5 ms·

Is it better to buy a home for investment than it is to buy stocks?

tenpies 5y ago
Depends on geography. For example, in Canada, housing is up 30% YoY. Trudeau's Federal government recently said that even a 10% correction in housing would be unacceptable. In practice, Canadian housing isn't housing - it's a 30% (or better) government bond that you get to live in or rent out. That's a 30% return guaranteed by a sovereign state that will gladly destroy everything else in the country to prop up housing. There is no investment like it anywhere else in the world, which is why Canada is seeing the largest real estate bubble in the world. The best part? You can sell your principle residence completely tax free. Not a penny in tax paid from capital appreciation.
- SadCanadian 5y ago
  I live here in Toronto and it’s an absolute dumpster fire. The country is increasingly becoming hollowed out and residential investments are increasing as a % of total investments. In addition, there is no plan for prosperity. GDP per capita has been stagnant or negative and the productivity numbers are weak. The housing sector is becoming a giant leech sucking the life of out of productive investment. Engineers have quit to become real estate agents and try their hand at selling to foreigners or over-leveraged locals. Very little hope here from the eyes of a local. Maybe you can study software to get out and go to an American city. America remains relatively industrious. Canada is just becoming a high tax version of Monaco (doesn’t even make sense but still).
  - jcims 5y ago
    I live about four hours due south of you and loved visiting Toronto as a kid. I had seen similar commentary recently about the real-estate market and thought folks were exaggerating. From what I could see, they weren't. Just now I was going to make a joke about the long game being in Nunavut but checked my work first and, uhh, nope. That's some crazy shit. $600k for a (nice) 5br on a half acre in the tundra? No thanks. I know we look funny from up there but we do love y'all. My sister-in-law is from Guelph and lives in Ohio, we just accidentally bought matching F150's. So feel free to come down any time. The politics suck but the people are fine.
    - smnrchrds 5y ago
      Unlike in the south, high property prices in the territories are due to the cost of shipping building materials, not the price of land.
      - jcims 5y ago
        It seems the pandemic has flattened that out. Construction material prices here in the midwest are up 100-150%.
- Logon90 5y ago
  A 30% return on real estate or a 30% depreciation of CAD? That's the interesting question. Though the best one to ask at this point is: crypto or real estate?
- smnrchrds 5y ago
  > Trudeau's Federal government recently said that even a 10% correction in housing would be unacceptable. Could you please provide a source? I cannot find anything on the web. > it's a 30% (or better) government bond This cannot possibly be true. First of all, 2020 was a special year for asset prices, not just in Canada and not just for real estate, but for all assets all around the world. Second of all, even if the first assertion is correct, there is a world of difference between not allowing prices to decline vs not allowing them to increase any less than 30% YoY. Third, 1.3^27 is 1192. Average home prices in Vancouver is over 1 million CAD. Do you honestly argue in 27 years, the current homeowners could sell off their property and net a sweet >1 billion CAD? That we would have millions of billionaires in Canada in 27 years?
  - SadCanadian 5y ago
    It was not the federal government that explicitly said this (emphasis explicitly) but rather an MP for Vaughn in Ontario. His name is Adam Vaughan and he said this two weeks or so ago. https://betterdwelling.com/canada-says-property-bubble-not-great-for-locals-good-for-foreign-investors/ https://betterdwelling.com/canada-says-property-bubble-not-g... Yes, BetterDwelling is a permabear but Vaughan's comments are legitimate. He said it in an interview with TVO. On another note, the 30% number seems ridiculous. And, yet, do not be surprised if Canadians seriously believe this. Remember, people have been screaming bubble for a decade, and there has been no such pop yet. Of course, I think this is unsustainable. At 6-12% growth rate you're looking at like low to mid 8 figure values...for the average home. At 15-30% you're looking at hundreds of millions of dollars over 30 years. Ridiculous, isn't it? Interesting discussion on the Financial Times comments section about young people feeling insecure also highlights this property inflation. Basically, the AngloSphere has decided to inflate assets and forget about industrious activity. In the long run, you just end up with a hollow, low productivity and low social mobility country. Is this acceptable? Well, Canadians aren't voting against it. Of course, this is because they think they are getting richer. In reality, the country is just heavily indebted and consuming tomorrow's income today. I am keeping most of my savings down south with the Americans and their equity market. If the BoC can keep the bonanza going, so can the Americans.
vmception 5y ago
The primary feature of the real estate market is that the prices change so slowly that margin calls take years to happen. People are trading houses on 400%-2000% (4x-20x) leverage. Whereas with the stock market and other asset classes, you can't generally get that much leverage, and when you do the risk of getting margin called is perpetual and instant. So although housing prices don't necessarily increase faster than the S&P500, and that there are many local variables in play, the same 7% increase YoY can really be a 140% increase YoY, while you are also renting out the home for more cashflow. Liquidity of the housing market has vastly improved over the last 5 years, mostly due to new kinds of lenders and underwriters in the market, with the current year being even more liquid than ever. The downsides of real estate haven't gone away. Like maintenance and physical presence needed, which is difficult for an individual as the portfolio expands. The physical presence demand - or the need to make it economical for there to be someone else maintaining the property - means that it is difficult to come up with the downpayment for real estate in areas you would actually like to live in, but are fully capable of renting in. So the barriers of entry stay where they are.
- toomuchtodo 5y ago
  The margin call only occurs if you can't service the debt. As long as the note is paid, you can drag the debt out to note maturity (assuming fixed rate vs ARM, interest only, etc). If you have enough income from investments, and can service the note until maturity, whether you rent the property or not is immaterial. You can leave it vacant forever. Same if you pay it off and hold. For this discussion, I'm going to waive away the maintenance costs on a SFH, as they are immaterial for the size of the homes in SF regardless of what the value is determined to be by an arms length transaction.
  - vmception 5y ago
    Yes, and this is true in both markets, real estate or stocks. In the stock market you have up to 5 days to service the debt, and may also get liquidated instantly if the broker feels threatened. In the real estate market you have months upon months and maybe years, before your property is taken away from you.
gjs278 5y ago
nobody can confidently say one way or the other. both could crash. at least with the stocks you probably aren’t doing it on margin so you won’t lose the principle and can wait it out. with the house you can lose all the payments and the house if you can’t cover the mortgage.
anonAndOn 5y ago
Probably not. The headaches from crappy tenants/contractors/property managers/equipment failures (choose any combination) can easily dissuade even the veteran landlord, let alone a fresh new one.
eweise 5y ago
I think it can be initially but it decreases as you have more equity in home.
gregwebs 5y ago
Mortgages are being given away now that the mortgage rate is about the same as inflation. The mortgage is now the asset and the home is the liability. It is probably you can make more by paying off the mortgage then investing the down payment and try to bring that investment up to the level of the mortgage (plus having enough for capital gains tax). It may be a unique situation in our lifetime that is only possible because the fed is buying trillions of dollars of mortgage backed securities while the base rates are already bottomed out. However, the overall value depends a lot on inflation, how much property value will go down in the future in real terms (home prices in many markets are now at levels of the previous housing crises), and how much you have to spend to repair the house in addition to known fixed costs such as home owner's insurance and property tax (actually this rate may go up where state and local governments are insolvent).
- imtringued 5y ago
  I wonder how many weird deflationary forces are acting on this economy. Fed buying mortgages causes people to get into debt for their house, ironically they end up consuming less, which drags down inflation and the cycle repeats endlessly with no hope of inflation going up to justify increasing the interest rates.
  - gregwebs 5y ago
    In the long-term I think buying a house at a low fixed rate builds wealth and leads to greater consumption and less reliance on government transfer payments (although the mortgage itself could be considered a government transfer payment). As the fixed mortgage payment gets reduced over time due to inflation the homeowner has greater ability to consume if their wages keep up with inflation. The only thing we know for sure is that the fed buying MBS has a strong inflationary effect on the housing market that can be seen in the record housing prices.
dcolkitt 5y ago
Nine times out of ten, I'd say stocks for the long run. But I think at today's mortgage rates, it's pretty compelling. Let me just run through a toy example. Say, you're buying a $500 thousand property with 20% down at a 3% mortgage rate. You're paying $1500 a month on your mortgage, and generously round it up to $2500 for taxes, insurance, HOA, and maintenance. There are very few places in America, where a half million dollar property would rent for less than $2000/month. Let's generously round that down to $1500/month for vacancies, turnover, evictions, etc. (And if it's your primary residence, you still "collect rent" by avoiding the expenditure of renting from someone else). On the face of it, this seems like a terrible deal. Cashflow wise, you're losing $12 thousand a year. However take a closer look at that mortgage payment. Starting from day one, $10k/year is going to principal pay down, which directly increases home equity. Another tailwind: price appreciation. Historically real estate tends to increase at the rate of inflation (currently forecast at 2.3% in the TIPs market). That's another $11.5k/year in home equity appreciation. (This assumes a base case, zero appreciation above inflation. It doesn't even scratch the surface of our current housing shortage and the fact that houses have been appreciating 2-3% above inflation.) In terms of accounting profits, you're actually making $9.5k/year. It's true you're flushing cash down the toilet, but you're building up home equity to counter it. Then in 5-10 years, you get your money out by either flipping for a big profit, or doing a cash-out refi. The ROE on that $80,000 down payment is 11.9% annualized. Historically the stock market has averaged 8-10%. And today's CAPE ratios are near historical highs, which would suggest lower long-term returns. This doesn't even get into the tax advantages on the real estate. All in all, real estate looks pretty compelling from an investment standpoint today. Now, I'm normally an efficient markets guy, so I don't say this lightly. But I believe the major driver is the lopsided nature of the cashflow vs. equity division of real estate returns in a near zero rate environment. The vast majority of real estate investors think in pure cash flow terms. The idea of buying a negative cash flow property seems ludicrous. So, right now I think the market's leaving a ton of attractive real estate investments underpriced.
chii 5y ago
if you can easily get a 5x leverage (20% down) for a property investment due to the current lending environment, then yea, a property is going to return more. But comparing like for like - zero leverage - stocks are always going to be better (and correspondingly riskier).

Depends on geography. For example, in Canada, housing is up 30% YoY. Trudeau's Federal government recently said that even a 10% correction in housing would be unacceptable. In practice, Canadian housing isn't housing - it's a 30% (or better) government bond that you get to live in or rent out. That's a 30% return guaranteed by a sovereign state that will gladly destroy everything else in the country to prop up housing. There is no investment like it anywhere else in the world, which is why Canada is seeing the largest real estate bubble in the world. The best part? You can sell your principle residence completely tax free. Not a penny in tax paid from capital appreciation.

SadCanadian 5y ago
I live here in Toronto and it’s an absolute dumpster fire. The country is increasingly becoming hollowed out and residential investments are increasing as a % of total investments. In addition, there is no plan for prosperity. GDP per capita has been stagnant or negative and the productivity numbers are weak. The housing sector is becoming a giant leech sucking the life of out of productive investment. Engineers have quit to become real estate agents and try their hand at selling to foreigners or over-leveraged locals. Very little hope here from the eyes of a local. Maybe you can study software to get out and go to an American city. America remains relatively industrious. Canada is just becoming a high tax version of Monaco (doesn’t even make sense but still).
- jcims 5y ago
  I live about four hours due south of you and loved visiting Toronto as a kid. I had seen similar commentary recently about the real-estate market and thought folks were exaggerating. From what I could see, they weren't. Just now I was going to make a joke about the long game being in Nunavut but checked my work first and, uhh, nope. That's some crazy shit. $600k for a (nice) 5br on a half acre in the tundra? No thanks. I know we look funny from up there but we do love y'all. My sister-in-law is from Guelph and lives in Ohio, we just accidentally bought matching F150's. So feel free to come down any time. The politics suck but the people are fine.
  - smnrchrds 5y ago
    Unlike in the south, high property prices in the territories are due to the cost of shipping building materials, not the price of land.
    - jcims 5y ago
      It seems the pandemic has flattened that out. Construction material prices here in the midwest are up 100-150%.
Logon90 5y ago
A 30% return on real estate or a 30% depreciation of CAD? That's the interesting question. Though the best one to ask at this point is: crypto or real estate?
smnrchrds 5y ago
> Trudeau's Federal government recently said that even a 10% correction in housing would be unacceptable. Could you please provide a source? I cannot find anything on the web. > it's a 30% (or better) government bond This cannot possibly be true. First of all, 2020 was a special year for asset prices, not just in Canada and not just for real estate, but for all assets all around the world. Second of all, even if the first assertion is correct, there is a world of difference between not allowing prices to decline vs not allowing them to increase any less than 30% YoY. Third, 1.3^27 is 1192. Average home prices in Vancouver is over 1 million CAD. Do you honestly argue in 27 years, the current homeowners could sell off their property and net a sweet >1 billion CAD? That we would have millions of billionaires in Canada in 27 years?
- SadCanadian 5y ago
  It was not the federal government that explicitly said this (emphasis explicitly) but rather an MP for Vaughn in Ontario. His name is Adam Vaughan and he said this two weeks or so ago. https://betterdwelling.com/canada-says-property-bubble-not-great-for-locals-good-for-foreign-investors/ https://betterdwelling.com/canada-says-property-bubble-not-g... Yes, BetterDwelling is a permabear but Vaughan's comments are legitimate. He said it in an interview with TVO. On another note, the 30% number seems ridiculous. And, yet, do not be surprised if Canadians seriously believe this. Remember, people have been screaming bubble for a decade, and there has been no such pop yet. Of course, I think this is unsustainable. At 6-12% growth rate you're looking at like low to mid 8 figure values...for the average home. At 15-30% you're looking at hundreds of millions of dollars over 30 years. Ridiculous, isn't it? Interesting discussion on the Financial Times comments section about young people feeling insecure also highlights this property inflation. Basically, the AngloSphere has decided to inflate assets and forget about industrious activity. In the long run, you just end up with a hollow, low productivity and low social mobility country. Is this acceptable? Well, Canadians aren't voting against it. Of course, this is because they think they are getting richer. In reality, the country is just heavily indebted and consuming tomorrow's income today. I am keeping most of my savings down south with the Americans and their equity market. If the BoC can keep the bonanza going, so can the Americans.

vmception 5y ago

The primary feature of the real estate market is that the prices change so slowly that margin calls take years to happen. People are trading houses on 400%-2000% (4x-20x) leverage. Whereas with the stock market and other asset classes, you can't generally get that much leverage, and when you do the risk of getting margin called is perpetual and instant. So although housing prices don't necessarily increase faster than the S&P500, and that there are many local variables in play, the same 7% increase YoY can really be a 140% increase YoY, while you are also renting out the home for more cashflow. Liquidity of the housing market has vastly improved over the last 5 years, mostly due to new kinds of lenders and underwriters in the market, with the current year being even more liquid than ever. The downsides of real estate haven't gone away. Like maintenance and physical presence needed, which is difficult for an individual as the portfolio expands. The physical presence demand - or the need to make it economical for there to be someone else maintaining the property - means that it is difficult to come up with the downpayment for real estate in areas you would actually like to live in, but are fully capable of renting in. So the barriers of entry stay where they are.

toomuchtodo 5y ago
The margin call only occurs if you can't service the debt. As long as the note is paid, you can drag the debt out to note maturity (assuming fixed rate vs ARM, interest only, etc). If you have enough income from investments, and can service the note until maturity, whether you rent the property or not is immaterial. You can leave it vacant forever. Same if you pay it off and hold. For this discussion, I'm going to waive away the maintenance costs on a SFH, as they are immaterial for the size of the homes in SF regardless of what the value is determined to be by an arms length transaction.
- vmception 5y ago
  Yes, and this is true in both markets, real estate or stocks. In the stock market you have up to 5 days to service the debt, and may also get liquidated instantly if the broker feels threatened. In the real estate market you have months upon months and maybe years, before your property is taken away from you.

gjs278 5y ago

nobody can confidently say one way or the other. both could crash. at least with the stocks you probably aren’t doing it on margin so you won’t lose the principle and can wait it out. with the house you can lose all the payments and the house if you can’t cover the mortgage.

anonAndOn 5y ago

Probably not. The headaches from crappy tenants/contractors/property managers/equipment failures (choose any combination) can easily dissuade even the veteran landlord, let alone a fresh new one.

eweise 5y ago

I think it can be initially but it decreases as you have more equity in home.

gregwebs 5y ago

Mortgages are being given away now that the mortgage rate is about the same as inflation. The mortgage is now the asset and the home is the liability. It is probably you can make more by paying off the mortgage then investing the down payment and try to bring that investment up to the level of the mortgage (plus having enough for capital gains tax). It may be a unique situation in our lifetime that is only possible because the fed is buying trillions of dollars of mortgage backed securities while the base rates are already bottomed out. However, the overall value depends a lot on inflation, how much property value will go down in the future in real terms (home prices in many markets are now at levels of the previous housing crises), and how much you have to spend to repair the house in addition to known fixed costs such as home owner's insurance and property tax (actually this rate may go up where state and local governments are insolvent).

imtringued 5y ago
I wonder how many weird deflationary forces are acting on this economy. Fed buying mortgages causes people to get into debt for their house, ironically they end up consuming less, which drags down inflation and the cycle repeats endlessly with no hope of inflation going up to justify increasing the interest rates.
- gregwebs 5y ago
  In the long-term I think buying a house at a low fixed rate builds wealth and leads to greater consumption and less reliance on government transfer payments (although the mortgage itself could be considered a government transfer payment). As the fixed mortgage payment gets reduced over time due to inflation the homeowner has greater ability to consume if their wages keep up with inflation. The only thing we know for sure is that the fed buying MBS has a strong inflationary effect on the housing market that can be seen in the record housing prices.

dcolkitt 5y ago

Nine times out of ten, I'd say stocks for the long run. But I think at today's mortgage rates, it's pretty compelling. Let me just run through a toy example. Say, you're buying a $500 thousand property with 20% down at a 3% mortgage rate. You're paying $1500 a month on your mortgage, and generously round it up to $2500 for taxes, insurance, HOA, and maintenance. There are very few places in America, where a half million dollar property would rent for less than $2000/month. Let's generously round that down to $1500/month for vacancies, turnover, evictions, etc. (And if it's your primary residence, you still "collect rent" by avoiding the expenditure of renting from someone else). On the face of it, this seems like a terrible deal. Cashflow wise, you're losing $12 thousand a year. However take a closer look at that mortgage payment. Starting from day one, $10k/year is going to principal pay down, which directly increases home equity. Another tailwind: price appreciation. Historically real estate tends to increase at the rate of inflation (currently forecast at 2.3% in the TIPs market). That's another $11.5k/year in home equity appreciation. (This assumes a base case, zero appreciation above inflation. It doesn't even scratch the surface of our current housing shortage and the fact that houses have been appreciating 2-3% above inflation.) In terms of accounting profits, you're actually making $9.5k/year. It's true you're flushing cash down the toilet, but you're building up home equity to counter it. Then in 5-10 years, you get your money out by either flipping for a big profit, or doing a cash-out refi. The ROE on that $80,000 down payment is 11.9% annualized. Historically the stock market has averaged 8-10%. And today's CAPE ratios are near historical highs, which would suggest lower long-term returns. This doesn't even get into the tax advantages on the real estate. All in all, real estate looks pretty compelling from an investment standpoint today. Now, I'm normally an efficient markets guy, so I don't say this lightly. But I believe the major driver is the lopsided nature of the cashflow vs. equity division of real estate returns in a near zero rate environment. The vast majority of real estate investors think in pure cash flow terms. The idea of buying a negative cash flow property seems ludicrous. So, right now I think the market's leaving a ton of attractive real estate investments underpriced.

chii 5y ago

if you can easily get a 5x leverage (20% down) for a property investment due to the current lending environment, then yea, a property is going to return more. But comparing like for like - zero leverage - stocks are always going to be better (and correspondingly riskier).