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The value of a house is that you have a place to live. A house is not an “investment”. It has no cash flow. It does not generate wealth. A house becomes less useful with time due to entropy (albeit more slowly than most other physical assets). One would expect the real value of the average house to go down with time.
I feel bad for the people who got duped, but this really should have been obvious. Artificial scarcity is not wealth. Abundance is wealth.
Well it has an imputed cash flow if you choose to live there yourself, and a real cash flow if you rent it out. Which makes it different from other non-investment investments, e.g. gold bullion.
By analogy, imagine investors in Walmart had a choice between (1) receiving cash dividends; or (2) receiving an equivalent amount of free product from the shelf at the local Walmart store. Whichever you choose, it's still an investment that generates returns.
I agree -- if you separate the value of the house structure from the value of the underlying land. On human timescales, the land isn't going to depreciate due to entropy. And if the land is convenient to a significant economic or cultural center, it may very well appreciate.
Well, at least for now you don't need to feel bad for me. I made the calculation that (1) it was roughly the same cost to make mortgage, tax and maintenance payments for 20 or 30 years, followed by maintenance and tax only, than to pay rent for the same time period; (2) buying would hedge against the risk of serious inflation in housing prices, which is a real risk; and (3) buying would spare me the headache of dealing with a landlord cuts corners on maintenance and repairs. The fact that I now own a house which would go for a lot more than what I paid is a nice bonus, but it's not something I was counting on.
What about natural scarcity? There is a natural limit to the number of houses with private yards which can be built such that they are convenient to one of the big 3 cities in the US.
Well that's one of the big questions posed by modern technological advancement. In the West, there is now what amounts to an unlimited food supply. So wealthy people eat steak at Michelin-starred restaurants while poor people eat hamburgers at MacDonald's. Poor people may become obese, but I doubt they feel wealthy.
In the US, the poorest people can easily afford a wristwatch which is more accurate and reliable than a Rolex or a Patek-Phillipe. And yet rich people spend tens of thousands of dollars on fancy watches while poor people (I assume) don't feel particularly wealthy wearing $15 drug store watches.
So it seems that perhaps wealth and scarcity are inextricably intertwined. That even in a state of abundance, people find ways to distinguish the wealthy from the non-wealthy. So I wouldn't be so quick to dismiss real estate as an investment, either in the cash flow sense or in the speculative sense.
This was the original dividend in 1610. The Dutch East India Company gave a a quantity of spice to every shareholder who personally showed up at a building to get a scoop. They were spice-rich so as a treat shareholders get a sample.
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A house is an investment! In a combination of the location being one that will be even more valuable than it already is in the future as the economy grows and people agglomerate, and the taxi medallion of already existing in a world of many different land use restrictions.
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As a specific example, my understanding is that the Japanese housing market does work this way, largely because there is a strong cultural demand for new houses, to the extent of replacing usable existing structures being common.
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A house is not only an investment, houses have cash flows so large it burns the Treasury's butt that they can't tax them. Second largest "tax expenditure" after medical premiums and just before 401Ks is "Exclusion of net imputed rental income". Of course, you might object that these aren't real cash flows (which they aren't, hence "imputed")... but they are spending avoided. They also provide a one-time inflow when sold, of course.
But in fact houses generally gain real value with time. I expect this to change in 10-15 years, but for now, they gain, not because any intrinsic properties but because of good old supply and demand. Well, that, and the fact that people do tend to fight entropy by doing maintenance and sometimes upgrades, which you need to account for.
Im gonna be pedantic and state the obvious. Most homes are geographically fixed, which is what causes the supply imbalance in areas that are desirable for whatever reason. This is a fairly unique property that introduces a lot of inelasticity that other markets in the consumer sector don't share.
Even if you could teleport houses into LA you still wouldnt fix house prices there because you'd have to find land to put them on, and thats before we even look at other factors that keep the housing market on a death march upwards such as inflation.
I imagine at some point urban population density will have a ceiling on how desirable it is to live in megacity block 13-A (formerly west village) but even the US's most dense cities like NYC are too nimby-ed up to actually let the market build the amount of vertical living space that the city currently could handle, let alone a scifi amount that plateaus the housing prices.
It’s actually very easy to create more land. Tokyo keeps growing and being desirable and housing costs haven’t exploded. The big thing that makes land for housing desirable are the public services. If you make it safe and provide transportation options you can just create more land.
Chicago for example has a neighborhood with all the characteristics of places with expensive housing. The University of Chicago is surrounded by very cheap land. At one point in history this was a very desirable neighborhood. It’s cheap because they shoot people next door. If you made it safer and improved public transportation then it would literally be building new land in Chicago that is highly desirable.
I think this is the most extreme version in America but I think every major city has some form of these issues that would unlock a large amount of land if you just fixed the provision on public goods. Extending subways in NYC would unlock a lot of land.
Some of these issues come down to not being allowed to do explicit segregation. People don’t want to build better trains because then the wrong people would enter the neighborhood.
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For the first couple of years after I bought my house, I let out a room to a friend who was in grad school. It wasn't a ton of money, but it was positive cash flow. Doing that with a rental would be a lot more problematic.
In practice it probably wouldn’t, I’ll wager thé majority of people doing this are renters.
Could you expand on that? Maybe it’s just the bubble I live in but that’s hard for me to imagine
Illegal sublets are incredibly common in both apartments and rented houses. It's pretty normal for apartments to only have one roommate's name on the lease(usually the guy with the better credit score). Lots of people do it- half a two bedroom apartment is much cheaper than one one bedroom apartment. And rented houses do the same thing all the time, only with more roommates. You can go on craigslist in your city and see examples, price range, etc, although it will also include owned homes, grouphouses, flophouses, etc.
Exactly- since rooming houses were banned almost everywhere, the default entry-level housing option is a bedroom in a HMO (House in Multiple Occupancy). To change this you both need to ban HMOs and spam sufficient purpose-built studio flats to make them affordable (many non-elite US cities have done this - it isn't that hard). If you only ban HMOs without spamming studios, then the entry-level housing option is a bedroom in an illegal HMO.
In 90% of illegal HMOs and about 50% of legal ones only 1-2 of the roommates are named on the lease and the others are cash-in-hand lodgers. (In legal HMOs it is more common to rent a bedroom directly from the landlord).
There’s plenty of illegal flophouses in US cities, where you pay cash to a landlord directly- and he in turn did not tell either the city, or his financial agency, that he intends to rent individual bedrooms out of the house.
Thank you both, that makes sense. My mistake was in assuming that laws around this sort of thing would stop it, as it stopped me when I was younger and poorer, but of course it does not.
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