Do people who passionate argue for buying a home instead of renting violate the Efficient Market Hypothesis? If that is so much better, why don’t see a lot of people making money from landlording, by buying on mortgage and renting it out? Actually, I would think if you live somewhere where you see that, buying may be a good idea. If you personally rent from a landlord and you have a good idea that you and another family just paid for the landlords holiday cruise, you may want to stop that. But if you live somewhere where renting from co-ops, councils etc. is more frequent, and you see nobody profiting off landlording, and this suggests buying and re-renting is not really an option, you probably don’t win much by buying.
Let’s call it the Diamond Houses Fallacy. A Diamond House one that is indestructible and its value can only go up. Everything paid in mortgage for a Diamond House beyond the interest goes towards the equity, which is better than throwing it away in rent. However, real houses depreciate, need renovation, and you must also price in a certain risk of the neighborhood becoming lower value, kinda slum. If your country allows—for tax purposes—depreciating a house over 25 or 40 years, it may mean a 25 or 40 year mortgage would buy nothing, in the accounting sense: of course the house worths something, but you may have spent more on renovation.
But the real point here is that if you trust in efficient markets, you need not speculate on whether rent is spent on renovation or eaten up by depreciation. All you need to look around and see if people are making money with arbitraging it or not.
Do people who passionate argue for buying a home instead of renting violate the Efficient Market Hypothesis? If that is so much better, why don’t see a lot of people making money from landlording, by buying on mortgage and renting it out?
There are transaction costs involved in landlording.
People take better care of a house if they own the house.
Sorry, I meant in the sense some places you see and some places not and this should inform your choice.
Efficient markets is like every hypothesis, it has various probabilities of working in various conditions. Usually we need a fluid market, something that is not like De Beers diamonds, but more like a market with a million homes on a city and hundreds of thousands of speculating homeowners. A market where it is easy to be a vendor and thus collusion and rigging is unlikely. Where the barrier to enter is low. Houses are really close to an ideal market, you won’t start a mutual fund tomorrow, nor open a Michelin-star restaurant, but you could be landlord really easily. Suppose you don’t want to profit in such a market just prevent others from profiting off you i.e. save that kind of money, which is the renters dilemma. Then the algorithm is really simple 1. is anyone profiting off me? 2. are there a lot of people profiting off people like me?
Renter who rent from private landlords can make an efficient decision just by inviting the guy over to a beer or five. You have no job? Rent out ten apartments and basically do this for a living? You have a nice car and holidays in good places? Well, fuck you I am off to buy a house :)
I think the question is whether someone may be leeching you off needs not be a theoretical question. This is what I mean under efficient markets: if you don’t see a leech, and see an improvement opportunity nevertheless, be aware of hidden costs.
You have a nice car and holidays in good places? Well, fuck you I am off to buy a house :)
Well, as Marx could have told you, you need the initial capital to start :-D
But yes, it’s a common way of earning money. Typically you buy a house in dire need of TLC (because it’s cheap), fix it yourself, and then rent it. There are a lot of people who are landlords and rent is their primary source of income.
It’s not all roses, of course—it’s just a business and like any business it has its own failure modes.
But as Mises would tell you, capital is not necessary as you can borrow money and still pocket the entrepreneurial profit and managerial salary, having to pay only interest, now whom to believe :-D
I am joking, of course, capital being difficult / expensive to acquire is one of the primary problems of real-world market economies, in the ideal market simply presenting a good business plan, even without any sort of a collateral would get other people’s money thrown at it which requires perfect trust and perfect trustworthiness. Markets where only people who already have capital can engage in entrepreneurship end up with nasty outcomes, not only high inequality but also crappy entrepreneurs the customers must put up with.
in the ideal market simply presenting a good business plan, even without any sort of a collateral would get other people’s money thrown at it
Well, Silicon Valley functions more or less like this. Hedge funds can look like this, too.
Markets where only people who already have capital can engage in entrepreneurship end up with nasty outcomes
That’s basically a counterfactual—businesses have been able to borrow money for a very long time in human history :-)
In reality the situation is a mix: it’s not quite true that “A bank will only lend money to someone who can prove he doesn’t need it”, but it’s also not quite true that a solid business plan is all a bank needs to lend you money. Banks are sufficiently rational to want to have positive-expected-returns loans—they will lend money if they think the loan will be good.
I also suspect that entrepreneurship is noticeably easier in the US than in Europe.
Do people who passionate argue for buying a home instead of renting violate the Efficient Market Hypothesis?
The explanation for this market inefficiency, as for so many others, is the government. There are massive tax benefits to owner-occupied housing, like the non-taxation of imputed rent. This means that the value of a house to a homeowner exceeds the value to a landlord. This plus the liquidity-constraints of the marginal homebuyer mean that the marginal house is worth more to the marginal homebuyer than he is able to pay for it.
As for whether people are arbitraging this or not? Yes, millions of middle class homebuyers are arb’ing this, saving themselves a huge amount of money.
I thought it is just the US-specific stuff, then I realized that the rent non-taxation applies everywhere the landlord is supposed to pay income tax on the rent, except where it is cash under the table, except where landlords are offshore companies with tax shenaningans, except where it is rented from a non-profit co-op, this third is actually our case.
But this gives a useful heuristic, if anyone pays tax on your rent—I think our co-op doesn’t but I need to verify it—that is an argument for ownership.
I too have noticed that the weird part of taxation is that it encourages barter and DIY. This is not every efficient. It is value in general and not cash movements that ought to be taxed, but of course it is both hard and useless, as governments need cash to finance services. I wonder what non-market-distorting tax ideas exist.
I think our co-op or non-profit organizations in general, if they are tax-free or tax-reduced, are good ways to deal with these distorting effects. If we ever decide to buy a property, we will probably look into a credit union mortgage, not a for-profit bank, and not necessarily because profits are evil but because—probably, need to find out—non-profits are not or lower taxed.
Do people who passionate argue for buying a home instead of renting violate the Efficient Market Hypothesis? If that is so much better, why don’t see a lot of people making money from landlording, by buying on mortgage and renting it out? Actually, I would think if you live somewhere where you see that, buying may be a good idea. If you personally rent from a landlord and you have a good idea that you and another family just paid for the landlords holiday cruise, you may want to stop that. But if you live somewhere where renting from co-ops, councils etc. is more frequent, and you see nobody profiting off landlording, and this suggests buying and re-renting is not really an option, you probably don’t win much by buying.
Let’s call it the Diamond Houses Fallacy. A Diamond House one that is indestructible and its value can only go up. Everything paid in mortgage for a Diamond House beyond the interest goes towards the equity, which is better than throwing it away in rent. However, real houses depreciate, need renovation, and you must also price in a certain risk of the neighborhood becoming lower value, kinda slum. If your country allows—for tax purposes—depreciating a house over 25 or 40 years, it may mean a 25 or 40 year mortgage would buy nothing, in the accounting sense: of course the house worths something, but you may have spent more on renovation.
But the real point here is that if you trust in efficient markets, you need not speculate on whether rent is spent on renovation or eaten up by depreciation. All you need to look around and see if people are making money with arbitraging it or not.
There are transaction costs involved in landlording.
People take better care of a house if they own the house.
We do.
“Efficient markets” are an idealized abstraction. Putting trust in such seems to be… not wise :-)
Sorry, I meant in the sense some places you see and some places not and this should inform your choice.
Efficient markets is like every hypothesis, it has various probabilities of working in various conditions. Usually we need a fluid market, something that is not like De Beers diamonds, but more like a market with a million homes on a city and hundreds of thousands of speculating homeowners. A market where it is easy to be a vendor and thus collusion and rigging is unlikely. Where the barrier to enter is low. Houses are really close to an ideal market, you won’t start a mutual fund tomorrow, nor open a Michelin-star restaurant, but you could be landlord really easily. Suppose you don’t want to profit in such a market just prevent others from profiting off you i.e. save that kind of money, which is the renters dilemma. Then the algorithm is really simple 1. is anyone profiting off me? 2. are there a lot of people profiting off people like me?
Renter who rent from private landlords can make an efficient decision just by inviting the guy over to a beer or five. You have no job? Rent out ten apartments and basically do this for a living? You have a nice car and holidays in good places? Well, fuck you I am off to buy a house :)
I think the question is whether someone may be leeching you off needs not be a theoretical question. This is what I mean under efficient markets: if you don’t see a leech, and see an improvement opportunity nevertheless, be aware of hidden costs.
Well, as Marx could have told you, you need the initial capital to start :-D
But yes, it’s a common way of earning money. Typically you buy a house in dire need of TLC (because it’s cheap), fix it yourself, and then rent it. There are a lot of people who are landlords and rent is their primary source of income.
It’s not all roses, of course—it’s just a business and like any business it has its own failure modes.
But as Mises would tell you, capital is not necessary as you can borrow money and still pocket the entrepreneurial profit and managerial salary, having to pay only interest, now whom to believe :-D
I am joking, of course, capital being difficult / expensive to acquire is one of the primary problems of real-world market economies, in the ideal market simply presenting a good business plan, even without any sort of a collateral would get other people’s money thrown at it which requires perfect trust and perfect trustworthiness. Markets where only people who already have capital can engage in entrepreneurship end up with nasty outcomes, not only high inequality but also crappy entrepreneurs the customers must put up with.
Well, Silicon Valley functions more or less like this. Hedge funds can look like this, too.
That’s basically a counterfactual—businesses have been able to borrow money for a very long time in human history :-)
In reality the situation is a mix: it’s not quite true that “A bank will only lend money to someone who can prove he doesn’t need it”, but it’s also not quite true that a solid business plan is all a bank needs to lend you money. Banks are sufficiently rational to want to have positive-expected-returns loans—they will lend money if they think the loan will be good.
I also suspect that entrepreneurship is noticeably easier in the US than in Europe.
The explanation for this market inefficiency, as for so many others, is the government. There are massive tax benefits to owner-occupied housing, like the non-taxation of imputed rent. This means that the value of a house to a homeowner exceeds the value to a landlord. This plus the liquidity-constraints of the marginal homebuyer mean that the marginal house is worth more to the marginal homebuyer than he is able to pay for it.
As for whether people are arbitraging this or not? Yes, millions of middle class homebuyers are arb’ing this, saving themselves a huge amount of money.
I thought it is just the US-specific stuff, then I realized that the rent non-taxation applies everywhere the landlord is supposed to pay income tax on the rent, except where it is cash under the table, except where landlords are offshore companies with tax shenaningans, except where it is rented from a non-profit co-op, this third is actually our case.
But this gives a useful heuristic, if anyone pays tax on your rent—I think our co-op doesn’t but I need to verify it—that is an argument for ownership.
I too have noticed that the weird part of taxation is that it encourages barter and DIY. This is not every efficient. It is value in general and not cash movements that ought to be taxed, but of course it is both hard and useless, as governments need cash to finance services. I wonder what non-market-distorting tax ideas exist.
I think our co-op or non-profit organizations in general, if they are tax-free or tax-reduced, are good ways to deal with these distorting effects. If we ever decide to buy a property, we will probably look into a credit union mortgage, not a for-profit bank, and not necessarily because profits are evil but because—probably, need to find out—non-profits are not or lower taxed.