[zimablue]

There's a kind of interesting way to think about this, especially in the UK. Because people don't automatically think in terms of opportunity cost and don't know eg. that the long term equity return is X, there's a disconnect between reality and how people think of it. People in the UK think of rent as "wasted" money. In an efficient market, it wouldn't be wasted at all because the saving from lower rent vs mortgage could be put into eg. equity/bonds. Someone will reply that there is no saving but that itself is a symptom of the way we run housing.

But because people think that, and think that no-one would ever want to rent, we tolerate super weird policies like a residency house being exempt from capital gains tax, poor protection for renters, government tax transfers (in the UK they will literally give you money to buy your first house, the government is so committed to the your-house-is-your-bank philosophy). All these distortions then actually CREATE the conditions which mean that you're consistently losing money if you rent, because the government is effectively taxing you much more.

So our misunderstanding of economics creates an economic system which conforms to our mistaken beliefs, it's kind of amazing.

[leoedin]

When people talk about the opportunity cost of buying, they very rarely take into account leverage. A typical house buyer might have somewhere between 2 and 9x leverage on their deposit (ie a 66-90% loan to value). Once you take that into account the returns, even if you don't take into account capital appreciation (essentially the saved cost of renting minus maintenance costs) rise significantly, becoming competitive with the long term returns on an index fund. Nobody's going to lend you significant money to invest in an index fund at anywhere close to mortgage rates.

As an example, a flat which costs £400k might have a rental value of £1.4k/month, or 4.6% annually. However, if you bought that flat with a 75% LTV at an interest rate of 2% you'd have invested £100k and have an effective return of £16800/year less £6k/year of interest. That means an annual return of 10.8%. The long term S&P 500 average return is around 12.11%[1]

It doesn't take much price inflation to tip you into better returns than the index fund. House prices since 1952 have risen by an average of 7.9%[2].

[1]: https://ycharts.com/indicators/sandp_500_total_return_annual [2 - XLS]: https://www.nationwide.co.uk/-/media/MainSite/documents/abou...

[GreeniFi]

I find it distinctly odd that arguably the central organizing feature of the British economy and culture is a massive state-sanctioned pyramid scheme, which as the author points out, is wrecking Britain, as populist governments invesnt ever more ludicrous tricks to inflate prices further to win political support.

I truly wonder how the Millenial generation might disrupt this idiocy and would welcome suggestions here. So far I have thought of the possible solutions:

1. A boycott on new purchases, which would tank the market as, being a pyramid scheme (or something akin to this) it depends on new money flowing in at the base. But I see no way for a boycott to be organized - and would not want to destroy the asset wealth of those caught in ownership who would see their primary asset tank in value. 2. There is beautiful and cheap housing stock in many parts of Britain that have fallen into decline. In particular south coast towns are an example. I wonder if these areas could (a) be rejuvenated, and (b) millenials could escape housing debt traps, if they had some sort of way of signaling to each other that many like-minded people would move there. Maybe high property prices in the SE benefit from a network effect (I live in London because people like me live in London) - but new networks could be established if people signaled their commitment to new networks.

I would be very interested to hear other ideas.

[zimablue]

My manifesto, roughly. I've never heard of this suggestion as inflation as a remedy, but that seems a bit like chemo, quite a wide-ranging medication:

1. Replace stamp duty with a progressive wealth tax (this is the hardest one politically I think. Really you'd need coordination with other EU states, this is discussed in Capital by Picketty) 2. Light rent controls (just can't be raised by more than X% over 1 year 2 years, to prevent people getting spiked) 3. Expand renter protection - whatever the agency there currently is we triple it in size and give it teeth 4. Include all houses in capital gains, at the same rates or higher than you'd get on stocks. I guess you have a rolling exemption so that people aren't totally blindsided. This would hopefully be counterbalanced by removing stamp duty. 5. Specific tax pn land banking by builders 6. A small land value tax 7. No school catchment areas, open application and decision by ballot. 8. There have to be more details on how we change the rules about who can build what where. It's very heavily regulated (down to minimum sizes of bedrooms, amount of space for leisure etc). I dunno if the point is to remove the regulations, more like shine more light on them and maybe reconsider some of them and add others. For example, I've spent 10 years in London in rooms that were below the minimum room size allowed for new developments and so have most people that I know, so that one should be removed.

[nostrademons]

Leverage isn't free: what you gain in returns you lose in risk. For housing, this is the risk that the bank can foreclose and take the house if you miss a payment, or that you can end up underwater and trapped in a location with no jobs if the housing market declines under your equity.

You can leverage up the same with stocks, just by buying them on margin. The risks are effectively the same: if the stock declines, the bank sells it off and seizes the collateral to cover your debt. The rates are also not that different: 5.25% vs. about 4.75% for mortgages now. People are rightfully skeptical about the risks of buying stocks on margin, but they never think much of the risk of foreclosure when buying houses on mortgage.

[ThrustVectoring]

Also a 30 year fixed mortgage effectively shorts long-term bonds with an embedded call option (via refinancing) to further reduce the risk of the position. It's an incredibly valuable consideration that's not super obvious.

[a008t]

One can get a 30-year fixed rate mortgage?

[ThrustVectoring]

In the US they're standard.

[claydavisss]

Who are these people who intentionally seek a lower rent over a higher mortgage so as to invest in stocks? I've yet to meet one. Renters are just as likely to give in to vanity purchases, dumb spending habits etc...

And why are stocks such an awesome alternative? A stock can go to zero...even foreclosed homes have some value.

Stocks are optional - shelter isn't. Since you must commit some of your earnings to shelter, it makes sense over the long run to fix the costs and find a way to profit.

On a subjective level, home owners have better finances, more say in guiding their communities, and many other advantages.

Of course we can turn your argument back...why does society make so many accommodations for people who just buy and sell pieces of paper?

[wh0knows]

Take a look at the FIRE community, or anybody who is interested in a self-funded retirement.

Most people who are the ones renting and investing large amount are not buying single stocks, they are buying broad index funds that encompass the entire market and are rebalanced to keep an even representation.

These broad index funds going to zero is not a very likely scenario outside of total anarchy. It would mean all publicly traded companies becoming worthless and you would be much more worried about acquiring water, shelter, food, and protecting yourself from looters than anything else (in this scenario I would imagine the piece of paper saying your house is yours would not be worth very much either).

Now think of the much more likely scenario of a local real-estate market collapsing, uninsured natural disaster destroying your house, or climate change making your area unliveable, and you can see which proposition is really the riskier one.

If you don't sell your house you don't profit you only pay more in property taxes.

The thing is it doesn't, that's the point. If I want to rent to keep flexibility and invest my money in stocks in order to retire I am at a decided disadvantage than somebody who buys a house and has it appreciate to double its initial value. In the vast majority of countries this appreciation is free from capital gains tax, or the house's value is not taken into account in the wealth tax. So why is the house owner rewarded for saving and putting money in a mortgage and the renter penalised by capital gains/wealth taxes?

[zimablue]

What you're saying, which is a good point, when you say that shelter isn't optional, you can phrase that more precisely as "owning property is a hedge against variable property prices". It's true but there are other ways to hedge this, eg. Long term rental contracts, limited rent controls or owning specific derivatives all reduce this risk. There are societies that run like that, eg. Germany.

Some stocks can go to zero, some are very unlikely to and most portfolios have things that are very unlikely to flatline like govt bonds. Well i don't mortgage although i could, and I do save so hello you've met your first. The idea that we need a bank threatening to throw us out of our houses to enforce responsible saving is infantile and grotesque.

General criticism of the finance sector is a bit too off topic for me to engage with.

[_ea1k]

"owning property is a hedge against variable property prices"

One of the best pieces of financial advice that I've ever heard centers on this. "The purpose of owning a house is to fix the cost of housing." Its brilliant in its simplicity and I had never thought about it until hearing it a few dozen times. :)

Unfortunately, it is also a vastly different mindset from many home buyers (and, for various reasons, sellers).

[dionidium]

> even foreclosed homes have some value.

Homes can go to zero. Homes can go to below zero, which is why there are land banks all across the Rust Belt with thousands of properties they have trouble giving away.

> On a subjective level, home owners have better finances, more say in guiding their communities, and many other advantages.

Of course, because we live in a society in which nearly everyone is convinced that it's better to own a house, so anybody with enough resources to own a house chooses to own a house. And because most of those folks have an even dimmer view of apartment-dwellers than you've displayed here, they use zoning to literally separate themselves from those lower classes, to fairly predictable outcomes.

[AnimalMuppet]

> Homes can go to zero. Homes can go to below zero, which is why there are land banks all across the Rust Belt with thousands of properties they have trouble giving away.

Could you give some reference(s) on this? I'd love to see a bank that was trying to give away property, and to find out why they couldn't (and to see if I could find a way where the property would have positive value to me).

[dionidium]

The Land Reutilization Authority in St. Louis holds about 12,000 unwanted properties:

https://www.stltoday.com/news/local/metro/lra-owns-the-st-lo...

The LRA usually ends up with these properties when they fail to receive any bids at the regular tax auctions. Fewer are falling into their hands, recently, because the hot housing market is driving folks to look at things they previously wouldn't have, but properties still routinely go unwanted:

https://www.stltoday.com/news/local/govt-and-politics/fewer-...

St. Louis is the market I'm most familiar with, but similar land banks exist in cities all across the country.

[thescriptkiddie]

> A stock can go to zero...even foreclosed homes have some value.

It's possible for a foreclosed home to have negative value, because the unpaid property tax bill is more than the value of the property. On the other hand, a total stock market index fund like VTSAX can only go to zero it something catastrophic happened.

[baybal2]

>in the UK they will literally give you money to buy your first house, the government is so committed to the your-house-is-your-bank philosophy

No wonder, banks were lobbying the state for generations. House is a purchase like any other, having to pay your tax money for somebody's else default on his McMansion is stupid.

I myself have zero reservations about renting till I kick the bucket. My dumbest decision in life was to listen to parents who were coaxing me day and night for a few years into buying a house in my hellhole hometown in Russia with like 75% of my lifetime savings. Yes, I spent ~$80k just to make my parents to fuck off. That was when I was 23, in 2014.

To some extend, I admit, the decision had in part an intention to teach them a lesson, of what a disservice they were making me with their "expert advise," but I could not have imagined just how wrong the things can go...

[restalis]

Wow! First, is Vladivostok that bad to be called "a hellhole" (that is, if you're referring to it, of course), and second, if it was only to make your parents shut up, couldn't you somehow done it with much, much less (say, a village house somewhere)?

[baybal2]

My hometown is Blagoveschensk, a city much more further inland than Vladivostok.

[stevenwoo]

There's some other mechanism at work in the UK as far as I can tell from just reading the news - a recent case mentions that UK real estate is claimed to be a haven for laundering money. https://www.theguardian.com/uk-news/2018/oct/03/bankers-wife...