mea culpa / povera me
TRANSCRIPT
Mea Culpa / Povera Me
I Sold my own home in 2012
I I thought it was the top of a cycleI Turned out a little right short run
I Intermediate run to date very wrong
I Tried to hedge Vancouver prices with Canadian stocksI Even “global” equities
I By arbitrage believed U.S. housing couldn’t be underpriced
I I still rationalize my failure with no arbitrage
I So take today’s talk with salt
Should I (continue to) own a home in Vancouver?
1. It’s ok not to own
2. There are good reasons to ownI Tax?I Contracting frictionsI Lifecycle consumption smoothing?
3. Supply Elasticity and Housing Rents and PricesI TheoryI Reality
4. Owning a home is risky
5. Owning a home is insurance
It’s ok not to own
I “I’m sick of paying the landlord . . .
I . . . I’d rather pay myself instead”I No.
I Efficient, no tax, riskless market:
Rent + Capital Gain - Expenses︸ ︷︷ ︸Return to owning
= interest rate× price︸ ︷︷ ︸Opportunity cost of capital
Mortgage payments
I PMT = interest + amortizationI Constant payment is common
I Subject to interest adjustmentI Early payments are mostly interestI Subsequent payments are mostly amortization
I Amortization is equivalent to buying a bond, so not a true cost
I But Equity in the home could be earning interest
I Interest is a cost much like rent
Owning and taxes
I Owners pay:I Property tax (with a bit of a credit)I Sometimes get credits for investmentI Rarely capital gains
I Landlords pay:I Property taxesI Income tax on rent less:
I “Depreciation”I Mortgage interestI Property taxesI Maintenance
I Capital gains when and if realizedI Net liability may be restricted to be positive
I Depending on scenario, owners pay lessI Frightening fact (corrected: “enlightening fact”):
I Rent to price ratio lower in Vancouver than SeattleI Yet renting is relatively tax-friendly in Canada
I No mortgage interest deduction here
Owning vs renting: contracting frictions
I Landlord Releasing costsI Landlord worries you will moveI Has to charge you for moving soonI Makes you want to move
I Your moving costsI You worry apartment won’t be available in the future
I MaintenanceI Investment not your benefitI So you underinvestI Damage not your problemI So landlord charges accordinglyI Typically see “1 building 1 owner”I So backyard, detatched home unlikely rental
I MortgagesI Owning involves “schmuck insurance”, too.I Currently recently a giant problem in the USI But landlords can default, too. . .
Owning vs renting: lifecycle considerations
I Owning requires a downpayment ⇒ kids shouldn’t rent
I Selling a home is costly ⇒ kids and movers shouldn’t rent
Is it cheaper to own or rent?
I Rent versus “user cost”I MortgageI Opportunity cost of equityI Property taxI MaintenanceI InsuranceI . . .I Less appreciation
I So we need to know appreciation rate
How much appreciation to break even?
I 4 BR North Shore homeI Rent: 35000 55000/year ⇒ 3.2% 3%.I Price: 1.1M 1.8M (?)I Mortgage + equity return: ≈ 3%.I Maintenance: 10k ≈ 1 .5%I Insurance, taxes, etc: 6k ≈ .3%I Selling costs: 4%/10 ≈ .4%I Total owner: 4.2%I Appreciation rate to break even ≈ 1.7 1.2%
I What’s missing?I Will 3% interest rates persist?I Will prices appreciate 1.7%?I Related questions!I Yield curve says “no” yesI History says “no” not sure
I Need a lot more than 1.2% on a detached home in KitsI Price double, rent similar, upzoning?
How much appreciation is reasonable?
I Giant real historical price appreciation in VancouverI Subject to this is the data we have (CMHC?)
I Pink: priceI Blue: rent
1976.4 1980.4 1984.4 1988.4 1992.4 1996.4 2000.4 2004.4 2008.4 - 0
100.00
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800.00
Phoenix: when prices rise, they will crashPlotted: lat and lon of Starbucks in Phoenix
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−112.4 −112.2 −112.0 −111.8 −111.6
32.8
33.0
33.2
33.4
33.6
33.8
Phoenix
a$lon[a$cbsa == 38060]
a$la
t[a$c
bsa
==
380
60]
Dallas: when prices rise, they will crashAs in the 80s
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−97.2 −97.0 −96.8 −96.6 −96.4 −96.2
32.4
32.6
32.8
33.0
33.2
Dallas
a$lon[a$cbsa == 19124]
a$la
t[a$c
bsa
==
191
24]
New York: when prices rise, will they crash?A bit in the late 80s, not much this time around
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−74.1 −74.0 −73.9 −73.8 −73.7
40.6
40.8
41.0
41.2
41.4
New York
a$lon[a$cbsa == 35644]
a$la
t[a$c
bsa
==
356
44]
Vancouver is more like New York and will never be cheap
We know that “bubbles” are punished in “Flatland”To a lesser extent in the “zoned zone?”
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1.0 1.2 1.4 1.6
1.0
1.2
1.4
1.6
1.8
2.0
Quantity growth in 1980s
Pric
e gr
owth
in 1
980s
China (This is all from 2012! “trump.jpg” diff)
I Some demand in Vancouver is driven by Chinese wealth
I In the long run, nicest city in China is good
I Short run risks of bubble collapse in China
I Reasonable people disagree about magnitude of the risk
Returning to rational pricing
Rent - Expenses + Capital Gain
Price= r
net dividend rate = r − g
I We don’t know what g is
I When r is very small, easy to believe very high prices
I Hence I can’t say if we’re in a bubble or not
I Many are willing to declare bubble
I Easy to see downside risks
Owning a home is risky
I I don’t know value of my home today within 20% 50%
I Over 10 years range of outcomes huge
I Housing is most of most of our wealth
I We might want a high return to compensate for riskI Luckily, our labor income doesn’t move with housing . . .
I e.g. investment banker in New YorkI Oil people in Texas
I But our retirement income likely does
Owning a home is insurance
I Bad if prices fall, but there are optionsI Trade upI Don’t sell
I Moving is a hassle at any age
I Good if prices rise
I In a perfect world, almost zero net exposure to housing costsI Real world
I Renting: negative exposure?I Owning: positive exposure?
Are owners long housing?
I Working backward, Grandma never sellsI Unless she goes into a nursing home . . .
I Does she then need the money?I Maybe this is why no LTCI market?
I . . . Or lives a very long timeI May be why no one buys life annuities
I Bequest and housing risk??
I Trades up are more common than down
I Is Vancouver correlated in price with your next market?
I Do you have to move or want to move?
I Owning pre-tenure is risky
Are renters short housing?
I Yes, if rental consumption is fixed
I But it’s not
I And renters (no kids) are a mobile population
I So those who are flexible do not need to insure against highrents
I Rent control helps with this . . .
I . . . But may increase starting rents
Comparisons to Coastal U.S. Make me(a) worry, (b) believe foreign $$$ is a crucial risk factor