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Yep. Housing can be affordable or it can be a good investment. Not both. Not for long. Home owners are heavily incentivized to "not understand" this, so the cy

Yep. Housing can be affordable or it can be a good investment. Not both. Not for long. Home owners are heavily incentivized to "not understand" this, so the cycle of abuse continues.

kiba 2y ago
It's also true that people are also economically illiterate. I don't think I am economically literate. I have only taken one semester of macroeconomic in high school.
kurthr 2y ago
See also China, which has seen massive overbuilding (50M empty units and 20M paid for but unbuilt), many empty buildings, and now the beginnings of a crash. Why? Because everything was financialized. Houses became an investment rather than a place to live. "If you move in, it loses value!" One thing there, though is that even though a 100m2 in Beijing/Shanghai/Shenzhen may cost $1M (30x urban educated middleclass income), the monthly rent will be under $1k (<30% income). That's still horribly expensive, but nothing compared to Spain or US. Maintenance suffers and there's even less reason for owners to fill "pristine" apartments, but it's a less bad form of malinvestment.
AnthonyMouse 2y ago
> Housing can be affordable or it can be a good investment. Not both. Not for long. This isn't really true. Suppose that housing is extremely affordable. Cost is only the construction cost, no scarcity component, and construction costs haven't been bureaucratically inflated. You get a house for $25,000. Then local rents are low, but they're not zero, because they'd still have to yield a return consistent with a $25,000 investment. Rents in that case are a lot lower than they would be if they had to yield a return consistent with a $500,000 investment, but the ROI is the same. It's just that if you invest $500,000 in housing you'd get 20 units and then e.g. rent them each for $250 (so $5000 in total) instead of paying the same amount for one unit and renting the one unit out for $5000. And it's not different if you live in it because living in it is an opportunity cost. In fact, the higher price is worse for you if you live in it, because then you're losing the much higher value of the imputed rent. Suppose you can get a loan for $500,000 and you want to invest that in housing. If that's the price of one unit and you live in it, you have to pay the whole mortgage out of your pocket and get $0 in rental income. If that's the price of 20 units, you live in one (which costs you $250/mo in opportunity cost) and then rent out the other 19 and get $4750 in rent every month you get to stick in your pocket.
- anonymoushn 2y ago
  "Housing is a good investment" means the price of the land and house increases over time compared to SPX or treasuries or whatever.
  - AnthonyMouse 2y ago
    "Housing is a good investment" means that the total returns from investing in housing are competitive with the risk-adjusted returns of the overall market. The returns from an investment include both capital gains and dividends. For example, there are stocks that never pay dividends, but might still be a good investment if the stock price increases. There are other stocks that only hold their value, but pay higher dividends, and those could have the exact same total returns. In the case of housing, rent or imputed rent is a dividend. If you get $250/mo in [imputed] rent on a $25,000 investment, or $5000/mo on a $500,000 investment, that's 12% annually. That's a good investment even if the sale value of the property remains flat.
    - BirdieNZ 2y ago
      The sale value won't stay flat unless you tax land (or use leasehold like Singapore), because typically incomes rise, and in most places the rate of building new housing has an equilibrium lower than the rate of demand, because profit is needed for private developments to go ahead. This results in a) higher incomes, and b) higher rents, because landlords can extract some of the increase in income, because tenants don't have enough alternatives to keep the rents low. Capital value of property is a function of rents, so increases in rents result in increases in sale value of the property.
      - AnthonyMouse 2y ago
        > The sale value won't stay flat unless you tax land (or use leasehold like Singapore), because typically incomes rise, and in most places the rate of building new housing has an equilibrium lower than the rate of demand, because profit is needed for private developments to go ahead. Developments can be profitable without the price per unit significantly increasing. Suppose that an existing unit is $50,000 and it costs $150,000 in construction costs including profit to replace one unit with four. Then you have a stable equilibrium; a construction company could buy one unit for $50,000, convert it into four, sell them for $50,000 each and net $150,000 which covers their costs and profit. They'll stop doing this if the price per unit falls to $45,000. They'll start doing it again if the price per unit rises to $60,000 and keep doing it until it gets back down below $50,000. Therefore, the price per unit remains stable at ~$50,000, even if demand increases, because that just triggers more construction as the price temporarily gets slightly above the breakeven point. This is why zoning restrictions cause housing costs to increase. If you declare that 95% of the land is zoned exclusively for single-family homes, you can't replace one unit with four or even two in any of those areas. Then the remaining 5% of the land already has a 20-unit complex on it and in order to add units, you have to replace it with a 30-unit complex. Taller buildings require more expensive materials, you've had to demolish 20 units instead of one and only increased the number of units by 50% instead of 300% and land on which you can even do this at all is now more scarce so you're paying even more per unit for the ones you're going to demolish. Now the breakeven price for new construction is $500,000/unit and if growth continues it has to rise to the level that can cover the cost of demolishing a 30-unit building to build a 40-unit one, even though 95% of the local land is still single family homes.
jjav 2y ago
"Housing can be affordable or it can be a good investment. Not both." This is a cut&paste response predictably in every housing thread. Can we dig deeper and do some analysis?
- steveBK123 2y ago
  It is a simple mathematical fact of nature. If something goes up more than inflation - it is a good investment, but also less affordable over time (it costs you more labor hours to purchase over time). Think - tech stocks, housing, etc. If something goes up same/less than inflation - it remains affordable. Think - basic consumer goods we mostly import like laptops, t-shirts, etc.
  - jwarden 2y ago
    > If something goes up more than inflation - it is a good investment It’s not that simple. First, risk is a also factor. But a real estate investor is not just looking for capital gains. They are looking at rent yields against costs (taxes, insurance, maintenance, interest). Real estate can be a good investment even without appreciation in real terms. And that is a good thing. Real estate investors play an important role in society. Without landlords, it would be impossible to rent a home. So anyone without the ability to purchase a home would have to rely on friends and family or charity, or sleep in the street.
    - steveBK123 2y ago
      Sure but if you make the tax incentives TOO good for landlords, owner occupied housing % goes down as those with capital amass larger portfolios to lease out. Further if you made building housing easier there would be more available, with less price pressure from excess demand pushing prices and rents up. I’m more interested in enticing developers to build than I am encouraging more landlords.
      - jwarden 2y ago
        Okay but I think we’ve lost the thread of the argument. I am arguing against the claim "Housing can be affordable or it can be a good investment. Not both." You support this claim with the argument that “If something goes up more than inflation - it is a good investment” and therefore it can’t be affordable. I am saying real estate can be a good investment even if it doesn’t go up more than inflation. Do you disagree? Further, for landlords to make homes available to rent, housing must be a good investment. Do you disagree?
bluGill 2y ago
That is false in the case of a house. a house you live n can lose value relative to inflation and still be a good investment. remember you have to live someplace and so that rent cost needs to be subtracted from you total investment costs as you would pay it anyway. After you pay the house off (if you do) you continue to sbtract those costs from your investment. a stock or bond might have a better return but a house also diversifies risk and so is a good investment for that. the above doesn't mean a house is good for everyone. Just that the analisys everyone else is doing is missing critical details.

Yep. Housing can be affordable or it can be a good investment. Not both. Not for long. Home owners are heavily incentivized to "not understand" this, so the cycle of abuse continues.

kiba 2y ago

It's also true that people are also economically illiterate. I don't think I am economically literate. I have only taken one semester of macroeconomic in high school.

kurthr 2y ago

See also China, which has seen massive overbuilding (50M empty units and 20M paid for but unbuilt), many empty buildings, and now the beginnings of a crash. Why? Because everything was financialized. Houses became an investment rather than a place to live. "If you move in, it loses value!" One thing there, though is that even though a 100m2 in Beijing/Shanghai/Shenzhen may cost $1M (30x urban educated middleclass income), the monthly rent will be under $1k (<30% income). That's still horribly expensive, but nothing compared to Spain or US. Maintenance suffers and there's even less reason for owners to fill "pristine" apartments, but it's a less bad form of malinvestment.

AnthonyMouse 2y ago

> Housing can be affordable or it can be a good investment. Not both. Not for long. This isn't really true. Suppose that housing is extremely affordable. Cost is only the construction cost, no scarcity component, and construction costs haven't been bureaucratically inflated. You get a house for $25,000. Then local rents are low, but they're not zero, because they'd still have to yield a return consistent with a $25,000 investment. Rents in that case are a lot lower than they would be if they had to yield a return consistent with a $500,000 investment, but the ROI is the same. It's just that if you invest $500,000 in housing you'd get 20 units and then e.g. rent them each for $250 (so $5000 in total) instead of paying the same amount for one unit and renting the one unit out for $5000. And it's not different if you live in it because living in it is an opportunity cost. In fact, the higher price is worse for you if you live in it, because then you're losing the much higher value of the imputed rent. Suppose you can get a loan for $500,000 and you want to invest that in housing. If that's the price of one unit and you live in it, you have to pay the whole mortgage out of your pocket and get $0 in rental income. If that's the price of 20 units, you live in one (which costs you $250/mo in opportunity cost) and then rent out the other 19 and get $4750 in rent every month you get to stick in your pocket.

anonymoushn 2y ago
"Housing is a good investment" means the price of the land and house increases over time compared to SPX or treasuries or whatever.
- AnthonyMouse 2y ago
  "Housing is a good investment" means that the total returns from investing in housing are competitive with the risk-adjusted returns of the overall market. The returns from an investment include both capital gains and dividends. For example, there are stocks that never pay dividends, but might still be a good investment if the stock price increases. There are other stocks that only hold their value, but pay higher dividends, and those could have the exact same total returns. In the case of housing, rent or imputed rent is a dividend. If you get $250/mo in [imputed] rent on a $25,000 investment, or $5000/mo on a $500,000 investment, that's 12% annually. That's a good investment even if the sale value of the property remains flat.
  - BirdieNZ 2y ago
    The sale value won't stay flat unless you tax land (or use leasehold like Singapore), because typically incomes rise, and in most places the rate of building new housing has an equilibrium lower than the rate of demand, because profit is needed for private developments to go ahead. This results in a) higher incomes, and b) higher rents, because landlords can extract some of the increase in income, because tenants don't have enough alternatives to keep the rents low. Capital value of property is a function of rents, so increases in rents result in increases in sale value of the property.
    - AnthonyMouse 2y ago
      > The sale value won't stay flat unless you tax land (or use leasehold like Singapore), because typically incomes rise, and in most places the rate of building new housing has an equilibrium lower than the rate of demand, because profit is needed for private developments to go ahead. Developments can be profitable without the price per unit significantly increasing. Suppose that an existing unit is $50,000 and it costs $150,000 in construction costs including profit to replace one unit with four. Then you have a stable equilibrium; a construction company could buy one unit for $50,000, convert it into four, sell them for $50,000 each and net $150,000 which covers their costs and profit. They'll stop doing this if the price per unit falls to $45,000. They'll start doing it again if the price per unit rises to $60,000 and keep doing it until it gets back down below $50,000. Therefore, the price per unit remains stable at ~$50,000, even if demand increases, because that just triggers more construction as the price temporarily gets slightly above the breakeven point. This is why zoning restrictions cause housing costs to increase. If you declare that 95% of the land is zoned exclusively for single-family homes, you can't replace one unit with four or even two in any of those areas. Then the remaining 5% of the land already has a 20-unit complex on it and in order to add units, you have to replace it with a 30-unit complex. Taller buildings require more expensive materials, you've had to demolish 20 units instead of one and only increased the number of units by 50% instead of 300% and land on which you can even do this at all is now more scarce so you're paying even more per unit for the ones you're going to demolish. Now the breakeven price for new construction is $500,000/unit and if growth continues it has to rise to the level that can cover the cost of demolishing a 30-unit building to build a 40-unit one, even though 95% of the local land is still single family homes.

jjav 2y ago

"Housing can be affordable or it can be a good investment. Not both." This is a cut&paste response predictably in every housing thread. Can we dig deeper and do some analysis?

steveBK123 2y ago
It is a simple mathematical fact of nature. If something goes up more than inflation - it is a good investment, but also less affordable over time (it costs you more labor hours to purchase over time). Think - tech stocks, housing, etc. If something goes up same/less than inflation - it remains affordable. Think - basic consumer goods we mostly import like laptops, t-shirts, etc.
- jwarden 2y ago
  > If something goes up more than inflation - it is a good investment It’s not that simple. First, risk is a also factor. But a real estate investor is not just looking for capital gains. They are looking at rent yields against costs (taxes, insurance, maintenance, interest). Real estate can be a good investment even without appreciation in real terms. And that is a good thing. Real estate investors play an important role in society. Without landlords, it would be impossible to rent a home. So anyone without the ability to purchase a home would have to rely on friends and family or charity, or sleep in the street.
  - steveBK123 2y ago
    Sure but if you make the tax incentives TOO good for landlords, owner occupied housing % goes down as those with capital amass larger portfolios to lease out. Further if you made building housing easier there would be more available, with less price pressure from excess demand pushing prices and rents up. I’m more interested in enticing developers to build than I am encouraging more landlords.
    - jwarden 2y ago
      Okay but I think we’ve lost the thread of the argument. I am arguing against the claim "Housing can be affordable or it can be a good investment. Not both." You support this claim with the argument that “If something goes up more than inflation - it is a good investment” and therefore it can’t be affordable. I am saying real estate can be a good investment even if it doesn’t go up more than inflation. Do you disagree? Further, for landlords to make homes available to rent, housing must be a good investment. Do you disagree?

bluGill 2y ago

That is false in the case of a house. a house you live n can lose value relative to inflation and still be a good investment. remember you have to live someplace and so that rent cost needs to be subtracted from you total investment costs as you would pay it anyway. After you pay the house off (if you do) you continue to sbtract those costs from your investment. a stock or bond might have a better return but a house also diversifies risk and so is a good investment for that. the above doesn't mean a house is good for everyone. Just that the analisys everyone else is doing is missing critical details.