I see a lot of expensive houses being built in my area. A LOT. And the weird thing is that they’re being bought pretty quickly. Are these people just making more money than me? If so, what are they doing for a living? Or are they just living house poor? How exactly are they affording these places?
Edit: For reference, my neighborhood is starting to become popular (because the other popular neighborhoods have priced most people out of affording places there). The normal price of newer homes here is $700k. My home, built in 1965, which is 2500sq ft on a quarter acre of land, is $500k.
I’m intentionally simplifying. Take all the concerns about ownership vs. renting, etc, and ask yourself: at the end of the month, what is someone willing to pay to put a roof over their head?
I can buy a car, or I can lease a car. I can buy a crane for my construction business, or I can rent a crane. I can buy an office building, or I can lease an office building. I can buy a house, or I can rent a house.
The function of a car, a crane, an office, or a house is not different based on how I structure the payments. I’ve got a budget, I need a car. I’ve got a budget, I need a house.
Sure, there are long term social implications of ownership vs. renting, clearly. But the economic value of a car or a house doesn’t depend on how one pays for it. I could pay cash money up front, I could take out a loan, I could rent. I could trade a supercar for a house, or mine gold to build a house. It doesn’t really matter. The opportunity cost of committing all the cash up front is similar to the interest on the mortgage, which is in turn similar to rent. Any method I might use to pay for it can be converted into a perpetuity… which is similar to rent.
That was the point of the hypothetical. That’s why economists say, if you want to know the economic value of something, find out the price of rental. That’s a quick baseline to the economic value. The seller – be they corporation, hedge fund, or private owner – doesn’t actually determine that value, the next buyer does, based on what they are willing to pay. If you’re not willing to pay, then you’re not the next buyer.
I’m aware. Turns out, if you remove enough nuance from a situation you can make it seem like whatever you want!
But paying a mortgage is not just paying for a roof over your head. It is working toward owning the shelter forever. You are paying for two different things simultaneously, versus paying only for the monthly shelter while allowing the investor to own the shelter forever. They are two fundamentally different things.
So, yes, the value of shelter from an economic view can be estimated looking at rent. And if you want to remove the nuance until unfettered capitalism seems like it’s going to work for the average citizen, then sure, all you need to think about is supply and demand. But those of us who live in the real world care about the long-term social and economic effects of allowing investors to control housing for the middle and lower classes.
What about “able to pay?” Leaning on the market to set all of these values with no regulation means that the only people able to own property are the ones who start with capital and everyone else is SOL. I’m not ok with that.
It means the same thing, unfortunately.
I’m not telling you how it should be, I’m telling you how it is. You can study rent control & related types of restrictions for how it might be different. But if homes are being priced out of your range in your geographic area, that’s because there are other buyers or renters willing to pay more, not because the house is owned by a corporation or a private citizen. The seller doesn’t decide how much the buyer or renter is willing – or able – to pay.