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Because this assumes that the value of the property increases more than inflation. And this assumption means that you see and treat the place where you live as

Because this assumes that the value of the property increases more than inflation. And this assumption means that you see and treat the place where you live as an investment.

sokoloff 4y ago
It doesn't have to increase faster than inflation for it to be a good investment for a leveraged buyer. Imagine inflation and property appreciation at exactly 5% and an interest-only mortgage (principal paydown is just forced savings, hitting cashflow, but not expenses). Buyer buys a $500K house, puts $100K down. Next year, the house is worth $525K, meaning that $100K in equity they put down is now $125K, for a 25% increase, even though the value of the property exactly tracked inflation.
- borroka 4y ago
  These are costs associated with owning a property (taxes, insurance) that come out of the portfolio + others that do not appear in the excel file, such as the risk associated with owning a property that is not covered by insurance, opportunity costs (less flexibility in terms of relocation if better professional opportunities arise elsewhere), and the occasional real estate crisis that can blow away all the gains on paper in a couple of months. If real estate values do not rise faster than inflation (I would say substantially faster), it would be a very poor investment or not an investment at all. Yesterday I was reading in the subreddit of the town where I live about people's complaints regarding the absurd cost of living here. It was funny and puzzling that people were saying, "Yes, it's so hard to live here, housing is so expensive. We were lucky to buy 10 years ago for $500,000, now our house is valued at $1.4 million." Not recognizing that they are the problem.
  - sokoloff 4y ago
    > Not recognizing that they are the problem. How are they the problem? They bought one house and occupy it as a family. That's fair play by anyone's measure, I'd think. If more other people want to move into the town than there are units of housing for them and, as a result, bid up the housing that's available, it's not the fault of the people in the town who bought one house 10 years ago and have lived in it for those 10 years. We bought our place in 2007 (and lived in it continuously). It's worth roughly 2x what we paid for it. That's a CAGR of just under 5% per year. Was that a good investment? Hard to say, but let's look: The S&P total return was a CAGR of 8.5% over that time, but would have been 8.5% CAGR on X (downpayment amount) or about +2.4X. The house was 4.8% CAGR on 5X or about +5.4X. Along the way, we've spent around 0.8X on repairs, improvements, and maintenance that I can think of and around 1.1X on taxes and insurance. Mortgage interest (after taxes) was another several X. Our house is vastly more pleasing to live in than our old apartment was and we've had two kids and a dog here comfortably for 15 years. The non-financial aspects dominate the financial aspects, but for a property that's appreciated about inline with inflation, it's been OK financially and great psychologically.
    - AstralStorm 4y ago
      They are not the problem directly. There's however just no intrinsic reason for the valuation to go up unless: * investors bought out most of the housing and made it "scarce" or otherwise inflated prices - tacit cartel is common * the area has been restructured to make it impossible for non-rich people to live there even if they get the housing for free (gentrification) * people cannot inherit property as they cannot pay the inheritance tax on the inflated valuation * there is an external scarcity factor like well paid jobs or at least opportunity for them Note that lack of space to live or overloaded services actually tends to depress prices. The statement already implies the people live there for a long time and have focused on the valuation for some reason. They will give their inheritors a problem they cannot pay off and have to try to sell. The ones being able to buy such property are likely to be investors. Now multiply that times a lot and you have the shape of the problem.
      - sokoloff 4y ago
        > people cannot inherit property as they cannot pay the inheritance tax on the inflated valuation I don't understand the mechanism by which this would represent a driver for the valuation to go up. This effect would seem to be small in any case, but also tend to reduce (not increase) prices in its small effect, all else being equal. Unless I'm misunderstanding your point somehow.
        AstralStorm 4y ago
        The valuation is always extrinsic, and as such, a tacit cartel. Property should depreciate. If you hear that it doesn't, there's a massive structural problem, likely one of the described above. And these people using the property thinking they're gaining something are not doing anything about it, dooming their heritors.
        sokoloff 4y ago
        Buildings should depreciate with wear (in real [after inflation] terms). Land should not, at least not land used for residential purposes.
- 8note 4y ago
  Leveraged buyers are more likely to be people that already own houses rather than not though
  - sokoloff 4y ago
    Everyone who takes a mortgage to buy a property is a leveraged buyer. That’s literally every first-time buyer that I’ve ever known.
  - bumby 4y ago
    Are you implying most first time homebuyers don’t take debt to finance the purchase?

Because this assumes that the value of the property increases more than inflation. And this assumption means that you see and treat the place where you live as an investment.

sokoloff 4y ago

It doesn't have to increase faster than inflation for it to be a good investment for a leveraged buyer. Imagine inflation and property appreciation at exactly 5% and an interest-only mortgage (principal paydown is just forced savings, hitting cashflow, but not expenses). Buyer buys a $500K house, puts $100K down. Next year, the house is worth $525K, meaning that $100K in equity they put down is now $125K, for a 25% increase, even though the value of the property exactly tracked inflation.

borroka 4y ago
These are costs associated with owning a property (taxes, insurance) that come out of the portfolio + others that do not appear in the excel file, such as the risk associated with owning a property that is not covered by insurance, opportunity costs (less flexibility in terms of relocation if better professional opportunities arise elsewhere), and the occasional real estate crisis that can blow away all the gains on paper in a couple of months. If real estate values do not rise faster than inflation (I would say substantially faster), it would be a very poor investment or not an investment at all. Yesterday I was reading in the subreddit of the town where I live about people's complaints regarding the absurd cost of living here. It was funny and puzzling that people were saying, "Yes, it's so hard to live here, housing is so expensive. We were lucky to buy 10 years ago for $500,000, now our house is valued at $1.4 million." Not recognizing that they are the problem.
- sokoloff 4y ago
  > Not recognizing that they are the problem. How are they the problem? They bought one house and occupy it as a family. That's fair play by anyone's measure, I'd think. If more other people want to move into the town than there are units of housing for them and, as a result, bid up the housing that's available, it's not the fault of the people in the town who bought one house 10 years ago and have lived in it for those 10 years. We bought our place in 2007 (and lived in it continuously). It's worth roughly 2x what we paid for it. That's a CAGR of just under 5% per year. Was that a good investment? Hard to say, but let's look: The S&P total return was a CAGR of 8.5% over that time, but would have been 8.5% CAGR on X (downpayment amount) or about +2.4X. The house was 4.8% CAGR on 5X or about +5.4X. Along the way, we've spent around 0.8X on repairs, improvements, and maintenance that I can think of and around 1.1X on taxes and insurance. Mortgage interest (after taxes) was another several X. Our house is vastly more pleasing to live in than our old apartment was and we've had two kids and a dog here comfortably for 15 years. The non-financial aspects dominate the financial aspects, but for a property that's appreciated about inline with inflation, it's been OK financially and great psychologically.
  - AstralStorm 4y ago
    They are not the problem directly. There's however just no intrinsic reason for the valuation to go up unless: * investors bought out most of the housing and made it "scarce" or otherwise inflated prices - tacit cartel is common * the area has been restructured to make it impossible for non-rich people to live there even if they get the housing for free (gentrification) * people cannot inherit property as they cannot pay the inheritance tax on the inflated valuation * there is an external scarcity factor like well paid jobs or at least opportunity for them Note that lack of space to live or overloaded services actually tends to depress prices. The statement already implies the people live there for a long time and have focused on the valuation for some reason. They will give their inheritors a problem they cannot pay off and have to try to sell. The ones being able to buy such property are likely to be investors. Now multiply that times a lot and you have the shape of the problem.
    - sokoloff 4y ago
      > people cannot inherit property as they cannot pay the inheritance tax on the inflated valuation I don't understand the mechanism by which this would represent a driver for the valuation to go up. This effect would seem to be small in any case, but also tend to reduce (not increase) prices in its small effect, all else being equal. Unless I'm misunderstanding your point somehow.
      - AstralStorm 4y ago
        The valuation is always extrinsic, and as such, a tacit cartel. Property should depreciate. If you hear that it doesn't, there's a massive structural problem, likely one of the described above. And these people using the property thinking they're gaining something are not doing anything about it, dooming their heritors.
        sokoloff 4y ago
        Buildings should depreciate with wear (in real [after inflation] terms). Land should not, at least not land used for residential purposes.
8note 4y ago
Leveraged buyers are more likely to be people that already own houses rather than not though
- sokoloff 4y ago
  Everyone who takes a mortgage to buy a property is a leveraged buyer. That’s literally every first-time buyer that I’ve ever known.
- bumby 4y ago
  Are you implying most first time homebuyers don’t take debt to finance the purchase?