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The Shock of Sweden's Housing Market Is Hitting the Country's Currency (bloomberg.com)
224 points by adventured 10 months ago | hide | past | web | favorite | 442 comments



When will we learn that a "strong" housing market is not necessarily a good thing? High housing prices are great for those who already owned houses but terrible for everyone else (e.g. the entire generations born after prices became inflated). Not to mention people are greedy and will over leverage themselves when interest rates are good. No country should let the "landed gentry" hold them hostage over interest rates or tax policy so that their assets - many of which they do not even actually own - can appreciate.


Totally agree. It seems one of the factors that helped the US until the 90s was that housing was affordable so people could move around easily. A "strong" housing market seems to indicate that there are no productive places for investing and no wage growth so people need to gamble on houses to rise instead.


I think a strong housing market may be the result of lack of productive capital, but I think it has more to do with supply and demand. Most average people pay for a house using a mortgage payment, so when buying a house, they'll be looking for a house that has an affordable mortgage payment.

Let's say Joe wants to spend / can afford a $1000/month mortgage payment. If interest rates are 5% and the maximum mortgage period is 30 years, Joe can afford to buy a house worth $190,000. However, if interest rates go down to 2% and Joe can now take a 40 year mortgage, Joe can now buy a house worth about $330,000. Great for Joe! The only problem is that housing supply is relatively inelastic, so the supply of housing didn't magically increase overnight. When Joe buys a house, he's essentially bidding against a bunch of other people for that house. If those other people's mortgage payments were affected the same way, then the actual effect is that what was once a house worth $190,000 is now worth $330,000.

This sounds like a problem out of an Econ 101 exercise. Either politicians are stupid, or more likely, they know that "homeowner policy" like this can make them and their other rich buddies even richer.


> Either politicians are stupid, or more likely, they know that "homeowner policy" like this can make them and their other rich buddies even richer.

It's not a malice vs idiocy situation, actually there is a third explaination : economy needs a growing money supply to work properly (and the money creation need to compensate the economic growth AND the reduction of money velocity[1]). But since the late seventies, money creation is only possible through the banking system via credit. That's why central banks reduces interest rates to stimulate economy, because you need to create money to enable economic growth. To get out of the rising housing prices trap, we need another money creation mechanism, but many people are affraid of the old ones (state-controlled monetary creation) and a lot of people (bankers, homeowners) have a lot to lose if we changed the system.

[1]: this is the failure of the monetarist view from the seventies, which predicted a constant money velocity, in fact we've had a declining one for the last four decades.


Very good point. My pet theory is that the emphasis on asset-ownership as a means of retirement is what is decreasing the velocity of money. For example, let's say we had a system where instead of purchasing a home/stocks/bonds to save for retirement, you could instead pay the government $X which essentially goes toward an annuity with payout determined by the age at which you retire. The government could just immediately spend that money - perhaps on other retirements - and your actual annuity is just an accounting entry. So this is similar to social security, except you can pay more if you want to.

The emphasis on assets for retirement locks a lot of money up in an unproductive musical-chairs of asset transfership. For example let's say I have a pay-day and want to spend $100 on buying stock. When I buy that stock I'm purchasing it directly from someone else who now has $100 instead of the stock. They can spend that money on goods and services, but in my opinion there is a far greater chance that they will reinvest that money in some other asset. If the actual assets in the market don't change, I think you can say that my investment increased the total sum of costs of all assets. I'm not 100% sure this is solid logic but it's some rough reasoning.

The problem is that at any given time more people are buying new assets instead of selling them off. This is because you can make money on purchased assets through rentiership (dividends, renting, or collateral for a leveraged investment that pays dividends/can be rented), and also because people are cautious and save more than they need, since asset prices are unstable.


That's an interesting point, and easily challenged since my country (France) is actually doing what you suggest. And as a matter of fact, retirement here is part of the social security system (La sécurité sociale). I'll check if we see the same kind of slowdown of money during the past decades here.

I have two personal pet theories (is that really a common idiom in english ? I like it !) on that topic.

1. since we now focus on low inflation, people have little incentive to spend/invest their money, they can just hoard cash for a long time with no risk of losing money.

2. The low imposition rate since Reagan accelerate the concentration of capital, and rich people buy assets with their money, not consuption goods.


One thing I'd worry about is that this kind of pension may only work in a closed system. People not living in France may still purchase French assets for investment, just as they continue to purchase international assets for investment, which will still drive an increase in demand. That could incentivize French people to continue investment, in the absence of strict capital controls.

And yes, it is somewhat common! I think your second point is definitely part of the problem. As to your first, I think that looking at inflation in these terms requires looking at interest rates as well. When both inflation and interest rates are low, hoarding cash is highly incentivized. If inflation is low and interest is high, there is a large opportunity cost to holding cash rather than collecting interest via a mechanism directly tied to the cash (e.g. a bond). If both inflation and interest are high, it would probably be optimal to invest in assets that won't have their underlying value erode as they do with bonds.


I'm sorry I think you are confused. When you buy stock, you are providing capital to the company issuing that stock. Yes, even in the secondary market, although indirectly. The company then invests that money productively and the economy grows.


Ah, no. The moment the company gets money, is when it sells the stock. After that, unless the company sells more stock, or buys and re-sells its stock, it receives zero more capital financing dollars, unless it undertakes other financing activity, such as the sale of bonds.

There is no indirect means to receive money, except for profit, and that it is not related to stock.

Profit is ultimately the primary means for company cash liquidity, held as retained earnings, after the company has survived its initial years of inception and growth.


Sorry, you are missing the point. A liquid secondary market is what enables the company to go public in the first place. There would be no initial sale of stock without it at all. In addition, liquid secondary market enables the company to incentivize its employees and undertake other financing activities, as well as gives value to its remaining treasury stock.


> A liquid secondary market is what enables the company to go public in the first place.

Dividends enable the company to go public. The secondary market makes the stock liquid, which is convenient but not mandatory.


No. Growth companies may not pay dividends for years and still go public. Dividends are paid by private companies too. The only reason to go public is the liquidity


That's not true. A company doesn't manage to sell its shares because of dividends. Dividends may be used to estimate value base on the expectation of returns, but if dividends were relevant or even dictated the share price then stocks of companies that posted negative results would be worth zero. Which they don't.


> To get out of the rising housing prices trap, we need another money creation mechanism,

...or simply a way to deflate the housing market, such as public housing and urban renewal projects.

I don't understand why a small issue that's easily solved and a very basic strategy all over the world is somehow interpreted as a insurmountable problem that means the entire economical system is broken.


"But since the late seventies, money creation is only possible through the banking system via credit."

? I don't know how the Kroner works, but usually a central bank issues currency into the market in exchange for some kind of asset - this is the primary mechanism for controlling interest rates.

Yes, more credit is created through fractional reserver, but this is taken into account.


> more credit is created through fractional reserve

There is no such thing as fractionnal reserve credit in 2017, bank don't need reserve to lend, they need reserve to hold bank accounts for their customers.


?

The fact banks can lend out more than they have in deposits means there is 'fractional reserve credit', or 'fractional lending' currently, in 2017.

Most of the credit in the world is created this way, actually.


Have you seen the balance sheet of a bank? They don't lend out more than they have in deposits.


Banks definitely lend out more than they have in deposits. [1]

It's why you've heard the term 'reserve ratios' etc..

[1] https://www.investopedia.com/articles/investing/022416/why-b...


The link you sent doesn't say that they lend out more than they have in deposits (it says loans create deposits... so they will always have more deposits than there are loans).

And the following passage doesn't make much sense: "When a bank makes a loan, there are two corresponding entries that are made on its balance sheet, one on the assets side and one on the liabilities side."

If you take a loan to buy a house, it will not be a new deposit at your bank. It will be a new deposit at the seller's bank. And against that new deposit, that bank can extend new loans. Etc. http://thenextturn.com/wp-content/uploads/2015/04/Fractional...

Of course when you are just getting the loan it will appear as a deposit at your bank. But this is not to balance the loan. The loan is coming from a reduction in reserves. This temporary deposit (on the liabilities side) will increase the reserves temporarily (on the assets side), but only until you take the money out to do whatever you asked the money for.

Definitely banks do not lend out more than they have in deposits (ignoring other forms of financing for banks, of course).


I see what you are saying, I agree, we are just arguing over words.

Technically, you are correct - they don't lend out more than what is deposited, but what is deposited is 'created' (or at least deposited and lent money against those deposits are both considered 'in circulation') by they or other banks, ergo, banks end up lending out considerably more money than is created from the central bank.


We agree, then. Simplifying a bit, M0 (physical cash) is lower than M1 (M0 + checking accounts) and M2 (M1 + savings accounts) which are the usual measures for money in circulation. Note that there are also broader definitions of money, including as well long-term deposits and other money-like instruments.


How else can money be created except through credit?


Direct reserve emission by the central bank. In practice, the central bank can just give some reserve to the governement account.


..or they can give it directly to people. There is an initiative for Europe that wants exactly that, Quantitive Easing for People. I love the idea and am sure it would do more for the economy than just pushing banks to lend more money.


That could be a good idea, even though we don't really know the impact it will have on inflation. Imho, the impact would be close to zero in nowadays economy where the lack of demand is much more of a problem than an hypothetical shortage of goods. In the long run though, the demand would catch up and the supply could be the limit, like it was after the first oil crisis.

Personnally, I'd rather give the money to the governement like we did in the keynesian golden age, because it fuels the development of infrastructures, housing and social security. And at our point in history, it could be used to transition to a sustainable society. But that's because I don't trust the market on this, I'm kind of a socialist.

> am sure it would do more for the economy than just pushing banks to lend more money.

This is such a failure (esp. in the EU) I don't see how I could disagree with you on this.


They did it in Australia during the GFC. Spent 10 billion dollars giving 12 million people $900 each.

Share market jumped, retailers rolled out significant sales. People bought TVs.


The problem with this idea is that the central bank doesn't have a list of bank accounts for the entire population and even if they did not everyone has a bank account.

It's more likely that negative interest rates will be passed onto consumer bank accounts by elmininating cash.


If money is given directly to people then that money will disappear in non-productive spending such as luxury goods and services, which typically mean that the nation's trade balance would suffer greatly.


And what prevents the arbitrary extension of credit?

The present primary reliance on fractional reserve monetary is not a carved-in-stone requirement of financial systems, only the present norm.

If you're interested in ideas and thoughts on money, I'd suggest William Stanley Jevons writing as a starting point for modern views. A. Mitchell Innis's "What is Money?" (1913) is not entirely mainstream, but strikes me as among the more insightful enquiries I've read:

https://www.community-exchange.org/docs/what%20is%20money.ht...

I'd stumbled across that here: http://neweconomicperspectives.org/2013/09/money-created-ove...


> The present primary reliance on fractional reserve monetary is not a carved-in-stone requirement of financial systems, only the present norm.

Their is no fractionnal reserve banking in the modern world anymore. And circa 2007, virtually nothing prevented the infinit expansion of credit, with the result we all know.

If you want to learn more about these topics, the keen-krugman debate (more of a controversy than a civil debate) a few years ago was really enlightening.


https://www.federalreserve.gov/pubs/feds/2010/201041/index.h...

The St. Louis Fed tends to have the largest set of articles on economic policy, generally.

Here are 632 results for "fractional reserve":

https://encrypted.google.com/search?hl=en&q=site%3Astlouisfe...

And limiting to 2010 and subesequently, 27. None declaring the concept dead.

https://encrypted.google.com/search?q=site%3Astlouisfed.org+...


> And limiting to 2010

The second paper on the page is from 1968 …

In the US, there is no limit anymore on how much credit you can lend given the amount of reserve you have, the reserve requirement is on deposit not credit lent.

https://en.m.wikipedia.org/wiki/Reserve_requirement


Please cite your source(s) that reserves and reserve requirements no longer exist, are no longer linked to money supply, and are no longer Fed policy.

Thank you.


It can be created backed up by assets instead of reputation though.


Via being backed to some tangible good, eg gold.


Or bitcoin ! Wait, this is ridiculous we have like two centuries showing us that commodity currency is a failure in an industrial economy.


I would not be so fast in that conclusion. There is actually research that indicates that the opposite might be true:

http://saifedean.com/Saifedean%20Ammous%20The%20Bitcoin%20St...

A slowdown a la Thiel due to fundamentally flawed monetary policies.


Thanks for the paper, but having skimmed through I don't think the word research is appropriate for this, it's more of a compilation of autrian propaganda than anything else.

Gold standard failed, no matter what libertarians like to fantasize about it.


Groan.. I think we need a version of Godwin's law for bitcoin


Homes are important to people and they tend to buy as good as they can afford. When employment is stable and interest rates are low people will spend more because they can and feel safe doing so.

Early movers purchase a higher grade of home than they could have previously. Eventually this shifts the market as a whole as income distribution remains stable. Then people buy the same house they would have previously at a higher price. Now nothing has changed and people are more in debt as the cycle returns to normal, if it ever does.

Plus the whole investor (foreign and domestic) vs owner occupier discussions we are seeing plenty of...


Isn't it inherently bad to buy "as good as you can afford"? Employment is rarely stable throughout a 30-year period. Shouldn't people be much more careful when maxing out their mortgage relative to 'the good times'?


Yes, I think so, but only because "as good as you can afford" usually means to people "as much money as the bank will loan me" instead of "as much as I have carefully budgeted."

I bought as much as I could afford, but my budget included savings and a cushion. The bank would have loaned me plenty more than what my budget could afford. And my budget included repairs and maintenance. I also included in my budget a 4 bedroom house costs more than a 900 sqft town house to heat and cool. The big thing was I wasn't willing to give up maxing out our retirement accounts.


That depends. Location location location. The right answer changes based on what side of the city you live in. As such nobody can give a definitive answer.

In all but the smallest cities you have options for a different job. They might not be as good, but there is an option. If you lose your job you can find a different job close enough to your current house that you don't have to move.

Remember this is NOT an rational economic problem. There are good reasons to live near by the same neighbors that you know well for years. There are good reasons to live near your family. When you own a house you can make modifications to support your hobbies which in turn make your house a better place for your to live than anyone else. These all mean there are good reasons to accept a job that pays less than you could earn elsewhere and thus stay in the same house. With inflation you can probably afford the house on a lesser paying job after a few years.


> Remember this is NOT an rational economic problem. There are good reasons to live near by the same neighbors that you know well for years.

Why is a living near the same people you know and love irrational or somehow an inappropriate object of economic reasoning? You could even estimate prices for such things! Just because they're not typically represented as currency amounts doesn't mean they're not 'rationally economic' or that making tradeoffs that involve these things couldn't be better done with good economics.


Generally rational economics assumes someone who is rationally trying to optimizes for other factors.

You are correct that it is fully rational behavior for people. However that is not the definition used in economics. (sort of like physics tends to assume no friction where possible)


No such assumptions are made in the axioms of VNM-rationality[1] or any other model of rationality of which I am aware. If it is not rational to live near people you like it is difficult to see why it would be pay more for a house with any other luxury.

[1]: https://en.wikipedia.org/wiki/Von_Neumann–Morgenstern_utilit...


Strangling the growth of cities and labor mobility is very much a rational economic problem:

* https://www.axios.com/sky-high-home-prices-are-thwarting-thw...

* https://www.citylab.com/equity/2017/06/the-other-side-of-har...

Cf. China, which has seen unbelievably explosive growth in its cities in the last 40 years and China has also seen ~1 billion people lifted out of poverty during exactly the same time period.


Sure. This is inspite of the hukou system, which is basically a kind of apartheid that keeps rural migrants from receiving services in the urban locales they are working at.


As good as you can afford would be fine. The problem is mortgages and the fact that people are buying more than they can afford. They're buying as much as they will be able to afford over the next 30 years. We've developed a system were some people make large amounts of money by creating the fiction that housing should be as expensive as it is.

There's a lot of evidence that shows that for every dollar of loans made available to students, the price of education rises, and that's a system without supply/demand dynamics since admissions aren't (supposed to be) based on a bidding process. It seems only reasonable to conclude that the availability of mortgages has similarly increased the price of housing. It's a hidden cost of our housing market that banks (and a few others) profit by. The banks loan fictional money, created out of thin air thanks to fractional lending requirements, and collect a percentage of that back every year on a house that only costs what it does because of that loan. Without mortgages, people would be forced to save up and the price of housing would be governed more by the cost of actually constructing houses and the amount that people were able to save before buying rather than a percentage of their income over the next 30 years.

Think, for example, if banks decided to change the standard loan time from 30 years to 40 years. What would happen to housing prices in areas with somewhat constrained supply? Homebuyers would still look at monthly payments and buy as much house as they could afford. So housing prices would increase accordingly and instead of mortgaging 30 years of our futures, we'd be mortgaging 40. We'd be buying the same houses and banks would be making more money. Change 30 years to 20 years and you'd get a similar drop in housing prices.

More than any other thing that we spend money on these days, housing prices have been decoupled from their cost of production and banks are largely the ones skimming that difference between what housing should cost and what it actually costs.


In theory, sure. If there were ever any options to be careful, that might be relevant.

But in practice, "as good as you can afford" really means "buy the lead paint, lead water, asbestos ridden, foundation broken 'cheap' house? Or buy the no-lead, no asbestos, no mold 'expensive' house? "As good as you can afford" actually translates to the "least shitty" option, for most people.

Buying an 8 bedroom house just because the bank will technically let you, is a fun TV sitcom joke. Not a real thing most people are ever able to actually do.


For many it is also tied to expectations of what they should be able to afford that are born out of what they saw their parents afford and what they grew up in.

If you grew up in a modest but well-kept house in a decent neighborhood, that is your baseline. If you then go on to reach some level of success in your career such that you are roughly on par or exceeding your parents income, your expectation naturally is that you should be able to afford something similar or better. Unfortunately the market dynamics have completely shifted since parents bought, and so people are having to take a really harsh look at the reality of their past expectations and how they align with their current reality. It often means paying way more than they ever wanted or thought was necessary to buy something way crappier.


I have been waiting 10 years for "emergency" interest rates to rise and the subsequent price fall here in Europe. So far it hasn't happened.


Sweden might be for you then


Especially when "good" means "big". The ability to pay for an 8 bedroom house does not imply that it's a good idea to buy one.


Stretching as far as you can and then some has been the optimum strategy in Canada for a very long time now.


http://cityobservatory.org/the-origins-of-the-housing-crisis... A major reason why housing supply is so inelastic today is that zoning has become much more restrictive in the last two generations.


And what's driving zoning?


Also, at least in the US, there are enormous tax advantages to speculating/investing in your house instead of in other mediums (equities/bonds/etc). Capital gains tax on gains is basically 0 on your primary home and you can deduct the mortgage (already low) interest (compare to a margin position).


I agree with everything except for the "make them and their other rich buddies even richer." Let's not bundle all politicians into this. :)


It's sort of telling how many prominent politicians in the UK make much of their income off of housing. Boris Johnson, George Osbourne, and David Cameron all come to mind - all who were in prime places to improve the situation, but it was against their best interests.


Same in US Congress. Most of them are millionaires who benefit from housing prices.


I don’t think you can really blame 3 conservative politicians for the home price boom in most western countries over the past 20 years! They weren’t even in power for a major part of the boom in the UK (Labour were in power from 1997-2010).

The most recent part of the increase has come from the slashing of interest rates to rock bottom following the global financial crisis and quantative easing, neither of which is the responsibility of the government.


Yes it’s not their fault - just saying it’s not in their interest to improve things, and they didn’t. But you think government has no influence over house prices? How about help to buy schemes and similar? London bubble is pretty extreme even compared to most other places, and the median price has doubled in the last decade under the tories.


I think it has been shown that the majority of politicians in the UK (or their partners) own extra properties.


If this is the case and Joe wants to bet that the housing prices will continue to rise, Joe gets an interest only ARM with a 7 year balloon.


Joe is probably risk averse and more concerned with having a place to live in the future than taking on risk.


In that case Joe is clueless and should stay in the same house he bought.


> A "strong" housing market seems to indicate that there are no productive places for investing and no wage growth so people need to gamble on houses to rise instead.

You've just summarized the situation in Prague, Czech Republic.


Same in Romania. For the first time in my life (I’m 37 now) I heard a couple of acquantainces saying something like “We’re 20,000 Euros reacher now compared to last November, our apparment is now worth 90,000 euros compared to 70,000 euros last November”. This discussion happened this summer, since then I’ve heard at least a couple other different couples saying pretty much the same thing (only the sums were different). Never mind they their investments are a hell of a inliquid ones and that the banking rules can change anytime, just like that (like it happened after 2008), which would send the real estate market collapsing.


I hear this almost everyday in Sweden.


Prague has problem with supply, new flats are build slowly.


Same in China.

Same in Australia.


Same in Norway.



Same in Ukraine


Same in Munich... QE money looking for a 'tangible' home


There's been a number of great bits of research over the past few years arguing that our "strong" housing market is a primary cause of economic stagnation.

Let me count the ways:

(1) reduced labor force agility as you say

(2) high rent and mortgage cost soaks up money that could otherwise fuel consumer spending, creating a demand constrained economy

(3) high housing costs in major cities also contribute to poverty elsewhere by preventing people from circulating between high priced urban and lower priced rural areas

(4) high housing costs risk actually destroying centers of excellence like the SF Bay Area and New York by making it impractical for new talent to move there


Got any reading on that? I'd never thought of it that way, but when you say it, it seems very plausible.


I don't think it's that there aren't productive places for investing. Housing is unique in that a regular person can get a loan to purchase an asset that normally appreciates, and they can deduct the interest from their taxes. There are a lot of transaction costs, so the market isn't as liquid as some others, but where else can the average person get that kind of leveraged investment?


You are correct, but VR will wreck the housing market within 10 years* , so it’s not a long term concern.

* 1st sub-$400 all-in-one with 6dof, face and finger tracking + 5 years


I somewhat disagree. The opposite can also occur. Because everyone is gambling on the house market, the amount of productive places for investing diminishes as they are left to be forgotten. This can be obviously self-perpetuating but this is how I would characterize New Zealand.


In Ireland we had a property bubble during the "Celtic Tiger" years, and suffered a major correction after 2007 [1]. Apartments in Dublin the capital city lost about 62% of their value. 10years later and prices are climbing steadily upwards [2]. It's deja vu all over again. In Ireland we have a national obsession with owning property.

[1] https://en.wikipedia.org/wiki/Irish_property_bubble [2] https://tradingeconomics.com/ireland/housing-index


> It's deja vu all over again.

Except for the lack of readily available credit. For the most part, it seems the people paying the high prices are "able" to afford it. The problem is that home ownership (and the security that brings, particularly in Ireland) is not attainable for most young people and families anymore.


Could this be a result of Ireland being somewhat of a tax haven? If there's a lot of capital just sitting in Ireland waiting to be repatriated, it might make sense to invest that money within Ireland in the interim. That would increase demand for housing in the short term. The main thing to worry about would be that your housing market could experience a crash whenever that money does get repatriated


> Could this be a result of Ireland being somewhat of a tax haven?

In short, no. It's not as if the EU lacks capital markets.

Also: "Is anyone really so naive to imagine that these balances are not already fully available to finance new investments by U.S. companies here? Do they think the global financial system is that unsophisticated? At present interest rate levels, a company needs only to issue debt at favorable rates in the U.S., invest the funds held abroad at floating rates, enter a fixed-floating interest rate swap, and voila, the company has access to the funds exactly as if they had been brought home. Indeed, this is just what many U.S. corporations appear to have done. So cry me some crocodile tears for companies that hold profits abroad." [1]

[1] https://www.hussmanfunds.com/wmc/wmc170821.htm


> Could this be a result of Ireland being somewhat of a tax haven?

Not really. The problem is that building all but stopped in the aftermath of the 2007/8 crash. Meanwhile the economy recovered, Dublin in particular is booming now but we're still lacking enough homes to meet demand and building never recovered to the necessary levels. Add in a reluctance for "building up" and a growing population, that gets you higher and higher prices...


No, it's nothing to do with Apple's tax arrangements. They're not in the business of buying houses. It's a simple supply and demand issue. There are a lot of young people who want to buy a home, and not enough housing stock to meet their requirements.


Apple isn't the only entity with assets in Ireland


Your use of the term "obsession" implies a degree of irrationality. Many people, myself included, would contend that the desire to own your own home is eminently sensible.


Jeez, nobody said the desire to own your home was irrational, by definition. You can have a rational desire to own a home or you can have an irrational obsession.

Irrational obsession would include things like when you prioritize homeownership over financial security and other basic necessities like healthcare or food. For example I know someone who gave up health insurance to buy house - and she readily admits this.


Correct, nobody said that the desire to own your home was axiomatically irrational. I didn't claim that anyone did. What I took issue with was the statement that the Irish populace have an obsessive (i.e. irrational) focus on property ownership.

We do prefer to own our own homes, but that preference is not evidence of a national personality disorder.


A broader definition of financial security _includes_ home ownership. The other options are homelessness and renting. The first one is silly, the second is just paying the landlord mortgage while being exposed to financial risk over the long term.


This has been repeated ad nauseum but if it were correct all businesses would always strive to buy their real estate as soon as they could afford it and since many (including my employer, who brings in a billion dollars a year) are content renting long term, that's obviously not the case.

If you buy once you factor in taxes, insurance, upgrades, maintenance, repairs, commission, closing costs, opportunity costs compared to other investments, interest, PMI, etc., assuming you were in a good financial position to buy in the first place so you don't default, you probably will come out ahead compared to renting if you live in your house for more than 5 or so years.

But! That's only if the cards fall just right. So if the neighborhood is still desirable, tax policy/political landscape doesn't change, your neighbors keep up with their maintenance, your HoA doesn't go into bankruptcy, a major employer doesn't leave town, tastes in housing doesn't change, the housing market doesn't crash, too many of your neighbors don't foreclose, nearby amenities don't leave, a major highway isn't built through your neighborhood, interest rates haven't soared, political housing incentives/programs haven't gone away, too many black people don't move in(1), etc., etc. You're taking on a very large risk if your buying vs renting, sure it has the ability to work in your favor (extreme example - buying in San Francisco in the 90s) or not in your favor (extreme example - buying in Detroit in the 50s).

I've seen people lose out terribly financially buying a house, and not just in 2008 recession, my parents house was bought in 1995 and hasn't even kept up with inflation. That doesn't mean it was the wrong choice for them to buy though, houses are really good at providing shelter.

You also have to have the ability and wherewithal to take care of a house - and tons of people don't.

I'm a homeowner, I'm not against home ownership.

(1) I'm not trying to be racist, but white flight does exist.


>if it were correct all businesses would always strive to buy their real estate as soon as they could afford

Unlike people, businesses do not reach a certain age then lose their capacity to earn (retire). A business can carry the cost of their leases as an operating expense, where individuals who do this will hit a roadblock when they retire as their operational funding is no longer able to cover the cost of rent.

There are of course exceptions for particularly high earners who manage to build up sufficient funds to be able to perpetually rent, even sometimes without drawing down on their principle savings. But this is far from attainable for most.

So equating the two is not valid.


> the second is just paying the landlord mortgage while being exposed to financial risk over the long term

Homeownership, for most, is a leveraged play on a politically-sensitive asset. Consider two companies. One goes all in—-with borrowed money—-on a deal that does well if the cards fall right but results in default if e.g. property taxes or zoning laws change. The other has higher fixed costs but diversifies its investments. It’s apparent which one is riskier.


You don't have to pay for health insurance in Sweden.


Or more accurately, you cannot avoid paying for it (as it is collected in employment taxes). The employer has to pay 4,35 % as sjukförsäkringsavgift, as well as other payroll taxes that total 31,42 % of nominal salary (2017).

https://sv.wikipedia.org/wiki/Arbetsgivaravgifter_i_Sverige


Is that in addition to income tax?


Yes but that's "paid by the employer" which means that it's on top of nominal salary, but obviously included in the total tax burden.

Employer pays $6000 per month, nominal salary is $4565, and employee's income tax 35 % => employee gets $3000.


Of course, it was merely an example of an unhealthy obsession I've personally seen. There are many more. Another would be neglecting to save anything for retirement because you believe your home is your retirement fund.


> High housing prices are great for those who already owned houses

Not really. Rising prices (not high prices) are great for people holding houses as investments. But for owner-occupied houses, rising prices are as bad for the owners as they are for everyone else.

my wife and I own a house in Northern California, which we bought during the sub-prime crash. Since then it has nearly doubled in price. It is also too big for us, so we'd like to sell it and move to a smaller house. But we can't. Why? Because by the time you factor in:

1. Capital gains tax

2. Real estate agent fees

3. Higher property taxes (even a smaller house costs much more than the prop-13 basis in our current house)

we can't afford to move!


Fellow Northern California homeowner here. You can sell it and you will net a return. I'm not sure I understand your gripe. It sounds like you're annoyed about the hassle of moving , the associated fees, etc. But the parent's point is valid - the appreciation of value of your house is great for you.

> 1. Capital gains tax

Note - if it's your primary residence you get capital gains relief on the first $500k.

> 2. Real estate agent fees

If you're in the bay area, then you negotiate these down to the minimum (IIRC 2.5%) because the market is so liquid and the agents add very little value (if you're smart). Also, you can negotiate not to pay the commission if you're the buyer. So the only burden is on the sale, which is less impactful since you've already made a profit on it.

> 3. Higher property taxes

Yes, this is a bitch in CA...see next point.

> we can't afford to move!

Clarification - you can't afford to move in the general vicinity, but you could certainly move to Nevada (for example). If you are not viewing your house as an investment, then guess what? You get to live in an area that is high demand! Good for you for timing the market appropriately when you bought.


> if it's your primary residence you get capital gains relief on the first $500k.

Yes, I know. But our appreciation is substantially more than that. The higher it goes, the more expensive it becomes to make a move.

> which is less impactful since you've already made a profit on it

Only if we move to a less expensive area. If we make a local move, that "profit" just gets rolled in to the next house. There's no way to cash out without leaving the area.

> Clarification - you can't afford to move in the general vicinity, but you could certainly move to Nevada (for example).

Yes, exactly right. What we really want to do, but can't because it's too expensive, is downsize. This would not be the case if prices were stable.


But you don't realize a net loss from moving to a smaller home in the same area. The only hinderance is paying a higher tax % (because of CA), but you'll likely net more positive cash (because of the transaction) + the absolute value of your new taxes will be less.

I'm still not sure why exactly the issue is. You literally can afford to downsize and you'll make a ton of money doing so.

> If we make a local move, that "profit" just gets rolled in to the next house.

Huh? That's not how it works...

2008 - Buy house for $1M

2017 - Sell house for $2M

2017 - Buy new house for $1M (but smaller size)

Congrats you have an asset worth $1M you've just made $1M in cash. Now net out fees and you have a downsized home and are more liquid than you were before, but with slightly less wealth than you had yesterday (due to netting of fees associated with the transaction).


> 2017 - Buy new house for $1M (but smaller size)

Assuming there's anything on the market for $1M. The problems start when there isn't.


But if you're downsizing then yes there is a cheaper house. That's how the housing market generally works ($ per square foot * # of square feet).

> The problems start when there isn't.

And the market always opens up when there isn't because it means the demand goes higher and thus creates new sellers. That also "rises the tide" and increase everyone in the area's house prices. So it nets it self out.


> But if you're downsizing then yes there is a cheaper house.

Sure. But it might be $1.6 million, not $1 million, in your example...


Ok, so what? It's still cheaper than $2M....so they can still afford it....


You don't get to keep the whole $2M. That's the point.


Uh what? If I have a house and I sell it for $2M cash and then I buy a house for $1.6M, I now have $400k in cash and $1.6M in assets.


Because of the expenses (moving, taxes, fees, etc) amount to $400K, you've just spent a lot of effort to replace a more expensive property with cheaper and smaller one for no gain.

Real-life numbers will differ, but that's roughly the point.


Right. See my point here about asset transfer fees and the idea of "gain" or "loss" to wealth: https://news.ycombinator.com/item?id=15708206

But there is a gain, you just turned an illiquid asset into a liquid asset. The fact that this exchange is even possible is why you are even able to say "its worth $2M" in the first place. If you couldn't turn an illiquid asset into a liquid asset it would be worth nothing, so you neither "gain" nor "lose". Would you rather have that scenario?

Lastly - if you see personal value in purchasing a smaller house, wouldn't you expect service providers (agents, movers, etc) to charge you for that value?


If you sell a house for $2M cash and have to pay capital gains taxes, and then buy a house for $1.6M, you do not have $400k in cash afterward.


If you sell it after 2 years and it's your principal residence you do actually have $400k in cash...

https://ttlc.intuit.com/questions/3229450-sold-primary-house...


No, you do not. If you buy a house for $1M, sell for $2M, you pay taxes on $500k. Those taxes are ~34% if you're in California, so you pay about $150k in taxes. You buy a house for $1.6M, you have $250k left, not $400k.


This is not correct according to the 2 CA tax accountants I just spoke in the last 2 weeks. I literally am researching this exact situation right now.

https://www.irs.gov/taxtopics/tc701

Where's your source?


I'm looking at the exact same source you are. What part of what I said is not correct, exactly? The capital gains are $1 million. $500k of it is excluded (assuming you're married filing jointly). The rest gets taxed.

If you think that's incorrect, what do _you_ think happens with taxes when selling a home for $2 million that was bought for $1 million?


> I said = 2017 - Sell house for $2M

> I said = 2017 - Buy new house for $1M

> you said = But it might be (for the "buy new house") $1.6 million, not $1 million, in your example...

> I said = so they can still afford it.

> you said = You don't get to keep the whole $2M. That's the point.

So, let's do this again.

1. Sell house for $2M

2. Buy house for $1.6M as you suggested

3. Congrats you now have $1.6M in illiquid assets and $400k in liquid assets (cash)

Note - I recognize that my original example was buy at $1M and sell for $2M, where you are correct you're not taxed on the first $500k and the remaining $500k is taxed at capital gains. I also recognize that this whole scenario is purely illustrative and doesn't take into acount all of the transation fees.


Awww poor baby. You’ve made more than $500K, much of which will be untaxed, simply by owning a house. Jesus fucking Christ. Cry me a river. Most people would trade their arm in for that kind of leveraged gain.


It doesn't matter what you're responding to; the guidelines ask us not to post like this.

https://news.ycombinator.com/newsguidelines.html


> You’ve made more than $500K

Nope! This is all speculative until you need to "sell & move". If you want to move to another place in the same area, guess what, you've probably made nothing. With all the taxes and fees that you have to pay on the sale price you can't buy the equivalent of your house. You can only capitalize on that appreciation if you move somewhere considerably cheaper.

Not only that, the owner faces higher (in some cases much higher) property taxes due to increasing house prices, which is totally out of their control.

I'm not suggesting that they're in a bad spot. It's just not the "jackpot" that your post is suggesting.


> With all the taxes and fees that you have to pay on the sale price you can't buy the equivalent of your house.

So why on earth would someone want to sell their house and buy an equivalent house in the same area...?


Switch schools or districts, change neighbors, move closer to work, change floorplans, move closer to family, etc.


In short, what is important to people in their residence changes.

Friend of mine bought a house he and his wife loved. Five years later he came to understand what owning a Dr Horton house means, and they wanted a better-built house.


Totally, but if you are wanting something of more value than yes there is a price to pay for that.


In all fairness, I can see wanting to, say, downsize and move to a more walkable community relatively nearby. (Or, for that matter, move out of an expensive urban condo and move somewhere with more room--although that will harder in the Bay area specifically.) To the degree that market value of the two is similar, the financial hit will be substantial.

But a lot of this is true with moving generally when you're living somewhere that's OK but isn't really optimal for you any longer.


I'm not asking anyone to feel sorry for us. I'm just pointing out that rising prices are not a panacea for owner-occupied primary residences. The result is bad for everyone because people like us end up staying in houses that are too big. That takes housing stock off the market and drives prices up even further. That's good for investors, but bad for everyone who wants to buy a house to live in.


Let's say the house didn't go up in value.. where would that leave you? Would you be any more capable to sell? (Serious question, not a rhetorical or sarcastic one.. just seems to me you'd still be in a hole, just a different hole)


> Would you be any more capable to sell?

Quite possibly, yes.

Let's plug in some plausible numbers. Say someone buys a 3-bedroom house for $300k (they have kids). At the same time, 1-bedroom houses sell for $200k.

Time passes, the kids grow up and move out. Say house prices didn't change at all. You sell for $300k, buy for $200k, pay some agent fees, have $85k or so left over.

Now say prices went up and the 3-bedroom house is $1,500,000. You sell, have a $1.2e6 capital gain. $500k is deductible, you pay taxes on the remaining $700k. That's taxed at 20% federal plus the ACA 3.8% investment income tax (because your income is way over that boundary) plus state capital gains taxes. In California, capital gains are taxed the same as other income, at first glance; let's be charitable and assume you avoid the higher tax brackets (12.3%) and get taxed at an effective 10% here. That's 33.8% tax. So your after-tax sale proceeds are $500k + 0.662*$700k = $963k.

Note that your house went up in price by 5x. If the smaller one did too, it costs $1 million and you can't pay for it anymore. If it went up by more than that (e.g. if the primary inflation was in land prices, which it often is) you might be even more in the hole.

Things are even worse if you're trying to sell and buy something equivalent instead of downsizing.


I’m amazed that the US charge capital gains on primary residence sales - in the UK we have Private Residence Relief which means you pay no capital gains from the sale of your primary residence, so long as you meet some requirements that are very easy to meet and I would say 99% of owner occupiers meet.


99% of American home owners also qualify for full capital gains relief.

Gains greater than 500k are extremely rare outside of certain overly restrictively zoned areas.


Ah, ok


You'r missing 300k from your after tax sale proceeds. You could still afford the smaller house with 263k left over. You would make a 37k loss yes, but you could buy the new house. An important distinction in my opinion.


Yes, you're absolutely right, good catch!

Of course all that assumes that you're not leveraged at all (paid-off morgage). If you're leveraged, price increases are generally a win even in the face of capital gains taxes on the increase.


The hole would be smaller, thus more likely to be affordable with wages / savings / etc.


You arguably have a point (so does the parent), but this isn’t the way to express it in a respectful discussion.


I dislike the notion that discourse needs to be respectful at all times.

Discourse shouldn't be baselessly disrespectful, sure.

But the robotic, tsk tsk, shaming attitude that gets thrown around on forums whenever someone expresses any negative emotion gets old too.

In any case, complaining about having to pay capital gains tax on gains OVER $500k really is the ultimate first world, privileged problem.


It's not about a "negative emotion", it's about saying something that you probably wouldn't say to someone's face.

If I were talking to lisper over a beer, I'd probably smile and say that that problem is one that 99% of the world's population would love to have, or something to that effect. Or maybe without the smile and straight to the point "complaining about profits so high that you're getting taxed on them when there are people who are homeless is not a great look".

OTOH, I don't think he's really complaining, just pointing out that the system is pretty screwy even for someone who is in no uncertain terms doing pretty well.


> In any case, complaining about having to pay capital gains tax on gains OVER $500k really is the ultimate first world, privileged problem.

Almost every complaint levied on this forum is a first world problem. Complaining about the ergonomics of a programming language is a first world problem. And secondly, he wasn't complaining, he was describing the economics of his choices. What is infinitely more toxic than 'complaining' about first world problems, is people jumping on explanations like the above as 'complaints' that need to be silenced.


>What is infinitely more toxic than 'complaining' about first world problems

That's just like, your opinion man.

>Complaining about the ergonomics

Look, complaining about work is a typical first world problem, sure. And of course we're all lucky to do the work we do and not live in [wherever.]

Complaining about 20% taxes on $200k of a ~$700k windfall is truly more like a .00001% issue and is pretty obtuse by any measure.

You wouldn't raise an eyebrow, or have any negative reaction to someone making $400k / year bitterly complaining that they have to pay taxes on it? I don't know anyone who wouldn't think that was obnoxious.

>he was describing the economics of his choices.

Sort of, in a fairly facile and borderline deceptive manner.


> You wouldn't raise an eyebrow, or have any negative reaction to someone making $400k / year bitterly complaining that they have to pay taxes on it? I don't know anyone who wouldn't think that was obnoxious.

Where are these bitter complaints? He commented to say that rising housing prices weren't good for him. He explained why. That isn't a complaint. He didn't say "I deserve this money from my rising house price!". He didn't say "the world is so unfair to me". He just explained why this thing that people thought would be helpful to someone like him, was in fact, not helpful.

> Sort of, in a fairly facile and borderline deceptive manner.

What was facile or deceptive about what he said? He's absolutely correct.


>What was facile or deceptive about what he said? He's absolutely correct.

First, he withheld the amount of capital gains, so everyone who initially responded naturally assumed it was under $500k, which is true of 99.9% of transactions. That was very misleading information to omit.

Secondly, he complained about broker fees, but it isn't required to sell a house using a broker by any stretch. Just do FSBO if you think the 3% cut (probably less) isn't worth it. And 3% isn't much at all when your already expensive house just went up over 100% in value. Facile and disingenuous.

>Where are these bitter complaints?

Pretending that he and his wife are "trapped" in his house and "can't afford to sell" makes it sound like a horrific and dire situation. Which is completely misleading, he and his wife are quite wealthy and could do anything they wanted. They are pretty much the opposite of "trapped."

>we can't afford to move!

Lies. They could easily afford to move.

They bought their house for something like $600k and now it's probably worth $1.3M. They pay 20% taxes on the $200k, so $40k and they lose 3% if they use a broker. That's another $40k, so $80k total. Let's make it an even $100k. So they have $1.2M to throw around, subtract $500k to pay off the existing mortgage, that's $700k free and clear.

$700k is a hell of a down-payment, even in the ritziest areas of Marin. Buy whatever you want.

I own a restaurant in norcal and have an employee whose room share / rental house burned in the recent fires. He goes to SRJC, doesn't have any family in the area, had no rental insurance, makes $12 an hour and no savings.

THAT's a dire situation, and considering I know people in situations like that, OP's framing of his (extremely cushy) situation as "I can't afford X!" is pretty disgusting to me.


> First, he withheld the amount of capital gains, so everyone who initially responded naturally assumed it was under $500k, which is true of 99.9% of transactions. That was very misleading information to omit. Secondly, he complained about broker fees, but it isn't required to sell a house using a broker by any stretch. Just do FSBO if you think the 3% cut (probably less) isn't worth it. And 3% isn't much at all when your already expensive house just went up over 100% in value. Facile and disingenuous.

There's nothing misleading about that. He didn't mislead you. You misled you.

> Pretending that he and his wife are "trapped" in his house and "can't afford to sell" makes it sound like a horrific and dire situation. Which is completely misleading, he and his wife are quite wealthy and could do anything they wanted. They are pretty much the opposite of "trapped."

You don't really understand money, it seems like. The fact that you have equity in the home you live in doesn't mean you can "do anything you want". I already explained why this is so.

> They bought their house for something like $600k and now it's probably worth $1.3M. They pay 20% taxes on the $200k, so $40k and they lose 3% if they use a broker. That's another $40k, so $80k total. Let's make it an even $100k. So they have $1.2M to throw around, subtract $500k to pay off the existing mortgage, that's $700k free and clear. $700k is a hell of a down-payment, even in the ritziest areas of Marin. Buy whatever you want.

700k is indeed a great down payment. But you have no idea what their income stream is like. If they aren't making a large income, they won't be able to afford their mortgage payments if they need to buy a house in an expensive area like SF. What he means by 'trapped' is that they have theoretically made all this money, but the money is of no actual use to them. And he is completely correct.

> I own a restaurant in norcal and have an employee whose room share / rental house burned in the recent fires. He goes to SRJC, doesn't have any family in the area, had no rental insurance, makes $12 an hour and no savings. THAT's a dire situation, and considering I know people in situations like that, OP's framing of his (extremely cushy) situation as "I can't afford X!" is pretty disgusting to me.

Gee, it does indeed sound dire. Maybe you should pay your employees more rather than yelling at people on the internet for being insensitive about money? Seems you're in a position to actually do something about that situation. But you won't. And there's a very good reason you won't: because it's bad business. The economics don't make sense for you to do that. Just like the economics of the OP's situation don't make him wealthy. Absolute values are irrelevant, it's the equilibrium that matters.

And secondly, making silly statements like "THATS NOT DIRE THIS IS DIRE" is absurd. Almost everyone posting here lives in a first world country. There are infinitely 'more dire' situations out there than any of us are in, and playing this childish 'no true scotsman' game is a waste of time.


It seems your comment is characterizing the OP as a complaint mostly in search of sympathy. That doesn’t strike me to be the purpose of the post at all.

The OP is using him or herself as an example of a real behavior in response to real economic incentives, no matter how unsympathetic you find their circumstance. The fact that this situation discourages moves that most other markets encourage is a worthwhile point to bring up. Among other things, it reduces supply which has a profound effect on new buyers.

Incentives influence actions much more than personal criticism does. The OP’s relatively fortunate outcome does not mean that they don’t have something relevant to share. In contrast, targeting them with pejorative shaming is totally unhelpful.


Please tell me where my math is off here.

They bought their house for something like $600k and now it's probably worth $1.3M. They pay 20% capital gains taxes on $200k, so $40k, and they lose 3% if they use a broker. That's another $40k, so $80k total. Let's make it an even $100k. So they have $1.2M to throw around after the sale. Subtract $500k to pay off the existing mortgage, that's $700k free and clear.

$700k is a hell of a down-payment, even in the ritziest areas of Marin. They can buy whatever they want.


Maybe if the comment added to the conversation somehow it'd be more tolerable. However, all the comment does is insult someone without adding anything interesting. It's a waste of space and time for everyone else reading it. It doesn't belong in HN.


Expressing incredulity and frustration at the obtuseness of someone's complaint doesn't seem especially useless to me.

Why is expressing emotional reactions pointless, in your mind? Doing so gives everyone more information about the reactions they might expect to their concerns... it enforces social norms, etc.


> Why is expressing emotional reactions pointless, in your mind? Doing so gives everyone more information about the reactions they might expect to their concerns

The problem is that the comment provides nothing else. You can do the same thing in a more civil and constructive way. Just look at your comments. You are providing logic and rationale for your argument. I don't agree with you, but you're adding to the discussion. Now compare that to "I'm sick of you people. Stop whining about other people's comments you big baby". Someone can correct me, but that doesn't belong here and that rule has been around since the beginning of HN. It's been written and clear along with the reasons why. It's the way things have been done here. If someone doesn't like it, they can post on reddit instead.

https://news.ycombinator.com/newsguidelines.html

"Be civil. Don't say things you wouldn't say face-to-face. Don't be snarky. Comments should get more civil and substantive, not less, as a topic gets more divisive.

When disagreeing, please reply to the argument instead of calling names. 'That is idiotic; 1 + 1 is 2, not 3' can be shortened to '1 + 1 is 2, not 3.'"


I don't disagree that the comment is probably against the rules.

I just believe the rules tend to stifle people from expressing how they truly feel about topics, and are therefore information limiting and generally a net loss.

It's a fine line. Some people's feelings are toxic all the time and wrong-headed and truly add nothing of value. Other people, when they have a negative emotional reaction there is probably a lot of accumulated wisdom behind it and you should really listen instead of censoring or rambling on about civility. Very subjective though.

Also, in my opinion, the constant suppression of any negative speech is exactly what gets someone like Trump elected. "Finally, someone on TV is saying what I FEEL and no one can stop him!"


To stay on point, my argument is that the rules are clear and they make sense. There are emotional comments on HN that are fine. However they are different. The particular comment we're referring is toxic and adds nothing to the actual discussion; there's no wisdom to calling someone a 'baby'. The only thing it promotes is a flame war since it personally insults someone. It shuts down discussion because it needlessly attempts to piss off someone. There were plenty of other comments that were both critical, insightful, and civil.


I think you have a point. It depends on context. Within the context of HN, you at least have to be civil. Civility and respect are not exactly equivalent, but they're quite close.


I agree that we don't need to be robotically respectful. If someone's a real asshole, I have no qualms with responding in kind, even if doing so is debatably effective. I wrote what I wrote because I thought that ttul's comment was baselessly disrespectful. The parent wasn't being a jerk, but ttul responded with out of place ad hominem attacks instead of addressing the argument.


But does ttul really get his point across at how he really feels without the colorful words?


Likely they could. "Colorful words" are often used to elicit an emotional response, and emotion can significantly impair one's ability to self-reflect and remove bias. If the goal is civil, substantive discourse (as is the goal of HN), all parties involved need to keep this in mind when commenting. That does take additional effort, but it's worth it to keep HN one of the better places to engage on the internet.


That's purely a paper profit. As the parent said, they can't afford to move to a similar apartment, so they're unwilling to sell. That probably goes for a lot of other homeowners in the area, which seems likely to contribute further to higher prices. Seems pretty dysfunctional to me.


Suppose they move horizontally to a similar house. I don't know, they want one story instead of two.

Since a rising tide lifts all boats, the new purchase is about even with the old sale- but they also owe taxes. So within this window, they are objectively worse off than your average Joe who can move across town without owning those taxes.

Anyone trading up is also impacted as well. Suppose you bought a condo at 100k, and SFH was 200k. In five years you want to trade up, but the market went up 100%. Your condo sells for 200k, but the SFH costs 400k. Despite the lovely appreciation on your condo, you'd probably prefer if the market hadn't moved.

Sure, there's people who have it worse. Owning any home at all puts them in better shape than most of the world. But it's still not enviable to be unable to move within your community.


Except you can really only "cash out" in a meaningful way if you sell and relocate to a cheaper area/somewhere without a housing bubble, which is extremely disruptive to your life.


There are financial instruments that will allow you to cash out if you own property while continuing to live in it for as long as you want to e.g.

https://en.wikipedia.org/wiki/Reverse_mortgage


I said "in a meaningful way."


These comments are helpful because this is how people think.

When a suit or Talbots customer argues over a price at Wal-Mart you should hear the similar type of tone the cashier takes after they leave. Especially if they argue for a buck or two.

This is real world


I am the only one not seeing "reply" links on some of these posts? I see others of the same depth with reply links... Edit: Actually it's just the one from davidw


HN has rate limiting on replies. Reply button should appear after a few minutes.


My understanding was that you can avoid all capital gains taxes via "1031 like kind exchange": you sell your house, buy one elsewhere for about the same amount, and pay no capital gains taxes?


1031 is only for business property. Specifically doesn’t apply to primary residence.

But CA Prop 60 allows Californians over 55 to downsize their house and maintain the same tax basis they had before the exchange, which very well might apply here, although IIRC it has weird county by county restrictions.


That only works for business property.


I feel like you're really making your own problem here -- you want to downsize while keeping a large portion of your equity.

The ratio of profit you make moving from a $2m house to a $1m house is the same as moving from a $200k house to a $100k house in a "stable" area.


This has nothing to do with equity (except insofar as equity is part of your net worth). This has to do with the actual cost of a move, that is, the difference in your net worth at the end of the day once all the dust settles. The higher prices go, the higher that cost goes. It's easiest to see that when considering a purely lateral move, but the cost of a move doesn't really depend on the cost of what you buy with the proceeds of the sale, it just makes the math easier if the prices are the same.

We put a certain positive intrinsic value on a local move (and a very high negative intrinsic value on a remote move), because we like the area but the house we're in is not ideal. If the cost of a local move is less than this intrinsic value, we'll move, otherwise we won't. The higher prices go, the higher the actual cost of moving goes, and the less likely we are to move.


> The higher prices go, the higher the actual cost of moving goes

Sans CA taxes, this is relative to the increase of wealth you've accumulated. So yes in the absolute it's higher, but relatively speaking you've still are earning more money in liquidity during the transaction.

> This has to do with the actual cost of a move, that is, the difference in your net worth at the end of the day once all the dust settles.

I think I finally understand your position now. The cost isn't prohibitive, it's the negative impact on your wealth. Which is true. The reason I and others are reacting strongly to your position is because your conflating transactional costs (expenses, fees, etc) with wealth (accumulation of assets). Two very different things that use a common medium to interact (i.e. currency).

Here's the predicament. Your implying that you can transfer assets (wealth) without any transactional costs. This is just not how the market for any asset transfer works (stocks, cash, etc), because someone or some system has to be setup to broker the transaction. What your essentially complaining about is why you have to pay fees to complete an asset transfer. I know very few markets were transferring assets doesn't incur a fee. I don't know what to tell you other than this is basically economics 101.

CA taxes on the other hand - that's something to complain about. CA taxes inadvertently nudge people to hold on to property longer, reducing supply and thus driving overall prices up.


> you've still are earning more money in liquidity during the transaction.

So? How does that benefit us in any way? We don't need to sell to have liquidity. We have a HELOC so we can turn our equity into cash on demand.

> your conflating transactional costs (expenses, fees, etc) with wealth

No, I'm not. I'm just saying that transactional costs decrease your wealth, which is simply a fact.

> The cost isn't prohibitive, it's the negative impact on your wealth

What exactly is the difference between "cost" and "negative impact on your wealth"? Those two seem like the same thing to me.


I think the core contention here is that, at the end of the day, you are better off because of rising housing prices. You're complaining about transnational prices on your massive amount of equity while brushing aside the fact that you have such a massive amount of equity because of the real estate market.


I don't deny that. But right now I'm worse off relative to my goals at the moment than I would be if house prices were more stable. I'm not saying that rising prices are not good for some home owners, only that they are not good for all home owners in all circumstances.


So you want prices to rise while you're comfortable building equity, and then level off when you've decided you have enough money? Your viewpoint is incredibly confusing to me.

Do you really feel like you'd be better off if your house sold for exactly what you bought it for?


> We have a HELOC so we can turn our equity into cash on demand.

But that HELOC has financing terms associated with it. Getting cash out from your HELOC does impact your overall "wealth" because you have to pay a fee (financing terms) to actual turn that credit line into cash. You could in turn take that cash that you borrowed at 3% interest and put it into assets that net you 4% return and effectively increase your wealth. You may take a short term hit to your income (the 3% interest fee) but you net out in the end.

> I'm just saying that transactional costs decrease your wealth, which is simply a fact.

That's not true in real terms. Your talking about a decrease of your perceived wealth. If the only asset I own is $1,000 in public traded stocks (i.e. I look at the stock market this second and they're worth $1,000), you could say your wealth is $1,000, but only for that second. However in practice your real wealth is the amount someone is willing to pay for your assets (when you put a sell order out) minus the transaction fees associated with making the transaction. That's the actual process ("in real terms") you would go through to realize your wealth.

This is effectively what people say when someone is "paper rich" E.g. a startup founder who has 30% of a business that is worth $300M, now has wealth valued at $90M...if he/she were actually liquidate to a seller at $300M, his/her wealth would probably be more like $40M-ish after taxes, transaction fees, etc.

> What exactly is the difference between "cost" and "negative impact on your wealth"? Those two seem like the same thing to me.

I should have probably said income instead instead of "cost". From wikipedia:[0]

Economic terminology distinguishes between wealth and income. Wealth or savings is a stock variable, that is, measurable at a date in time, for example the value of an orchard on December 31 minus debt owed on the orchard. For a given amount of wealth, say at the beginning of the year, income from that wealth, as measurable over say a year is a flow variable. What marks the income as a flow is its measurement per unit of time, such as the value of apples yielded from the orchard per year.

In other words, your wealth is measurable at a moment in time and can't realize a true negative impact on it unless it actually gets liquidated. Otherwise the measurement of it today is simply theoretical.

[0] - https://en.wikipedia.org/wiki/Wealth


>> 3. Higher property taxes

>Yes, this is a bitch in CA...see next point.

Property taxes in CA are extremely low.

https://en.wikipedia.org/wiki/California_Proposition_13_(197...


That's not the parent's point. If I buy a $1M home in CA 10 years ago and I pay 1% in taxes then and the house is worth $2M 10 years later, I don't get charged 1% of $2M after 10 years. I get charged a marginal increase ever year and this increase isn't based on market norms (I forget what the actual # is, but it would be like paying 1% of $1.25M). This means, if I sell my $2M house after 10 years), and buy another $2M house next door, my taxes are way higher in my second home due to prop 13.


Depending on your age, you may be able to not get dinged with the new home's taxed value.[1]

[1] http://www.boe.ca.gov/proptaxes/faqs/propositions60_90.htm


And this is the problem with Sweden; we got rid of the property tax, but we kept the capital gains tax meaning people are less incentivized to sell since the prices are rising anyway, meaning fewer houses end up on the market, meaning the prices rise.

This is one of the many contributors to this crisis; high capital gains taxes for people selling their house, no property tax for people keeping it. Add to that our tax deductions on interest rates and local government monopoly on what types of houses gets built (obviously not affordable housing projects, they pay terrible taxes compared to the nice people who would move into luxury condos) and you have a recipe for disaster. There's many, many other reasons too but those things are what the government could and should work on.


Canada has no capital gains tax on housing and it has similar housing inflation to Sweden.

I would say people are frantic to buy a home in Canada because it's tax free and the alternative (stocks/bonds/etc..) isn't.


Is this really true?? I think if you are selling a home that is not your primary residence then there is some sort of tax but I'm not 100% sure of the details.


It's true for the primary residence.

For secondary properties most people are just going to move in for 2 years to meet the requirement.


I am very confused on your reasons not being able to downsize. Capital gains should have no impact, since first 500K is exempt. So you will have at least 500K in cash. Real estate agent fees are everywhere and can be negotiated to 2%. Property taxes are not really high. I live in Union City, and pay 1.2%.

I guess you cannot downsize because a smaller home costs a lot of money these days. Which is fair enough, but you can book your profits, invest that cash in other assets and rent for a few years till the market comes down.


That's true, we could do that. But then we'd have to move twice, and at this point in our lives (we're both >50) moving is a non-trivial hassle. It's also not a given that prices will come down, so this strategy carries some risk that we end up stuck in a rental.


#3 is real, but more a sign of California's disfunction than an inherent problem with high property values.

PS: #1 only consumes a percentage of profits, so it can't make a sale unprofitable.


> #1 only consumes a percentage of profits, sit it can't make a sale unprofitable.

Yes, that's true, but it makes a move less efficient. If we sell our house and buy another one of equal value, the higher the price, the more we lose in capital gain tax in the transition. If our house had not appreciated, we would pay zero cap gains. The higher prices go, the more expensive it becomes to move locally.


If your house didn't appreciate you would not have any profits either. Very confused on what the issue is.

Let's say your house is 1mn and stays 1mn. You have zero gains and pay zero taxes. Net cash in your bank = ZERO

Now your house becomes 2mn. So you have 1mn profit, first 500K is exempt. And you pay 25% on your next 500k. Net cash = 750K.

Are you suggesting that you would rather have zero dollars in your bank account than 750 K?


I think the issue is that if housing prices hadn't gone up, they could buy a house of equal price without triggering capital gains.

So if your house is 1m and 10 years later stays at 1m, then you can swap for any other house in the neighborhood.

If your house was 1m but in 10 years becomes 2m, and all the other houses in the neighborhood are now 2m... you would hypothetically not be able to swap for another home. You now have 1.75m to buy with. A good problem to have, no doubt.


He does not want to fill his bank account and be homeless. He wants a house. To be bought with the same money. That does not go into the bank account but into the new house.


You can use that 750,000$ to buy anywhere else that's not inflated. If you want to buy a house in an inflated area you end up in the same situation as anyone else that wants to buy a house in an inflated area.

AKA, if a prison opened up next to their current house keeping property values the same then they would be strictly worse off.


He has the original $1m to buy a house.


The first 500,000$ of capital gains are excluded when selling a primary residence jointly. So, if your net profit > 500,000$ yes it costs money, but if your actually downsizing then you will very likely come out ahead. Further, your new home is also worth more money in the event you move out of the area.


> if your net profit > 500,000$

It is.

> yes it costs money but assuming you want to down size that should hardly be an issue.

Why? A loss is a loss. What difference does it make if it comes out of your checking account or your home equity?


You home equity is only realised when you sell.

There is no loss. There is only the money you get net after the sale.


You also save that 500,000$ of appreciation when selling the second house. AKA, if house 1 gained 2 million and house 2 gained 2 million your better off than if house 1 gained 4 million.

Now, you can get into cash flow issues etc. But, with home interest being tax deductible and long term capital gains being below normal taxes your almost always better off over time to sell after a bubble than before.

PS: If your investment makes 4% and your mortgage is 5% then you have a net savings after taxes.


> if house 1 gained 2 million and house 2 gained 2 million your better off than if house 1 gained 4 million.

No, that's not true because the $500k cap gains exemption is per-transaction.


> cap gains exemption is per transaction.

Reread what I said?

That's why 2 houses with 2 mill gains is better than 1 house with a 4 million gain.

Selling 1 house with a 4 million gain is one transaction with a 500k cap so you pay taxes on 3.5 million. But selling one house with a 2 million gain then another house with another 2 million gain is 2 transactions so you pay capital gains on 3 million and get an extra 500k tax free.

Remember, until you sell the second house it's value is meaningless but when do sell it's purchase price and value become important.


You're right, sorry, I misread it. I'm losing the battle of trying to keep up with all the branches of this thread.


> Rising prices (not high prices) are great for people holding houses as investments

This is right. Part of the problem is that we don't refer to this by what it is: Inflation in housing prices.

The thing about housing is that you can't choose not to consume it. You can't anticipate your consumption to beat inflation either.

The only way to win with housing inflation is by exploting some subsidy like cheap leverage and the like.


> Inflation in housing prices.

Self-defeating definition. Inflation is generalized prices increases. It stops being generalized if you pick an asset type.


Capital gains is only applicable when you sell the house and it's not your primary residence, or if you made a ton of money on it. And it's only a tax on the appreciation of the house, not its market value.

Real estate agent fees are only applicable on x% of the value of the house you sell.

Higher property taxes do stink but are not applicable after you sell the house.

I'm not sure why you can't afford to move. Have you talked to a tax specialist or a financial advisor? If you bought a house at X and sold it at 2x, even if you haven't paid any of the principal of your mortgage(if you have one), you would likely pay a maximum of ~25% of X between capital gains (if you own multiple homes) and real estate agent fees. So you still made 75% of X from appreciation. I don't really understand what you think your problem is.


Suppose I bought my house for $1M and prices are stable. I can sell my $1M house and buy a different $1M house and the net cost to me is 6% agent fees.

But if prices have doubled now the net cost to me is much higher. The agent fees are double what they were, and I have to pay cap gains on $500k. All that is money I have to come up with somehow in order to complete the transaction. I either have to write a check, or take on more debt. The higher prices go, the more expensive a lateral move becomes.

Yes, I have more home equity if prices go up, but that only helps me if I cash out and move out of the area.


Not understanding your complaint. You would have to sell your house for more than $1.5M to have any taxable capital gains. You would have to sell your house for more than $2.5m to have an effective tax rate of more than 10% on the sale. (For example, if you sold your house for $2m, your effective tax rate on the sale would be 5%, ignoring AMT and assuming no other significant sources of income.) Boo hoo.

On the second point: the only cash you need to come up with is the down payment for the new house, which you would get out of the proceeds from selling your old house. If you sold your house for 2x the purchase price, you have more than enough cash to pay the down payment. Boo hoo.

Complaints like yours are why people outside of the Bay Area really hate Silicon Valley.


> For example, if you sold your house for $2m, your effective tax rate on the sale would be 5%

The tax on capital gains in this case would be 20% federal, ~10% state (in California), 3.8% ACA investment tax. That's an ~34% rate, not the 20% you seem to think applies.

> the only cash you need to come up with is the down payment for the new house

Let's take the simple case where the old house was paid off, no mortgage. Are you suggesting that it's unreasonable to want to downsize and still not have a mortgage?

If you do have a significant mortgage, and are hence highly leveraged, an increase in property prices is pretty good. If your mortgage is more or less paid off, you can in fact end up in a situation where you can't buy any house at all in the same general market after selling your existing one and paying the property taxes. See a worked-out example at https://news.ycombinator.com/item?id=15706565


The 3.8% net investment income tax doesn't apply to real property, it applies to investment property. The NIIT specifically excludes gains from the sale of primary residences. The IRS provides a helpful FAQ on this: https://www.irs.gov/newsroom/net-investment-income-tax-faqs.

Second, the 25% rate is an approximate rate that combines the federal and state rates while taking into account the deduction for state and local taxes. 25% is a nice round number. I'm not going to prepare a detailed tax model for an anonymous internet comment.

My point stands either way: he's whining about having to pay an effective tax rate of 10-15% on his profits from selling his million dollar house while people in other parts of the country are struggling to even afford rent. He's acting like an entitled child and quivering about the exact tax rate he pays doesn't change that.


> The 3.8% net investment income tax doesn't apply to real property

Ah, I didn't realize that, thank you!

> he's whining about having to pay an effective tax rate of 10-15% on his profits

No, the key part of the complaint is that the combination of price rise and tax structure mean that a lateral move requires liquidity he does not have.

It's a first-world problem for sure, but it's still a problem caused by the fact that we have various fairly dumb tax policies.


It only becomes remotely intelligible if you include these extra constraints:

- Assume all other houses in the area also appreciated the same amount as the poster's house (say 2x).

- Assume the poster will only consider a move within the same area.

Now if they want to make a "lateral" move, they are looking at $2m houses, not $1m houses, since all other houses they would consider - local to their area - also increased in value.

I feel like they should just get a $1m house (yes, a "downgrade") if that's the case and have fun with their near-$1m profits, but what do I know.


I don't think there are $1m houses in their area. My guess is that the value of a $2m house in that area is land $1.5m, structure $500k. Even if they downsize the house cost by half, and buy in a smaller lot, the minimum house cost is still $1.5m.

I think the one element that the OP is missing is that after the transaction, he is better off by about $130k in tax due to the increase in basis of his home. If he eventually sells and doesn't buy another home in that area, he will realize an additional $130k in profits on the second home that would be lost to tax if he had not sold the first house.


Aren't agent fees and capital gains only applicable after the sale of the house?

I think I'm beginning to see your problem, which is that a lateral move is expensive. But the lateral move is only more relative to your initial buying price. A lateral move (in terms of value of your house and in the same area) would in your example cost about ~$135,000. I see why that would cause a liquidity problem but your actual equity is still higher than before.


You can actually get screwed more by going from X to 4X than by going from X to 2X _if_ you want to buy your new house in the same market.

In the simplest case, consider that you want to move to a house of the same value (e.g. closer to work). That's a lot easier to do if there was no taxable appreciation in value than if there was.

But even when downsizing you could run into problems; see the example I give elsewhere in this thread: https://news.ycombinator.com/item?id=15706565


You're right on 2/3 of those things.

Capital gains is never a "cost" to them, they are by definition only going to be taxed on their gains.

Real estate agent fees, like you said, are based off of the sell value, so unless their commission starts approaching 50% of the value of the house on a 2x gain...they make money. And if their mega-agent charges them 50% of the value of the house, then at least there are no longer any gains to be taxed on :)

The property taxes, however, make sense. Some places lock you in to a certain rate at the purchase price, and they said they bought very low. The argument is that they would be paying more in property taxes for a cheaper house, because they would no longer be locked in to their favorable current rate, which is entire likely given their circumstance.


You're right, I thought the parent was complaining about higher property taxes, not that property taxes would increase if they were to move to a similarly valued house.

That does disincentivize moving into an equally valued house, but moving into that house would have the parent paying about ~2% of X each year in property taxes as opposed to ~1% of X. The appreciation of the house still covers the increase in property taxes for the next 75 years.


Thank you -- this post did not add up to me either.

Do a FSBO if you're that worried about brokerage fees.


'nearly doubled' is more like gambling than investing. Investemnt would be fine if your money is little above inflation. 1-8% with renting it out.


Just to be clear, we didn't buy this house as an investment, we bought it to live in. We're actually hoping for prices to come down so we can downsize without taking a huge financial hit in the process.


But you're not taking a hit really. You just think your are. You have made a profit still if you sell your house, tax the hit in capital gains and buy another place. It's not as much profit as without the capital gains but it's a lot more profit then if you took that original house price money and put it in a mattress. Hell that's even more money then just sticking it in the bank and getting a small interest rate.

You're not taking a financial hit, you just feel as you are. You think the capital gains tax is taking out a huge financial hit on something you already made lots of profit from. So you're still making a profit just not the one you imagined you were making.

That's like someone seeing their pay for the first and releasing the difference between gross pay and net pay. They think they are getting X but really they are getting Y. Both amounts of which are > 0 and so they are still making money. Like you still are.


Why not rent this one out and then rent a smaller place yourselves? Anyways, this is a good problem to have. I don't think 1.) and 2.) justify wanting prices to come down since they only affect a % of your appreciation.


Because we don't want to be landlords. And yes, it's a nice problem to have, but it's still a problem.


You get a property manager. The net cash flow is going to be much higher than the mortgage payment and the tenants pay the mortgage. Or, if it’s paid for, you do the same thing except cash out equity, let the tenants pay the equity loan, use that loan to buy the house you want to live in, take a deduction on the interest and you end up with two houses — both paid for by someone else and with a property manager you don’t have to fix toilets. Since you aren’t selling anything, you have no cap gains AND you can deduct depreciation from the rental income which means you end up paying no taxes on the rental income. With Valley housing in short supply you probably have at most an average on 1 month per year of vacancy — if that.

Then if you ultimately sell both houses, you can do a 1031 exchange and invest all of the proceeds into a new house — and defer the cap gains until you sell that.

These problems aren’t that hard unless you look at them from a single direction.


Won't you only pay a % of the gain in price in tax? In that case you're strictly worse if it goes down in price. You'd pay less tax, yes, but as tax is % of gains you're net worse off. If this really isn't the case can you share some example numbers showing how you can be worse off with a house that's worth more?


Suppose we bought our house for $1M and now it's worth $2M. We have to pay 25% cap gains (federal + state) on $500k so it costs us $125k to move to a house of equal value. If prices were stable, we could move without taking that hit. The higher prices go, the higher the cost of moving.


You are better off unless you bought the large house for cash. Otherwise, you made a big gain in leveraged terms.


What you say is true, but it misses the point, which is that big gains only help you if you actually cash out. If you're making a lateral move, or downsizing in the same area, it doesn't matter whether you're leveraged or not. A loss is still a loss.


The example is useful, thanks. I see that there's $125k of cap gains to pay for a move to a property of the same price. You're calling that a loss though, and I'm not sure I see it that way. Sure, if house prices hadn't gone up you could have moved from a $1M house to another $1M house and paid nothing. But in your example you're still $875k "in profit", so it's not really a loss, it's just a cost associated with a lateral move in the same area. If you downsize you actually realize some of those gains - of course not all of them because tax must be paid, but there's no avoiding taxes :)


That's more because prop-13 is a garbage fire than any other factor.


Well, if you didn't have prop-13 wouldn't your taxes just go up anyway even if you didn't sell? Around these parts all real property is reassessed every five years. So the tax burden would hit right away rather than when you sell which would be worse.

I have a family friend whose neighborhood became really high end since the 30 years she bought the house. Her taxes are really high now and it's becoming a financial burden on her.

Unless I'm mistaken.


A hidden consequence of prop-13 is that every city wants commercial real-estate and none want residential because they get more taxes from businesses. This restricts the supply of housing, and is one of the root causes of high prices and long commutes.

Without prop-13 we'd have more housing, more convenient housing options, and lower prices. Yes, long-term residents would have higher taxes. However most of us would save both time and money on our housing costs.


Thanks for the explanation.


The cap gains is also a big factor. Even if prop 13 were not a factor, the higher prices go, the more expensive it becomes to make a lateral move, or even to downsize.


This is pure nonsense.

Lateral move or downsize are two different transactions. Capital gains has no effect on the second one.

People who are complaining about the capital gains taxes pretending that such taxes prevent them from either moving laterally or downsizing are complaining that other properties also appreciated in price. What they would have preferred is that their property appreciated and the properties they wanted to move to did not.


If I buy a house for 50k and want to immediately move laterally to another house worth 50k then the cost is 0 + overhead. If I buy a house for 50k and want to move laterally when it's worth 100k then the cost is the taxes of the 50k profit + overhead.

This gets even worse if you want to buy a larger house (if appreciation is percentage based).


That's not correct.

In the second case:

You bought a house for $50k, which in a year appreciated to $100k. You sell the house for $100k, pay the capital gains of X% on the $50k of appreciation which gets you $100k - ($50k * X% ) to play with.

You lateral move would not be to a house worth $100k, it would be to a house worth $100k-($50k * X%) because you d not have $100k, you only have $100 - (50k * X%).

If you wanted to defer capital gains and play with entire 100k, then instead of doing a sale you would do 1031 exchange.


> Capital gains has no effect on the second one.

Of course it does. A loss is a loss. It doesn't matter whether it comes out of your checking account or your home equity.

> What they would have preferred is that their property appreciated and the properties they wanted to move to did not.

That's generally not an option if you want to move locally.


if you sell your asset for less than what you paid for it there's no capital gain, and hence there's no tax.

> That's generally not an option if you want to move locally.

You don't get to have your cake ( gain money on a sale of appreciated house) and eat it too ( buy at the price before the appreciation )


I believe that lisper is saying that he would prefer not to have his cake.


It seems like 3. is the real problem? If taxes were a function of current home value rather than at purchase home value, you wouldn't be stuck.


Well, it's all of the above really. But does it really matter? The point is that we'd be better off relative to our goals if prices were stable. So we are a counter-example to the claim that rising prices benefit all home owners. They don't.


Rent it and use the rental income to establish finance for the 2nd house.


Do you have to pay capital gains tax on your primary home? I was under the impression you didn't if you lived in it for X number of years.


There's a 500k exemption, but our house has appreciated more than that. The more it goes up, the more we lose if we move.


But you're not "losing" more...you're only losing more in relation to the gain that has appreciated.

Are you inferring to the fact that the rest of the market is appreciating at the same rate, and thus "losing" out when you buy on the downsize?


Yes, exactly. The higher prices go, the more it costs to make a local move. We only "win" if we actually cash out and move to a different, less expensive area, but we don't want to do that. We like it here.


Do you mean “win” compared to the counterfactual where the house has appreciated and you don’t move to a similar one, or compared to the counterfactual where the house didn’t appreciate and you move to another one at the original price?

If there had been no appreciation, your final wealth (cash + home equity) would be lower than in the case where the houses are more expensive, even after paying taxes, so it’s hard to see where is the loss.

But of course if you expect prices to go down it’s a good idea to avoid paying taxes on a gain that may be reduced in the future.


> Do you mean “win” compared to the counterfactual where the house has appreciated and you don’t move to a similar one, or compared to the counterfactual where the house didn’t appreciate and you move to another one at the original price?

Either one.

We put a certain intrinsic value on a local lateral move. If the cost of moving is less than that intrinsic value, and we find a house we like, we'll move. If the cost of moving is more than that intrinsic value we'll stay regardless of whether we find a house we like. So the higher prices go, the less likely we are to move. So when prices go up, that removes liquidity from the market, which perversely drives prices up even further and makes the problem worse. So while we're sitting on a pile of equity, we can't actually use it unless we move out of the area, and that has a huge negative intrinsic value for us. We really like it here.


I must say I am thoroughly impressed by your patience. You're repeatedly explaining what seems to me like a pretty simple calculation to lots of different people who only gets it after a lengthy explanation.

It's a first-world problem, but as you say, it's still a problem. Unless you're okay with taking the loss, or just moving somewhere far away because the market decided that this area has now become too expensive to allow existing homeowners to downsize.


Thank you, I'm glad someone noticed that.


I understand your point, but saying that "rising prices are as bad for the owners as they are for everyone else" is hard to justify.

In your case, you can a) stay where you are or b) sell the house, pay the tax, and buy a similar house (or a cheaper one elsewhere).

An alternative you that didn't buy that house at that time, and got lower after-tax returns on that money, doesn't have option a) and has less capital available for option b).

Everyone else is in an strictly worse position than owners.

You have an unrealized capital gain and an unrealized tax liablity. Selling the house you'll realize both. You "feel" that you are not realizing the capital gain if you buy a similar house with that money. It's understandable, nobody likes paying taxes. But if you were to sell the new house in the future (maybe to downsize) the transaction would be tax free if prices don't change.

And as I said already, if you think prices may go down it's rational that you avoid realizing the capital gain and the tax liability at the current level if the utility gain from moving to a "similar" house is not larger than the expected savings of realizing (maybe) a lower capital gain in the future and paying less taxes.


> saying that "rising prices are as bad for the owners as they are for everyone else" is hard to justify.

You're right. I retract that. (Unfortunately, it's too late for me to go back and edit the original comment.)

Let me rephrase: rising prices are not always an unalloyed good even for home owners.


Consider renting out your current house and buying that smaller house to live in. Talk to your tax person, you may get depreciation and more.

EDIT: person


Not every reader of HN possesses "a tax guy".


An HN reader who doubled their money on a house in California can find a tax guy.


More importantly, a person who made money that will be subject to tax unless they find a person to explain to them how to avoid paying tax can DEFINITELY afford a tax person.


[flagged]


Oh, for Christ's sake. The OP isn't saying that he's being lynched or thrown into a gas chamber. Just that spiraling housing costs aren't an unalloyed good for home owners who want to stay in the area they live in.


Agreed. It's odd to hear people boast about housing prices being high, considering that shelter is a basic need just like food. You don't hear praise being thrown about when milk, eggs, and bread reach unaffordable prices as they are in northern Canada.

Perhaps basic human needs shouldn't be subject to the same market forces as caviar and champagne are...


High housing prices are also very nice for banks and benks control nations. Essentially all mortgage money is created as dept. Banks can simply say: Here you go ma'am/sir, here is your money, created out of thin air. Now, please sign here to pay for your house twice, 1 time to the original owner and 1 time to us, because we created this money for you out of thin air.


Yes and no: The bank wants 2% as interests, but inflation is 3%

--> The Bank effectively loses money


Isn't that only true for fixed-rate mortgages? At least around here, almost all are variable-rate, so they rise with inflation.

I think banks only really lose money on defaults, and that's if the house lost value.


The bank only has to have a very small percentage of the money they loan you. Most of it is created at the time of the loan.


Exactly, the bank is not hurt from money devaluating when they don't have to do anything for it but create a dept in their books. Sure, what you will pay them will be less in 20 years but it more than the nothing they had before...


Rising housing costs used to be considered a public crisis that required intervention. For instance, in the 1960s Sweden responded to a housing crisis with their "Million Houses Program."[0]

But after decades of "ownership society" propaganda all we hear about now when there's a shortage of an essential good like housing is the comparatively few winners and their unearned windfalls. The much more numerous victims don't matter and aren't considered.

[0] https://en.wikipedia.org/wiki/Million_Programme


There's some indication that Adam Smith was aware of this:

The plenty and cheapness of good land, it has already been observed, are the principal causes of the rapid prosperity of new colonies. The engrossing of land, in effect, destroys this plenty and cheapness. The engrossing of uncultivated land, besides, is the greatest obstruction to its improvement. But the labour that is employed in the improvement and cultivation of land affords the greatest and most valuable produce to the society.

https://en.m.wikisource.org/wiki/The_Wealth_of_Nations/Book_...

It helps greatly to know that "engross" in this context means "to purchase or control large quantities".

Another realisation I've had is that the incentive amongst those who hold valuable assets is to see their value increased. This includes land, money, financial holdings, commodities, licences (think of taxi medallions or professional licenses), education, and the like.

And the means of increasing price generally involves restricting the supply, or throwing constraints on the production of more of a thing.

Where the underlying asset is itself directly productive or essential, this tends to be tremdously disruptive.

https://www.reddit.com/r/dredmorbius/comments/608w97/asset_p...


Nice subreddit, I agree with a lot of what you write. In particular I wish more people were looser, as you seem to be, with the assumption that actors within an economy act rationally. It's impossible to act rationally given the huge amount of information asymmetry in the economy, and especially given that others' information asymmetry will cause the economy to not behave rationally regardless of whether you can make rational decisions on it.

It's also impossible to rationally determine whether an arbitrary law / policy change will pass at arbitrary point in the future. So with housing, because we aren't guaranteed that interest rates/zoning/taxes will behave predictably, we can't really rationally determine a "true" price for a house in a market where those may change


Thanks.

Rational actor theory seems to be crumbling rapidly as behavioural economics progresses, so there's that.


I agree. The article isn't very clear on what the problem would be, though it does mention deflation. Deflation is bad by axiom, and we must be pathologically afraid of it. If housing prices sink enough, that may mean that the overall inflation rate turns negative, which is deflation, and thus bad. Even if this "bad" thing, in this case, would just mean that people could consume, save, and invest more.


Deflation means a drop in price levels, a systematic effect. Housing prices falling while consumer prices hold steady isn’t deflation. Deflation is scary because (a) it encourages capital to hold money over productive investments and (b) it is very difficult to fight. Deflation usually occurs once an economy is already at the zero bound of interest rates; no help there. You could monetise a bunch of fiscal spending, but that, too, has a bunch of nasty side effects.


> Housing prices falling while consumer prices hold steady isn’t deflation.

We're both handwaving here, but Wikipedia says: "In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate)." https://en.wikipedia.org/wiki/Deflation

The inflation rate is given by a price index which typically includes housing. If housing prices fall while everything else holds steady, that index has nowhere to go but below 0%.

I realize that this is distinct from a systematic deflationary spiral that affects the entire economy. The point was, some people might only look at the inflation rate, see it's below 0, and start panicking and doing stuff to "prop up" prices instead of letting people profit from affordable housing.


People don't consume more in a deflationary world, per the economists, because that dollar you've got today is worth more tomorrow, so you put off as many purchases as possible. Fewer people would take out loans as well, because the loan would become harder and harder to repay over it's life (which means fewer opportunities for investors)


On the other hand, prices of computers and electronics are always dropping due to technology improvements. Stocking up on computer equipment in advance rarely makes sense since next year it will be better.

But this doesn't seem like a bad thing. Would you prefer the alternative, that technology improvements stop and computers become more expensive, so they become good investments? And people do still seem to buy lots of electronics even though they don't hold their value.

Generally speaking, lower prices are better. There are only a few exceptions such fossil fuels and cigarettes where you can say cheaper is worse, due to externalities.

To be sure, if tomorrow a magical new technology gave us free, clean energy, health care, or housing, this would be a tremendous financial shock. Many investments would be worthless. But this is because it's a big, sudden change, not because it's inherently bad. A more gradual decrease in prices is a good thing.


Generally speaking, lower prices are better.

Not an economist, but I believe that statement needs to be indexed to inflation/deflation. Lower prices relative to income, in other words higher purchasing power, is good. But you can't inflate/deflate your way to lower real production costs or higher wages.

prices of computers and electronics are always dropping due to technology improvements

Right, the electronics market is in some senses an example of the behavior of a deflationary market, but it is also different than prices dropping due to financial wizardry.

Would you prefer the alternative, that technology improvements stop

In many parts of the market, improvements have stopped. Continuing improvement is clearly best, but not always an option. A gallon of milk or a shovel isn't getting any better next year. So what then?


Yes, I agree, lower prices are better except for wages. If most prices go down and wages stay the same, that's measured as an increase in productivity.

Technology hasn't stopped in agriculture. For example, there are automatic milking machines [1], and there's a well-funded startup that wants to grow lettuce in warehouses built near distribution centers [2].

I wouldn't expect the price of milk to change much in the short term. In the long run, who knows? Maybe biotech improvements will mean we don't need cows?

[1] https://www.nytimes.com/2014/04/23/nyregion/with-farm-roboti... [2] https://www.bloomberg.com/news/features/2017-09-06/this-high...


That doesn’t make sense at all except for with housing. If I want to go vacation I will, if I need a new washing machine I will get it, if I want a cappuccino every morning now I can afford it no matter who I am!


If you want to go on vacation, but you can go on a little bit of a nicer vacation if you wait until next spring...

If your old washing machine still mostly works, the new one will be cheaper if you can get the old one to limp along for a while longer...

People don't completely stop buying things; life must go on. But people would start to drag out purchases where ever they can.

Have you ever put off buying a computer or phone because you know next year's chips will be faster and batteries will last longer?


What seems to matter more is that there has been a productive deployment of capital that gives you a reason to buy a new product, and that you have discretionary income after housing cost and other fixed costs are paid.

High housing costs are an incredibly unproductive use of capital unless it leads to building new supply and is therefore effectively a temporary incentive for developers to build more. Landlords on the other hand want there to be an undersupply, and don’t fully align with developer interests.

Prices for consumer goods have decreased for quite a while and people still buy.

And even when computers were improving significantly every year and prices went down people on average still increased their buying of new computers.


productive deployment of capital

Right, and the economists argue a deflationary market makes capital scarce

High housing costs are an incredibly unproductive use of capital

Right; it seems desirable for housing costs to keep even pace with the rest of the market, and ideally stay close to depreciated replacement cost

And even when computers were improving significantly every year and prices went down people on average still increased their buying of new computers.

I still buy computers in the deflationary technology market, like everyone else. But because I am putting off purchases and cannot recoup my costs with a sale, I probably buy a lot less computing hardware than I would if, for example, improvements were still just as big but much less frequent. I'm not saying it would be better for the world if computers improved more slowly- but clearly market behavior would change.


> Right; it seems desirable for housing costs to keep even pace with the rest of the market, and ideally stay close to depreciated replacement cost

In markets where there is enough housing supply, do we see people change housing ownership more often? E.g. buy a bigger apartment when they get kids or downsize when they are empty nesters.

In markets with enough housing supply, do we see higher expectations for housing being modernized and up to code instead of being resold with only cosmetic changes? E.g. most bay area housing is very drafty and energy inefficient since it was built in the 60s/70s.


I don't have a study, but I think you expect to see all the things you ask about.

If there is enough housing supply, prices are reasonable and moving to a different house isn't a $2M transaction, it's $100k. Aside from other things this makes the finances easier- if the down payment is $200k, you must line up the purchase & sale. If the down payment is $10k, you can front that, and the purchase isn't 100% contingent on the sale. (purchase/sale contingencies sink a lot of home sales) Additionally shopping for a house is not a dog-eat-dog fight.

If there is enough supply, you don't have to spend every dime of your income in a bidding cage match with other buyers, which leaves you with capital available for real repairs & renovations. Builders and private developers can buy the really crappy old houses for very low prices and knock the whole thing down and build new. Plus, in a market where appreciation is the prime determinant of value, and it's a major seller's market, why bother doing much renovation? It'll sell no matter how bad it is.

My local market certainly shows all these things compared to California- but, who can say exactly how much of the state of the California housing market is due to Prop 13?

P.S. Yeah, it's ironic how the Bay Area is this wealthy progressive metro, and yet so much of the housing stock is ancient, way behind code, and terribly energy inefficient.


Yeah, let's hold up the vacation so that we can get that airport sandwich for free.

I don't even think people have a grasp of the effects on inflation/deflation in practice anyway, let alone suddenly make strategic decisions upon it.


Different types of goods are affected differently. Groceries aren't affected at all, but for large purchases there is empirical evidence that expectations of deflation lead to a general decrease in spending:

e.g. https://www.dallasfed.org/assets/documents/institute/wpapers... , http://www.tandfonline.com/doi/abs/10.1080/13504851.2015.110...


The fact that you take that as an axiom is frightening. Moderate deflation is no more scary than moderate inflation, and the idea that an "overall inflation rate" determines people's behavior is laughably wrong.

I mean, which of the thousands of inflation rate definitions are you talking about? The FRED database tracks 34,000 different series of some 10,000 inflation measures. More importantly, people don't sense overall inflation at all, they make decisions on domain specific inflation. Prices dropping for farm equipment or homes does not mean businesses stop buying computers and homes stop buying washing machines. It is entirely possible for housing prices to tank while prices for nearly everything else increase...in fact, we've already seen it happen.

Think about what you are proposing: you're saying that even if prices are irrational and we are in a bubble, the only response is to maintain those irrational prices for that bubbled item and inflate everything else until we reach equilibrium. That is insane. If we did that, we'd still be trying to catch up with railway mania. And it puts us at far more of a risk of runaway inflation problems than letting housing prices drop would ever put us at a risk of a deflationary spiral.

It's time to start questioning your axioms. Don't get me wrong, there are plenty of blowhard macroeconomists out there that share the idea, but there are far more economists that have far more nuanced views and understanding of inflation and how it really affects people's behavior, and it is nowhere near axiomatic.


I think the post you're responding to is being critical of the unexplained/unexamined axiom that "deflation is bad", which is usually an underlying assumption in the financial press.


Wow. I had to take a look at the grandparent comment to understand he was being sarcastic. Thanks for the correction.


Is it not deflation a signal of underutilization of available resources in the economy, and necessarily, in the long term, of diminishing capacity?


Shouldn't home prices rise the same rate as inflation?

The % of salary people devote to housing shouldn't increase by a large amount each year.

And people's salaries don't rise that much year to year either. It rises the same rate as inflation.


Bank loans, money creation, and tax breaks subsize them, causing prices to rise. Not to mention population growth and nimbys restricting supply.


In this case home prices rose because it became cheaper to make mortgage payments on a house. People were willing to spend the same mortgage payment as before, so the net effect is that housing prices rose.

Salaries don't necessarily rise at the same rate as inflation. If they did, there would be 0% real growth in the economy. Inflation is usually measured by watching the prices of a basket of goods: if those goods' prices increased by 5%, then inflation is 5% (in reality it can be more complex than this).

Inflation isn't a "real" metric in the sense that it affects all things equally. Housing prices could increase by 50% but the price of a gallon of oil or a bar of soap could decrease by 10%.


> Salaries don't necessarily rise at the same rate as inflation. If they did, there would be 0% real growth in the economy.

You are confusing “salaries” with “output”; salaries (or even domestic incomes in total, which involves more than salaries) growing at the rate of inflation can occur with negative or positive real growth. Zero real growth means output growing at the rate of inflation. (National economies aren't closed systems, and some output may produce foreign rather than domestic income, as in returns to overseas investors.)


True, but for practical purposes salaries (or the mean of salaries + returns from investments) closely approximate output. In any case it should be clear that salaries and inflation aren't directly linked. Salaries should (generally) increase slightly more than inflation as productivity increases over time


As you get richer, you have a choice as to what to spend your money on. You could buy more expensive food or eat out more, buy hand-made suits, go on expensive holidays, buy a huge car, etc, but most people seem to put higher utility on a better (size, location, whatever) house. Therefore, the distribution of your spending over the various categories can change as your income goes up.


No, it should be slightly faster as outlying areas get more central (relatively speaking) as cities grow.


I think that's how it used to be for a long time.


> High housing prices are great for those who already owned houses...

Not unless you are ready to sell, otherwise it kind of sucks to have your property taxes go up 10-20% every year.


We don't have a property tax in sweden.

Also no inheritance or gift tax. Very good place to live if you are wealthy and don't make money the peasant way of going to work.


I see your problem right there...


Why did a lot of rich people (Bjorn Borg, Ingvar Kamprad (IKEA)) move out of Sweden, then?


They moved out earlier, when there were (quite high) property taxes. The tax was abolished in 2007.

Ingvar Kamprad moved to Switzerland in 1976; in 2014, when the abolition of 2007 had survived one election cycle, he moved back to Småland.

Björn Borg moved out of Sweden already in 1974 at age of 18, perhaps more because on 90% income tax than property taxes.


This totally depends on how your municipality levies property taxes. In many parts of the Northeast US, for example, the county first sets its budget for the year, and then levies tax by dividing the budged among property owners in proportion to assessed property value. Therefore, if the county's budget hasn't changed, and if all of your neighbors' houses have increased in value by the same % as yours, then you'll pay the same tax as last year. Conversely, it's possible for your house to increase in value but to owe less tax if your neighbors' houses increased in value by more than yours.


This is very location-dependent. Here in the UK, the nearest thing to a property tax is the "council tax", which is based on the estimated value of the property in 1991.

There is also a tax on property transactions which can be considerable.


Yeah. This 100%. It's a broken system for everyone except investors (and maybe even for them, ultimately).


The older generation could buy at a very low price and refinance during a very long almost nul interest rate era. Guess which generation owns the political and financial power... I am scared that in some high public debt countries they will confiscate value through (increased) inheritance tax... But I am even more scared by the ECB normalizing the interest rates...


>>When will we learn that a "strong" housing market is not necessarily a good thing?

Because you can't operate the housing market in isolation. Housing market is basically everything connected to the housing markets. Plumbing to paint, it includes everything.

The economy is a whole. Sectors are only for our understanding. Economy works as largely a monolith, so its just free market economy at the end.

Only thing that matters in a set up like this is Demand and supply equations.


>"No country should let the "landed gentry" hold them hostage over interest rates or tax policy so that their assets - many of which they do not even actually own - can appreciate."

Can you elaborate on what you mean here?

What would be examples of ways in which people who live in places with strong housing markets hold others hostage via interest rates or tax policy? What policies are the policies that accomplish this specifically?


Sure, as a politician you shouldn't be favoring homeowners more than people who don't currently own a home / younger generations. Passing policies that increase home value necessarily makes it harder to own a home than before, and also raises rent prices.

Homeowners essentially hold everyone else hostage because they are able to vote and youth/the unborn/many immigrants cannot. So politicians are highly incentivized to pass policies that increase home values. Of course, not everyone who can vote is a homeowner, but politicians and wealthy/connected people disproportionately are.

The main way to increase home prices is to make the monthly payments lower than before, by either decreasing interest rates or extending the maximum mortgage loan length. In another one of my posts, I explained why this will actually simply raise the values of the homes without affecting mortgage payments very much. This has the added effect of pricing a lot of people out of home ownership compared to the previous market, because this does increase the down payments that you need to make. Thus the increase in rents.

Regarding tax, if you let interest be deductible from your taxes, you are making mortgage payments even lower. Again, this raises home value because mortgage payments will again revert to what they were before.


>'The main way to increase home prices is to make the monthly payments lower than before, by either decreasing interest rates or extending the maximum mortgage loan length"

>"Regarding tax, if you let interest be deductible from your taxes, you are making mortgage payments even lower. Again, this raises home value because mortgage payments will again revert to what they were before."

But these two policies/practices also allow more people to become homeowners and part of the "landed gentry." Isn't this acceleration of home values a side effect of encouraging home ownership rather than a strategic attempt by the segment of homeowners to keep other's out? I think you are making this side effect out to be something conspiratorial and I just don't believe there is any such unified home-owner voting block.


this is short sighted. while its 'nice' to buy when the housing market is going down, essentially what you are saying is that a house should not appreciate in value. but in reality, there is virtually no good reason to own a home unless its an appreciating asset.

after owning a home, i have nightmares about water. that was before the city flooded my basement with 3 feet of water (destroyed my washer, dryer, furnace, water heater) and said they have an ordinance that they cant be sued by accidents they cause. you may not get it, but anything that breaks, YOU MUST FIX. it doesn't matter if you had a hard day at work or you have to take your kid to the doctor that day, it has to get done and you need to have money available to do it.

the fact that homes ARE appreciating assets is what makes them so good everyone (even if you rent)

I think the better question to ask is, when will certain people learn that a continually 'weak' housing market is bad for everyone. dips in the housing market give good opportunities for people to get a home cheap, but they are still bad overall for the economy. its also only an opportunity if the housing market turns around and goes back into its upward trajectory.

the city collects taxes on me even though my home is not on the market. when I bought my home, I spent at least 8000$ at home depot, IKEA, etc, plus another 3000$ on a new roof and water heater (because the existing water heater was from the 70s and super energy inefficient). see, even good for the green crowd. although i wish i hadnt, the city was about to destroy it a year later anyways. i digress.

and while you think a trashed housing market would be great at lowering your rent, you might be surprised to find out landlords would have no incentive to keep your facilities nice if it was not a profitable endeavor.


I don't understand your argument. $11000 in repairs is basically nothing compared to the cost of a home which even in cheap cities will cost you at least $250000. If the prices double to $500000 then $11000 suddenly becomes such a tiny amount it's not even worth thinking about it.


i live in philadelphia, the median home value is around ~200k I think, but that doesnt really matter based on your comment. the ~11k$ was brought up to mention how that helps the economy. a lot of people were put to work just by me buying a home. it also misses the point that 11,000$ to burn on something that is not going up is a really bad decision.


Many healthy countries have been held hostage by others doing ZIRP so they had to cut rates due to their currency being too strong.


I don't know much about this. What would have happened if the other countries/currencies didn't cut rates? Is it just capital flight to the lower-interest currency?

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