Is Real Estate Actually a Good Investment on Average?
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@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
Only sort of. Everything is an asset and a liability at some point. But houses are far more of a liability than most things. They are truly either depending on the circumstances.
If we want to be precise in finance (like you are when you talk about IT) - Nothing can be "asset and liability at some point".
Some things are assets (money, real estate, investments), and some other thing are liabilities (loans, account receivables....)No, houses are truly both. Because they carry costs whether or not their are used as an asset. They are like a loan in some cases. You have to pay to hold them.
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@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
The prices in the UK for renting are above what you would pay for mortgage payments.
TODAY this is true. Unless that has always been true, then your logic doesn't hold. Looking at a momentary financial situation isn't a good way to invest for a lifetime.
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@JaredBusch said in Is Real Estate Actually a Good Investment on Average?:
Neglected a huge cost of owning a house in the U.S., property taxes. That would bring that $115,000 significantly higher as I currently pay ~$6,000 per year in property taxes. That comes to $120,000 over a 20 year loan.
So now I need to sell this house in 2041 for $463,000 (in 2016 dollars) just to break even.And don't forget the huge sales tax and assumed real estate fees that will be on top of that sale. You tend to lose most of your money on the transaction overhead. That adds up quickly.
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@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
P.S. I bet you will be able to sell it for $463K in 2041. - at least because of inflation.
That's very likely true. But given the current state of real estate, the risk that it isn't true is reasonably high. Rampant inflation tends to favor real estate investing with mortgages because mortgages offer a hedge against high inflation. That's very true. But if inflation stays low for 19 years, and the real estate market corrects or worse, over-corrects, it's really easy to see a real loss on the property. Almost expected given the trends.
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
No, houses are truly both. Because they carry costs whether or not their are used as an asset. They are like a loan in some cases. You have to pay to hold them.
No, houses are assets.
You are talking about costs related to owning a house over a period of time. And that costs are related to specific countries, types of houses...
You can own a house in my country without any significant costs, and these costs, are small fraction of price of rent. -
@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
P.S. I bet you will be able to sell it for $463K in 2041. - at least because of inflation.
That's very likely true. But given the current state of real estate, the risk that it isn't true is reasonably high. Rampant inflation tends to favor real estate investing with mortgages because mortgages offer a hedge against high inflation. That's very true. But if inflation stays low for 19 years, and the real estate market corrects or worse, over-corrects, it's really easy to see a real loss on the property. Almost expected given the trends.
I aggree mostly. I do not like investing in real estate.
But I am watching rise of prices in last 40 years, and I can't say that people are stupid to buy a house/apartment.
In many countries, it shows like a good investment. -
@Mario-Jakovina And there are more and more people on Earth...
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The biggest likely factor in all of this is: flexibility.
Anyone buying a house (at a reasonable deal) that can guarantee that they will never want or need to relocate or move to living in a different house will likely (but anything but surely) benefit from buying if they are going to hold out for 30-50 years in the same house and never need to upsize, downsize, or move. But I honestly have never known anyone that fit that scenario over their lifespans, so they always end up either overbuying and overpaying and/or selling at an inappropriate time to absorb the adjustment.
Most people need a small house when they are young, want something big when they are middle age, and small (or none) when they are old. Buying a house logically doesn't fit that pattern. Owning a house essentially forces you to conform your life to your house, rather than letting your housing work for you.
Whether it is because you have kids, hobbies, pets, change jobs, changing neighbourhoods, changing interests, changing friends, changing weather, career opportunities, marriage or whatever... having the same home rarely is a good fit.
Comparing rental vs. owning costs can't be done based on the same house unless, and again, I've never met any person ever where this would be true, you're that unique person who at every life stage and every career opportunity would always choose the house that you are buying as the example house and would never, neither in youth or old age, ever opt for a different living situation.
My dad is a great example, once I moved away, the pets were gone, and my mom had passed... the house that he bought when I was born and held for 40 years cost so much in taxes that he couldn't afford to live there, it made no sense (it was only a liability.) He didn't make money on the sale, even having held for 40 years, but it was necessary so that he could move to a small, appropriate, modern apartment where he could have someone else mow the grass, pay a small fraction in energy costs, and doesn't need the vehicle to go to the store.
The ability to predict a lifetime of housing isn't something most people can do, and anyone who thinks that they can is likely crazy or just lying to make a fake point. Now you can estimate the cone of uncertainty and within that owning can quite easily make sense. But you have to consider just how much the house not remaining the right fit is over a lifetime when gauging this investment.
That that's not being mentioned shows how far off the evaluation is. What matters most isn't even being considered.
I'll use myself as another example. I had a mortgage of $1600/mo recently. Now I rent a bigger place for $350/mo. In a place that I like more. ANd now I don't need a car, but I needed one before. That's even more savings. Assuming that rent will always equal mortgage just isn't a reasonable assumption.
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@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
@Mario-Jakovina And there are more and more people who on Earth...
True, but less and less in the places all of us are reasonably considering for housing. Europe, Japan, LATAM, China... all starting to shrink or see shrinkage coming. Sure, if you live in India or sub-Saharan Africa and only want to live locally you have to consider the population growth. If you plan to live anywhere else, you have to consider the shrinkage and how much of a housing crash that is expected to create.
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For years China's peak has been predicted to be between 2022 and 2025. This year, probably because of COVID, it's already on us and China is expected to be at its peak right now. Growth has already stopped. So the place that everyone has been pointing to for generations as "the earth just won't stop growing" has stopped. Will it fall? Almost certainly, but that's just a projection. But the peak projections proved to be true, as they did in Europe and Japan. So likely the decline projections will hold true as very little can alter them.
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Global population peak is projects for the early 2060s putting it towards the end of most of our potential real estate investment timelines. So we are likely the very, very last group with enough resources to do "growth based" real estate investments and only if we focus on the poorest of the distant third world where the limited growth remains.
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
The prices in the UK for renting are above what you would pay for mortgage payments.
TODAY this is true. Unless that has always been true, then your logic doesn't hold. Looking at a momentary financial situation isn't a good way to invest for a lifetime.
This is why I ask if this is regional. Its been true in South East UK for a long time. My parents purchased in Greenwich, London, in the early 80s for £38k. They sold in 2014 for £1.1m. Looking at inflation 38k would be £164k in 2014. They were hugely up on the initial purchase ~£960,000. Sure, they had some maintenance, insurance, and other costs, but that is a huge amount.
If they were renting from the 80s until 2014, they would have had zero.
Even now, my place in 2019 was £270,000. Its currently valued at £340,000. In fact, I am going to sell soon and move. But that is £70k addition compared to if I had rented. If I rented, I get £0 from that £70,000. That 70k goes straight in to the pocket of the landlord.
I get it. It may not have always been like this. But where I am in SE UK, mortgages are going for 1,000 and rental for the house next door is £1,200 - £1,400. It just doesn't make sense to rent here right now. If I could rent this place for say £500 - £800 that could make sense. I could take the difference and put it in a fund long term. But, realistically - its just not going to make sense here right now.
Same for Liverpool, Aberdeen, Barcelona? I don't know. That is why I think its regional. If I have to rent for more than it would cost to own, then it makes sense to own here.
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
@JaredBusch said in Is Real Estate Actually a Good Investment on Average?:
Neglected a huge cost of owning a house in the U.S., property taxes. That would bring that $115,000 significantly higher as I currently pay ~$6,000 per year in property taxes. That comes to $120,000 over a 20 year loan.
So now I need to sell this house in 2041 for $463,000 (in 2016 dollars) just to break even.And don't forget the huge sales tax and assumed real estate fees that will be on top of that sale. You tend to lose most of your money on the transaction overhead. That adds up quickly.
Keep in mind this is regional. We do not have the same situation in the UK as the US with selling houses. You only need to pay tax when selling if its a buy-to-let or a second home. If you are selling your home to move to another home, you don't get taxes here for that. You would pay a fee to the selling agent. But, the money is yours.
Buyers have to pay various taxes though.
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@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
@JaredBusch said in Is Real Estate Actually a Good Investment on Average?:
Neglected a huge cost of owning a house in the U.S., property taxes. That would bring that $115,000 significantly higher as I currently pay ~$6,000 per year in property taxes. That comes to $120,000 over a 20 year loan.
So now I need to sell this house in 2041 for $463,000 (in 2016 dollars) just to break even.And don't forget the huge sales tax and assumed real estate fees that will be on top of that sale. You tend to lose most of your money on the transaction overhead. That adds up quickly.
Keep in mind this is regional. We do not have the same situation in the UK as the US with selling houses. You only need to pay tax when selling if its a buy-to-let or a second home. If you are selling your home to move to another home, you don't get taxes here for that. You would pay a fee to the selling agent. But, the money is yours.
Buyers have to pay various taxes though.
In the US we pay MORE taxes if it is a second home or a non-living investment, but we always pay a lot.
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@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
If they were renting from the 80s until 2014, they would have had zero.
This is unlikely to be true. Your point is valid, but it misses a lot of cost of lost opportunity.
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@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
This is why I ask if this is regional.
All real estate is regional. Some regions will have decades of non-stop growth. London perhaps. NYC had this with a century or more of non-stop growth, and then when it crashed, it crashed hard. The losses were epic.
This is where a lot of places are now, the question is, will the growth continue for decades? Years? Months? Is the end here? The end always comes, adjustment always happens. It's just... how long can it wait?
Rome probably had an artificially high market for hundreds of years. But definitely crashed at the end, for example. But that's an extreme case.
In the 1500s, Spain had the highest real estate prices in the world.
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@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
Looking at inflation 38k would be £164k in 2014.
Not quite. Had they put it into an Index Fund, the most common here being the S&P used as a baseline, that 38K in 1982 would have turned into 556.3K in 2014. Not the same gain as your real estate, but a lot more than you are using for comparison.
Now they would have had to have rented during that time, for sure. But not paid for maintenance and such. Or taxes and those kinds of things. And would have been free to move around to look at other housing options or take different jobs.
The problem that arises is we all know someone, or lots of people, who bought, held for decades, and won big time. It happens. But we almost all also know people who tried the same thing and lost big time. For every winner, there has to be a loser.
What happens to all of us is that if you are close to people who've won, you feel like if you take the same gamble the same thing will happen to you. And likewise if you are close to people who've gotten burned, you'll worry that the same thing will happen to you.
In both cases, the emotions are wrong. Math and math alone is the tool to estimate the likely return on investment opportunity. If you are in the right market, never need to move, and get a great deal on that initial home you could score big time. But we all expect London to undergo a staggering crash, too. So your gamble is one of "hot potato"... will you be holding a mortgage when the crash eventually comes, or will you be safely renting? The trick is to own while it is growing and switch to renting before it crashes, and own again after a crash.
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Your housing can be see like stocks and bonds. Stocks are like owning and bonds are like renting (very loosely, mind you.)
When there is market growth you want to be in stocks to ride the rising tide. When there isn't market growth you want to be in bonds to lock your position relative to the tide.
What's different, and key, is that stocks and bonds you can buy or sell anytime. Housing you often have to buy or sell based on life events you rarely control or loosely control. So a house carries a risk of no longer being what is useful to you at a time that it is impractical to sell it.
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
If they were renting from the 80s until 2014, they would have had zero.
This is unlikely to be true. Your point is valid, but it misses a lot of cost of lost opportunity.
Agreed there, for sure. But my point is where I am in the UK renting is more than mortgage. You don't have a monthly disposable difference to invest. You are at a net loss compared to the mortgage. Therefore, you don't have excess money to invest in other vehicles.
Like I said, I get it if rent was far less than mortgage. But where I am, its not.
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@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
You don't have a monthly disposable difference to invest.
The numbers I used were purely based on the initial number, not the much, much larger potential mortgage number. If you had a lower rent and could invest the difference, then renting wins by a staggering amount with little effort.
