Tobold's Blog
Thursday, August 03, 2023
Death and Money

After early retirement, I bought my first house, with the money I had recently inherited from my parents. That statement is true, albeit somewhat misleading; I could have afforded a house much earlier, and I could have bought a house with my own savings. I used the inherited money because it was on hand, not tied up in some other investment. For a moment I thought that buying your first house so late in life, with inherited money, was somewhat unusual. Then I realized that this might well become a trend.

In many first world countries two things have happened over the past decades: House prices have risen a lot faster than general inflation, and wages have risen slower than general inflation. I won't be going into all the reasons for that, from green belt / zoning laws to globalisation. But the overall effect has been that the price of a single family home as a multiple of that single family annual income has gone up significantly. I just saw a report from the UK, where it was stated that even in the regions with the cheapest houses the house price / annual income is now over the recommended maximum of 5, and in London it can be as high as 14. That is simply unaffordable, even more so with rising mortgage rates.

But there is another side to that coin. Economists have jokes few non-economists understand, and one of them is that we haven't found out how to get a loan from the Martians. Which is to say that every debt, every mortgage of one person is another person's savings. Even if you think you owe that money to your bank, that bank has owners and shareholders, and thus indirectly you own that money to them. Somebody profited from that rise in house prices, and it is the people who own those houses.

Now I have always been opposed to the simplistic and wrong narrative that the boomer generation has somehow conspired to steal all the money from the millennial generation. Parents rarely consciously steal from their children. But the boomer generation, of which I am a part of, had a work life under very different, and more favorable, economic circumstances than the younger generations. And a large majority of those unaffordable single family homes is owned by the family living there. Intergenerational economic inequality has gone up, but that has a natural end. Sooner or later these house owners will die, and the younger generations will inherit that house.

Of course for some families this generational transfer of wealth will happen earlier and voluntarily. A lot of house purchases these days are financed by the "bank of mom and dad". Parents who bought a house when it was still affordable, and have paid off their mortgage, sometimes are willing to take out a mortgage on that now much more expensive house and give the money to their children, so they can put down enough money for their house. Other parents won't be as generous, or would rather hang on to their retirement savings because nobody knows how long they will live. In that case the generational wealth transfer happens at the death of the parents. And from statistical information about life expectancy and typical age of having children it is easy to see that a lot of those inheritances will go from parents in their 80's to children in their late 50's.

Of course there is a lot that is wrong with that picture. It means that for many people having a middle-class education and job becomes less important than having middle-class parents, reducing social mobility. Waiting for your parents to die so that you can afford a house is a terrible thing. And it also means a world in which families with children live in cramped rented apartments, while those single family homes are inhabited mostly by people whose children are out of the house already, and there are a lot of empty rooms.

A sharp drop is house prices would provoke a lot of cries of woe and recession. But in the end, cheaper houses means a better intergenerational wealth distribution. Thus public policy should do a lot more to enable more houses to be built, and to provide more social housing as well, existing house prices be damned.

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Sorry Tobold I can't recall which country you live in, but I can definitely assure you that this exact situation is a very big deal in Australia at the moment.

We've has massive increases in house prices here for some decades, combined with relatively flat real wages, and now, of course, increasing interest rates.

There's a lot of talk about home ownership becoming very much a matter of have and have-not families, with inheritance being the only feasible way for a lot of people to own a house.
One of the problems you don't mention. When house ownership implies getting a mortgage, then free market rules don't apply: it's not your money which fixes demand, it's how much the banks are willing to lend you. This has caused an explosion of house prices, helped by the banks for which the interests you pay are profit. There have been proposals fixing the maximum amount of mortgage to the price of the house and NOT to your credit rating. While people scream that this will cause a lot of people to be unable to buy (which is already the case), it would force real estate prices back into humanland instead of being based in bankland.
In the Netherland there were policies in place to encourage parents to not wait till death to help their kids. It's called the "Jubelton" - freely translated to "Happy One Hundred Thousand". Parents are allowed to give their children 100.000 EUR completely tax-free as long as that money was spent on buying a house. The policy has stopped now - because it was taken over by "bank land". It worked for a short while, but it moved to the first question a young couple would get when going to the bank was "How much are your parents contributing?" and house prices would just rise due to the fact that combined with mortgages, people were ably to pay higher prices. This happens more often on other aspects as well. Young couples were exempt from paying taxes when buying a house and promptly the housing prices for (relatively) cheap starter houses would rise to now include the taxes you saved. The one thing that DID help (for now) is the new rule that you have to pay 11+% tax on a house if you DON'T end up living in it instead of the 2% you pay when you do. Together with the government enforcing max rent prices on more and more types of residences, this is leading to an exodus of investors in the Netherlands. Prices have dropped a bit more than average for houses where this applies. Now what happens when a new equilibrium is reached we'll have to see. The Netherlands still has a housing shortage of about 2%. Sounds low - but in practice that is about 200.000 houses, and the shortage is increasing due to conflicting regulatory pressure. Projects are cancelled because investors fear that max rent prices will push the project into a negative proposition and the projects that do want to continue are being held back by not getting permits due to nitrogen emmissions or other climate related rules. All in all - it's complicated. Turn one dial with the best of intentions and a cascade of other effects happen...
In the US (I don't know enough about other countries to comment on them) I'd like to see one small change made to see how that affects property values. That is to limit how much an organization can purchase. Companies like Zillow, Redfin, and others in the US have been buying homes to resell them at a premium. I support house flipping if it involves actual value add (i.e. fixing the home up and then selling it). However, I do not support buying homes to then just relist them at higher prices. It reminds me how people used to game the WoW auction house - they'd corner the market on an item and really drive up the price. Some people think that's okay, but I don't when it comes to housing (if was designer sneakers then I could care less).

I also wonder how much of the price increases are due to peoples wants (developers catering to people with money will drive the whole market up) and/or government regulation. That has 100% happened for automobiles - there are so many regulations that it is pricing poorer people out of being able to purchase a vehicle. I know in the US there is a tremendous amount of homes that are inexpensive, however people typically don't want to live in those areas. So it doesn't strike me as a simple supply vs demand equation.

The simple fact that some of us can afford to pay more means that the market will rise unless there are price controls. In addition, multi-generational families, people getting interest-only loans, and other individual factors all serve to raise the cost of housing.

If they ask, I would encourage my children to by homes that need lots of work and then to put that "sweat equity" into the home. Don't be the person that needs 3000sq ft minimum. Start small and build your way up. I just bought a home last year so I feel like I'm in touch with the market and there are plenty of opportunities, but people, especially young people can't go into the process thinking they can afford what their parents have now. Their parents had decades to build wealth, it's most likely not going to come overnight. Buy a house for $150k, put "sweat equity" into it and then sell that and put it into another house that gets you closer to your goals.

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