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Comment by jandrese | Hacker News Reader

IMHO the inflation of housing costs has many factors, but one of the ones that gets overlooked is the concentration of wealth near the top. Rich people need safe places to stash their money, and they end up buying real estate all over the country. This isn't just Americans either, US real estate is a popular investment all over the world. But when you are buying real estate as an investment where do you buy, not out in some no-name town in some flyover state. You buy in a place where the market is already hot and ride the wave. Thousands of millionaire investors piling into a market end up pricing out regular folks who just want a place to live.

I'm frankly surprised that we have not seen more real estate bubbles pop over the years. It's clearly unsustainable, yet somehow the market keeps going. Ask your parents if they could afford to buy their home today, even with their best yearly income. Most of them will say no if they lived in the city for a couple of decades or more. I know so many who bought their house for $70k-$100k in the 70s and now see their neighbors sell for $1m-$1.5m. It's insane.

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Here in CA we're riding one hella of a Macro bubble that no one sees. This certainly can't continue.

The unwillingness of voters to expand the housing supply is one the greatest social ills of our time. I can accept and understand that those who benefit don't want to address the issue. But, there are countless many who don't benefit from it at all.

Why is this not a great national issue of enormous debate? Why is there so little visibility? everytime i see a list of voter related issues, housing is never mentioned.

Shelter is a fundamental human need - it's at the very bottom of maslow's hierarchy of needs. If humanity can't even get past this bottom layer, we're not going anywhere.

The entire concept of real estate is wrong. You hear it all the time. Whenever real estate prices go up, people react like it's a good thing - it's not. For society to make progress, prices must come down. It's not just for those who don't have a home. Property owners should benefit too, with lower tax bills. Of course prop 13 creates more perverse incentives than i can count... I could go on, but we've already discussed this millions of times.

They benefit in the form of less congested streets and easy-to-find parking, light coming through their windows (rather than blocked by tall buildings across the street), low building heights giving their neighborhoods a familiar small-town feeling, etc.

To be clear, I think it's unconscionable that we prioritize these concerns when rents are so high, but average people absolutely do benefit from restrictions on housing supply as long as they are secure in long-ago mortgages and grandfathered rent control.

One of the NIMBY talking points is that upzoning creates a profit incentive to destroy rent-controlled buildings and replace them with higher-density market-rate buildings. Rent-controlled lease holders actually become more secure in their positions when the neighborhood downzones.

This is really about seniority/tenure in an area, and if there's any serious reform, it will likely be to further protect those with grandfather status from newcomers.

> Whenever real estate prices go up, people react like it's a good thing

The problem is that, based on how things work, a significant amount of our assets are tied up in real estate. If you're a homeowner and your home's value tanks compared to the rest of the market, you're screwed! You can't move to another place because you've lost all of the money that you put into your home.

It gets even worse if you need the money: Think of elderly who sell their homes and use the profits to pay for assisted living.

Or, look at how we pay for education: We use our homes as collateral for education loans!

In the long run this hurts even the homeowners. They can never move and they're slaves to the needs of their home. At that point the home is equally a liability as well as an asset; if so much of your worth is tied up in it that you are destroyed if anything happens to it, isn't that slavery not freedom? Sure they may feel some selfish benefit if housing prices go up but it's a terrible prisoner's dilemma - everyone else's home values are going up as well; so you can never sell or move. For people that have a home because they need a place to live and not as an investment, that's not wealth, it's just a number on paper.

Just move to a cheaper part of the country and then illegally rent it out. This lets you profiteer off of more than one side of the shortage. You don't have to give up that property you don't particularly need anymore but could never acquire again. I know plenty of examples of people doing this.

Why is this not a great national issue of enormous debate? Why is there so little visibility? everytime i see a list of voter related issues, housing is never mentioned.

Good question, but I think the answer is that it's simply not a national issue. In New York City, you can bet that it's a campaign issue across local politicians, and it's in the news weekly. Also, it's not true that one 'can't build' in NYC due to regulations. While there are regulations (as one would expect of a highly densely populated city), there's plenty of building. The price of land, however, is obscene.

Meanwhile, that $1M condo that's one bedroom apartment you purchased in Manhattan (in Manhattan it's probably small) or even the $800K 2 bedroom you purchased in Brooklyn (in a cheaper part of Brooklyn, like Bed Stuy or Bushwick), you could live like a Sheikh in a place like Omaha, NE or (perhaps) Dallas, TX.

Hotpots like SF, NYC, Boston and so on - the smaller, dense cities with jobs and no land left - no so much.

It's not a national issue. Everyone wants to live in California because you get nice weather, high salaries and cannabis edibles rain from the sky. You're a victim of your own success.

I've found that I prefer living in the Midwest and having an extra thousand or so a month for travel and stuff than living in a more hipster city.

Midwestern cities are experiencing housing inflation too. Urban houses that were 140k five years ago are well over 200k now.

Intuitively it seems pretty rare for Midwesterners to live in cities or "urban" houses. Most of us seem to be in the metro areas, but in freeway-connected suburbs, not urban cores.

Yeah. I'm paying 1k a month for 1k square feet about 15 minutes from Minneapolis. When I want to do stuff in the city it's pretty easy to drive or use Lyft. I spend most of my time camping, playing board games, or doing martial arts and none of those are improved by actually living in a city so it makes little sense for me to live in one. Not everyone has the same hobbies so I understand if some people need cities but I talk to a lot of people who are paying 3k a month on the west coast and living a very similar life

We have the same issue in Australia and it is very much a national issue. The problem with bubbles is that once they've begun and have enough people invested in them it becomes political suicide to deflate. You can't go to an election with a promise of reducing the value of the biggest asset most people will ever own. I doubt you can even win on a promise to stop it inflating further because most people have factored in future increases.

Ultimately I think trying to slow down or deflate the bubble might make things worse for more people than just letting it pop.

I'd assume it was forced by all of the initiatives of making the "American dream" of owning a home a reality for as many people as possible.

Real estate shouldn't be an investment, it shouldn't raise in value, and it shouldn't be possible for a huge chunk of the population to fund the financial sector through mortgage interest. It's a tax on everyone designed to funnel wealth upwards towards a sector of capital owners that get paid for doing very little.

Regulations and taxes should be arranged such that it is very expensive to own real property that isn't for your own personal or business use. If you want to act as a gatekeeper for real estate, at least a large chunk of the profit should go to the state for the benefit of the public. If it's expensive and not beneficial to own things so others have to pay you to use them, the market will shrink dramatically and more people will actually be able to own homes.

Yep. And as you also know, there's so much money in it that we won't see it change in our lifetimes. Why work when you can let the land work for you?

Why spend all your income today when you can save and invest some for the future, thereby allowing you to consume more later in exchange for consuming less now?

Investments, including land, are owned on the backs of consumption foregone in the past.

Just no.

All investments are not owned on the back of consumption foregone in the past.

Unless you believe that someone with 100 million dollars is "foregoing consumption" when they invest (particularly in real estate).

I do believe that. They can take that $X MM and put it into an investment xor into a yacht/airplane/supercars/vacations.

One is consumption; the other is investing.

Fancy-ass houses and condos are consumption. Most of these people buy up a place, then completely gut it, replacing everything with the new trendy kitchen or whatever. Even if they sold it for more than they paid, there's no way they made money on it after renovations, taxes, utilities, upkeep, and staffing.

But land is special in that it requires no maintenance. Its not the same as any kind of capital that requires care or maintenance in the long term,like a house itself.

There is a case to say that big money that buys land does something to make it more valuable, and hence there was care and investment. But most of the time, land is something bought long ago, that has benefit basically forever.

Does that then make unimproved land a particularly good long-term investment in your opinion?

No, but its still is an investment with an expected positive return. Otherwise nobody would have any and would tend to sell it at 0.

Land also has the chicken-egg problem capital doesn't have. The first one that built a house didn't consume his capital, the first one that got the property rights didn't consume capital whatsoever.

I am closer to your position than to the other commenter in this thread, just wanted to distinguish that land can capital do have some differences worth thinking about.

Most places have real property taxes (and to a lesser extent, adverse possession laws) that act as a beneficial (to society) drag on infinite holding periods of land. That tends to be a tax on the current (improved) value of the land, where others have made an argument that a tax on unimproved value would work differently (in some ways better, in some ways worse).

My apologies on the prior post; I meant to imply that buying unimproved land in the "right" place is a great long-term investment.

There are so many things wrong in this country: real estate should be highly taxed, financial investments should be rightly taxed. Failure to do so is just maintaining a constant drain of money from the larger part of the population to that small group of rentiers. Instead, politicians want people to believe that everyone can get rich at the same time investing in housing and stocks. We are starting to see the results.

Where will poor people who are unqualified for mortgages live if there are no landlords? Some kind of government housing?

> Real estate shouldn't be an investment, it shouldn't raise in value,

This is an economical impossibility. Land becoming more valuable is unavoidable, because of the weather, of the people that surround you, the availability of jobs. Rent is high in SF because people are moving to SF and finding high paying jobs. Its not an unrelated effect.

So if there is land more valuable than others, and you taxed away all the value of the land (lets supposed that rent is taxed at 200%, hence all rents drop to 0), you are now going to see something new: people buying land. Now instead of renting, the only operation left is buy and sell. Provided it is cheap at first, because investors would all dump their properties, it will be impossible to get later on. Its an extreme case of rent-control.

> I know so many who bought their house for $70k-$100k in the 70s and now see their neighbors sell for $1m-$1.5m. It's insane.

Yet those returns (10x-20x) are lower than having invested the purchase price in the S&P500 (with dividends re-invested), which returned a 21x to 30x total return over that same time period (depending on which exact spot you chose to be the "70s")

https://dqydj.com/sp-500-return-calculator/

The house also provided a place to live, so you need to goose the house effective returns a bit there, but that place to live also came with overt property taxes, maintenance expenses, etc.

> The house also provided a place to live, so you need to goose the house effective returns a bit there, but that place to live also came with overt property taxes, maintenance expenses, etc.

indeed. there are also more transaction costs involved in real estate, too. driving around to look at properties, real estate agents, significant paperwork, etc.

Unfortunately, homes have a lot more protection from taxation of the returns than mutual fund investing: you can only put a small amount each year into a tax-protected account, and if you don't, any rebalancing or dividends produce a taxable event.

In contrast, the capital gains from owning a home are exempt for a certain amount, and "imputed rent" (the savings from not having to rent a similar house at current rates) is untaxed, like any other cost-saving purchase. [1]

(One small advantage the other way is that you don't have to pay "property taxes" on mutual funds, though you do have to pay management fees, which, even for index funds, are of similar magnitude.)

[1] IIRC the original income tax did cover imputed rents of sufficient magnitude.

> you don't have to pay "property taxes" on mutual funds

In my view, the tenant is paying the property taxes on the space they rent to live in, so the mutual fund investor (who is also a tenant) is paying property taxes, just on their housing not on the funds.

It's rolled into the rent, but there's no reason to me to think that the landlord is paying it when the tenant is the one bringing the money into the system.

I beg to differ. You, as the landlord, don't necessarily set the rent price--the market does. If the market is going for lower than your monthly upkeep cost (including property tax) then you will be paying the tax and other expenses.

It is implausible for this to happen at scale. Presumably all properties in competition for the same clients will have comparable tax and each landlord will implicitly factor taxes into their prices. This should have an effect, similar to collusion (by with no malice), of effectively raising the cost.

The taxes get factored into the price of the land and the house, not rents. If demand for housing falls such that rent does not make owning a house worthwhile, it gets sold (or force-liquidated through foreclosure), and the new owner at a lower cost basis will let it out at market rates.

> The taxes get factored into the price of the land and the house,

So you have checked with every property owner and verified this?

I actually rent now, from my father (because he makes bad real estate decision despite having his real estate license). After talking with my landlord, who I know well and often talk to, I learned that in this area there are laws about how low rents can be. In his specific situation he is not allowed to rent the property for less than 125% of the price of his mortgage payment which must include the property taxes. Apparently, this is to insure there is money repairs.

So as for houses in Omaha I am fairly certain you are factually in error. I suspect other jurisdictions have other things going on in general, but it seems reasonable that most people do simple things like take their expenses into account which includes tax.

Well the mortgage got them that initial capital in the first place to buy a home. Banks weren't giving them a loan to buy an index fund so it's not really a fair comparison, especially if you ignore opportunity cost of paying rent as you state.

S&P 500 might have been a better return, but I can't borrow hundreds of thousands of dollars at < 5% interest invest in the stock market.

Also, do you think property taxes and maintenance expenses aren't passed on to renters in the form of higher rent?

Of course they are, but they are excluded from the "so and so bought for $70-100K in the 70s and just sold for more than a million" calculus. The latter was my point about needing to include them in the comparison.

Well, there are a number of things that complicate the comparison:

1) Mutual funds get hit with a lot more taxable events (any rebalance or dividend), and only a small fraction of that can be shielded.

2) Even if you could borrow to invest, stocks fluctuate a lot more and you would be subject to margin calls.

3) You are implicitly paying maintenance/insurance costs as a renter, true, but only as a renter do you benefit from division of labor and tax-deductibility of such expenses.

4) For the specific time history: It would have been difficult in the 70s to buy something like an S&P index mutual fund; Vanguard started then but you're unlikely to have heard of them. Then again, you wouldn't be borrowing at 5% either!

> I can't borrow hundreds of thousands of dollars at < 5% interest invest in the stock market

Of course you can [0], and it's even cheaper than mortgage interest (because it's much easier to margin call a stock a portfolio than a house!).

[0] https://www.interactivebrokers.com/en/index.php?f=1595

He can only do that if he has 6-figures of net equity in his IB account.

It's easy to make money if you are already rich. The parent post is an excellent example of that. If all of those poor plebes who bought homes in the 70s had instead inherited their home and invested millions of their own dollars in the stock market just like those smart rich people they would be way better off today.

One interesting thing I learned: as a homeowner, your home doesn't depreciate. As a landlord, the home you own is an asset and you take depreciation on it. That's a massive tax benefit.

> That's a massive tax benefit.

Which is subject to depreciation recapture upon sale, so it's more of an immediate cashflow benefit than a long-term structural benefit. (It can also be seen as a form of "hand-out" to renters, but it's unpopular to complain about that, so few people do as compared to those who object to mortgage interest deduction.)

In Canada there is the "Smith Maneuver" which involves a Home Equity Line of Credit (HELOC) where you borrow against your equity and invest it, and write off the interest payment on the HELOC.

So technically you're using low-cost mortgage lending (2.15% rates are possible) to invest and get 5-7% returns on average, plus writing off the interest payments.

Sounds very safe.

Interest rates were also very high in the 70's and early 80's.

If we could get housing interest rates up to 8% you'd see a large decline in housing prices. If it got up to 1970's and 1980's rates it would be around 17%. This would dramatically reduce the price of a typical house and become a darling market for people who have can pay in cash.

If rich people just stashed they money in housing, you would see a higher gap between housing and rental prices (because if there isnt demand to rent those places, but there is demand to buy them, the gap would increase).

I dont think thats whats going on. Concentration of work in cities is a global effect, and although china erupting cash over the world might change some numbers,it wouldnt explain the migratory movement from rural to cities.

The easiest and most classical explanation of housing prices in the US is that construction took a huge hit in 2008, and getting the whole system to produce more housing for the demographic growth is lagging. I remember seeing some data about that happening.

A more esoteric one is that we are living in a world with a curious monetary policy, with low interest rates but no inflation, and that as money gets more expensive, housing demand will lower and so will its prices.

If you look at the US, people mostly congregate around areas with nice weather and flat geography. The rust belt is arguably a reaction to Air Conditioning not offshoring.

100 years ago being north of Virginia meant trading milder summers for worse winters. But, summer with high humidity and no AC can be brutal.

People also mostly congregate near bodies of water.

I think that has been somewhat broken as small ports and small farms have become less important due to contanerized shipping. Las Vegas is a rather striking example, as it's close to lake mead but not centered on it like say NYC, DC, or SF. The draw of living near other people still pushes people to the coast, as does recreation.

> If you look at the US, people mostly congregate around areas with nice weather and flat geography.

New York City and San Francisco beg to differ...

NYC is flat, and pre-AC had very nice weather.

San francisco is on the flat part, look at a topo map from San francisco to San Jose and compare elevation with population density.

This is exactly why property taxes should be higher for non-resident owners. Squash the real estate as foreign money stash urge a little.

Henry George explained it all a century ago: http://www.henrygeorge.org/pcontents.htm

I think this confuses cause and effect.

Rich people buy real estate because it steadily rises in value. Not the other way around. If motorcycles had the same price development, they'd buy motorcycles instead.

The interesting question is why real estate prices behave like this.

On average, (after smoothing out the bubbles like in 05-07 and the crashes like in 08-09) real estate prices track inflation. Deflation is exceedingly rate, so this behaviour of nominal prices rising steadily is to be expected. Unless you mean real estate prices rise steadily in real terms, in which case I'd like to see data behind that assertion along with corresponding interest rates as mentioned in another comment.

Across America prices may follow inflation on average, but in the high tech/low construction centers I think it's rising much faster than that.

And that's where people buy housing as investment.

The only high tech/low construction center is the San Francisco Bay area. Seattle has had a lot of construction over the past few years. Since housing supply isn't perfectly elastic, it can take a few years before supply shifts to meet demand and in the mean time, prices rise. New York is definitely a high tech center but it is also a center for a lot of other things too. I'm not sure if it is high or low construction but there are other factors at play in the high rents there that aren't at play in other tech centers.

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