Short Stories About Housing
Probably two or three years ago I posed the following questions on a post about Housing:
1. How do houses make money?
2. What value does a landlord provide?
3. How can house prices rise faster than rents sustainably?
4. How can rents rise faster than wages sustainably?
5. If housing is such a safe investment, why do banks lend money to people to buy houses rather than simply purchasing the housing themselves and renting them to tennants?
It still feels recent largely because of how relatively infrequently I publish a post in these recent years. In that post I tried to actually steel-man a pro-housing investment position that made sense of these questions. I really tried and I largely failed. I'm time rich, by the way. A big part of my privilege is that I get to sit around and write blog posts, and I realize not everybody does. The point of that post was that if people are going to make large bets on the housing market, it strikes me that they should be able to answer these questions, because these are precisely the bets they are making. I am ever grateful to the few people who read this blog, and even more grateful for the few who had a stab at answering in part one of the five questions I feel anyone buying a property should be able to answer.
For this post, I thought it handy to just bring up a refresher of those five questions, to prime the mind when reading my ridiculous short stories about housing. Stories intended to get whosoever might read them to see the world they live in differently.
Now story time.
Seachange
Your husband had an affair affair with your sister and was arrested for fraud, leaving you and your children in disarray. Needing to make a seachange in your life you accept a job as a local Magistrate for a seaside community. You get in touch with a real estate agent and discover there's a house on the market that suits your needs perfectly and the owner is asking for $50,000. Your employment contract is going to pay you (after tax) $200,000 a year, working full-time as a magistrate. You arrange to meet the owner at the estate agents office and sign the paperwork.
When it's all scheduled to go down, Barry walks in to the meeting, unannounced. He informs you he is a local businessman that's made a fortune from selling abalone to the Japanese. He can secure a loan from the banks for a much larger amount than you and at a lower interest rate. He offers to do you a favor, he'll buy the house not for $50,000 but for $200,000 then you can pay him $5,000 dollars a month in rent. And you're welcome.
Being a magistrate and trained and experienced in calm, sober consideration, you point out to Barry some facts of the case: A) he doesn't need the house, whereas you do. B) You can afford the house, at the asking price. C) the rent you would pay him, is more than you would buy the house for if he wasn't taking out a loan to overpay for it.
Your verdict: he isn't doing you any favors. Barry holds up his open palms and interrupts, stating 'I'm happy to invest in good old bricks and mortar.'
You ask the agent if there are any other houses on the market, Barry interjects 'I'll grab that one too. Of course, that's going to mean two loans I have to repay and one house just sitting empty. I'm afraid $5k a month might not cut the mustard...'
The Great Property Apartheid Retirement Plan
You are sitting with your accountant explaining that you plan to retire in a few years. Your problem: You've grown accustomed to a certain lifestyle your working income affords you, and you don't want your autumn years to be less enjoyable than those years you've worked your butt off during being compensated for making the world a better place.
The accountant starts talking about the potential future demand for renewable energy and the need for investment in that sector as your eyes start glazing over...
That shit's all to complicated for me! you say. Gimme something simple, you demand. The accountant stands up abruptly, moves to the window and shuts the blinds. He walks over to the office door and locks it. Yes, no cubicle for your accountant that's why you pay him the big bucks.
The accountant says 'okay, I may have the ideal retirement financing strategy for you.' He pulls down a large chart and explains.
'See you are here, currently working, earning an income. This income pays for things like cheese, foxtel, petrol and airconditioning. In a few years though you'll be here... with no income. But what if you could take someone else's income?'
Go on you say, you're listening.
'You have a son, who lives in a room in your house, he is in his early twenties and will be earning an income for many years.'
Yeah, you say, he has an honors degree in fine arts and now works as a guy who delivers food to people with real jobs, but you don't see how that is relevant.
'Well, what if you were to charge him rent? He earns $400 a week, you could say young man if you are going to live under my roof you have to contribute. And charge him "rent"'
Rent? You mean that thing I paid way back when I was at uni?
'Exactly, you could charge him up to 60% of the money he earns for living in your asset.'
Well, okay that's something you admit, but that's not enough to buy cheese and foxtel and petrol...
'Ah ha, excellent point sir. But what if you had more sons?'
Well I'd need more rooms...
'Yes, so what if you owned lots of rooms? then you could take 60% of the wages of 10 or 20 young people with shitty jobs, that will be working until the day you die.'
I see, but where would I get those rooms?
'You would buy an investment property.'
An investment property... interesting. But what if my son decides to buy his own house?
'Well, fortunately houses are very expensive. Your son won't buy a house because his job is insecure and he doesn't have much money. So nobody will lend the money to him to buy a house. He may refuse to pay you rent, and decide to rent elsewhere.'
So your whole scheme is broken then? What a waste of my time.
'No, that's the beauty of it. I have many clients like you, and if your son refuses to pay you rent and he instead goes to pay rent somewhere else, who do you think he's paying that rent to?'
...someone...like me.
'Exactly, housing is expensive not everyone can afford to buy, fortunately though renting is much cheaper than buying, so those who can't afford to buy pay the rent to those who can.'
So it's like a big charging your own kids rent swap?
'Yes. Exactly.'
But isn't buying a house expensive? I mean sure I can get a loan based on the assets I already have, but isn't it like paying $10 a week in order to charge my kid $5?
'Well, yes, but fortunately nobody really buys property for the rent. See here's the thing, if you were paying for something like a restaurant meal, what would you expect?'
Well... an excellent meal, cooked properly and served hot. Good service, on time... a good atmosphere... those sorts of things.
'And if you were paying rent to live in your current home what would you expect?'
To rent my own home? Well a bloody lot if I'm paying some other basterd for the roof over my head.
'This is the beautiful thing. If your toilet broke, you'd call a plumber, if your dishwasher broke you'd call an electrician.'
Yeah, that's just common sense.
'When someone is renting, if the toilet breaks they have to call an agent and request emergency repairs, if the dishwasher breaks, they have to fill out a maintenance request form, lodge it with the agent who passes it onto you and you arrange an electrician to go repair it whenever you feel like it.'
So I basically could charge them rent, and provide no service?
'Almost no service, toilet breakdowns are rare, so it's pretty close to none whatsoever. I mean what are your tennents going to do? Build their own home?'
Well yeah, that's what I'd do, you're whole system falls apart.
'But you forget, I have many clients, so where would they build their home? On whose land?'
...they'd have to buy it first.
'Yeah, and are you going to sell it cheaply? No, you've lost a lot of money charging $5 rent when it costs you $10 to own.'
Yeah!
'You need someone to bail you out, by overpaying by even more than you overpaid to provide no real service in the first place!'
That's right. But I have some questions, if this is all about getting our kids incomes... I heard there's less of them than us. And they have less job security than we do, and their incomes aren't very good.
'Well, it doesn't matter, property prices always go up, so really it wouldn't matter if you didn't rent your house out at all. I mean we can say that immigration will bring the working population back up, but that's kind of a red herring. The fact is, like you most people don't understand productive industries that make and do things of value. Heck! Most of my clients don't really understand the industries they work in, and aren't particularly good at their jobs. Even you sir, are asking questions most people never even think to ask. People hate landlords, and they hate paying rent, and they hate living with their parents, so much so that they will pay pretty much any price to not do so. I mean think of it this way, if your son was kidnapped how much would you pay to have him returned alive?'
Well, everything I have?
'Is that all? What if they were asking more? Much more? Would you still retire? Would you go into debt?'
Yes! Yes! Anything for my son.
'Well, isn't it fair then, that your son would do the same for you? I mean this is basically that, in reverse.'
So it's like a... kidnapping or extortion racket?
The Best Years of Our Lives
Now we turn to a happy couple in the early 80s at an auction, and here after much preamble, our story takes off. Imagine though that we didn't bid in the local currency of dollaridoos, but instead simply pledged years of our working lives. Now there's a reason we bid in dollars, and that is because people earn very different salaries and other incomes. So if 90's Bill Gates was at an auction with a 90's supermarket cashier, one might be pledging 0.001% of a years wages and the other 10,000 years. This would make it hard for the auctioneer to keep track of whether the bids were higher or not.
But here at our 1980's auction, everyone earns about the same and so the bidding opens.
'One year!' an enthusiastic couple call out. 'One year and one month' chimes in another bidder. Things tighten up at one and a half years, before the most persistent bidding couple decide to go for a knockout blow 'One year, 8 months.' it goes once, it goes twice, it goes three times. The owner is delighted the property sold for so much over the reserve of one year and two months. The bank approves a ten year loan to repay one year and eight months worth of wages. Everyone is happy.
Time passes.
Interlude
What happens when labor can no longer capture the returns of economic growth through higher wages? Where real wages are by and large stagnating. Not just for a little bit, but for decade after decade. Surely this would make workers angry, demanding economic protections against overseas competition, the threat of capital moving operations offshore for cheaper wages, lower taxation and more relaxed regulation?
Well, let's see what is happening at the auction. Our happy couple who bought their first home back in the 1980's are now selling it in the present day, on auction of course. A crowd gathers. Many just to watch the events of the auction unfold. Bidding opens. 'Twenty years' calls out the auctioneer, someone takes it. 'Do I hear twenty two?' 'Twenty five!' someone interjects, 'I got twenty five, can I hear 26?' ... again after an initial flurry the bids climb up into the late 30s, there are only two bidders left, an anxious young couple with pram in tow, looking for a home to live in to raise their child, and some guy in a leather jacket with designer sunnies looking for an 'investment property' to help secure his retirement and lifestyle aspirations. 'Thirty nine' says the young woman choking back the pleading desperation in her voice. 'forty' says the man in the leather jacket, reflexively while checking his phone for notifications. The couple anxiously request a moment to confer, doing some back of the envelope calculations... as a hail mary, they bid 'forty years, one month.' the man counters with 'forty one years.' It goes once, twice, three times. The young couple demoralized walk away.
Sharktank
'...and by taking the principle of the mobius strip and rendering not in three dimensions, but π dimensions I devised a new form of wind turbine that makes no noise, can be constructed from household materials and can provide free clean energy to power a four occupant dwelling from the slightest breeze.' she straightened her tie, trying to tamp down the excited movements of her hands.
'And you want our funding... to manufacture these mobius-turbines?' says the middle shark with the silver beard and hair.
'Oh no, I need a small amount of funds to set up the electronic distribution infrastructure to distribute schematics to the world via a pdf. I mean, this could stop carbon emissions... tomorrow.'
'How much would you charge for the pdf?'
'I'm thinking, pay what you feel. I mean this would be going out to markets everywhere.'
'I mean free energy might mean a saving of thousands to some, you don't plan to capture that? Over a lifetime it could be hundreds of thousands for an individual.'
'Oh yeah, well, in undeveloped markets though, the local currency and average wages of the population would amount to a micro transaction, I want them to have this too. To put an end to selling cheap dirty coal to poorer nations.'
'Well here's my problem Keith. I could put the money you are asking for down as a deposit on a house, and within a year make a double digit return on that. Because house prices historically always go up, and you, your answer to piracy of your intellectual property is to just give it away to people who don't feel like paying. It's a pass for me.'
Short Story
'So would you like to pay 8% interest on a 1.5 million dollar loan, or 20% interest on a 75 thousand dollar loan?' 'How long do I get to pay it off?' 'Well you can pay off the interest first, then the principle.' '8% please!'
The Eve of Battle
The mood in camp was grim. Many of the men had fought alongside the enemy putting down the rebellion of the Northerners. They'd fought side by side, and now this. Tomorrow they would meet upon the field and shed blood. Had only the King the lucidity to cede to the demands...
What were the demands again? The general sent forth an envoy to fetch terms of surrender. Perhaps no battle would be necessary after all.
Sure enough, the price to not do slaughter was cheap, agreeable. A granting of lands along the north shore of the riverbank and payment of the Lord's captured brothers ransom, as well as back payment for defending the north border. All-in-all peanuts when compared to a long campaign. The King might feel the stain upon his honor simply buying out his rivals rather than noble conquest, but at least he could finally turn his attention to a disastrous crusade to the Holy Land...
Property is Booming!
On a mysterious world there lives a couple, in a house and also on this world there is a bank. Where the bankers sleep is a mystery, but it is a mystery nobody seems concerned with for the purposes of this narrative, because one day one of the couple arrives home with some bad news. 'I've been made redundant, I'm laid off.'
'We'll have to sell the house.' says the partner, 'it's the only way to finance our lifestyle. We just can't afford this anymore.' so they make the painful decision to sell their home, and place it on the market. 'We'll need a place to live.' said one to the other. 'I saw a house has just gone on the market!'
So the couple head to the bank, and arrange a meeting with the manager. 'We'd like a home loan.' 'How much?' 'Well the owners are asking for $100,000' 'We'll we should be able to arrange something let's look at your budget.' so the couple pull out there budget, their balance on the savings account, documents relating to their remaining salary.
'We also plan to sell our house, we're hoping to get $100,000 for it.' 'Well...' said the bank manager. 'If that goes ahead, combined with your salary and savings deposit, we'd be willing to lend you $200,000' 'Well!' said the couple 'That would certainly do it.'
The couple are thrilled to receive an offer on the house for $200,000. 'That's almost double what we were asking!' and papers were signed and so the couple were able to sell their house to themselves ready to move into their new abode. After fees and taxes and interest was paid down, they found themselves with very little outstanding on their mortgage.
'You know...' said one to the other, 'We made more on the sale of our house than we have earned for the last ten years.' 'Property is booming.' agreed the other. 'We should really sell while it's still a seller's market.' So the couple excited by the recent trends puts their house on the market again, asking $250,000.
The bank manager based on the strength of last quarters real estate figures, is happy to lend them $300,000 to invest in their next property.
Time passes. The couple had never in their wildest dreams imagined that they would one day be sitting on a multi-million dollar property portfolio, but sure enough every time they nearly blinked on taking out such a mortgage, they always found themselves willing to buy their house from themselves at ever increasing prices.
The inflation in price had been so rapid and dramatic, that both had been able to quit their jobs to go full time into property investment. The more they sold their house to themselves, the more confident they felt. A confidence that was shared by the bank, who agreed to lend them more and more money each time they sold their house in order to purchase it at their ever increasing asking prices.
And of course, they lived happily ever after.
Not in Conclusion
When I was younger, in my late teens to early twenties I was a big fan of Warren Buffet who had come to my attention thanks to a profile on his eccentricities in the Age weekend supplement 'The Good Weekend' something I had taken to reading out on the spit of Lake Wendoree on a Saturday morning while I threw pine cones into the lake that my dog Lil, would fetch. If one wanted her to be occupied for a good twenty minutes at a time, you had only to throw two pine cones in at a time. Like Marty McFly's reaction to being called a chicken, she couldn't back down from the challenge of trying to bite down on a pine cone, while she already had a pine cone in her mouth.
At any rate, Warren Buffet made a profound impression on me, and through my fascination with him stumbled across one of his investment heuristics 'Don't invest in anything you don't understand.' Which had notably spared Buffet from the Tech Stock crash of the early 2000s and the collapse of Enron.
Being an artist has kept me from investing in general, also I suspect the acute awareness that having something to read while throwing pine cones to a dog is a good life; and so long as I have sufficient leisure time, life for the most part is sufficient, resulting in a chronic lack of material ambition.
But it has meant that for most of my adult life, I have been running around a mental labyrinth that folds back around on itself like a pretzel, trying to understand what most adults are doing with their lives. The housing labyrinth is more elaborate than my mental capacity to construct metaphors, I simply cannot picture how the housing market works. I do not understand it.
However I feel like I may be Zeno pointing out the impossibility of motion to Diogenes, who simply gets up and leaves the room. Which is to say, I attempt to construct arguments to show that property investment can't possibly be sustained, then I walk past the newspapers that seem to demonstrate the opposite.
My position then, is basically that property investment is a dead end in a labyrinth. We just have no intuition for dealing with labyrinths so large that it might take several lifetimes to hit that dead end. It may even be a positive, speaking as an elitist rather than an egalitarian.
We know, all of us generally, that wealth is becoming increasingly concentrated. Taking this as an a priori it simply must be the case that most people are actually losing at property investment. Further buttressing this argument is the observation that there's generations now who are not expected to ever own property in their economies of birth. That means that the assets are not even able to be passed down through the generations, they have to be sold off to the wealthy elites.
That could be a good wealth redistribution mechanism, if it meant that people are basically just pledging most of their income to a bank or in some cases landlord, for their entire working lives and that income then finances the highest value (emphasis on value, rather than wealth) individuals in the world. I just suspect that it tends to prop up societal deadweights like Donald Trump, literal 'rent seekers' and not the people working on clean renewable energies etc.
1. How do houses make money?
2. What value does a landlord provide?
3. How can house prices rise faster than rents sustainably?
4. How can rents rise faster than wages sustainably?
5. If housing is such a safe investment, why do banks lend money to people to buy houses rather than simply purchasing the housing themselves and renting them to tennants?
It still feels recent largely because of how relatively infrequently I publish a post in these recent years. In that post I tried to actually steel-man a pro-housing investment position that made sense of these questions. I really tried and I largely failed. I'm time rich, by the way. A big part of my privilege is that I get to sit around and write blog posts, and I realize not everybody does. The point of that post was that if people are going to make large bets on the housing market, it strikes me that they should be able to answer these questions, because these are precisely the bets they are making. I am ever grateful to the few people who read this blog, and even more grateful for the few who had a stab at answering in part one of the five questions I feel anyone buying a property should be able to answer.
For this post, I thought it handy to just bring up a refresher of those five questions, to prime the mind when reading my ridiculous short stories about housing. Stories intended to get whosoever might read them to see the world they live in differently.
Now story time.
Seachange
Your husband had an affair affair with your sister and was arrested for fraud, leaving you and your children in disarray. Needing to make a seachange in your life you accept a job as a local Magistrate for a seaside community. You get in touch with a real estate agent and discover there's a house on the market that suits your needs perfectly and the owner is asking for $50,000. Your employment contract is going to pay you (after tax) $200,000 a year, working full-time as a magistrate. You arrange to meet the owner at the estate agents office and sign the paperwork.
When it's all scheduled to go down, Barry walks in to the meeting, unannounced. He informs you he is a local businessman that's made a fortune from selling abalone to the Japanese. He can secure a loan from the banks for a much larger amount than you and at a lower interest rate. He offers to do you a favor, he'll buy the house not for $50,000 but for $200,000 then you can pay him $5,000 dollars a month in rent. And you're welcome.
Being a magistrate and trained and experienced in calm, sober consideration, you point out to Barry some facts of the case: A) he doesn't need the house, whereas you do. B) You can afford the house, at the asking price. C) the rent you would pay him, is more than you would buy the house for if he wasn't taking out a loan to overpay for it.
Your verdict: he isn't doing you any favors. Barry holds up his open palms and interrupts, stating 'I'm happy to invest in good old bricks and mortar.'
You ask the agent if there are any other houses on the market, Barry interjects 'I'll grab that one too. Of course, that's going to mean two loans I have to repay and one house just sitting empty. I'm afraid $5k a month might not cut the mustard...'
The Great Property Apartheid Retirement Plan
You are sitting with your accountant explaining that you plan to retire in a few years. Your problem: You've grown accustomed to a certain lifestyle your working income affords you, and you don't want your autumn years to be less enjoyable than those years you've worked your butt off during being compensated for making the world a better place.
The accountant starts talking about the potential future demand for renewable energy and the need for investment in that sector as your eyes start glazing over...
That shit's all to complicated for me! you say. Gimme something simple, you demand. The accountant stands up abruptly, moves to the window and shuts the blinds. He walks over to the office door and locks it. Yes, no cubicle for your accountant that's why you pay him the big bucks.
The accountant says 'okay, I may have the ideal retirement financing strategy for you.' He pulls down a large chart and explains.
'See you are here, currently working, earning an income. This income pays for things like cheese, foxtel, petrol and airconditioning. In a few years though you'll be here... with no income. But what if you could take someone else's income?'
Go on you say, you're listening.
'You have a son, who lives in a room in your house, he is in his early twenties and will be earning an income for many years.'
Yeah, you say, he has an honors degree in fine arts and now works as a guy who delivers food to people with real jobs, but you don't see how that is relevant.
'Well, what if you were to charge him rent? He earns $400 a week, you could say young man if you are going to live under my roof you have to contribute. And charge him "rent"'
Rent? You mean that thing I paid way back when I was at uni?
'Exactly, you could charge him up to 60% of the money he earns for living in your asset.'
Well, okay that's something you admit, but that's not enough to buy cheese and foxtel and petrol...
'Ah ha, excellent point sir. But what if you had more sons?'
Well I'd need more rooms...
'Yes, so what if you owned lots of rooms? then you could take 60% of the wages of 10 or 20 young people with shitty jobs, that will be working until the day you die.'
I see, but where would I get those rooms?
'You would buy an investment property.'
An investment property... interesting. But what if my son decides to buy his own house?
'Well, fortunately houses are very expensive. Your son won't buy a house because his job is insecure and he doesn't have much money. So nobody will lend the money to him to buy a house. He may refuse to pay you rent, and decide to rent elsewhere.'
So your whole scheme is broken then? What a waste of my time.
'No, that's the beauty of it. I have many clients like you, and if your son refuses to pay you rent and he instead goes to pay rent somewhere else, who do you think he's paying that rent to?'
...someone...like me.
'Exactly, housing is expensive not everyone can afford to buy, fortunately though renting is much cheaper than buying, so those who can't afford to buy pay the rent to those who can.'
So it's like a big charging your own kids rent swap?
'Yes. Exactly.'
But isn't buying a house expensive? I mean sure I can get a loan based on the assets I already have, but isn't it like paying $10 a week in order to charge my kid $5?
'Well, yes, but fortunately nobody really buys property for the rent. See here's the thing, if you were paying for something like a restaurant meal, what would you expect?'
Well... an excellent meal, cooked properly and served hot. Good service, on time... a good atmosphere... those sorts of things.
'And if you were paying rent to live in your current home what would you expect?'
To rent my own home? Well a bloody lot if I'm paying some other basterd for the roof over my head.
'This is the beautiful thing. If your toilet broke, you'd call a plumber, if your dishwasher broke you'd call an electrician.'
Yeah, that's just common sense.
'When someone is renting, if the toilet breaks they have to call an agent and request emergency repairs, if the dishwasher breaks, they have to fill out a maintenance request form, lodge it with the agent who passes it onto you and you arrange an electrician to go repair it whenever you feel like it.'
So I basically could charge them rent, and provide no service?
'Almost no service, toilet breakdowns are rare, so it's pretty close to none whatsoever. I mean what are your tennents going to do? Build their own home?'
Well yeah, that's what I'd do, you're whole system falls apart.
'But you forget, I have many clients, so where would they build their home? On whose land?'
...they'd have to buy it first.
'Yeah, and are you going to sell it cheaply? No, you've lost a lot of money charging $5 rent when it costs you $10 to own.'
Yeah!
'You need someone to bail you out, by overpaying by even more than you overpaid to provide no real service in the first place!'
That's right. But I have some questions, if this is all about getting our kids incomes... I heard there's less of them than us. And they have less job security than we do, and their incomes aren't very good.
'Well, it doesn't matter, property prices always go up, so really it wouldn't matter if you didn't rent your house out at all. I mean we can say that immigration will bring the working population back up, but that's kind of a red herring. The fact is, like you most people don't understand productive industries that make and do things of value. Heck! Most of my clients don't really understand the industries they work in, and aren't particularly good at their jobs. Even you sir, are asking questions most people never even think to ask. People hate landlords, and they hate paying rent, and they hate living with their parents, so much so that they will pay pretty much any price to not do so. I mean think of it this way, if your son was kidnapped how much would you pay to have him returned alive?'
Well, everything I have?
'Is that all? What if they were asking more? Much more? Would you still retire? Would you go into debt?'
Yes! Yes! Anything for my son.
'Well, isn't it fair then, that your son would do the same for you? I mean this is basically that, in reverse.'
So it's like a... kidnapping or extortion racket?
The Best Years of Our Lives
Now we turn to a happy couple in the early 80s at an auction, and here after much preamble, our story takes off. Imagine though that we didn't bid in the local currency of dollaridoos, but instead simply pledged years of our working lives. Now there's a reason we bid in dollars, and that is because people earn very different salaries and other incomes. So if 90's Bill Gates was at an auction with a 90's supermarket cashier, one might be pledging 0.001% of a years wages and the other 10,000 years. This would make it hard for the auctioneer to keep track of whether the bids were higher or not.
But here at our 1980's auction, everyone earns about the same and so the bidding opens.
'One year!' an enthusiastic couple call out. 'One year and one month' chimes in another bidder. Things tighten up at one and a half years, before the most persistent bidding couple decide to go for a knockout blow 'One year, 8 months.' it goes once, it goes twice, it goes three times. The owner is delighted the property sold for so much over the reserve of one year and two months. The bank approves a ten year loan to repay one year and eight months worth of wages. Everyone is happy.
Time passes.
Interlude
What happens when labor can no longer capture the returns of economic growth through higher wages? Where real wages are by and large stagnating. Not just for a little bit, but for decade after decade. Surely this would make workers angry, demanding economic protections against overseas competition, the threat of capital moving operations offshore for cheaper wages, lower taxation and more relaxed regulation?
Well, let's see what is happening at the auction. Our happy couple who bought their first home back in the 1980's are now selling it in the present day, on auction of course. A crowd gathers. Many just to watch the events of the auction unfold. Bidding opens. 'Twenty years' calls out the auctioneer, someone takes it. 'Do I hear twenty two?' 'Twenty five!' someone interjects, 'I got twenty five, can I hear 26?' ... again after an initial flurry the bids climb up into the late 30s, there are only two bidders left, an anxious young couple with pram in tow, looking for a home to live in to raise their child, and some guy in a leather jacket with designer sunnies looking for an 'investment property' to help secure his retirement and lifestyle aspirations. 'Thirty nine' says the young woman choking back the pleading desperation in her voice. 'forty' says the man in the leather jacket, reflexively while checking his phone for notifications. The couple anxiously request a moment to confer, doing some back of the envelope calculations... as a hail mary, they bid 'forty years, one month.' the man counters with 'forty one years.' It goes once, twice, three times. The young couple demoralized walk away.
Sharktank
'...and by taking the principle of the mobius strip and rendering not in three dimensions, but π dimensions I devised a new form of wind turbine that makes no noise, can be constructed from household materials and can provide free clean energy to power a four occupant dwelling from the slightest breeze.' she straightened her tie, trying to tamp down the excited movements of her hands.
'And you want our funding... to manufacture these mobius-turbines?' says the middle shark with the silver beard and hair.
'Oh no, I need a small amount of funds to set up the electronic distribution infrastructure to distribute schematics to the world via a pdf. I mean, this could stop carbon emissions... tomorrow.'
'How much would you charge for the pdf?'
'I'm thinking, pay what you feel. I mean this would be going out to markets everywhere.'
'I mean free energy might mean a saving of thousands to some, you don't plan to capture that? Over a lifetime it could be hundreds of thousands for an individual.'
'Oh yeah, well, in undeveloped markets though, the local currency and average wages of the population would amount to a micro transaction, I want them to have this too. To put an end to selling cheap dirty coal to poorer nations.'
'Well here's my problem Keith. I could put the money you are asking for down as a deposit on a house, and within a year make a double digit return on that. Because house prices historically always go up, and you, your answer to piracy of your intellectual property is to just give it away to people who don't feel like paying. It's a pass for me.'
Short Story
'So would you like to pay 8% interest on a 1.5 million dollar loan, or 20% interest on a 75 thousand dollar loan?' 'How long do I get to pay it off?' 'Well you can pay off the interest first, then the principle.' '8% please!'
The Eve of Battle
The mood in camp was grim. Many of the men had fought alongside the enemy putting down the rebellion of the Northerners. They'd fought side by side, and now this. Tomorrow they would meet upon the field and shed blood. Had only the King the lucidity to cede to the demands...
What were the demands again? The general sent forth an envoy to fetch terms of surrender. Perhaps no battle would be necessary after all.
Sure enough, the price to not do slaughter was cheap, agreeable. A granting of lands along the north shore of the riverbank and payment of the Lord's captured brothers ransom, as well as back payment for defending the north border. All-in-all peanuts when compared to a long campaign. The King might feel the stain upon his honor simply buying out his rivals rather than noble conquest, but at least he could finally turn his attention to a disastrous crusade to the Holy Land...
Property is Booming!
On a mysterious world there lives a couple, in a house and also on this world there is a bank. Where the bankers sleep is a mystery, but it is a mystery nobody seems concerned with for the purposes of this narrative, because one day one of the couple arrives home with some bad news. 'I've been made redundant, I'm laid off.'
'We'll have to sell the house.' says the partner, 'it's the only way to finance our lifestyle. We just can't afford this anymore.' so they make the painful decision to sell their home, and place it on the market. 'We'll need a place to live.' said one to the other. 'I saw a house has just gone on the market!'
So the couple head to the bank, and arrange a meeting with the manager. 'We'd like a home loan.' 'How much?' 'Well the owners are asking for $100,000' 'We'll we should be able to arrange something let's look at your budget.' so the couple pull out there budget, their balance on the savings account, documents relating to their remaining salary.
'We also plan to sell our house, we're hoping to get $100,000 for it.' 'Well...' said the bank manager. 'If that goes ahead, combined with your salary and savings deposit, we'd be willing to lend you $200,000' 'Well!' said the couple 'That would certainly do it.'
The couple are thrilled to receive an offer on the house for $200,000. 'That's almost double what we were asking!' and papers were signed and so the couple were able to sell their house to themselves ready to move into their new abode. After fees and taxes and interest was paid down, they found themselves with very little outstanding on their mortgage.
'You know...' said one to the other, 'We made more on the sale of our house than we have earned for the last ten years.' 'Property is booming.' agreed the other. 'We should really sell while it's still a seller's market.' So the couple excited by the recent trends puts their house on the market again, asking $250,000.
The bank manager based on the strength of last quarters real estate figures, is happy to lend them $300,000 to invest in their next property.
Time passes. The couple had never in their wildest dreams imagined that they would one day be sitting on a multi-million dollar property portfolio, but sure enough every time they nearly blinked on taking out such a mortgage, they always found themselves willing to buy their house from themselves at ever increasing prices.
The inflation in price had been so rapid and dramatic, that both had been able to quit their jobs to go full time into property investment. The more they sold their house to themselves, the more confident they felt. A confidence that was shared by the bank, who agreed to lend them more and more money each time they sold their house in order to purchase it at their ever increasing asking prices.
And of course, they lived happily ever after.
Not in Conclusion
When I was younger, in my late teens to early twenties I was a big fan of Warren Buffet who had come to my attention thanks to a profile on his eccentricities in the Age weekend supplement 'The Good Weekend' something I had taken to reading out on the spit of Lake Wendoree on a Saturday morning while I threw pine cones into the lake that my dog Lil, would fetch. If one wanted her to be occupied for a good twenty minutes at a time, you had only to throw two pine cones in at a time. Like Marty McFly's reaction to being called a chicken, she couldn't back down from the challenge of trying to bite down on a pine cone, while she already had a pine cone in her mouth.
At any rate, Warren Buffet made a profound impression on me, and through my fascination with him stumbled across one of his investment heuristics 'Don't invest in anything you don't understand.' Which had notably spared Buffet from the Tech Stock crash of the early 2000s and the collapse of Enron.
Being an artist has kept me from investing in general, also I suspect the acute awareness that having something to read while throwing pine cones to a dog is a good life; and so long as I have sufficient leisure time, life for the most part is sufficient, resulting in a chronic lack of material ambition.
But it has meant that for most of my adult life, I have been running around a mental labyrinth that folds back around on itself like a pretzel, trying to understand what most adults are doing with their lives. The housing labyrinth is more elaborate than my mental capacity to construct metaphors, I simply cannot picture how the housing market works. I do not understand it.
However I feel like I may be Zeno pointing out the impossibility of motion to Diogenes, who simply gets up and leaves the room. Which is to say, I attempt to construct arguments to show that property investment can't possibly be sustained, then I walk past the newspapers that seem to demonstrate the opposite.
My position then, is basically that property investment is a dead end in a labyrinth. We just have no intuition for dealing with labyrinths so large that it might take several lifetimes to hit that dead end. It may even be a positive, speaking as an elitist rather than an egalitarian.
We know, all of us generally, that wealth is becoming increasingly concentrated. Taking this as an a priori it simply must be the case that most people are actually losing at property investment. Further buttressing this argument is the observation that there's generations now who are not expected to ever own property in their economies of birth. That means that the assets are not even able to be passed down through the generations, they have to be sold off to the wealthy elites.
That could be a good wealth redistribution mechanism, if it meant that people are basically just pledging most of their income to a bank or in some cases landlord, for their entire working lives and that income then finances the highest value (emphasis on value, rather than wealth) individuals in the world. I just suspect that it tends to prop up societal deadweights like Donald Trump, literal 'rent seekers' and not the people working on clean renewable energies etc.
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