Same problem in Australia. Just to define some terms for non-Australian folk:
- Negative gearing: A deduction received on net rental income losses (e.g. I'm a landlord who pays $100 in loan interest, receives $60 in rent, so I claim a tax deduction of $40)
- Capital gains: I buy a house worth $100,000. A few years later I sell it for $260,000. I've made a capital gain of $160,000.
It's inter-generational theft perpetrated by the baby-boomers, aided and abetted by tax policy. These tax breaks also cause of financial system instability and capital mis-allocation. The tax breaks are regressive: the top 30% highest income households receive 62.2% of total negative gearing tax breaks (http://www.macrobusiness.com.au/wp-content/uploads/2015/04/S...).
Personally, I think the main issue is that the distortionary effect of untaxed land rents are greatly amplified by capital gains tax exemptions. That, and housing market supply inelasticities due to restrictive zoning laws, property transaction taxes (i.e. stamp duty), drip fed land releases by local governments etc.
It’s frowned upon to talk about this as a generational thing, but it very much is. Debt is the instrument to have now and pay later, and the debt burden is rampant everywhere. Modern economics has essentially disregarded the role of debt in the economy.[1] All our government institutions seem hell bent on maintaining asset prices at any cost.[2] There’s no sensible plan to even remotely reign in government debt. The world’s stuck at zero percent interest rates, handing out money to the politically connected, and growth is still anemic. Even at low rates people can hardly afford to buy anything since asset prices are so inflated.
I would like to believe we can deal with this in a reasonable fashion, but am skeptical. As can already be seen by the U.S. elections and elsewhere, populism is rearing it’s head on both the left and the right. It feels like a storm is on the horizon and I only hope it doesn’t devolve into war.
Pretty much spot on, on every point. I've been starting to worry about the whole 'war' possibility as well. We might find out about the latter in a couple of weeks when the Saudis and about 10 other allies conduct massive 'training exercises' on the Syrian border.
FYI the Bank of International Settlements is 'the Central Bankers' Bank', and the slides are from a speech given by its 'Head of Monetary and Economic Department'. The last dot point on the 'summary' slide (#2) really jumps out:
The whole situation in Australia is infuriating at the moment. I feel like I'm in a reasonable position for a young professional but I have zero chance of getting any sort of housing security with the way things are now. Between bills and rent at the moment it would take me years to save the amount needed for a deposit, and even then I'd only be able to borrow enough money for a house more than an hour and a half's commute from work each way, which totally defeats the point. I've been willing to forgo a short travel time for a reasonable place to live for years, and it's really starting to get to me. Sadly, remote work is also out of the picture thanks to the sad state of my 'ADSL2' that tops out at 2mbit/s... It's just not a great place to be right now
About the same situation for me in Aus. only I'm living in a rental that's 1-1.5 hrs out. At least I've got NBN. I'd like to blame it all on zoning, debt etc., but I suspect some of it is all that Chinese and other foreign money looking for a safe place offshore.
Still the jobs market beats the pants off of Midwestern U.S. when it comes to software dev.
Does Australia have other nice but lower cost markets that off-set the high cost areas like Sydney or Melbourne? What kind of trade-offs does that require?
With only a few notable exceptions, some dying fast (mining jobs), the cost of living in Australia but not Melbourne or Sydney is any chance at meaningful career advancement. Adelaide, Darwin, Perth, Cairns and to a lesser but still noticeable extent Brisbane offer only small firms. Let's not talk about Hobart.
>noticeable extent Brisbane offer only small firms
Though, for me personally this is brilliant and one of the reasons why I still live in Brisbane. The small firms have some big clients, and salaries are high if you're good at negotiating as there is a massive lack of talent in Brisbane/SEQ!
1. Higher than average wages mean higher than average prices. It's not much different to Melbourne in terms of house prices. Two full time prof incomes is the norm. Cost of living is higher. Quality is lower.
2. Fed gov is pretty backward and hard to get into (I voluntarily left after 5 years and no real prospect of job progression while still effectively taking below market wages at my org, while non-technical unskilled bureaucrats at other departments got paid 10-20k more, and I was politely informed if I wanted to progress, I would have to become non-technical/non-expert). Job cuts in recent years, promotion based on whether the person above you has died/left yet, and a policy of redeployment rather than competitive rehiring means it's really hard for young people.
3. You have to live in Canberra. Don't get me wrong, you really can make a career of it, and if you and your SO want to plop down, live in suburbia, have a child, and not worry about merit/skills/culture/tech/life while carrying a mortgage for 25 years, I can think of worse places to try to pull it off.
Heh, I am also a 5 year Canberra public servant and am pretty close to my breaking point. I've heard it said that Canberra is a good place to settle down and die.
When you're on the outside, you figure all the clever folks in the 'central agencies' have got it figured out; they're tweaking their models and pulling the right policy levers at the right time.
When you get in, the horrible realisation hits you: no-one actually knows what the f* they're doing. There's no plan, no coherent goal, just a bunch of people doing....stuff. It's like you've wandered into the cockpit of a commercial aircraft, only to discover that no-one is flying the plane.
Are you a techie/IT person? It's a criminally under-valued skill-set in the public service.
I never worked in the "IT" streams (backend databases/helpdesk/hardware is kinda what I'm thinking of when I say that), but worked doing analytics for the ABS. Which at least at the time was one of the worse paying agencies in terms of the levels at which tech staff are employed, and by tech staff, i mean, people with specialist skills who actually do work (APS 4 - 6, with a handful of competent techie EL1 - EL2 old timers who are still there mixed in with the incompetent APS 6 - EL 2 rusted-ons). But it was also one with the smartest workforces (if I might say so) and had highly skilled requirements.
I found my time there quite intellectually stimulating at times, and left for a variety of reasons. Part of which was Canberra itself and the public sector attitude.
Part was because they were trying to phase out the higher skilled positions and enforce a mangement-aucracy: only managers get paid high, and we should get rid of EL1/EL2 non-supervisor specialist roles and subsequently they weren't willing to match pay to demand/productivity but had to try to fit everything into the public service predefined heirachy.
And part was a crackdown on social media posts and commentary that was happening at the time.
And part was questions of whether the government would try to claim intellectual property over anything I worked on during a side project, meaning I had some risk of them not letting me do challenging stuff at work any more, but claiming rights over it if i subsequently did it on the side.
Anyway, a whole host of issues. Good luck, hope its managable where you are :)
Oh, and if you aren't in bed with one of the parties or politically savvy, I would advise you against every speaking out on any issue ever. Especially on social media. That's not to say you can't, and many do, but you're taking your employment/job into your own hands if you do...
The trade offs are present even where I'm living now, long commute times and poor infrastructure even for very new areas (built in the last 15 years) make it harder to get anything done. Even so, in this more reasonable area, I'm spending almost 60% of my weekly income on my house and a further 25% on food and bills.
I'm living in western Sydney at the moment, it takes 1:20-1:30 each way to get to my office in north Sydney. I can live with this because the distance means my rent gets me a house with a garage instead of a one bedroom flat in inner sydney. By reasonable I just meant that for the money id say where I am is the best value in terms of house size and area where I live.
This reminds me why I don't live in Sydney. Even Melbourne is better than that. Adelaide, Brisbane, Perth and Canberra all have IT jobs as well where you commute will be a small fraction of that.
I just recently moved to Perth from Sydney. House prices here are much better and there is a decent tech industry here. Not as big as east coast but big enough.
Choose life. Choose a job. Choose a career. Choose a fucking startup in San Francisco that drops vowels out of its name and ends in "io". Choose a NoSQL database that doesn't support joins, and a constantly crashing backend that the founder wrote in a weekend in the trendy web framework of the week. Choose a starter apartment in the Tenderloin that's smaller and smellier than the carboard boxes the homeless live in on Market Street. Choose a fucking "unlimited vacation" plan that means that the first employee who tries to take a vacation gets a permanent one. Choose a facial hair style that makes you look like a Confederate general, and granny glasses. Choose an open plan office with no walls or dividers that's noisier and more distracting than a call center in Bangladesh. Choose your future. Choose life... But why would I want to do a thing like that?
I know how hated negative gearing is in Australia but I believe removing this is solving the wrong problem and may exacerbate the top end owning a greater proportion of real estate over the longer term. It;'s a different view but hear me out.
Once negative gearing is removed, the wealthy can simply debt shift against asset classes that still allow negative gearing. e.g shares. The very wealthy have this asset base to increase debt ratios against share type assets, then buying property for that cash borrowed, effectively leaving them with the same negative geared net benefit just more higher leveraged against shares (and likely debt covenants against the property for collateral). Meanwhile the middle class can never do that so you just knocked them out of the property investment game reducing competition for the wealthy.
Secondly, removing negative gearing doesn't stop property hoarding of all those people that own a bunch of houses debt free.
Ultimately I believe the goal should be to allow people to own a home if they wish, and this group should always have a financial advantage to doing so over someone simply investing/spectating as residential property should not be a speculative asset class.
The best way to solve investment hoarding of residential property is to remove/reduce land tax on owner occupied houses, and place a premium % land tax on investment properties. This will influence people buying both with and without debt. Further it will be easier for government to increase/decrease the % land tax differential to get the ratio right between investment opportunity and not overheating the market. Whilst Removing negative gearing is a one time move.
I'd also look to do the same deal for farmland or we're likely to find rural Australia largely owned by corporate interests over the next couple of generations.
If you remove negative gearing for property investment in isolation, sure, agreed. But I think there are ways via taxation and other policy to effectively nullify any advantages to shifting to assets such as shares.
I mean, the general problem you describe is that money creates means, to create more money. How do you solve this problem now that existing policies have resulted in a skewed distribution of existing money?
Absolutely agree though that owner occupied houses should be massively incentivised compared to investment properties. IMO it's advantageous for society to have most people owning property. I think a good goal would be to have most people both owning property, and not being cash-poor at the same time.
> But I think there are ways via taxation and other policy to effectively nullify any advantages to shifting to assets such as shares.
Sure. But then you making increasing complicated rules when the land tax premium is simple. And generally the more complicated/specific the rule the more new loop holes are made.
> I mean, the general problem you describe is that money creates means, to create more money.
Not at all. The government should encourage people to save, invest and build wealth. I guess what my general problem is allowing unfettered business activity into essential areas of life, above the needs of the masses and especially where demand is inelastic. So I'd be inclined to keep strong regulation or government involvement in areas of; housing, health, education, agriculture (ie food), and telco if it became a problem to ensure this is available to the population at fair market rates not distorted by monopoly (or similar) or speculation.
As an Australian, I came to say the same thing. I have one of the highest income brackets in Australia, when I choose to work. But currently I choose live in China. Renting. Why? All the reasons you mentioned, but also one big one...
Owing to the shorter engagement norm with any given employer, and the constant acceleration of change through technology, we cannot bet against entropy (unemployed, economy has tanked, etc.) as surely we once did. This is particularly the case for singles, who are faced with the entire gambit themselves, whereas traditionally more people were in partnerships which would effectively halve the chances of a particularly 'bad run', as it were.
In short, not only is it unaffordable, but the degree to which one takes ones chances even when committing to a long-term attempt at investment has increased significantly.
In my family, which is probably representative of upper middle class Australia, my brother has taken the conventional route and worked his ass off for most of a decade, and now has the deposit down and a fat mortgage on a shoebox with a view ... in conjunction with his 10-year long-term partner (they are unmarried). I on the other hand have studiously avoided such a commitment, living a year in London, a year in Hollywood, a year in Bangkok, traveling the world, seeing the Arab Spring first hand, spending months on end in 5 star hotels, having a family, and spending the rest of my time here in China, where I play with expensive toys like sailboats. In the end, out net worth is the same.
Most of my friends from youth in Australia, who are generally also higher income bracket people, are still unable to buy property or are locked in seemingly loveless relationships just to get past mortgage go.
My 'uncle' (actually somewhat more distant) recently sold the highest value property ever recorded in Melbourne (Toorak). He is the ex chairman of the board for Rothschild in the region, as well as ex-CEO of famous companies. When I last saw him, he said something is fundamentally broken in Australia, because his kids couldn't afford the downpayment on a house without his help (they have literally had all the opportunities you can pay for, and are not doing badly).
In Europe, the will to own is commonly seen as dissipated, in fact in Italy it has sunk so low as to be replaced by "the will to live away from one's parents", which many, many 30-something can ill-afford.
The world has changed. Travel gives you perspective. Individual countries, policies regardless, may have extreme difficulty changing this new reality. I say cheat. Leave your homeland, enjoy the differences. We are too intelligent to live stuck in a box. Eat someone else's young, or at least get drunk with them.
Social Security in the US is very similar, for many years before I was born politicians elected by my parents and grandparents generation voted to take money from the federal retirement program and pass them ahead as lower taxes for my parents and grandparents. Now they are all standing around with their hands out asking "Where is my retirement? Lets raise taxes to fund it!".
Government makes no money, all the money the government distributes as benefits is taken from the productive slice of society in the form of taxes. There is no magic way you can raise benefits for an aging population without also raising taxes (specially when you are already operating in deficit).
OK, the government can print more money, but this causes inflation, the worst taxation of all.
So, one thing these gen-Y-complains-about-the-boomers screeds always miss is how life was for the boomers at the same age. Home ownership also wasn't huge when the boomers were 20something. I'm a gen-Xer myself, and I always find it amusing when someone just out of tertiary education is complaining that they don't have the accumulated wealth of someone in their 50s, who has been working for the past few decades; that people somehow find it wrong that someone who has barely started their working life somehow doesn't own a string of properties.
Keep in mind also that negative gearing was brought in to try and stimulate house-building. It has overstayed it's purpose, but it wasn't brought in as a 'fuck the young' measure.
No, we're complaining about baby boomers complaining that we just need to "work harder". The cost of houses (relative to inflation/wages) in their 20-30's was multitudes cheaper. Anyone who thinks the young have it nearly as good as baby boomers hasn't done the maths.
> Anyone who thinks the young have it nearly as good as baby boomers hasn't done the maths.
Damn, you guys have a lack of empathy. Life isn't absolutely perfect for you, so whine whine whine.
Medicare?
Gay rights?
Indigenous rights?
Advances in medicine?
Equal rights for gender? Same wage regardless of gender? Women even being able to work at what they want?
End of the WAP and far greater multiculturalism?
Strong public attitude shifts against domestic violence?
Global travel? Cheap travel?
Legal abortions?
Working in airconditioned offices instead of brick factories being the norm?
Cheaper food and clothing? Much cheaper technical doodads. Colour television as standard?
Vastly greater entertainment offerings, and cheaper too? Entertainment on demand?
Food revolution? Coffee revolution? Bars closing later than 6pm?
No conscription?
Safer vehicles?
The bloody internet?
But no, you guys can only see the one issue right now about house pricing. ONE problem, and bam! it's 'worse than the boomers ever had it'. Whine whine whine; it's the only thing the young have to say about the difference between the generations. Show some empathy, and have a go at understanding how it was for the people before you. Then you'll better understand how things got to be that way today - and you'll start to see a lot of the things that you take for granted today are considered luxuries by the boomers, and you'll start to understand why they say "work harder". Whether or not they're right is a different thing, but jeez, the whining.
Instead of just focusing on this one issue and assuming they had it better than you, tell them to shut up and show them that you are already working hard - show them the hours or the effort. But most importantly, try and understand where they're coming from, why they say what they do. Show some damn empathy instead of just complaining that you didn't get dealt a perfect hand.
I see that my comment inspired some emotions. I think I should clarify - I absolutely know that I have it better than baby boomers in almost every way, but I wish they would lay off telling me how housing now is "not that bad". Trust me, I'd rather try and think of a solution than sit on my hands and say "why me!". But I'm Australian, whining is in my blood I guess.
I should apologise, it's not directed at you specifically. I've just been hearing this complaint for several years now and it's really getting on my tits these days. I generally mean everything in that comment, I just could have phrased it a bit less like we're face to face in a pub.
My apologies for that.
And yes, I have a double whammy - I'm Australian, and I'm a sysadmin, so I really like to complain :)
The weird thing, is why have houses become considerably more expensive in AU, the UK, NZ, CA and a few parts of the US while most things have become much better?
The finance thing, on negative gearings and capital gains isn't enough. And why does it do it now when negative gearing has been around in AU since 1915 and there was no negative gearing at all until the 1980s. But housing was much cheaper in the 1970s?
I think part of it is that household income has increased overall - women now work more often and at higher salaries than they used to, and other goods have generally become much cheaper. The leftover part, "housing + disposable income" is a larger proportion of the overall. As a result, people pump more money into the 'housing' bit - individually, it's 'have a bit less disposable income for a bit of a nicer place'. But at a demographic level, it'd put a lot more money into the market.
Totally a gut intuition, not supported by anything in particular. Things outside housing have become cheaper. And most people consume their full income in some way - I just think that housing seems to be taking up the slack from other things being cheaper.
Actually I think the main cause is overly concessional capital gains tax discounts, which are exacerbated by, and amplify, the effects of untaxed land rents. By any conceivable measure, including price to personal income, residential property is about 4-5 times more expensive compared to 15 years ago.
The second graph is especially telling. The value of an investment asset is determined by how much income it is expected to produce in the future. Yet even though rents (i.e. the return to property) stayed flat, the price of the asset quadrupled.
And no, at the time it was brought in it wasn't intended as a 'fuck the young' measure. It was more, 'fuck the poor'. However, a 15 year head start on wealth accumulation and a selfish refusal by the baby-boomers to entertain the idea of fixing this glaring inequity (among many others) means it has since morphed in to 'fuck the young'.
And I don't want to own a string of properties. I just want to own one. I like the idea of owning my own shelter, as a form of insurance against homelessness.
The problem faced by the UK, and many other countries, is not that people are renters, it's that they have diminishing financial security. Swiss people rent more than any other people in Europe (only 35% homeownership rate) but they are relatively more affluent and being a renter does not impair their ability to save and accumulate assets. Spanish people own their home in a large proportion and I'm sure Swiss people wouldn't trade with them.
Let's not conflate the means with the end. The goal is to make people financially secure, homeownership can be a mean to that but it's far from automatic. In fact homeownership can be a consequence of financial security.
Your home is an incredibly illiquid asset, and you are likely to need to liquidate it at the worst time.
I agree that homeownership is not the be all and end all for financial security and Switzerland is a great example.
I think the biggest concern is that many young people today will not enjoy the same standard of living as their parents in many categories such as job security, retirement prospects, child bearing, etc
I attribute their affluence to their direct democracy. When you delegate decision making to a oligarchy, they find ways to help their friends nickel and dime you and make you into serfs that are ever easier to exploit for their personal benefit.
This same pattern plays out in most places that're desirable to live. People want to move somewhere, demand for housing goes up, and prices rise because those people compete against each other for the existing housing stock. Ordinarily, this would be addressed by new construction: build enough housing units to meet the demand, and prices will be reasonable.
But construction is controlled by local governments through zoning law, and local governments are controlled by incumbent landlords who want the prices to skyrocket to unreasonable levels. So young people end up paying huge amounts of money to established landlords, while landlords distort the narrative to blame the problem on anything and everything except the lack of construction.
You could do similarly vague postulations about the effect of foreign buy-in of your local real-estate, or the relation between attractiveness/cost per unit of places where replacing existing buildings with denser housing is not desirable for many reasons (historical city centers spring to mind).
(EDIT: Speaking as someone who appreciates european-style preserved city centers, even though they do come with their own bag of problems)
High prices mean there is a shortage. The solution to shortages is to create more, until there is no longer a shortage. Anything else is lame excuses and class warfare, and it has gotten old.
It's a chicken-egg problem. Desirable places tend have an ecosystem that offers a high quality of life (as agreed upon by the demand-side of the market at the time). Local coffee-shops, a decent arts and music scene, acceptable public transportation and proximity to work (sociologists have conducted studies which find duration of commute is a direct function of quality of life) are pre-existing features which exist within the those high-demand/low-supply areas. You can gentrify and build out (i.e. Williamsburg, Oakland) gradually building those ecosystems out with it, but in high-demand places like NYC and SF which have a fixed area of land, you can only build up a certain amount in certain regions, and only build out a certain radial length before your commute becomes 90 minutes. Zoning laws controlled (as you mentioned) by incumbent lessors/landlords and NIMBY's who currently own property (and don't want a new co-op or apt complex housing to go up because they'll lose their scenic view) contribute to this problem. "Create more" in those spatially limited/legally restricted regions is difficult. You can region shift and build out there (ie. there are tons of homes available in Kansas one could buy for 3 months of an average SV engineer's salary) but it lacks the ecosystem that, say, SF offers. In places like greater London it's an even bigger problem due to even higher density (you can't really build out into the English Channel).
In the town where I live there are a lot of summer homes that are unoccupied in winter. In London, there are obviously a lot of homes that the rich use when they are visiting. This is an extravagance that is affecting the UK as a whole and a second home tax might help a little. I don't think that the above measures go anywhere near far enough though.
To be clear - this is a one-time 3% tax on the purchase price of second/more homes, for both occupation and rental. It's not an annual property tax.
Interestingly, it's waived for corporate landlords with (I think...) at least fifteen properties.
The UK doesn't have property taxes in the way that the US does. There is an annual tax and it is charged on second homes. But it's barely related to market value, so the tax difference between a studio flat (apartment) and a mansion isn't huge.
There are mutterings about a mansion tax on very expensive properties irrespective of occupancy, but they won't come to anything while the Tory party is in power.
Ah, yes, I'm getting stung by this despite my case not being a target one.
Our house is not selling quickly (it needs "neutralizing" and showing as empty, not packed with a family in it) but we have grossly outgrown it. Luckily we can afford two mortgages so are buying the house we want and doing up the "old" one to sell. So because it's "expanding our portfolio", we'll get to pay the extra tax (some £10K+) although supposedly we can reclaim it if we sell within 18 months. So it's annoying but TBH at this rate I just want to move so que sera.. :-) For people on tight budgets, it's going to kill a lot of options though.
1) Some people have high incomes and low liquid capital/savings after paying a deposit. (So could afford to service two mortgages temporarily but don't have the stamp duty to lay down then reclaim.) They may not be poor either, they may simply have a lot of equity in property 1 that isn't liquid.
2) Others may choose to rent out their old property for a year or so until they are in a better position to sell. This does not really make them rich landlords to target with extra tax and they'll get it back anyway, but they may not have the capital as in option 1.
I would think at least #2 would be exactly the type of target this second home tax is aimed at. And those that fall under #1 should probably not move prior to selling the first home.
If you're going to buy a 350K property, you're going to want to have access to 10K in cash anyway. If you're buying a second (even temporarily), even moreso.
As an aside, this is the first time I've ever seen a -1 score on a HN comment. New HN feature? Even my troll posts have only made it to 0 before, and I'm seeing a -1 on something that's just a statement of fact, haha :-D
Florida makes its money primarily from income tax. If it's your primary residence you can get some tax relief. If its your vacation home you pay the full weight. It hasn't made an appreciable difference in housing prices. Lots of foreign owners know they'll have to cough up a few thousand dollars every year out of their millions of dollars in assets.
Florida has no income tax. It has a higher sales tax to compensate (and other tourist-related taxes, such as on hotels and rental cars). Our property taxes are very, very low compared to other states though.
You're correct in that you receive an exemption if the property is your primary residence, but you overstate the burden of property taxes on >$1MM residences (its really not that high).
People purchase a high dollar value home in Florida because there is no limit to the value protected from creditors (except notes tied to the house) in the event you're sued or declare bankruptcy (1/2 acre of land or less within a municipality, 160 acres if you're in an unincorporated area).
Cook County sales tax is 10.25%. If you're in downtown Chicago there is a pretty wide area in which restaurants collect an additional 1% tax. And of course there's still income tax. I wish Florida still counted as "higher" sales taxes.
Everything you mention is true, but that's an artifact of Illinois being fiscally irresponsible. Isn't Gov. Rauner still waging war on unions and still hasn't presented a budget? Priorities man!
The home rule provisions in the Illinois constitution allow Chicago wide leeway in setting its own tax rates, and in keeping the revenue from such taxes. Chicago has mostly itself to blame for its looming bankruptcy, even though the long train of awful, corrupt governors hasn't helped any.
But to be honest, why is everyone focused on buying a house? Does everyone want to own a house, 1.7 kids and a car or where does the need to buy instead of renting come from? Maybe I'm missing something, but the flexibility of renting seems a lot bigger advantage than the small advantages of owning a house.
It's not always about buying into the norm or just having an investment - there are a lot of compelling reasons to want a house.
-More choices in terms of size, acreage, architectural features
-No worry about landlords disapproving of your lifestyle, no drop-ins and inspections, etc. (I knew someone whose landlord let her cat out and it was missing for weeks)
-You can change your property to suit your tastes
-The only pet limits are those imposed by your government
-With a fixed rate mortgage, your monthly costs stay basically the same. Yes, there are repairs, but you can save up for that and postpone many things in a pinch. Except in extreme cases coupled with poor emergency savings, rising property values are unlikely to push you out of your home (and if they do, you get something for it). With rent, your landlord can raise the price and you have no choice but to pay it or move out.
-You can get attached. Some people just like that feeling of having roots, and there's nothing wrong with that preference.
> -No worry about landlords disapproving of your lifestyle, no drop-ins and inspections, etc.
In Germany, "inspections" are flat out illegal except in very strictly regulated circumstances.
> The only pet limits are those imposed by your government
Not true either. Just look at the HOA crap in America. Worse than government, in fact. Laws at least have to act like they've been passed by a democracy and stand up to judicial review, HOA decisions more often than not are pretty much final.
> With a fixed rate mortgage, your monthly costs stay basically the same
Good luck getting a long term fixed rate mortgage.
> With rent, your landlord can raise the price and you have no choice but to pay it or move out
That is what regulation is for: in Germany, there are laws limiting rent raises.
Why do you say that about fixed rate mortgages? Are they not available in the UK? They're readily available in the US.
HOAs can be a pain, but aren't universal. The HOA that covers my home approves exterior changes, collects fees to cover shared property maintenance and insurance, and that's about it. No limits on pets (beyond county rules, mostly dealing with livestock). No limits on interior renovations. Etc.
Even with regulated rent increases, you still end up paying more over time. With a fixed rate mortgage, you pay less per month over time (after inflation). By the time you retire, the house is yours, with only taxes and insurance to be paid.
Yes the 30 year mortgage is a creature of extensive US Government involvement in finance. 30 year mortgages wouldn't' exist if they had to rely on private money for funding.
Most people my parents age purchased a house, waited a few years and it doubled in price. Then they kept doing that until most of them are in £500,000 houses having paid off their mortgage.
So the pressure from them to their kids 'invest in houses' is very big. After all, house prices always go up.
I worked it out for my Uncle and he was making more on his house price going up than in his job (for a couple of years.)
You can't do up a renter. Most people want to 'nest' or have different requirements from a home than the renter has. Got a baby? Need a baby room. Go surfing? Need a surfboard storage room. Want to paint over the mould? Need permission from landlord.
And where I live no one rents out houses. So renters just can't live here.
Not sure how else to fix it. The UK is very wet, houses are stone and cold. Condensation is almost constant and mold pops up most winters. We used to run a dehumidifier and it would collect water, but as soon as you open the front door another houseful of wet air comes in.
don't paint over mold. It's dangerous stuff, get mold removal products or a specialist in; better yet, make the landlord pay for it (which he should, because if his property becomes uninhabitable by mold he's screwed).
> flexibility of renting seems a lot bigger advantage than the small advantages of owning a house
Want to paint a wall? Own a pet? Add a garage? Replace your grass with desert cactus? Build an extension? Knock a hole in the ceiling so you can hang upside down like a bat from the rafters? Build a dirt bike track in your backyard?
Owning is nothing if not flexible.
At the very least, you should agree that describing "flexibility" as a characteristic of renting alone is a incomplete summary of the situation.
Some places it's worth to own. You may be paying the bank for a few years, but the bank isn't setting rules like no smoking, walkthroughs to enforce compliance, no additional tenets, or "non-refundable pet security deposits." If you are going to live in one place you might just be better off throwing the same amount of money at the bank instead of at the landlord.
The flexibility of renting is also the landlord's flexibility, and I could get kicked out of a rental.
Where I live is almost magically optimized -- My spouse and I can both commute to work without driving or parking a car. We're within walking distance of shops. Our kids are guaranteed of attending good schools. It would suck to be displaced from that situation.
Turning things around, why would you want to be a landlord? I'm my own landlord, I collect "imputed rent" from myself, and I have perfect tenants. ;-) Of course being a landlord has some risks, but if I had to move, I'd probably keep my existing house and rent it out.
I think the biggest reason is that in most Western markets buying a home is a fantastic investment. In the Bay Area at least it lead a lot of families to a good pile of generational wealth.
>Maybe I'm missing something, but the flexibility of renting seems a lot bigger advantage than the small advantages of owning a house.
This varies a lot.
I don't actually care to own a house too much but we are going to buy one soon because the rental market in my area has gone in-fucking-sane in the last few years so its ao much cheaper to own in my neighborhood, I'm basically lighting dollar bills on fire every month with how inflated rents are.
Oh, and landlords are so stupid. We are model tenants, both very high income... but we have a cat so we are ineligible to rent 90% of properties, no exceptions.
That is because it is a landlord's market right now.
I don't think governments have any business promoting home ownership though and society shouldn't make you feel like you didn't "make it" until you are strapped with a mortgage you can't afford.
Let's talk moves. Every month, renters play a stressful game of "musical homes": they have to move in a single day. Those that are lucky happen to be moving to a place that has been vacant for some time, and can negotiate a head start to start moving there before their official move-in date.
Owners negotiate possession dates, giving themselves comfortable time zones for moving gradually, and can write clauses into contracts like "we will buy this place, pending the sale of our current place".
Payments. Many people who own have a mortage. But you can shop around for a mortgage independently of the property you're moving into. Mortgages have flexibility. They can be moved to a new property ("portability"). How many landlords offer "skip a payment" feature in the rent?
Depends on factors like vacancy rates in your area.
How do you overlap if the place you have now is month by month, and the place you want to move into isn't available until the 1st of next month? If you give notice, you have to move out the morning of the 1st, unless you pay another month's rent, and only on the 1st can you get keys to the new place.
The only way you will get overlap is if the people move out of the new place sooner and the new landlord lets you start moving in, or else your current landlord doesn't find any new tenants for the next month and nicely agrees to give you a few more days to move out.
When vacancy rates are low, the good places you want are never the ones that are conveniently vacant: what you want, everyone else wants.
It's not unheard of for one group of renters to be moving in simultaneously as another is still moving out.
In Vancouver, Canada things must be quite dim in this regard these days. Check this out:
Ouch! You're not likely going to find a nice, empty, move-in-before-official-date apartment here in this market.
By the way, from the above: "citywide, two-bedroom rents jumped to $1,643 from $1,571 in 2014." I haven't been looking, but the 2014 figure substantially surpasses my current mortgage payment plus property taxes and maintenance fee. Bye bye!
Places I rented never had the period starting on the 1st. Maybe that's a standard somewhere else, but I didn't experience it in the UK. It seems like a nightmare to both the renters and landlords...
Not exactly randomised, just available when they're available. It normally looked like this - my current rent ends on the 10th of March, found a new place to rent and say "here's the deposit, I'd like to move in on the 5th of March, ok?" and everyone's happy.
In a college town like Boston, many (most?) of the student rentals turn over on Sept 1, so Aug 31 and Sept 1 are an utter shitshow, especially when mixed with the inbound collegians, and the inevitable dim bulb who decides to stuff their moving truck under one of the bridges on Storrow or Memorial Drive.
When I was renting, I always tried to get a few days overlap, but in some markets it's very difficult. After all, if I'm moving into my new place on 9/1, you can't very well move into my place a few days early, and vice versa.
Owning a house is a significant life change (not just having a mortgage, that's just a stage along the way to ownership). For one, it significantly cuts down your expenses and opens up your options, giving you a ton of freedom.
Want to take a long time off from work (either a sabbatical or by being between jobs)? Good luck doing that if you have huge monthly expenses. If your expenses are instead hundreds of dollars a month instead of thousands, then it's a lot easier to save up for a 4 month hike of the Appalachian Trail, or a month long trip to explore Europe or Japan or Southeast Asia or to travel around the US or whatever. Or to spend a year concentrating on shifting careers or focusing on a hobby (or turning a hobby into a career) or volunteering or raising your kids. Or, for that matter, just taking full advantage of your vacation time.
Also, owning a home is great for investing. For the first several years not much will change, but then you'll start building equity, after that you'll be well into the "market proof equity" range. But after you've paid off your mortgage you'll likely not be retired, so now you have massive amounts of cash ballooning out your savings and investments.
All of this is predicated on actually paying off that mortgage and building positive equity, which is not always going to be easy and may not be the most reasonable economic choice depending on the housing market and one's income. But if you can manage it then it can have tremendous benefits.
You would probably come out far ahead taking the money you would have paid on the down payment and house maintainance and invested in the stock market.
Tends to be much MUCH better return wise versus homes.
In the US, mortgage interest is tax deductible whereas rent is not. The more you earn (and thus the higher your tax bracket) the more this subsidy is worth.
The other big factor is inflation. Rent will increase every year while your mortgage payments will stay at the same nominal value. Admittedly inflation is much less of a thing now, but in the past it made owning a home hugely more worthwhile.
However, it's much easier for an ordinary person to borrow hundreds of thousands of pounds to invest in the property market than it is to borrow that sort of money to invest in the stock market. The leverage makes up for the lower rate of return.
Better returns directly on the money (given historical averages hold) yes. You also have to consider I'm locking in my monthly housing cost in 2016 prices (until I pay off the mortgage that is, then I merely have to pay property taxes) also I can make improvements to my standard of living that renters can't. If I want a hot tub, I simply install one rather than having to find an apartment with one and paying a massive monthly premium for it. Rent for a decent one bedroom in my area is $1200 a month, my mortgage is $1120 (taxes and insurance included) and that gives me 3 bedrooms and a yard. For me this was the better choice.
If you plan to sell, the calculation is much more complicated. I wouldn't buy a house unless it was one I was keeping (which is what I'm doing now). It's equivalent to a very expensive savings account. What do you get at the end of 30 years of renting? A big fat goose egg.
Rent cost has to be insanely low to compete with owning a house in the long term.
And once you've paid off your mortgage, there's still investment opportunity cost. I agree that owning may be the smart thing to do on balance (though things like stamp duty add too much friction for me), but it isn't a slam dunk.
Which really only benefits the rich. You have to itemize to take advantage of the deduction, and then you're only saving money over and above the standard deduction. Unless you buy a really expensive house, or have lots of other deductions, then you save a couple thousand dollars a year at most. Which isn't peanuts, but shouldn't figure prominently into the decision to buy a home or not.
Always run the numbers. Numbers are the difference between emotion and logic.
>Which isn't peanuts, but shouldn't figure prominently into the decision to buy a home or not.
No but the point is the government literally pays you (maybe not much, but a few $k) to own a house. This is a form of discrimination against renters and causes the marginal guy ("should I buy a house or rent?") to lean towards "buy" for no good economic reason.
That's the shoeshine-boy story: "you can't go wrong with bricks and mortar". Coming at the end of a decades-long rise in leverage it's easy to see why people swallow it without too much examination, but the Great Unwinding is arguably upon us, and you're assuming (and ignoring) a whole bunch of things.
> because payments toward ownership build capital
Money invested outside of property also builds capital. Money not spent on mortgage interest builds capital. Money not spent on maintenance builds capital. Money not spent on property transaction-related costs (surveys, legal fees, Stamp Duty in the UK) builds capital. Owning property when a major housing bubble collapses burns capital faster than your wildest dreams. (Not everywhere has a housing bubble at the moment, but an awful lot of places do.)
Obviously you can argue with a lot of that, but the picture is nowhere near as clear-cut as you're making out.
Don't think about today. Think about 30 years from now. Markets swing up and down. In 30 years you can own your property or you can keep renting somebody else's property and paying their mortgage for them.
If you rent, you're likely paying all those additional fees in addition to a share of the mortgage for the owner. Property owners aren't charities and are under no obligation to take on those costs when they can get somebody else to take them on for them.
Sentences like that are a huge red flag. It cannot be as clear cut as that. You can't ignore price levels when making that kind of blanket statement. Think of it as a reductio ad absurdum: if it's always better to buy, then it's still better to buy when buying costs 25x the annual rent, right? 50x? 100x? 1000x? 1000000x? People really do fall into thinking like this; it's exactly how bubbles happen.
Buying my current place would probably cost about the equivalent of 35 years' rent (before taking into account opportunity costs etc). That's longer than I expect to live. I could just about swing it, but my savings would be gone, I'd suddenly be stressed about losing my job etc. You might think it's still clear-cut, but it's far from obvious to me. If prices weren't completely ridiculous, sure, I'd probably go for it. But they are, and that matters.
Average life expectancy in most of the world is >70. So somebody expecting to die in the next 35 years would have to be over 35, at which age I'd hope they would have learned about basic economics and arithmetic.
This isn't a very difficult discussion since it can be pretty easily rooted in readily available information and pretty basic calculations. There's even on-line calculators that will do the hard work of adding numbers together if people can't be bothered.
The hard realities that lots of people can't seem to get into their noggins are pretty simple:
- housing costs money, are you recouping that money in some way? owners do eventually, renters do not. Period.
- property owners don't run charities, all those things house owners pay for explicitly, renters pay for implicitly, they just don't get the itemized list
- renting a bedroom out of some guy's basement is not the equivalent of buying (or renting) a house, if you think they are, you've entered into a conversation you cannot possibly understand and you need to back slowly away
- owners get many more options to sway the cost of housing into their favor than do renters, in surprisingly common cases, owners can even make money off of their property
It doesn't work quite like that. Here are the economics in my area:
- Buy $1.2M
- Rent $1800 a month. By law rent can only be increased a limited amount every year (and it's never been increased for me).
The landlord is getting 1.8% return on his money before his maintenance expenses, taxes, etc.
The only scenario this makes any sense is interest rates remain at 0% for the next 30 years. Even in this case it's not clear that house prices can keep appreciating at the same rate. Unless we go negative rates.
If I have 1.2M in cash why would I buy this house instead of renting? I'm taking a big risk with a lot of money. It's true that over the last 10-20 years people who have taken this bet came usually ahead (except in some parts of the US) but it's still a huge risk.
Actually in SF, you can have your cake and eat it too. If you live in a rent controlled apartment but can afford to purchase a single family home, you should stay in your rent controlled apartment, buy the house and rent it out at market rate since single family homes are not subject to rent control.
This is not the only post with dodgy numbers, but this one may be specific to London:
- London yields 2-5% https://www.portico.com/yields
- No such rent capping law in London, it's generally expected that rents will increase every year and there's plenty of demand to cover it.
Clearly, people are making the decision to buy the house.
Indeed! If you have $1.2 million in cash, investing it to produce a 5% dividend gets you an income of $60,000 a year before taxes -- while $1800 a month is $21,600 a year. (Hint: Chevron's stock has fallen so far that their dividend, which they haven't lowered, is 5% of their stock price. The chance won't last forever; when the price of oil goes back up, Chevron will go back up with it.)
An income from investments of $60,000 a year isn't enough to live like a king, but it's certainly enough to live like a yeoman, even after taxes. If you buy an expensive house with that money, instead of buying an income stream with it, the best you can hope for is to live like a wage-slave.
It has to be an absolutely bizarre market for a renter to find an equivalent place to rent, then have enough money left over that they can invest in some mythical financial instrument that will earn them all that rent back plus whatever valuation a property owner is earning while their property appreciates in value.
At the end of the mortgage the owner now only has to pay any applicable taxes and the cost of living is more or less "free" (minus maintenance). A renter will rent forever.
Sure you can. Housing units come in all shapes and sizes. In the U.S. at least small places are usually sold as condos and can be as small as any efficiency.
> Perhaps we do live in a bizarre market because I've done exactly what you described.
No, you rented a smaller place than a house, then invested the difference.
I said "equivalent place to rent".
I'll say it one more time and maybe this time your reading comprehension will kick in, unless you live in an absolutely bizarre market, where rents are vastly under mortgage costs, and you can rent an equivalent property (same size, same number of bedrooms, etc.) at those vastly lower rates, you'll never have enough money extra that you would have spent on property ownership that will earn back the money you've set to fire by renting.
For example (since you seem to need a specific one):
A house that costs $600,000 needs slightly more than $2,600/mo to service a 30 year loan. Unless you live in an absolutely bizarre housing market, you will not be able to rent the same house for an amount that is significantly less than that.
But, let's suppose you cut a deal and rent it for $2,000/mo. That leaves you with $600/mo. You need to turn that $600 into $2,000 every month to make up for the loss on rent. I laugh at your 50% return, because now you're only $1,100 a month in the hole each month.
Suppose your landlord is a real cool guy and let's you keep the same $2,000/mo for 30 years (unlikely, but let's suppose he's an idiot), You've now burned about $400,000 and still have to figure out how to cover housing costs until you die.
Your smart friend on the other hand, after 30 years, has $600,000+ in property, no more major housing costs for the rest of his life and spent less than you to get there.
Suppose your friend hits it big, he can refinance after a few years, lower his mortgage payment below your rent (which has probably gone up by then), and can now make 50% gains on his investments and he's still buying his property.
Let's say he hits it really big on his investments, he can just pay the house off early, not pay the balance of the interest, his housing costs go to near zero and now he can invest all the money he'd spend on housing on your 50% return investment plan.
If he's real smart, he'll just buy a second house, and rent it out to you since you'll just pay most of that mortgage for him.
After 30 years he now owns two houses, has made a fortune on your investment plan and you're still paying what are probably much higher housing costs for renters.
Maybe you're a real clever guy and after 30 years you've somehow saved up enough to just buy a house outright and skip all the other costs (minus maintenance), maybe you but the house your renting from your friend. Great, you now own property, and your friend still has his house and the money you paid to buy his second house (now valued well in excess of the $600,000 he paid for it) plus the fortune he earned investing in your stock tips, plus you'll probably have paid him back for all the interest he ever paid on the house via your purchase price.
(okay okay, I'm handwaiving away interest and taxes and such, but the math doesn't change all that much once considered and most competent landlords simply pass along those costs to their tenants).
You're handwaving a lot more that that -- all maintenance and upkeep. Over 30 years you'll likely have to replace all appliances and the roof at least once, which could easily be 100k on a 600k house.
You've also got hundreds a month in day to day maintenance and upkeep, not to mention the taxes and insurance and hoa fees. Oh, and a point of PMI unless you've got 120k in your back pocket for a 20% down payment.
Don't forget 6% commission, closing costs and other taxes on the sale.
Buying doesn't pencil out against renting when the rent is lower than a 30 year mortgage payment.
> Over 30 years you'll likely have to replace all appliances and the roof at least once, which could easily be 100k on a 600k house.
You seem to think that renters don't pay for that and owners operate a housing charity where they foot all the maintenance and other costs while renters just pay some kind of courtesy "I'm occupying your property" fee.
In many 30 year models, given a $500k home up for rent or purchase, the owner comes out somewhere between $1mil-$2mil ahead of the renter in terms of total asset ownership. After which the owner has only maintenance and taxes to pay for living while the renter continues to burn their money at higher and higher rental rates.
During the same 30 year period, the owner will have a diminishing cost of living while the renter will maintain around a steady cost (on average) meaning that not only will the owner come out wealthier than the renter, it will be easier for them to gain that wealth as per inflation.
Renting for less than the mortgage is de facto operating a housing charity or speculating on house price increases. You must rent for a good deal more than the mortgage to cover all the expenses involved.
Run the numbers on your scenario without handwaving and you'll show the homeowner taking a stark loss over the renter.
1% rule is a good place to start. That would estimate the rent would have to be 4400/mo minimum for that 600k property to cashflow. 2600/mo? no way.
It's not even close, owning wins under most existing market scenarios by pretty large and unambiguous margins. There's online calculators available since the math appears to be beyond you.
Best calculator I've found (http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...), given standard values like a 4% mortgage with a 20% downpayment and a 5% investment return rate, shows your scenario break even at best over 30 years -- hardly "large and unambigouous margins".
That's an okay one, it's broken in some ways (assumes you're selling your home after the mortgage is up, or that buying 100% of the home up-front doesn't make any long-term differences. It doesn't figure into standard of living deltas over time or time-value of money.)
So now it's just your reasoning that's broken.
Here's the tl;dr - You need to pay for housing no matter what. Do you buy and rent out your property to somebody who'll pay your mortgage and costs for you? Or do you pay those costs for somebody else? Assuming an equal start, the property owner comes out somewhere around $1-2mil ahead of the renter over 30 years, and has housing in the end.
For those parameters, on a $500k property, you would need to find an equivalent property to rent for $1,491/mo for 30 years for renting to be "better". After which the renter has no housing and the owner has housing into perpetuity.
Good luck finding equivalent housing under $1,491/mo for that kind of property. In most areas in the U.S. at least, an equivalent property rents out for far higher than $1.5k/mo. In the areas I spot checked it was more in the range of $2.5-$3k/mo.
This assumes the owner only ever keeps this particular mortgage, never pays down the principal, never rents any of their rooms out or takes any other cost saving measures that aren't available to the renter.
Meanwhile percentage of income required to live in that property will stay the same for the renter while going down (relatively) for the owner.
If you fiddle with the down payment slider, you'll note that no matter what it's set to, it doesn't make all that much difference in the ratio. Set it to zero since you can finance 100% without too much fuss. Now this sets things as equal, there's no additional money to invest for the renter other than some imaginary delta they would save by renting at rates far below any available realistic market rental rate.
The renter still has to find property to rent about a thousand dollars less than the going rental rate in the market he's in, then still has to find housing at the end of the 30 year period.
If the owner decides to sell at some point along the way, they can convey the stored value of their property into their new property. The renter has simply burned all that money and will rent forever, at increasing nominal costs pegged to inflation or current market forces (whichever is greater).
So that I don't have to repeat myself again, here's an excellent write-up on the topic. Assuming an equal start, the property owner comes out somewhere around $1-2mil a head of the renter over 30 years, and has housing.
"In the areas I spot checked it was more in the range of $2.5-$3k/mo."
Exactly my point. The rent has to be above the mortgage payment by a good deal to make buying pencil out. If, as in your example, the equivalent rent is 25% less than the mortgage payment would be, buying doesn't come out ahead at all, nevermind by "large and unambiguous margins."
Your analysis link makes the same handwavey errors you did in your initial breakdown -- maintenance costs far too low, ignoring other costs involved with homeownership, etc. Interestingly enough, the link has a postscript where he redoes the analysis after people point out those errors with just a couple of those factored in (not all of them) and concludes that the renter would just about make his money back -- and that's with a rent payment about the same as the mortgage payment, not 25% less.
> A house that costs $600,000 needs slightly more than $2,600/mo to service a 30 year loan. Unless you live in an absolutely bizarre housing market, you will not be able to rent the same house for an amount that is significantly less than that.
Even if rents are a bit lower now, that $2600 payment will stay approximately the same. In ten, fifteen years, those initially lower rents will have surpassed the $2600. Moreover, rent continues to be money set on fire. Less and less of that $2600 is burned on interest as time goes on.
Mortgages have ways to reduce the burn. You can choose accelerated payment plans with more frequent, smaller payments. There are ballooning options: pumping some money yearly into the mortgage to pay down principal.
I pay $30 per week in rent and maybe $30 in utility a week, after renting an apartment, and sub-letting with the owner's permission the other rooms. That's like $300 a month.
Your figures are way off.
I started with $5000 in late-2012, and 3.5 years later, I have lower six figures investments. That's enough to buy a house in some parts of the country. So I don't get why I have to wait 30 years to buy a house if I wanted to.
I'm guessing you own property with a mortgage tying you down financially and are trying to justify why you did so.
I can quit today and live for 7 years doing absolutely nothing.
You seem to not understand what "equivalent" means. Renting a room in an apartment is not the equivalent of buying (or renting) a house.
> So I don't get why I have to wait 30 years to buy a house if I wanted to.
Why don't you? Then continue to just live in one bedroom of that house and rent the rest out to make more investment income? It doesn't make sense that you aren't? In fact it sounds pretty stupid that you aren't: in one swoop you secure infinite-term housing and you can get other people to cover all of your cost of living.
> I'm guessing you own property with a mortgage tying you down financially and are trying to justify why you did so.
No not really. There's a bit left, but I can finish paying it out from savings pretty easily. It's not worth it because my interest rate makes borrowing the money essentially "free".
>I can quit today and live for 7 years doing absolutely nothing.
Can you?
Sure, I can liquidate my assets and pretty easily retire for the rest of my life to a few places my wife and I have scouted out in nice parts of the world. It wouldn't be lavish, but it would be fine.
If we're clever, we'll instead probably just rent our current house out to somebody like yourself and use the (rent - maintenance - taxes) to take out a mortgage on the same property we're thinking of buying outright for retirement and just live on the passive income forever. We'll thank the renters for funding our retirement with a gift basket full of cheap wine and summer sausages once a year. The mortgage on the place we're eyeing is not in the U.S. and current runs ~$600/mo. The rent on my house right now would run around $3k-3.5k/mo. In 30 years the rent on my house would run around $6k (keeping with expected inflation). The mortgage on the property we bought would still be $600. Feel free to do the math.
I and my wife expect to live another 40-50 years if that puts the value of property ownership into perspective for you.
Can't buy a small room? Says who? A house could be turned into a strata property. The hallways and bathrooms become common areas, and the bedrooms are free hold. :)
Yes. Moreover, although interest rates fluctuate, that is all they do. Mostly they stay in the single digits. Whereas rent just rises absolutely with time. If you're near the end of, say, a very long 30 year mortgage, chances are that the payments you're making are ridiculously small compared to what people are paying in rent in the same area.
Correct. Assuming everything tracks over the long term with inflation (a historically accurate guess): mortgage payments stay nominally the same or shrink, rent goes up. This means that the cost of living goes down for owners while staying relatively the same for renters.
There is almost no long-term scenario where renting wins over buying in the long-term. It would require a magical multi-decade convergence of oracle-like investment ability and absolutely bizarre and sustained housing market that has no historic precedent anywhere in the world.
The situation is completely insane. For example, Cambridge used to be a relatively affordable place. Now, rents for 1 bed 50 m^2 flats are in the range of, at least £1200 per month (climbing at a rate of ~£100 / year).
It's sad, because it's a good place to do science in, but everything is really expensive. I come from Scandinavia, and things work much better there and are miles ahead in terms of affordability.
Cambridge is an excellent example of what's wrong with the UK housing market at the moment. What we need is a range of homes with enough availability to support a range of buyers. What we're getting is super-expensive flats (often with 7-figure prices or close to them) in the city centre aimed squarely at London commuters, combined with new estates built around the edge of the city. New estates typically have conditions attached to their planning consent about providing a certain amount of so-called affordable housing. In reality the developers seem to be able to build the high-end and most profitable houses first, drip-feed them into the market to maintain high prices, and somehow never quite get around to building and selling all the mid- to low-end property that was supposed to be part of the deal.
Until the government changes planning policy to be realistic, such that it's economically attractive for the big homebuilders to build at about twice the rate they are doing at the moment, or it's economically viable for individuals to buy a plot of land and get their own house built as more commonly happens in continental Europe, or both, no amount of tinkering around the edges is going to do anything particularly useful. Schemes like Help to Buy just pump money into the existing system, without actually generating much new housing stock. Token tax rises on second homes bought for letting out won't do anything either, as they'll just get passed on to the tenants through higher rents. And even if they didn't, many UK homes "earn" more than the people living in them, so taking a 3% hit on stamp duty is basically pocket change to professional landlords.
The bottom line is that what we need is lots more homes, but since any change in policy that brings that about will hurt the values of existing homes and/or the profits of the big homebuilders, it seems unlikely we'll see any meaningful change in this direction as long as the Tories are in power. That said, for a variety of reasons I wouldn't bet on the Tories still wielding much practical power in government by the end of the current five-year administration, and housing is the kind of issue that could come back to bite them at election time if we do see another 3-4 years of huge price rises between now and then.
Yes, it's a sad situation. In Scandinavia I was always renting houses from people that had moved abroad, or switched countries for a while. Here it's always investors, who are feeding the bubble.
Not sure Scandinavia is a good example of effective housing policy. Sweden and Stockholm in particular has one of the most severe current housing bubbles in the world. Housing prices have far outpaced GDP growth for several years.
Huh? I'm currently renting in a 1 bed 50sqm flat in Cambridge for £750/mo (up £25 over the past year). The only thing I can think is that you're only talking about really central properties? But Cambridge isn't that big, it only takes me 15mins to cycle to the centre.
You really shouldn't buy a house with less than 20% down in the US, either. It's just that some banks have looser financing (and higher interest) to allow 15% or 10%, and there are government programs that subsidize first-time home purchases to allow a 3.5% down payment.
FHA 3.5% for the win. I went from paying $1300 in rent for one unit in a duplex to paying $1800 in mortgage/insurance/taxes for the entire duplex, and I get to charge the $1300 for the other unit. It's a no-brainer.
My buddies in middle-America were capitalizing heavily off of both the FHA and the incredibly low interest rates circa 2011 (thanks artificially depressing the dollar, Fed!). They started out with a handsome amount of capital and borrowed against their 401(k) [I don't recommend this] to speculate on the rise of land [I also don't recommend this], threw down 20% to avoid PMI [I do recommend this, if you can afford it] and started renting out properties. They essentially speculated on gentrification, got lucky, and pay a management company to maintain their properties so they don't even deal with their tenants. Their bi-monthly involvement is limited to reconciling their accounts for 20 minutes and a five minute phone-call to resolve any potential outstanding issues with the management company.
> Compare to London, where the average deposit needed to buy a first home is £91,000 ($130,000) -- 25% of total price
The deposit required is more like 5-10%. I think a 25% deposit is pretty rare for a first time buyer. Of course this still means you need the income to afford the huge mortgage.
Are you getting confused with the average deposit used by purchasers?
I'd say the majority of the people renting in Cambridge are from academia, and they cannot afford decent flats. This is quite absurd, because there's plenty of space. Cambridgshire is all marshland and low-value farmland.
I was referring to the Copenhagen area in particular.
It's a nice balance between salaries and house prices. Malmö is even better. Since housing is usually taking the majority of your income, this has a huge impact on the quality of life.
As a postdoc, you can easily buy a house in Copenhagen. Or you can rent, at it's barely 1/3 of your salary. In Cambridge, an equivalent flat is more like 1/2-3/4 of your salary.
Also the rental market in the UK is really wacky with regards to tenant protection.
Malmö is cheaper because you get to "live" in Malmö, which I could never recommend to anyone, especially jewish or gay.
Yeah but at least the UK got a rental market, think about it.
Stockholms market is scattered and hard to come by without connections or help. But not only that, most people who rent out their apartments in Sweden will either go through the Co-op board and only get a year, or do it under the table, both situations adds a lot of insecurity to the tenant.
In Singapore, there is a broad market from super cheap and shitty, to super expensive and amazing.
Having a broad, free market helps consumers a lot more than having it closed down for a queue-system.
Sure, I can get a closet space with no air condition and no kitchen for a 1/5, or I can pay 3/5 and get a condo, at least there is a choice.
I can't speak for rest of Scandinavia, but I know in Stockholm that choice doesn't exist. You're forced to buy.
I don't think renting is better in CPH than in Stockholm. Right now I'm paying 10.000DKK (1500USD) for a one bedroom apartment, not in the center (NV). It was the only option that didn't involve any shady stuff like no-contract or not being able to register myself in the apartment. Most of my friends live doing one of those, or renting a room for around 5.000DKK (750USD).
That's a lot. I was renting in the northern suburbs (Holte-Virum-Birkerød) and I got very nice 2 beds for 5000-7000 DKK with excellent landlords. UK on the other hand...
hear hear. the UK is one of the few places in the world that a non-tax resident can buy land freehold. That means the owner pays no tax on gains and no tax on rental income (There's been talk of taxing them but how exactly?).
Here in London, all these new shiny builds with glass and metal balconies are selling (ok about 60%) to rich people overseas who are not UK taxpayers. They like new builds because they can buy off plan without ever seeing the actual property.
This is false. Rents have always been taxable in the UK, just like any other business income generated in the UK, whether or not owned by a non-resident.
Capital gains on property for non-residents were indeed not taxed until 2014, but that loophole is now closed.
Let's say I'm Chinese and do not set foot in the UK and you are my tenant. You pay money into my bank account. I do not file a UK tax return. how exactly am i taxed on this rent.
Capital gains do not apply to companies. I own the property through a company, whence no tax.
Could you not levy a tax, and if after x number of years of no tax income, have the state repossess? You could have the tax information as a required document for purchasing land.
That sounds suspiciously like a political way of blaming some other group that no voter will be a member of so it's pretty safe for politicians.
The fundamental problem is not enough houses, not that UK people aren't xenophobic enough. Just allow developers to build more and prices will come down.
No that's not it at all. The fundamental problem is that everyone wants to live in the same few square miles of London, exacerbated by the fact that London property is seen as the new Swiss bank account by ultra-rich foreign investors from let us say less than stable regimes that might simply annex their wealth one day.
It's not inevitable but it would require some major changes in policy.
Not sure if it's planned that way but concentrating property is one way for powerful to keep their power in the future. It's pretty safe to assume that in some decades you can have a robot that will be able to provide with your basic needs for free and live autonomously and not have to buy many things anymore. The way to get around this for the powerful is to own the land and intellectual property so people will have to pay rent (tribute?) forever.
This sounds a little extreme but I honestly thinks it's where things are going without major changes.
>>The super wealthy buying property from all over the world literally for rent seeking?
The super wealthy have been buying investment instruments for time immemorial.
>>Is this desirable? Inevitable?
The least of evils. Think of yourself as a "temporarily embarrassed millionaire" not as a exploited serf under a feudal, everything will suddenly makes a lot of sense.
You're probably thinking of the City of London, which is an area inside London that has it's own government and special privileges apart from the rest of what we think of as London.
So there are 7,000 residents. Oops, that's not zero. The majority of votes do go to businesses though, and it is an artifact of its long existence, not a new thing.
The votes go to employees of businesses, rather than to businesses. I had one for a while. Left that job and moved across the border into Shoreditch before i could use it, though.
It's a housing bubble that's going to end the same way all housing bubbles end. Much of this "wealth" is just paper wealth that's going to disappear over the course of a few months.
The UK has few rights for tenants, and those it does have are frequently ignored. If you stick up for your rights you will find yourself homeless.
I am not exaggerating, there is no register of landlords, there are a lot of bad amateur landlords who bought into cheap "buy to let" mortgages. Agents don't stick up for tenants.
Here in England I have lost deposit money because of blu-tacking a poster to a wall. (That was pre TPS but still).
It is a culture where it is stacked against the renter. You don't feel like it is your home. And in many cases it isn't, the problem isn't just about renting,it is also about house sharing.
Lots of what were two bed houses are now 2 separate 2 bed flats (Convert downstairs room and basement to bedrooms, squeeze in extra kitchenette upstairs). The quality of housing is decreasing to match demand.
And even where that hasn't happened you'll find multi - tenancy is common.
Local economic conditions (incomes and rising rents especially) and renter laws aren't equal everywhere. Here in NYC market rate renters can expect 4-10% rent increases a year and can be tossed out for almost any reason whatsoever. In SF they have the Ellis Act. My understanding is that in places like Germany, where renting is common, things are very different (renters are some kind of partial owners of the places they rent, and enjoy much greater protections than in other places.)
In the most difficult US markets, ownership is a lifeboat on a wild economic sea if you can come up with a downpayment or, even better, can buy outright, as rents tend to grow much more slowly than property taxes. This is doubly true if you own an apartment rather than a house and can just pay a maintenance fee rather than dealing with paying for it yourself.
The German renting market is really interesting. Some reasons contributing to such a low owner rate include, 1: favorable laws in rent control - preventing more than 15% over 3 years (~4% per annum), negating the need to buy to hedge against the risk of huge rent increases[1], 2: the tax policy is structured such that home-owners do not get to deduct things like mortgage interest payments, unlike in the US and Spain, 3: the German banks are inherently risk-adverse and as such have historically been pretty stringent when it comes to lending, 4: in tandem with (3) , there are no government subsidies or programs like the FHA which offers banks the ability to offer mortgages to people with only 3% down.
There is an old joke - person A says "I wish I had enough money to buy an elephant." Person B replies "What would you do with an elephant?" Person A says "I wouldn't buy one, I just wish I had enough money to."
Before I wrote this comment I saw that less than a third of families in California can afford to buy a home. Perhaps for an individual family we could make the argument that they are somehow better off not buying, but I'm not sure it's a good thing that very few of them actually could if they wanted to.
Firstly there seems an inherent bias that young people want to be homeowners and not being a homeowner is bad for people. My first reaction to "Under-35s in the UK face becoming permanent renters, warns thinktank" is, "So what?". We are not talking about people being homeless.
Also I think lots of these reports never make any mention of demographic changes over time. The 35 year old of 1998 is likely to be a very different person to the 35 years of 2026.
In the 18 years since 1998 we have seen university attendance increase from 25% to 33%. We have seen the cost of university education increase, so most graduates now carry more debt. I suspect we've seen an increase in the average age of marriage. Probably also a reduction in marriage and number of people that are having children by 35.
When I graduated from college you'd see exactly this sort of article in the paper every so often. And indeed, at the time the 20% downpayment for a house was going up faster than I could save money. And then the housing market collapsed and I bought a house.
Over long periods of time housing only goes up about as fast as inflation. Younger people in the UK are not facing "becoming permanent renters". They're just facing a bubble, for the time being, that will produce lots of bargain prices when it pops.
That's not true, certainly not in the south east. The bubble never burst here, house prices have been growing faster than inflation for decades.
Politically it is now impossible to let it burst, so all sorts of schemes are made up to keep it going.
Edit to add: a typical 2 bedroom terrace or end of terrace now costs between £350-500k ($500-700k) here. These are not large homes, don't have luxurious gardens, don't have a garage at all. This isn't even London, this is just outside London in the south east. And wages haven't kept up.
Imagine San Francisco house prices without San Francisco wages, that's why people are talking about a generation of renters.
> Imagine San Francisco house prices without San Francisco wages, that's why people are talking about a generation of renters.
As someone who lives in both cities, I can assure you that San Francisco is measurably worse. Before I moved here from London I didn't think that was possible.
Directly comparing the advertised prices of housing in London and SF is misleading, because houses in SF in most cases are being sold above their sticker price, whereas that's still very uncommon in London. It is not unheard of to pay a 30% premium on the price the seller has put the house on for in SF. For renters London also isn't nearly as bad: for comparison - an average one bed rent in SF is $3,500 per month [1], whereas in London even in central areas like Bloomsbury it's $2,500 per month (£1700).
This is not to detract from your argument, and SF also has a "generation rent" problem (as does the rest of the bay area). But London's market is more comparable to New York in terms of prices and pressures - both cities have a housing crisis, but one that is at least partly tempered by more supply and a far superior transport network than SF. SF is in an insane world of its own.
And now compare average software developer salaries between London and San Francisco, you'll find the SF one about 50% more.
I'm not sayin that SF, or NY doesn't have a housing crisis, they have their own problems too. But the problem or rather the solutions required are different in each case.
I don't think it is OK to hand wave it away with "it is OK just buy the crash" as someone further up did.
This concisely points out exactly why we never recovered from the great recession of our time. It is politically beneficial to obey the rich paying for their campaigns, and placate the voters, then to deliver the harsh correction for bad behavior that a controlled lancing of the bubble would involve.
No, that won't do it. As long as people think the market is still going up, when old people "start dropping off the perch" their property will be be snapped up at a premium.
The price of property can't keep going up indefinitely. When it stops going up, speculators will start to dump their stock, and that will turn into a panic.
WTF!!? & here I thought Toronto was bad. I'm assuming rents don't get any higher than this right? You must earn a lot although I'm certain the rent erodes a significant amount of your take home, after tax pay.
But central, rather than inner. Of course it's eyewateringly expensive to live in central London. The way London works is that people live in the bits outside the centre, and commute in for work and leisure. People who live in the centre are a bit of an anomaly.
My answer to London was to find a cheap, multi-bedroom flat and sublet the rest. After that I wound up paying about £300/week, or under half what you pay. 2009 Whitechapel, near Brick Lane.
I feel like I'm burning money renting in London right now.
I tried renting somewhere really cheap to save money for a deposit but it made me miserable. Now I spend a lot more and only have to share with one person but I can't save.
The funnies thing is the CPI (inflation index). The weight it assigns to housing/rent is about the same as the weight for "restaurants and hotels", and lower than "recreation and culture" and "transportation". While this might be true for the houseowners and for non-Londoners, for me rent represents about half (!) of my monthly expenditures. Renting "cheap" doesn't really help - even moving a few zones out of the center, rents would for 10-20% at most.
Looking at the CPI list now, it appears that the weighting of housing is broken.
It seems that rent is included whilst mortgage interest and imputed interest on equity is not.
The split in the UK is very roughly 33% rental, 33% owned outright, 33% owner occupied.
What that means is that essentially all the other items have roughly triple the weighting that they should - in a rough sense it ends up showing the housing costs of 1/3 of the population, whilst showing all other consumption of 100% of the population.
Don't want to rub salt of people's wounds here, but remember when you guys screamed on the top of your voices that real estate was a bad instrument. This is basically what happens when you follow that line of thinking, when your demands start popping up later in life you realize you could have easily made those investments a few years back, but you didn't. And may be even watch people who made far lesser than you in salary having better house than you.
May be if these under-35's had saved some money instead of blowing it all on "enjoying their lives", "travelling the world" and on those new iPhone models every year they would have a decent sum for a downpayment somewhere in the out skirts.
Also note that most landlords themselves probably went through hell to build themselves this portfolio for their rainy days.
If you think you can't buy yourself a home, you need to drastically rethink your priorities. Because like it or not, anytime is the best time for these things. Its about timing, location and money. Earlier you buy, the better place and lesser price you get to buy. For the perspective of the next decade now is the right time.
You an tax the rich as much as you won't, no matter anywhere in the world. Most of these people will never come to own a home. The true reason why these people can't afford a home is not because its expensive, but because they refuse to commit themselves to any kind of a long struggle, that doesn't interfere with the privileges they think they are entitled too.
Hmmm... biggest shortage of housing is in the London area, I guess?
This is due to people parking their funds in real estate because interest rates anywhere in the stock market are basically zero when compared to real estate, and because transferring ownership of an estate holding company is a pretty nice way to launder/transfer money.
I'd propose a law that makes it illegal for an estate owner in housing-crisis areas to leave a home un-occupied for over 4 months a year; if this is not the case the state is allowed to choose an arbitrary person and let him rent the apartment at a rate similar to the non-luxury-housing market.
In Germany, in some areas this law is already in effect (e.g. http://www.hamburg.de/contentblob/3999156/data/hamburgisches...). The legal foundation for these laws is in the Grundgesetz: "Eigentum verpflichtet. Sein Gebrauch soll zugleich dem Wohle der Allgemeinheit dienen.", which basically means that if you have the privilege of owning something, you have to contribute to common wealth with it.
How do you determine that someone has occupied the home before 4 months? How long should the length of the stay be? If some ridiculously rich person has a bunch of houses, this would mean they just need to visit each house once every 4 months, or send someone to do it, which for the people lucky enough to own a home in London I can't imagine being difficult.
Reading grandparent post, sure, you could, but if it was in a housing crisis area, the government would be empowered to appropriate it for the purpose of renting it out at rates comparable to non-luxury housing (presumably, with you receiving the proceeds of the rent.)
Clearly, such a rule would need an objective definition of "housing crisis", but the temporary seizure of property with compensation this proposes is actually fairly mild compared to the way critical resources are generally treated in times of genuine crisis.
Again, reading the post with the proposal, the government's authority to rent the property out exists only within the geographic and temporal extent of a "housing crisis".
So, again, the concrete definition of the crisis would be critical.
Right. Let's give government the right to check on people, see where they live, where they sleep, for how long. Hell, let's throw "with whom" in there as well, why not, honest people have nothing to hide.
And if the secret police don't like something, they'll take over your property and put "an arbitrary person" in there. Brilliant.
mschuster91, I don't know if this is really acceptable in Germany, but I downvoted your post because I find the proposition in(s)ane and harmful.
Well one issue that has been pointed out by people who work in this area is the program Help to Buy. Many have claimed that this artificially raised prices of homes because of the guarantees and money built in the system.
The solution as with Vancouver is to ease the cost of building new homes and possibly using targeted property tax relief of those you are seeking to encourage into home ownership.
One other issue is apparently you can actually get a discount on taxation on your other homes if they are furnished because there seems to be some relation to the number of days it is occupied; unless I am just reading that wrong. If so this one area that needs adjusting, reducing tax because you don't actually spend time in the home but it otherwise is unavailable to others should not incur a benefit and if anything encourages buying up second and third homes
Perhaps true of fashionable London, but hey, that's supply and demand. Tax the Russians and Chinese more, and those addresses would come down in price.
with people in the comments claiming a nursery place is 1000 pounds a month which sounds right based on what friends tell me, compared to out capped ~£250 a month in Norway where everyone screams about high taxation but where the cost of living and quality of life are (probably) much higher.
It is an average of £28,000 per year to send two children to nursery in London [0]. In stark contrast, the cheapest house in central Bradford was £29,000 [1], and last year 120 homes in Liverpool were sold (with conditions attached) for £1 each [2].
I live in Aberdeen, and you can definitely add Aberdeen and the surrouding -shire to that list. With the ongoing and very deep cutbacks happening in the oil industry, the prices have stabilised a little, but don't appear to have dropped any.
From speaking with friends and acquaintances with whom I went to Uni, it appears there's a pretty predictable pattern to housing costs: anywhere there's reasonably plentiful work, prices are very high. It's cheap to live in Stoke-on-Trent or Ayr, but good luck getting a job that pays much more than minimum, if you can find even that.
Presumably because no one wants to live in Dumfries and Galloway. That's not meant to be a slant against the place -- I don't think I've ever been there -- but the price will drop if there's a decrease in demand with flat/rising supply.
Whilst other areas are expensive London it totally in a league of it's own.
Edinburgh (most expensive part of scotland) average property price £234k. London, average property price £642k
Also people in Scotland and areas like Manchester can more easily get on the property ladder by buying in cheaper nearby areas. for Edinburgh places like West Lothian (average price £164K) make a much easier starting point.
Heck with improving internet access, if you can do your job remotely the western isles are nice and cheap (average price around £100k)
For me the UKs property market is heavily split between London and the south east and "the rest of the country", a lot of the stories about expensive UK property don't seem to cover those aspects.
Prices in many parts of the UK have been more or less static since 2008, and in some cities they've actually fallen.
The hot spots are all "capital" cities for their catchment areas.
>if you can do your job remotely the western isles are nice and cheap
I've considered this, but I decided that moving to Europe is a better idea, for cultural and political reasons.
Also, it doesn't rain nearly as much; climate change is going to flood/rot a lot of the UK's housing stock and infrastructure over the next few decades, and I'd rather be somewhere hotter and drier.
It's not just supply and demand. The government is heavily subsidising house purchasing. This essentially means that I'm paying (through high taxes) for homes that I don't live, for people who can't afford them.
> The government is heavily subsidising house purchasing... I'm paying (through high taxes) for homes that I don't live
How so? Taxes on property purchases, especially in London, generate significant income for the government - according to http://www.standard.co.uk/news/london/stamp-duty-burden-on-l..., London house buyers paid more than £3 billion in stamp duty in 2014, with one London borough (Westminster) contributing more than Scotland, Wales and Northern Ireland put together, and the most expensive London property (in Belgravia) raising more than the whole of Liverpool.
Not really, as I wrote above, it's using my money to pay for other people's homes. It's also increasing the demand for housing, which in turn pushes the prices higher, encouraging speculators and helping them.
Why will taxing them mean they make more money? And also why is that a problem? Even if it doesn't improve the housing situation it makes sense to maximise tax income from rich foreign investors.
Disclaimer: I don't know anything about anything and it probably isn't that simple.
I may get downvoted into oblivion, but i will still voice it out.
I read the US exported their Inflation of QE to other countries. And then gets the Chinese to spend buying property all around the world.
Most government are reluctant to act due to worry of popping another housing market like US 2008.
But it is good finally some* are taking notice, given we have 3 HN article the same week on property pricing. But it is likely too late. Those who are now 25 may have some hope to have some things sorted in their prime years. Those who are in their 30s like me will likely have to battle hard just for survival.
For those who don't know where this is going, take a look at Vancouver, Sydney, London, or a place call Hong Kong where many people could only afford to live in 10m2 "flat".
I maintain that unless there is social housing program in place to guarantee every citizen a place for basic living, housing should NOT be an investment options or should at least be heavily taxed / regulated.
HK's answer, post-bubble, was apparently nearly free loans. Now that it's losing business to Shanghai and Guangzhou, and being flooded by mainlanders, we'll see how that goes ...
In certain parts of the UK people are rejecting the norm and opting to live in boats, caravans, yurts and the like. Many of these people live outside the standard economy and work on a semi-barter system, trading skills, and some are artists who are working with modern systems like Etsy and the internet at large to sell their wares. I think that this is going to become increasingly common over time but it does tend to be younger people doing this; it begs the question of what these people are going to do in their old age when their lifestyle choices means that their savings (and pension contributions) are minimal.
In London, cheeky people used to live on canal boats, but even that has become expensive. There are a few great documentaries out there on living small, though mostly US-focused, and mostly "avoid housing regulations by living in a trailer-mounted mini house and calling it a vehicle", there are some interesting exceptions.
Good catch. (It's better to email hn@ycombinator.com, though, because it's pretty random which of these comments we see.) We changed the URL from http://www.vice.com/en_uk/read/hangover-news-observer-propos... to the Guardian article it points to, which seems marginally more substantive than the Telegraph one.
Submitters: when posting, please follow the HN rules, which ask: Please submit the original source. If a post reports on something found on another site, submit the latter. This does take a little diligence, but only a little, and the benefit to site quality is high.
I am not in the 1% by either the income or wealth metrics, and I can assure you that a drop in housing prices would do nothing but hurt my family's net worth.
Well I did say net worth, not cash flow or credit or anything like that. But a sudden drop in the value of your primary residence can cause issues, including:
- Difficulty obtaining a loan if you wish to use the home as collateral (Second mortgage or HELOC)
- Inability to sell the house if you owe more than the home is worth
If you have no interest or need to move and have no need to use your home's equity to obtain capital, it's just a number in a spreadsheet and is largely unimportant.
- Negative gearing: A deduction received on net rental income losses (e.g. I'm a landlord who pays $100 in loan interest, receives $60 in rent, so I claim a tax deduction of $40)
- Capital gains: I buy a house worth $100,000. A few years later I sell it for $260,000. I've made a capital gain of $160,000.
The under 30s age group receive:
- 1% of total negative gearing tax benefits, whereas the 50+ age group receive 55% (http://www.macrobusiness.com.au/wp-content/uploads/2016/02/S...)
- 2% of capital gains tax benefits, whereas the 50+ age group receives 76% (http://www.macrobusiness.com.au/wp-content/uploads/2016/02/S...)
It's inter-generational theft perpetrated by the baby-boomers, aided and abetted by tax policy. These tax breaks also cause of financial system instability and capital mis-allocation. The tax breaks are regressive: the top 30% highest income households receive 62.2% of total negative gearing tax breaks (http://www.macrobusiness.com.au/wp-content/uploads/2015/04/S...).
Personally, I think the main issue is that the distortionary effect of untaxed land rents are greatly amplified by capital gains tax exemptions. That, and housing market supply inelasticities due to restrictive zoning laws, property transaction taxes (i.e. stamp duty), drip fed land releases by local governments etc.
Eat the young!