More charts on housing from The Economist

[Valuebo]

Hi all,

 

This article with interactive charts from The Economist is certainly very informative.

http://www.economist.com/blogs/dailychart/2011/11/global-house-prices

 

What do others here think? Will future inflation, wage increases and/or higher rents make renters look foolish in the end, even in countries like Canada, Belgium and Australia? Or is there no way this could end well? I'm certainly leaning strongly to the latter but know that some believe the former is equally or even more likely.

 

My girlfriend and me are in our mid-twenties and she would definitely prefer buying something sooner rather than later. Rationalizing that it seems to make little sense with prices 50%+ above long term averages (based on rents and income) doesn't really seem to work. Friends, family, colleagues, ... have the same general idea. It's hard to offer long term thinking to people who vote with their emotions ("I want a place of my own.").

 

Opinions?

 

Tom

[ukvalueinvestment]

I recently sold my flat in London, taking some equity out, and am now renting.  I target 12% on my investments and that will beat housing over the long term - obviously you have to make adjustments for difference between rent payable and interest on a mortgage etc when doing calculations.

 

Most people who aren't value investors just don't get that housing may not be the best investment for them.  Rates have collapsed over the last 40 years, and house prices have soared.  Anyone who bought 10, 20, 30, 40 years ago looks like a genius.

 

Setting aside finances, I have found there are pros and cons to being a renter:

 

Pros: Flexibility, can move any time.  Don't have to worry about appliances breaking, don't have to worry about interior decor.

Save on maintenance costs.

 

Cons: Don't have the feeling of "home".  Can't customise your place.  People think you are unusual.

 

This is the conversation I usually have:

 

Me: I'm selling my flat

Friend: Where will you buy?

Me: I won't, I'll rent

Friend: What will you do with your equity?

Me: Invest it

Friend: """Total Incomprehension, conversation ends***

 

 

[Ian L]

You have to look at it from a personal point of view as well. Are you happy to live in a place owned by someone else and pay rent to them?In the end, I got sick of renting and bought my own place, not because it is a good investment, but just so I could own my own place.

 

It might take years and years for house prices to correct. Politicians realize that many of the electorate want their house's price to go up and up, so engineering a continuation of the boom is what they try to do. In the UK, they brought in "help to buy", whereby the government would provide a loan to house buyers, so that they could buy a place with only a 5% deposit. This was sold to the public as helping hard working families buy, but the result is just that house prices just got pushed up. It should have been called "help to sell".

 

 

 

[yadayada]

Yeah it is like a game of hot potato. You look good, but the next guy in office will be the victim of your mess.

 

I hate that landlords are usually awefull and it does not feel like your own place. Had land lords trying to barge in multiple times unnanounced because they felt it was their place, and they should inspect it. Or they try to kick you out because they want to sell it. And then when you want to get your deposit back, you sometimes have to proof you did not destroy anything. Or else you get some cleaning bill of 800e. And even then you gotta call em up 5 times before they send the money. That said I will keep renting untill it will not hurt investment returns in stocks much. If you can beat the market with stocks, it does not make sense to buy, unless you are rich already.

 

Lol UK is spiking up more then singapore. And if you pull out germany next to it, you don't even have a 100% increase over like 30 years, yet for the UK the increase is 1000%. That must be a bubble.

 

Also looking at spain, they are even worse then the UK. And then Japan is barely up too. Is this only affected by policy and easy credit? Or is it caused by age of population? House prices are down in Japan in the last decade. And south africa is through the roof.

[ERICOPOLY]

A $3m home (near me in California) rents for $100k a year.  About 3.3% gross rental yield.

 

It takes almost $200k of pre-tax income in California to pay that rent with after-tax dollars in the luxury home market (where people pay the peak income tax rates). 

 

Therefore owners get about $200k a year of imputed income.  After covering property tax ($30k pre-tax) and maintenance ($10k of after-tax costs), maybe you are at $150,000 or so.

 

So it's down to only a $50,000 a year pre-tax income difference between renting and owning...  that margin gets slimmer and slimmer every year with rising rents.  A 5% increase in rent cuts it to $40,000 a year.  So in just 5 years, it could be down to zero.

 

That's how homes are priced here... five years of rent increases to close the gap.  You start clawing back those funds if rents continue to rise from there.

 

[gary17]

So a $3m home is really like $6m of pre tax earnings ?

 

 

 

A $3m home (near me in California) rents for $100k a year.  About 3.3% gross rental yield.

 

It takes almost $200k of pre-tax income in California to pay that rent with after-tax dollars in the luxury home market (where people pay the peak income tax rates). 

 

Therefore owners get about $200k a year of imputed income.  After covering property tax ($30k pre-tax) and maintenance ($10k of after-tax costs), maybe you are at $150,000 or so.

 

So it's down to only a $50,000 a year pre-tax income difference between renting and owning...  that margin gets slimmer and slimmer every year with rising rents.  A 5% increase in rent cuts it to $40,000 a year.  So in just 5 years, it could be down to zero.

 

That's how homes are priced here... five years of rent increases to close the gap.  You start clawing back those funds if rents continue to rise from there.

[ERICOPOLY]

So a $3m home is really like $6m of pre tax earnings ?

 

 

 

A $3m home (near me in California) rents for $100k a year.  About 3.3% gross rental yield.

 

It takes almost $200k of pre-tax income in California to pay that rent with after-tax dollars in the luxury home market (where people pay the peak income tax rates). 

 

Therefore owners get about $200k a year of imputed income.  After covering property tax ($30k pre-tax) and maintenance ($10k of after-tax costs), maybe you are at $150,000 or so.

 

So it's down to only a $50,000 a year pre-tax income difference between renting and owning...  that margin gets slimmer and slimmer every year with rising rents.  A 5% increase in rent cuts it to $40,000 a year.  So in just 5 years, it could be down to zero.

 

That's how homes are priced here... five years of rent increases to close the gap.  You start clawing back those funds if rents continue to rise from there.

 

The people who have accumulated $3m after-tax are probably paying roughly 50% income tax (California income tax on top of Federal).

 

Thus it's probably close to $6m of pre-tax income.

 

 

[Valuebo]

A $3m home (near me in California) rents for $100k a year.  About 3.3% gross rental yield.

 

It takes almost $200k of pre-tax income in California to pay that rent with after-tax dollars in the luxury home market (where people pay the peak income tax rates). 

 

Therefore owners get about $200k a year of imputed income.  After covering property tax ($30k pre-tax) and maintenance ($10k of after-tax costs), maybe you are at $150,000 or so.

 

So it's down to only a $50,000 a year pre-tax income difference between renting and owning...  that margin gets slimmer and slimmer every year with rising rents.  A 5% increase in rent cuts it to $40,000 a year.  So in just 5 years, it could be down to zero.

 

That's how homes are priced here... five years of rent increases to close the gap.  You start clawing back those funds if rents continue to rise from there.

 

 

5% rent increases and a maintenance cost of only 0,33%? That is certainly optimistic!

 

What does it cost to refurbish a room in a $3M home? What about a new bathroom, kitchen? Placing a new roof? Landscaping the garden?

[gary17]

If the $3m home becomes a $6m home over 20 years... That's a lot of tax free in Canada...  In Canada it's the best way to shelter taxes

[ERICOPOLY]

A $3m home (near me in California) rents for $100k a year.  About 3.3% gross rental yield.

 

It takes almost $200k of pre-tax income in California to pay that rent with after-tax dollars in the luxury home market (where people pay the peak income tax rates). 

 

Therefore owners get about $200k a year of imputed income.  After covering property tax ($30k pre-tax) and maintenance ($10k of after-tax costs), maybe you are at $150,000 or so.

 

So it's down to only a $50,000 a year pre-tax income difference between renting and owning...  that margin gets slimmer and slimmer every year with rising rents.  A 5% increase in rent cuts it to $40,000 a year.  So in just 5 years, it could be down to zero.

 

That's how homes are priced here... five years of rent increases to close the gap.  You start clawing back those funds if rents continue to rise from there.

 

 

5% rent increases and a maintenance cost of only 0,33%? That is certainly optimistic!

 

What does it cost to refurbish a room in a $3M home? What about a new bathroom, kitchen? Placing a new roof? Landscaping the garden?

 

I didn't say $4m or $5m home.

 

It doesn't take much to hit $3m here.

 

As for optimism... that would be if I mentioned capital gains.  Like if the property appreciated... 1% annually... it adds $30,000 a year tax-free (until it hits $500,000 total at which point it starts becoming taxable capital gains). 

 

Now, a $30,000 tax-free capital gain covers $30,000 of after-tax expenses. 

 

5% a year rent increases for Montecito don't appear high -- the incomes have been growing at least that fast...  this is not median income people, or low income people.  The people in the upper income brackets have been seeing income growth in excess of that for quite a while.

 

The public elementary school is better than the regional private schools, so the rental demand is very firm.  Say you have 3 kids -- that's $75,000 of private school tuition saved!  Leaving you with just $25,000 rent for a nice house on an acre in Montecito.  It's bizarre, but these rents aren't as high as it looks for families with multiple children.

 

[Liberty]

If the $3m home becomes a $6m home over 20 years... That's a lot of tax free in Canada...  In Canada it's the best way to shelter taxes

 

But if you buy at the top and a $3m house is worth $3m in 20 years (not adjusted for inflation), that's not such a great deal.

 

People who bought in Toronto at the end of the 80s had to wait almost 15 years to break even.

[gary17]

 

Agreed.  But the alternative is paying rent. So I look at it as paying rent is almost he same as paying for mortgage in this low rate environment and if there's inflation the odds of house price going up are better ,.. Free option.

 

You could also just buy a 800k condo... And as your income goes up, trade up and take advantages of dips in housing prices along the way.

 

I think interest rate will be very low for a very long time !

 

 

If the $3m home becomes a $6m home over 20 years... That's a lot of tax free in Canada...  In Canada it's the best way to shelter taxes

 

But if you buy at the top and a $3m house is worth $3m in 20 years (not adjusted for inflation), that's not such a great deal.

 

People who bought in Toronto at the end of the 80s had to wait almost 15 years to break even.

[Liberty]

 

Agreed.  But the alternative is paying rent.

 

What's wrong with paying rent if it's properly priced? I'm renting right now, and it's a much better deal than buying.

[Valuebo]

A $3m home (near me in California) rents for $100k a year.  About 3.3% gross rental yield.

 

It takes almost $200k of pre-tax income in California to pay that rent with after-tax dollars in the luxury home market (where people pay the peak income tax rates). 

 

Therefore owners get about $200k a year of imputed income.  After covering property tax ($30k pre-tax) and maintenance ($10k of after-tax costs), maybe you are at $150,000 or so.

 

So it's down to only a $50,000 a year pre-tax income difference between renting and owning...  that margin gets slimmer and slimmer every year with rising rents.  A 5% increase in rent cuts it to $40,000 a year.  So in just 5 years, it could be down to zero.

 

That's how homes are priced here... five years of rent increases to close the gap.  You start clawing back those funds if rents continue to rise from there.

 

 

5% rent increases and a maintenance cost of only 0,33%? That is certainly optimistic!

 

What does it cost to refurbish a room in a $3M home? What about a new bathroom, kitchen? Placing a new roof? Landscaping the garden?

 

I didn't say $4m or $5m home.

 

It doesn't take much to hit $3m here.

 

As for optimism... that would be if I mentioned capital gains.  Like if the property appreciated... 1% annually... it adds $30,000 a year tax-free (until it hits $500,000 total at which point it starts becoming taxable capital gains). 

 

Now, a $30,000 tax-free capital gain covers $30,000 of after-tax expenses. 

 

5% a year rent increases for Montecito don't appear high -- the incomes have been growing at least that fast...  this is not median income people, or low income people.  The people in the upper income brackets have been seeing income growth in excess of that for quite a while.

 

Good arguments Eric, can't really argue that. But while that may be the situation over there, it certainly isn't so everywhere!

[gary17]

Nothing wrong , my brother is renting. I may rent if I sold my condo.... But just that i would rather pay down mortgage in a low rate environment, and with the prospect of free capital gain.... Vs. renting (building landlord's equity)....

[ERICOPOLY]

A $3m home (near me in California) rents for $100k a year.  About 3.3% gross rental yield.

 

It takes almost $200k of pre-tax income in California to pay that rent with after-tax dollars in the luxury home market (where people pay the peak income tax rates). 

 

Therefore owners get about $200k a year of imputed income.  After covering property tax ($30k pre-tax) and maintenance ($10k of after-tax costs), maybe you are at $150,000 or so.

 

So it's down to only a $50,000 a year pre-tax income difference between renting and owning...  that margin gets slimmer and slimmer every year with rising rents.  A 5% increase in rent cuts it to $40,000 a year.  So in just 5 years, it could be down to zero.

 

That's how homes are priced here... five years of rent increases to close the gap.  You start clawing back those funds if rents continue to rise from there.

 

 

5% rent increases and a maintenance cost of only 0,33%? That is certainly optimistic!

 

What does it cost to refurbish a room in a $3M home? What about a new bathroom, kitchen? Placing a new roof? Landscaping the garden?

 

I didn't say $4m or $5m home.

 

It doesn't take much to hit $3m here.

 

As for optimism... that would be if I mentioned capital gains.  Like if the property appreciated... 1% annually... it adds $30,000 a year tax-free (until it hits $500,000 total at which point it starts becoming taxable capital gains). 

 

Now, a $30,000 tax-free capital gain covers $30,000 of after-tax expenses. 

 

5% a year rent increases for Montecito don't appear high -- the incomes have been growing at least that fast...  this is not median income people, or low income people.  The people in the upper income brackets have been seeing income growth in excess of that for quite a while.

 

Good arguments Eric, can't really argue that. But while that may be the situation over there, it certainly isn't so everywhere!

 

It's how I struggled to eventually pull the trigger and commit to buy (I bought a 3-yr purchase option locking the price).  Even in housing, I'm playing with options.  Too funny.

[Valuebo]

A $3m home (near me in California) rents for $100k a year.  About 3.3% gross rental yield.

 

It takes almost $200k of pre-tax income in California to pay that rent with after-tax dollars in the luxury home market (where people pay the peak income tax rates). 

 

Therefore owners get about $200k a year of imputed income.  After covering property tax ($30k pre-tax) and maintenance ($10k of after-tax costs), maybe you are at $150,000 or so.

 

So it's down to only a $50,000 a year pre-tax income difference between renting and owning...  that margin gets slimmer and slimmer every year with rising rents.  A 5% increase in rent cuts it to $40,000 a year.  So in just 5 years, it could be down to zero.

 

That's how homes are priced here... five years of rent increases to close the gap.  You start clawing back those funds if rents continue to rise from there.

 

 

5% rent increases and a maintenance cost of only 0,33%? That is certainly optimistic!

 

What does it cost to refurbish a room in a $3M home? What about a new bathroom, kitchen? Placing a new roof? Landscaping the garden?

 

I didn't say $4m or $5m home.

 

It doesn't take much to hit $3m here.

 

As for optimism... that would be if I mentioned capital gains.  Like if the property appreciated... 1% annually... it adds $30,000 a year tax-free (until it hits $500,000 total at which point it starts becoming taxable capital gains). 

 

Now, a $30,000 tax-free capital gain covers $30,000 of after-tax expenses. 

 

5% a year rent increases for Montecito don't appear high -- the incomes have been growing at least that fast...  this is not median income people, or low income people.  The people in the upper income brackets have been seeing income growth in excess of that for quite a while.

 

Good arguments Eric, can't really argue that. But while that may be the situation over there, it certainly isn't so everywhere!

 

It's how I struggled to eventually pull the trigger and commit to buy (I bought a 3-yr purchase option locking the price).  Even in housing, I'm playing with options.  Too funny.

 

:D That's great. What do you pay percentage-wise for such an option? Just curious!

[Liberty]

Nothing wrong , my brother is renting. I may rent if I sold my condo.... But just that i would rather pay down mortgage in a low rate environment, and with the prospect of free capital gain.... Vs. renting (building landlord's equity)....

 

But that's assuming that you will have capital gains. If you assume capital losses over the next few years, it might look a lot less attractive.

[gary17]

i think the odds of RE going up over the next 30 years as being higher than it going down...    if I am wrong then the cost should be not significantly different from renting -  just my view...     

 

Nothing wrong , my brother is renting. I may rent if I sold my condo.... But just that i would rather pay down mortgage in a low rate environment, and with the prospect of free capital gain.... Vs. renting (building landlord's equity)....

 

But that's assuming that you will have capital gains. If you assume capital losses over the next few years, it might look a lot less attractive.

[Guest hellsten]

Have you considered the option that maybe it's really different this time and this new global economy with 0.05% interest rates will last forever:

http://upload.wikimedia.org/wikipedia/commons/thumb/a/a3/German_bank_interest_rates_from_1967_to_2003_grid.svg/639px-German_bank_interest_rates_from_1967_to_2003_grid.svg.png

[Liberty]

i think the odds of RE going up over the next 30 years as being higher than it going down...    if I am wrong then the cost should be not significantly different from renting -  just my view...     

 

30 years? Sure.

 

5-10 years? Not so sure.

 

Renting for a few years while waiting for house prices to be at more historical levels could certainly beat buying at the top, even if you don't sell for 30 years.

 

Some might call it market timing, but I don't think so. It's bottoms up, just like not buying companies that you find too expensive. Right now I find houses too expensive where I live (and I don't even live in one of the most expensive areas of Canada). I also wouldn't buy a Honda Accord for $70k, that's not market timing...

[ERICOPOLY]

A $3m home (near me in California) rents for $100k a year.  About 3.3% gross rental yield.

 

It takes almost $200k of pre-tax income in California to pay that rent with after-tax dollars in the luxury home market (where people pay the peak income tax rates). 

 

Therefore owners get about $200k a year of imputed income.  After covering property tax ($30k pre-tax) and maintenance ($10k of after-tax costs), maybe you are at $150,000 or so.

 

So it's down to only a $50,000 a year pre-tax income difference between renting and owning...  that margin gets slimmer and slimmer every year with rising rents.  A 5% increase in rent cuts it to $40,000 a year.  So in just 5 years, it could be down to zero.

 

That's how homes are priced here... five years of rent increases to close the gap.  You start clawing back those funds if rents continue to rise from there.

 

 

5% rent increases and a maintenance cost of only 0,33%? That is certainly optimistic!

 

What does it cost to refurbish a room in a $3M home? What about a new bathroom, kitchen? Placing a new roof? Landscaping the garden?

 

I didn't say $4m or $5m home.

 

It doesn't take much to hit $3m here.

 

As for optimism... that would be if I mentioned capital gains.  Like if the property appreciated... 1% annually... it adds $30,000 a year tax-free (until it hits $500,000 total at which point it starts becoming taxable capital gains). 

 

Now, a $30,000 tax-free capital gain covers $30,000 of after-tax expenses. 

 

5% a year rent increases for Montecito don't appear high -- the incomes have been growing at least that fast...  this is not median income people, or low income people.  The people in the upper income brackets have been seeing income growth in excess of that for quite a while.

 

Good arguments Eric, can't really argue that. But while that may be the situation over there, it certainly isn't so everywhere!

 

It's how I struggled to eventually pull the trigger and commit to buy (I bought a 3-yr purchase option locking the price).  Even in housing, I'm playing with options.  Too funny.

 

:D That's great. What do you pay percentage-wise for such an option? Just curious!

 

The option was 10%, and I put in an additional .002% each month towards the option.  All option payments are credited back to me if I exercise the option.  It's a 3 year option.

 

[yadayada]

Nothing wrong , my brother is renting. I may rent if I sold my condo.... But just that i would rather pay down mortgage in a low rate environment, and with the prospect of free capital gain.... Vs. renting (building landlord's equity)....

 

a great investor is always "wealthier" if he rents. I heard a story (may not be true) that Buffett never wanted to buy a house when he was younger. Having said that, buying a house may keep your wife happy. it may provide a more suitable lifestyle, roots etc. but economically, if you are a great investor, investing the down payment at high rates is what makes you way richer if you rent. Not saying one is better than the other. the thing is great investors can do both and still be extraordinary wealthy. if I was young and also someone who could compound at 20+ rates over long term, I would wait to buy.

+1 most people on this board are worse of buying. Especially if what you put down is a large % of your networth. If you have like 5 million then it matters a lot less.

[Ham Hockers]

http://idiosyncraticwhisk.blogspot.com/2014/09/speculative-position-in-housing.html

 

[rukawa]

Agreed.  But the alternative is paying rent. So I look at it as paying rent is almost he same as paying for mortgage in this low rate environment and if there's inflation the odds of house price going up are better ,.. Free option.

 

Ontario based analysis follows:

 

If there is inflation and interest rates go up then housing will go down not up. The logic of buyers is based on affordability of houses which is driven by how large their monthly mortgage payment is and their disposable income. If inflation goes up without salaries going up (which can happen) then buyers will be able to afford a smaller mortgage payment and so won't be able to pay as much for a house.

 

How do you get inflation without rising salaries...Simple!

 

US raises rates. Canadian interest rates don't go up. Then our exchange rate goes down and all US goods become more expensive. But our salaries don't increase. So everyone can afford less house. Eventually we will be forced to raise interest rates and housing prices will accordingly go down because monthly mortgage payments will go up.

 

There are other things people don't take into account like the payroll tax to support Ontario's new pension system (less disposable income), massive increase in electricity costs, rising taxes to support infrastructure and unsustainable spending, and of course the mother of all housing demand destroyers: the baby boomers who didn't save for retirement and therefore need to sell their houses.