The title is a common belief, real estate is an investment that can never lose value in the long run. The current housing market collapse is just a bubble popped, homes still worth more than they did in 1990 after inflation.
(the statistics are from simple web search, I couldn't find US or EU cumulative data, feel free to send a better one)
Several financial analysts claimed that real estate is not good compared to other investments and also several warned against the bubble. But the financial dogma "in the long run the home prices always move up, if you seek a safe and sure investment, buy a home" was never challenged.
Of course I cannot estimate the prices of homes in 2040. I can't even estimate their prices in 2011. I just want to share with you the reasons why I decided to never buy a home in my life (unless there is simply no proper home to rent or the annual rents would seriously climb above the home price/15 golden line). I also urge you to think seriously on the topic seeking information before you make a decision that involves a 20+ years old financial commitment.
To challenge the dogma, I have to find reasons why home prices increased (above inflation) in the previous decades/century and prove that these reasons will change in the near future. At first let's separate the value of the land where your home stands and the value of the building itself.
We all know that a piece of land can cost insane amount if it stands in an urban area. Just guess how much an acre would cost in Manhattan! In the same time, the land prices in rural areas have not increased that much. In the old times most people lived in rural areas, doing agricultural work. It needed them to live near their farmlands. Later people moved to urban areas, near the factories they worked. However factories can be distributed evenly on the land, but services not. As more and more people worked in services area, the more urbanized the life became.
The reason for that is simple: to offer services, you need to be near people. Good luck running a beauty salon on the North Pole! Today 70-80% of the people work in some job that requires them to be near to other people: customers or colleagues. Since they are also consumers of similar services and also don't want to travel hours every day, it's convenient to live near other people. Since land is a limited resource and more and more people want it, its price can only go up.
What can change that? Internet and other communication devices! As we speak more and more jobs are outsourced to different continents. The internet marketing and sales in webshops is getting larger and larger shares. These allow you to work with lot of people while being far-far away from them. This blog itself is a mean of arguing over topics with each other, and we can do it despite living on different continents. So in the following decades more and more people can keep working "in the city" while actually living in other places like smaller towns, where you can have a garden and your kids can ride a bike down to the open green land! Don't tell me you love the concrete and the dark alleys! You may like the people and the "atmosphere" of the city but you hate the city itself. That's why already the higher class people move to suburbs. The internet allows you to keep the atmosphere of the city while actually living in a small town where you can leave your door unlocked.
For the market this means that land will much less be a limited resource. You can already buy pretty cheap homes in smaller towns, you just can't move there because your job demands your physical body to be in the city from 9 to 5. But soon that restriction will be over!
Now let's address the buildings. As an engineer I can tell you how big improvements are done in the architecture. Some of them are already available to buyers like heat pumps or so effective insulation that allows passive houses to be built. Better and better additives make concrete stronger, more resistant to the environment. Other improvements like building-printer, cheaper and cheaper solar cells are developed as we speak and will be available in a decade. Why does it matter? Because prices of other items are decreasing over time even if they are not damaged by use. A 3 years old computer, even if it was never used can only be sold for a fragment of its 3 years old price. The reason is simple: this computer knows much less than a brand new, therefore its price must be much cheaper than new products'. On the top of that, the new one - due to the advancement of technology - is possibly cheaper to build than the old one was in its heyday. I can't see how the same would not happen in homebuilding. I can more or less guarantee that your 20 years old home in 2030 will be much-much less attractive to buyers than a brand new next to it and the new one will cost much less 2010 dollars than the old home did in 2010!
So think, count and ... rent!
(the statistics are from simple web search, I couldn't find US or EU cumulative data, feel free to send a better one)
Several financial analysts claimed that real estate is not good compared to other investments and also several warned against the bubble. But the financial dogma "in the long run the home prices always move up, if you seek a safe and sure investment, buy a home" was never challenged.
Of course I cannot estimate the prices of homes in 2040. I can't even estimate their prices in 2011. I just want to share with you the reasons why I decided to never buy a home in my life (unless there is simply no proper home to rent or the annual rents would seriously climb above the home price/15 golden line). I also urge you to think seriously on the topic seeking information before you make a decision that involves a 20+ years old financial commitment.
To challenge the dogma, I have to find reasons why home prices increased (above inflation) in the previous decades/century and prove that these reasons will change in the near future. At first let's separate the value of the land where your home stands and the value of the building itself.
We all know that a piece of land can cost insane amount if it stands in an urban area. Just guess how much an acre would cost in Manhattan! In the same time, the land prices in rural areas have not increased that much. In the old times most people lived in rural areas, doing agricultural work. It needed them to live near their farmlands. Later people moved to urban areas, near the factories they worked. However factories can be distributed evenly on the land, but services not. As more and more people worked in services area, the more urbanized the life became.
The reason for that is simple: to offer services, you need to be near people. Good luck running a beauty salon on the North Pole! Today 70-80% of the people work in some job that requires them to be near to other people: customers or colleagues. Since they are also consumers of similar services and also don't want to travel hours every day, it's convenient to live near other people. Since land is a limited resource and more and more people want it, its price can only go up.
What can change that? Internet and other communication devices! As we speak more and more jobs are outsourced to different continents. The internet marketing and sales in webshops is getting larger and larger shares. These allow you to work with lot of people while being far-far away from them. This blog itself is a mean of arguing over topics with each other, and we can do it despite living on different continents. So in the following decades more and more people can keep working "in the city" while actually living in other places like smaller towns, where you can have a garden and your kids can ride a bike down to the open green land! Don't tell me you love the concrete and the dark alleys! You may like the people and the "atmosphere" of the city but you hate the city itself. That's why already the higher class people move to suburbs. The internet allows you to keep the atmosphere of the city while actually living in a small town where you can leave your door unlocked.
For the market this means that land will much less be a limited resource. You can already buy pretty cheap homes in smaller towns, you just can't move there because your job demands your physical body to be in the city from 9 to 5. But soon that restriction will be over!
Now let's address the buildings. As an engineer I can tell you how big improvements are done in the architecture. Some of them are already available to buyers like heat pumps or so effective insulation that allows passive houses to be built. Better and better additives make concrete stronger, more resistant to the environment. Other improvements like building-printer, cheaper and cheaper solar cells are developed as we speak and will be available in a decade. Why does it matter? Because prices of other items are decreasing over time even if they are not damaged by use. A 3 years old computer, even if it was never used can only be sold for a fragment of its 3 years old price. The reason is simple: this computer knows much less than a brand new, therefore its price must be much cheaper than new products'. On the top of that, the new one - due to the advancement of technology - is possibly cheaper to build than the old one was in its heyday. I can't see how the same would not happen in homebuilding. I can more or less guarantee that your 20 years old home in 2030 will be much-much less attractive to buyers than a brand new next to it and the new one will cost much less 2010 dollars than the old home did in 2010!
So think, count and ... rent!
51 comments:
Barons did a similar article in the mid eighties. When factoring in maintenance and upkeep they came to the same conclusion. When my parents passed away the work needed to upgrade ,repair and prepare their house for sale I figured t-bills would have been a better return.
I've not put a lot of thought into it, but a house is an asset, in that you can resell it.
You never see the money you pay for rent again.
@duncan: but you won't see the interest part of your mortgage either.
I rent a lovely home in a small village in the Italian Alps, (I'm Australian). I do a lot of my work on the internet, but have since supplemented it with some work in the local area where I live. I pay €300 a month in rent and the house would cost me €230,000 to buy, which would be around 60 years of rent without paying the interest on the loan that I would require. So in this regards I would have to say that my actual real life situation mirrors what Gevlon is saying in his post.
However, the prices of material items such as computers owe a lot to the explosion of Chinese made goods for their current cheaper prices. My new 22 inch Samsung monitor cost me just €130 while a 17 inch over five years ago cost almost €400.
It seems that the only reason you would buy a home is to leave it for your children so they could sell it and buy a big car.
@thenoisyrogue In Belgium or the Netherlands, the rent for that house you're in would be around 600 to 750 Euro (or more). Which would make buying it (at 900 euro/month over 30 years intrests included) not such a bad idea.
If renting a house is almost as expensive as buying one, you may just aswell buy one.
I your case off course, you're better off renting
Very interesting article, thanks Gevlon.
Regarding the "money lost" for renting - take the monthly repayment amounts for the mortgage of a certain value of house. Compare with the rent required for a similar value rented house.
If the repayment amounts are greater than the rent, then you can rent and invest the difference.
The difference is the "opportunity cost" of owning a home, that can go into a secure investment, instead of into a 20year investment that may lose it's value if the neighborhood goes to the dogs. In 20 years that can very easily happen!
Also.. interest paid on mortgages are insane... For the first few years of your mortgage, you're mostly just paying interest, you're not even touching the actual mortgage amount.
I googled Mortgage interest and found this site that explains it better than I can:
http://michaelbluejay.com/house/interest.html
Note that if you rent a house, you can't change it to your needs, at least in my country. In my house we removed a wall, to make one big room. This would not have been possible in a rented house, because it will be rented to someone else after you leave it.
The only reason I would every buy a home is because of that. However, it's still a suboptimal solution. You pay a lot more for the ability to change the house according to your needs.
@anon in reference to my post:
The problem with buying as opposed to renting in the case you discribed is that you are locked to the house. If you need to move but you cannot sell it for the price you require you are trapped. This happened to my brother three years ago who 'invested' in a block of land in a good part of the city, (Perth, Australia.) After a couple of years his situation changed and he needed to sell the land. But he couldn't for the price that he needed just to break even. And he was trapped into staying in his job which he wanted to leave at that time. He sold the land last week, after four years of trying. He's now coming to Europe. His profit for four years worth of investment, payments and stress? €600.
Maybe real estate is much different where you are Gevlon, but here a loan payment is slightly less than the rent on the same property.
A friend of mine has bought a couple houses and condos, and rents them out. A company takes care of the renting, so there is no effort on his part. The rent he collects is higher than the loan payment. The extra he makes above the loan payment is basically a wash with costs (maintenance, taxes, etc.). The properties are in a college town near campus, it is very easy to find renters.
So for an initial down payment, no additional investment and very little effort on his part, he will eventually own these properties.
Is this really not something you could do where you live Gevlon?
Bleh, the link in my previous comment is to a pro-home-ownership website! :)
I certainly don't endorse the rest of what the website says, but the page on interest is comparing a 30 year loan to a 15 year loan, and I definitely agree with his conclusion there.
the major reason so many people buy a house is relative security. if your landlord decides that they have other plans or the place you are currently renting - guess what. the moment your lease runs out? You are out of there, find another place to live. Of course if you take out a morgage that you cannot pay off, you also lose a place to live, but it takes a great deal more effort to froclose o na house and get you out of there, then to remove you out of the rental property. Idealy, you are only buying what you can afford.
Moreover - you cannot customize the place you are renting, you cannot make any changes to it that aren't approved by your landlord, you are very restricted in what you can have in your place of residence, when renting. The restrictions are much less strict for a place that you own. there are still zoning restrictions and if for some reason you chose to buy a condominium or apartment in a building with a board of, you have almost as many restriction as when renting, but the added security of a more long term place of residence is still there.
One must weight there needs and goals carefully before deciding whether they wish to rent or buy, of course. But do not discount the possibility of property ownership being more financially beneficial then that of renting.
In the US, as you might know, we get big tax breaks for having property. Thus, after taxes, a mortgage and a rent almost breaks even and it does in most areas in the US, the problem for the majority of wannabe homeowners is getting the inital down payment
At least for the Netherlands, there has been an increase in housing price over the last decennia that people often forget: a moving from 1 income households to 2 income households. It was a slow process where at the start the double incomes were the exception and could afford bigger homes. But more and more households became double income and there didn't come better houses on the market but current houses became more expensive. Nowadays in the Netherlands, double incomes are the norm and it's hard to get a house on a solo income, even if it's good.
This doubled the prices of houses.
This is a 1 time price shift something which won't happen again and still people think that this pice rise is normal.
I've given it some thought, and though i agree with your general argument (technological amortization, the concept of the land value going down). But, (correct me if I'm wrong) actually you should not simply compare your rental with the interest on mortgage. I mean I rent a flat in downtown Budapest, which costs me about 250Euros per month. Thats the cost of me living in a flat, not on the street. (plus overhead of course, but that you'd have for you own flat as well, maybe even less if I would not live in a house built in the 50s) If I'd bought my own flat, than the cost for me not to live on the street would be the net present value of my mortgage + interest, minus the net present value of the price I could sell my flat in 20 years or so. If you buy your flat there is some uncertanty regarding the pricce you could sell and other factors, but hey there is risk in every investment. So for me to decide wether I would be better off buying my own flat is comparing the two costs above. I did not make the actual calcuations yet, and the reason is really simple. I could not afford to buy a new one. Even is I'm paid pretty well. What I can do is to save up some money, invest the best I can and once i think I have the necessary funds than see if the rent + invest the spare money way would give me better result than invest in a flat or house.
There are other factors like health, security and stuff which you cannot really translate into hard money. And that is where it's getting tricky. (I love how my parents live in the own house where I could ride my bike and even play on the street when I was young all day long) Good luck doing that in the metropolitan areas :)
PS.: One comment on the pricing and value tendencies you wrote. I guess it's largely influenced by the society. Today we live in one where it is fun to live in the city. Or at least for the socials. Socials would miss their fun and buzz of the city. That's a fact you can count on, which to some extent would make an investment into you own flat more solid.
Something I've noticed people ignoring while making posts regarding renting/owning is the lack of attention to the cost of repairs and upgrades.
If you own the home, you are responsible for paying for and fixing any problems that crop up. Failure to do so and you risk damaging your property to the point that any assessor worth his salt will notice the damage and tank the property value. On the other hand, the landlord is responsible for all these repairs.
They are incidental costs that aren't guaranteed to happen, but maintenance is something you need to consider.
Also, utilities are also a factor. I have a 950sqft apartment. It's two bedroom and I don't even use the second bedroom. I just toss crap in there that I don't feel like dealing with and shut the door so that I'm not trying to heat/cool it with the rest of the apartment. Unused rooms that cannot be closed off will raise the cost of utilities.
Regarding the comparison between the value of modern versus older property, your argument ignores the fact that land is a finite resource and that development is controlled.
Furthermore, the value of a building may have an aesthetic element so that an older 'character' building may command a price premium over a new build 'box'.
The argument that renting is always better than buying is certainly not nearly as simplistic as you suggest. Most of the comments above testify to this.
Perhaps the most pertinent point on a pure investment level is the fact that you have to chose to put your money somewhere.
If you are not going to put the cash 'under the mattress' but rather want to put it to work then many people understandlably prefer to invest in something they understand (property in their local market) rather than to entrust their money to banks or investment managers...
duncan's comment pretty much sums up why buying a house is a better financial decision than renting, even if housing prices DON'T go up so dramatically.
Rent is money that you are guaranteed to never see a cent of again. And while this is also true of the interest portion of a mortgage, it is NOT true of the principle payment...that gets you equity. Even if housing did not go up in value, you still get some of the money you payed to your mortgage back when you move.
But here's the thing...housing HAS always gone up in value. And not in terms of incredibly volatile average gains like the stock market...it's been pretty stable for a long time. Aside from the latest bubble (which, funny enough, came mostly from people trying too hard to treat housing as an investment), housing has proven to be a good way of making money.
Now it's possible that the things that make housing go up in value won't be true in the long term, like Gevlon says, but if so, that's the incredibly long term. Building materials may become more sophisticated, but as anyone who's looked at houses can tell you, that doesn't seem to translate into better houses. Whatever they lacked in sophistication, builders years ago tended to build houses WELL...while new developments seem to be built CHEAP. Some people might like newer houses, but I think you'd be hard pressed to find any evidence that housing prices for newer houses are significantly above the price level for older houses.
Now I agree that in some situations, for some people, buying a house is not a good idea. If you can't afford a decent down payment, or you might move in the short term, for example. But overall, I think a lot of the arguments against house buying are based on ideal investment situations and not real world data.
One general rule of asset markets goes like this: Things go UP in price when there are more buyers than sellers, AND things go DOWN in price when there are more sellers than buyers.
If you are familiar with the demographic notion of "BABY BOOMers" you will understand why now the owners are a lot ( a 40 years huge generation,the "baby boomers" ) and why the the next generations are underrepresented in numbers compared with the baby boomers.
That would mean soon a lot of sellers and few buyers.
In 1950 there were seven workers per retiree and the system was balanced. By 2005, that ratio had dropped to only 5 to 1, and the system was already exhibiting signs of distress. By 2030, that ratio will have plummeted to a thoroughly unworkable value of less than 3 to 1.While it may not seem like much, the ‘hole’ that exists in the population behind the baby boomers represents an enormous challenge.
Here’s what I mean. The boomers are the wealthiest generation ever, they hold nearly all of the assets, and they will need to dispose of those assets to fund their retirements.
Who exactly are the boomers planning on selling their assets to? Even if next generation somehow could afford to buy all these assets, there simply aren’t enough people in his generation to buy them.
In order to fund their retirement dreams, boomers are going to have to sell off their assets. And again we might wonder, to whom, exactly?
Remember :Things go UP in price when there are more buyers than sellers, AND things go DOWN in price when there are more sellers than buyers.
http://www.chrismartenson.com/crashcourse/chapter-14-assets-demographics
You have completely missed your own argument. Supply and Demand.
I cannot comment on other countries, but in UK, the demand for housing continues to outstrip supply. People continue to want either to buy or rent houses, yet there are not enough. So house prices continue to rise.
Also you mentioned that new houses are going to be cheaper. Which is true. However as we continue to develop here in the UK, land becomes harder to find and becomes more expensive. So therefore houses become more expensive and what we find is new housing is built on less plot space than before. Which gives the developers more housing per square metre = more profit.
I would highly recommend anyone in the UK to get onto the property ladder as soon as they can. It is never lost money. Renting however, is money going no where.
Thril (Undergeared EU)
As a Geographer who has studied how little space and distance from home to job matters these days, and a chick who married a guy with a house and is now stuck in said house, I approve of this message.
I keep trying to tell my friends... DON'T BUY A HOUSE. It is an anchor - a very expensive one at that.
But no one listens to me, so I'm bookmarking this post. The stupidest financial decision my fiance ever made was in buying a house - and he'll be the first to admit it.
There are a couple of things you missed that are benefits to purchasing a home.
First, those numbers you showed are values in homes, not the purchase price. Most of the time when you purchase a home, the bank automatically sets it's value at the purchase price. However, if you got it independently appraised, a lot of times it can be significantly higher in value. Granted, you may never sell it for that price but it can be leveraged against other loans at a fixed and hopefully good interest rate.
Second, a home gives you the ability to invest as much as you have every month in small amounts. You can simply pay on top of the minimum payment and that goes to the principle balance even in the early years of the loan.
Even paying 10% extra per month on a home can significantly reduce the amount of interest paid 5 years down the road. So while comparing interest to rent now might be a wash, comparing interest to rent when 5 years down the road when investing in the principle will definitely be in favor of the home, even despite maintenance costs.
In summary - if you get a good buy on a house (compared to like houses in the same area) and pay towards the principle, a house is not as bad of an investment. Of course, if you buy a house at face value and pay the minimum amount on the loan, then it is a poor investment.
I would like to point out the following sentence of the text: "Several financial analysts claimed that real estate is not good compared to other investments."
If you consider buying a house purely as a financial investment it is a very risky (=bad) one. You not only invest a big portion of your savings/income in a single asset class (real estate) but in a single asset (a house). This investment is at risk to lose if the housing market goes down or ther is a flood or a big storm or an earthquake or whatever.
In order to secure your savings/income it's elementary to spread the risk.
You forgot one aspect of house pricing and why it cannot rise indefinitly, and that's the income of the people who live in the house.
(This is from a dutch standpoint, of course. These things vary too much by locale for me to claim much about other countries, though the same principle applies.)
If you take a house built for people with an average income, you can see tha thirty or fourty years ago, they cost a single income to buy and maintain. Right now, the prices have risen so much that it takes almost two average incomes to maintain that same house. This works quite well here, since the culture has shifted from "women stay at home" to "women have to work too!"
However, if prices rise even more, they will eventually reach a point where you need a third income to buy the house, and that third income cannot reasonably exist in that average family. These average families, on the other hand, are such a huge part of the population that there are too many houses of the type for them to be sold to richer people easily. (Not enough richer people to live in all of them.)
This will contribute to the fact that houses cannot rise in price indefinitly.
Much like different wow servers have different economies, so different countries have different issues between renting and buying. Renting may make perfect economic sense in some countries over the long term but not in others. As an example Britain has the highest percentage of owners over people who rent than any other EU country. The consequence is that house prices have risen enormously in the period 1950 to 2010. Even if you factor in inflation, each pound invested in a property would be worth more than the same pound invested in stocks and shares in the equity market over a similar period. Here is a link to two graphs proving the data for Britain
http://www.whatprice.co.uk/financial/housing-market/house-prices.html
Due to various reasons in Britain, one can expect further house price growth in the next twenty year cycle. Thus all British goblins should be buying properties. Thats not to say Austo-Hungarian goblins should be avoiding it, merely that you need to know your local market. Thus I own my own property and own others I rent to tenants.
Buying a home is better than renting as it is a viable retirement plan. I do not mean that you can sell the home or gain any additional money from it. You benefit by removing the cost of shelter from your budget.
If you actively work to own your home, at some point that mortgage payment goes away. By removing this payment from your life you vastly increase your spending power and reduce the amount of time you need to work. Just owning your home will guarantee that you can hold a part time job later in life.
I have two comments.
First in the US the main issue since 2004-10 has been the price of newly built homes. Most buyers expect a discount for a "used" home but starting in 2004 the price of a house 3 years old started being roughly the same as a newly built one, which eventually led to the massive discounts in 2006-9.
Second in the US houses are not mass produced. Thus technology really doesn't reduce the cost. The lot cost is a big factor, and then labor. I think the only way houses will ever get cheaper is if they are made like cars in a factory.
Most of the Baby Boomers assets won't be sold, they will be willed to the Baby Boomers kids and grandkids.
"I can more or less guarantee that your 20 years old home in 2030 will be much-much less attractive to buyers than a brand new next to it"
The fallacy here is not correctly identifying what your house is in competition with. There isn't an open lot in my subdivision for this 'brand new home' to be built on. Most of the houses in my neighborhood are of similar age and style so when/if I sell it'll be up against similar homes.
Also, I'm guaranteed a relatively fixed cost for my house thanks to the Fix Interest Rate Loan I got. Your land lord can increase your rent every year. The bank can never increase my mortgage payment.
@Thril: The population of the UK citizens is decreasing with time. The average British woman has less than 2.1 children. So If less and less people will live there, the demand shall drop.
@Honor's code: the problem is that the average baby boomer has less than 2 children. If 2 baby boomer gives his home to his daughter and his son, and the mentioned children marry, they will have 2 homes. They will sell one.
I agree with Samus.
One of the most secure ways to retire over here in the USA is to be a land lord. When you get to your 50's buy a 3-5 cheaper houses/trailers. Today $70-130 range. 3bedroom min with a yard and garage if possible. Mind you homes not townhouses. Rent them for $900-$1300 using a managing firm, so you don’t have to worry about calls at 3am about something being broken. You break even while your paying on the mortgages but by the time you are 65 they will be paid off and you have pretty much $4000 a month in income. If you ever get in a pinch, and need money fast just sell a property. The people you rent to are people with no credit, and or a criminal background. Most decent apartment complexes do credit check or criminal background checks, and require proof of income; since your renters will fail these they are willing to pay. Since their rent is >= your monthly mortgage payment you aren’t investing your money, but theirs. They are pretty much buying you a house. Only danger is if you lose a tenet and can’t replace them for a couple of months, something serious goes wrong with the property, or the property is being use for illegal activities (in numerous states the land owner can be charged for criminal offences that take place in their property even if they don’t live there).
If this didn’t work, people would never build apartment complexes for the sole purpose of renting. When some developer builds a brand new apartment complex it probably takes them a good 10+ years to pay off their loans, anyone living there is effectively paying that mortgage off for them. How many abandon apartment complexes do you see? Not many, because not many fail to be profit turning. Even if the developer goes bankrupt someone tends to buy the property and take over. The private home owner has a lot less rules and regulations to worry about if they want to rent.
Your analysis doesn't apply to the USA. The cost of my home per month, including upkeep and the opportunity cost associated with the down payment, is actually less than rent. I pay less per month for a 2,400 square foot home that I would pay for a 1,500 square foot apartment BEFORE the tax subsidy on home interest. If you have good credit in US Midwest or South, buy a home. If you have bad credit, rent!
@Honor's code: the problem is that the average baby boomer has less than 2 children. If 2 baby boomer gives his home to his daughter and his son, and the mentioned children marry, they will have 2 homes. They will sell one.
I'm thinking of my own situation as the married child of a BabyBoomer parent. First the assets will be Willed, but ultimately those assets will be sold.
Gevlon,
The population of the UK is not decreasing.
http://www.statistics.gov.uk/cci/nugget.asp?id=1352
Even with the digital revolution there is still a higher value in Even with the digital revolution there is still a higher value in urbanized areas over rural. A good (more expensive) area may have, trash picked up, nearby shopping malls, good school districts (even if you don't have kids those who do want to live where the good ones are). So for the good places, there's more demand, but still limited supply, therefore prices go up.
As others have commented, in the US at least, rent and mortgage payments (the interest portion at least) are about equivalent (especially considering tax breaks). Also recall that rent prices generally rise, but once your mortgage is set, the interest amount your paying actually decreases. So you're basically trading you ability to move easily (with renting) for money in the long term.
A house to live in is more like investing in a college degree than buying into the stock market. You're giving up quite a bit of opportunity cost for a future payoff. Also you can't switch fields easily, so you're 'locked in' by your degree choice. Now of course if you manage to get a higher paying job with just a high school degree, then it might not be worth it to go to college (e.g. you have cheap rent compared to house prices). Also there is the same kind of 'ape-subroutine' factor of thinking that you're 'better' because you went to college/own a home.
@Gevlon actually although the birth rate might be low in UK, there is quite a bit of immigration, so overall population is still increasing, and predicted to continue to rise.
I rent my home and I would never buy a house or flat to live in.
That said buying property to rent to others is a great investment.
I own several properties and over half of my personal income comes from rents. Overall the value of property does increase over time. It always has. Plus you have tenants who are paying the mortgage for you so apart from the initial investment you can even skim a little profit off each property every month. But to be a successful you have to treat the property AS an investment not a home.
People spend money on ‘improving’ their home all the time. These improvements may make the property more suited to their tastes but they rarely increase the property value (or if they do the increase is less than the money spent on improving it).
That’s why I don’t own my own home it makes it easier to be business like about the whole thing.
Plus the UK is a great place to buy property as the entire country is changing from a nation of homeowners to home renters. Good goblins should want to be landlords!
Ultimately real property (like most investments) is not an asset that should be assessed on a categorical basis. Some property investments are ultimately dubious, whilst others are far more secure. It depends very much on the location.
For example, Sydney is a rapidly growing city which has largely sprawled rather than increased in density. The city CBD is crammed up against the coastline and consists of buildings which are either already large or heritage listed and unlikely to be bulldozed to make room for more. Transport infrastructure has fallen woefully behind and travel from the outer suburbs to the CBD is excrutiating. It is not uncommon for a worker who lives in the outer suburbs to have a 12-hour round trip every work day. The situation is now so bad that even a concerted effort by the state government to fix the problem would take decades, if it were (politically) possible at all.
In that context, residential real estate in or near the CBD translates into a massive time saving and corresponding improvement in quality of life. Over the forseeable future, the value of such property is relatively secure, even taking into account the long-term nature of the investment.
Of course, there are plenty of bad places to invest in property too. It follows the old rule that life does not boil down into simple categories, and all investments need to be assessed on their merits. The moment you rule something out without looking at the detail, you exclude yourself from an opportunity for profit.
Like any financial decision, there are times that real estate is an excellent option, and times when renting is the rational choice.
I bought my house in the middle of a local economic slump in the late '90s. Although it's old, and needed quite a few repairs, it was still cheap enough that I paid it off in 10 years. The economy has since heated up red hot, and now has slowed again. The place is not worth as much as it was last year, but it's still worth five times what I paid.
I'm no longer paying rent, or a mortgage, which has increased my feeling of security even though the economy is not good.
Local economies matter a great deal. Plus, someone has to own all that rental property.
On the other hand, home ownership means I can't just take a job in another city without thinking about how quickly I can sell my place. Mobility means opportunity. If I were entering the real estate market right now, I don't think I could find the same deal I did back then.
Quite a thoughtful and thought provoking article.
I am thinking land prices won't ever drop, especially in the city. Rent is pretty much same or dearer than loan repayment. Why throw money away when after 20-30 years you can wave goodbye to rent and own your own place.
I mostly agree. However:
1) There is a considerable difference between the returns/soundness of owner-occupied housing and buying real-estate as an investment ( i.e. the # of "investors" buying Miami condominiums at the peak ) Especially since Governments and tax policies can effect the "rational" decision with tax policies that encourage home ownership. In particular, all the interest on a home loan or home equity loan is deductible, none of the interest on a car or credit card loan is. Not that car or credit card loans are good ideas, just that government policies encourage home ownership.
2) Also note that housing demand is also affected by birth rates and legal and illegal immigration. There will need to be many millions of additional housing units desired in the US in 2030 than 2010.
3) Like buying any long term asset, it is also a bet on inflation. If all the stimulus money now results in "Jimmy Carter" inflation like in the 70s, then many real assets will out perform financial assets, be they houses or gold coins or whatever. It works the other way also, something real estate people tend to not mention.
4) Unless the changes are far more dramatic than in the past, it is many decades before it is cost effective to "scrape" a house and totally rebuild it. So even though your house does not use the current state of the arr 2030 techniques, it will still be built the same as all the nearby competitor who aren't rebuilt either. Location matters.
5) For historical reasons, there are some minor benefits to "owning" - if you owned rather than rented the exact same house, then your credit score would be higher and you would probably pay a lower rate on not only your home insurance but probably car, life or health insurance. Car loan rates would be lower for the owner.
6) America [used to be?] a mobile society, and a IIRC, the mean/median time people own a home is about 5 years. Building technologies won't change much in the 5-10 year time scale. Government regulation moves slowly.
7) There is far more people resisting doing the rational change in housing than you suspect. Government building and zoning codes gives way for both the populists and powerful to resist change. E.g., the previous Californina governor coincidentally received a $260,000 campaign contribution a few days before deciding on keeping California as one of two states where it is illegal to use the easier to install and cheaper plastic pipe.
BTW, If you can do your job in a bucolic, rural area using the internet, then why can't the job be done in another country with dramatically lower labor costs?
But yes, real estate, especially non-occupied, tends to be overrated and certainly over-recommended.
Gevlon,
Ah, but someone has to own the houses for people to rent. Who do you suggest fills this role?
While the total land area of the world is pretty much stable (except for a little land winning here and there or the loss of some islands due to rising sea levels), world population is going to increase from around 6.8 billion now until close to 10 billion in 2050. Increasing demand + stable supply = higher prices. It's as simple as that. The actual situation can be different in some areas, like in Europe, we are pretty much capped, population wise, but for most areas in the world, investing in real estate is a safe long term bet.
Even with technology allowing for a more dispersed population, city land prices will continue to climb with increasing population. Centralisation and specialisation of services in cities will always make urbanisation an appealing option for a large proportion of the population.
What's more interesting however is house prices, and here is where I think you have missed an opportunity in your article: Houses are a liability.
Yep, they're not an asset, they're a liability. They go down in price. Land goes up in price. If you're lucky, land goes up in value faster than the house loses it. You've got tenants for your house? Great, but if you're pouring money into maintaining it, the income isn't quite so significant, no? And if you don't maintain it, they vote with their feet and you've no rental income.
The only tenant who won't demand you keep the house maintained is you. So I figure if you buy a house on a block of land, let that sucker fall apart over the years with only the bare minimum of maintenance, then land prices go up, house price bottoms out, and the value of your home (the package of both) remains positive.
But of course this doesn't appeal to the average M&S homeowner, who wants the latest mod cons so as to keep up with the Jones's. It's their loss, though.
My house may not be the shiniest one on our street, but then again, when I talk to our neighbours they mention there's been drama with some sort of financial crisis this past year. I'm not sure exactly what they're talking about.
I must be a M&S, i only made 50k on my condo, about double the investment price, in 10 years. Also the idea that renting is cheaper is not usually the case, its often more expensive; not only do you not pay the principle but you don't get the tax deduction of the interest. This adds up.
Owning a home is more about an investment in your life and community, it says you have roots and have a stable life. If you don't have enough money to buy a house, then rent. But I really can't see renting being at all better than buying, after all the newer construction in this country tends to be worse than 10-20 year old houses..the lot sizes are way smaller, the landscaping is very primative or absent, the homes are all cookie cutter. There is really alot about owning a house. Now that my wife and I at the age of 35 finally own a house, we are never renting again. This is heads and tails SOOO much better than renting. No landlords, no loud neighbors, no high crime in the apartment complex, actual landscaping, you can do improvements, you are actually generating money from your investment. So many things.
Lastly consider an example.
You buy a house for 100k ten years ago. You sell it for 100k today. You make no profit. However, every month you are paying say $1000, and some of that is principle. If you are smart and got a 15 year loan, you would have paid off more than half of the loan, so $50k in your pocket, and you had a place to live for 10 years.
Now if you rent, you have paid the landlord $1000 a month for ten years. At the end of ten years, you get up and walk away. You get nothing for it, not a dime.
So $50k and a place to live for 10 years, or a landlord. Take your pick.
@gibbex - great example of when you should buy. if rent on a 100k home is 12k a year then buying IS the better option.
the decision line is at about $555 pcm on a 100k property. (value / 15 per year)
if rents are less than this then renting is the better option.
Blogger Gevlon said...
@Thril: The population of the UK citizens is decreasing with time. The average British woman has less than 2.1 children. So If less and less people will live there, the demand shall drop.
To Gevlon.
This is true. However, the UK continues to have an influx of people from the open borders policy in Europe. We have far more people entering the country than we have leaving or dying. Each one of these people need somewhere to live.
House prices continue to rise. And will continue to rise. The house my parents bought for £15,000 is now worth £250,000. My brother bought at £60k and sold 3 years later at £100k. I bought at £100k and sold during the recession for £120k 3 years later. Even during the recession and housing price slump recently, many people didnt have negative equity.
I continue to enjoy your thoughts and as always they spark debate.
Thril.
@Gevlon
Know your market! As a number of posters have already pointed out, Britain as opposed to virtually all other EU countries will grow enormously in population over the next 60 years cf Annonymous who quoted the NSO data or http://www.telegraph.co.uk/news/uknews/6395813/Britains-population-to-hit-70-million-by-2029.html
The result is part of the calculation that property in Britain is a very sound investment.
Even if you are correct that a home purchase in your own country is not a sound investment, as a goblin you should be calculating exchange rate, rental return (as you wouldn't want the property abroad standing empty), upkeep, and capital growth of making a property purchase in another country and renting it out. It's a fairly complex calculation, but can be finacially advantageous.
I choose to buy a property in another country (as well as the ones I own in my home country) in an attempt to spread my portfolio (aka wow I went into another market in the AH). It's still in the EU. I bought it not on my own but with a bunch of others, so as to spread my risk (admittedly I get less profit, but it was my first venture abroad so I was feeling conservative with my investing).
So far over the nine year period the value of the foreign property has risen above inflation, and better than money invested in the stock markets, the rental income has covered not only the general up keep but also some improvements (as Cheesewiz commented improvements should be aimed at increasing value, and not anything to do with personal taste). Thus after careful research of another market = profit.
I dare you to re-think and buy a property somewhere in the EU and see if you can make a profit on it, even if it's not a property you live in.
There are a lot of things missing in this analysis. While I can readily think on the premise that cities aren't going to grow as rapidly or play as big a role in the world, that doesn't support (alone) the conclusion that renting is superior to buying.
Tax breaks (in the US), cost of a mortgage vs rent after 7-10 years (when mortgage payments tend to dip below rent payments), and the ability to recapture some degree of investment are all important factors.
Even more important are convenience factors. There is a value to knowing that as long as you pay your payment, you will not have to move. As a renter, where leases are typically for 1 year, rarely for more than 5, you have to renegotiate cost every year and risk that the owner of the property is unwilling to rent to you again. Even as a perfect tenant, the owner may decide to put the land to more economic use. Being able to use the property as you see fit is also an advantage. You can improve it, use it, or not use it in any manner you see fit without risk of losing the value of the improvement.
While I agree that "buying is better because land prices always go up" is far too simplistic an analysis, and maybe even wrong, the analysis needs to be more in depth than what you proposed as well. Both renting and buying have economic value for an individual based on their occupation, future plans, and individual needs. While you give us something to think about, it's not an answer.
Hmm actually thinking about it, the argument that location doesn't matter as much might argue that getting a piece of property has less downside. After all a big downside is that you're tied to that one location, so if a job opportunity arises there's a lot of hassle to sell your property and move. But if, as you say, location is becoming irrelevant for work, then the downside of property ownership is mitigated. Despite being tied to a particular geographic area, your still able to pursue opportunities.
@Flex
I'm intrigued that in your model it is the "slackers" who do the home maintenance and the "hard working goblins" who sit back and allow it to fall into disrepair.
Some of the comments here are truly cringeworthy. The idea that renting is always "throwing away money" is completely ludicrous as is the example of renting a place for $1,000 when total owner's housing payment is also $1,000. Of course you should buy the place! You'd be paying only 8 times annual rent for it, about half of Gevlon's golden 15 number. The decision is easy now finding a deal like that would be a lot more difficult (unless you're looking at foreclosed bank property but those aren't really on the renters market now are they?).
On the issue of throwing away money, please consider all current and future discounted cashflows involved with both renting and owning before making any conclusions. A renter will have to pay rent but he will receive income from money he has saved on the downpayment. An owner will have to pay a combination of his mortgage payment and maintenance but will receive a tax deduction on those two (in the US at least) and will receive any discounted future price increases or declines in the price of the home.
There are many factors to consider so you can't simply say one is worse than the other. Given all the underwater homeowners today, heeding the rent is "throwing away money" advice in the last 3 years would likely have been an awful financial decision. For many regions that still holds true although prices are favorable in some areas. I'm looking at you Miami.
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