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> What does matter is ... (rental affordability) Rental affordability is 100% correlated to asset pricing.

dragonwriter 5y ago
> Rental affordability is 100% correlated to asset pricing. It's not, though. In a very simplified toy model, maybe there should be a direct 1:1 link, but empirically in reality there isn't even close.
dmw1 5y ago
To a degree but it has an upper bound of income. Unless people are going to start taking on mortgages to pay their rent.
maerF0x0 5y ago
Of course rental affordability is not tied to asset pricing. Simply put it's tied to opex + cost of capital. And is opportunity costed against other investments -- but keep in mind real estate has high exit costs (realtor). So you'd have to think you can do much better on another investment to sell (and drive the asset price down) for it to make any sense. The insight is that the cost of capital is roughly fixed at the time of purchase. If someone bought a place in 1970 they can price bid down to nearly nothing because that's their operating cost and the purchase price is only a fraction of landlords who bought recently. Supply and demand create the conditions where landlords either compete on price, choose to sell, or potentially declare bankruptcy.
vkou 5y ago
This is where you're wrong. It's the other way around. Asset pricing is what's correlated to rental affordability. If the tenant class, in general, can't afford rent increases, rent won't increase, and real estate asset prices will stop growing, all other things being equal. Obviously, if money becomes cheaper for landlords, then they will borrow more of it to buy the same properties. But this does not give them any more power to unilaterally set rents. But all in all, the tail does not wag this dog.
randomdata 5y ago
Rent reveals the true value of an asset. In a typical market asset value should correlate with rents, however in an asset bubble you would expect to see deviation where asset value increases beyond the rental factor.
MichaelZuo 5y ago
Considering your account age and your 14921 karma, the conviction with which you state a complete falsehood, without any hedging, on a topic that is regularly discussed on HN and in broader society doesn’t make me confident in the future of intelligent discussion online…

> Rental affordability is 100% correlated to asset pricing. It's not, though. In a very simplified toy model, maybe there should be a direct 1:1 link, but empirically in reality there isn't even close.

dmw1 5y ago

To a degree but it has an upper bound of income. Unless people are going to start taking on mortgages to pay their rent.

maerF0x0 5y ago

Of course rental affordability is not tied to asset pricing. Simply put it's tied to opex + cost of capital. And is opportunity costed against other investments -- but keep in mind real estate has high exit costs (realtor). So you'd have to think you can do much better on another investment to sell (and drive the asset price down) for it to make any sense. The insight is that the cost of capital is roughly fixed at the time of purchase. If someone bought a place in 1970 they can price bid down to nearly nothing because that's their operating cost and the purchase price is only a fraction of landlords who bought recently. Supply and demand create the conditions where landlords either compete on price, choose to sell, or potentially declare bankruptcy.

vkou 5y ago

This is where you're wrong. It's the other way around. Asset pricing is what's correlated to rental affordability. If the tenant class, in general, can't afford rent increases, rent won't increase, and real estate asset prices will stop growing, all other things being equal. Obviously, if money becomes cheaper for landlords, then they will borrow more of it to buy the same properties. But this does not give them any more power to unilaterally set rents. But all in all, the tail does not wag this dog.

randomdata 5y ago

Rent reveals the true value of an asset. In a typical market asset value should correlate with rents, however in an asset bubble you would expect to see deviation where asset value increases beyond the rental factor.

MichaelZuo 5y ago

Considering your account age and your 14921 karma, the conviction with which you state a complete falsehood, without any hedging, on a topic that is regularly discussed on HN and in broader society doesn’t make me confident in the future of intelligent discussion online…