Low interest rates in advanced countries have pushed money into real estate
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Everybody who has been renting or has been buying a home in the last 10 years knows this...
All the cash that's been "pumped into the economy" has only fueled inequalities. It's gone in the pockets of those who were already wealthy enough to secure a loan. And yes, they did buy houses, and bitcoins, and stocks. Oh and then that caused the prices to go up, so whoever forgot to invest started doing it, pumping the early birds' wealth up, allowing them to borrow even more. The whole economical landscape is bubbles everywhere.
And now the FED can't really reverse it. If you start raising rates, and stopping QE, you're not actually getting the money back from the people you gave it to, you'll just get a lot of businesses to close.
We need to erode all that capital concentration, and the only way to do it without hurting the regular guy is through heavy taxation.
If you are wealthy enough, you can just leave or find a way to bypass taxes. In the end Laffer curve dictates there will be less money to give to freshly unemployed low income families whose employers just moved to more friendly markets.
Stop the money printing machine. It was supposed to be stopped earlier and it will hurt now more than ever. But the more credit you create, the more will assets that are usually bought on credit cost.
what does that mean?
We are beating a dead horse.
If we could just let market decide the interests and not money printer, the economy would stop inflate itself. The only money banks could lend would be those that the bank really owns.
You (and many others) have some money, but you don't need it now.
The bank lends it out and puts it to work. They keep enough to pay people back, assuming there isn't a bank run.
If you banned fractional banking, people would find a new way to invent it.
But government runs the same scam because they also don't have enough money to lend so they borrow money from another bank, namely FED. This bank also doesn't have the money so they start up the printers and act like government owns them.
The government debt is so high that if you sum up all the debt government owes and add what government promised (social security etc.) you will find out it pays so much in interest that it's basically bankrupt.
Somehow we ended in system where no one has money, everyone owes each other and we all act like it's okay.
We all know this will implode and the longer we wait the worse it will be.
while this is sound in theory, the past has shown that if you do it this way, there would be possible run on banks, as well as credit crunches that hurt more than help.
If money is tight, because lots of lenders fear lending out (who would lend money out that they can't guarentee a return of?), then people who really need to borrow would pay dearly for it (and may be not be able to afford to pay). This would hurt, and probably hurt a lot more than the current "inflationary" printing. You just don't see it because the current system is actually good enough, and all you can see are the minor flaws.
This is like saying we dodged withdrawals by taking more of the drug.
These are not minor flaws. We are creating money from nothing which means pereptual inflation which means your savings are no longer safe. It's much more sound to just borrow money, which makes you dependent on the mercy of state regulations.
We don’t need to take every math object as a physical truth.
Laffer especially should be seen a political tool more than an economist.
Where it is a political tool is where it was applied before doing that empirical work, and where it is presented with unrealistic shapes (including, notably, most of search results when I search for "Laffer curve"!)
Laffer has never had and never will have anything to do with pre-existing human behavior itself.
He never defined any of the math objects he used. As far as I can see he’s not invented any net new value, he translated English economic babble into math. It’s elementary abstraction by today’s standards. Since most people could barely balance a checkbook in his day, he’s a genius for life.
It’s like taking a child’s drawing of a tree and acting like the child gave life to the tree.
It’s ridiculous to foist prestige on idiots wielding arithmetic. Look at the misogynistic, misandrist, classist, racist, culture our elders grew up in and chuck their prestige in the bin; they’re human like everyone else.
You want to put a number value on others? Here’s yours; 1 of 7 billion+.
Rich people are rich because everyone else worries if we tax them, everyone can’t magically become rich. They’re aren’t actually smarter, stronger, better; it’s just propaganda; aka today as data science.
Bob bought a house this year. He paid $500,000 even though it should've been $200,000. He's paid $100,000 and still owes $400,000. If you cause his house to be worth $200,000, as it ought to be, regardless of the method, he's going to default on the loan and you'll have screwed him out of $100,000 and (at scale) bankrupted all the banks.
How is raising somebody else's taxes going to fix that?
> And now the FED can't really reverse it. If you start raising rates, and stopping QE, you're not actually getting the money back from the people you gave it to, you'll just get a lot of businesses to close.
The solution is to move the incentives back the other way.
Raise interest rates on debt. This will cause people to pay back existing debts. At the same time, print money and give it out to everyone. This will give people the money to use to pay back their debts, without screwing over the people who didn't take out debts to begin with, because they still get the money.
Now asset prices come down in real dollars, because people aren't as willing to borrow money to invest when interest rates are high. We need that not to happen in nominal dollars or everybody will be underwater on their mortgage, but that's okay, because we're printing a lot of money and all the people who didn't have debts to pay back are going to spend it. We get inflation, which counteracts the nominal fall in asset prices.
Instead of having asset prices fall to parity with wages and consumer prices and causing everyone to default on their mortgages, we need wages and consumer prices to rise to parity with asset prices.
It's got to be one or the other.
As long as Mr. Bob is actually living in his house and not just speculating on the market, he's still quite likely to come out ahead in the long run, despite the unfortunate setback.
When that life change happens, if you try to sell your house in a market downturn, it would be at a tremendous loss where you would have to cover that shortfall in one single payment. Ex: you owe $500k mortgage on a house that’s only worth $300k, you would have to find $200k in cash (and no bank will lend this) to be able to sell your property. And if you can’t do that, well…then you can’t move.
Alternatively, in a hot market, you could sell your house for 650k, and since you only owe 500k on it, you would get a $150k lump sum (tax free here in the USA). Even if you didn’t want to sell the place, you could still rent it out, and also take out a home equity line of credit, where you still could get nearly 80% of that 150k in a tax-advantaged lump sum and still have the rental cash flow coming in to pay for that loan while you’re living that lavish lifestyle. Since it’s a line of credit, you can extend this lavish lifestyle for quite a while until… you guessed it, the market tanks and you’re back underwater on your mortgage.
There was a show on national television in my country that had a bunch of cases like this after the 2008 crash. The typical scenario was a couple buying a house pre-crash to start a family, then breaking up after the crash and having to deal with that and a house that neither of them could afford on their own, and with the prospect of ending up with a high-interest mutual consumer loan if they sell to cover the rest of the loan.
I remember reading a forum post from a dude who was being forced by the bank to start paying his ex-wife's share of that consumer loan because the bank had given up on her.
Now, there are some theoretical ways out. They could haved stayed together for perhaps 10 years more, even if not romantically. Perhaps easier said than done. They could try renting out - but not all people have what it takes to do that on top of a full-time job. And it requires coordination between two people who may be fighting. They could try to make the bank write off some of the debt, or lower the interest. Actually, that solution sort of worked in some cases, not that they managed to do it on their own, but the show had a financial expert who negotiated on behalf of them.
Raising taxes and/or raising interest rates decreases speculative forces. Property tax is especially effective in combating speculation, since you have to pay it even if you let the house sitting around waiting to appreciate and be sold (and worse, as it appreciates, you might have to pay more of it). Taxation that discourages speculation to the benefit of people actually looking for housing (and not assets that will appreciate) is a good idea.
> Instead of having asset prices fall to parity with wages and consumer prices and causing everyone to default on their mortgages, we need wages and consumer prices to rise to parity with asset prices.
Either housing prices fall back to earth, or the earth expands so that housing prices don't seem that high anymore :). The latter is obviously just old fashioned universal inflation (wages and consumer prices rise), and really screws someone saving for a housing downpayment (not to mention, loans would be harder to get as inflation picks up).
That Bob is indeed really screwed, and so is the bank. But if we're printing a bunch of new money and giving it to everyone equally, that Bob doesn't get any more than the original one.
> Raising taxes and/or raising interest rates decreases speculative forces.
Raising interest rates especially, and that's the one I'm suggesting.
The problem with raising property taxes is that it equally impacts people who aren't speculating. You have to pay the same amount even if you only bought a house because you needed somewhere to live; even if you're not borrowing the money.
It also doesn't solve the general problem, because then people move money into things that aren't subject to property tax, like stocks. We don't need to deflate the housing bubble by creating a stock bubble the size of the sun.
> Either housing prices fall back to earth, or the earth expands so that housing prices don't seem that high anymore :).
Right, exactly. And housing prices falling screws people with mortgages and causes defaults, which is so bad that we haven't been able to solve it since 2008.
> The latter is obviously just old fashioned universal inflation (wages and consumer prices rise), and really screws someone saving for a housing downpayment
Their existing savings will be the same percentage of the house as it was before, because the nominal housing prices are staying the same -- inflation offset by higher interest rates. Then their nominal wages go up, so they can save the rest of it more quickly, which is the entire point.
> (not to mention, loans would be harder to get as inflation picks up).
Not harder to get, just higher interest rates. Which is, of course, the idea.
If you want to make it easier to buy a house, fix zoning so we can build more housing.
Property taxes is simply rent you pay to your locality based on the value of your property. But it acts to reduce speculation because you have to pay it whether you are using the property or just holding it for the appreciation.
> because then people move money into things that aren't subject to property tax, like stocks.
And they aren't keeping it in real estate...so at least we don't have to compete with Bob Speculator when trying to buy a house.
> Their existing savings will be the same percentage of the house as it was before, because the nominal housing prices are staying the same -- inflation offset by higher interest rates.
But then why did I save for that downpayment in the first place? If I saved $200k over 10 years...and then houses double to $2 million while I go from making $100k to $250k/year...well, I was really stupid those first 10 years. And not only that, but my downpayment of 20% is no longer viable...I have to pay 40% to make the loan officer comfortable with the loan. Ugh, now I need to save $800k. Ugh. Maybe I can save that in the next 10 years with my higher salary.
> If you want to make it easier to buy a house, fix zoning so we can build more housing.
Yes, because every mega city in the world that has focused on density is affordable? Yes, Shanghai, Hong Kong, Paris are plenty dense, but they are not affordable by any measure of the word. Zoning isn't the only thing that needs to be done, you need to deal with the speculators, and you need a sane inflation rate so that people can afford to buy those houses eventually.
Interest rates only apply to people borrowing money, which is the thing that promotes speculation. It even promotes speculation among people who are living in the houses, because then they try to buy a bigger one until so does everybody else. With the result that everyone ends up in the same house they would have before, but pays more for it.
Property taxes apply even to people paying their own money for their homes, which is an undesired side effect. It makes it more expensive to own a home, which is the thing we were trying to prevent.
> And they aren't keeping it in real estate...so at least we don't have to compete with Bob Speculator when trying to buy a house.
So then you can buy a house, which won't have a very high resale value because of the high property taxes, but then you can take the money you saved to save for retirement by investing in other assets like stocks and bonds. Which you just made unaffordable.
> But then why did I save for that downpayment in the first place? If I saved $200k over 10 years...and then houses double to $2 million while I go from making $100k to $250k/year...well, I was really stupid those first 10 years.
Let's compare our alternatives here. You spent ten years to save up a 20% downpayment, now you're ready to buy a house. Suddenly a change occurs.
If a change is that the nominal value of the house is cut in half, whether you get screwed or not depends entirely on whether you buy your house the day before or the day after the change. That isn't really ideal. This is also, effectively, deflation -- an incentive to hoard cash. That's bad.
If the change is that your nominal wages double, it doesn't matter if you bought the house yet because the nominal price of the house stays the same. It just gets easier to earn that amount of money going forward. It would be nice if we would have done this ten years ago, but we didn't.
> And not only that, but my downpayment of 20% is no longer viable...I have to pay 40% to make the loan officer comfortable with the loan.
The price of the house is the same and now you're making twice as much money, so the loan officer is more comfortable giving you the loan, not less.
> Yes, because every mega city in the world that has focused on density is affordable? Yes, Shanghai, Hong Kong, Paris are plenty dense, but they are not affordable by any measure of the word.
It's not a question of absolute density. What you need is more housing than you have people, so that you're only paying the construction cost and not competing over artificial scarcity because further increases in density are illegal. The amount of density needed for that in San Francisco is different than it is in Houston.
> Zoning isn't the only thing that needs to be done, you need to deal with the speculators, and you need a sane inflation rate so that people can afford to buy those houses eventually.
If you deal with zoning then you deal with speculators, because increasing the housing supply by a sufficient amount prevents prices from skyrocketing, which drives away speculators. Nobody expects the price of housing to double if a 20% increase in price induces enough construction to cause it to fall back to the original price in five years, and nobody speculates unless they're expecting prices to rise.
Yes, interest rates also promote speculation. But they aren't the only thing: if you amassed capital, you wouldn't need loans but could still speculate on the property market. Property taxes then act against such un-leveraged speculation.
> Property taxes apply even to people paying their own money for their homes, which is an undesired side effect. It makes it more expensive to own a home, which is the thing we were trying to prevent.
Property taxes represent the reality that living somewhere costs money beyond the initial outlay to buy the property. They also makes it more expensive to rent a home, but it is money that needs to be paid anyways. Roads, schools, and other city/county services don't fund themselves. By tying it to property ownership rather than use fees, it creates a built in disincentive to hold property and not use it productively (because those taxes have to paid if you use it or not).
> The price of the house is the same and now you're making twice as much money, so the loan officer is more comfortable giving you the loan, not less.
If inflation is high, the loan officer isn't really comfortable giving you that loan at all. If the high inflation happens overnight and then stops...that's a different story, but that usually causes a free fall in confidence anyways.
> The amount of density needed for that in San Francisco is different than it is in Houston.
Dense cities are more expensive than less dense cities. Not because they are more dense, but because they are more desirable. Increasing SF density doesn't make it cheaper to live there if it also increases its desirability. More demand just springs up to account for the new units. You have to do something like Singapore has done instead: make housing production and distribution more public (ironic, given that Singapore is often considered the most libertarian country out there).
> If you deal with zoning then you deal with speculators, because increasing the housing supply by a sufficient amount prevents prices from skyrocketing,
That has never shown to be true at all. The Chinese have tried this, and...without a property tax anyways, it has just led to a lot of bought for but empty apartments. A better alternative might be Japanese style depreciation (require that housing be rebuilt every 30 years, hey, it also means a lot of construction jobs).
Whereas if you raise interest rates, housing prices go down relative to wages without any change to property taxes.
Except your policy is inflationary and Bob with 10x homes is highly in debt with likely fixed interest rate, so inflation likely is very good for him (ie you dramatically increased his net present value/gave him a lot of money in real terms).
We need to let risk takers fail. They gambled and lost. That should serve as a warning to other risk takers to better calculate their exposure.
When the forces that cause the market to crash are the feds monetary policy it’s a tough sell that it’s actually a free market. To first order individuals should be able to purchase shelter assured that it’s fairly priced. The concerns should be like “the foundation is cracked” not “JP Morgan is pumping house prices.”
Of course it's not a free market. Has America ever had a free market? When is the last time that the real estate market hasn't been manipulated in some way?
Land is a zero sum game, you can't pretend same laws apply to it and iPhones
i still don't understand what these distortions being claimed are. "artificially low" interest rates isn't a distortion - it affects everything, and the rates may not be that low, compared to the growth. As for taxation, real estate isn't treated too differently from any other forms of investment.
It needs utilities, shopping centre, major metro line, highway, arts, jobs, good schools, and general 'nice area' vibes created by artists on the verge of bankruptcy. None of those things area created by the construction company.
In fact randomly building houses leads to congestion, lack of places in schools and other facilities, and miserable living conditions.
What have you measured to determine that these markets 'work fine'? These are terrible markets, speculation is higher than productivity, fraud is endemic, prices are volatile and liquidity is low. Antiques and arts are infamous for fraud and enabling tax evasion.
People don't need limited edition shoes to survive, so we can just ignore the problem.
Bob's N+1th house is an investment.
When buying a house, bob becomes heavily invested.
At the same time some of us salaried folks have gotten small windfalls this year, but most jobs haven't seen a comparable rise in salaries.
All of this leads me to be on team taxation.
I’ve recently seen in a youtube video by the NYT that there are actual lobbies against changing low density housing zones to high density housing zones: https://youtu.be/hNDgcjVGHIw?t=253
I’d recommend to give it a watch :)
Imo the soviet apartment complexes are a good idea. I live in one as well (Germany), and I can afford rent without hassle.
Now you're paying a form of interest to borrow someone else's house on a floating rate. The price of the underlying asset continues to increase, which applies upward pressure on the cost to borrow the asset.
I use the yield to determine if a given property market is speculative or not because rent represents real utility (“yes I would like to live there at that price”)
https://www.commonfloor.com/guide/price-rent-ratio-grows-in-...
China and India probably share similar low rent yields in cities with more speculative real estate markets.
Now we're talking. Related: how do you feel about shorting TSLA? Or GOOG? If you think its appropriate to do so, what fraction of your net income or worth are you willing to place on that bet? I'm pretty sure they're overpriced, but I'm not kilobucks/month sure.
Now the real crux of it is that I do not have unlimited cash flow to pay peak rent. The previous rental I moved out of has somehow gone up by 85%, a number which would push me into savings or have me calling my boss for a raise.
Shorting housing by renting risks you burning savings or moving to stay out of the bubble. Buying when the market is high is a hedge against the market going higher.
Yeah. But you only look at it from the perspective at staying at one place. What if you want or have to move somewhere else, but in the meantime your house lost its value ("marked crashed"). Now you have to pay both rent in the new place as well as your mortgage (that his now way to high for what you have).
In other words: you can't afford to move anywhere anymore, because of your high mortagage. If you had just rented, you would still be flexible and could move whereever your current pay allows.
Don't fall for survivorship bias. Prices rise for a longer time, but in the short times when they fall, they fall much faster.
and then the landlord can increase the rent by any amount and then Bob has to look for a house again.
10 years ago my first real job was a research assistant position in Copenhagen. Housing was very reasonably priced, and I could buy an apartment in the suburbs with just 3 years of salary. I rented a nice place with 1/4 of my salary. It was great.
I then moved to Cambridge, and while the university is cool, real estate took most of my free income. It was a nightmare. More than 1/2 of my salary went to renting a small flat in the middle of nowhere. During the course of several years, my I had to move houses six times because landlords wanted more money, or because agents wanted to generate fees and the house actually sat empty without a tenant for pretty long.
Now, looking back at Copenhagen, and mostly anywhere else in the EU, is a nightmare. Salaries paid by the government have barely increased because inflation is said to have been really low. But buying or renting is easily 2.5x more money. If you live alone, it's hard to make both ends meet.
these numbers aren't directly comparable.
The rent should be compared with the interest cost of the mortgage plus the capital cost of the deposit (which at minimum is the risk-free rate).
So if you paid 1/4th of your salary as rent, but the apartment costs 3x of your salary, this means you're paying 1/12th of the cost of the apartment as rent, aka, an 8% rental yield. This is an amazingly good yield - greater than the stock market expected yield (of 7%-ish). No wonder investors would want to buy.
The general consensus is that if the rental cost is greater than 5% of the property, you're better off paying the mortgage (and conversely, if the rental cost is less than 5%, then rent is cheaper, and invest the difference would yield more financial returns).
That's a form of participating "in an inflated housing market". There us no difference, you just introduced landlord as a middlemab.
the only way to opt out is living in a cave
Landlords provide flexibility to the market. They take on the risks of owning. In a fully healthy system, it would still be very good to have landlords and rental properties, people would just pick them because they are the best option, rather than the only option.
Why do you think people need to own everything they use, lest they be short?
Or are you saying that he should become homeless?
I hope you don't want to claim here that buying a house means that you cannot ever "lose a house over your head"? Because that would be plain wrong. And if you just wanted to say that it reduces the chance, then you should have some good arguments.
Also, some of your points are strange:
> 4. if he gets a girlfriend or boyfriend and they want a bigger place
Well then it's much easier to move to a different place, rather than buying a new house and selling the current one, don't you agree?
But he _is_ forced to participate in that market, even if he doesn't know it; whether that's by renting or buying is another question. Renting is less risky but it's still a bet, no?
I'm not sure.
Bob's risks shouldn't negatively influence people who have more risk aversion to the point where it's less risky to take risks like Bob because then we'll all take risks like Bob and then end up in the situation where we are now.
We’re at a point where we’d rather Bob secure his “investment” while younger generations can’t afford a home to live in.
> We all need a place to live but we all didn't take a risk in taking out a mortgage like Bob did.
My point is it wasn't necessarily a risk Bob has voluntarily taken. I'm not saying that we shouldn't do something to fix this but we shouldn't cause Bob to go bankrupt while trying to help younger generations as Bob may not be the opportunist here.
To my point of view, I see exactly where the haircut makes the most sense.
This is the part most people don't know or understand. We should fix the banking system first. Only one entity should be able to print money, not all banks.
Without refusal to participate, there is no braking effect on Asset inflation. Someone quite literally has to lose their ass for things to correct so that the next generation has a sane foundation to build from, and Lord only knows, the centralization hacks pulled off by the last handful of folks have been so stupidly effective, we're even having this conversation. So, who is in the best spot to take haircuts? I assure you, it isn't the people on the lower side of the income/wealth curve.
renting is actually more risky, because you are left exposed to interest rate risk, and housing market risk, etc in form of ever increasing rent prices.
in my opinion the proper solution would be increasing property taxes across the board and spending that money locally on schools and other community reinvestments, applying them on market prices and heavily taxing investment properties in single family homes (second and third house, house in title of LLC/S-corp, etc).
also tax heavily houses located in restricted zoning areas, like Palo Alto, CA. If NIMBYs don't want to see new housing in their backyard, they gotta pay up even more on market prices of their homes. provide tax incentives for YIMBYs
If you take a variable interest rate mortgage, as many people do, there is a risk of increased interest payments.
If you buy to live, and something changes in your life that requires you to move, you may be forced to sell in unfavorable market conditions. This is another risk of ownership.
The situation is quite involved.
So? The house is as livable the day before the mortgage went underwater as the day after mortgage went underwater. It only matters if Bob care about selling the house. If Bob's primary intent is to live in the house as opposed to selling it, it wouldn't be a problem.
But also it significantly limits Bob’s options in life. They can no longer refinance to repair the roof, they can’t move to a different city for a better job, etc.
Yes, that's the point...
>But also it significantly limits Bob’s options in life. They can no longer refinance to repair the roof, they can’t move to a different city for a better job, etc.
Bob knew the risks.
Within the legal system remedies Bobs everywhere are going to bankrupt. Banks can arrest the bankruptcy by changing the legal system, and Bobs everywhere can change the legal system to make bankruptcy more lenient.
At the end of the day a large portion of the population is not going to simply accept that they need to shoulder the losses for a bubble they didn’t make and had no perceived choice but to participate in. Particularly not when it occurs twice in two decades.
They (you?) don't have to accept it. That's not a factor at all. Your acceptance is not required.
If Bob was a first-time homebuyers, then he just got royally screwed because of all the speculation propped up by nigh interest-free lending, which was absorbed via inflated ask prices. There really is nothing natural about the economy of the last 15 years. At all.
Wouldn't this de-risk speculative investment and drive assets higher?
I'm not in favor of homes dropping in value either, but if the argument is it's going to hurt investors, then let's do it.
First of all, buying a house for $1 million that is later worth $700,000 has no bearing on what is owed to the mortgage company. The mortgaged amount has already been paid to the original seller, that money is gone and the buyer has agreed to repay it. Defaulting on the mortgage can be done, but any money already paid will be lost and the borrower won't be able to obtain another mortgage for 7 years.
Or the homeowner can continue to live in the home, but there are a few potential problems:
1. They cannot sell the house should their life situation change. Depending on the overall real estate market, they may also not be able to rent the house out for an amount that covers the mortgage payment.
2. Not only did they agree to pay $300,000 too much at purchase time, they also are continuing to pay interest on that amount. $1 million for 30 years at 3.5% is $616,000 in interest; $700,000 is $431,000 in interest.
3. The loan cannot be refinanced, because they don't have at least 20% equity in the house. Say that interest rates drop from 3.5% to 3.0% -- that would save $100,000 in interest over 30 years. But in order to refinance, they would need to pay the mortgage down to the point that they have 20% equity in the house (in this example pay the mortgage down to $440,000).
4. Since they have no equity, they cannot obtain a HELOC to help finance home repairs or life events in an emergency.
So yes, investors and speculators will be hurt when their portfolio value drops and those are the risks you take when investing. Homeowners, however, are also hurt by the decline of home values.
(1) and (4) are valid concerns. However, if Bob stays there for a long period of time until prices rise again, he'll sell with less capital gains taxes.
So, like in many situations, and how it should work, buying a house works if you stay still for a while, and is worse then renting short term.
On a house? Most people don't have cap gain taxes on house sales. Only extreme high value homes.
The concerns for you in this scenario may be:
1. Has the property been poorly maintained for some time because the previous owner could not afford repairs after buying at a high price?
2. Has the property recently been poorly maintained because the owner knows it will be foreclosed on?
3. Will prices continue to drop, potentially putting you into the same situation as the current owner, or is now the right time? It's generally impossible to time the exact bottom of the market -- and what seems like the bottom may be far from it.
You are saying that now but when it actually happens to you then it becomes real and different people react differently when it actually happens to them.
Imagine you have to move because if job or family, you can't sell the house and buy another - its worth -$300,000
You are conflating defaulting with underwater loans.
-- The gp actually make this clear and is grasping for alternatives to this scenario rather than advocating. So you reply is either ignorant or disingenuous.
Edit: Gp's quote before your quote - "If you start raising rates, and stopping QE, you're not actually getting the money back from the people you gave it to, you'll just get a lot of businesses to close." The same clearly goes for individuals.
That's a big red flag that something is wrong, and that's because houses wear out. Therefore they should depreciate like a car.
The problem is not solved by messing about trying to control "Domestic Credit Expansion". Limiting the supply of money causes the problem by limiting the funding of housing production.
The problem is the power of exclusion. Housing should be used for housing services, not hoarding. If the price of it is going up, all that is telling you is that there are insufficient housing services available, and there is some market failure that is stopping it being produced.
The solution is anti-trust action and, if necessary, government intervention to limit the power of exclusion and directly produce more housing services until houses start to depreciate.
Address the root cause, not the symptoms. The solution to asset prices going up is produce more of the required assets and stop people trying to corner the market in them.
Nobody is suggesting that the price of used cars suddenly going up should be solved by reducing the loans available to buy them. It should be solved by sorting out the production issues for cars to put the market back where it normally is.
Why not the same for housing services?
Take Detroit for example, nothing has changed to the land itself, but the community has changed and caused land (and housing) prices to change.
the way to solve it, I think is to build better communities, help with more construction of houses, parks, and building better public services (police, fire, public education, parks&recreation, etc).
What should be the source of such funding? I dont know, but the American approach seems to be to use local funding from property taxes, but this approach only sustains status-quo, and does not help to improve struggling communities
This absolutely does screw over people who didn't take out debt. Yes you gave them money, but you also devalued the money they already had. And you have just driven up the price of houses and assets even more.
> Instead of having asset prices fall to parity with wages and consumer prices and causing everyone to default on their mortgages, we need wages and consumer prices to rise to parity with asset prices.
You can't just raise wages and consumer prices without raising asset prices - the people who are getting more wages would either loose that money on higher prices of goods or invest in assets - driving up their prices.
Raising targeted taxes on very wealthy individuals and corporations is assuming that this wealth is going to be redistributed at the bottom somehow, effectively helping Bob not default on his loan.
Printing money and giving it to everyone also risks causing more bubbles…
Either method requires fine tuning…
Deflation causes defaults, the disproportionate wiping out of the wealth of the middle class (because mortgages are leveraged) and a financial crisis. Inflation, if done by printing money and giving it directly to individuals, reduces wealth inequality.
To get things back into alignment, your choices are: deflate the price of those assets, or inflate the price of everything else. Which do you choose?
How is repricing home loans going to affect banks?
So basically, take everyone sitting on mountains of cash (e.g. Apple) and start to pay enormous returns for keeping that money stationary, instead of investing it in the productive economy?
> Now asset prices come down in real dollars, because people aren't as willing to borrow money to invest when interest rates are high
The economy isn't composed of only "people". There are businesses too. Rising interest rates means that businesses borrow less money to build new factories, hire new people, and expand. Corporate finance takes available interest rates into consideration; it is literally one of the factors on which CFOs decide whether to start a given project or not. That ultimately translates into whether business start to lay people off or not.
Look, I also think that interest rates should be brought up. But I also appreciate that it's not that simple.
Why would that be? If he locked in a low rate, his mortgage payments could still make sense. If it's a variable rate, then yeah.
Or they'll use it to buy booze, pot and iphones like most oeople did with the $2000 covid cash handouts.
Consider leveraged stock buybacks, leveraged dividends, selling to a greater fool, and simply owning corporations which are too big to ever go chapter 8/11 without taking the economy with them.
Increasing rates will simply mean that these individuals can get paid by interest rates ( you have to borrow from someone after all ).
The only strategies to break this wealth concentration involve punishing capital accumulation. Meaning inflation or taxation.
An honest question: why “should” or “ought” the price have been $200k, instead of the actual selling price (assuming that this was a typical price for a comparable home in the area over the same time period)?
Who gets to determine the canonical value of real estate, and how is this somehow more fair than market consensus?
We have many policies that for good and ill restrict housing supply and increase the marginal price for shelter. There isn’t any strong reason to believe that this pattern should or will continue indefinitely.
Why is this ideal? Ideal for whom? Should all goods and services be priced using a cost plus model? What, then, would be the incentive for efficiency? Goods made by inexpensive means would be low priced by fiat, regardless of performance.
I’m not saying that nothing should be cost plus, but there needs to be a strong justification for it.
This process incentivises more efficient means of production, when goods become very cheap relative to performance then consumers of that good can spend money elsewhere. In practice most material goods should be on a cost plus pricing model for this reason. The alternative is scarcity economics which hardly incentivizes efficiency but instead rewards market timing, monopolies, and other activities which don't do a lot to make the world better in the future.
Consider two people who make violins, where their costs are comparable but one is widely deemed vastly superior to the other. Musicians would be willing to pay a hundred times more for the superior instrument, but the cost plus mandate requires they be sold at roughly the same price. The incentive to achieve this much higher level of skill at violin making is far lower than if we allow willing customers to vote with their wallets.
Just raise the taxes on peoples 3’rd or 4th home. It will definitely screw over a lot of real estate investors and banks, but that’s sort of the deal with investment risk, and after more than a decade of state guaranteed return on this investments it’s about time for and quite fair with a state guaranteed shakedown.
This will cause the market to drop, and the unfortunate ones who overspent on their primary recode are will have a big loss, which you help reduce through tax breaks for people owning no more than one home.
Purchase cost on housing is very, very tightly correlated with the interest rates, because shoppers' budgets are determined by their monthly payments, not by the total cost of the house.
When interest rates go up, potential buyers can't afford to borrow as much money, and prices have to fall.
> Raise interest rates on debt. This will cause people to pay back existing debts
But this is risky for the stock market right? interest rates on debt are connected to the fed's interest rate and to bonds yields. Higher bond yields = stocks are less appealing. That could be fine during normal times but the stock market is very very high so the risk for a huge crash is high. Who knows what the result of a stock market crash might be, the 30s were one huge depression. During the current political climate I can see why the high-ups want to avoid that.
But It's something to think about what you're suggesting and it's very possible what you're suggesting will happen in some form or another.
Especially if any alternative is buying stocks ... everyone knows stocks is just another paper and real estate is ... real deal.
Not going into bitcoins as still for normal people it is not something they can grasp and for me it is pure ... how to say a pyramid scheme but less offensive... Stocks are pyramid scheme currently as much as bitcoin is. With P/E ratios waay over what is healthy it is just "there will suckers in the future that will pay more for that". If all goes to the ground real estate will still have at least some value even if people also use it in a way where "there will be suckers in the future that will pay more for that".
If you tax the ownership, that's property tax, it already exists, and 1) It's already high in the most HCOL states (imagine paying 30K a year for a property worth 750K, that's Westchester, NY or many parts of NJ, and a handful of other states) 2) Imagine you're 75, retired, and suddenly your property tax spikes and the house you bought 20 years ago for 150 is now worth 750K, and now you're on the hook for 30K.
So that's out. Next we have taxing transactions. OK, so we up flip taxes (ownership less than X months), we increase transaction taxes on a sale, we can even rid ourselves of the cap gains tax exclusion for single and married couples, and perhaps even tax everything as short-term cap gains.
So now people will never sell.
What have you accomplished?
Or were you just expressing your emotions and letting others figure out the incredibly complicated logistics of your suggestions?
Easily solved by not hitting people who own one property which is their primary residence.
I'd go easy on two-property people; some people need two places for various reasons, and they occupy both.
The tax rules can be crafted such that heavy penalties are imposed on people with three or more properties, and on house flipping activity.
Only reason you don't see more of that is because, doh, the rules are written by the rich. The politicians themselves or their rich chums are doing a lot of that speculating.
This would discourage individuals from renting out their property for a small profit, which is exactly what you want to see more of to increase affordability (and liveability — not everyone likes renting from big investment firms and property management companies).
That is because they themselves have to live somewhere. If they have to rent, then what have we achieved?
Harassing these people is entirely regressive.
People doing something entirely normal, like buying a place and living in it, are not the root cause of any problem.
(OK, I've heard of the practice of sleeping under the desk at work and using the company kitchen and shower, while AirBnB'ing your apartment for $. Good luck with that if you have a family.)
Alternatively, and worse still, it might erode profit margins such that rentals become exclusively the domain of big investment firms. How is this of benefit to ordinary renters?
I'm with you about the undesirability of these investment firms who hog up properties; the tax structure could easily be set up to squeeze them out, while encouraging the small owner rentals: people who have two or three places.
These firms are basically parasites who contribute to the housing problem as much as home flipping speculators. It should be entirely unprofitable for someone to have like twelve properties. We simply cannot have that in cities where affordability is spiraling out of control.
Maybe once upon a time chains of managed condo buildings and such owned by big companies wasn't a problem; it could be high time to crack down on it.
But that tax structure would put downward pressure on rental unit availability, which would very likely raise rents. Wasn’t the goal of all this to solve housing affordability?
> It should be entirely unprofitable for someone to have like twelve properties.
Someone, as in ... a human? What about LLCs? It’s easy and simple to form several of them.
As someone who owns no real estate, and strongly prefers renting from individuals, my concern is all these plans to make it harder for individuals to own several properties will make it even harder than it already is to find a good deal as a renter.
What's the fallout from that? Let's keep this going and see if it reaches sustainable or insane.
You mean, what’s the fallout of banning anyone or any business regardless of the circumstances from owning more than one property?
Starting with the obvious one, it incentivizes investors to form multiple legal entities to own multiple properties — thereby entirely defeating the proposed regulations. This is already how it works today amongst informed property investors (though for reasons of legal liability, privacy and wealth protection rather than skirting regulations).
But assuming you could close this (realistically impossible to close) loophole... I’m guessing people in this hypothetical fantasy would prefer buying huge tracts of land, and building ADUs? Rentals would likely become a lot more scarce. Maybe corruption would rise due to the general ridiculousness of the proposed regs. Dunno. What do you think?
How it could work is that a residential property must be registered to an individual's social insurance number, not to a corporation.
So then they will have to start inventing people if they want to shelter their activities.
These people can be audited. How did you get the title to this property? From whom? Where is the mortgage in your name? How come you're not actually paying the mortgage? Etc.
You can't hide the fact that you didn't buy that property from the tax man.
In you can get business visa in you invest X amount into a company, it can be in construction but not a property, house-flipping or rentals
Nobody is entitled to live in the same space forever. It’s perfectly reasonable and expected for for someone on a fixed income to sell their appreciated home rather than paying the higher upkeep. If the value proposition makes sense for someone with a higher income then they’ll fill the void. If not, the price will drop and it will all adjust anyway.
The alternative is to end up like CA and we all know the shit show that has become.
The Medicaid look back period for assets is five years.
The real “trick” is to have kids, raise them right, and then get old knowing that they’ll do what’s right. Whether that’s taking you in, putting you in a home, or kicking you to the curb is all a matter of what you teach them.
This should also apply to rent control.
I propose a complete overhaul to this tax. We make this tax a federal tax, no exclusion allowed for any reason. Increase this tax rate to about 8% of the property value meaning if the property is worth USD 1M, you owe USD 80k in property tax each year. No exclusions for anyone. Walmart pays. Megachurches pay. Amazon.com pays. Yes, even the state capitol pays and public schools pays.
Now, to make the math work, we must make a calculation we revise each year. What is the median price of a two bedroom unit in the nation? Every adult gets this allowance for the year. Ideally, this more than offsets the cost of the property tax for this person. If it doesn't, the person is responsible for the difference.
The beauty of this scheme is every building pays and failure to pay for about five to ten years is enough to confiscate the property and put it back in circulation. Everyone has some money for housing. If some place is too expensive, move elsewhere and make money.
$80,000 is what, twice the median income?
But you don’t want to kick someone out of a house they bought because property taxes went up. That property taxes have increased so much that this is even possible is concerning. They shouldn’t go up that much.
The housing issues in California come down to regulation making it expensive and difficult to build, and just way too many people wanting to move somewhere with some of the best weather and natural features and jobs in the world. That California is inherently expensive shouldn’t be controversial or surprising.
Very easy to avoid stupid tax ideas, a million way to avoid
Y'all got yours, now what - screw me?
I want to build my wealth - give people like me a 5 year tax break or something instead. I can't afford to live where I work (California) unless I'm willing to live in a shitty area with high crime and terrible schools.
Taxing capital gains on principle residences means people are less likely to move up to a better home which creates a problem for first time home owners trying to enter the market as no supply exists.
Wealth tax requires you to know everyone's wealth. How are you going to get that information / verify on a yearly basis.
obviously this would be difficult and would require new rules, but it doesn’t seem at all impossible
you could start high (say 1000x the federal poverty line) and work backwards
there are already a number of proposals from lawmakers that cover the details better than some rando on the internet
I'd really like to understand your wealth accumulation algorithm here because, having lived in CA, I wrote a bunch of programs to model my family's guessed at expected inflation, house appreciation, income appreciation, and tax scenarios, and I bailed.
The people ahead of you are not going to let you climb that ladder, is what I decided. Twenty-five years later, yup.
And I won that game. Survivor bias for sure, but now I'm sitting on what I didn't expect: prime real-estate for CA remote workers + retirees.
* $0 to $9,950 - 10% of taxable income
* $9,951 to $40,525 - $995 plus 12% of the amount over $9,950
* ...
* $523,601 or more - $157,804.25 plus 37% of the amount over $523,600
Problem? There is effectively no taxes on wealth, only income/capital gains.
This system really screws over the middle class and immigrant families because we generally accumulate wealth through income... meanwhile Bezos can passively "earn" billions per year through his prior ownership of Amazon shares, with an effective tax rate of 0%.
The low interest rates further benefit the rich because they can take out low-interest loans collateralized by assets (that is, Jeff can take out a $100M loan to get liquidity, without liquidating $100M in shares - he only needs to sell enough to pay off interest [the portion sold is taxed as income]).
because the wealth is already taxed - how else did you acquire that wealth without paying taxes first?
To tax wealth is to prevent accumulation of wealth, and i think that has bad, unintended consequences. On paper it sounds good, but like all things, this hurts some group of people more than others, and just because that group being hurt isn't "your" group of people, it doesn't mean they deserve it.
Taxing income (of which capital gains is one type) is fine - adjusting the brackets is fine too. But a lot of times, people come into the more-taxation side assuming that more taxation means better society - but i can tell you it isn't true. Better politicians comes first.
When the group is "the most successful in the current system", it's not exclusionary / discriminatory or exploitable. Whether their success is due to luck or smarts or inheritance, they succeeded in the current system by definition, because there is only one system. Therefore, they can be asked to pay proportionally more to maintain it. Furthermore, the bargain "to pay less tax, be less successful" is not one that any rational actor would make. It's inherently fair.
The only part you could reasonably quibble with imo is using wealth as a measure of success, but since it is the currency that taxes deal in -- one alternative: government takes some of your children -- it's the one that makes the most ssense. Still, those in society that find some way to life satisfaction without accumulating wealth do have an advantage in the proposed system. Maybe that's something we should encourage?
if it were really true that paying more taxes leads to more success, then they would pay more. But it isn't true - patently not true. The less tax you pay, the more you get to keep for yourself, and reinvest, and the more likely you reach higher "success".
Thiel bought a lot of PayPal equity for basically zero dollars in a tax-free account. The tax exclusion for inheritance is enormous, allowing children to inherit millions and millions without paying taxes and receive a step-up in basis.
so he did pay his taxes - he paid the amount required by the financial instrument setup by the gov't (which happens to be zero here).
And his situation is fairly unique and rare - very few people invested in a startup via their retirement account, and have massive success.
For most people, their wealth would already have been taxed; e.g., people with excess savings that they put into investments such as property or shares.
The very wealthy minimize taxes paid by taking deferred compensation in the form of equity held past the long term capital gains threshold, and then only selling a small portion at the low long term capital gains rate.
The next level tax avoidance approach is as the GP described: don't sell your equity, thereby not realizing any taxable gains, but get cash flow by borrowing against it. This requires you to have so much equity that borrowing a small percentage against it is all you need to pay for your daily life, a position that few people are in.
That's just scratching the surface of tax avoidance mechanisms, but the result is as Warren Buffett described: he pays a lower tax rate than his secretary.
but they'd have to pay interest on that borrowing, and presumably, these interest from borrowings for daily life and consumption is not tax deductible (or only the portion related to an investment expense could be deducted).
Therefore, to pay that interest, they'd either have to borrow even more, or sell some equity to pay. The current taxation scheme encourages this, because if the person's consumption is lower than their wealth's growth, they would want to reinvest their excess, and this is the most efficient way to do so without the state taking away a large portion from taxation.
Or take a minimal salary or use equity sold at the low long term capital gains tax rate to pay for it.
Also consider that when you have huge amounts of assets - far greater than the loan principal itself - you can negotiate an interest rate that regular people can't. Borrowing 20M for living expenses against assets worth 200M is a very low loan to collateral value ratio.
Why do you see this as a bug rather than a feature? Sure, it disproportionally benefits rich people but it's still beneficial for not-so-rich people.
I find it unlikely that there is a system in which rich people don't benefit more unless you create an arbitrary definition of "rich" (I.e. $10M net worth) and tax "rich" people more. Even then they'd probably be able to get around it.
> This system really screws over the middle class and immigrant families because we generally accumulate wealth through income
I disagree. Almost no one gets wealthy without owning assets that appreciate in value.
Fix the money, and fix the housing affordability crisis. Slash the demand to buy housing as an investment.
In a deflationary environment, as housing/rent prices drop, savers are rewarded.
Renting doesn’t entail taking out a mortgage.
> It doesn't create more land or housing.
Nor does building more housing in an inflationary environment necessarily satiate investor demand for inflation-resistant assets in the form of residential property.
Also, "sound money" is anti democratic because the whole point of a fixed supply is to make money exclusive and let existing social classes maintain their status (kings and aristocrats owned a lot of gold mines and thereby controlled the economy)
> whole point of a fixed supply is to make money exclusive
In this case, it’s to obviate the need to take your inflationary funbucks to what is essentially a casino, or otherwise park it in residential property in the hopes of not getting debased.
[1]: http://www.princeton.edu/~mgilens/Gilens%20homepage%20materi...
Have a look at data before you spread FUD https://www.bls.gov/bls/news-release/realer.htm#2010
And even if the claim is entirely off base, isn't it sort of the opposite of FUD? (being unrealistically rosy, rather than motivating "fear, uncertainty, and doubt")
More details:
https://insight.kellogg.northwestern.edu/article/wage-stagna...
> The average hourly wage for production and non-supervisory workers is up 5.8 percent over the last year. It’s up 10.3 percent if we want to go back two years.
> The increases are even larger towards the bottom end of the wage distribution. The average hourly wage for non-supervisory workers in restaurants has risen 12.4 percent over the last year and 13.5 percent over the last two years.
This is pretty substantial.
But it even goes further than this, because what policy tools does the government have on-hand to curb inflation besides raising interest rates until they induce a recession, and won't this be much more harmful to a normal family's bottom line than inflation is?
1. Enforce no-hoarding by businesses to release inventory into markets. Hoarding leads to price increases.
2. Expand infrastructure (in progress) to alleviate bottlenecks in the supply chain
3. Remove some of the not-so-smart tariffs instituted by the previous administration. Import tariffs are paid by, well, importer which leads to price increases.
4. Instead of continuously selling oil from reserves to foreign governments, keep some at home and release continuously to keep energy prices low. Energy cost is the single most important factor in consumer prices (because it takes energy in form of various fuels to: cool, transport, etc)
5. Break down monopolies that stifle innovation and lead to increase in value extracting behaviors by monopolists, instead of real innovation and new business formation.
6. Create new business federal subsidies of some sort?
7. Criminalize scalping (as is done in some countries)
How do we know that?
> And now the FED can't really reverse it.
By the way, Fed is not an initialism, so it doesn't really make sense to write about them in all-caps.
> We need to erode all that capital concentration, and the only way to do it without hurting the regular guy is through heavy taxation.
What do you want to tax? Land Value Taxes are pretty neat (or rather, the least bad taxation).
Are they? From what I read they’d heavily mess with anyone that bought a family home anywhere near a city more than 10 years ago.
You can argue that their net worth has increased, but their salary is still the same, so increasing their taxes based on the current value of their house just makes them lose the house (and forces them to buy a new house much further from city center).
Maybe exclude property that’s actually lived in?
Alas, that would be a terribly idea, because all of a sudden you have the government snooping into your living arrangements. Especially for grey areas where people share their time between multiple apartments. Way too complicated.
And, people living in bigger places would get effectively get a discount this way.
Your argument does highlight a problem with the transition phase of the introduction of the tax, though. There's a few ways to solve this, eg by slowly phasing the tax in over a decade or more.
(It's not a problem in the long run, because land prices will drop until the financial burden of tax plus mortgage payment is the same as today.)
... not really. Most folks only own one house, so nothing complicated. A few folks own multiple houses. These folks already need to establish residency in one house for tax purposes in a lot of places: Taxes vary from city to city and state to state. It isn't a new grey area, and we can use this established system to tax. The folks can, in general, just use one house or apartment or pay more for more than one house.
I'd personally only give it out to folks with longer terms: The place should still be someone's primary residence, and only give a discount if it has been rented out x months out of the year. This would be to discourage airBNB units (for example) and encourage landlords to make their units affordable and attractive to the residents of the area.
Your scenario plays out just the same. The opportunity cost difference between any two uses is exactly the same.
There's a small difference in a detail of accounting: in one case you see a higher LVT bill, in the other case you pay more for your mortgage. (Or alternatively, if you own out right, your opportunity cost for holding onto the land increases.)
> Land Value Taxes are pretty neat
...if you want to encourage concentration of land in the same hands in which capital is concentrated, yes. (Heavy LVT harshly punishes any land use that isn't maximally efficient at financial value extraction, which is often extremely capital intensive—encouraging upward transfer of land to those able to apply the most capital to it to optimize extraction.)
The opportunity costs between different land uses is exactly the same with LVT as without.
To illustrate more:
Without LVT, when you use a plot of land costing x dollars that you own outright, you 'pay' the opportunity costs of not being able to employ those x dollars elsewhere (or rent the land out etc).
With LVT, the price of that plot of land will adjust to y << x, so that the total of LVT on a plot of land costing y and the opportunity cost of y, will equal the opportunity cost of x amount of capital.
(This discussion ignores risk and other taxes for simplicity.)
Slightly off-topic: I'm also against capital gains taxes. We want more capital employed, so that workers become more productive, and so that the different providers of capital compete. So if anything we should encourage more deployment of capital, and capital formation rather than consumption of wealth.
(Also thanks to international mobility of capital, I suspect that a big part of the burden of capital gains taxes mostly falls on the users of capital, less on the providers. But I am not sure there.)
Low interests helped those who invested in equity or had real estate to sell.
This is why measuring CPI doesn’t work anymore to track inflation and why the quoted rates are nonsense.
When people had less income you could measure their spending at the till to see how much it’s increasing. In 2021, people aren’t spending more at the till because they largely don’t need to right now so these asset bubbles are serving as many people’s emergency fund. If/when things start to turn the rush of forced selling could be unprecedented.
Taxes don't create abundance, capitalism does.
There's also capital gains tax or even wealth tax. Especially the last one will target the wealthy.
Due to the zero-sum nature of real estate, it fundamentally breaks the positive sum theory of capitalism. Adam Smith even called landlord’s right “theft”.
TL;DR: things that people produce such as labor, products, and services are not taxed at all. No payroll taxes, no sales tax, no income tax, and no capital gains tax on investments in productive activity or human-made capital.
Things that people did not produce such as land or the right to extract natural resources are taxed. For land the land value is taxed, but this does not include the value of things built on the land.
You're basically billed for the right to "own" things that existed before any of us were born. Since not much else is taxed, these taxes could be rather steep.
This strongly incentivizes efficient use of land and natural resources and discourages non-productive squatting on them. You would not see, for example, a bunch of self-storage places and gigantic sprawling car washes in Silicon Valley. The land value taxes in such an area would be far too high to justify anything but highly efficient productive uses of the land such as housing, manufacturing, offices, etc. Vertical construction would be highly incentivized in high value areas.
Lowering or removing this disincentive would increase the amount of work that gets inspected.
As an owner-occupant, I want the inspections and am willing to pay one-time for an impartial second set of eyes.
As an owner-occupant, I do not want to pay a recurring subscription fee (in the form of higher property tax) as a result of the inspection.
Given how many properties have obviously recent remodels and no permits pulled in the last 30 years, it’s fair to say that at least some of the market has decided that permits aren’t worth the tax increases.
as you probably know, AVMs (automated valuation models) have been the hotness over the past few decades, but zillow (recently, but all along too) has shown the real limitation of AVMs. in theory, the likes of google and apple have enough geospatial data to create good land value AVMs, but you really still need appraisers on the ground for hyperlocal adjustments that just don't get captured in the AVM data and/or model. and that's all before the politicians, bureaucrats, and competing public interests get involved.
One thing the Bitcoin issue has shown me is just how pivotal that 'number go up' is to society. When 'number go up', that thing gets bought in, which brings more people to it. I think many look at the LVT like medicine, yes, this thing is good and important, but it tastes bad, so we can't get the collective buy-in, and never will. But we all know what's going to happen to Bitcoin, it's a bubble, and it will crash, crash hard. But so is the real estate market.
Real estate has gone up as interest rates have come down. With our interest rates at 0%, there is now no more room for the interest rates to go down, and thus real estate market to go up. We've reached the end, as we come out of CO-VID they might go up another 10% or so, but the easy money is gone - but the downside is now massive. If rates go back to 5% we will see real estate prices go back to where they were at when interest rates were last at 5%. Investors have a huge risk disparity.
And this is where the Land Value Tax can help. If we can implement the Land Value Tax, and at the same time implement a one-time tax credit equal to the price of the land, not only will no one lose out, but those that have the most at risk will now de-risk, and have the most to gain. All in the meantime instantly incentivizing the correct behavior.
That's what they said about the French Revolution, American democracy, the abolition of Russian serfdom, the abolition of US slavery, the Paris Commune, the Bolshevik Revolution, Prohibition, the Holocaust, the establishment of the State of Israel, the Great Leap Forward, the Iranian Revolution, etc.
I mean, that's also what they said about lots of other changes that actually didn't get implemented. And, as the examples above illustrate, it's easy for radical changes to have unintended effects...
This is actually very logical. Never understood why salaries are taxed so high. Always seemed to me like the governments are punishing workers for actively working.
Wouldn't that just mean those lots would stand empty? Its not like the car washes are there because there is a higher revenue option but people just dont want to do it.
In this specific example, what's preventing the land from being used for something more valuable than a car wash currently? I get that a land value tax would disincentivize hoarding land, but urban-sprawl-car wash hardly seems like a case of land hoarding. I think the parent was suggesting that these car washes would no longer exist because taxes would be too high under a land value tax regime - but that raises the question of what the more valuable usage is? Does there exist one, why isn't it currently being used that way, and is the reason something that lvt would rectify? If car washes are the most valuable usage, then they will either continue to exist or if the tax burden is too high in the new regime, they will stop existing and nothing will replace them.
I'm sure there are plenty of examples where lvt would encourage more efficient land usage, i'm just confused why this would be one of them.
Basically car washes are the slightly-harder version of land banking, but there is still enough value in the land that if the land was put up for sale, some other business would purchase it and utilise the land better.
If the car wash owner wanted to maximize returns they could set up a more profitable business today, sure. It's just more effort than they can be bothered with.
Even for land, the value is all about how developed it is, which is not zero-sum: one can always develop more land.
In England for example, known as a densely-packed country, only about 2% of land is actually built on, and of that 2% only a tiny fraction is actually dense.
Every newly-built house lowers the value of every already-built house. It is straightforward to specify initial conditions where the result is negative-sum.
The second value is what society should care about increasing, and it should go out of it's way to destroy the first kind of "value".
Do you mean every already-built house nearby or every already-built house in the world?
If you mean nearby then your theory would predict that places like San Francisco, Manhattan, and Paris would be among the cheapest places in the world to buy housing. This is very much the opposite of the truth, so if that's what you mean, then either your theory is completely wrong or the effect it describes is swamped by other effects that are much more important determinants of housing value.
If you mean in the world then I suppose it's possible that you're correct in a market-value sense, since the effect on the price of my house due to someone in Shanghai building a nice new condo would be to drop the price by, say, US$0.00003. But if we're talking about use-value rather than exchange-value (which is the sense in which it really matters whether things are zero-sum, positive-sum, or negative-sum) it's hard to see how that could be true. Perhaps you think the use-value of my house is primarily that it enables me to laugh at the suffering of the homeless beggars of Dhaka? I assure you I spend zero time on that activity.
So I think it's clear that your theory is just completely bogus.
So evidently the main determinant of housing prices is "demand", not your hypothetical effect of houses getting cheaper because other houses are nearby.
What do you think produces "demand"? Why is there more demand for houses in Phoenix than for houses 200 km to the northwest? In some cases, of course, there are real differences in land quality: land that is close to waterways or railroads is more valuable for industry than land that isn't, land that's close to iron ore deposits is more valuable for automotive manufacturing, land that's frozen cold 9 months out of the year is less valuable for human habitation, and so on. But none of these explains the universally observed price premium for land in cities over land in the nearby countryside, which often amounts to three orders of magnitude.
It turns out that the main driver of demand for housing is being close to other housing. So building houses drives up the price of land nearby. Not down, as your theory predicts.
This seems to be conflating the symptom with the cause. I doubt housing is more attractive because there are more houses nearby; they're attractive because more services are nearby. Granted, they are going to correlate strongly but I think it's a mistake to conflate the two.
Consider the following:
1) A house with no neighbors within a 100 mile radius. But it has all the best restaurants, utilities, schools etc. within walking distance.
2) A neighborhood with hundreds of houses, but none of those services within 100 mile radius. It's a little isolated island of housing.
Which do you think would cost more to live in?
It seems like the price of each meal at the restaurants would need to be sufficient for the restaurant to operate for a month or two, perhaps a few thousand dollars. That seems like it would discourage eating at these wonderful restaurants.
Building codes, bureaucracy, and NIMBYism all contribute to construction costs, which in many cases severely constrict supply (SF being a shining example), and thus make existing units more expensive. Focusing solely on land prices is missing the forest for the trees. The problem is that there isn't enough supply to meet demand, so prices are skyrocketing.
Building more housing will drive prices down at best, or slow price increases at worst, but it doest affect housing affordability, which is the original statement I was commenting on.
One of your questions was “Perhaps you think the use-value of my house is primarily that it enables me to laugh at the suffering of the homeless beggars of Dhaka?”
I think omitting a proper response to that question is more courteous than discourteous.
If by "developed", you mean "built upon", that's empirically not the case:
Here's an empty lot in the heart of San Francisco for $2 million dollars: https://www.fortressofdoors.com/content/images/2021/08/image...
Here's a building next door to it on a similar sized lot for $2.3 million dollars: https://www.fortressofdoors.com/content/images/2021/08/image...
Location, Location, Location. The vast majority of the value of urban real estate is land (locational) value.
The same land in the same location, with no development nearby, would be worthless.
Advocates of a land value tax therefore often call it a location value tax, or a site value tax, because it is the location and the society around the location that has value, not the dirt itself.
Cities need to be supported by enough resources -- that includes enough water, proximity to arable land, hospitable climate, and ease of access. The 2% figure you quoted can be a bit misleading because we can never develop 100% of the land into houses.
But as Japan/China/Korea has shown, it is probably still very possible for England to become much denser than it currently is. It would require all the residents to change their lifestyles to match though.
Any land is arable if we want to. See Phoenix.
That just pushes it to another zero sum game of money.
My point is that in a world of finite resources, it's going to be zero-sum at some point whether that's land, water, money, labor, or something else. It's not good or bad, but you do have to pick your poison to a certain extent.
There are residential and agricultural technologies that dramatically reduce water usage. For instance drip irrigation. Also the city of Las Vegas recycles almost all the recyclable water and consequently is extremely efficient at using water
I’d worry that it would upend agrarian economies (in the short and medium term, at least $
Those who already own property (myself included) are participating in a system that is increasingly pulling up the ladder on those who wish to join. The housing market is one of the least free. Rules requiring bedrooms have 2 points of egress and that building have minimum fire resistance are fantastic and need to stay. Rules that do things like prevent 2, 3 and 4-plexes, mandate a whole city can't go above 4 stories, and require 1:1 parking for every adult need to get tossed out right away.
In places like California, simply strictly applying the existing rules would be a huge step forward. Instead, even projects that are 100% compliant with all building and zoning rules and already granted building department approval are subject to an endless and often patently illegal "community review" process. See, e.g., https://www.sfchronicle.com/sf/article/State-gives-S-F-30-da... and https://www.sfchronicle.com/sf/article/Supervisor-Mar-pushes...
Under Supreme Court precedent such ex post facto community "vetoes" are unconstitutional. The community votes by passing laws a priori, not through ad hoc, targeted manipulation of the regulatory review process. But for complex procedural and policy reasons the Supreme Court has unfortunately been too reticent to police violations of this principle. My disposition is toward federalism and local control, but in many cases the system is violating fundamental principles in our society about the creation and application of law. Principles even more basic and fundamental than property, free speech, or personal liberty rights.
States like Oregon and Washington that greatly limit supply are widely praised for their natural beauty and conservation precisely because they don’t chop down forestry to build cheap homes to sell to the CCP.
Fools have created an acronym - NIMBY - to denigrate those who don’t want to waste land just for personal financial gain. However, there remain very real benefits to conserving forests and very real consequences to turning every square mile of land into an AirBNB. The landlord won’t live in that area and the renter won’t stay in the area long enough to care about the area but the long-term residents will pay the price regardless.
Coming at this from a UK perspective, housing is a nightmare here too. But our green belt is at an all time low and London is an unbelievable sprawl. No, I'd rather rent forever than ruin the countryside.
Also very little of the NIMBY vs YIMBY debate is whether or not to turn forests into condos, it's almost also SFH vs denser construction.
City center land > suburban land > rural land > land on Mars > land in faraway galaxy.
There is always scarcity of land even though there is an infinite capacity of it across the Universe.
If you want a vibrant, sane, and fair rental market, we’d need an actual free and fair market in the first place.
that's different from providing rental housing, whereby owners earn rent by constantly working to provide safe and desirable housing. capitalism is premised on the idea of using markets to drive down prices to the marginal cost of production plus a small industry-/market-specific risk premium. rent-seeking is entirely counter to that.
From World War II to the early 1970s, the utilization of existing US capital equipment rarely dipped during the worst of a deep recession, to what have been the highest levels of capital capacity utilization rate since the 2008 financial crisis. The old lows have been about what the new highs have been. This indicates an overabundance of capital investment and overproduction, which was the opinion of former GE CEO Jack Welch.
https://www.federalreserve.gov/releases/g17/revisions/Curren...
What I mean is, for example, my house is 130 years old. So it’s in a _worse_ state than it was 20 years ago. But it costs probably 10 X more.
It’s not like houses are a fine wine that matures. Nor is it in any way upgraded or better like a new technology would be.
But up in cost they go, indefinitely. Exponentially. Pointlessly. A complete and utter failure of policy.
I have family who made a fortune off the backs of people living under this delusion in the 1980s and the 1960s.
This is a non-sequitur; lots of things are limited, but often collapse in value. As a former Saudi energy minister once said: 'the stone age ended, but not for lack of stones'.
And all of these countries (except japan/Switzerland) are planning to bring more immigrants in to make sure the population is always increasing faster. Something that most people in first world countries don't realise is that the entire population of their country is smaller than the number of millionaires in china+india. Even if all if america+EU became sterile, there would still be enough foreigners to buy more unit and push the bubble further if they open borders. And they would, because the entire economy depends on it.
As is, people have children who occupy a cumulative more houses with or without others than their parents/grandparents did, and there's not more land being made. So that's why the old land and what's on it go up in value.
Basically, the increasing population (demand) is the cause of an asset increasing in value despite not increasing in quality.
One can make policies which reduces the number people who wish to use homes in the domestic market of a given country if they want to prevent that from happening without expanding the supply massively instead, that may lead to other negative externalities though based on which method is chosen (birth limits, immigration controls, ect.).
Now whether anyone should be allowed to own land is a good question. Lots of folks can’t even imagine a world where that’s impossible, but ownership is just law, a social construct.
It's everyone else's vertically built accommodations that attract the hatred.
“jobs”, “good food”, “nightlife”, “dating” and “social opportunities” are all things i hear. the last two are a direct result of density. the first 3 are only possible as indirect results.
anecdotally, the price per sqft of townhomes exceeds that of detached homes in several Seattle neighborhoods. several confounding factors, including the year of the building, but in general that suggests a preference opposite to what you claim. or at least, that, in the face of constricted supply we can’t really tell where the preferences truly lie.
Anecdotally, in Australia, post COVID both rent and real estate in regional areas have gone up dramatically - much more than in cities - rapidly pricing locals out and forcing them to move elsewhere and sometimes find temporary accommodation. Now that WFH is more normalised and either want a quiter lifestyle or straight up can't afford houses in major cities, so they are moving to smaller towns instead.
My own preferences are fairly different but I can't argue with data.
But if you have to decide between an hour commute and living vertically plenty of people would choose to live vertically.
And the experience of high rise social housing from the 60's and 70's shows that that tower blocs do not solve housing problems.
And eventually those people visit friends or see pictures on social media of people similar to them with large back yards, land and big kitchens - and say, shit, maybe we should look into this.
As it happens, just possibly a black swan pandemic event keeps those folks indoors with their kids and dogs, with their nonplussed neighbors, children running around behind Zoom conference calls, and pictures on social media of people with houses and backyards causing massive envy...
And welcome to today.
That's the housing situation in the suburbs and exoburbs. This is BEFORE even even talk about the insanely low interest rates on offer during this time.
If labour and material costs are also high that increases the value of houses that are pre-existing. It means the buyer does not have to pay extra for and wait for a house to be built, which has some value. Also, there's a certain tolerance that I'm sure many people, if I may project, have for how crappy of quality a house actually is. They just want a damn place to live and call their own. Especially when the market is not in the buyer's favour.
At least that's how it all seems in Toronto. In the city of Toronto proper, a detached house selling around $1,000,000 is almost guaranteed to be of relatively bad quality right now.
House is often a necessary evil - its never what buyers imagine as ideal, but in comparison with going through the hell of building one's own (or also adding tearing down the old) its an acceptable compromise for many.
Life is too short, and no house is worth destroying a marriage.
So if they offer a policy that covers the market value of the house, that's much less than what it would cost to repair/rebuild (so insured people can't afford to get their house back after a fire), and they don't want to offer full repair/rebuild value, as that incentivizes people to just burn the house down because in that case the insurance payment would be much more than what they can sell the house for.
They are both worth more over time.
To build a new house just like the old one will cost more since labor went up and materials went up.
https://www.komatsuforest.com/-/media/komatsu-forest/images/...
A machine grabs the tree, cuts it from the ground, rolls it through a thing to remove all the branches all in just a few rapid smooth movements.
All this to say, many houses are upgraded over time, not merely degraded. I'd much rather live in my house now after the decades of upgrades than when it was freshly made in the 70s.
In most cases every 20 year increment backward yields a higher quality house. Newer houses are garbage in many dimensions.
An older home requires a little more capital investment, but if it has lasted 130 years, it’s sound and could be remade/modernized at a cost well below any new construction.
Right now, investing in public companies and tech is very risky, as valuations are at record highs. Many experts estimate near-zero returns for decades from public markets. And, as a small-time investor, I don't have access to private deals or markets.
So, that leaves real estate. I don't put my money there because I want to drive up the cost of shelter for anyone, I do it because I don't have any other reasonable way to protect my savings.
I agree with OP, if you just leave hard earned money of us middle class sit in the bank, it will be eaten away by inflation and fees. Its what our parents did, and its properly dumb. Risk with markets which most don't understand, or invest into real estate which everybody does at least a bit. Most folks consider only these 2 options.
Also, if SHTF, in most cases you will have physical places or even land to live off, instead of few bank statements. People will still have to live somewhere, and there is constantly more of us.
This is important because age of labor and consumers directly influences macro economic conditions, which trickles down to investment returns.
https://ourworldindata.org/uploads/2014/02/World-population-...
The problem goes back for much longer though. Interest rates hav been near zero since the Great Recession, and for most of that period, inflation was also below 2% almost the entire time. Add to that a lot of the year over year inflation we are experiencing is due to base effects eg the collapse of oil prices last year. Current oil prices are hardly elevated from their historical norms.
> Right now, investing in public companies and tech is very risky, as valuations are at record highs. Many experts estimate near-zero returns for decades from public markets.
...is a big red arrow pointing to the fact that we're living in a castle made of sand
if we continue to let pathological incentives drive economic decisions the tide will wipe it all away
purchasing power is a mutually constructed fiction and remains a useful social technology only while material productivity can plausibly support the web of lies we tell each other
now that people have noticed the foundation caving in, it would be nice if we could formulate and incentivize a positive sum response, otherwise we get zero or negative sum dogfights over scraps as you describe
This write up of 80s Japan (from 1990!) is worth a read
https://hbr.org/1990/05/power-from-the-ground-up-japans-land...
It’s also justified as the USA is by far the most dynamic economy in the world and has the most advanced military there to protect your investment in USD.
I wouldn't bet the farm on this one. The US ain't what it used to be and China is rising fast.
I’m happy for China and Chinese people having a better quality of life. But their economy is based on humans doing things inexpensive. It’s essentially a services business, not a SaaS business. It doesn’t scale well but they have so many poor people to exploit that they can make a thing of it.
When the seriously export culture, novel technology, or medicines then sure. When they aren’t a net importer of food then sure. But the yuan is not a serious threat to usd. It’s pegged to it.
> So, that leaves real estate.
That’s a huge leap to jump to real estate as somehow safer than public market investing. Real Estate can also be highly volatile and is also prone to significant drawdowns.
Real Estate also has very high carrying costs relative to other investments. Especially if you’re trying to rent it out, at which point it becomes a business with not insignificant labor requirements, either from you or someone you hire. It’s more of a side job than an investment.
If you’re serious about investing, you shouldn’t be choosing between a bank account or real estate. Those are on opposite ends of the risk spectrum and opposite ends of the work-required spectrum.
Instead, you’d want to do things like dollar cost averaging into equities over time (nobody really invests by keeping it all in cash and then flipping it all into specific stocks in the middle of a frothy market). Or you should be looking into ladder if CDs, or bonds, or something like I-bonds to invest an asset specifically indexed to inflation.
But choosing between a 0% bank account or real estate investing is a major false dichotomy.
Ok, so interest rates are near zero. A ton of money is leaving the bond market and going to stocks. Price of stocks is being pushed up due to the increase in money chasing yield there. These companies didn't get more valuable, your earnings per share just went down. Now you're anticipating inflation as printing money is a great way to get out of the next crisis when your interest rate can't get any lower. This personally leads me to real estate.
> investing in public companies and tech is very risky, as valuations are at record highs
To real estate where valuations are also insanity and at record highs doesn't make any sense.
> To real estate where valuations are also insanity and at record highs doesn't make any sense.
The difference for me is that I saw what was happening in public markets and I bought real estate in a country where this wasn't yet the case. It is now though, so your point is valid.
I can easily imagine a society, capitalistic or not, that doesn't subsidise land speculation, which doesn't suffer from real estate bubbles.
Empirically this does not seem like a problem in the US at the moment. Large US banks are starved for lending opportunities, and turning away deposits for lack of balance sheet. The Federal Reserve bought corporate bonds. Lending conditions are loose (see links)
https://fred.stlouisfed.org/series/DRTSCILM https://fred.stlouisfed.org/series/DRSDCIS https://fred.stlouisfed.org/series/NFCICREDIT https://fred.stlouisfed.org/series/NFCI
I can afford the mortgage by myself. I won't have to deal with the city over problems $600 / month rent control tenants create when they were mad at the last owners. I won't have to pay $6k going on $20k to evict a tenant who requests a jury trial, not to mention house them for free for 6 months. My city already has a housing shortage and I am strongly considering just having an awesome SFH instead of this.
Every incentive seems to be against the use of this property. Rent control causes individual landlords to subsidize the poor societal zoning policies. Legacy rent control tenants also distort the market, raising the price of other units at market rate. It also lowers the income that would be put toward building more units. This property is zoned for 15 units and I would love to build those. Any extra income would be going toward that (as is my personal income). Instead the incentives are for this property to limp along so no one has to move ever.
Investing in real estate is a real investment when it results in houses being built. In fact it is maybe one of the most timeless and obvious form of investment. People have built and traded dwellings through the ages. Prices have to rise when good land gets scarce and labor gets more expensive.
Low interest rates _also_ boost investment in technology and businesses.
Raising rates, if you mean central bank rates, would reduce investment in both houses and technology. Raising interest rates is a signal and incentive from central banks to not invest in anything and instead hold on to government paper.
Raising rates means funding the wealthy's savings by providing them a backstop. When they can't find assets that retain sufficient value on the private markets, they can just hold to government paper having above market returns. I wrote more here a while back: https://medium.com/@b.essiambre/the-world-deserves-a-pay-rai...
And “throughout the ages” is nonsensical, slavery is as old as civilization and yet abolishing it led to wealthier and happier societies.
Imagine if instead of real estate speculation that capital went into creating new technologies and businesses.
Higher prices of houses means there is more incentive for them to be built (or repaired) and for the builders to be paid well. Central banks stimulation is meant to make sure this happens to a sufficient degree, just not so much that builders (and workers more generally) are paid too well that it would drive inflation too high.
Land-lording and economic, monopoly rents are bad, housing developments and rentals being hired out are good.
Food, clothing and shelter are basic needs. Providing one of them is most certainly creating value.
Real estate is not zero sum. Having shops, schools, offices, factories and whatnot around your real estate makes it more valuable, not less.
There is a problem now around the world in many cities where a great deal of value is created in that government has made it too hard to build new dwellings and the price of dwellings has been rising.
However, there are also cities around the world that have had a lot of growth while having reasonably priced houses.
In 2000, Houston had a population of 3.8M in 2020 it was 6.3 M. From
https://www.macrotrends.net/cities/23014/houston/population
They have also managed this with affordable housing.
That's something to learn from.
Sydney (some of the highest house prices in the world) has a few new estates built outside the city but they suffer from no schools, no shops (except a strip mall equivalent), no parks, no tree cover, and general shoddy building work.
https://www.theguardian.com/australia-news/2021/nov/16/ultim...
And yet there is literally millions of people begging for a opportunity to get a unit in large/rich cities. If there was no value to it, why does everyone cares so much about living there?
If you truly believe what you say, than you better never ever complain about home prices. Paying 100$/ft² for a massive modern house in a shithole place is an option that is always there for you if you think location doesn't matter. But let me guess... you want to live in [insert big city near your location] but people richer than you also want to and they priced you out
There is a social role to be played here, whether homeowners do it themselves or landlords do it.
* Two-thirds of global paper wealth is tied up in real estate valuations (residential and commercial).
* Paper wealth is now nearly 50% higher (!) than its long-run average relative to income, globally.
* Paper wealth and economic growth are no longer moving in sync, as they had in the past for a long time at the global level, albeit with some country-specific deviations.
Asset prices around the world, including property prices, are now in unprecedented territory; there is no doubt about that.
There are many possible explanations for this deviation from long-term norms, but they come broadly from two camps. In one camp are those who are not sure why they should even worry about this, because they believe the global economy is about to shift to much faster economic growth, driven by new technologies like AI, quantum computing, cheap sustainable energy, and space exploration. In the other camp are those who are quite concerned about the financial, economic, and political consequences if paper wealth reverts to historical norms in relation to global income.
Some of the smartest people I know are either in one camp or the other, with little overlap between camps. My perception is that there's no shared agreement as to what any of this means, or whether anything should be done about it.
--
[a] https://www.mckinsey.com/industries/financial-services/our-i...
If paper wealth takes a shit the people that will be impacted will be retirees and the wealthy, not your average joes.
These price fluctuations matter for people who either want to invest into real estate or withdraw previous investment, not for people who want to live in their current house.
I'm sure I'm preaching to the choir, but this is a terrible strategy. In a perfect world it cuts the interest payment a lot, but the risks are significant.
a lot of everyday people will tell you that just won’t happen. that governments perceive the risk of falling home values to be so large that they will do everything in their power to prevent that from happening.
I think that in the fullness of time, it will be seen that today’s high asset prices were directly and unambiguously a consequence of extremely low interest rates and the creation of money by central banks and nothing more than that. When returns on lending are low, investors have to switch to riskier asset classes in order to generate the returns that they need to service their future cash flow requirements. For example, pension funds have to generate a certain amount of cash flow to cover their future pension liabilities, which are fixed and unchangeable. When central banks make money cheaper by lowering interest rates, pension funds have to shift to classes of assets that generate higher cash flow, even if that means taking on more risk. They don’t really have a choice in the matter.
There is a positive feedback loop here. Low interest rates cause large investors like pension funds to shift to riskier assets. This stimulates the risk appetite of retail investors, who pile in when they see the trend of increasing prices in these riskier assets, such as stocks and houses. The increase in asset prices reduces the effective returns on those assets, forcing pension funds another large investors to shift to even riskier things, like venture capital. Rinse and repeat.
I suppose nobody can say for sure that there hasn’t been some kind of long-term shift in global economic growth because of changes in technology, but it sure seems to me like cheap money is a more reasonable explanation for all of the craziness we have been seeing in the past year or two.
I'm not so sure - it depends on how heavily leveraged buyers are and what % of them have used price increases to secure more capital. If your home has significantly appreciated in value but you haven't taken equity out of it, it could be said that you were leaving money on the table but only if you knew of a better investing opportunity. If you just let the property appreciate and didn't securitize that gain, a decline from peak values doesn't hurt because you have no loan to service.
This source [1] also says HELOCS or 2nd mortgages are only 8% of owners, 1/2 of what they were in 2009. But that was 2018 maybe pandemic upped the %.
So to get another 2007 meltdown this thesis would be that a lot of people would have to lose their jobs first. Interest rates going up wouldn't matter if they make the same (or more) money.
But could argue collapsing real estate values would cause weak job market.
[https://www.socialexplorer.com/blog/post/once-viewed-as-easy...]
By magical means of course.
Inflation is a sneaky way to give the poor a wage cut. How else do you suppose the fed is supposed to be able to increase employment using inflation?
Edit: down voted, ok here is a citation from an economics Nobel laureate:
https://krugman.blogs.nytimes.com/2010/02/13/the-case-for-hi...
> when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation would lead to lower unemployment
By its very nature, giving laborers inflation-matching pay raises counters the explicit, intended policy effect of using inflation to increase employment. Or, your employment model could be relying on "let's use increasing prices to light a fire under people's asses to get them to look for jobs". Which, if you ask me, as a neoliberal programme is far crueler, far more pernicious, than any slash-public-services scheme that fiscal conservatives dream up.
Suppose we print a bunch of new money and hand it out to everybody. Now people have money in their pockets and want to spend it, so demand goes up, so prices go up, and we get inflation.
But most goods and services have elastic supply. We can make more of most things given higher demand. So companies make more of stuff and have to hire more people to do it; unemployment goes down. Hiring people is supply and demand again. Demand goes up, wages go up.
Then, if you stop printing money, the demand (in real dollars) goes back to the original level once prices and wages have both increased. If you continue to do so (i.e. a constant rate of inflation), the extra demand is sustained by the continuous infusion of money.
Now suppose you do the same thing, but instead of giving the new money to individuals, you give it to the rich, or to borrowers in the form of low interest rates. They use it to bid up housing prices. Then people have to work more to afford the same house or apartment, which lowers unemployment. This is obviously bad and screws the poor.
The most important thing is who gets the new money. It needs to go to individuals, not borrowers, not institutions.
Government by its very nature must generally give out newly created money to the wealthy (handing out money to the public directly does not get low income housing built, or highways, or military bases, or warships, or scientific research... To "get shit done" you must give it to already-wealthy contractors), and by its current construction, the interest payments to create that money goes to banks. Now if you want to argue that "government maybe should not be doing a lot of that shit", perhaps you do have a concrete proposal for reducing the wealth divide.
Why?
Last year they sent everyone a check. They could do that.
Sure, they can do that sort of thing from time to time to make people like you happy, but the primary spending of government, as in, "to do shit", cannot be structured like that.
Are you arguing that 100% of government spending should be stimulus checks?
I'd be down. Count me in on your reform program.
The rich own assets, they financed these assets with debt. Debt becomes less burdensome with inflation, increasing their equity.
At the same time, lendors lose with inflation. But who are the predominant lendors now? Life insurance companies, pension funds, mutual funds, household / nonprofits, state and local govts., etc.
All of these institutions seem to be an aggregation of middle-class / poorer people vs. elites.
If you're Elon Musk you own Telsa. You're main source of liquidity is likely cash from a revolver[1]. During inflation, your debt becomes relatively smaller to your Tesla equity. Your net equity becomes larger.
I think this just leads to more inequality, more corporate control, and weaker labor bargaining power.
We'll see - hope its ok.
[1] form of debt, where Elon is the lendee and is using Tesla stock as the collateral
In a bout of inflation, not all prices increase at the same rate at the same time; this is known as the Cantillon effect (https://en.wikipedia.org/wiki/Richard_Cantillon).
This is a pretty bold statement given that it is the opposite of all conventional wisdom, and historically those concerned with the poor have argued that inflation is a way for the rich to rob the poor. For example, the "misery index" in the 70s was the sum of inflation and unemployment, because it tracked how much wages were falling and how much unemployment there was.
So this "new economics" that says inflation is good for the poor is pretty stunning -- is it something you figured out on your own or do you have a reference for statisticians or economists making this case?
> Statistically, the wealthy have way more cash than the poor, while the wage-earning population will get increased income along with inflation.
Let's take a look at what is going on:
Over the past year inflation is up 6.2%, so let's deflate:
- real SP500: +25%
- real bonds: -7.8% (PIMCO total return)[2]
- real wages: -1.2% (using BLS data)[1]
Now definitions of "rich" are always arbitrary, but if you are rich you have most of your wealth in the form of assets -- stocks, bonds, etc. If you are poor, most of your wealth is your future labor - wages. That's another way of saying that the rich make money from passive income while the poor have to work.
So inflation reduces wages but the effect on passive income is mixed. Stocks go up and bonds go down. A typical wealthy person will own a mix of stocks and bonds and will generally own more stocks than bonds, so on balance their holding of equity protects them and their wealth still increases. But that's not true for the poor, who have only their wages.
This is why conventional wisdom about inflation mostly hurting the poor is correct, and the galaxy-brain takes that inflation helps the poor and hurts the rich is incorrect. Wealthy people can shield themselves from the rising cost of consumption while the poor cannot.
[1] https://www.bls.gov/news.release/realer.htm
[2] https://www.pimco.com/en-us/investments/mutual-funds/total-r...
The problem with this is in what the Fed does with the new money. They currently use it to buy back government debt, which goes to the rich, i.e. existing bondholders. What they should do is to give it out to all citizens equally, which is the opposite of screwing the poor.
That is one of the causes of high asset prices. Another is that cheaper debt allows more people to borrow money to buy assets.
> If paper wealth takes a shit the people that will be impacted will be retirees and the wealthy, not your average joes.
If paper wealth drops average joes will also be affected. Employment depends on consumer spending, and a big drop in asset prices can have a significant impact on spending through wealth effects (https://en.wikipedia.org/wiki/Wealth_effect)
Climate change and sealife collapse is getting pretty serious for SE Asia and I don't know what to believe about India water supply.
Also the elephant in the room is that property taxes are a derivative of your net worth, not your income. So if paper wealth (due largely to RE) continues to outpace income then we're in for a big hurting soonTM.
This is the hilarious part about critics against a wealth tax - we already have a wealth tax. I live Texas and people are about to have a brutal wake up call when they can't afford $10k/year in taxes because their $200k ranch they bought 5 years ago (and cost them $40k down) is now worth $500k.
Note - I have mixed feelings about the proposed wealth tax. The proposed implementation was misguided.
But probably better if they didn't have zoning.
I do have a friend that has 100% service-connected disability... And Texas has a 0% property tax for veterans with that categorization. He's thinking about moving
>Some of the smartest people I know are either in one camp or the other, [...]
And you believe them?
What about the camp that is worried that paper wealth doesn't revert to norms? I mean, if a person doesn't already own a house, then inflated prices work against them.
If we can come up with a consistent policy scheme(taxation and incentives) which can undo land ownership as being a sure-fire way to build wealth(maybe a land value tax?) then it's perhaps not so bad to have a nation of renters.
(at least in my experience of like everyone I know).
https://ec.europa.eu/eurostat/cache/digpub/housing/bloc-1a.h...
While some metropolises such as Tokyo seem to be set up well for providing housing at a wide range of price points, others such as the San Francisco Bay Area and Los Angeles do a much worse job; there are some people who regularly commute 2-3 hours each way from these metro areas because this is all they can afford, yet the job markets in the Central Valley (near the Bay Area) or the Inland Empire and Antelope Valley (both near Los Angeles) areas are rather anemic at best. For many of these people, the choice isn't between a condo in Fremont versus a single-family house in Tracy. Instead, it's an apartment in a place like Stockton or Modesto versus moving outside of the orbit of the Bay Area; that's how bad the housing crisis has gotten for many people.
The chief cause of this is zoning regulations and other policies in the Bay Area and Los Angeles that discourage denser development, thus encouraging sprawl further and further out; hence, the "drive until you qualify" phenomenon. The normalization of mega-commuting has social and environmental consequences.
Yes, there are cheaper metro areas, but these cheaper metro areas tend to offer fewer job opportunities compared to the more popular metro areas. Part of what fueled the social divide between "blue state" and "red state" America is economic opportunity being increasingly concentrated in a handful of coastal metro areas, while these opportunities have largely failed to trickle down to much of rural America and the Rust Belt.
What's needed are two solutions: 1. Change the zoning policies of certain metro areas in order to accommodate the demand through densification instead of sprawl. 2. Find ways to encourage the economic development of areas outside of the coasts.
Disclaimer: I grew up poor and I have relatives who lived in public housing; the environments they lived in were very rough, not only in terms of the quality of housing, but also in terms of living in crime-ridden neighborhoods. Now, I'm not saying that public housing has to be that way; I've heard good things about Singapore's public housing.
The only thing that Americans might hate about it is that they are universally 30 story concrete apartment buildings that Singapore is selling to its citizens at affordable costs. If you want detached, that is the private market and will cost a lot.
Maybe an "opportunity" that doesn't provide a living wage isn't actually an opportunity at all?
- The Amtrak San Joaquins train (https://www.amtrak.com/san-joaquins-train) connects Stockton with Richmond, where passengers can transfer to BART.
- For those headed to Silicon Valley, the Altamont Commuter Express runs from Stockton to San Jose (https://acerail.com)
I'm looking forward to the California High Speed Rail project being completed. This will make a commute from places like Merced, Madera, and Fresno much more feasible. Currently it's possible to drive from San Jose to Fresno in less than three hours; the bullet train will likely cut the duration of this trip by half.
I agree with you; it would be nice to see some nice transit-oriented developments spring up around train stations in the Central Valley.
> there are some people who regularly commute 2-3 hours each way from these metro areas because this is all they can afford, yet the job markets in the Central Valley (near the Bay Area) or the Inland Empire and Antelope Valley (both near Los Angeles) areas are rather anemic at best.
Just move. If you don’t, I find it hard to be sympathetic. Family w/e you can make it work. This is peak American bullshit to drive 2 hours each way to work and if you are putting up with that it’s on you.
I don't mind doing a long commute once or twice a week, especially when I have flexible work hours, but anything more often than that becomes draining.
What is the problem again? Rich people getting less rich? Imaginary number of net wealth getting lower?
- retirement plans often rely on equity from real estate, and so do some nursing home admissions
- as per 2008, when people have more money remaining on a mortgage than the underlying asset (home) is worth, some of them will declare bankruptcy
- when rich people suddenly have a lot less nominal cash, they can't fund their businesses by liquidating assets, so they cut costs, and then those costs have to find new jobs, which can take years and is hugely disruptive for everyone[0]
Overall there's an argument to be made for doing it anyway, but there are pretty clear downsides to causing an economic crisis, even if the economy eventually reaches a better equilibrium state.
[0] note that I'm not supporting trickle-down economics, just warning about the disruption that suddenly changing the distribution of wealth will cause
incredibly convenient to just dismiss those people who lost wealth this way, and claim that the "truly wealthy" is to be blamed.
One camp is the "this time is different" camp and the other camp is the camp that has been proven correct (eventually) in every historical instance of an asset price bubble. It should be noted that the first camp ALWAYS has a very good argument (usually involving technological change) about why this time is in fact different, but it always turns out to not be different.
It always blows my mind a bit when people talk about the productivity gains of the future coming from cutting-edge "sci-fi" technology.
I've seen with my own eyes the insane productivity gains some knowledge workers can get simply through the use of hacky-but-effective domain-specific Python scripts. We're talking one person producing more benefit than an entire team by an order of magnitude.
I'm sure there are other tried-and-true technologies that simply aren't rolled out widely enough and constitute a massive amount of economic low-hanging fruit (especially in the developing world).
I'd push for them before I look to the stars for the next miracle technology.
We had a data hunting that would go out into supermarkets and collect data, but oftentimes with errors. Supervisors would sift through all of them and spend 4-5 hours a day removing/fixing/joining faulty entries.
I saw that, wrote two Python scripts to automate it (~2 weeks from start to deployment). All that workload automated immediately, and to my knowledge it's still in use today.
I've seen many shops where the amount of code for dev and QA tools significantly exceeds whatever product they ship.
I saw some similar things in the accounting department at my previous employer, and on the flip side I've met many people who seem to spend an inordinate amount of time doing steps that a computer could do, but worse.
I think the important bit is to have tight integration between the person writing the code and the person with the domain-specific knowledge that the code is performing - ideally they should be the same person.
As we move away from seeing computer programming as a specialised skill for a class of elite engineers and towards something just generally useful like reading and writing, I can see this yielding huge dividends economically.
That’s not meant as flattery, it’s just pointing out that the efficiency gains of universal computer literacy will not be realized.
I disagree - we spend years from age two teaching literacy. It's a skill that needs practise, but it's a relatively new invention that has enormous benefits. Software is too.
(Mind blowing fact: The walls of jericho were built 2,000 years before writing was invented)
> will not be realized.
Not quickly, but give it a few decades. In particular, you will probably have to wait for another generation of teachers.
Exactly this. Not everyone can work for Google (or even for a B-grade software firm!), but in many instances all you need to do is string a couple of libraries together in order to get order-of-magnitude productivity gains.
I worked at an international company with its own terrible email marketing system.
I wrote my own email builder based on their templates that allowed me to visually build emails and then just copy and paste in the code!
I also wrote a Ruby script that iterated over a CSV/Excel spreadsheet file supplied on a regular basis to generate HTML page, which I then pasted into their horrible CMS!
The previous person in my job used to have to do all those things manually and it took forever!
The key win for me was convincing the head of IT to enable WSL on my work supplied Windows 10 Laptop!
Having access to Linux made everything possible!
There was a whole team of people doing this job and this one script got through what a whole team of engineers were doing in about 30 seconds
---
“You’ve just done in two hours what it takes the three of us two days to do.” My college roommate was working at a retail electronics store in the early 2000s. Occasionally, the store would receive a spreadsheet of thousands of product prices from other stores. A team of three employees would print the spreadsheet onto a thick stack of paper and split it among themselves. For each product price, they would look up their store’s price and note all the products that their competitors sold for less. It usually took a couple of days.
“You know, I could write a program to do that if you have the original file for the printouts,” my roommate told them, when he saw them sitting on the floor with papers scattered and stacked all around.
After a couple of hours, he had a short program that read a competitor’s price from a file, found the product in the store’s database, and noted whether the competitor was cheaper. He was still new to programming, so he spent most of his time looking up documentation in a programming book. The actual program took only a few seconds to run. My roommate and his co-workers took an extra-long lunch that day.
This is the power of computer programming. A computer is like a Swiss Army knife that you can configure for countless tasks. Many people spend hours clicking and typing to perform repetitive tasks, unaware that the machine they’re using could do their job in seconds if they gave it the right instructions.
If only that was what actually happened when people took initiative in this way...
Reminds me of "93% of Paint Splatters are Valid Perl Programs":
These investments may be overvalued and if prices change, owners will find they're not as wealthy as they thought, but they'll own the same thing.
Also, what does it mean to say that wealth is "tied up" in real estate? Prices going up doesn't change anything real. The effect might be more resources going into construction and renovation, though.
Debt and financial derivatives backed by inflated asset prices might be the problem, as in 2008. Those income streams might be less solid than they look.
It seems to me that wealth isn't being lost. It's being transferred to those wealthy, smart, or lucky enough to have invested in real estate.
Real estate is a seniority system.
However, sometimes the transfer is via inheritance and sometimes it’s by selling property. I wonder to what extent retirement could be considered to be funded by real estate sales? It’s certainly something people do: sell the house and move somewhere cheaper.
I think people are biased towards assuming the first one whereas the are structural reasons relating to Ray Dalio's long term debt cycle argument why the latter is more likely at this specific moment even though historically the former happens more than the latter.
I am one of those millennials that is forever priced out of the housing market. And that to a large extent has shifted my political belief away from hard left that I once used to be. Especially seeing how the local mostly leftist politicians in SF have basically helped fuel the crisis even further and basically have done nothing. And many neoliberal leftist economist and media outlets even defending the status quo monetary policy that is clearly behind this wealth divide.
To my disappointment though as much of a victim clearly as millennials and GenZ are, their political beliefs don’t acknowledge they want a change. It’s as if they expect the same group of people that are largely behind some of the bad policies causing the wealth disconnect are suddenly going to reverse course. A case in point is SF where they keep voting the same old eggheads who have virtually made it possible for the boomers to retire extremely wealthy at the expense of prices out millennials like me. If you vote for the same people expecting some sort of change will happen then spoiler alert. It won’t.
https://finance.yahoo.com/news/peter-thiel-vast-majority-cap...
Restricting the housing supply might very well be the cause of traffic, not the solution to it.
1. Build great transportation infrastructure so it is easy to get to work from outlying suburbs. That takes the pressure off on the need to buy centrally. This doesn't have to be (and probably shouldn't be) just freeways, it could be subways and urban rail.
2. Build very dense housing so people can live near their jobs, thus not needed as much infrastructure.
The best cities (e.g. Tokyo) do both.
I understand that left and right mean very different things in Europe or in the US, for instance.
Inequality on access to housing has shifted you away from hard left. And neoliberal leftist economists and media are defending the status quo.
What are leftist politicians for you? the Democrat party? What are some examples of neoliberal leftist economists? I cannot think of anything neoliberal that it is not center-right to hard-right.
Probably it is because I am not from the US, and would be curious to know. To me, hard left is anarchist/communist and neoliberals are always right/hard-right/center-right depending on how much one likes them :)
I think your understanding is generally correct, it's American politics that is tipped a little bit sideways at the moment.
Neoliberal economists would be any mainstream economist who are still living in their la la land thinking QE is done for greater good of middle and working class and lower interest rate has nothing to do with investor class using their inflated market value of assets to borrow more and buy more assets that in turn also keeps going up. Meanwhile credit card interest rates are still averaging 10%+.
The point in the article I was highlighting was about prices outpacing growth. And that’s a problem. When you have prices doubling almost every 5-10yrs and no chances of slowing down then why even work?
This is a deliberate political choice, and it shows, especially if we account for the mass individualisation of (american) society.
If even one city embraced Manhattanization the way America has embraced sprawl for the last 75 years, you could direct the complainers there. But there isn't one.
I don't see any simple ways to fix this, interest rate hikes will slow price growth, but payments will still go up. Some incremental changes (additional taxes on empty houses, rezoning, etc.) may have small changes, but do not seem likely to bring down affordability. Any small dip in affordability in the desirable places will likely see more migration there, unless we hit a huge recession, which based on my experience in 2008, still means most of us will miss out, as the price won't dip enough and the major asset holders just get to buy at a discount.
That’s not how asset owning class uses low interest rate environment in their favor. Say you bought a house in SF in 2010. Well your market value of the house has already doubled if not more. So 5yrs later you borrow against that asset to buy another rental unit in even lower interest rate. Which in turn has doubled.
Meanwhile if a first home buyer like me wants to get in I have to not only have 20% down payment, but also clean credit and a secure job. Do I get to use the low interest rate in my favor? Let’s see credit card interest rates are still 10%+.
Have you talked to a mortgage broker lately? In my locale, very few first time buyers are going to be in a place where they have to put down 20%. There are so many state programs available for first-time buyers and so many different loan options. I understand you are in SFO, but a lot of the frustrations you are expressing in your posts above are very localized to California and to SFO and don't really match the left/right politics of the rest of the country.
I think phasing out mortgage interest deductions over time beginning with a cap would be one positive, but as we saw with the recent SALT cap, that effect is mostly overridden by other factors at least today.
I don't think there is a single entity or action that can be pointed at, there are many inputs, with only recession (in one city or the whole country) seeming to have a strong enough signal to override all the other inputs for the most part. Hiking interest rates to 15% ala the 80's also might work, but I don't expect to see anything near that.
Conservatives and liberals in cities nationwide block the construction of new housing. And it's perfectly rational for people to do so, without it being a judgment of their broader political beliefs. People like their private property and they want it to appreciate. You have to realize that ideal is present in both well-to-do left and right leaning areas.
My point is the moment politicians realize they don’t actually have to make any efforts to improve the quality of life for their constituents, and can rather keep them busy driving culture war outrage and making them single issue voters is the moment people as a whole lose. For example I don’t like Joe Manchin or Kristin Synema. But they are hell of a better choice for the people they are serving than Nancy Pelosi or Ted Cruz. Knowing your action can cost you elections is how democracy is supposed to work.
> If we followed the logic in your comment, a millennial in a southern red city would reject the right, and choose the left
If it means that the right is virtually winning every election cycle and not doing anything to improve their quality of life and major pressing issues, then yes they should. Democracy is all about keeping people in power in check so when it comes to re-election we can vote them Out if they didn’t do a good job. at least in my book.
The left vs right distinction hasn't existed in San Francisco for decades at this point - it barely exists in California metros at all anymore beyond the old party fundraising machinery. The Republican party is already practically irrelevant state wide. The same can be said of Democrats in rural California or even many states. In those scenarios, the second you make it about political ideology, you shut yourself out of the process, either by refusing to engage with it because they're the "others" or failing to understand what the constituents actually care about.
For example, you're negatively comparing Nancy Pelosi, the House Rep of one of the wealthiest districts in the country, to three senators of diverse states. I don't see what led you to that conclusion other than a ideological blind spot - all the SF homeowners who put her in office for nearly 40 years have benefited wildly from the national policies she has supported. She has so much power in Congress because she represents that district so well that she can spend all her time fundraising for other members of Congress and fighting the culture war (which, in my experience, rarely bleeds into her actual campaign because her constituency doesn't give one shit as long as their two bedroom condo is worth 7 figures). These are the "wealthy" that the GP is talking about and they've stuck with her for nearly four decades through several boom and bust cycles. Say all you want about her politics, but her constituents overwhelmingly chose her over and over again. Are they idiots?
Most striking is that all of your complaints seem to be about the local politics of San Francisco - so what do Pelosi, Cruz, Sinema, or Manchin have to do with it? If they had any more than a passing, indirect influence on San Francisco decision makers, it would be a major breach of the Federal/state/local separation of powers. Likewise with monetary policy. A focus on national politics makes one completely blind to what's actually going on at a local level.
That's actually the problem! Spoiler: They don't vote (enough, compared to older cohorts). Older people are generally wealthier, and they also tend to vote in greater numbers and for their own interests, but younger people don't. It really is tragic, but not for the reasons you listed.
I don't understand this, where I live rezoning means your land becomes 3x more valuable overnight and every house landowner dream of it. Opposition is either sentimental or for environmental concerns (which can be justified).
In Austin they are tearing down old homes left and right and replacing with 2-3 on same plot. Never seen this done in Maryland, California or New York when I lived there.
Construction and zoning seems much less of an issue in Texas vs California. I believe it's the same in Arizona, Florida etc. But no firsthand experience in those markets.
Simply rezoning SFH plots to allow for multi-family construction and allowing the free market to work will very quickly produce new housing stock. It also immediately benefits existing homeowners by increasing the utility/value of their land. e.g. you now own a plot that can produce a 4 unit home, inherent value is higher
It's a big country. There are plenty of cities where it's possible to buy a home and start a family on a regular salary. Have you been to Cleveland lately?
As someone born and raised in the bay area it's not that easy. All my friends and family live here. I have a well paying job that I like here and I like my co workers. I have accepted that for as long as I live in SF, I will have to rent. I will never be able to own a home remotely close to SF or to my office.
I don't want to just run to a low COL city and start over. I would rather fight for lower housing prices so that one day I might be able to own a home and start a family where I grew up myself.
It's great that you want to fight for lower housing prices. But what happens if you fail? In 30 years if you're still stuck renting a tiny apartment will you have regrets? Pick your battles wisely.
Not OP but on the other hand my own parents did that, and that's exactly why I don't want to move away. I'd rather stay close to the family I cherish, my time with them is literally priceless. Luckily housing prices aren't so bad here, but my point stands
I laugh every time I hear that. Especially proposition 13 which is basically age-based redlining.
Look at Laurel and Hattiesburg MS for example. Decent towns with families, schools, breweries, hipster cafés, largely all the jazz people clamor over in expensive towns. And look at the real estate prices over there.
https://apnews.com/article/mississippi-referendums-elections...
but yes, overall only a small proportion of people i know really care about these things
Also, as someone who grew up in the rural midwest: the statue thing is kind of silly and a distraction. The real problem with the southern midwest is that you get what you pay for.
The schools are god-awful; often you can't even buy a good education with infinite money. Even the "good" schools are only parochially good; transfer them to a coast and they're embarrassingly bad.
The local employers don't provide interesting work, and professional networking opportunities are niche to non-existent.
(Crime too. Contrary to popular perception, the wealthier coastal cities have a far better handle on crime at least in the areas where wealthy tech workers typically live. SF might be an exception, not sure. Thinking mostly of the northeast and PNW. In the rural midwest, you'll get meth heads with shotguns even in nicer suburbs. Cheap housing is a great equalizer, for better and for worse.)
Liberals concentrate in a few enclaves and then get upset when the rules they have to play by don't give them what they want. The US is arranged to empower the flyover states and complaining about it won't change it.
>And that to a large extent has shifted my political belief away from hard left that I once used to be.
I thought you would be left because you want government intervention for the housing market? I know SF has some weird rules about something called zoning? But shouldn't you still be on the left side of the spectrum?
Could someone ELI5?
The available option for "left" in the US is the Democrat party. They are very establishment, very corporate, very status quo. They also still cater to the baby boomers as they are the largest voting block.
Thank You that make some sense.
>The available option for "left" in the US is the Democrat party.
And thanks for the explanation, I always knew it was different between left from EUR and left in US. But your explanation put it in much better prospective.
I don't think it's clear at all that loose monetary policy causes a wealth divide. Most evidence points to the fact that the bottom quartile's income is the most sensitive to labor market slack.
It's not that young people aren't voting for their interests (which in my biased opinion is in the best interest for the country overall), it's that we don't have the numbers yet. I presume the story is similar in local SF politics.
E.g. easy monetary policy, bringing back the SALT deduction, NIMBYism, rent control.
Where is the strong push to kill exclusionary zoning?
Housing problem is very easy to solve by changing zoning laws and allowing free market forces to work. Also by the Fed not inducing FOMO buying sprees by keeping rates artificially low for long periods of time.
Mostly short term solutions from an empathic, reactionary, and transient voting bloc that does not stay long enough to experience any consequence of their actions.
There’s more to the country than the bay area. I have no idea why millennials feel they deserve to own property in extremely expensive areas for cheap.
All areas are more expensive now.
Boomers may have suffered other high costs over the decades, and higher interest rates and inflation, but there were folks in London over the last 20-30 years putting mortgage deposits on their credit cards, paying them out of a single annual bonus, or simply putting down nothing. Well paid professionals who bought property in London in the 90s can easily be multi-millionaires now. These people have seen asset appreciation that has almost beaten the global stock market. That's without considering the effects of their leverage. And unlike the stock market those capitals gains are absolutely 100% tax free (on primary residences of unlimited value).
Relative to median incomes the average house is now 3x as expensive as it was in the 80s and 90s. Low rates only help if you can get a deposit and a mortgage together to get on the ladder. When houses are 10x median income it's just really really hard to do that, even for the well-paid.
It’s remarkable that our generation willingly takes out 6 figure loans for worthless college degrees but can’t save 10k for a down payment on a condo in Atlanta.
People spend more money on their homes nowadays. Especially now that remote work is widely accepted.
> in SF
Perhaps you may be priced out of the housing market in SF specifically. That doesn't mean the housing market as a whole. There is cheaper housing elsewhere.
I'm GenX, in my 20s I wanted nothing more than to live in NYC. Could never make it happen, too expensive. I was literally priced out forever of the NYC housing market. I gave up on that, moved to California which was back then still a lot cheaper.
If you're young, no point in banging your head against the established old money and demand they change for you. Shift targets and build the next great thing/place.
And as real estates absorbs all the investment capital, a lot of buildings are built that sit partially or even fully empty, just appreciating. But not really producing anything.
Sometimes, even the shelter a house was designed to provide is not used. People literally buy larger houses for the tax advantages, not because having the space is worth the investment.
Meanwhile, other investments actually produce good and services people are willing to buy and often turn a profit. These kinds of investments are the real source of wealth. A house is something that can only be built using existing wealth, whether yours or borrowed.
All of this is done because someone convinced policy makers that consumption is somehow what causes prosperity. This is incorrect.
It's actually PRODUCTION that creates prosperity. To consume something, someone has to produce it first. Everybody may want a car but until Henry Ford figures out how to produce it cheaply enough, they won't get one.
And that's over investment in real estate is a problem: it takes capital away from innovation. It DELAYS innovations. And those delays cost trillions, depending on what time period you're looking at. Certainly delaying the invention of the assembly line by a century would have cost trillions.
It's a coordination problem. The mechanisms that regularly work on this (politics, markets) are not as effective as they could be, because of interdependencies, blockages, ideologies, etc.
This is BEFORE asset appreciation. That is, if the house stays the same in value in 30 years you're still outperforming the stock market's historical average.
I guess the ups and downs are ok as long as you don't have to sell and can continue to make the payments. And taxes.
So if your wages or other assets track or exceed inflation, then that debt should be paid off more easily
If your salary does not increase with the inflation, you don't get the additional 4.5% in salary and then you are NOT getting 2% real returns.
Combine that with all energy costs going up and you have a real problem because the governements cannot raise interest rates (without crashing everything), that leaves banks to compensate for energy (which you cannot print) which means people are going to get hurt (the interest spread, the difference between what a bank pays to the central bank and what you pay to the bank, is going to grow until things get out of hand).
My prediction is that house prices cannot increase more than general inflation now since the margin of the central banks is now permanently zero (we have had official zero interest rate for some time, but not for the banks, only last year did the central banks remove the spread for banks to borrow money from or hold money at the central bank, but now they cannot increase the incentive to borrow ever again for this civilization) this means the debt collateral (it's not an asset if you have debt on it) wont be able to appreciate either!
And energy inflation is VERY deflationary for housing because you need to buy heat, water and food before you pay rent/interest.
One easy way to see this trainwreck in motion is to watch the state of houses that need repairs, the second you cannot borrow to repair a house the music stops. In fact, that you can borrow to do maintenance in the first place should have been enough warning.
We're living through the biggest margin call possible right now (a margin call on money itself, or as you should call it "housing backed debt" because thats 99% of it) and there is nothing anyone can do about it!
The end game is that there is a split between debt money and non-debt money in terms of what interest rate they have, and again the spread will increase until things get out of hand, they allready are; in some countries you pay negative rates on your savings above a certain amount and at the same time the loan rates will increase in the other direction!
Spreads and margins!
So you sold the bank a bond with an inflated par value, figuring interest rates will rise soon (lowering the bond value) and snatched a good deal. Except the banks are almost certainly better at predicting the future interest rates, and they demand a coupon rate significantly higher than the risk-free rate to compensate.
The short of it is that the banks aren't stupid; the potential for a future interest rate hike is priced in.
The exception is if the banks are selling on their mortgage bonds to someone else-- then they don't care if they're paying too much for them, and they'd be happy with the additional demand.
Isn't that how the 2008 Global Financial Crisis happened...?
https://www.investopedia.com/articles/pf/07/secondary_mortga...
[0]: https://en.wikipedia.org/wiki/Life,_Liberty_and_the_pursuit_...
Economic distributions that are massively skewed aren't sustainable, any more than organic distributions are; either you end up with chronic bad conditions (like diabetes) or abrupt discontinuities (like heart attacks and strokes, parallel to authoritarian crises or revolutions). I think moderate (2-3%) inflation might actually be a good thing in the short-medium term as long as its led by wage increases. Much of the inflation we're seeing now is result of demand shocks following the pandemic and thus economically rational.
As the rest of the world adds property taxes to real estate, evergrande is coming everywhere.
> the big government spending programmes of the post-Covid era present a new opportunity to try and push money into more productive sectors, which could ultimately bring wealth and growth back into alignment
We've seem some huge big government spending programs recently (monetary expansion and fiscal stimulus) and it's pretty clear the money has flowed into speculative asset classes, equities, and real estate. The conclusion is a non sequitir. Government spending programs have arguably caused the real estate bubble, not sure why more of them would have a different impact.
Here are some government programs that would probably help lowering housing prices:
* allow for multifamily housing
* remove the mortgage interest deduction
* implement land taxes instead of property taxes
* have the Fed stop purchasing mortgage backed securities (in the midst of a housing bubble)
* get the government out of the mortgage securitization business
The Great Mortgaging is a great source on this: https://www.nber.org/system/files/working_papers/w20501/w205...
Just look at this scary chart: https://www.fortressofdoors.com/content/images/2021/10/2021-...
>* allow for multifamily housing
Zoning is entirely a local matter, so sure, talk to your local city / county / state if you prefer there to be more allocation for multifamily. It isn't something that the feds have any control over.
>* remove the mortgage interest deduction
So what's your goal here, given that historically this was the single biggest tax benefits to the (ever-declining) middle class.
>* implement land taxes instead of property taxes
Real estate is predicated on the concept that adding value to the land increases its value. So... what exactly become the merit of taxing land over property? If you tax property, the value of the land is included in that tax.
>* have the Fed stop purchasing mortgage backed securities (in the midst of a housing bubble)
Real estate is local. I'm sure there are markets that are in a bubble, but that doesn't mean that every market is experiencing that.
>* get the government out of the mortgage securitization business
These programs by and large benefit the non-wealthy by providing a degree of stability in the mortgage market that make it worthwhile for lenders to lend. Wealthy investors generally don't care - they are paying cash, working out seller financing arrangements, borrowing from hard money lenders, or have long-term bank relationships such that they have all the access to conventional money they need. It's the less fortunate and middle-class that get hurt when government programs are restricted.
If land--but specifically not improvements to that land--is taxed then there's relatively more incentive to make productive use of the land. $1 of investment to improve the productivity of land by building housing or whatever is tax advantaged over $1 of investment to try to hold onto appreciating land in hopes it goes up.
An issue with property taxes as they are currently implemented is that they discourage development. Someone who owns a parking lot in downtown Los Angeles will pay very low property taxes on that land relative to someone who has built a large apartment building (even setting aside Prop 13). If the owner of the parking lot decides to build an apartment building on it, their property taxes will go way up. So the county is punishing the property owner for developing on that land, even though it's socially desirable.
The idea is that the land value is value that is created by the property's location, not anything the owner has specifically done. In other words, it's value created by the rest of the society that the owner has captured. However, development on the land is produced by the owner. A land value tax captures some of the value produced by society as a whole and does not tax value that was created by the owner. This incentivizes owners to develop on their land. (Or more properly, doesn't disincentivize development.)
>So what's your goal here, given that historically this was the single biggest tax benefits to the (ever-declining) middle class.
Weird, I've mostly read that it disproportionally helps the rich. Examples:
[1] https://www.stlouisfed.org/open-vault/2018/may/why-economist...
[2] https://www.forbes.com/sites/artcarden/2019/06/28/should-we-...
[3] https://fivethirtyeight.com/features/the-tax-deductions-econ...
Check out Henry George; given it's HN, check out Scott Alexander's blog on Henry George: https://astralcodexten.substack.com/p/your-book-review-progr...
Removing the mortgage interest deduction (for owner-occupants) would widen the gap between commercial landlord’s ability to buy a property and an owner-occupant’s ability to buy that same property. (It’s spectacularly unlikely that mortgage interest for commercial landlords would become non-deductible as a general principle of tax code allows the deduction of ordinary and necessary business expenses in pursuit of profit. Mortgage interest for commercial landlords is clearly such a business expense.)
So, if you would like to favor owner-occupants over commercial landlords, you should be in favor of, not opposed to, the mortgage interest deduction for the former.
From: https://www.irs.gov/businesses/small-businesses-self-employe...
> What Can I Deduct?
> To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
Their central banks literally flooded the economy with cash. Buying bonds, stocks, real estate, whatever it took to stabilize markets.
This is their "role". Call it "quantitative easing" or whatever fancy term they come up with this week.
What it means is devaluing the currency. In this scenario, if you hold assets (houses, stocks, etc) you gain "wealth". If you don't, you are on the short end of the stick.
In the US, the Federal Reserve now has to "unwind" this, because they don't exactly want to be holding $8.5 trillion in securities. It's not what they "do".
They can take this on the "books" because they have literally unlimited money and can buy anything they want. But at some point, the Fed banks don't want to be in the securities game and have to move them back off the books.
Because they can move the markets so dramatically, they will likely turn a profit for the US Government. That will get them closer to the goal of low unemployment and interest rates in check.
But at what cost? 2008 was the first time we tried this, and here we go again.
Congratulations to everyone who was on the upside of this. Now we wait for the downside.
So people invest in everything that somehow holds value. So stocks, real estate prices are record high.
Honestly has anyone a good idea how to invest a large sum of cash to just get inflation protection?
Assets tend to become inflated when interest rates are low or lots of financial leverage is used to acquire them.
To counteract this, one solution might be to eliminate the deductibility of interest for tax purposes, which for mortgages in particular, is a regressive tax subsidy that benefits higher earners.
It could be implemented gradually (e.g., reduce the deductibility by 1-2% per year until it reaches zero) to avoid immediate shocks to the system and provide investors with the ability to plan.
It could also be implemented to apply only to non-primary residences if we want to keep a popular middle class tax subsidy. This would target 2nd, 3rd, etc. homes and property and assets owned by corporations.
It shows that in the USA "net worth relative to nominal GDP" is actually pretty stable. The US has the lowest multiple of all the countries under analysis. Indeed the graph shows the US being almost exactly at the historical average.
I'm not sure what this means, but I certainly found it surprising.
Say that your income is at the 0.75 quantile, nationally: you're just barely in the top quarter.
Now arrange the housing from least desirable to most and look at the 0.75 quantile of that: how affordable is the entry to the 25% most desirable places to live?
How close are those places to where you earn your 0.75 quantile living?
Contrast this to a tiny country like britain or japan with only one major city london/tokyo where everyone wants to live. Where land actually is a limiting factor.
In Cleveland & Detroit and many small towns you can get literally old mansions for less than $200k.
You can get small pieces of crap an hour out of even NYC and LA for around $300k - even in this crazy market. Plus your wages will likely be higher...
SF night be the only metro in the US where this isn't possible.
You need to talk to some Canadians ;)
> “Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become “profiteers,” who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.”
> “Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
J. M. Keynes - "The Economic Consequences of the Peace"
Further analysis: https://monetary-metals.com/keynes-was-a-vicious-bastard-rep...
But for some reason new cities are not built anymore.
And when someone proposes building a new city inevitably the press fills up with dystopia/rent-seeking/we-should-make-existing-housing-cheaper/... articles.
I’m supportive of new cities as experimentation projects - think that’s great actually. If it’s take a sprawling suburb and build another one it’s like why would you bother doing that versus just doing the same thing you’re doing now in current cities?
But that doesn't happen either, maybe because existing cities are surrounded by private lands, or other stuff that is hard to displace, in a litigious place like US.
Adding to an existing city plugs you into all these incumbent systems, including existing hierarchies and notables.
Sometimes there are resources that are exploited but everyone knows that the resource is very temporary so a city doesn't really grow. Instead, a town forms but never plants roots. For example, the small cities across the Bakken Formation which grew huge transitory populations but no one stays because everyone there knows when the price of oil shifts the Bakken will become unprofitable.
The important thing is attempting to plant a city in the middle of nowhere almost always fails absent very strong government incentives. Washington DC is sort of like that, where it was put where it is because of very strong political incentives (Virginia and Maryland didn't want that land). Brasilia is the other example that jumps to mind, where they wanted the seat of government away from Rio and forced the issue.
Today that resource could just be "cheap land". We don't need coal or iron today, we need housing.
> very strong government incentives
Could "cheap housing" be such an incentive?
Yes, who uses steel anymore? /s
[0] https://www.forbes.com/sites/davidrvetter/2021/08/19/how-swe...
How is that refilling paid for? What source of water does it draw from?
I imagine that things may have changed a bit over the years, depending how big the development was perhaps it was the catalyst for more development?
They can also grow around political and religious motivations like the Massachusetts Bay Colony, Las Vegas, Salt Lake City, the utopian experiment of New Harmony, Indiana, etc.
https://web.archive.org/web/20210809032137/https://landequit...
Land in Gerlach goes for $0.0054/sqft
Land in the heart of San Fran can go for $865.21/sqft
That's 159,000 times more expensive.
The increase comes from the fact that some land is more naturally productive than others, and also because of agglomeration effects: https://en.wikipedia.org/wiki/Economies_of_agglomeration#:~:....
> Phoenix is officially America’s fastest-growing major city.
https://news.yahoo.com/phoenix-nation-fastest-growing-big-17...
Nearby Gerlach is Reno, the biggest little city in the world. It's 100 miles or 1 hr:45 mins away by car, 51 weeks of the year. With no income tax and a Tesla plant, Reno is thriving. Northern Nevada may have a lot of desolation, but the same rules of real estate apply - the three most important things are location, location, location. Land in Reno is expensive compared to Gerlach but cheap compared to downtown SF, at $270/sq ft (of course, SF being one of the most expensive cities in the US means everywhere is cheaper).
And yeah, my point is the same as yours -- it's always the location that matters. If you can somehow bootstrap yourself a desert-mega city in the world's worst location, then agglomeration effects take over and the land becomes valuable because people want to be next to other people. But typically desert cities get off the ground because there's something about the initial conditions of that particular piece of desert that's more interesting than everything around it (that's what happened with Phoenix with regards to the canals/water).
Of course, once a critical mass of settlers shows up and sticks around long enough, wherever they happened to congregate is the most valuable location in the local area from then on.
See: https://sitn.hms.harvard.edu/wp-content/uploads/2017/12/Fig1...
It's not 'profitable' and it requires actual competence.
It's the same reason you have meetings where nobody will commit to anything, hoping that some other fool will commit to take on extra responsibility for no extra pay. Politics is exactly like that.
As soon as “indoors” was invented, humans preferred to live that way, even though it was expensive as compared to outdoors. I don’t see a reason to think that would change and, especially with people spending more time in their home and less money on services and experiences, would expect that more money would flow into improving the at-home experience, bidding up housing.
1) All the unemployed autoworkers who got automated away can move to make something that has had almost no productivity gains
2) Debt payments by government are basically nill.
Another view: https://americanaffairsjournal.org/2021/11/vampires-at-the-g...