This totally misses the point that there is no where else you can get 20x leverage at < 3% interest. Even with modest appreciation, you're going to make a lot of money putting 5% down on a house.
Do you mean 5X? I believe 20% down is more common. If you do only put down 5% you'll also have PMI on top of interest.
That said, your point stands that it's easy to get low interest leverage.
Another related point that I think is implicit in your comment is that you win even if home values only keep up with inflation (what you'd expect with a healthy home supply).
Using leverage to buy something not expected to increase in value more than inflation is not necessarily a savvy move.
Maybe you'd take issue with my "not expected to increase in value more than inflation" statement, but ultimately you are certainly in no way guaranteed to "make a lot of money putting 5% down on a house".
Everyone thinks they are a financial genius after a 10 year bull market.
If it moves exactly with inflation, then levering up actually is savvy. Ex: if inflation is 1% and you put down 5%, your return in real dollars is nearly 20%.
But the results are all dependent on your assumptions. If you assume houses will increase in value you get much better results than if you assume they will lose value, or not keep up with inflation.
If you assume stocks will go up a lot, it makes housing a comparatively "worse" investment.
Yes, my calculation ignored property tax, repairs, etc. I thought you were making a claim that being at the inflation level meant leverage wouldn't help you. I agree you'd have to take the total cost into account before deciding whether to buy or rent, but then in that larger analysis I don't see how comparing to the inflation rate is so crucial: it's possible that the home value increases faster than inflation but it still makes better sense to rent (if taxes or repairs are prohibitively expensive). I think I misunderstood your point.
This completely depends on the "modest appreciation". Even though it seems like it, growth in housing is not a given in the way you can reasonably assume stock market appreciation over the long term. Plus there is a lot more uncertainty since you cannot hedge your investment in a home. The entire market could be doing great but your particular house may be affected by local zoning laws or a homeless shelter in the neighborhood or a new highway or anything else.
Except it is 1x risk for example in the US - see jingle mail.
The debt is against the property not the person thus 20x return 1x risk (plus your destroyed credit).
For other countries in the world there is bankrupcy.
Doesn't this only matter if the property is worth less than the mortgage? If the lender can foreclose and sell the property for enough to clear the outstanding mortgage, there's no additional loss beyond the down payment (and any equity paid in since then).
If the down payment was x, how are you out 20x? Let's use real numbers:
House cost: $200,000
Down Payment: $10,000 (5%)
(Time passes...)
Value at foreclosure: $200,000 (no price change)
EDIT: I changed the math on this a few times, updating to reflect that you indeed get your downpayment back (minus fees).
The bank sells the house for $200,000. You get your $10,000 back after paying the $190,000 mortgage balance. But you're not on the hook for anything. You walk away with only a hit to your credit. You went from owing the bank $190,000 to owing $0 and having $10,000 in your pocket.
This! Putting down 20k on a house in my late twenties was one of the best investments I’ve ever made.
I was especially surprised so many of my peers who had no clue that’s how little it takes to get into a mortgage. Of course, assuming you have a steady job/income.
That said, your point stands that it's easy to get low interest leverage.
Another related point that I think is implicit in your comment is that you win even if home values only keep up with inflation (what you'd expect with a healthy home supply).