
Housing bubbles are universally destructive - Zweihander
https://www.tbwns.com/2018/10/01/the-bears-lair-housing-bubbles-are-universally-destructive/
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zimablue
There's a kind of interesting way to think about this, especially in the UK.
Because people don't automatically think in terms of opportunity cost and
don't know eg. that the long term equity return is X, there's a disconnect
between reality and how people think of it. People in the UK think of rent as
"wasted" money. In an efficient market, it wouldn't be wasted at all because
the saving from lower rent vs mortgage could be put into eg. equity/bonds.
Someone will reply that there is no saving but that itself is a symptom of the
way we run housing.

But because people think that, and think that no-one would ever want to rent,
we tolerate super weird policies like a residency house being exempt from
capital gains tax, poor protection for renters, government tax transfers (in
the UK they will literally give you money to buy your first house, the
government is so committed to the your-house-is-your-bank philosophy). All
these distortions then actually CREATE the conditions which mean that you're
consistently losing money if you rent, because the government is effectively
taxing you much more.

So our misunderstanding of economics creates an economic system which conforms
to our mistaken beliefs, it's kind of amazing.

~~~
claydavisss
Who are these people who intentionally seek a lower rent over a higher
mortgage so as to invest in stocks? I've yet to meet one. Renters are just as
likely to give in to vanity purchases, dumb spending habits etc...

And why are stocks such an awesome alternative? A stock can go to zero...even
foreclosed homes have _some_ value.

Stocks are optional - shelter isn't. Since you must commit some of your
earnings to shelter, it makes sense over the long run to fix the costs and
find a way to profit.

On a subjective level, home owners have better finances, more say in guiding
their communities, and many other advantages.

Of course we can turn your argument back...why does society make so many
accommodations for people who just buy and sell pieces of paper?

~~~
zimablue
What you're saying, which is a good point, when you say that shelter isn't
optional, you can phrase that more precisely as "owning property is a hedge
against variable property prices". It's true but there are other ways to hedge
this, eg. Long term rental contracts, limited rent controls or owning specific
derivatives all reduce this risk. There are societies that run like that, eg.
Germany.

Some stocks can go to zero, some are very unlikely to and most portfolios have
things that are very unlikely to flatline like govt bonds. Well i don't
mortgage although i could, and I do save so hello you've met your first. The
idea that we need a bank threatening to throw us out of our houses to enforce
responsible saving is infantile and grotesque.

General criticism of the finance sector is a bit too off topic for me to
engage with.

~~~
jsight
"owning property is a hedge against variable property prices"

One of the best pieces of financial advice that I've ever heard centers on
this. "The purpose of owning a house is to fix the cost of housing." Its
brilliant in its simplicity and I had never thought about it until hearing it
a few dozen times. :)

Unfortunately, it is also a vastly different mindset from many home buyers
(and, for various reasons, sellers).

------
msvan
It is true that housing prices in urban areas have risen astronomically in
many regions of the world, and while we may well see a correction, I wonder if
these these areas have simply become way more valuable than they used to be.

People thought that the internet would make location irrelevant, but it seems
that the opposite has happened. I can think of many armchair theories as to
why, but it's not a simple question to answer.

~~~
AnthonyMouse
> It is true that housing prices in urban areas have risen astronomically in
> many regions of the world, and while we may well see a correction, I wonder
> if these these areas have simply become way more valuable than they used to
> be.

They are, in the short-term. The problem is that high housing costs have a
slow, long-term corrosive effect on a city. Companies have to pay higher wages
for workers to achieve the same standard of living, which makes them less
competitive. So, for example, you see a lot of tech companies springing up in
Austin now. It doesn't happen overnight, but it happens.

It also creates a large net transfer of wealth out of the city whenever
someone moves. Someone who moves in with half a million dollars in net assets
would normally be a boon because they would go use that money to patronize
local businesses, but now they have to spend that and a good chunk of their
salary going forward on housing, which goes to the seller who is moving out of
the city and taking the money with them.

The housing ratchet is also completely unsustainable. The people who already
own real estate want prices to increase rather than decrease to justify the
high price they already paid and generate a competitive return on that huge
amount of money, but when housing is already the majority expenditure for city
residents, costs long-term can't increase faster than wages, and the higher
wages get for the same standard of living the less competitive local companies
are.

Eventually you reach a limit on how high housing costs can sustainably go, but
once you hit it, nobody wants to put down a million dollars for a house that
won't appreciate at all when they could be getting some ROI on the same money
in the stock market. Then prices finally start to decline, but people
_definitely_ don't want to pay $950K for a house that will _lose_ value, so
the decline is _rapid_. This is, of course, catastrophic.

It's almost impossible to avoid this once the values are already ridiculous,
but what the article suggests can mitigate it somewhat: Sustained moderate
inflation combined with a large increase in the housing supply, so that real
values come down even though nominal values are stable. Then the crash is in
real value rather than nominal value, so people don't end up with underwater
mortgages, and it can ideally happen over a period of a decade or so rather
than instantaneously in a way that causes a local economic crisis.

~~~
timcederman
I think for most folks actually living in these high cost areas, capital
appreciation is not the primary motivation.

Also I disagree that they are universally destructive - how else do you
explain the long term success of high price cities such as London, New York
City, Hong Kong, etc.

~~~
AnthonyMouse
> I think for most folks actually living in these high cost areas, capital
> appreciation is not the primary motivation.

Sure, they want a house so they can live in it. But who wants to pay a million
dollars, which you either have to pay interest on (if borrowed) or can't
collect interest on (if not), when it's only going to be worth the same amount
of money in 30 years? At 5% interest, the lack of equivalent appreciation more
than _quadruples_ the opportunity cost of buying the house over the course of
30 years. It changes what they're willing to pay.

> Also I disagree that they are universally destructive - how else do you
> explain the long term success of high price cities such as London, New York
> City, Hong Kong, etc.

It has always been the case that some cities are more expensive than others,
but that's not what we're talking about. Nor are we talking about small
affluent sections like Manhattan. If you look at, say, Brooklyn, it was
historically affordable to ordinary people (and 20 minutes from Manhattan).
That's what's changed.

And there's no way housing in San Francisco isn't a massive bubble. It's hard
to predict how long it will be before the crash, but it's obvious that it's
not sustainable.

~~~
isostatic
> But who wants to pay a million dollars, which you either have to pay
> interest on (if borrowed) or can't collect interest on (if not), when it's
> only going to be worth the same amount of money in 30 years?

People who want to live somewhere?

House prices tend to be what people can afford to live. People tend to budget
x% of their household income on housing. With lower interest rates, it means
houses are more expensive. With two full time workers it means houses are more
expensive. With higher wages it means houses are more expensive.

Since 1990 house prices (in real terms) in the US have increased about 15%,
but disposable household income has increased nearer 80%. Even in SF from 1990
to 2016 house prices only increased about 80% in real terms, and I suspect
that average household income has increased far more

~~~
nly
Are you comparing inflation adjusted house prices against _unadjusted_ income?

The % of take home pay people are putting, on average, in to housing here in
the UK (ok, different economy) has gone from something like 20-25% in the
1950s to something like 40-50% now.

I myself live in London and put 47% of my take home pay in to rent. That's
without property related tax. I'm in the top 5% of earners in the land and can
only afford a modest ~45sqm apartment. If my rent goes up next year and my
income stays the same, I will have to consider a longer commute.

~~~
isostatic
Nope. But these are averages, London is extreme. My mortgage in Cheshire costs
25% of my takehome pay (not the household takehome pay) - and half of that is
paying off the capital. That's on a 4 bed semi.

Two earners on median £27k take home about £44k. 25% would be £900 a month,
which is more than enough to rent a house.

This house is half an hour out of Manchester, 40 minutes out of Leeds:
[https://www.rightmove.co.uk/property-to-
rent/property-372566...](https://www.rightmove.co.uk/property-to-
rent/property-37256626.html)

£625pcm rent.

~~~
nly
Regional house prices are correlated with regional demand which correlate with
regional job opportunities. I could go live in the sticks but then I'd
struggle to find work. I moved to London because I couldn't find satisfying
opportunities in the South East, 25 miles outside of London, let alone in the
suburbs of Leeds. If I hadn't moved to London my 10 hour work day would have
become 12-13 hours, including a nasty rush hour commute, and I would still
have been paying £500/month in transport for the privilege _and_ a high rent.

The problem here is that salaries don't scale in a linear fashion with
regional property prices. In places like London, where quality property supply
is low, rents are set to the absolute maximum, while still filling tenancies,
and salaries, just as else where, are set to the bare minimum to fulfill
demand. The result is rent as a % of take-home is maximized.

There are only three solutions. Lower property prices and rents (more housing
supply), higher salaries and/or a more regionally distributed job market.

Don't get me wrong, i'm not bitching. I'm comfortable. But when people hear
what you earn, and you can see by the way they react that they think you're a
rich git, they just don't see these realities.

------
dgudkov
He is talking about inflation as a way to resolve it, but my personal (and
totally unscientific) pet theory is that inflation is already here. The prices
are so high not because the real estate is expensive, but because the
intrinsic value of money is declining. How come elevated inflation is not
reflected in official stats? The problem with counting inflation is that it
doesn't account for the loss of quality which is happening in all areas except
high-technology products. E.g. while the price (in real money) for a burger in
McDonalds can be more or less the same as in the 90s or 60s, the quality went
down due to excessive use of herbicides and drugs in farming.

No wonder many people get debts because it's the right strategy when money are
losing value. If the _real_ inflation is say 5%, then getting a mortgage at
3.5% earns you 1.5% a year. No wonder stock indexes are record high nowadays
-- it's not because businesses excel more than ever, it's because the dollar
is worth less.

~~~
a008t
Why is gold doing so poorly then?

~~~
dgudkov
My guess would be that the intrinsic value of gold is declining as it has no
much use outside of manufacturing and jewelry. Gold itself is a complex market
heavily influenced by regulations and a few players. But I'm in no way an
expert in it.

~~~
AnimalMuppet
The _intrinsic_ value of gold is set by manufacturing and jewelry; it has not
changed much. The _investment_ value of gold is (primarily) set by two things:
the need for an inflation hedge, and speculation. Speculation is pretty much
dead at the moment (nobody's buying gold because they think gold is going to
go up). And gold's use as an inflation hedge is declining, because people are
less worried about inflation than they were.

Why were people more worried about inflation recently? Because they thought
that QE was going to cause a ton of inflation. As it now looks like the Fed
will be able to unwind all of that without triggering mass inflation, people
see less need for gold than they did, say, five years ago.

------
CPAhem
Real estate bubbles rarely burst unless there is accompanying unemployment.
The reason is psychological, people hate realizing a loss.

Another practical reason is that if borrow $1 million for a house, and it is
now worth $800,000 you just keep paying off the mortgage and hope prices go up
again. Selling it would require you pay in some cash to pay off the loan. All
this is provided you keep you job and can afford the loan.

~~~
david927
The faster a bicycle goes, the more stable it is and therefore less likely to
fall over. But also when it does fall over, the damage is much more
devastating.

You're right that there's a keel keeping real estate from tipping. The reason
isn't just psychological (although there is a strong sentimental sense of
attachment you have to your house); real estate is also less liquid than
almost everything else. Other factors, including proximity to work, children's
schools, etc. make it a last resort in terms of liquidating. You're right --
as long as someone can keep up the mortgage payments, they'll do so.

The problem is that the bigger the bubble, the more unlikely someone can
maintain those payments if suddenly unemployed or underemployed. The crash of
2008 wasn't so much averted as postponed. Subprime mortgages became 'nonprime
mortgages'. The practices are still there. The artificially low interest rates
are still there. The bicycle is going a thousand miles an hour and when it
really crashes, look out.

~~~
saint_abroad
> The crash of 2008 wasn't so much averted as postponed.

This.

The US housing market correction from 2006 was 30%. In this time, the US Fed
funds rate went from 5.25% to 0.15% cutting banks' monthly cost for a $250k
loan from >$1k/m to <$50/m.

In the meanwhile, median LTV has gone from 80% in 2007 to 95% in 2017 [1] and
median loan sizes have gone from $175k to $325k. What happens when interest
rates normalise and mortgage interest doubles?

The banks have been propped up but the risks have not left the system.

[1] [https://www.urban.org/research/publication/housing-
finance-g...](https://www.urban.org/research/publication/housing-finance-
glance-monthly-chartbook-september-2017/view/full_report)

~~~
a008t
Why would interest rates "normalize" though?

~~~
sct202
US Federal Reserve rates have been increasing so banks get loans at higher
prices which means consumer interest rates will also increase.

~~~
a008t
But the Fed cannot just arbitrarily set rates, presumably? There is some
"real" rate in the economy, which is determined by supply/demand of capital at
different maturities. If the Fed goes significantly below or above that, you
should get price inflation or deflation.

Some people argue that interest rates are objectively low because we are in
secular stagnation - there are loads of savings, but real economy growth is
sluggish which means there are few investment opportunities, leading to low
interest rates (e.g.
[https://www.morganstanley.com/pub/content/dam/msdotcom/ideas...](https://www.morganstanley.com/pub/content/dam/msdotcom/ideas/secular-
stagnation/Beyond-Secular-Stagnation.pdf) \- may not be the best link, I have
seen the ideas elsewhere).

~~~
saint_abroad
> But the Fed cannot just arbitrarily set rates, presumably?

They absolutely can, by quantitative easing (aka large-scale asset purchases)
buying $4 trillion of bonds priced to keep yields in range. This market can
remain irrational longer than anyone can remain solvent.

By price-fixing this market they stimulate liquidity. Institutions (such as
pensions) that would normally buy safe bonds are forced to invest elsewhere at
marginal yields (ie. corporate bonds and MBS). Other, more risky, investors
chase growth stocks with marginal yields.

> you should get price inflation or deflation.

Indeed there has been, though currently visible only through asset prices such
as bonds, stocks, securities and housing. Who can complain?

The danger comes when the tide goes out and yields go up [1]. All that extra
liquidity washes from assets into yields, thereby driving inflation on
produce.

[1] And up yields must, to determine how much have been swimming naked.

------
randomdata
As a resident of a more rural area that has seen a complete economic
turnaround in the last few years, which seems to be attributable to people
leaving the big city to find more affordable ground, the big city housing
bubble is the best thing that has ever happened. It may be destructive at a
local level, but I'm not sure it is universally so.

~~~
dsfyu404ed
>As a resident of a more rural area that has seen a complete economic
turnaround in the last few years, which seems to be attributable to people
leaving the big city to find more affordable ground, the big city housing
bubble is the best thing that has ever happened. It may be destructive at a
local level, but I'm not sure it is universally so.

Your town is going from the "boarded up storefronts" phase to the "hardware
store and Chinese take out restaurant" phase. You'll probably start
considering the housing market driven gentrification destructive again when it
gets to the "organic free trade hemp clothing store and bars that only serve
micro-brews" phase.

~~~
randomdata
That's scarily accurate. But I would say we're already in the last phase.
Which is great, as it means we now have all the amenities one expects from the
city, without having to live in the city.

------
lewis500
This whole piece makes me ask what a bubble really means. The author admits to
having been wrong about housing prices since 2000. But that’s okay because
bubbles can, apparently, last decades. If a bubble can last a very long, but
totally indeterminant amount of time, does it have any reality?

~~~
setr
Im no economist but intuitively i would think the key piece is that they
“pop”; that is, the market corrects itself ib a sudden and aggressive fashion.
That its a “correction” necessitates that the valuation is divorced from its
“real” value, the primary mechanic allowing this being speculation.

And ofc, since speculation and correction is always a market, the final piece
of the dish is that the speculation (and thus, the eventual correction) is
significantly large.

And then given that the market itself lasts long (substantially longer than
decades), and that we rightfully fear, not the existence of, but the crash,
then it seems fine to claim a bubble lasting decades, and even centuries.

And like all predictions of the future, there’s money to be made in the
difference between its actual popping and its predicted pop, if you choose to
make the bet. Ofc, money to be lost too. And if you expect it to last a
century... then just make sure your grandchildren get out before it bursts
(and hope it doesn’t take everything else with it). Doesn’t matter to you
particularly at that time scale, but it still exists (unless ofc it corrects
slowly... but hey, hindsight is 20/20)

------
purplezooey
It's no bubble now because we don't build nearly enough in these areas. We
need some kind of big federal or state project where lots of people get bought
out to leave, or moved via eminent domain, and higher density built.

~~~
chadcmulligan
I'm in brisbane, australia, and this seems to be the case here as well. There
has been huge increases in property values and rental returns. Recently though
they're has been a high rise building boom and sure enough rental prices seem
to be dropping and there's an over supply. There is a general property slow
down occurring to, though how far its going to go no one knows. The supply
side of the demand / supply seems to be increasing.

Another theory that seems to be going around recently is its the availability
of credit that causes these bubbles, which on the face of it seems to make
sense. If credit isn't available then prices wont increase, if easy cheap
credit is available then people will leverage up, which pushes up house prices
and the circle continues.

