’t know the particulars of your company but this got me thinking. There is a necessary shift somewhere in the spectrum: [start up] —- [enterprise] where you don’t know everyone who works with you nor does everyone know you. Everyone is a cog in a wheel (even if they don’t fully appreciate it). Everything is a system and human capital is just one of many inputs that the business _should_ optimize. Companies that are too fat get replaced by ones that are lean, etc. For me, there is some comfort in knowing that I’m as replaceable as anyone else. It helps me deal more humanely with others when you have to fire/lay-off/reduce hours. And it helps remind me that my professional work isn’t the essence of my life; it’s just one component of my own personal system. It has to be optimized alongside family commitments, volunteer work, and my own faith-based pursuits. There is no benevolence in a system, but that doesn’t mean we shouldn’t act benevolently towards each other. It might sound crass, but you are unlikely to retire from your current job. And nor will your boss. In fact, one of my main focuses as a manager is to remind people of that fact along with this advice: when they start to feel the itch to move on, let me know if I can help them get experiences that will position them for the future. TLDR; the business doesn’t care about you, but hopefully as an executive those that report to me always feel that I have treated them with human empathy. Also, I strongly encourage you to build up your non-professional circles. Most of my closest friends are previously coworkers that I stay in touch with after one or the other inevitably moves on. We’re way past the point in time where the system is designed for pensions and 50 yr watches.

lottin 7y ago

"If they fall to 5%, the value of that same stream of flowers doubles to £2,000." How would that work? The idea is that people would sell assets that have below-market returns and buy assets that have above-market returns. Asset prices will adjust accordingly and so will the respective returns which are a function of price. And this will go on until return rates equalise across all assets. This is the theory, but it's hard to imagine that in most circumstances a house can be traded for another asset. Why? Because having a place to live is a pre-requisite for being a functioning member of society. If tulips are under-performing sure I can sell my stock of tulips. If houses are under-performing I don't care. I'm not going to sell my house and buy something else, because I need a house. Thus I'm sceptical that the theory will work in the case of the housing market.

gjm11 7y ago
You need a house but you don't necessarily need exactly that particular house. More importantly, this also applies to anyone who's moving house right now. Suppose you need a new house, and you want to own rather than rent. You will be willing to buy a more expensive house if the mortgage interest rate is 1% than if it's 10%, because the amount you actually have to pay is lower when the mortgage rate is lower. Mortgage rates vary along with other interest rates. So when interest rates are lower, mortgage rates are lower, and people can and do pay more for houses.
- lottin 7y ago
  Trading a house for another house has no effect on the prices of other assets (i.e. non-housing assets) or their rate of return, which was what the original argument was about.
  - gjm11 7y ago
    Was it? I thought the original argument was mostly about how interest rates affect housing prices. The particular bit you quoted -- > If they fall to 5%, the value of that same stream of flowers doubles to £2,000 -- and asked "how would that work?" about, wasn't about how buying and selling houses affects the prices or rates-of-return of other assets, it was about how prevailing interest rates affect the prices of houses. Which is what my comment addressed. Incidentally, it's very rare to "trade a house for another house". You buy houses for money, and sell houses for money. (You often do those two things together, but often the house you buy is quite different in price from the house you sell, and in any case the buyer and the seller are different people, so this still isn't equivalent to trading one house for another.) This isn't just nitpickery; it's because houses are bought and sold for money that could be used for other things that their prices can interact with the prices of other things.

GreeniFi 7y ago

I found this a more helpful explanation of the rise in house prices. https://medium.com/iipp-blog/why-cant-you-afford-a-home-9c5cf009be21 https://medium.com/iipp-blog/why-cant-you-afford-a-home-9c5c... I also can’t help but wonder whether the change in house prices has been a factor in the rise of populist politicians. It feels impossible to prove or disprove, but in places like the UK and US, a high cultural value is placed on home ownership. And at the same time, housing is unaffordable. In that gap dissatisfaction grows. And a more obvious target of blame is immigration than cost and availability of credit. I emphasize, the above is an hypothesis. I look for evidence to either prove or disprove.

occamrazor 7y ago

Second post in the series at https://bankunderground.co.uk/2019/09/06/houses-are-assets-not-goods-taking-the-theory-to-the-uk-data/ https://bankunderground.co.uk/2019/09/06/houses-are-assets-n... with data from the UK market.

Merrill 7y ago

Land is an asset, but if there's a house on it, it is an unproductive asset that you pay property taxes on. The building is an asset, but you also pay property taxes on it, and in the US, about 60% of "home owners" have a mortgage on which they are paying interest and principle. Furthermore, it is a deteriorating asset that must be maintained and updated in order to hold value, and that has continuing operating costs such as sewer, water, electric, etc. that may otherwise be bundled into rents. Complicating the economics is the fact that lots and houses are very non-standard and hard to value and the fact that when selling it the transaction costs will be about 10% of the selling price. Consequently if your mortgage is 60% of the selling price, you will lose 25% of your equity. Psychologically, homes are more like jewelry, since people have strong likes and dislikes which depend on fashion, and people get attached to the pieces that they have.

pcmaffey 7y ago
Except this doesn’t factor in the utility they provide.
- Merrill 7y ago
  True, but the practical utility of owning versus renting a house is pretty equal. Owning a house has the added utilities of allowing for social signalling through personalized home improvements and selective social group membership, also associated with educational opportunities for the children.
  - generatorguy 7y ago
    Also control of your life and certainty in your Costs. Landlords can kick tenants out via renovictions etc, raise rents as much as they can, and never improve the space. If you are renting are you sure you can stay there for 5 years, 10 years, 25 years? I think if your time horizons are longer than 5 years the certainty of owning would also provide some value. I have been a tenant, am a landlord for 4 units, and a home owner. All properties are partnerships which makes it easier to deal with operations and maintenance.

amoitnga 7y ago

Can somebody try to answer a real question for me, please? I'm 30, single, a software engineer working remotely, making ~100k a year, saved around 70k so far. I'm not very interested in investing it in any kind of active business. So I see 2 options: - buy stock ( some kind of index) - put a downpayment on an apartment(house) Both have pros and cons. I lean towards getting an apartment. Something around ~350-400k with low HOA and taxes should get me into something nice, having smaller mortgage payment than if I'd rent it. Say we're talking about San Diego or Austin. After crunching some numbers ( in a very primitive way ) I feel having to pay amount that is less than I would typically pay for rent and most of that payment going towards my saving is a very good situation to be in. Can somebody run some sort of calculation with above variables and tell me something I don't know/think of?

rwmj 7y ago
I had a longer answer, but I think this short answer suffices: Everything is a terrible investment at the moment. Everything is overpriced. Everyone is expecting a recession imminently. Therefore whatever you do you will lose money, and lots of it. So, don't take risks, but do whatever will make you happier. For example if you don't like paying rent to a landlord every month and not being able to decorate the walls, maybe you'd be happier if you owned a house. (This may not apply to you, it's only an example)
- simonebrunozzi 7y ago
  > Everything is a terrible investment at the moment I would agree, but: you can also invest in things that thrive in a downturn (e.g. gold is considered to be a safe asset, some would say Bitcoin as well), or simply invest in risk-free assets (e.g. govt bonds), or in savings accounts that pay you 1.5-2% annual interests.
  - bluedevil2k 7y ago
    No one would consider Bitcoin to be a safe asset Safe investments in a downturn include REITs that invest in apartments.

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GoodJokes 7y ago

Which is the ENTIRE problem. Housing should be a human right, not a financial instrument. Just like healthcare. Just like food.