5 ms·

Homeownership is the rational choice when (1) you expect to live in the same place for a long time; (2) the value of a home is either stable or rising, and is e

by kijin 11y ago

Homeownership is the rational choice when (1) you expect to live in the same place for a long time; (2) the value of a home is either stable or rising, and is expected to continue like that for a long time; and (3) you have assurance that if you need to liquify your assets on short notice, you'll be able to sell your home or take out a second mortgage easily. None of that is true for most people under 45 now. Lifetime employment has all but disappeared. The 2008 financial crisis has shaken people's faith in housing as a safe investment. You don't want to tie up a large percentage of your net worth in an illiquid asset that doesn't gain much value, especially if you need to be able to pick up your stuff and move across the country at any time. Therefore, renting is the rational choice for us. The problem is what to do when you're old. If you happen to own a 5-bedroom house, you can rent out a part of it or sell it and move to a smaller house. In either case, you'll have enough income to enjoy a comfy retirement. Owning a home, in that sense, is like having a massive savings account. Renters can get the same benefit if they save up a lot of money or invest smartly, but that takes more discipline than just making mortgage payments each month. I wonder how many renters are actually aware of this difference, versus just spending their extra disposable income on fancy clothes, booze, and gadgets.

logicchains 11y ago
>Renters can get the same benefit if they save up a lot of money or invest smartly, but that takes more discipline than just making mortgage payments each month. I wonder how many renters are actually aware of this difference, versus just spending their extra disposable income on fancy clothes, booze, and gadgets. I'd be interested to hear what Americans think of a policy we have in Australia called mandatory superannuation. It essentially forces people to put around 12% of their income into pension funds (they can choose which fund, or possibly even self-manage it in some cases) that they can't touch until they're retired, meaning that people who rent their whole lives and save nothing can still have hundreds of thousands in savings to support them when they retire.
- whatusername 11y ago
  Try searching for: "privatised social security"
- Swizec 11y ago
  We have the same concept in Europe, or at least the country I'm from (Slovenia). You are mandated by law to put a percentage of your monthly income into pension. If you miss a payment, you are in debt to the state and they will hunt you down for it. They take these things very seriously. Everyone under 40-ish agrees that we are never going to see that money. We're essentially paying out of pocket for the current retirees and by the time we retire there will be nobody to pay our pension. Or at least there will not be enough somebodies.
  - logicchains 11y ago
    >We're essentially paying out of pocket for the current retirees and by the time we retire there will be nobody to pay our pension. Australia's system is slightly different, in that the pension funds are privately owned and the government (currently) has no way to take money out of them or use it for anything else. People here'd be pretty pissed off if the government started dipping into their super.
    - Swizec 11y ago
      To be fair, I don't think our government is dipping into anything. They're just using the funds to pay out current pensions because there isn't enough money in the system. Why there isn't enough money in the system I don't know. There are likely to be multiple factors ranging from the fact that the country is just 25 years old, that there's been population decline or stagnation, or that those pension funds weren't growing enough. Hard to say.
      - rodgerd 11y ago
        > Why there isn't enough money in the system I don't know. If it's anything like most countries, because the generation currently drawing a pension never paid in remotely enough in taxes to cover it.
        vetinari 11y ago
        The sad thing is, that they probably paid enough, when considering purchase-power-parity over the decades. It is just the inflation that destroyed the savings. It does not matter, whether the government is running the fund or whether it is privately owned, the result will be the same.
- kayman 11y ago
  I'm a US Citizen living in Australia. I find the mandatory superannuation very refreshing and surprised the US doesn't implement something. I feel if everyone saves 10% of their income for the rest of their working life, it leaves you with something around retirement. The closest in the US is the company you work for can match upto 4%. So financial advice in USA is put away maximum into 401k/Superannuation that your company will match because if not, you are losing that free money. As a current renter, the mandatory superannuation law allows me to make a rational choice to rent when it suits me. Renting allows me the flexibility and freedom to go where the work is. At least have the option to go where the work is. If I owned a home, I wouldn't feel as free. I plan on buying when it makes sense, but right now, I do not see any benefit of tying up most of my wealth into home ownership. I look at renting as a utility of life. I need to live somewhere and it costs me x dollars. In retirement, I plan to have x dollars in retirement money to pay for my rent then too. On the other hand, I'm in IT. I don't ever plan to retire. Because when I retire, I'll be doing the same thing...coding at home. Might as well get paid for it. :)
  - gambiting 11y ago
    >> I don't ever plan to retire. Because when I retire, I'll be doing the same thing...coding at home. Might as well get paid for it. :) You can still retire and get a pension,and still make money by coding.
  - netcan 11y ago
    The best thing about it is that it is an account that the saver has actual visibility on. It encourages retirement savings. It's a good base for employer and/or government contribution match schemes. It has obvious and fair inheritance implications (if you die at 64, who gets your pension?). It's far safer, with much less risk that the money will be gone when you retire. The systemic risk aspect is much better too. The alternative is pension schemes, alarmingly similar to pyramid schemes. The company (or however it is centralized) pays out of current income, IE current employees or tax payers pay for old pension obligations. This works until it doesn't. If people start living longer, the company/tax base shrinks or no one bothered to do the sums 30 years ago, it collapses. The reason pension schemes are so common is because it's easier to start a pension scheme and very hard to move from the pension scheme to a superannuation scheme. When you start a pension shceme, the costs are very low at first while the number of retirees is low. You can pay out pensioners starting now. Superannuation only hits full speed once people have contributed to it for a lifetime start to retire. Way way longer then the horizon of CEOs, politicians or union bosses. If you try to move from pensions to superannuations, you are in a problem. Your current crop of workers need to pay for their parents/grandparent generation of pensioners while saving for their own retirement as well. Australia is lucky to have the system it does.
- zo1 11y ago
  It skews the market, of course. Currently, I stay in South Africa. Here they don't have a similar mandate, but a de-facto one by virtue of giving a large tax-benefit to individuals who put up to 25%(I think) of their annual income into a Retirement Annuity. This is a private thing (except for government employees), but withdrawal from it is regulated by government among other rules. You lose an immeasurable amount of opportunity cost by putting away so much of your earnings there. Not to mention that most of these retirement products are heavily linked to equities, meaning you are very likely to lose a lot if the market down-turns. Short of going on a huge rant on the topic, I'll just settle to saying it's a huge scam that makes people indebted/vested into keeping the market system chugging along, no matter what. And then we are being told that "rich people" are causing inequality. Right.
toomuchtodo 11y ago
I'm curious to see the effect of the baby boomers moving through the age pipeline. You have this massive cohort of people with the majority of their wealth in their home, all about to hit the exit door at the same time. Are house prices going to correct in a massive way at the same time interest rates are rising? Is all of that paper wealth going to get wiped out? Interesting times!
- ageek123 11y ago
  They'll probably leave their homes to their children.
  - sbov 11y ago
    Especially in California, where IIRC transferring a home from parent to child doesn't trigger a tax re-assessment under prop 13.
  - rodgerd 11y ago
    Ha. I work in the financial sector and reverse mortgages are becoming a big thing: essentially an annuity secured against the house. You get a nice lifestyle and the kids get zip.
pauljohncleary 11y ago
>I wonder how many renters are actually aware of this difference, versus just spending their extra disposable income on fancy clothes, booze, and gadgets. Where I live (London), rent is more expensive than mortgage repayments.
- briandear 11y ago
  Does that take into consideration the amount of down payment necessary to get a mortgage? If you pay 20,000 pounds to get a mortgage that saves you 200 pounds a month; you're looking at a bit of time before that starts paying a return. Unless the value is increasing and you're able to cash out equity through a refinance.
  - cowls 11y ago
    Compared to the interest only part, the savings are significant. Way more than 200 per month. The capital repayments are not money lost in the same way that rent would be (assuming your house price doesnt plummet and you are forced to sell at that time). So in the UK (outside London at least) at the moment there is little argument for renting, assuming you can afford the down payment. London is a slightly different beast mind as prices have skyrocketed and down payments can be huge
  - vetinari 11y ago
    The time value of expected rent (minus future maintenance costs, minus the value of expected vacancy periods) has to cover at least current sales price . Otherwise, it would make no sense to rent your property instead of selling it. So, if it makes economic sense to rent it, someone is making money on it. After all, the flexibility of renting has to have a price tag too.
pjc50 11y ago
renters are actually aware of this difference, versus just spending their extra disposable income In the UK, being a homeowner is usually significantly cheaper month-to-month than renting. And we're still expecting home values to go up forever. http://monevator.com/historical-uk-house-prices/ http://monevator.com/historical-uk-house-prices/ especially http://monevator.monevator.netdna-cdn.com/wp-content/uploads/2011/12/real-house-prices.jpg http://monevator.monevator.netdna-cdn.com/wp-content/uploads...
- kijin 11y ago
  Even in the US, the equation varies by region. It also varies by the type and size of living space you want. Suburban homes with a pool and two garages are completely different from urban condos. But I was thinking more in terms of increased mobility -> better bargaining position -> better chance of finding a job that pays $12K more than your current job -> other things being equal, $1K extra disposable income per month.
  - pjc50 11y ago
    $12k extra income does not mean $1k extra disposable income per month, because you have to pay tax on it. And then you have to account for increased rent in high-earning areas for the same amount of space. Someone I know recently told of moving in and out of London over a five-year period. They were very fortunate in being able to buy their house there, because the house price rise was greater than their total salary income over that period. They earned more by being a homeowner (ie leveraged property investor) than by working. And in the UK you don't have to pay capital gains tax on your primary residence.
exodust 11y ago
> versus just spending their extra disposable income on fancy clothes, booze, and gadgets. investment in the short term is still investment.
- ska 11y ago
  I found your reply confusing. Are you suggesting looking at "fancy clothes, booze, and gadgets" as an investment of some sort?
  - exodust 11y ago
    Yes, short term benefits. Clothes can open doors, gadgets can be productive or increase learning/happiness/entertainment. Booze... well, a bit of a stretch, but booze can assist in unwinding and/or celebrating which has benefits. Neglecting the short term is very risky personal business.
- vetinari 11y ago
  Fancy clothes, booze and gadgets is consumption, not investment. You will never have positive cash flow out of it.
  - exodust 11y ago
    Gadgets can return productivity, learning, and entertainment now and into the future. Clothes can open doors as early as the day you buy them, or weeks later. Booze is consumed but it's an important part of many social interactions, without it things can get boring. Boredom closes doors. A colleague once gave up coffee when he calculated the annual spend as something like a grand. Okay, congrats on the extra grand you'll have in the bank at Christmas. But sucks to be you because you miss out on coffee every single day of the year. Wise investment advice can hurt your short term life - which does actually run out. You don't stay in your twenties forever. You don't stay in your 30s forever.

by kijin 11y ago

logicchains 11y ago

>Renters can get the same benefit if they save up a lot of money or invest smartly, but that takes more discipline than just making mortgage payments each month. I wonder how many renters are actually aware of this difference, versus just spending their extra disposable income on fancy clothes, booze, and gadgets. I'd be interested to hear what Americans think of a policy we have in Australia called mandatory superannuation. It essentially forces people to put around 12% of their income into pension funds (they can choose which fund, or possibly even self-manage it in some cases) that they can't touch until they're retired, meaning that people who rent their whole lives and save nothing can still have hundreds of thousands in savings to support them when they retire.

whatusername 11y ago
Try searching for: "privatised social security"
Swizec 11y ago
We have the same concept in Europe, or at least the country I'm from (Slovenia). You are mandated by law to put a percentage of your monthly income into pension. If you miss a payment, you are in debt to the state and they will hunt you down for it. They take these things very seriously. Everyone under 40-ish agrees that we are never going to see that money. We're essentially paying out of pocket for the current retirees and by the time we retire there will be nobody to pay our pension. Or at least there will not be enough somebodies.
- logicchains 11y ago
  >We're essentially paying out of pocket for the current retirees and by the time we retire there will be nobody to pay our pension. Australia's system is slightly different, in that the pension funds are privately owned and the government (currently) has no way to take money out of them or use it for anything else. People here'd be pretty pissed off if the government started dipping into their super.
  - Swizec 11y ago
    To be fair, I don't think our government is dipping into anything. They're just using the funds to pay out current pensions because there isn't enough money in the system. Why there isn't enough money in the system I don't know. There are likely to be multiple factors ranging from the fact that the country is just 25 years old, that there's been population decline or stagnation, or that those pension funds weren't growing enough. Hard to say.
    - rodgerd 11y ago
      > Why there isn't enough money in the system I don't know. If it's anything like most countries, because the generation currently drawing a pension never paid in remotely enough in taxes to cover it.
      - vetinari 11y ago
        The sad thing is, that they probably paid enough, when considering purchase-power-parity over the decades. It is just the inflation that destroyed the savings. It does not matter, whether the government is running the fund or whether it is privately owned, the result will be the same.
kayman 11y ago
I'm a US Citizen living in Australia. I find the mandatory superannuation very refreshing and surprised the US doesn't implement something. I feel if everyone saves 10% of their income for the rest of their working life, it leaves you with something around retirement. The closest in the US is the company you work for can match upto 4%. So financial advice in USA is put away maximum into 401k/Superannuation that your company will match because if not, you are losing that free money. As a current renter, the mandatory superannuation law allows me to make a rational choice to rent when it suits me. Renting allows me the flexibility and freedom to go where the work is. At least have the option to go where the work is. If I owned a home, I wouldn't feel as free. I plan on buying when it makes sense, but right now, I do not see any benefit of tying up most of my wealth into home ownership. I look at renting as a utility of life. I need to live somewhere and it costs me x dollars. In retirement, I plan to have x dollars in retirement money to pay for my rent then too. On the other hand, I'm in IT. I don't ever plan to retire. Because when I retire, I'll be doing the same thing...coding at home. Might as well get paid for it. :)
- gambiting 11y ago
  >> I don't ever plan to retire. Because when I retire, I'll be doing the same thing...coding at home. Might as well get paid for it. :) You can still retire and get a pension,and still make money by coding.
- netcan 11y ago
  The best thing about it is that it is an account that the saver has actual visibility on. It encourages retirement savings. It's a good base for employer and/or government contribution match schemes. It has obvious and fair inheritance implications (if you die at 64, who gets your pension?). It's far safer, with much less risk that the money will be gone when you retire. The systemic risk aspect is much better too. The alternative is pension schemes, alarmingly similar to pyramid schemes. The company (or however it is centralized) pays out of current income, IE current employees or tax payers pay for old pension obligations. This works until it doesn't. If people start living longer, the company/tax base shrinks or no one bothered to do the sums 30 years ago, it collapses. The reason pension schemes are so common is because it's easier to start a pension scheme and very hard to move from the pension scheme to a superannuation scheme. When you start a pension shceme, the costs are very low at first while the number of retirees is low. You can pay out pensioners starting now. Superannuation only hits full speed once people have contributed to it for a lifetime start to retire. Way way longer then the horizon of CEOs, politicians or union bosses. If you try to move from pensions to superannuations, you are in a problem. Your current crop of workers need to pay for their parents/grandparent generation of pensioners while saving for their own retirement as well. Australia is lucky to have the system it does.
zo1 11y ago
It skews the market, of course. Currently, I stay in South Africa. Here they don't have a similar mandate, but a de-facto one by virtue of giving a large tax-benefit to individuals who put up to 25%(I think) of their annual income into a Retirement Annuity. This is a private thing (except for government employees), but withdrawal from it is regulated by government among other rules. You lose an immeasurable amount of opportunity cost by putting away so much of your earnings there. Not to mention that most of these retirement products are heavily linked to equities, meaning you are very likely to lose a lot if the market down-turns. Short of going on a huge rant on the topic, I'll just settle to saying it's a huge scam that makes people indebted/vested into keeping the market system chugging along, no matter what. And then we are being told that "rich people" are causing inequality. Right.

toomuchtodo 11y ago

I'm curious to see the effect of the baby boomers moving through the age pipeline. You have this massive cohort of people with the majority of their wealth in their home, all about to hit the exit door at the same time. Are house prices going to correct in a massive way at the same time interest rates are rising? Is all of that paper wealth going to get wiped out? Interesting times!

ageek123 11y ago
They'll probably leave their homes to their children.
- sbov 11y ago
  Especially in California, where IIRC transferring a home from parent to child doesn't trigger a tax re-assessment under prop 13.
- rodgerd 11y ago
  Ha. I work in the financial sector and reverse mortgages are becoming a big thing: essentially an annuity secured against the house. You get a nice lifestyle and the kids get zip.

pauljohncleary 11y ago

>I wonder how many renters are actually aware of this difference, versus just spending their extra disposable income on fancy clothes, booze, and gadgets. Where I live (London), rent is more expensive than mortgage repayments.

briandear 11y ago
Does that take into consideration the amount of down payment necessary to get a mortgage? If you pay 20,000 pounds to get a mortgage that saves you 200 pounds a month; you're looking at a bit of time before that starts paying a return. Unless the value is increasing and you're able to cash out equity through a refinance.
- cowls 11y ago
  Compared to the interest only part, the savings are significant. Way more than 200 per month. The capital repayments are not money lost in the same way that rent would be (assuming your house price doesnt plummet and you are forced to sell at that time). So in the UK (outside London at least) at the moment there is little argument for renting, assuming you can afford the down payment. London is a slightly different beast mind as prices have skyrocketed and down payments can be huge
- vetinari 11y ago
  The time value of expected rent (minus future maintenance costs, minus the value of expected vacancy periods) has to cover at least current sales price . Otherwise, it would make no sense to rent your property instead of selling it. So, if it makes economic sense to rent it, someone is making money on it. After all, the flexibility of renting has to have a price tag too.

pjc50 11y ago

renters are actually aware of this difference, versus just spending their extra disposable income In the UK, being a homeowner is usually significantly cheaper month-to-month than renting. And we're still expecting home values to go up forever. http://monevator.com/historical-uk-house-prices/ http://monevator.com/historical-uk-house-prices/ especially http://monevator.monevator.netdna-cdn.com/wp-content/uploads/2011/12/real-house-prices.jpg http://monevator.monevator.netdna-cdn.com/wp-content/uploads...

kijin 11y ago
Even in the US, the equation varies by region. It also varies by the type and size of living space you want. Suburban homes with a pool and two garages are completely different from urban condos. But I was thinking more in terms of increased mobility -> better bargaining position -> better chance of finding a job that pays $12K more than your current job -> other things being equal, $1K extra disposable income per month.
- pjc50 11y ago
  $12k extra income does not mean $1k extra disposable income per month, because you have to pay tax on it. And then you have to account for increased rent in high-earning areas for the same amount of space. Someone I know recently told of moving in and out of London over a five-year period. They were very fortunate in being able to buy their house there, because the house price rise was greater than their total salary income over that period. They earned more by being a homeowner (ie leveraged property investor) than by working. And in the UK you don't have to pay capital gains tax on your primary residence.

exodust 11y ago

> versus just spending their extra disposable income on fancy clothes, booze, and gadgets. investment in the short term is still investment.

ska 11y ago
I found your reply confusing. Are you suggesting looking at "fancy clothes, booze, and gadgets" as an investment of some sort?
- exodust 11y ago
  Yes, short term benefits. Clothes can open doors, gadgets can be productive or increase learning/happiness/entertainment. Booze... well, a bit of a stretch, but booze can assist in unwinding and/or celebrating which has benefits. Neglecting the short term is very risky personal business.
vetinari 11y ago
Fancy clothes, booze and gadgets is consumption, not investment. You will never have positive cash flow out of it.
- exodust 11y ago
  Gadgets can return productivity, learning, and entertainment now and into the future. Clothes can open doors as early as the day you buy them, or weeks later. Booze is consumed but it's an important part of many social interactions, without it things can get boring. Boredom closes doors. A colleague once gave up coffee when he calculated the annual spend as something like a grand. Okay, congrats on the extra grand you'll have in the bank at Christmas. But sucks to be you because you miss out on coffee every single day of the year. Wise investment advice can hurt your short term life - which does actually run out. You don't stay in your twenties forever. You don't stay in your 30s forever.