[CompelTechnic]

The article is dead wrong about the economics of whether buying a house is a good investment. So much so as to be intellectually dishonest.

1. The alternative to buying a home is renting. If the net cost of home ownership is lower than renting, you do not need to make a net profit on the sale of your home for it to be a good decision. The right way to make this decision is to look at all net cash flows, discounted to their present value, such as is done by the New York times rent vs. buy calculator.

2. The article ignores the fact that mortgages, which most people use, amplify the gains of inflation.

3. The inflation hedging properties of a home make for a good way to protect your future self and retired self from cost of living changes in a way that alternative investments cannot.

Many people outside of VHCOL San Francisco have found housing that is both affordable and a good investment.

[candu]

Here's the core argument of the article, rephrased slightly: housing cannot both outpace inflation and remain affordable indefinitely.

This is not incompatible with some people being able to find affordable housing that is a good investment. All it means is that in the long term - especially when real wages remain relatively constant [1] - these two policy aims are mathematically at odds.

[1] https://en.wikipedia.org/wiki/Real_wages

[CompelTechnic]

I agree with your rephrasing that housing cannot both outpace inflation and remain affordable indefinitely, but I disagree that it is identical in content to the article's core argument.

Now I'm just picking nits I suppose.

[hoaw]

> The article is dead wrong about the economics of whether buying a house is a good investment. So much so as to be intellectually dishonest.

What part of the article is that? Because that certainly wasn't my take away. The article is about whether housing can be affordable and a good financial investment, giving large returns, at the same time. Housing as an "investment" in your life, family or security isn't what is meant.

[krn]

Just an example: the average price per square meter in Berlin has increased up to 4x between 2007-2018[1], and it was possible to buy a 42 m² apartment for 25k EUR in 2006[2].

[1] https://guthmann-estate.com/marketreport/real-estate-report/

[2] https://www.toytowngermany.com/forum/topic/48094-advice-on-b...

[Retric]

That’s a single data point. Extend that rate of growth relative to inflation for the next 10,000 years and you reach absurdity.

[alangpierce]

For others not in the loop, VHCOL seems to mean "very high cost of living".

[A2017U1]

> If the net cost of home ownership is lower than renting

How do you know the net cost on a 30 year loan? If you can confidently predict decades of interest rates there's far more profitable investment classes for your money.

[chewbacha]

I thought that with most mortgages you end up paying for the house twice. Once in principle and once in interest.

This will vary a lot by the rate you get but I think it’s in the ball park.

https://budgeting.thenest.com/end-up-paying-house-once-paid-...

[DrJosiah]

Most homes are bought with fixed interest rates. If you are buying with a variable rate, 99% chance your credit is shit, and you shouldn't be buying a home, because the bank will own it soon.

[A2017U1]

Ah yes, you're right, I forgot about that occurring in the States. Everywhere else offers far shorter fixed terms. Struggle to understand how the banks manage it, seems like some risk is offloaded onto either taxpayers or other bank customers.

So let me rephrase then: How do you know the cost of 30 years rent to compare it with?

[DrJosiah]

In a big city, rents almost never go down. Here's my calculations to buy: I will pay somewhere $1700-$2200/month to rent 2+ bedrooms (wife + 2 kids) in LA near where I want to work (5 years ago). $2200 can cover the mortgage on a $600k house, assuming ~3.5% interest (rates were good 5 years ago) and ~20% down payment (pretty common down payment). In the right market conditions in the part of LA I like, $600k of house might be 2-4 bedrooms, 2-4 bath, and 1000-1600 square feet. Now it's just a parameter fitting / optimization problem.

But how does that even pay off? Consider down payment as an investment, and rent / mortgage something you'd have to pay to live wherever as a cost of life or an investment in yourself.

Even if all you got was your original purchase price back in 30 years, that can make the purchase worth it. Doing the math above, saying I paid $2200/month for 30 years on a $600k house, that gets me $792k paid for a $600k house, with $120k required up front. But I get $600k back at the end (even assuming zero market appreciation). So if you had instead invested the $120k somewhere else, rented some place for $2200/month (never to see that money again, like it was burned up), in order to get $600k back in 30 years, you would need to beat 5.5% annual return on that invested $120k.

But if that house increased in price (even by average appreciation)? Then the reality is that your investment of $120k needs to beat 9.2% of annual return in the open market to beat the investment in a house, even if all you did was live there instead of some place else (assuming your house can fit your needs).

Of course things like property tax, HOA dues, etc., can muddy up those calculations, but all of it is easy to drop into a spreadsheet. The hard part is actually earning the money (or at least that's been the hard part for me).

(please note that I paid substantially less than $600k for my home in LA, the numbers above are for reference, and not necessarily valid for current market conditions - especially interest rates and home cost)

[chemicalnovae]

Maybe that's true in the US (I don't know), but it's certainly not true elsewhere in the world; such as Australia for example where most home loans are have a variable rate.

[DrJosiah]

Good point, US-centrism bit me.

How often do the rates change? Anything crazy like 2-3% swings? Doesn't that make budgeting tough?

[chemicalnovae]

No, never massive swings in the short term (GFC caused a 4% drop (7% to 3%) in 2009 for example). I think that even when the cash rate is moving quickly rates don't change more than a percent or two per year.

Re budgeting, I think the relatively slow rate of change makes it mostly a non-issue though I think people at the upper end of their borrowing power struggle with rate rises.

[DrJosiah]

Good to hear that they aren't so bad.

The ARMs (Adjustable-Rate Mortgages) here in the US can jump pretty severely, mostly because they are only given to folks with bad credit. Folks with bad credit push to buy something out of their budget, get behind, rates spike, then lose it all to the bank, continuing the bad credit cycle.

[acjacobson]

Fixed interest loan?

[baybal2]

1. No: housing bubble crashes, and the 10+ years of your life crashes and burns with it. That's your good investment decision

2. True.., but the era of net negative rate mortgages, a minutes hike in rate will trigger a wave of defaults

3. That's only thanks that in the west that "unique inflation hedging property" is a result of decades old self fulfilling prophecy

Housing market in US is, I believe, the best examples of "ECON 101" vs common sense and reality.