JackoC wrote: ↑
Fri Sep 21, 2018 1:36 pm
Valuethinker wrote: ↑
Fri Sep 21, 2018 11:15 am
1. Shiller goes to a lot of lengths to find like for like properties. The Herengracht (canal in Amsterdam) since 1630s. What Monnery additionally says is that if you don't update, the value of the property falls.
2. New York nearly went bust in 1976. Its recovery since then is sacre mirabile. London also was in bad shape in the late 1970s. The c. 4% real pa appreciation in London property prices has beaten even the performance of the FTSE index of the London Stock Exchange over that time. But there was another bust in 1990-92 (40% real drop). Real estate in either city was not a no-brainer in 1976 (friend of a friend, family bought a building downtown Manhattan for an amount now equal to its annual rent).
There's a group of cities tied to the financialization of the world economy that have done phenomenally well. London/ NY/ Hong Kong in particular. These are the centres of global finance (at least Pre Brexit) and they have risen the multiplication of debt, equity & financial instruments over that time.
3. But your house does not increase in value. It falls, pretty steadily. If I look at my parents' house (in another city associated with global financial capital) the new "teardowns" are 3000+ square feet, not 2000. They have en suite bathrooms, central AC, 2 car garages, etc. etc. etc. Building that would cost you say $750k-$1m on those lots. To buy say a house for say $800k is to buy the auction to knock it down and spend that again -- the lots are 30' x 140'. You are paying $800k for the lot -- an empty lot with nothing on it probably would go for $800k-1m.
4. Houses produce lower returns than stocks. You might get lucky and be in NYC or London, but you might not - and those housing markets (and to some extent Silicon Valley) have a correlation with equity markets that is higher than housing markets as a whole.
5. However you can leverage houses,
6. I don't really think the housing market is inefficient in an informational sense.
1. I don't challenge those very long time findings and I think they are interesting. But not necessarily so relevant unless your horizon is 100's of years. Could be relevant next year, but not necessarily even for 10's of years.
I would term it the other way "things have a long run tendency to revert to their means". What Monnery found was that despite the modern nostrum (he's a British writer) that nothing is "safe as houses" that's actually not ture.
We spend a lot of time trying to dig out stock returns back to the 18th century (we really only have those for one Dutch company; US data starts early 19th century) trying to figure out if the long run returns of stocks are stable. They are to a surprising degree - although if you look at the chart, it looks quite fractal to me.
That was the bulls-eye from Monnery for me. The chart of Dutch housing prices looks fractal-- there was the Dutch Golden Age, then there was stagnation, then catastrophe, then not much, then finally post 1945 another recovery (Dutch housing prices crashed after 2008, I don't think they have recovered).
This should remind us of Mandelbrot's daily cotton prices back to the 1500s. Again, the pattern of returns is fractal (scale invariant). Knowing what they did in the past does not tell you what they will do in the future in terms of magnitude and volatility. That should be central to our understanding of equity returns.
Housing price indices are a lot more tendentious because of the absence of good like-for-like data. It's hard to find. But where we have it, it shows similar patterns, it seems.
2. The appreciation I see in particular properties, particular addresses (as in, that I own or have seriously considered buying) is over the early 20th century to now, for buildings that existed then and now. It's not since the 70's. And it's not so uneven actually over long sub periods.
I don't call say 1929-1945 "short term" -- about the duration of the bear market in houses for most developed world economies (from what I was told in Baltimore, which saw its peak in the 1920s, the real price of houses had not fully recovered as of the 1980s). There have been some serious bear markets in real estate in the data. Toronto I think the 1989 peak was not hit again til something like 2010 (prices have gone insane since then, doubling roughly 2012-2017). One could add Tokyo, of course, where prices are still below the levels of 1990 by about 50% I believe. Boston they took a very long time to recover post 1990.
The point about 1976 in New York or London (and San Francisco I presume; and definitely Sydney Melbourne Toronto Vancouver Seattle Portland) was that it was not at all obvious that houses would do so well in the subsequent 40 years in those cities. Nor that they would do so much better than say, Chicago, or Dallas and Houston. Even population data, had you had perfect foresight, would not have told you that, at least in comparison to say Atlanta and Houston and Dallas-FW.
There's one caveat to this. Edward Gleaser thinks there was a structural change in some American cities, around about the early 1970s - call it the rise of the NIMBYs if you will. Thus, Manhattan has not replaced 20 storey mid century buildings with 100 storey 21st century ones, at the rate that its price inflation would suggest. Similar stories in LA, SF, Boston (perhaps Portland and Seattle). Structural change. There is long term evidence though that employers have responded by moving jobs to where their employees can afford to rent or buy homes -- hence the rapid rise of the population of Texas compared to either California or New York.
I keep coming back to Monnery. Australia has one of the most highly urbanized populations in the world -- actually *sub urbanized*. It has had a rising population since the early 1800s and those people mostly come to live in a handful of big cities. History of previous Australian housing booms shows that these things level out - the real house price surges are followed by busts & stagnations.
3. It's irrelevant as investor whether it's the land or improvements (ie the structure) which appreciate, it's the total that matters. The whole investment is not in a structure, an especially important difference in expensive areas. Likewise we have to keep in mind that major capital improvement costs as % of the structure are a lower % of the whole investment.
Anything but irrelevant. We overestimate the returns on RE because we don't compare like-for-like. Old buildings need *big* updating, and it's expensive, that's a very real outlay. (US tax system appears to subsidize that via depreciation allowances? I am unclear on that).
So you have a structure which is depreciating on you from the day you buy it. Then, you have the land.
And of course there is everyone's favourite thing - -property taxes
. That's the carrying cost of your land (plus various capital improvements to utility services). Those are quite large in the USA -- say 1-2% of property value, typically?
4. Unlevered RE should give lower return than stocks, because of my earlier point: there's no reason to think single/few family properties are inherently more volatile than corporate assets, and corporate assets are already leveraged by corporate debt when you buy stocks without leverage. Risk and return. Unlevered RE should also be less risky than leveraged corporate assets, aka stocks. Some degree of mortgage borrowing should raise the risk of RE to that of stocks. Where that point is and what the relative expected returns would be at the point of equal risk is IMO too complicated and situation dependent to give a valid general answer. Again long term studies of property values are fun but not very relevant to answering that question from a practical stock+RE investor's POV. For example details of NY city rules (where I can increase rents for some forms of capital improvement, for example) are much more practically relevant to me than Amsterdam in the 17th century.
One would be a business topic, the other more of a recreational topic.
The reason RE pays a lower return, unlevered, than equity, is because residential RE also provides an economic service - you can't live in your stock portfolio. Thus the financial return aspect gets bid down by the other value the asset creates.
I think very long price series on real estate, one of the common forms of investment for as long as we have had post medieval civilization (and land ownership was, of course, very important in the medieval and ancient economies) are extremely relevant. There may be structural shifts around imposition of zoning controls, but the evidence is that over long periods, housing price booms are then followed by long slumps or stagnations.
The interesting thing is that city centre real estate has slipped -- commercial RE. The estimate I saw was of growth in value about 1% less pa than real GDP growth. That's counterintuitive given that economies grow and populations grow. So what is going on? It appears that changing technology has allowed first people (the suburbs) and then businesses (the office park, the Edge City) to move further out, reducing the locational value of city centre RE.
Right now we are in an upswing for "downtown" and telecommuting has not had the impact that it was thought it would have. Yet, more and more workplaces have gone to "hot desking" with seats for only about 60% of staff and "Working From Home" 1-2 days a week. City centre retail is being crucified (as is retail, generally). Cue structural change (the rise of Amazon-style distribution centres).
5. Again stocks already contain leverage. You can lever them more with your own borrowing or via index futures if you want. It's true most people are more used to the concept of *their own borrowing* to leverage rental properties, and varying that according to their risk appetite.
You can get margin called with such strategies. It's a losing strategy in that particular casino because the house has deeper pockets than you do. You can't leverage your stock portfolio to the time horizon that gives you a good probability of winning (say 30 years +).
RE you generally cannot get margin called.
6. The sense I mean is simply that trends IMO are manifestly more likely to persist in RE for many years, doesn't have to be centuries. In the stock market 'everybody knows this product or company is upcoming' is pretty much worthless as an observation, because everybody already knows. That's not as true IME of 'everybody knows this neighboorhood is upcoming' in RE, that's more subject to persistent trends IME. Other people's experience may vary. Overlaid on the issue of leverage or not is the basic apples/oranges of RE v stocks. In stocks (for most people most of the time at least) you want to specifically avoid relying on your own value decisions this stock v that stock. In RE investing you simply can't do that. You must rely on your own value assessments, as well as your ability to execute (deals, management, etc. but competing in a relatively limited sphere, not competing against instantaneous moves of the smartest global money like you would be with stocks). Which is itself another form of diversification: stocks and RE are really not one market in a number of different ways, albeit there is some correlation between just about all forms of financial risk. And again casting aside any assumption that the choice is necessarily *all* in RE or *all* in stocks. The point I'm getting at here is that generalizations are less useful when it comes to RE than stocks, because wise stock investing (most people/most times) is going with averages at least nationally if not globally, RE is not.
There's sweat equity in RE - if you can do the work, then you can improve your performance.
However it's undiversified and lumpy - until you have a fairly big portfolio, a problem with a location or unit is going to hit you quite hard, potentially.
What I did find whenever I wanted to buy property was that the market was informationally quite efficient - there were not a lot of bargains to be had, you could have done a multiple linear regression and got prices along that well explained by features. In fact, in the UK no one quotes square footage or meterage in prices psf/psm etc. Yet the market seems to basically price in the differences in sizes as well.
As to future uncertainties re neighbourhoods etc. It's very hard to get an "inside track" on that. Hoods rise in popularity and fall in popularity, and buyers seem to know this. Buying in Notting Hill (say Park Slope in Brooklyn? Maybe Islington is a better bet) in 1980 was a great move. However you didn't know that London was going to go up, and you couldn't be certain that the drug dealers, rooming houses etc. would be cleaned out -- you could have seen the potential (close to the Tube, close to Hyde Park etc.) but you couldn't be certain that it would be realized.