
The Rise of the Rich Renter - clumsysmurf
https://www.citylab.com/equity/2017/10/the-rise-of-the-rich-renter/542007/
======
jquery
Don’t kid, most people aren’t renting because they prefer it. We shouldn’t
glorify unaffordability. My “rich” coworkers would largely love to own but
they can’t afford the mammoth down payments, and the sky high rents plus sky
high taxes make it difficult to save.

“One of Aesop's best-known fables is “The Fox and the Grapes.” On its surface,
or its literal level of meaning, the story tells of a fox who wants a bunch of
grapes hanging above his head. The fox tries desperately to reach the grapes
but cannot. He finally gives up, saying that the grapes are probably sour
anyway.“

[https://en.m.wikipedia.org/wiki/The_Fox_and_the_Grapes](https://en.m.wikipedia.org/wiki/The_Fox_and_the_Grapes)

~~~
jfaucett
> Don’t kid, most people aren’t renting because they prefer it.

I can't speak for the USA but in Germany - specifically where we live, home
ownership is not/barely worth it financially speaking. The taxes alone for
"owning property" i.e. renting it from the government until you die are
extremely high. You pay 6.5% (varies by state) of the property value in
"Grunderwerbsteuer" when you initially buy and then for a home valued at
around 250k (fairly normal prices) you're looking at a 2-4k per year in taxes.
Throw on top of that all your upkeep costs in time and money and it really
doesn't look like such a nice deal.

That's why we haven't bought and I don't want to. Nowadays, "home ownership"
is just another name for renting where the costs are slightly less and the
upkeep to you in time and effort is more.

~~~
barrkel
Property taxes as a brake on house prices make sense, and since we all need to
pay taxes, they can be revenue neutral should the government structure them
that way.

The way it seems to work in the Anglosphere is that house prices are mainly
limited by the cost of money. When interest rates are low, long mortgages for
enormous sums are affordable so people bid up the cost of desireable places to
live. But it's a zero-sum game - increased property prices don't create more
land in the desireable area, and due to planning laws and nimbyism they
usually don't increase density much either. Everybody works harder and pays
more for approximately the same distribution of physical assets - except for
the windfall for people who got in early, who turn into a political support
base for parties that then need to keep house prices propped up. And the cycle
needs to continue, otherwise those mortgages would have negative equity.

------
jseliger
It may also be that smart rich people have gotten over the cult of
homeownership:
[https://www.ft.com/content/00bf5968-f518-11e2-b4f8-00144feab...](https://www.ft.com/content/00bf5968-f518-11e2-b4f8-00144feabdc0)
or
[http://www.slate.com/blogs/moneybox/2013/07/29/political_eco...](http://www.slate.com/blogs/moneybox/2013/07/29/political_economy_of_homeownership_a_disaster_area.html).
Or search for the term "The cult of homeownership" for more.

There are well-known possible positives to owning but the negatives are vast
too, especially compared to investing in an ultra-low-fee index fund in lieu
of a house.

Owning a house also made more sense in an era in which a single worker
expected to work for a single company at a single site for decades. In an era
when two workers may work for a myriad of companies for ranges of six months
to ten years, it makes a lot less sense.

~~~
walshemj
realy so why are non residents buying housing as an investment in London Sf NY
and Vancouver?

And if your rich diversifying from just a me to index fund makes a lot of
sense hint if the Rothschild's and other mega rich families run actively
managed funds its probably a good idea for you to - I have done very nicely
out of RCP on the LSE

~~~
blackguardx
Rich people invest in property because they have enough money to view a
million dollar condo as a diversification strategy. Property can be a good
investment, but shouldn't be your only investment.

~~~
sidlls
I'd take 10 houses for $200k in the Midwest over one $2m house in the Bay
Area. Appreciation is lower, but rents (as a percentage of cost) are much,
much better. The shortfall in appreciation can easily be made up for in better
rent yield.

~~~
inuhj
Less desirable areas always have higher cap rates. Most investors are NOT
looking to make money on the cap rate though. If you're seriously investing in
real estate you're looking into development projects, re-zoning, etc. You're
buying because you know the local government has a 10 year plan to revitalize
that part of the city or some other strategic bet.

~~~
sidlls
True, but I think the context here is people buying one (or a very small
number) of single family homes as an "investment."

My point is that to "invest" that way in a high cost area is not the smartest
move. It's better to buy conservative dividend paying stocks. But if one must
"invest" in property it's better to buy 10 for $200k than 1 for $1M. I also
didn't mention risk mitigation: the risk of loss on the former is lower.

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efficax
I make a decent living, way above median household income, but my wife and I
rent in a dense urban center for the simple reason that even with our income
we couldn't afford to own in this area. Even if we weren't paying student
loans it would take several years to build up a down payment that would result
in cheaper mortgage payments than our rent burden, which would be crucial
since homeownership adds property taxes and significant upkeep costs above the
mortgage payment. Sure, we could afford a house in the 'burbs, but we don't
want to live in the 'burbs. The rent is too damn high, but so are the housing
prices.

~~~
matt_wulfeck
7 years of saving I believe is the average for a down payment. It doesn’t
sound like your story is too outside the range of normal.

~~~
hammock
Seems to make sense, buy a house 3x your annual income, with 20% down you
could get that in 7 years if you save away 8.5% per year. And you have a house
at 29

~~~
davidjnelson
Lol, houses for 3x your income? I take it you don't live in the Bay Area ;-)

~~~
hammock
That's a general rule of thumb for safe mortgages...which is why so many rent
in bay area

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paulpauper
_Here’s the upshot: rich households—those earning more than 120 percent of the
metro median income—saw their renter share rise by 1.2 percent between 2012
and 2015. Since 2006, that growth was a striking 6.2 percent. The renter share
among households making less than 50 percent of the median income, on the
other hand, remained roughly the same since 2012. Since 2006, it grew by a
modest 2.9 percent. More educated subsets of metro residents also gained
renters in this period._

This does not make much sense how the author derives the 6.2% figure and then
says its 1.2%, nor does a 1.2% gain over a 3-year period seem like much.

~~~
noobermin
That does seem super weak sauce. Also, the "striking" 6.2% included 2008,
who's to say that the even among the 1.2 X median people, that the economic
hurt wasn't enough to explain the delta there?

~~~
walshemj
120% of the median income is not "rich" in this day and age

~~~
noobermin
Hmm, it's above the median, it is well off. But yes, it isn't well off enough
to be sheltered from the effects of the great recession, I agree.

~~~
walshemj
well that's about 48k given the median salary in the US that's not relay well
off puts you just about out of JAM (just about managing ) territory given
health care costs

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nostrademons
This is dual to "the rise of wealthy foreign landlords that buy homes site-
unseen as investment properties."

My wife and I, despite being able to afford a home, have chosen not to buy
one. Why? Because home prices in our area run at $2.7M for a 3BR [1], while
we're paying $2600/month to rent a 2BR townhome. People we know who have
bought are now paying $6-7K/month on housing, for something not much better
than what we have (they have a yard and an extra bedroom, but we have a pool).
Even with the mortgage interest tax deduction, you're still paying more on
_interest_ alone (let alone principal, property taxes, or maintenance) than
we're paying in rent.

[1] This is perhaps an overestimate - it was a news story about a couple that
were outbid 4 times and wanted a fairly nice property. But even so, minimum
prices on a 2BR condo in the area now range around $1M+, so the math still
doesn't work out.

~~~
rentcontrol
The difference is that with average appreciation rates in California, when
they sell they get all of their money back (minus fees, of course). You? Well,
you had a place to stay.

As long as appreciation + inflation over the period you stay in a house you
buy is greater than your interest rate, buying a house is effectively free
(minus the downpayment). People bring up maintenance, however this is already
taken into account with rental price increases, vs. a fixed 30 year mortgage.
Maintenance is an overplayed expense, honestly.

EDIT:

I can't reply to the children comments, but I just want to say that the
situation mention is absurd.

1\. 2.7M worth of 1985 S.F. property would be entire neighborhoods and give
you more than 6%. Forget houses, 2.7M in 1985 would buy you acres of prime
real estate.

2\. Even if it did not, it's not necessary to put down 20% on a house.

3\. Investing and purchasing a house are not mutually exclusive strategies.

4\. Overall, over 40 years buying will always be better.

~~~
j7ake
The correct analysis should take into account that you now have a downpayment
and extra money to invest every month if you rent compared to buy.

Buy scenario, free maintenance and no property taxes: Living in a $2.7M house
means a downpayment of $540,000 plus $6.6k/month of mortgage (assuming 2%
interest rate on ~$2.2M mortgage paid over 40 years). Your housing prices
increase 6%/year on average (1985 - 2015 average,
[http://www.doctorhousingbubble.com/california-housing-
histor...](http://www.doctorhousingbubble.com/california-housing-history-real-
estate-market-trends-30-years-of-data/)). You sell 40 years later your house
for $22,628,579.

Rent scenario: You put your $540,000 plus $4400 per month into your average
stock market. 1985 to 2015 the performance was more than 10% per year
([http://www.moneychimp.com/features/market_cagr.htm](http://www.moneychimp.com/features/market_cagr.htm)).
Let's say you're conservative and you go for 6%/year in growth. In 40 years
your net worth is $77,737,237.02.

Renting is definitely better than buying in the scenari outlined in
grandparent's comment.

~~~
nostrademons
Yeah, that's the math that was running through my head. Again, this all hinges
upon housing prices being so overinflated: usually, rent vs. buy is a wash
when you do out the math, and you spend about as much on rent as you would on
a typical mortgage payment. The Bay Area is just in a very weird place as far
as housing prices go right now, because of foreign buyers, massively-
appreciated stock options, development restrictions, and lack of land.

Also, I was considering a number of tail risks in our decision. For example,
I'd bet that the house in the Bay Area will be worth roughly $0 in 40 years,
because:

1.) Tech will have run its course, leading to a Detroit-like situation where
everybody moves out and you can't sell what you've got.

2.) The housing stock here is objectively terrible by the standards of
anywhere else in the country - many were cheaply built in the 1950s to 1970s,
and they need major repairs and upgrades _now_ , let alone in 40 years. Friend
of mine was recently buying and was like "I offered $279K over asking on a
house that needs _at least_ $100K of repairs", and he didn't get it anyway.

3.) Termites are endemic here. Every house has termites and few of them have
concrete basements. There's a good bet that the house you just spend $2.7M on
doesn't actually have a foundation.

4.) Earthquakes and wildfires. The big tech companies assume that there is a
100% chance that the Bay Area will be hit by a major earthquake in the next 30
years; I don't see why I should assume any differently.

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ComradeTaco
Many of those who have high incomes would prefer to build equity rather than
hand it to landowners. However incomes only rose only modestly above inflation
while real estate prices have doubled and even tripled in many places.

We're really in trouble as a society if essentials like education, healthcare
and housing continue to eat an increasingly large portion of consumer income.

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techisamix
My wife and I are in this percentage. Both educated, making ok money but with
a new family and undergrad loans still looming it feels like homeownership is
still years away. I will probably be 35 by the time I can buy my first
"starter home".

We are moving all around the country to find better and more affordable places
to live. In fact now that my wife has her master's we're chasing clinics that
provide loan repayment just so we can get our debt out from under us.

Another reason we keep renting - I've worked other industries that do poorly
during a recession and tech feels no different. I'm highly predisposed to not
being stuck with a huge mortgage when things get tough which means in a lot of
cities I'd never feel comfortable buying a home (insinuating that we couldn't
survive on one income).

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closeparen
Is anyone surprised? The fall of the private car has us contending for less
and less land (near work, near transit stations, etc). Of course everyone’s
housing situation moves down a few notches when we throw away the vast tracts
of housing supply enabled by freeways and parking.

High rises and elevators could compensate, but so far no city is contemplating
adding downtown luxury condos at anywhere near the rate it’s divesting from
sprawl.

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hiram112
Mid 30's guy - make over six figures, no wife, kids, or other expenses. I
could easily buy my own modest home with cash, but instead I pay about $2K for
a tiny studio in the middle of an expensive city.

I actually have been looking to buy a home in my high COL East Coast city this
year, and here is why I'm holding off on it:

1\. An actual 'home' like I grew up in with a few bedrooms, garage, yard, etc.
within a one hour commute to most jobs would be $750K. Maybe I could get that
down to $400K with a 2 hour each way commute. That's simply way too much money
(taxes, insurance, upkeep) for a single guy, and the commute isn't worth it
anyway.

2\. I could buy the same type of tiny studio / one bedroom where I live for
about $500K - way more than I'm paying for renting, all things remaining
equal. In other words, renting is lower cost than owning at the moment.

3\. I could buy the same tiny condo with an hour commute for $250K, but then
I'm stuck there. The equity I gain is minimal since half the costs (about $1k
/ month) are HOAs, taxes, insurance, etc which will only go up over time.

When it's all said and done, there is almost no reason for someone like me to
own. If I had a wife and kids, maybe. But as a single guy no way.

The low interest rates of the fed and lack of new construction ( NIMBY) have
again pushed up prices to 5x-6x the median family income in my area - about as
high as 2006. Mortgage interest deduction is worth almost nothing because
rates are so low (contrary to the Realtor and mortgage industry), and it may
be going away anyway.

Jobs aren't stable enough where I'm comfortable being tied to one area. In our
industry, even if your company doesn't lay you off or go under or whatever
every 3 years, it's a bad idea to get to comfortable with one way of doing
things - one framework, language, stack, etc. You need to keep jumping jobs if
you ever want a raise.

Nor do I feel like being tied to one locality or another when it's apparent
many of them are woefully underfunded with their pensions / health insurance
for retirees. Gouging home owners for higher property tax bills will be the
main way they balance their books.

~~~
htormey
This plus rent control is very similar to my situation in San Francisco.

The only thing which would change this is if I had kids.

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htormey
If you are in an apartment with rent control it really changes the rent/buy
equation.

I’ve lived in a two bedroom rent controlled apartment in San Francisco for the
last 7 years. I pay significantly below market rate for rent. I also have
enough to afford a down payment on a house here.

Their is no incentive for me to purchase a house unless I lose my rent
controlled apartment and even then I probably wouldn’t buy. I know many of my
peers who are in similar situations. I’d say the same is true of NYC.

~~~
bradleyjg
Rent control unbundles the bundle of rights that is property ownership. The
result from the renter's perspective is a hybrid between tenancy and
ownership.

It's not the only way to unbundle it either. Consider the more traditional
life estate, for example.

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rentcontrol
Personally, I ask my friends who complain about rent why they just don't
change what they want, e.g. roommates, worse quality, further away, worse
amenities, etc. and generally they say they want it all.

Well, unfortunately to have it all you have to pay. Paradoxically, those who
want to live in the city will want to enjoy the amenities, which cost money.
Money that will take them that much further from buying a house. Clearly, from
the behavior they must not want a house that much.

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yardie
We currently live 3 blocks from the beach and have no intention of buying
here. The older buildings are prone to flooding, some are sinking, and the
foundations are cracking. The newer buildings are incredibly expensive.

We’ll stay here until it no longer makes financial sense. Until then I
continue to rent while stashing money away for property not near the slowly
rising oceans.

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buf
I rent simply because I cannot afford to buy in the area I desire and I refuse
to commute an hour.

