Hey Thomas, I have a spreadsheet to highlight the disparity rather than a source, I can send it to you’d if you like? As an illustrative example though let’s imagine we have a 30 year old person with $50k saved up. They can either donate this to charity and continue to rent, or use it as a deposit (down-payment) to buy the same house, which let’s say is valued at 500k. The numbers will depend by city, but let’s assume mortgage interest rate of 4.5%, rental yield of 3% and an average house price increase of 3% per year.
If you have a 450k mortgage on a 30 year schedule, you will pay a total of $773k in mortgage repayments (450k in capital repayments and 323k in interest) and at the end of the 30 years you will own a house worth $1.21 million. If you choose to rent, you will pay $713k in rental payments over the 30 years and obviously at the end you will not own anything.
The most difficult part of this calculation is the amortization schedule for mortgages, but there are websites that will do this work for you such as this one;
Does this mean that housing is mispriced? I don’t think so. Firstly there is a huge tax advantage to owning your own house vs renting. This is because you don’t pay any tax on the rent you avoid paying. However, if you buy an investment property under the same terms and rent it out, you will have to pay income tax on the rent received. Second, in my example investors make 6% a year (pre-tax) owning housing in the long run. This compares with 8-10% by owning stocks in the long run. In general property is considered a safer asset than stocks, so a lower return makes sense, but given government bonds usually return 3-4% and they are much safer than property, a return of 6% or even higher seems reasonable.
Do people make a lot of money by investing in housing? This is a separate question to that of inefficiency and the answer is generally yes they do! One of the huge drivers of wealth inequality (Piketty) is that wealthy people have their money invested in long term assets like property and stocks, where the return is 6-10%. Meanwhile most working and middle class people have a substantial amount of their capital sitting in current (checking) and savings accounts earning 0-2%.
Several of your assumptions—for example, about taxes—are country-specific. Property tax for owners, closing costs, and tax breaks for homeowners vary from country to country.
You also didn’t include time or money costs from maintenance, which I expect to be substantial.
Your core argument—young EAs should build up savings—could be right, but has already been discussed at length. For example, see http://globalprioritiesproject.org/2015/02/give-now-or-later/
Just want to second that interested readers visit Khorton’s very helpful link. It’s a great article with a very helpful decision tree produced by 80,000 Hours & the Global Priorities Project.
Thanks for the link, I hadn’t come across it before and agree it is a very useful analysis of investing vs giving depending on one’s opinions about opportunities for investment and the discount rate applied to future donations. I think this point is related to mine and very useful in it’s own right, but the point I am trying to make also involves personal utility.
I’m worried about the sustainability of giving which requires sacrifice on the part of the donor—which I believe is the path of least resistance for those interested in EA at college and who end up taking the GWWC pledge at that time. I’m trying to communicate that it is possibly, and perhaps even likely, to be more productive to reach a level of wealth at which you can sustain your desired lifestyle and then give large amounts in excess of that level, rather than giving a significant % from the moment you join the workforce.
I agree that tax treatment of property varies from country to country along with several other relevant variables. I only offered an imaginary numerical example for illustrative purposes. My goal is certainly not to convince people to buy property without knowing anything about their circumstances, only to have them consider the possibility that it might be beneficial, and that running the numbers specific to their case is an exercise worth doing.
Hey Thomas, I have a spreadsheet to highlight the disparity rather than a source, I can send it to you’d if you like? As an illustrative example though let’s imagine we have a 30 year old person with $50k saved up. They can either donate this to charity and continue to rent, or use it as a deposit (down-payment) to buy the same house, which let’s say is valued at 500k. The numbers will depend by city, but let’s assume mortgage interest rate of 4.5%, rental yield of 3% and an average house price increase of 3% per year.
If you have a 450k mortgage on a 30 year schedule, you will pay a total of $773k in mortgage repayments (450k in capital repayments and 323k in interest) and at the end of the 30 years you will own a house worth $1.21 million. If you choose to rent, you will pay $713k in rental payments over the 30 years and obviously at the end you will not own anything. The most difficult part of this calculation is the amortization schedule for mortgages, but there are websites that will do this work for you such as this one;
http://www.amortization-calc.com/
Does this mean that housing is mispriced? I don’t think so. Firstly there is a huge tax advantage to owning your own house vs renting. This is because you don’t pay any tax on the rent you avoid paying. However, if you buy an investment property under the same terms and rent it out, you will have to pay income tax on the rent received. Second, in my example investors make 6% a year (pre-tax) owning housing in the long run. This compares with 8-10% by owning stocks in the long run. In general property is considered a safer asset than stocks, so a lower return makes sense, but given government bonds usually return 3-4% and they are much safer than property, a return of 6% or even higher seems reasonable.
Do people make a lot of money by investing in housing? This is a separate question to that of inefficiency and the answer is generally yes they do! One of the huge drivers of wealth inequality (Piketty) is that wealthy people have their money invested in long term assets like property and stocks, where the return is 6-10%. Meanwhile most working and middle class people have a substantial amount of their capital sitting in current (checking) and savings accounts earning 0-2%.
Several of your assumptions—for example, about taxes—are country-specific. Property tax for owners, closing costs, and tax breaks for homeowners vary from country to country. You also didn’t include time or money costs from maintenance, which I expect to be substantial. Your core argument—young EAs should build up savings—could be right, but has already been discussed at length. For example, see http://globalprioritiesproject.org/2015/02/give-now-or-later/
Just want to second that interested readers visit Khorton’s very helpful link. It’s a great article with a very helpful decision tree produced by 80,000 Hours & the Global Priorities Project.
Thanks for the link, I hadn’t come across it before and agree it is a very useful analysis of investing vs giving depending on one’s opinions about opportunities for investment and the discount rate applied to future donations. I think this point is related to mine and very useful in it’s own right, but the point I am trying to make also involves personal utility.
I’m worried about the sustainability of giving which requires sacrifice on the part of the donor—which I believe is the path of least resistance for those interested in EA at college and who end up taking the GWWC pledge at that time. I’m trying to communicate that it is possibly, and perhaps even likely, to be more productive to reach a level of wealth at which you can sustain your desired lifestyle and then give large amounts in excess of that level, rather than giving a significant % from the moment you join the workforce.
I agree that tax treatment of property varies from country to country along with several other relevant variables. I only offered an imaginary numerical example for illustrative purposes. My goal is certainly not to convince people to buy property without knowing anything about their circumstances, only to have them consider the possibility that it might be beneficial, and that running the numbers specific to their case is an exercise worth doing.