
Houses are assets, not goods - AndrewDucker
https://bankunderground.co.uk/2019/09/05/houses-are-assets-not-goods-what-the-difference-between-bulbs-and-flowers-tells-us-about-the-housing-market/
======
mellosouls
I guess this is one of the reasons I'll never be rich, but to some of us
houses are _homes_ , not just figures on a balance sheet.

I find the clinical discussion of asset values and such in the context of a
bizarre market which leaves local families on modest incomes priced out of
owning properties in their neighborhood (in extreme cases like London often
owned by dubious foreign organisations) and the disruptive ("dynamic") trend
to transience of others' communities in pursuit of the individual's bank
balance distasteful and anti-social.

~~~
_nalply
I have come to realize that not everything in our lives can be modeled as a
monetary value after reading Varoufakis' book «Talking to My Daughter About
the Economy». One example is the work done by parents to raise children. If we
really were fixated on the monetary value of things, then parents would only
raise children if they got a salary for the work.

It seems we have two worlds: first the world of the well-known monetary value
but also the perhaps even more important world of the — let me entertain this
notion — reverential value.

After this insight I understand many weird things a lot better and also why
many economists, business people and leaders fail if they don't consider the
second world.

~~~
rayiner
You can quantify any value in monetary terms, but that doesn’t mean that only
cash is value. Indeed, economics inherently involves trading cash for things
of quantifiable but intangible value. It’s not like economists can’t explain
why people buy roller coaster rides.

But with respect to raising children you can see economics in action. In first
world countries, the opportunity cost of raising kids has gone way up. Kids
cost more, and having kids requires you to give up more consumption. So people
have many fewer kids.

~~~
_nalply
This doesn't explain everything. That's the economical fallacy: that
everything can be exchanged for money, even things which have intangible
value. I believed that, too.

In the book there is a story about a girl helping a man (diving for a lost
anchor in a Greek harbour), and when the man offered payment, the girl was
offended.

This gives trouble to people who believe that everything can be traded.

~~~
rayiner
It’s not the economical fallacy. It doesn’t presuppose everything can be
traded for money. It presupposes that money can be a common measure for
exchange between in-kind things.

------
andy_ppp
The problem I see with this article and arguably all classical economics is
that housing as a market is lead by irrational concerns (feelings), you could
list many of them... for example I’ve bought a 1960 absolutely disgusting
council flat for probably too much money but once renovations are done up I
should be able to rent the rooms for near £2800 while the mortgage is £1600
per month. A Victorian house in the same area barely rents for more
(£3400-600) but the mortgage with a 10% deposit would lose you money renting
it out.

This makes zero sense, but regularly happens. Also property is not fungible as
no two properties or areas are the same.

~~~
nabla9
Economists talk about aggregates. Layman thinks individual houses and their
differences. The differences in individual houses smooth over in large scale.

The context of the article is whole economy at macro level. They specially
mention how they ignore even regional differences.

~~~
Retric
> The differences in individual houses smooth over in large scale.

Not really. In aggregate you get the same discrepancy between rental prices
and purchase prices in many ways including different areas.
[https://smartasset.com/mortgage/price-to-rent-ratio-in-us-
ci...](https://smartasset.com/mortgage/price-to-rent-ratio-in-us-cities). That
exists because renters and buyers have measurably different desires, for
example buyers want more space than renters as transaction costs are higher.
This is often true when it’s the same person is considering buying vs renting.

Ignoring those differences does not smooth them out, it just ignores them.

~~~
nabla9
As they say in the article.

Can you explain how these differences are relevant to the subject of the
article?

~~~
Retric
Sure, when increasing a regions housing supply it matters what kind of housing
is being added. Adding single family homes in the suburbs is different than a
60 story apartment building down town.

The markets responds differently to price drops. Land lords care about
occupancy and generally respond more quickly than people selling their homes
who will wait longer.

------
amoitnga
Can somebody try to answer a real question for me, please?

I'm 30, single, a software engineer working remotely, making ~100k a year,
saved around 70k so far. I'm not very interested in investing it in any kind
of active business. So I see 2 options:

\- buy stock ( some kind of index)

\- put a downpayment on an apartment(house)

Both have pros and cons. I lean towards getting an apartment. Something around
~350-400k with low HOA and taxes should get me into something nice, having
smaller mortgage payment than if I'd rent it. Say we're talking about San
Diego or Austin. After crunching some numbers ( in a very primitive way ) I
feel having to pay amount that is less than I would typically pay for rent and
most of that payment going towards my saving is a very good situation to be
in.

Can somebody run some sort of calculation with above variables and tell me
something I don't know/think of?

~~~
rwmj
I had a longer answer, but I think this short answer suffices: Everything is a
terrible investment at the moment. Everything is overpriced. Everyone is
expecting a recession imminently. Therefore whatever you do you will lose
money, and lots of it. So, don't take risks, but do whatever will make you
happier.

For example if you don't like paying rent to a landlord every month and not
being able to decorate the walls, maybe you'd be happier if you owned a house.
(This may not apply to you, it's only an example)

~~~
simonebrunozzi
> Everything is a terrible investment at the moment

I would agree, but: you can also invest in things that thrive in a downturn
(e.g. gold is considered to be a safe asset, some would say Bitcoin as well),
or simply invest in risk-free assets (e.g. govt bonds), or in savings accounts
that pay you 1.5-2% annual interests.

~~~
bluedevil2k
No one would consider Bitcoin to be a safe asset

Safe investments in a downturn include REITs that invest in apartments.

~~~
simonebrunozzi
> No one would consider Bitcoin to be a safe asset

Pretty wrong. I personally know several people that do, and most of them
compare it to "digital" gold.

REITs can go down as much as stocks, or more, in a downturn.

------
xanipher
"But at the end of each sales chain is either another landlord or someone who
was previously renting."

Or, in many cities, on the end of many sales chains is a Chinese or Saudi who
is trying to get wealth away from an oppressive regime.

~~~
blub
Or they are part of the oppressive regime and want to launder their money.

~~~
std_throwaway
Both, they benefit from the regime but don't want their children to grow up
under the circumstances they helped to create.

------
Merrill
Land is an asset, but if there's a house on it, it is an unproductive asset
that you pay property taxes on.

The building is an asset, but you also pay property taxes on it, and in the
US, about 60% of "home owners" have a mortgage on which they are paying
interest and principle. Furthermore, it is a deteriorating asset that must be
maintained and updated in order to hold value, and that has continuing
operating costs such as sewer, water, electric, etc. that may otherwise be
bundled into rents.

Complicating the economics is the fact that lots and houses are very non-
standard and hard to value and the fact that when selling it the transaction
costs will be about 10% of the selling price. Consequently if your mortgage is
60% of the selling price, you will lose 25% of your equity.

Psychologically, homes are more like jewelry, since people have strong likes
and dislikes which depend on fashion, and people get attached to the pieces
that they have.

~~~
pcmaffey
Except this doesn’t factor in the utility they provide.

~~~
Merrill
True, but the practical utility of owning versus renting a house is pretty
equal. Owning a house has the added utilities of allowing for social
signalling through personalized home improvements and selective social group
membership, also associated with educational opportunities for the children.

~~~
generatorguy
Also control of your life and certainty in your Costs. Landlords can kick
tenants out via renovictions etc, raise rents as much as they can, and never
improve the space. If you are renting are you sure you can stay there for 5
years, 10 years, 25 years?

I think if your time horizons are longer than 5 years the certainty of owning
would also provide some value. I have been a tenant, am a landlord for 4
units, and a home owner.

All properties are partnerships which makes it easier to deal with operations
and maintenance.

~~~
scarface74
I “own” my home (ie pay a mortgage), but being worried about being kicked out
of my place wouldn’t be a deciding factor. You can always move and rent
somewhere else easily in most of the country.

We bought a house for a lot of reasons, but one was an inflation hedge. We
don’t have to worry about our home prices increasing except for property taxes
and insurance.

------
lottin
"If they fall to 5%, the value of that same stream of flowers doubles to
£2,000."

How would that work? The idea is that people would sell assets that have
below-market returns and buy assets that have above-market returns. Asset
prices will adjust accordingly and so will the respective returns which are a
function of price. And this will go on until return rates equalise across all
assets.

This is the theory, but it's hard to imagine that in most circumstances a
house can be traded for another asset. Why? Because having a place to live is
a pre-requisite for being a functioning member of society. If tulips are
under-performing sure I can sell my stock of tulips. If houses are under-
performing I don't care. I'm not going to sell my house and buy something
else, because I need a house. Thus I'm sceptical that the theory will work in
the case of the housing market.

~~~
gjm11
You need _a house_ but you don't necessarily need _exactly that particular
house_. More importantly, this also applies to anyone who's moving house right
now.

Suppose you need a new house, and you want to own rather than rent. You will
be willing to buy a more expensive house if the mortgage interest rate is 1%
than if it's 10%, because the amount you actually have to pay is lower when
the mortgage rate is lower. Mortgage rates vary along with other interest
rates. So when interest rates are lower, mortgage rates are lower, and people
can and do pay more for houses.

~~~
lottin
Trading a house for another house has no effect on the prices of other assets
(i.e. non-housing assets) or their rate of return, which was what the original
argument was about.

~~~
gjm11
Was it? I thought the original argument was mostly about how interest rates
affect housing prices. The particular bit you quoted --

> _If they fall to 5%, the value of that same stream of flowers doubles to
> £2,000_

\-- and asked "how would that work?" about, wasn't about how buying and
selling houses affects the prices or rates-of-return of other assets, it was
about how prevailing interest rates affect the prices of houses. Which is what
my comment addressed.

Incidentally, it's very rare to "trade a house for another house". You buy
houses for money, and sell houses for money. (You often do those two things
together, but often the house you buy is quite different in price from the
house you sell, and in any case the buyer and the seller are different people,
so this still isn't equivalent to trading one house for another.) This isn't
just nitpickery; it's because houses are bought and sold for money that could
be used for other things that their prices can interact with the prices of
other things.

~~~
lottin
He says "interest rates on other assets", which I take to mean "rate of return
of other assets" since the phrase "interest rates on other assets" doesn't
make sense. Interest rate is a particular rate of return, that of money.

~~~
gjm11
He does indeed say those words. And what he means by them is that _house
prices_ change if _interest rates_ change, not the other way around.

(Whether he means interest rates specifically, or rates of return on other
assets like equities, I'm not certain, but those things have some tendency to
vary together and I would expect all of them to influence house prices in a
similar way.)

------
GreeniFi
I found this a more helpful explanation of the rise in house prices.

[https://medium.com/iipp-blog/why-cant-you-afford-a-
home-9c5c...](https://medium.com/iipp-blog/why-cant-you-afford-a-
home-9c5cf009be21)

I also can’t help but wonder whether the change in house prices has been a
factor in the rise of populist politicians. It feels impossible to prove or
disprove, but in places like the UK and US, a high cultural value is placed on
home ownership. And at the same time, housing is unaffordable. In that gap
dissatisfaction grows. And a more obvious target of blame is immigration than
cost and availability of credit.

I emphasize, the above is an hypothesis. I look for evidence to either prove
or disprove.

------
progre
A house is a liability. _Land_ is an asset

~~~
danhak
Nah, a house is an asset. A depreciating asset but an asset nonetheless.

Depreciating asset !== liability.

~~~
tonyedgecombe
It can be both, an asset because it is a store of value, a liability because
you need to maintain it.

------
imtringued
I don't understand why house prices should rise. Buildings have a limited
lifespan. If a modern reinforced concrete building only lasts 80 years then it
should lose 1% or more of its value every year.

~~~
barrkel
The value of a house is normally a fraction (in my case in London, about 20%)
of the value of the plot. Rebuild cost is something you see on your home
insurance, and is normally much lower than market value.

~~~
jaclaz
Any "prominent" city and particularly London are not good examples.

In a non-main city the cost of a newly built house is basically the cost of
the land + the cost of construction (done at a more industrial level, i.e.
let's say a lot of 16 houses or a building with 30-40 flats is built with
costs that are some 20-30% lower than those to re-build a single house/flat) +
the margin of the builder/developer (which often is not exceeding 15 or 20%).

I will give you some real world costs for my area (Italy, Tuscany, non-main-
city):

Plot/land (incidence on built surface) 500 Euro/m2

Building costs 1200-1400 Euro/m2

Projects/Taxes/permits/financial costs 500 Euro/m2

Final sale price 2800-3000 Euro/m2

Same in the nearest "main" city , Florence:

Plot/land (incidence on built surface[1][2]) 1500-2000 Euro/m2

Building (re-building) costs 1300-1500 Euro/m2

Projects/Taxes/permits/financial costs 800 Euro/m2

Final sale price 4000-6000 Euro/m2[2]

[1] largely this is about buying, (partially) demolishing and rebuilding an
existing building as there are very few possibilites of a completely new
building on a "virgin" land plot

[2] of course this depends a lot on the exact location

------
occamrazor
Second post in the series at [https://bankunderground.co.uk/2019/09/06/houses-
are-assets-n...](https://bankunderground.co.uk/2019/09/06/houses-are-assets-
not-goods-taking-the-theory-to-the-uk-data/) with data from the UK market.

------
petra
Cars are expensive purchases. So there's a competitive marketplace around
leasing them.

Leasing housing - i.e. rent-to-own - could solve the need to save for a large
down-payment.

Why isn't there a competitive and fair marketplace there ?

~~~
dazc
Here in the UK where 'rent to own' is a concept that exists but has never
quite taken off, the traditional business model is to borrow money to build
houses and then sell as soon as possible to recoup the investment. Often the
buyers will then rent out the house to someone else at a premium.

It's a hugely inefficient process that results in poor build quality and high
costs.

Build-to-rent is an option that mass-housebuilders are catching on to (maybe
15 years too late) but there is still resistance to changing existing business
models.

I believe the real problem is that people like to own the house they live in
and will pay any price to achieve this. In a bubble of ever increasing house
prices though, who can blame them?

------
nickthemagicman
Capitalism has bled into every aspect of our lives. Employees are 'resources',
houses are 'assets', etc.

I like capitalism for most things, but if left unregulated, it really
dehumanizes us.

~~~
ipython
My absolute biggest pet peeve along those lines is that we are all nothing but
“consumers”. Words matter.

~~~
pcmaffey
And users. It’s trivial but I always replace ‘user’ table with something like
humans or players or creators. Because yes, words do matter.

~~~
test6554
Do you add a separate table for credentials held by applications?

------
test6554
Good: a product or service which can command a price when sold.

You can argue that a house and housing are two separate goods, but they are
still goods.

Everyone needs housing. But people also seek houses to provide themselves with
housing or to generate rental income.

