> If you can qualify for a mortgage, you have a big leg up on people who rent.
This is not always true. Often, the price of real estate outpaces rent. I.e. renting is cheaper than buying.
As a renter, you're not paying property tax, insurance, repairs, maintenance, and maybe utilities.
As a renter, you have no risk. Remember 2008 when housing prices tanked?
Making money off your house often depends on how good a negotiator you are.
Most people neglect to consider transaction costs. For example, you have to pay your real estate agent 6% of the sale price of the house. The house also may sit vacant for many months waiting for a deal, this is all dead weight cost.
The first few years of your mortgage, you aren't gaining much of any equity. It's nearly all interest payments.
A renter can walk away any time. This is why renting is better if you're going to stay less than 5 years.
> As a renter, you have no risk. Remember 2008 when housing prices tanked?
As a renter, you have the risk of your rent shooting up year after year as has happened these past few years basically globally.
Housing prices tanking are mostly an issue if you’re planning to sell your house, or you’re one of those people who buy with the intention of reselling. If you bought something in your affordable range and prices drop in half afterwards, well, that sucks, but you’re paying what you expected to pay and missing out on a discount you didn’t anticipate.
> This is not always true. Often, the price of real estate outpaces rent. I.e. renting is cheaper than buying.
> As a renter, you're not paying property tax, insurance, repairs, maintenance, and maybe utilities.
You are though, are you not? Ie the only thing that changes between renting and owning is who is maybe economies of scale. For sake of discussion, lets say you rent from someone who owns a spare house. You are paying everything you just mentioned, on average, as the renter. If you don't, then the owner is losing money - and that's not likely.
Now with a larger business owning your home/apartment/etc, i imagine there is room for economies of scale. They don't have to pay to have a plumber come out, they might already have one on staff or retainer. etc. Perhaps they get better deals on land taxes and whatnot too?
But lets not forget - you're paying for everything your landlord is, plus profit. Always. The only way it works out cheaper for you is if they are more efficient at it.
> But let's not forget - you're paying for everything your landlord is, plus profit. Always.
Definitely not always. Loss is common in business.
Doubly so here when asset values are appreciating. If the landlord thinks they're making bank simply holding property, any rental income on top that helps minimize costs is just gravy. There isn't tremendous pressure for costs to be fully recouped.
In reality, you're paying the least amount you can that still beats the alternatives. That doesn't guarantee profitability for the landlord. The landlord recognizing lack of profits and selling the property is an alternative, but may not even be a tenable one in some circumstances (e.g. a market downturn that leaves potential buyers weary) without taking even greater losses.
> Doubly so here when asset values are appreciating. If the landlord thinks they're making bank simply holding property, any rental income on top that helps minimize costs is just gravy. There isn't tremendous pressure for costs to be fully recouped.
Maybe with certain small owner groups, but I can guarantee you that any community with a dedicated management company (separate from the ownership group) has a goal of making profit on top of however much their property value is appreciating. Not every owner plans to sell the property within a few years of buying it. This applies to all of your apartment communities regardless of age (well, minus lease-ups in their first year).
Also, most properties run on a bog-standard business checking account for their income and expenses; the owner isn't just dumping money in it every month to support operating losses because "the property is appreciating anyways!". If the manager and management group isn't making money to sustain operations, you'll have both an angry owner and angry corporate management that can't pay themselves for their management fees.
I have observed that many small landlords are speculating on a longer term payoff of the property greatly increasing in value, are not present but planning on moving back in at some point, or own outright and have out of date ideas about market rent. All of these lead to situations where they may take losses of varying sizes in the near to medium term. Combine one of these landlords with someone who is not planning on sticking around long term and you've got a match made in heaven.
> Definitely not always. Loss is common in business.
Maybe randomly here and there, but you will be homeless if your landlord continually loses money. I said it earlier in my comment, "on average".
If your landlord on average is losing money, you will be homeless soon enough, or someone else will buy it and increase your rent or find a way to be more efficient than the previous landlord.
> but you will be homeless if your landlord continually loses money.
Or you will find yourself continually cycling through landlords as each one eventually gives up and sells to the next sucker. Assuming the next sucker comes along. The landlord might be stuck with the property. Real estate has been an easy sell of late, but that hasn’t been true historically.
> and increase your rent
To which you can say, "no thanks". Sure, they can kick you out[1], but with no rental income their losses will be even higher. What landlord worried about profitability wants to reduce profitability even further? The landlord is beholden to what the renter is willing to pay. The renter couldn't care less about the expenses involved in running a rental property. That doesn't factor into how much they are willing to pay at all.
[1] If your jurisdiction has liberal enough laws. Where I live it is essentially impossible to evict tenants. Even in egregious cases, like the tenant who stopped paying rent, there is currently a year+ backlog in the government signing off on the eviction.
I dunno, these seem like exceptions that prove the rule to me. Seems a time consuming game to seek out landlords who are losing money so that i can save money in the long run. Especially if i don't want to live in a place that behaves like it is also losing money. Ie where repairs and basic needs aren't met because the landlord is upside down and is seeking to sell asap.
Anything is possible, but it seems quite improbable to a, what appears to be, very profitable venture for many corporations. A probable explanation to so many potentially owned homes being offered as rentals, too.
For the significant majority of tenants i cannot imagine they're "winning" over their landlord.
> what appears to be, very profitable venture for many corporations.
It no doubt can be quite profitable where the tenants are willing to pay more than your costs. There are unquestionably markets where that is the case. I'm not sure it holds universally, though. Not everyone is a landlord in San Francisco renting out to software developers with the capability to pay almost anything to be there and a competitiveness to be willing to do so.
Do you really think the landlord in a dwindling town is profitable? As the town dwindles costs rise, and at the same time what incentive is there for the renters to pay more? It is not like there is a lineup behind them champing at the bit to rent the place when they leave.
> Do you really think the landlord in a dwindling town is profitable? As the town dwindles costs rise, and at the same time what incentive is there for the renters to pay more? It is not like there is a lineup behind them champing at the bit to rent the place when they leave.
Yes, anywhere that renting continues to exist. If it wasn't profitable on average it would be sold asap. Again, there's always the chance you're buying from a chain of incompetent landlords who all can't do math and continually fail to turn a profit, i just don't seem that as the likely long term outcome. Let alone trying to rely on you making out better than your landlord.
On average a simple and easy rule of thumb is that your landlord is paying what you'd pay, plus profit. Economies of scale/politics (lower taxes/etc) are the only time i see where on average both parties can profit.
Oh and of course, as someone else pointed out, if you're in an amazingly rent controlled place for a variety of reasons you're probably making out like a bandit. My coworker's mother lived in a place in Seattle that, for some reason, was paying like $600/m (half my rent at the time!) in downtown Seattle. Comparable apartments were going for $1,800+ iirc. A bit of golden handcuffs, because she couldn't afford to move anywhere given how cheap the rent was, hah.
> If it wasn't profitable on average it would be sold asap.
To who? If it can't be profitable, why would anyone else want to buy it? Maybe you'll get lucky and find another sucker, but then you're just pushing the same problem onto the next guy.
Outside of that, about all you can do is disappear as if you never existed and let the fate of the property land where it may. But as humans tend to be strongly loss averse, more likely you'll keep plugging along in hopes that one day things will turn around.
> To who? If it can't be profitable, why would anyone else want to buy it? Maybe you'll get lucky and find another sucker, but then you're just pushing the same problem onto the next guy.
Someone will almost assuredly buy it at a low enough rate. It's either that or actively lose money each month.
Tbh i'm still confused by your argument. Are you saying that you believe people will, month after month, take a loss for years so that someone can live more cheaply in a house than it would take that same person to own the home themselves?
Economies of scale is the only way this plays out in the long term in any stable way. No?
> Someone will almost assuredly buy it at a low enough rate.
Let's examine that. If you were selling it to yourself you would charge yourself $0. We have established, for the sake of argument, that you can't turn a profit renting out the place. Which means that even $0 is too high. Are you suggesting that the rate is negative? i.e. You will pay someone to take it off your hands? I think at that point you may as well just disappear into the night and never come back.
I mean, maybe you're thinking that this hypothetical person is trying to heat the place with $100 bills and the next guy to come along can cut costs dramatically by switching to natural gas, but I think for the purposes of discussion we can assume that the costs are already reasonably minimized. Are there small gains to be made with economies of scale? Sure, but I don't know if they are significant enough here.
> Are you saying that you believe people will, month after month, take a loss for years so that someone can live more cheaply in a house
I'm saying losses in business are the norm. It's not done out of the goodness of one's heart, it's just the nature of business being largely unpredictable and hard. I expect if you are discerning in your choices you can also continually eat at restaurants that see the restauranteur pay out of their own pocket for you to eat there. Even most software never turns a profit.
> Do you really think the landlord in a dwindling town is profitable? As the town dwindles costs rise, and at the same time what incentive is there for the renters to pay more? It is not like there is a lineup behind them champing at the bit to rent the place when they leave.
Oh and one additional thought. To think of it differently, do you really think a landlord in a dwindling town would lose money month after month, year after year? Any sane landlord will be looking to cut the losses asap.
> Do you really think the landlord in a dwindling town is profitable?
Yes, and so do the landlords.
If they didn’t, instead of renting the property out, they'd sell it for the price of one month's rent—someone willing to rent at that price would be even more willing to buy, and the landlord would then be free of the future losses they expect to suffer.
Given the scenario, why would someone pay even a month's rent to take on a larger monthly expense going forward?
More concretely, let's say it costs $1,000 per month to the landlord and the tenant pays $500 per month. The landlord is losing $500 a month and wants to unload the place, so he offers the property to you, the tenant, for $500. But now you have to assume the $1,000 per month cost. What's in it for you to double your expenses?
That is unless the landlord continues to carry the $500 per month shortfall even after the sale. That would be a good deal for the tenant, but why would the landlord sell under that scenario? If you're paying $500 per month out of pocket either way, you may as well ride it out and hope things improve someday.
There is a small seeming exception in regions where housing prices are rising rapidly: if the owner is willing to forgo increasing rent at the rate of housing price increases (which is pretty common among smalltime landlords), then renting can appear to be cheaper than the present-day mortgage for an equivalent property. Of course, in that market as a renter you lose out on appreciation of the house, so renting is only better if you can get bottom-market rates near the top of the market.
Not always. Around here, there were several years where house prices rose faster than rents. The owners were renting them out for less than the mortgage.
That was pretty standard leading up to the Great Recession. It was the new economy, you see, and fundamentals like valuing property based on rental market values was the old economy because property values never go down.
My sister was renting out her house for less than the mortgage for a few years waiting for the price to rise enough to not lose money selling it and she bought well before the real estate boom.
The “experts” were literally telling people that on a regular basis. The “fundamentals changed” so it was ok to sell a person making 35k a half a million house because they could always sell it (at a profit) before the interest rates increased on the loan. Or it was ok to use your house as an atm machine by pulling all the equity out to buy whatever you wanted.
There are further aspects that speaks against home ownership:
a) The money one puts into a house is an investment whose future value depends on the increase or decrease in the value of the property. If a person puts most of her or his money into this investment, this means per se a high risk, because the person's investments are not well-diversified.
b) People run the risk of overspending early in their life, because many of them want to build or buy a house for life, which means building something larger than they would rent at that age, thus generally spending more money on housing (via interest rates).
c) When people have no heirs or their heirs are already well provided for, it makes little sense to own a more or less mortgage-free house when they die. The money could have been spent during their lifetime.
These aspects speak, of course, not absolutely against home ownership. Point (a) cannot easily be avoided, when the property's value is high compared to one's savings and income. But it also means a commitment to saving, which can be a good thing. Point (b) can be mitigated by starting with a small property, selling it later and then buying or building a larger property. Point (c) can be mitigated by a mortgage on the house, if this is possible, or by another financial instrument where the house is (partially) sold but one retains a right to live there until death. -- All in all, however, the danger of overspending is real.
>Point (c) can be mitigated by a mortgage on the house, if this is possible, or by another financial instrument where the house is (partially) sold but one retains a right to live there until death.
In Italy (but probably in many EU countries) there is a way to sell what is called "bare property" (in Italian "nuda proprietà"), while keeping use of the house (in Italian "usufrutto").
The cost of a "nuda proprietà" is of course much lower than the full one, and basically the buyer is betting on the time the seller will still live, whilst the seller is using the sale income to live those remaining years.
It is not particularly common, sometimes the buyer (of course not really poor people) use this form to buy a house for their sons as a form of investment for when they grow up.
> This is why renting is better if you're going to stay less than 5 years.
Sometimes the opposite if you have rent control.
Mine can only pass on property tax increases and capital improvements. As monthly strata fees, interest and repairs go up, they can’t pass any on to me.
I'm in the same boat as you. I live in Southern Ontario (Canada) in a small town (10-14 thousand people). I have a 1000sq/ft apartment, 2 bedrooms, central air/heating . Moved in 15 years ago, rent was $726/month (Canadian dollars obviously). It's rent controlled. 15 years later, I'm now paying $868/month. Just 15 units/apartments here, VERY quiet building. On top of rent, I pay my own hydro, which is about $100/month, water supply is included in rent.
I write software for a living, and over the last 15 years I've saved (invested) enough money to buy any house in town for cash. But I don't see the need, I'm single, no kids, and I work from home (second bedroom is my office). I'm 56 now, and am on track to retire in 7-8 years, with low 7 figures saved. The more I save, the more cheap/stingy I become with my money. While I could easily buy a new vehicle for cash, I prefer to keep my (rusted in places) 2010 F-150, I keep it maintained mechanically, and it is still purring along.... except for the rusted rocker panels that is. :)
There is VERY rarely any units in my building for rent, all 15 units/apartments are rented by long-term tenants. The only way the landlord/owner can raise the rent is when a tenant moves out. About 5 years ago, the couple across the hall moved out, landlord renovated their apartment, and rented it for $1,800/month (same apartment as mine, just a mirror image).
I don't know anything about the US of A, if there is rent control there or not, but it's almost universal in Canada for "purpose built" commercial rental buildings. Private rental units, like privately owned condos and houses, they can raise the rent as much as they want AFAIK.
And this is why rent control is bad for society - very beneficial for those who have it, prevents anyone else from finding cheap land nearby (because the remaining non-controlled housing is in higher demand :/)
A poor renter often can not walk away any time as easily as a home owner.
First and Last months rent is often a deposit, and when you don't have credit is a minimum, 30, 60, even 90 days notice (and the naive or people who can't take a phone call, research laws, or just don't have time) will sometimes pay more.
In effect, poor, don't have credit, then lost deposits + new deposits could be worth more than a down payment.
Oh, and those with credit might have gotten down payment assistance (with forgiving), or a low% downpayment - and their worst loss is that downpayment and 7 years of bad credit; plus it takes a lot longer to evict a delinquent mortgage than a delinquent renter.
I'm not sure of any time I've heard of a house sitting empty for a year. Even in 2009. Until a few months ago, you had houses selling in hours/days, and even now it seems like they still move quickly.
What can I say. I have. The market goes up and down, and in down markets houses can sit for a long time. The last house I had was in a development with several homes in it for sale for over a year.
> The first few years of your mortgage, you aren't gaining much of any equity. It's nearly all interest payments.
It might not have to be that way.
Where I live we have the linear mortgage. Every month I pay a constant amount back on the principal, and a variable amount of interest on the remaining principal. At the end of the mortgage (30 years here) it is all paid off. With this type of mortgage we pay the lowest overall amount of interest.
Because the monthly payment goes down each month, the first payment is the highest. As a result some people choose to get a different type of mortgage instead, even though the linear type costs the least in the end.
> Making money off your house often depends on how good a negotiator you are.
Good luck negotiating with the bank's appraiser. During the 2021 housing craze you might've been able to get 5-digits over closing, but from what I've heard, it was still rare to have a buyer with another $20k to throw your way. Nowadays, you're completely at the mercy of the market and how much the homes around yours are being sold for, relative to your home's square footage and whatnot.
Have you ever bought or sold a home? Unless the buyer is buying in cash, or at least has large cash reserves to give to you at closing, they can only afford up to whatever the bank approves them for, and lenders don't hand out $400k loans for properties valued at $350k just because "the seller made a hard bargain and the buyer agreed". If they did, they'd be upside down the second after closing because a foreclosure means the lender/bank can only sell the house for $350k less than what the buyer owes (and they don't tend to stake their foreclosure sales on whether or not they find another oblivious buyer willing to pay way over market for a house that they could go across the street and get for much cheaper).
Even if you do that, do you assume they have the extra money to pay you in savings? Because the lender for sure isn't increasing their liability for a house they'd lose money on if the buyer skips the first month. Also, this is illegal if you already have a PSA, so I assume you're negotiating before any sale goes pending, in which you'd probably be better off with a regular two-week bidding window and bidding war anyways.
Most of the US is not the west coast, and an FHA mortgage only requires 3-5% down and a credit score of someone with a pulse.
That mortgage principal and interest is fixed for the life of the loan. Rent always goes up. Real estate builds wealth because it’s one of the most accessible ways to acquire an asset that historically beats inflation with easily accessible leverage. You can even rent it out after only a year of occupancy (although one can only have one FHA mortgage outstanding at a time).
There is always risk with any asset, but you have to live somewhere; might as well borrow to capture the upside if you’re going to stick around for a bit. If you’re renting, hopefully you’re still allocating cashflow to investments to offset the real estate exposure you’re not getting through ownership.
> an FHA mortgage only requires 3-5% down and a credit score of someone with a pulse
Those kinds of loans are a huge government subsisdy, contributing quite a bit to the unaffordability of housing. So many mortgages today are backed by the government. These came about in the 1930s with the New Deal.
Without government guarantees it would not make sense for banks to take on the risk of underwriting fixed rate low interest 30 year loans. Many other countries, like Canada and the UK for example, have mortgages that must be rolled over to new interest rates every 5 years. Would you wanted to underwrite a 30 year loan for 500k a couple years ago at 3%, knowing that rate could only go higher?
It's not fair. These government loan guarantees skew the price of housing, negatively impacting people who need a roof over their head and don't have the money to compete with investors who can bid up the aritificially limited supply of housing to make passive income collecting rents.
> Those kinds of loans are a huge government subsisdy, contributing quite a bit to the unaffordability of housing.
Not really.
Everyone bids as much as they can afford to pay on interest payments, which means that if you earn less, you miss out to those that can pay more than you. The interest rates and some other factors are mostly irrelevant to affordability. Change the interest rates, house prices move accordingly to just be affordable to those that bid, because people bid as much as they can to get a home. Things work a little differently in the US compared to New Zealand, but the gross mechanics are the same.
The mechanics of the bidding process, means there is a minimum price wall for most of the housing market in New Zealand (almost independent of the “worth” of the property) because there might be 30% of the population who can’t afford the mortgage payments at that price, so there is a lot of unmet demand below the minimum house price.
I also suspect houses are the engine of middle class working hours: buy something you can only just afford, work your butt off, upgrade to something more expensive if you have more money. Paying the principal is also enforced savings. Without those dynamics I am not sure how many people would retire in any form of comfort, or how the economy could get younger people to work so hard to support the number of retirees we have.
I think I follow, but I'm not sure if you're capturing all the factors.
For example, let's say you lived in Canada and bought a house 4 years ago for $300k with a 5 year 3% mortgage. You can't get a 30 year mortgage in Canada, the banks won't underwrite a loan that long. So you will have to enter a new loan next year, and lets say it will be at 6%. Your payments change, going up significantly. You might have to put the house on the market if you can't afford the new payments.
In the U.S. that same person would have had the option for a 30 year fixed rate government backed mortgage at a 3% interest rate, with only 3-5% down. They don't have to refinance in 5 years=, like in other countries. If interest rates go up, and they had nowhere else to go, their mortgage will not increase.
How could these government subsidies not be contributing some amount to an increase in housing costs? Doesn't that make it harder for people coming later to afford housing, since housing has increased in price so much faster than wages?
Sure, in the short term, changes can put individuals under water. But I am actually talking about how the market moves.
Let’s ignore investors (they matter, but that complicates the argument).
If you have 10 houses and 20 people want a house, then the 10th person sets the minimum price, and they bid a price on the house so that they can only just afford a mortgage. 10 people miss out on a house because they are unaffordable, however the minimum house price was set by the 10th buyer who can only just fucking afford their mortgage payments (mostly interest). So minimum house prices depend on the earnings of the marginal buyer that can just afford a house. That marginal buyer is usually somewhere near median wages, so there is a lot of demand just below that price point, and no house will go for much cheaper because for most people it is better to own a shitty house than to rent.
Over the long term, the interest rate is almost irrelevant, because house prices are caused by interest rates.
There are a lot of misconceptions about house pricing - it needs to be looked at as a system - not from an individual’s point of view.
I think that I follow what you are saying, but what happens now that first time buyers have to pay higher interest rates, and can't afford a large enough loan to tempt sellers out of the low-rate 30 year fixed mortgages that they are currently paying?
In Canada everyone has to refinance every 5 years. I assume there will be more liquidity in their housing market over the few couple years than there will be in the U.S., and that their prices are more free to adjust to current conditions.
I have difficulty seeing how government backed mortgages don't distort the market? It's such a high percentage of first time home buyers that receive these subsidies, and then those owners benefit when they can roll that extra equity into their next house at higher prices, while at the same time these higher prices mean that it becomes harder and harder for future first time buyers, especially now that rates are coming off long term historic lows. I've assumed these subsidies are one of the reasons why housing costs have grown so much faster than inflation and wages, helping those who got in a while ago and could ride the wave.
Let’s stick with the model of 10 houses with 20 people that want a house, and add some spherical assumptions: zero deposit, zero maintenance, zero taxes. 10 people above the median wage will get a house, and 10 people below the median wage don’t get a house. Let’s say Bob earns the median wage and Bob can just afford to spend $50k on mortgage costs.
Assuming an interest only mortgage: if mortgage rates are 10% then Bob can bid somewhere around $500k for a house, but if mortgage rates are 4% then Bob can bid somewhere around $1250k. But fundamentally the same 10 people get the 10 houses, and the same other 10 people miss out.
If we add in principal, taxes and maintenance: over a 30 year period Bob pays the same amount because Bob has bid the house price up to what he could only just afford. The amount Bob can only just afford is fixed by Bob’s income, so the amount Bob can afford is the constraint on what the lowest house price becomes due to his bidding.
That result is because the median buyer had to bid as much as they could afford, so house prices are caused by mortgage costs. The other 10 that got houses were bidding against each other, so they also pay as much as they can afford. Interest rates change the mixture of payments, but they don’t make those 10 houses more or less affordable.
If rates double in the long term then house prices should halve in the long term. In the short term with higher mortgage rates, most people stay in the home they have with the mortgage they have, and fewer houses transact.
Is there a housing shortage? Firstly most people are living somewhere, so perhaps there is already enough housing? Alternatively most people want a better place than where they are living, so there can never be enough housing? There are many places in the first world where there is enough housing, so the least wanted house will sell for $0. Yet high demand areas can perhaps never have enough housing? If New York doubled it’s housing tomorrow, how long before it would be back to the same prices?
A higher interest rate environment could possibly help the less well off, because they can save for a bigger deposit quicker?
All the different dynamics require some deeper analysis to determine what is actually happening. There is a lot of misinformation and common wild misunderstandings about how the market dynamics actually affect us.
I will add two real world observations.
Firstly, only a single digit percentage of homes are sold each year, so houses price expectations are set by a relatively small number of house purchases. A few years ago in Christchurch, New Zealand, auctions changed from nobody bidding on most houses to crazy crazy bidding. The economy didn’t really change, so there was a herd problem with housing prices. Certainly the economy didn’t get better by 30%, but house prices changed that much.
Secondly, an anecdote that mortgages drive house prices: I bought a house in Christchurch for less than half price of the equivalent house up the road. In 2010 we had a severe earthquake in Christchurch, which left many houses uninsurable. Some homes were perfectly safe (could be rented) but were uninsurable for technical policy reasons. Genreally you can’t get a mortgage on an uninsurable house, so in Christchurch we could see the situation where two equivalent houses would go for wildly different prices, because house prices are mostly driven by mortgages. The rental yield on my property would theoretically be high so investors should have bid on it, but they didn’t: maybe because small investors had already spent their money buying houses, and maybe corporate investors felt it was a risky market due to earthquake risk?
Thanks for the additional explanation. You seem to be describing how people bid on houses with offers based on the highest mortgage payment they can afford, and this sets the market prices for housing.
I don't argue that this is not a factor. But couldn't government subsidies also be a factor, especially if they are not given evenly to everyone?
In the U.S. we have:
1) Government backed mortgages, allowing borrowers to get mortgage loans below long term bond market rates because the government/taxpayers are taking on the risk of default. Do they have 30 year fixed mortgages in New Zealand? Until last year you could get a 30 years fixed mortgage in the U.S. at a 3% interest rate (which has increased to 7% this year).
2) First time home buyer subsidies, allowing for minimal 1-3% down payments, instead of the normal 20% or 5% or more with the additional expense of private mortgage insurance, there's currently also proposed new legislation for a first time home buyer credit credit worth up to 10% of the home price, or $15k max for a married couple.
3) Tax deductions for the interest portion of mortgage payments (this was made less relevant for the owners of modest homes a few years ago, by giving everyone a larger standard deduction, but these deductions still help those with homes more expensive than the average, and will become much more relevant with the current higher interest rates)
4) Capital gains tax exemption, allowing $250k of profits (double if married) made from sale of a primary residence to be made tax free, unlike other investments that are taxed at 15-28%, encouraging houses to be used as investments (it's possible to make money as a landlord renting a place out for years then live there two years before selling for the large tax break, people do this with vacation/retirement homes all the time)
5) Two large taxpayer bailouts, because banks were writing 30 year mortgages without taking into account the risks, effectively the government and taxpayers ended up on the hook as a cosigner for all the bad loans (the 1980s Saving & Loans bailout, and the 2008 "To Big to Fail" Great Recession)
6) Restrictive zoning, greatly reducing the supply of housing in desirable areas (where the jobs are), which has the effect of maintaining high prices as the population and demand grows (zoning for new housing overwhelmingly favors single-use single-family neighborhoods on the outskirts of town, and the large developers who build them)
I have trouble wrapping my brain around how the above wouldn't have an uneven affect on market prices.
It seems that people who bought before each of these subsidies went into effect (over the last 85 years) would benefit most, as the prices of houses would be bid up as time went by, according to what people can afford with new subsidies in place.
It also seems that people with more income and in higher tax brackets are being strongly encouraged to invest in housing, as opposed to other possibly more socially productive (but unsubsidized) investments. They can also borrow to leverage their housing investments much more than is legal for other investments like stocks. These subsidized investors act to bid up the price of all housing, competing on price with people just trying to put a roof over their heads.
There's other countries like Japan and Austria that have much different regulations around housing and mortgages and have much different outcomes when it comes to affordable housing, so I've assumed that the stuff I'm talking about makes some kind of difference.
Would you disagree, or say that the buyers income is the only factor that matters?
I guess I wasn’t being clear because I agree with all your points, and I agree that government interventions change prices. You originally said:
> contributing quite a bit to the unaffordability of housing.
> It's not fair. These government loan guarantees skew the price of housing, negatively impacting people who need a roof over their head and don't have the money to compete with investors who can bid up the aritificially limited supply of housing to make passive income collecting rents.
I was trying to explain why I think the cause-and-effect that you were positing above is incorrect. Where investors come in is harder to understand. But investors are a problem in New Zealand too, and our mortgages are approximately variable rate and are not government backed, so it isn’t clear how much 30 year mortgages cause investors to overbid home-owners. If we want people to own their own homes, then that requires government interventions to make it cheaper for first home owners, and more expensive for investors.
Does densification solve anything? Well, New York has very high density but that has not made it cheap. One issue is that there is near unlimited demand for popular locations, so there must be some mechanism where some people miss out . . . Missing out will always feel unfair.
(Disclosure: I fully support all reasonable measures to make housing more affordable)
On the contrary, government backed mortgages provide an opportunity for buyers to become homeowners competing against institutional investors and cash buyers.
They are a subsidy, but that’s not a bad thing if desired policy is to encourage home ownership. I would very much like to see your data that these mortgages are what cause unaffordable housing, versus lack of supply, institutional investors buying up residential real estate, restrictive zoning, and most recently, a real estate asset bubble due to Federal Reserve zero interest rate monetary policy (which caused real estate prices to skyrocket when money is cheap).
> Would you wanted to underwrite a 30 year loan for 500k a couple years ago at 3%, knowing that rate could only go higher?
Tangentially, the bond market seems to be a peace with 30 year mortgage terms, probably because the life of a 30 year fixed term mortgage is typically under a decade (while being amortized over said 30 years).
On the one hand, if the government helps to lower mortgage interest rates, which they have, then they are acting to increase the price of housing some amount, given the laws of supply and demand. In Canada and the UK people will have to refinance every few years in this rising interest rate environment, which will put downward pressure on housing prices.
On the other hand I agree with what you said about institutional investors being difficult to compete with. This is the downside of housing being prioritized as an investment. Investors know that supply is constricted, so they are taking advantage. I would address this by taxing investors and making it easier to increase supply, not subsidies that inflating the price for everyone trying to put a roof over their head.
> the bond market seems to be a peace with 30 year mortgage terms
I'd be pretty easy-going about a government backed loan, too. That's a lot less risk. That means the interest rates are lower than they would be if the government was not guaranteeing them.
Its usually true in urban areas especially given the somewhat global housing shortage that seems to plague most of the big cities around the world right now. Definitely true in mine, renting is way more expensive here and now rates have risen and landlords have sold up its spiking even more due to lack of supply.
As a renter, you're paying at least 1/N of things like utilities and maintenance, where N is the number of renters for that property, right?
In the case of N=1, where someone is renting a single family home, you must be paying at least as much as if you owned the home, since presumably the landlord wants to make some profit on top of all the expenses being passed to you.
In my country, renting carries a strong risk of instability. As our rental laws were written in the 60s, when it was something you only did while at university.
After the Christchurch earthquake, I ended up moving house 3 times in 2 years. Why? Because the landlord wanted or needed the house back.
The first one, the farm the cottage was on was sold, and the new owner wanted it for worker accommodation.
The second one, the owner's house was red-zoned[0], and he needed somewhere to live.
The third one, the owners had bought it for their retirement, and were renting it out until then. Not that I knew that up front.
But, 10 months in, they decided to retire.
So how much cheaper was it to rent, considering the costs involved with moving, the cost of cleaning rentals you're leaving, the time you spend finding a new rental, and the letting fee that every property manager used to charge until recent legislation?
And I haven't even mentioned the cost that such instability imposes on you and your family. My oldest son has lived in about 11 different houses. Renting!
> A renter can walk away any time
In my country, that wasn't true on a fixed term tenancy, you were liable for rent for the entire term.
TL;DR - it depends.
Oh, and fun fact, my mortgage repayments + taxes + insurance + maintenance are significantly cheaper than the rents I'd been paying for significantly worse houses.
Which makes sense, when the "Mum and Dad" investors are using your rent + tax breaks to cover the ongoing costs until they can sell for sweet tax-free capital gains, of course you're paying more.
This is not always true. Often, the price of real estate outpaces rent. I.e. renting is cheaper than buying.
As a renter, you're not paying property tax, insurance, repairs, maintenance, and maybe utilities.
As a renter, you have no risk. Remember 2008 when housing prices tanked?
Making money off your house often depends on how good a negotiator you are.
Most people neglect to consider transaction costs. For example, you have to pay your real estate agent 6% of the sale price of the house. The house also may sit vacant for many months waiting for a deal, this is all dead weight cost.
The first few years of your mortgage, you aren't gaining much of any equity. It's nearly all interest payments.
A renter can walk away any time. This is why renting is better if you're going to stay less than 5 years.