Published on: 2020-10-12

Housing Hubris

I - The economic insanity of owning an abode

I always found it fascinating how weird housing behaves compared to most other tradeable goods.

Take the UK as an example, 63% of households in England owned their own homes (2016-2018). If this number seems small or reasonable to you, consider if this statement had been made about any other thing of such tremendous value:

63% of households own and operate the farmland producing most of their food.

63% of households own a self-sufficient electricity generation system.

63% of households own the spring and/or purifying station which provides them with clean water.

63% of households own the equipment and have the skills to create their own clothes.

The above facts would all be plausible if the country in question was Liberia rather than the UK, I might even assume them to be correct. But they are signs of a deeply dysfunctional society.

One of the main advantages of this whole "civilization" thing is that we don't have to be self-sufficient and can instead rely on a much more efficient system to provide us with most goods and services necessary for us.

The two arguments for owning a house are:

  1. The safety of owning vs renting (i.e. even if you are dirt poor, you will have a place to sleep and store your stuff).
  2. The appreciation of value (i.e. houses, much like everything else, tend to go up in value).

The first argument makes sense, but only as far as owning your own money-storing vault, electricity generator or farm makes an equal amount of sense.

After all, the assumption you would no longer be able to afford rent, assuming you saved&invested all money spent on a home, is assuming a total breakdown of society.

The scenario in which a large majority of the British population is unable to afford to live in the UK is about as dystopian as one where they are no longer able to trust the centralized power grid. And, in such a scenario, the likelihood of a piece of paper indicating land ownership still being valid is questionable at best.

The second argument makes sense, but it doesn't seem to me like the math really checks out. That is to say, yes, a house will appreciate, but so will the money invested in a company concerned with buying, creating, maintaining, and renting houses.

As with all other areas of the economy, it seems reasonable that a larger company would be much more efficient than a single individual and the distribution of risk would make it a much safer investment.

Of course, a house has the advantage of being both a store of value and a tangible good one uses, but so does farmland, and I don't see many people owning and maintaining that. Even more so, once you consider that most houses are not bought cash-in-hand but rather via mortgages which require monthly payments, much like rents, for a very long amount of time.

Take a simple thought experiment, based on a quick Investopedia search, and assume one had bought a 45,600$ home in 1975 via a magic no interest credit of 100$/month over 38 years.

Or, assume that the same person invested 50$ monthly in the SNP500 re-investing all dividends (averaging out an 11.3% increase every year) and spent 50$ on rent.

The homeowner would now own a house worth 228,000$ in 2013.

The investors would own 272,000$ in 2013.

Granted, this is a simplified calculation, one can't just take average interest over 35 years to compound, but I can't find an SNP500 investment calculator. Still, I think the assumptions I'm making fall very much in favor of the homeowner since I'm not taking in accounts:

  1. Risks of the house being destroyed or damaged.
  2. Insurance costs for alleviating (1).
  3. Maintenance cost.
  4. Time spent maintaining the house.
  5. Lost economic opportunity due to being unable to change locations at will.
  6. The actual interest a ~40 years mortgage would have.
  7. Lost flexibility due to being unable to switch money from one investment to the other (our SNP500 owner could be a multi-millionaire if he switched 10% of his investment to tech in the early 80s)

Granted, there is a point where housing is more advantageous than renting+investing. A point where one has a very low income can somewhat afford a mortgage and mortgages aren't that much more expensive than rent.

Yet I doubt this calculation comes out in favor of buying homes for most people in the UK (where I based my example), in the US, or any other developed nation for that matter.

II - The housing religion

Yet it seems that, especially across generations, housing has proven to be a great store of value.

Families that pass on a small but significant amount of intergenerational wealth more often than not do so via houses.

I know many upper-middle-class people which own their wealth due to a stable accumulation of land and housing throughout generations. I know not a single one where said wealth accumulation comes from stock or bond ownership.

I assume this is because of a few behaviors homeowners exhibit which I find to be almost religious in nature.

Chief amongst these behaviors is the pleasantness associated with sinking time and money into renovating. I've even observed this in my own mind, after having rented a place for long enough, but it seems to be much more strongly associated with people that have owned a house for a long time.

On paper, having to renovate a house seems like one of those elements that should count as a plus for renting. If the years have gone by and you now dislike walls between the kitchen and the living room or want a wooden floor or natural-patterned marble tiles, this change will come at great discomfort.

For days, weeks, or even months part of your house becomes unlivable, the rest of it is covered in dust from the construction work. You have to spend time doing the physical labor, or finding professionals and paying them to do it. You have to spend money buying materials. You have to spend time protecting your belongings from being damaged. You have to spend time researching all the steps involved in the procedure and all the things you need to buy.

As a renter, on the other hand, one must only give a notice to their landlord and leave for a more ideal abode in one or two months.

But necessary repairs are equally important to consider here. Houses break, this seems to be something that occupies a lot of the homeowner's time, but they hardly seem to notice it and they even get a sense of enjoyment once the pipe is patched or the drywall replaced with a less-crumbly one.

It could be argued home renovation and repairs are necessary to ensure price appreciation at an optimal rate, but nobody I know of is considering putting in extra time at work to have more money to invest as an alternative to reinvigorating their bathroom with wall mounted hexagonal lighting.

People also seem to have a hard time selling their homes, even if it seems like a reasonable thing to do. I've tried pointing out to people chains of reasoning such as:

  1. Hey, you have this apartment that's too big for you and you aren't planning to rent a room.
  2. You could probably sell it now, after all, prices are reasonably high. Invest the money and likely come out ahead financially, even with a very conservative investment strategy, one that's much safer than betting on this one apartment.
  3. This also means you get to move to a rented apartment. This frees you from a lot of responsibilities, worries, and duties. It also means you can live in conditions that are more to your liking in an area you know you'd enjoy more.

I've never once seen someone try to do a cost-benefit analysis of this scenario, instead what I get are answers like:

This collection of behavior turns home into assets with a spiritual substrate that provides a few amazing qualities to them:

a) Time spent maintaining the asset is seen as e benefit, rather than a cost.

b) Money spent maintaining the asset is viewed as money spent toward entertainment, rather than investing.

c) The asset is viewed as being so worth-while that it should be held on to indefinitely, regardless of the present economic outlook, unless selling it in a life or death scenario.

While it can be argued that this behavior is irrational, it's the kind of irrational that wins out in the long run. Over a lifetime or several generations, there are periods where people are less careful with money.

A kid with a 50,000$ fund can spend it all on status symbols and sex workers in a few weeks, or even a few days or hours during a particularly psychotic episode. That same person might however find the barrier of selling their grand-grand parents home too hard to cross in order to facilitate the spending requirements of said psychotic episode.

Stupidity could cause one to think they can beat the market, thus driving any sum of invested money into nothing in a matter of minutes. But even the most delirious wanna-be architect will have a hard time destroying a house via renovation, and even if they do, the foundation and the land will still hold value.

In short, these qualities of homes seem to guard against particularly common irrational human behaviors which more easily manifest when money is invested in other assets.

III - The hubris of owning a home

To me, homeownership still seems insane, you are:

  1. Predicting that your home is situated somewhere you will be able to live and work in the future. Or that you will be able to sell it at a good price if this is ever not the case.
  2. Predicting that the country/city your home is in will preserve your property rights over a long period of time. Considering that, with very few exceptions, property rights were arbitrarily taken away from people in almost all countries in Europe, South America, Asia, and Africa over the last 80 years, this is a fairly large gamble.
  3. Predicting that you will be able to afford insurance for your home at all times and that the insurance companies will payout in case of a disaster.
  4. Predicting that you will want to live in the area your home is in for a long time, sufficient enough to account for the large overhead of moving when one is buying as opposed to renting.
  5. Predicting that your home investment is wise enough to beat a conservative investment strategy plus the cost of rent.

I work in machine learning and I used to work in data engineering. I know a thing or two about gathering data and making predictions with it, I'm not that good at it (otherwise I'd be extremely rich). But I'm confident enough when I say I'm probably in the upper 10% given enough time to get familiar with the specifics of a domain.

Yet if I had to pick a city and make bet conditional on all 5 of the above, I would require insanely good ods to even take a crack at it.

You are putting in crazy amounts of time and money into maintenance, time, and money that could be spent enjoying life in other ways.

You are locking yourself in place during the only known time in history where even a modest amount of money is enough to travel around the whole planet.

Still, I can't help but feel that this is hubris on my part, I'm just as irrational as other people. Maybe keeping all my assets liquid will facilitate a one-time psychotic spending episode that will leave me destitute. Maybe the chance of this happening is even greater than the chance of me getting 1 of those 5 predictions wrong.

It might also be that the happiness one gets from owning a house and performing the associated rituals is much greater than I'd anticipate. After all, as is the case with all other drugs and spiritual practices, "You don't know until you try".

But still, the idea of a life of renting seems unimaginably appealing to me. It seems to make economic sense, at least from the semi-intuitive standpoint presented above. Perhaps more importantly, it feels nice for housing to be something as minute as groceries, a restaurant meal, or my mobile internet subscription. Not a thing which dictates my life, but rather one of the many services I enjoy and can change at will.

Alas, I don't think I had ever put my thoughts on the subject in order, and writing this down probably helped clarify my perspective a bit. I sincerely hope someone else might also find this useful.


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