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Home Price-to-Income Ratios (jchs.harvard.edu)
125 points by alexhutcheson 19 days ago | hide | past | web | favorite | 161 comments



In late 1980s Melbourne, Australia my dad and his best friend were accountants and bought their houses for ~$40,000AUD, ~3 times their annual income. According to the best friend, this was considered a lot to pay for a home.

In 2020, those houses are around ~$1.8-2M, so ~22.5-25 times the annual income of someone that has their job today. In Melbourne and Sydney generally, housing is 10 and ~13x annual income. Above 6-8 is already considered _extremely unaffordable_. Sydney is 2nd only to Hong Kong in housing un-affordability.

It's a profound change across a generation. Among my college-educated friends, the only one's thinking of buying property are either high income (doctors, investment bankers) or buying in markedly worse (thus cheaper) areas than they lived in as children.


I'm one of your dad's generation and we like to call this "inter-generational theft" because it kind-of sums it up: the spending patterns we established, are predicated on leaving our kids (and grandkids, probably) worse off. Not because of a debt burden, there is nothing wrong with long term public sector debt financing.

The problem is the asset bubble in home ownership prices. We should have 10+ year secured residential tenancies and rent controls in place, and put home ownership back into the 3-5% compounding asset class. Sydney and Melbourne is insane. Brisbane (where I live) is better, but only just.

I worry about Hobart: the longterm income levels in Tasmania are not going to keep up, the price of housing there is creating a huge social dislocation issue.


>Not because of a debt burden, there is nothing wrong with long term public sector debt financing.

To an extent...

>The problem is the asset bubble in home ownership prices.

I just want to point out that these two are, are somewhat tied together as of the recent decade.

A lot of central banks around the world have been doing QE type things, which consists of printing money in exchange for taking assets off the market in (supposedly) equivalent value until they (central banks) are repaid the printed money to destroy. This arguably causes inflation - not in the traditional sense, but in the form of asset price bubbles. The reason they're doing this stuff is because of the lack of liquidity in the market regarding financing debts. In the US in particular, a large part of the FED's balance sheet is composed of mortgage backed securities (houses) and government debt (bonds) which money was printed for...

Anyhow, the point I’m trying to make here, is that the public debt burden we have is a contributing factor to the asset bubbles we see in housing and stocks and other areas...


What happens to those houses when you die? Are they mortgaged with no equity? If you leave an inheritance, you are giving the wealth back/forward.


And what happens when people live longer and longer, so that people have lived a longer percentage of their lives without that influx of assets? It is perfectly common for 60+ year olds to still have their parents living. That will stretch to 70 year olds, and so on. There is a demographic concern that needs to be acknowledged in order to develop societal solutions that provide even basic opportunities such as home ownership at an age when you are raising your own family.

One potential contribution to a solution would be to tax investment properties/second homes at a very different rate than primary dwellings (which should be taxed at as close to 0% as is practically possible). This would help reduce compounding the effect of demographics with investment portfolio concerns. If governments are to be at the service of their citizens first and foremost, it makes sense to me that they also have a specific tax rate or other restrictions on property ownership by foreign investors. If those things are not legal, then laws should be changed. They exist in some form in many countries, but not all. I doubt those opinions are popular, but at least they are worth thinking about.


> One potential contribution to a solution would be to tax investment properties/second homes at a very different rate than primary dwellings (which should be taxed at as close to 0% as is practically possible).

as a renter, that doesn't sound like a good solution to me. my landlord would just pass through the "investment property" tax to me, while homeowners in my income bracket would be getting a fat tax break.

people should be assessed a property tax that roughly approximates the local services they consume. after that, we can think about credits for people who are genuinely struggling to make ends meet.


I understand the renter dilemma. The goal would be to propel you towards home ownership. If taxes were higher on investment properties purchase prices would get pushed down, thereby reducing the amount your landlord would need to charge for rent. Rent will go up with inflation regardless, since landlords optimize for profit. But all of a sudden there is less of a difference between what rent costs and a mortgage payment. it is easier to jump out of the renter's cycle. And that means less demand and lower rents for those who remain, creating a virtuous cycle. In the medium term (5 years plus) this would keep rents flat or lower, and reduce housing prices at the same time. At the same time there is a basic philosophy I espouse that all people have a right to a home and a piece of land, and unless absolutely necessary to society, they should not be renting from the government.

I agree that there need to be several other programs in place to support lower income individuals, including in respect to primary residences, but that is an expanded conversation in a election year ;).


so I have two main objections here. the first is that tax breaks for homeowners tend to benefit the middle class at the expense of those who are just below the threshold to qualify for a mortgage. unless you just give them the money or have the government guarantee their debt, this is going to be a problem. if your idea works really well and housing prices drop a lot, this could be a pretty small group, but it's still worth thinking about imo.

my second (and very self-interested) reason, is that I don't want to be propelled towards home ownership. if I really wanted to I could buy a home now (and probably break even; I live in a low price-to-rent area), but I like renting. I'm quite happy in a 700 sq ft apartment, and I don't want the work that comes with a larger dwelling. I'm not exactly hurting for money, but I just don't see a compelling reason why the alternate version of me who bought a house deserves a tax break. I'm not sure I'm convinced by your argument that this policy would also lower my rent, but I'm not an economist so I can't really say.

> At the same time there is a basic philosophy I espouse that all people have a right to a home and a piece of land, and unless absolutely necessary to society, they should not be renting from the government.

just wanted to say I can certainly respect this, but I have a very different philosophy. land, especially in cities, is one of the only truly scarce things in the world, and its value depends almost entirely on what other people are doing near you. in our era of prosperity, I can agree that people should be entitled to a place to live, but I don't believe they should get to control a specific plot indefinitely.


Rentals are almost 40% or the market so it will have a real effect. Of course this requires more changes to our systems. But given the terrible status of current US social structure, anything you do worth doing will likely fail without a number of changes to support it.

There is nothing that makes 700 sq ft something you can't own and can only rent. That's a condo.

People will still buy and sell depending on their life goals and situations. If you move, you will be more likely to sell rather than hold your old house for a rental. Refis will still exist, along with the pressures they create for some people to sell, etc.


> you are giving the wealth back/forward.

But it's now much more concentrated. Over time my family and dad's best friends family have ~5 houses and apartments each. When they die there'll be ~5 places split between 3 children and 2 children respectively.

Easy to see how that's not rebalancing things much.


3-5% is unrealistic. in the long long term, housing prices can't exceed inflation (roughly 2%). and if we were to actually make progress in building houses/shelter, then it would be even less than inflation.


This is not surprising at all. Population has exploded, immigration is easier than ever before (since the Industrial Revolution), desirable places have become even more desirable, plus real estate is used as investment.

Under such conditions, wages can only stagnate or have modest growth, while prices for scarce resources like land in desirable areas can only go up.

Good news is that there are still cheap places everywhere. But everyone treats them like they're all plague infested or something. Building a new town/city is no easy feat, but it sure used to happen more often in the past.


In the late 1980s Australian interest rates were 17% so the repayments required were much higher on the same level of debt.

However, your point in general stands that houses in Australia are much more expensive than they were 30 years ago. But a better metric is the proportion of income required to pay for a house.

It's also worth noting for Australians and Americans that these housing cost issues are a global issues in many successful cities around the world.

Some cities and states have avoided these issues. In particular Texas in the US has seen huge growth and has managed to keep prices down.


> In the late 1980s Australian interest rates were 17% so the repayments required were much higher on the same level of debt.

Inflation was also in the >10% range (https://www.abs.gov.au/websitedbs/D3310114.nsf/home/ABS+Chie...) so if your wage kept up with inflation and you could weather the high interest rates for a few years then your mortgage:income ratio shrunk very quickly.


You could've just saved the 3x income and paid cash if you wanted. Today, it's a much longer path to use frugality to build up the pile of cash needed to buy a home outright.


And indeed, buying a home outright would sometimes be impossible depending on when you started saving. E.g. If you tried saving to buy a house outright in the 00's in sydney, the cost of housing would increase faster than you could save.


Tell that to Austin and some areas in Dallas.


Mine did the same in the early 80's on a cleaners salary, granted the money was better for cleaners back then (no several levels of contractors) and in a less desirable location (Gold Coast), but on my top decile for the country salary there's no way I could afford the same house today. It was also a single income household since they started a family about the same time. It shows how much our standard of living has dropped in four decades.

> Among my college-educated friends, the only one's thinking of buying property are either high income (doctors, investment bankers) or buying in markedly worse (thus cheaper) areas than they lived in as children.

Personally I scaled down expectations and bought a small "affordable" apartment. It's fine for me and achieves some financial stability but I wouldn't want to raise kids in one.


> In late 1980s Melbourne, Australia my dad and his best friend were accountants and bought their houses for ~$40,000AUD, ~3 times their annual income. According to the best friend, this was considered a lot to pay for a home

Something has to have changed since then.

What was the interest rate like back then and what kind of terms did he get for his loan?

(edit spelling)


> Something has to have changed since then.

In 35 years an awful lot has changed. What are you thinking specifically?

Interest rate wouldn't be too hard to find, though it'd be a lot of trouble to find out the terms of the loan.

One thing I can comfortably say though is that they'd been living at home and saving for a while, so could pay quite a lot of the full housing cost up front. Maybe 30-50%. Nowadays it's a joke to think about doing a 50% down payment on a 1-2 million dollar home.


I was thinking maybe it was a time when purchases were made in cash or seller financed

But siem already posted that interest were around 17% and someone else mentioned 10% inflation in the eighties

Then you throw in immigration and global markets and a somewhat clearer picture emerges


You picked the wrong Melbourne. The one in Florida is a far better deal. Median household income is $40,000, and the median house is just $150,000. The house is 3.75 times the income. Of course, it is even lower for the typical people here on Hacker News.


Are we looking at income post tax here?


Pre-tax I suppose, but it hardly matters. The local and state tax is only a 6.5% sales tax, excluding food. The only income tax is federal, which is approximately nothing for people at that income who have children.


How is that even possible? At interest rates that's 100% of income. Or it's becoming a rich area and next generation of up and comers needs to find a new frontier like the old generation did


> How is that even possible? At interest rates that's 100% of income.

Can you elaborate on what you're saying here?

> Or it's becoming a rich area and next generation...

Yeah in a sense it has to become a rich area because of housing costs. The "new frontier" where houses (not apartments) are 3x median annual income is 2 hours drive out of the city.


Comparing income vs median sales price across time isn’t quite as interesting as income vs. total monthly payment (principal + interest).


yes, but in many desirable areas a significant portion of buyers are cash only buyers whose monthly payment is $0 (other than property taxes).


Intuitively, I would say the number all cash buyers is a pretty small number in every market. Especially in a low interest rate environment.

Most people with the means to pay cash for a property would likely be savvy enough to understand that that they would be better off getting a jumbo mortgage at 3.25% and deploying that capital at a higher rate elsewhere.


In hot markets you see a lot of cash buyers because they don't want to lose the deal. Some will then finance afterwards, and a lot of them are flippers who will sell the house a few months later.


IIRC San Francisco all-cash buyers were accounting for 25% of transactions a couple years ago.


Manhattan is usually at 50% all-cash. Recently it softened to 40%+, but still much higher than intuition based on everyday-folks might suggest.


> Most people with the means to pay cash for a property would likely be savvy enough to understand that that they would be better off getting a jumbo mortgage at 3.25% and deploying that capital at a higher rate elsewhere.

Sellers want buyers to pay cash to reduce risk of the transaction failing. Fewer parties in the transaction is less risky. Buyers can always refinance the house after they have the title.


Buy cash, refinance later. In a competitive housing market, sellers would rather take the cash than risk a contingency falling through.


I’d say it’s more interesting to look at recent immigrants income vs monthly payments.

Existing residents aren’t necessarily buying new houses at 8x multiples. And the new arrivals to an area might be tech workers pulling in $400k, and can afford that $1.2M house with just a 3x multiple.


I'd say it's more interesting to look at income-after-taxes vs monthly payments.

The same payments/gross income ratio for a worker earning a median salary is a lot better than for someone earning $400k (as the payments to net salary ratio for the latter is higher).

Not to mention the probability of sustaining the income at the current level in the next 20 years is probably different as well.


I almost don't want to buy property as a protest to the horrible policies we have regarding basic necessities. Why should property owners be entitled to a major portion of my productivity/success? I'll rent the cheapest apartment I can find until the next housing crash or we have some sensible policy put through that negates the investment aspect of housing.


That’s essentially what I’m doing, but not as a protest. Prices just don’t make sense to commit to at these ratios. I wouldn’t suggest staying out as a protest though. Maybe look for loopholes - at some point it may make sense to buy a beat up home in an undesirable place for very low and either fix it up and resell or use it for casual purposes and tax incentives.


I'm not sure if this argument makes a lot of sense.. If you're renting, property owners are definitely still acquiring the fruits of your productivity. Moreover you lose out on all aspects of housing security and can readily be displaced if said 'cheapest apartment' stops being so affordable.

If you're imminently expecting a housing crash, then sure, go for it.


My rent cannot go up by more than the Consumer Price Index, and I cannot be evicted without just cause, except in very limited circumstances (owner move in, condo conversion, etc.). How much housing security have I given up?

What I’m really giving up in this situation is the right to make significant improvements to my unit, and such. In exchange, I don’t have to pay for any repairs due to wear and tear. I don’t think it’s a terrible deal, but I would like to own a home, simply so I can have a living space that I alone fully control.


Is property ownership a basic necessity though?

Or is its prevalence as an ideal a product of a burgeoning middle class through the last century?

I understand it's not even so common (or common as a goal) now in continental Europe, they think it's some silly English thing to care so much about home ownership.


Australian tax law is incredibly geared towards home ownership, and the culture of owning your home is very, very strong. See https://en.wikipedia.org/wiki/Australian_Dream.

Personally, most of the people in my age cohort (mid 20s) who've bought homes, have bought in areas considerably further away from the city than they were raised.


I think this is an expectation thing. We grew up in houses that our parents owned in their 40-50's, after building their careers and wealth. Yet we expect to buy them in our 20s. That doesn't align with where my parents were in their 20s.


Your parents were in their 40-50s when you were born? That's certainly not the norm.


Average age of the mother at birth in Australia (which doesn't sound unusal to me, but it's Australia specifically being discussed) is ~30:

https://www.theaustralian.com.au/nation/health/average-age-o...

And GP said 'grew up in' not 'born into', so average mother ~40 at 10 years old and ~50 at 20.

So yes, average Australian baby has a 40-50yo mother while 'growing up', especially for the purposes of house expectations which I'd have thought would more likely be formed over adolescent than younger years.


It is a basic necessity to have physical space in which to exist. Property ownership of course isn't strictly necessary; renting is a fine way to satisfy this need. But how can rent prices remain very far below the price to own?

In prior generations, rent was a way to express a preference about longterm vs. short term occupation of a given space, or it was a way for people with relatively little credit or capital to get access to space. But it seems impossible for purchase prices to perpetually outpace rent prices, and it is unsettling to imagine the fraction of the economy dedicated to land ownership growing perpetually.


> But how can rent prices remain very far below the price to own?

I'm guessing you meant this rhetorically, but it relates to something I've been wondering for a while. in very expensive areas, you tend to see a very high price-to-rent ratio. even if you could afford to buy, it might not make sense economically unless you plan to hold on to that house for a pretty long time.

I've been trying to learn more about why high price-to-rent seems correlated with expensive areas, but it's kinda tough to google for when all the hits are just practical guides to help you decide between renting or buying. if there's some deeper connection, it may that rent stays well below the price to own for a long time.


In my locality, I believe the difference is explained in part by local policies that severely restrict new building and renovation of old buildings.

You might not expect such housing supply restrictions to cause land prices and rent prices to rise at different rates. But you would expect them both to rise. There may be real estate speculators investing on a momentum theory, but renters aren't willing to pay a premium based on the past trend in rental prices. This theory wouldn't support unbounded divergence between land and rent prices, but it would support some divergence consistent with what I've seen over the past few years.


Well, in England being a tenant has been a terrible experience for me despite paying premium prices and trying to aim at high quality properties with reputable landlords and agents. I've spent 5 miserable years. So I can totally understand why people tend to buy. Most people I know currently letting are either low income or moving jobs and cities.

You have very few rights (even in comparison to Wales or Scotland). So landlords use you for example to live in a property they plan to sell immediately. Typically they sign a rental contract and shortly afterwards advertise the house for sale. You need to cope with all the viewings, probable breaches in the tenancy (agents will enter the house quite often without notice) and the certainty that after ~6 months you will need to relocate again (which also impacts your credit score).

My experience renting in other places in Europe is, in comparison, fantastic. Totally boring (in a good way) experiences in Scandinavia, Germany and Belgium. Rent, pay, stay undisturbed for years, return keys, get deposit back and go. Also much lower prices.


Why do you live in England and not Belgium? Is it because quality of life is so much better that it's worth the housing hassles?


Just getting stuck in hyperspecialized jobs, so I can't really choose location. But quality of life in Belgium and elsewhere in Western EU is IMHO much better than Southern England.

I really enjoyed, in particular, living in Ghent.


It absolutely is a basic necessity unless you wish to remain a serf for life.


why? there's nothing inherent about owning a house that protects you from having all your surplus income siphoned away. if most of your wealth is tied up in the house, you are still vulnerable to property tax increases from appreciation on the home. not every state shields you from this to the extent that california does, and even california could change the law at some point in the next several decades.

I'd much rather be renting and have $300k in a diversified portfolio than own a $300k house and no other assets.


You'd rather have both though right? Obviously it depends on the market and california is a pretty bad example as an outlier where renting may make more sense but in most places in the world atm buying is the cheaper and safer (as in less chance of eviction at short notice) option. On the flip side renters only pay for increase in property values and never gain. Real Estate is a major wealth generator for people who get on the ladder. Finally you can't live in your 300k diversified portfolio if the market crashes.


I would only prefer a house over stocks/bonds if the price-to-rent ratio was very low and I could purchase a house I liked for a small fraction of my net worth.

> Real Estate is a major wealth generator for people who get on the ladder.

ultimately this comes down to luck and how much of your income you spend on housing vs put into investments. there are certain locales where home prices are skyrocketing, but over the long term, average home appreciation is basically flat (but with lots of variance). [0] actively investing in rental properties is a different story, of course, but involves a lot of work, too.

> Finally you can't live in your 300k diversified portfolio if the market crashes.

sure, but rent is only about half of my monthly expenses currently. by the same token, you can't eat your house or fill up your tank with it. if you're worried about a crash and/or losing your source of income, you can always rebalance into bonds.

[0] https://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index


that happens anyways. if you own a home and have it paid off, you'll still be paying super high property taxes on that reallly expensive house. and with most 1st world governments taking in 40-55% of all income earned nationwide, we're all just serfs, at the end of the day.


I expect services for the taxes I pay. Paying taxes to my government is basically paying myself because I like living in a functioning society. If the government isn't doing a good job I'll try vote them out. Nothing like serfdom.


The difference is one doesn't have a choice in paying taxes i.e. one is obligated to pay them. If one doesn't pay, one loses their house.


You're still paying them if you rent though, even if by proxy, and I don't think anyone wants to be homeless.


Most people have been serfs for most of the history of civilization. They prefer it to scratching a life out of the dirt in the frontier.


It's not a basic necessity, but it does give you a lot of financial security, physical security and a sense of permanence in your community, especially when paired with other trends like gentrification. I've got retired friends that rent and have lived in my area since they were children but their pensions/funds aren't keeping up with rent prices and moving out to the country to die is a real possibility. Owning a property would have buffered them against this change. For people starting families today increasing rent prices is taking up more of their salaries, a mortgage goes down relative to inflation, and when you buy a property you can factor in things like which schools your children will go to. A home owner of any age will be able to weather negative events like unemployment or debilitating illness a lot better.


Living somewhere is.

Rents are also high in these very high cost cities.

Continental Europe has places with higher rates of home ownership than the UK.

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

Norway - 82%

Spain - 78 %

Italy - 72%.

All higher than the UK at 64%.


When rent is close to or even greater than a mortgage (because the RE market is essentially seized) then I’d say people are having difficulties finding a place to live. Having a place to live absolutely is a necessity. Does no one any good to have people commuting en masse.


I think for the vast majority of people (no complex investment strategy, pay bills and go on with life) home ownership is incredibly valuable, both for stability and security, as well as for a decent investment to leverage later in life.


Say what you will about Texas government, but they know how to stay out of people's way and let housing supply keep up with demand efficiently.

California on the other hand, is absolutely pathetic when it comes to this. So absurd watching a state whose booming economy is funneling most of that money to property owners pockets. A huge and abject failure that will be in future economics textbooks as the example of how giving local government too much power creates huge bottlenecks.

Not to be overdramatic, but NIMBYism and overly restrictive zoning is California's equivalent to a tumor. Unchecked growth (of housing prices) that sucks all the resources out of the host (renters and people looking to buy a first home).


By far the majority of renters I know in CA, in SF and Santa Monica, have largely abandoned any hope of homeownership and live incredibly spendy lifestyles while they can afford to be in the area.

Eventually, they will wise up, move out of their expensive rentals and turn frugal - likely outside of these cities with a good possibility of leaving the state.

In their absence, new young folks in their high-earning high-spending phase will move in, and the cycle repeats itself.

None of this is bad for California. The state, in the desirable cities, is a meat grinder drawing in a constant supply fresh, gullible, overpaid talent, working not just to pay high rents but high everything, including state income tax, while saving very little. When they get exhausted, they leave, and make room for more fresh meat.


> supply fresh, gullible, overpaid talent, working not just to pay high rents but high everything, including state income tax, while saving very little

IDK, most people in know in California seem to be saving 30-50% of their post tax income. That's clearly not the case anywhere else in the world.


That's great, but maybe you know exceptionally high earners with good money sense?

Or maybe I just know exceptionally low earners with poor money sense.

Given the constant furor surrounding housing affordability in California's desirable cities, I'm leaning towards the former.


And 30-50% is A LOT more in absolute dollars than it is outside of Cali.


Would that mean that, since California + Federal taxes are something like 46%, post tax income is roughly 54% salary?

If so, they're saving only roughly 15-25% income?


> California + Federal taxes are something like 46%

49.3% is the top rate you'd pay in California at the highest bracket (or 50.3% if you make over a million) .

If your income is over 2 million a year you'd pay an effective rate of 44%.

If your income is $200K, your effective rate is about 34%.


at higher and higher incomes, it makes more and more sense to try and deduct income via investment costs (such as interest on borrowing). So your optimized effective tax rate would be a lot lower.


Most of the renters I know in the bay area rent a house with 3-4 roommates and pay reasonable rent with that split ($1400/month -> $1900/month each for a room in the house).

Then saving as much as possible and hoping stock or RSUs will get you the rest of the way there to buying something (or buying a 1 or 2 bedroom for ~one million once you find an SO and working from there).


"reasonable" is relative to what you get, and nothing in that area is reasonable. In no way is $1400 to $1900 per month reasonable for just a room. For that price you ought to get a 1500 to 2200 sq ft detached 3-bedroom or 4-bedroom house on a quarter acre lot.


Reasonable relative to income is what I'm talking about.

If you're able to get total comp from 200k -> 400k and save 50% of that or more per year into a total market index fund for ten years that's pretty good, especially if you start at 21 or 22 out of school.

The economics make sense even when you ignore the other benefits (great environment for cycling, running, general outdoor activities - huge amount of smart people to learn from and work with, huge amount of companies hiring, startup opportunity, high quality food, etc.)

It's still a shame though because if Prop 13 was phased out and housing was built we could have all of this without having to waste huge amounts of money on overpriced, run down, tiny little houses, but that's Moloch [0] for you and local NIMBYs operating in their own self-interest.

[0]: https://slatestarcodex.com/2014/07/30/meditations-on-moloch/


If you are in CA for a tech job, a good plan is to get established and experienced and then eventually move somewhere else that's nice and cheap and work remotely. You'll continue to earn lots, be able to buy a house pretty quickly and, depending on what your criteria are, generally have a high quality of life. I am speaking from experience here.

Obviously I'm not talking about people who move to the Bay area to start a business, etc.


Supply and demand amigo. There is an abundance of land and water in TX. In fact, an over supply...


Over 8x seems to be a CA thing mostly (one tile in Oregon bordering CA).

Wonder if we can thank prop 13 for that? (Frozen property tax that constrains supply and encourages ani-development stance by removing the tax consequences of appreciating property)


I doubt you can lay all the blame on prop 13. It passed because CA home prices went crazy in the 70s. My parents bought a home in 1973 for $34k and sold it for $95k in 1978 (the year prop 13 was enacted). A 3x increase in 5 years.


Just out of curiosity, I tried to 'ground' those figures to median income to compare against what's happened in the past few years.

Per the US Census[1], median income in 1973 was $10,500, so the price of your parents' home increased by 3x median household income.

Looking at a completely unremarkable house in the sunset of SF on Zillow[2]. It sold for $1.725M in Nov of 2019 after selling for $997k in June of 2014. Household income today is right around $60k, so an increase of more like 12x median household income in 5 years.

Just madness. (And yes, I know that the median household income in SF is higher than the nationwide, but that'd apply in the past too.)

[1] - https://www2.census.gov/prod2/popscan/p60-096.pdf

[2] - https://www.zillow.com/homedetails/610-Rivera-St-San-Francis...


That's a bad example, that home was completely remodeled between the two sales.


Fair to a point, it was merely a random click on a recently sold property, but it was a $20,000 kitchen remodel (permit 201608084481), a $7,000 bathroom remodel (permit 201408113562) and a new roof for $7,500. So not sure if it's really a bad example when 5 years + $35,000 in investment adds over $700k in value to a home.

You can review the permits here: https://dbiweb.sfgov.org/dbipts/default.aspx?page=PermitType...


That's really cool thanks, didn't realize you could just look up the permits like that.

I'm not sure what those values in the permits really mean, but they can't be the total costs. Hell, the kitchen remodel probably has $20,000 just in appliances.

According to https://blog.housemanager.calstate.aaa.com/blog/how-much-wil..., the price for a mid-range kitchen remodel in SF is ~$83,000, $65,000 for the bathroom and $30,000 for an average roof replacement.

Looking at the pictures of the kitchen (https://www.zillow.com/homedetails/610-Rivera-St-San-Francis...) and bathroom (https://www.zillow.com/homedetails/610-Rivera-St-San-Francis...) those numbers seem like they're probably closer than the permit numbers.

It looks like they also remodeled the half-bath as it matches the remodeled master.

It's probably more like $100-150k in renovations.


Yeah the city sets prices based on the square footage being renovated and:

> "The valuation data is based on information provided by a variety of sources, including without limitation, local contractors, design professionals, cost estimators or nationally published construction cost data books or websites."

https://sfdbi.org/sites/default/files/Cost%20Schedule_0.pdf

So it looks like SF figures $98/sq ft. + $10,561 for the kitchen remodel and $8/sq ft. for reroofing, etc.

In either case, even if it did cost 3-4x that permit amount, we'd be talking about 10x the median household income instead of 12x over those 5 years. Still just a crazy situation.


Those are probably tax values. Actual out of pocket is likely a lot more - SF area has a huge shortage of construction labor and prices are really high, with completion rates low.


All the blame? No.

Most of the blame? Probably.

The same that happened to your parents happened to landowners of huge properties. They still pay peanuts for property tax 40 years later. In the end - it helped people who got there first and then screwed everyone else over. It helped rent seekers more than anything.


That is a flaw of Prop 13, but I don't see how it drives home prices up? Wouldn't it motivate devleopers to build properties to rent out because of a long term margin improvement in the profit? (because the property tax rises are constrained below most inflation).


It drives home prices up by reducing velocity of home sales because people can afford to stay longer without higher taxes.

The issue that seems to have developed is that towns are building commercial property, as it brings in sales taxes or payroll taxes which total a lot more than property taxes


> It drives home prices up by reducing velocity of home sales because people can afford to stay longer without higher taxes.

Why? It doesn't change the total inventory, nor the ratios of how many want a home vs have a home.

> The issue that seems to have developed is that towns are building commercial property, as it brings in sales taxes or payroll taxes which total a lot more than property taxes

Commercial property also includes apartment complexes too doesn't it? In my town there is an excess of commercial retail and office property, and builds are shifting to apts/condos as far as I can tell.


It does change the ratios of who wants a home since it makes a better investment. IMO prop 13 should only apply to primary residence.


I fully agree that Prop 13 should only apply to primary residences! But I fundamentally think it's wishful & unexamined leaps of thinking that repealing all of prop 13 would somehow lower home prices. I think it's repeal would just cause unnecessary churn in where people live, increase the speed of gentrification, without holding back home prices at all.


Your argument is that more available supply on the market would cause home prices to increase. In econ 101 terms - That doesn't make sense. More supply -> cost goes down.

Lower incomes would actually be better off because it would mean that more properties would sell, lowering the price of homes, and thus rentals would have to come down in price too. Churn in housing market could lead to more housing developments as well - since you have to pay full price of the land you are just sitting on. You'd be better off developing the land than just sitting on an empty lot and paying lots of property tax.


I just think it's repeal would be absolutely cruel to people who lived and worked in California their whole lives, making much of what it is today, but can't afford to pay today's prices because their salaries were not what people now make here. So irrespective of what the effects would be, it smacks of flagrant injustice.


Zoning is a big issue, neighborhood associations almost universally oppose new development and they have a lot of say in the process.


Right but it's unclear how Prop 13 drives that. If you repeal Prop 13, presumably it forces more people to sell, but that just means different people with closer to market price mortgage ratios. Would make it more or less likely to oppose new development if they're at risk if something changes and the price goes down on their homes?


> it forces more people to sell

More availability -> lower prices. A lot of people hold because the income:expense ratio on their property is really great. If your rental home goes from $1000/yr in taxes to the $15k/yr that every new homeowner is paying, you'll see that cut into your rental income. You could try to raise rent by $1000+/month but that won't happen because salaries aren't gonna rise that fast. So, you'll sell.

Thus, as a homeowner, when you go to sell then you will get less... A lot of these homes will fund peoples retirement in other regions. I see a lot of people in older age (who don't want to deal with renting, don't want to pass the home down, or didn't save for retirement) selling their homes here and moving to somewhere cheaper. They get to live a nice life off the gains they made.


I think policies forcing people out of homes are bad. And if you look at history, people that get forced out of their homes arent going to a nice farm upstate - they go into declining and more precarious life with less stable housing and financial situations.


Strawman argument. People in $2m homes are not going to live a poor life with less stable housing when they sell. Even if it sold for 50% less. Give me a break.


not everyone lives in a $2M home... not even in CA


which is a big government problem which is a california problem (though some townships in rural american can be quite big government themselves). Zoning should be illegal imo but I get that assholes make it some you need some rules. The problem is everyone adds to their rules to control their fifedom.


> build properties to rent out

That (generally) increases your tax assessed value. Whenever you renovate or build out - they will factor that in and tax you more. Your taxes don't stay flat with building more. You're incentivized to hold and not build - if anything. Zoning isn't in your favor either - you can't just add 10 units to your SFH. Remember - people bought when they couldn't afford to renovate - so they couldn't build out and then hold at peak development. They bought at lowest development and held. It's only after the property got really expensive that they could because they moved, rented the place out, and started raking it in.

So, what people do here is keep the properties as close to the same as possible because it's too late to build out more. (And zoning) If they're able to "renovate" in such a way where they can put up an in-law unit that adds like $100-200k in assessed value, they'll do that because then they can charge $2500+/month for that unit. Ideally, in their case, they'll just convert the garage and never get taxed more. But it adds housing but at a worse quality for both the main home owner and, likely, the person in the in-law than if they just built out a lot of nice apartments somewhere. If you have a "historical" house in San Jose - you can renovate the interior all you want and get no increase in tax assessed value as long as you don't modify the exterior. In one home I was in, they gutted the entire interior of a 900sqft 2-bedroom house into a 5-bedroom 2-bath so that they could rake in $5000+/month in rent out of 5 students going to SJSU. This resulted in 0 increase in tax assessed value - it's a common move and we can probably agree shoving 5 adults into 900sqft isn't ideal. A lot of people buy homes and will renovate them to add as many bedrooms as possible - each new bedroom is like $1000+ in rent you can charge. But - remember, the interior space doesn't increase. You just cram more people in the same square footage - different than how apartments would build up and give people the same amount of living space.

To give you another idea of why you wouldn't probably build out - my neighbor bought his house for $1.2m (This was like 2013). They spent who knows what demolishing the old home and putting up a new one. The house isn't like 5x bigger or anything - it's modestly larger than what was there. We'll say maybe 2x the interior square footage. Mostly because they added a second story on the new design. The tax assessed value is now $2.3m for that property (nearly double). If you're a landlord - would you spend $500k+ on renovating/building a property to be taxed on it too? Nah - better to just hold and rent. Besides, zoning gets complicated. There are only so many SFHs that you can make bigger and bigger to get more rent.

There's a reason why almost all the housing in the bay area is outrageously expensive but has nearly original interiors from when it was first made from 1930-1975 - it's cause people don't wanna improve the property because it will be rented anyway. The cost to improve isn't worth it - it doesn't outweigh the tax increase and the minor gains in rent. The cost to change the interiors to add more bedrooms in the same square footage is the only thing that is a sometimes worthwhile investment.


Looks like 20k of that was just inflation: https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=34000&year1=19...

While still a lot, I’d suspect it’s quite different from today’s situation.


That was likely due to the macro environment of high inflation in the 70s until Paul Volcker knocked it down.


Prop 13 just removes property tax consequences driving transactions, not housing price concerns of anti-development / anti-density owners.

IF you drive those owners out via property tax increases, you have new owners just as concerned with the same anti-density drivers, maybe even more because they're in even greater debt at a higher price and can less absorb a feared price decrease.


If you can't afford high property taxes you're incentivized to allow building so market rate housing price goes down (or at least increases slowly).

With Prop 13 people have zero incentive to allow building because they benefit from extreme housing value increases with no downside. Prop 13 also means only new people are paying any of the real costs for the town since their property tax dwarfs the tax of old owners (one year of a new owner's property tax can be more than the entire cumulative thirty year payments of a neighbor).

I wish Prop 13 was changed so every year local town failed to build X houses (where X is some large value determine by how large the property tax spread is from new and old owners) property tax on those protected by Prop 13 would jump 10% capping out at the actual fair market valuation of the property.

This way if people don't want to build at least they're actually paying for it.

This will never happen though given the current incentives.

I think the key problem is that housing can be an investment or affordable, but it can't be both.


New owners want to get the most out of their purchase. This means multifamily buildings.


People who can develop multifamily buildings have better rent profit margins if property taxes are controlled - how does repealing prop 13 change the (re)zoning motivators (pro or con).


While we're on this subject - does anyone know how median household income is actually calculated within the USA? I feel like there's some weird distortion bubble within the bay area because I've seen the data on household income within the bay area and the amount of households under $100k/yr seems way too low. Individuals under $100k/yr would make sense but households? No - it doesn't add up.

For instance, the median household income in SF is around $100k/yr. By its own measure in SF - $100k/yr is considered poor for a household of 4. I have a hard time believing that somewhere around 50% of residents in SF are poor.

I feel like something is off with the way this is measured. How can it be that a large amount of housing is SFH (can't be rented on a $100k/yr income), about half of people rent here (thus - half of people can't be prop 13 beneficiaries), and yet the median income is $100k/yr? The median rent in SF is beyond $2,500/month - which is the max a $100k/yr household can afford.

I've looked at the stats a bit and it just feels like the incomes are estimated to be too low across the board for households. I see way too many homes/apartments where there are 3+ working adults.

If I look at all the people I've worked with or socialized with - I can't find a single one where the household income was below $150k+. I know there's a bubble in terms of what I've worked with or interacted with - but the truth is that anyone below $100k/yr income was very likely renting with someone else. (Which would push the household income higher)


gotta remember 75% of SF is rent controlled. Plus, if your income is below 60% or 40$ of median income you can get nearly free housing from subsidized housing.


But this applies outside of SF too - I used SF as a relatable entity. Santa Clara and plenty of other cities without rent control are the same.

Subsidized housing is not very common within the bay area. I doubt 20%+ of people are living in that...


This map looks more like the result of a highschool project, not Harvard published data. I wish they would have linked the specific sources and labeled more on the map.


Without looking at their data, I can vouch that this sort of data may be prohibitive to access. The players involved don’t see data as something to be given out freely IME. It’s probably provided in a technically difficult to parse way-just to add insult to injury. Enough so that the simplicity of the presentation is remarkable.


Is there a way to download the raw data?


I used to make about $600K/yr salary in SF and couldn't imagine affording a home there that I'd feel comfortable with a 30-year mortgage payment on.


It's ridiculous to say you can't imagine affording a home on a salary where you could live off 150% of the median household income while still saving enough to buy a 150% of a median home for straight cash in under a decade. Color me incredulous.

[Assuming you live like you make $150k/year (a bit over 150% AMI), you'll have about a quarter million per year left over after taxes. You could save $2.1M (a bit over 150% of median home) in cash in just below 9 years.]


I currently make 600K / year in SFBA and don't feel comfortable buying a home (2000+ sqft in a good neighborhood is 2.5M) We rent for $7K / month but our mortgage would be 14K a month if we bought.

I am not sure how much money I would need to make to do this.

My worry is that I lived through 2 recessions and we'd almost certainly lose everything if I lost my job and couldn't afford the mortgage.


At that salary, you should be able to save pretty quickly to put more than 20% down. Live like you're only making $150k/yr and you can buy a $2.5M in cash in a decade if you prefer a $0/month mortgage.


With 20% down it should be "only" $12k for the PITI. If you like to keep your house payment at 1/3 your income then 12 * 3 * 12 = $432k/yr is what you need.


Where did you move to after that, and what's your current income if your don't mind sharing?


This plot suffers from my pet peeve for geographic display of data. Small areas will have all the interesting details (e.g. extreme outliers in inner city areas), and you just can't see them from a zoomed out perspective.


Do you have a favourite solution for this problem?


No, but I would love to hear about one.


Restrictive governments in coastal cities (Boston, NY, SF, LA, now Seattle) as well as a few places where people, often retirees, are asset rich but income light (N. Arizona, S. Florida, some parts of Colorado) are limiting nationwide growth.

It is a shame that there are no national supply-siders in congress who are willing to to 'encourage' coastal building.


Whenever these graphs come up, I want to see the median ratio between sales price and income, not the ratio between median sales price and median income. I expect they'd be very different. But that data isn't so readily available, so report what you've got I guess.


For anyone wondering how these price multiples translate to a fraction of median annual income paid on mortgage..

Briefly poking around a mortgage payment estimator (assuming 20% down, 3.75% 30 year fixed rate), annual mortgage payments come to roughly 7.2% of purchase price (including tax and insurance). Slightly higher towards $100k price (7.8%) and slightly lower towards $1.5M+ (6.8%), but lets say 7.2%.

So, for a house priced at X times median income, you're paying 0.072X of annual median income every year into mortgage payments. 2-3x in the chart means 14-21% of income spent on mortgage. 8x means 57.6% of median income spent on mortgage. (Quick reminder that 20% down on an 8x house is 160% of median annual income in the first place)


I grew up in the 70s in a two-story house with 4 bedrooms (5 if you count the unfinished basement) with Mom and Dad, plus 8 kids. A total of 10 people in the house. No air conditioning until later years, two bathrooms, no garage.

My wife and I, with our 3 kids, currently live in a house that's bigger and has 5 bedrooms and 3 1/2 bathrooms and of course the cars are housed. It's more luxurious in every way than the house I grew up in.

I think this situation is not uncommon. Sure, houses cost more. So do cars. Both last longer, are more energy efficient, have more amenities, and are better in just about every way. I'm not surprised they cost more.


I wonder if this is due to stagnant wages, excessive home price inflation, or both.


A bit of both, and also a sprinkle of the interest rates going from almost 20% at points in the 80s, to essentially 0% today, meaning people can afford to borrow a lot more at once, and home sellers profiteering off this.


Just to give an example: a 30 year mortgage for $300,000 at 4% is about $1400 per month where a 30 year mortgage for $100,000 at 17% is about $1400 per month. That can explain a 3x multiplier in the home price to income ratio assuming that people purchase based on what they can afford monthly.


Housing supply has been increasing at far lower levels recently than it has historically. Lots of good jobs have been flooding certain cities and which means people with the money to bid up the existing stock. Since people are coming for the jobs and they have money and there isn't new housing to soak up that demand, those people end up bidding up what supply exists.


I don't think it's as simple as that. In Australia we've had a massive housing boom and consequently the market has been flooded with houses. Strangely this hasn't led to lower house prices. There's a large amount of housing which is purchased and is sitting empty, mostly investment properties which people bought with the intention of re-selling at a much higher price so they're not concerned about renting them out. This has led to a perverse situation where very expensive houses are being built and left empty and prices continue to rise to support this.


That can happen for a time. Investors might sit on things hoping that it will appreciate in value. However, many times there's a myth of "empty houses" used to justify not building more. Some people have cited non-owner-occupied condos as "empty" when they're merely rented. When a large new property comes on the market, often the owners take time selling off units so as not to flood the market and drive down their investment (just as one doesn't want to unload shares all at once and overwhelm demand). There's always a certain level of vacancies and a lot of the time when people think there are a lot of vacancies, it's not actually high. They just notice a couple fancy buildings that aren't full.

Prices are also sticky. If you bought a home at $X, you're going to psychologically want to get that back when selling. If you're a buyer, you've seen prices at X and you've become accustomed to thinking it costs that.

And a lot of people say that there's been a "massive housing boom" when production is a tiny fraction of historical levels. This can be understandable. If your area used to increase housing by 1% per year from 1920-2007 and then shrunk down to 0% per year from 2007-2015, increases of 0.5% per year might seem like a boom. However, it's below historical levels and might be coming after a near decade of under-creation. As such, there can be huge pent-up demand combined with a level of building that's still well below normal (but seems high compared to post-mortgage-crisis levels).

EDIT: https://twitter.com/TweetBenMax/status/1218712012114538497/p...

This isn't the best graph because housing production had already dropped off by the 90s, but it's still pretty clear. Everyone in expensive US cities thinks we're building lots of housing. However, when you look at it we're just not. Compared to the dip after the mortgage crisis, we're definitely building more. However, these expensive cities are also seeing historic levels of high-income job growth and migration towards them while having building at lower than historical levels. Maybe Australia is different, but it's probably just a comparison with post-mortgage-crisis lows and not actually a building boom. Even with new stock coming in, it can take years (think 5-15) to settle.


I'm not talking about non-owner-occupied housing. A group here did a survey using water consumption figures to determine which houses were actually occupied and found that substantial numbers were completely unoccupied.

https://www.abc.net.au/news/2014-11-12/water-use-study-highl...

(Old link but the same still applies)


> There's a large amount of housing which is purchased and is sitting empty

is that really true? I keep hearing people who can't find rental properties to rent, or have huge waiting lists.

I suspect that perhaps renters' is a market that has a price expectation, which is not met when the property prices are so high. The "normal" rent is about 5% (p.a.) of the property's market value. However, as bank interest rates dropped, property valuations skyrockets, and rent income cannot keep up. This would lead to landlords who sees tenants as a PITA to just not rent out (saves on any potential damages, low/zero utilities etc, not to mention no inspection, agent fees and other misc).


Why does that matter? If no one can afford the property then the current property owner will make a huge loss.


They're comparing the median price houses sold for with the overall median income for the area. It may be the case, in some areas, that people below the median income are renting rather than buying, or staying in already-purchased houses as the real estate market heats up.

Seeing the ratio of median house price to median home buyer's income would be interesting.


This is also interesting though, isn't it?

If more and more below-median-income people are renting because they can't afford to buy, that's definitely important and interesting.


Yes, but not in isolation.


The other aspects of prices is the replacement cost for an existing or the build cost for new. Its a min of $500 a sqft to build in CA these days. Double and triple that for a high end home. Building codes, permits, zoning, materials and labor have all increased dramatically over the last 40 years.Those add significant costs to housing.


Don’t forget about interest only ARM mortgages and other factors making higher ratios possible (at least in the short term).


for some reason, it's getting harder and harder to build shelter. Shelter is becoming increasingly expensive and increasingly less affordable. This is in stark contrast to the progress that humanity has made in many other industries.

I think it's about time we started asking why. Most people don't understand why. Why is it so hard to build shelter. Why is something we've done for hundreds of years so well, all the sudden become so hard and so innaccessible that only the most elite can afford it.


The reason is fairly obvious. In most of the places (SF, NY etc.) where housing is expensive, it is illegal (or very difficult to get approval) to build new housing.


Cross-reference with school quality and you’ve got a map I’ve wanted for some time. Difficulty: it’ll be less useful the more people have access to it :-/


I may be interested in building such a map. Pm me (check my profile for website, which has my email).


There is no bubble in technology

looks at TSLA $650


I'm not a TSLA shareholder because I don't really understand how the company is being valued but I also wouldn't be surprised if the stock price goes beyond $1000 within the next 2 years.


The bubble is in assets. Anything that any slight bit of profit growth or good publicity will go up higher as people and HFT bots are looking to get the best return possible.


Anyone know what caused such a jump around 2001-2003?


Post dotcom bust and 9/11 interest rates were dropped significantly to spur consumer spending.


Right. Without factoring in interest rates, this doesn’t really tell us much about how affordability has changed.


The cost of the home is normally quoted in dollars today (what the seller receives), not the total dollars you will pay on your mortgage. So interest rates don't have much to do with affordability.


The dollars don't really matter though because the majority of people don't actually have that money.

The majority of people base their housing budget on the monthly payment they can afford.

When interest rates are low, people can afford higher principal values.

When interest rates go up, the amount of a monthly budget that can go toward principal goes down.

Housing prices will tend to fluctuate to match what people can afford, and what people can afford is determined by their monthly payment.


The typical early stage buyer is financing their home and very often buying within 25% of the mortgage they can qualify for, especially in competitive markets. Mortgage rates absolutely drive this affordability.

When you’re bidding against other buyers, the more they can borrow for a constant monthly payment, the higher the equilibrium price will be.


interesting, so interest rates go down and prices go up then?


Lowering interest rates makes borrowing cheaper, and it has the effect of putting more money to work faster. It’s one of the basic tools of economic policymakers.


Yes, that's the most basic feature of interest rates/discount rates. In fact it's kind of the definition.


This data makes me wonder why taxation doesnt take CoL into account? "Lower" salaries in the Bay Area are upper tier tax brackets.


This is a feature, not a bug. This helps prevent everyone from completely piling on top of desirable places and further driving prices up, as well as effectively subsidizing poorer places cover the remaining 99% of the US.


Why shouldnt people pile onto something that is desirable? Isnt that effectively a market making their decision?


Yes but we also artificially make it worse with the way we build and sell housing.




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