• Steve H. Hanke
    05/04/2016 - 08:00
    Authored by Steve H. Hanke of The Johns Hopkins University. Follow him on Twitter @Steve_Hanke. A few weeks ago, the Monetary Authority of Singapore (MAS) sprang a surprise. It announced that a...

The Fallacy of Homeownership – Why Do People Believe The Myth?

Tyler Durden's picture




 

Submitted by liberta blog,

In our previous article we explained why buying a house is often a very silly financial decision, especially for people who are young, or those that have a low net worth.

In this article we're going to explain why we think people are so infatuated with the idea of buying and owning a house, even though, if you look a the facts, it goes against many of the investment principles they believe in and hold dear.

But first, I need to address one of the myths about buying residential property...

Myth #1: Buying a house is a way to beat inflation

The theory is:

It is worth borrowing a huge amount of money to purchase a house because, not only will your property appreciate in value over time, your loan amount will also decrease in value in record time, partly because you are paying off a bit of your loan every month and partly because inflation eats away at the value of the amount you still owe!

And it is true – borrowing R1,000,000 to buy a house may seem like a scary amount right now, but a few years later, R1,000,000 will be considered a small amount of money.

If you would like to see just how effectively inflation destroys the value of money over time, plug a few numbers into the inflation calculator and see for yourself.

I have to admit: this theory makes for a very convincing argument.

But it is not.

The elephant in the room

The hole in the buying-a-house-is-a-way-to-beat-inflation-theory is the fact that the interest rates commercial banks charge their customers have always been higher than the inflation rate.

If you take out a loan, you pay more in interest to the bank, than you gain through the devaluation of the amount outstanding on your loan due to the effects of inflation.

The only real winner in this equation is the bank who was kind enough to grant you a loan to buy your property.

And when I say winner, I really mean it, because not only is the bank earning an above inflation return on the money they lend to you, they also create the money they lend to you, right there on the spot, out of thin air.

If I had to behave like a bank and you were a customer to whom I was granting a home loan, it would be pretty much the same as if I had a printing press in my basement, where I would quickly print up R1,000,000 in counterfeit currency to lend to you, make you sign a contract with dire consequences to yourself should you ever miss a loan payment and then, to make sure I get the best deal possible, charge you an above inflation interest rate on the counterfeit money I lend to you.

If you or I behave like this, it is called a scam and, of course, it is illegal.

When banks behave like this, it is called fractional reserve lending and, whether you like it or not, it is perfectly legal.

The wonders of fractional reserve banking

I know what you’re thinking.

But this is no conspiracy.

The fact that commercial banks create money when they grant loans is not a secret.

Not at all.

In fact, commercial banks create over 90% of all the money that circulates in our economy. It is just the way the system works.

If anything is suspicious, it is the fact that everybody uses money, but almost no-one understands where the money they use comes from.

How to make money from a Residential Property Boom

Once you understand the way the system works, you’ll understand that one of the best ways to make money out of a residential property boom is not to invest in residential property, but to invest in commercial banks that grant loans to people who buy residential properties.

During a residential property boom, banks are creating massive amounts of money out of thin air and lending it out, with interest, to many many customers who are lining up to buy the rapidly appreciating residential property.

If you own a part of the banking action, you can make a lot of money while the boom lasts.

There is only one problem with this approach: like all good parties, it eventually comes to an end and, the next day, you wake up with a massive hangover.

Booms usually lead to bubbles, and bubbles eventually pop. When bubbles burst , the very same banks who were raking in record profits just a few months prior to the bubble bursting are all suddenly bankrupt. A good example is the 2008/2009 housing bubble collapse.

But have no fear.

There is an even better way to make money out of a residential property boom, with just about zero risk:

At the start of a housing boom, find a job with a commercial bank and negotiate your salary in such a way that your bonus is linked to the profits the bank makes on residential property loans.

Trust me. It’s a slam-dunk.

So, who is spreading the propaganda?

This is pure speculation, but since bankers are the main beneficiaries of the fractional reserve banking system, I won’t be at all surprised if they are also the main players responsible for spreading propaganda about the home ownership myth I have attempted to debunk with these articles.

And if you’re a banker, who better to get on your side than the government?

Much has been written about the way politics work (especially in America), how lobbying costs money and how big business is the main contributor to political campaigns, so I’m not going to add my own thoughts here.

What I will say is this: if these concepts are new to you, perhaps it’s worth re-reading this article one more time. Perhaps click on some of the links and watch the youtube videos to make sure you understand everything.

Then, if you just want to feel patriotic and inspired, take a look at the video below. I’m sure you’ll love it. It nearly drove me to tears. Heart wrenching stuff.

Over to you

When, after many years of being an investor, I finally figured out how the monetary and banking systems work, it massively changed my perspective on investing.

Since the money we use is something that affects everybody on a daily basis, I find it astounding that so very few people understand where money comes from. I encourage you to do your own research. Reach your own conclusions.

0
Your rating: None
 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 03/27/2014 - 17:12 | 4600264 synergize
synergize's picture

A little too simplistic ...

(1) you're assuming that on the long-term the banks current interest rates (lets say 3, 4, 5% - yes I know someone with a nice 3% 15 yr loan) are going to stay below inflation - if they dont then you ARE making money.

(2) You're ignoring the tax break that people get for interest payments - the society is geared towards debt.   Add that tax break in (on the tax payer backs i'll note) and the interest rate is much lower than advertised

Thu, 03/27/2014 - 17:38 | 4600339 Notsobadwlad
Notsobadwlad's picture

Since this is pretty much a repeat, it is looking more and more like a shill piece for the buy to rent funds ... such as Blackrock.

Let's say you have the choice of paying $1400 on a mortgage or $1400 in rent. On the mortgage a small but increasing amount goes into principle, which should theoretically over the long run sit idle but increase in value approximately with the rate of Fed created inflation (this is currently much higher tham a bank savings account)... and on the rest, which is interest you get a 1:1 tax deduction against ordinary income. On the other hand with the $1400 rent, you basically just flush it down the toilet every month, never to see it again. It only benefits the rentier class.

If buying was not a good investment then there would not be buy to rent funds. Don't do what we do, do what we say, so that we can make money... typical banker b/s.

Thu, 03/27/2014 - 17:48 | 4600406 Skateboarder
Skateboarder's picture

This is the very exact reason Skateboarder's dad wants to throw down for a 750K house in a banana market, even though nothing at all makes sense.

We pay 3K in rent every month. That's a lot of fucking money going right down the john, every month after next. Unless hyperinflation or SDRs take over soon, housing prices will continue to escalate, come whatever recession or depression. It's an inherent attribute of the exponentiation of monetary supplies.

The only thing that hasn't gone up is wages, in the last two decades / home-price-doubling-cycles.

Would you rather 'own' a home and be able to someday sell it for a [diminutive] profit, or just flush the money down the toilet in rent? Not everyone can go Galt / live off the land / be a prepper extraordinaire. Everyone needs a pad. Housing is one of those things that people call bollocks on once realizing the nature of the banking system, but there is still reason to buy property, the main one being competition and the surefire doubling of home prices every ten years, at least in Silicon Valley.

Thu, 03/27/2014 - 18:07 | 4600454 fonzannoon
fonzannoon's picture

My PITI is 3k a month, so figure same as your rent. Goes up a little every year obviously. We bought the piece of sh....house... for 515k. I have refinanced twice (original rate was 6.875%) so I have started the 30 year clock over twice even though the interest rate is lower. I figure between principal and interest I will pay about 875k when it's all said and done and that does not include the thousands of dollars for basic upkeep. But still I get the idea that no one is stamping their feet on top of me or smoking below me. It's nice to be in a free standing home. I can rent out the basement for about 1k a month to a crackhead if I need to. So that helps.

There is something to be said for renting a house and not forking over the downpayment and keeping it in the S&P 500 instead. Because if we all think asset prices will go up forever then that goes for the stock market too. Everyone is in a different situation in terms of location etc. and has to decide accordingly.

Thu, 03/27/2014 - 19:38 | 4600748 jbvtme
jbvtme's picture

that bush gene pool could use some diversity...

Thu, 03/27/2014 - 19:45 | 4600777 jbvtme
jbvtme's picture

i haven't had a mtg, car loan, health/life insurance, homeowners insurance or heavy car insurance in thirty years. i drive eight year old cars and have been renting for six years.  oh, and did i tell you i have been retired for eight years?  not bragging. when i was un my twenties i asked a few guys my age the secret to success.  they pretty much agreed that being self employed and staying out of debt were the keys. americans are slaves to the zio bankers. the bars on the windows of their houses are imperceptible.

Thu, 03/27/2014 - 22:47 | 4601367 boogerbently
boogerbently's picture

What do the "rich guys" do ?

Fri, 03/28/2014 - 08:54 | 4602058 N2OJoe
N2OJoe's picture

What is better, owning or renting? What a ridiculous argument!

 

The obvious answer is:

Foreclosure squatting!

 

Make friends with an electrician who can turn the power on for you, and you're good to go.

Fri, 03/28/2014 - 08:55 | 4602065 jbvtme
jbvtme's picture

not rich. frugal. stay out of debt and develop your own ideas

Thu, 03/27/2014 - 22:31 | 4601323 The Deacon
The Deacon's picture

I not very bright, sorry.

If over 25 years I buy a home and pay essentially DOUBLE the value of the home with interest included (don't forget taxes and maintenance), I still end up with only one home after paying for 2.

If I rent A HOME instead, I only 'pay for one' over my lifetime, but pay no taxes or maintenance.  I also have more free cash slow...and MUCH greater mobility.  I am free to go where the jobs are....if such a place exists!

So, besides price appreciation (NO guarantees)  and paying rent beyond the 25 year amortization, what is the monetary downside to renting?

Fri, 03/28/2014 - 01:42 | 4601641 Notsobadwlad
Notsobadwlad's picture

Yes, over 25 years you buy a home and own a home and it might cost two times the purchase price. If over 25 years you pay rent, you STILL pay for a home twice over and you own NOTHING. Do you really think that you are not paying for interest, taxes and maintenance through your rent? Is there a magic tax and maintenance fairy where you live?

Fri, 03/28/2014 - 02:13 | 4601659 Gusher
Gusher's picture

Notsobad, thank you for writing the obvious so I don't have to. You wrote: "Do you really think that you are not paying for interest, taxes and maintenance through your rent? Is there a magic tax and maintenance fairy where you live?".  Love it!  Right on!    Folks, if you have steady reliable income, buy the damn house. Better in numerous ways including the stability it gives your family.   Nuff said.

Fri, 03/28/2014 - 10:00 | 4602282 Blue Dog
Blue Dog's picture

It's always more expensive to rent than it is to own. Our mortgage is $550. It would cost $750 to rent a comparable house.

Fri, 03/28/2014 - 14:25 | 4603242 Black Warrior W...
Black Warrior Waterdog's picture

In California, your statement is considered bullshit.

Thu, 03/27/2014 - 23:01 | 4601410 post turtle saver
post turtle saver's picture

silly rabbit, you're supposed to refi _and_ cut the clock when you do it... 30 year, pay 10, refi to 15, cut 5 and keep paying principal down at the same rate...

sure it's a game but you gotta be good at it

Thu, 03/27/2014 - 18:12 | 4600475 kaiserhoff
kaiserhoff's picture

Shallow and silly article, and just plain wrong on many points.  My daughter recently refied to a 3% 15 year fixed loan.  Tax deductable which makes the real rate under 2 percent.

Does this clown think the inflation rate is sub two percent?

Thu, 03/27/2014 - 18:21 | 4600499 fonzannoon
fonzannoon's picture

I am not defending the author but your daughter is absolutely an anomaly. Most people can't afford a 15yr mortgage payment even at 3%. I'm 37 and none of my friends can afford a 30yr fixed at 3% without some serious help from their boomer parents. Maybe not with the mortgage but definitely with the upkeep.

Thu, 03/27/2014 - 18:28 | 4600539 kaiserhoff
kaiserhoff's picture

Yes, she lives a town of about 100,000.  Prices in the cities, especially DC have gone nuts, but it's easy to forget, it hasn't always been this way.   For decades anyone with a job could buy a house for about one quarter of his take home pay.  We would get back to that if the Fed ever quits central planning.

Thu, 03/27/2014 - 18:31 | 4600553 fonzannoon
fonzannoon's picture

I hear you man....but I believe in 2008 we got a peek behind the curtain, and we were staring at the end of the financial system as we know it. Everyone (almost) decided to go this route and we will travel it till it ends. But when it does I don't think anyone will be buying a house like they did 30 years ago. It will be something very different and probably scary as shit.

Thu, 03/27/2014 - 18:48 | 4600596 kaiserhoff
kaiserhoff's picture

I've starred at the same abyss, and all it means to me is that the the richest of the banksters lose a shit load of money.

I'm OK with that.

 

Thu, 03/27/2014 - 18:52 | 4600607 fonzannoon
fonzannoon's picture

I am pretty sure they will be just fine. They have ripped off enough wealth already to last them a few centuries at least.  

Fri, 03/28/2014 - 07:11 | 4601838 Doña K
Doña K's picture

I hear and understand every argument you guys make and most have logic. One thing that no one mentions is that after 30 years, houses are worth very little after paying twice as much, and with the interest and the maintenace even more.

If you now want to sell the 30 year old house what can you buy with the appreciated value that everyone is talking about? just another 30 year old house.

Rentals give you more flexibility, more opportunity and the savings from not having to pay interest, maintenance and taxes can be saved and accumulate wealth. Based on the fact that per square foot of buying versus renting, renting is cheaper by far and you don't need the extra room that you sometimes get with houses.

If you have strong feelings about ownership, stability and need proof of self worth, then go ahead and buy but don't argue with others passionately that buying is better.

Someone asked: What do the rich people do? The answer is: anything they want. It does not matter to them. Cost comparison is the last thing they care.

Fri, 03/28/2014 - 00:39 | 4601570 DYS
DYS's picture

You think they EVER lose?

 

Think again.

Thu, 03/27/2014 - 23:02 | 4601415 post turtle saver
post turtle saver's picture

see above

Thu, 03/27/2014 - 19:15 | 4600674 Boondocker
Boondocker's picture

my credit score is crap because we don't use credit  cards or auto loans and my interest rate is 3,25% thru bank of asses

Thu, 03/27/2014 - 18:55 | 4600617 WhackoWarner
WhackoWarner's picture

I agree totally.  Why pay rent if you have a down payment large enough to make your monthly mortgage less than current rentals?

I also point out that many people, like me, bought a house cheap, cheap.  I have the roof over my head paid for silly. Inflation?  Bring it on.

Thu, 03/27/2014 - 19:01 | 4600637 fonzannoon
fonzannoon's picture

why not rent a house and use your downpayment to buy PM's?

Thu, 03/27/2014 - 20:13 | 4600892 TinF0ilHat
TinF0ilHat's picture

I rent due to the fact I wont have to pay the 28k to replace the roof, or the $500 to the plumber to fix the broken pipe, or spend thousands a year on lawn maintenence, or fork over $8000 for a new fucking A/C.  I save the money that I would be spending on upkeep on PMs.  And plus you never really own your home, You have to pay your lot rent to uncle sam........

Thu, 03/27/2014 - 20:54 | 4601032 effendi
effendi's picture

Who is dumb enough to spend thousands a year on lawn maintenance? Unless you rent an apartment then you still need to mow the lawn as either an owner or renter. 

We rent a house, purchased a lawn mower and whipper snipper for under $500 and they will last perhaps 5 years. The petrol and oil to operate them will cost us $40/year. So all up it will cost $140/year.

Plus I mow my neighbours lawn at $20 a time so I will make $300/year. 

Fri, 03/28/2014 - 10:04 | 4602297 Blue Dog
Blue Dog's picture

You pay for lawn maintenance. It's priced into your rent. Just like property taxes.

Thu, 03/27/2014 - 20:59 | 4601049 greatbeard
greatbeard's picture

>> or fork over $8000 for a new fucking A/C.

Tell me a fuckin about it. My AC just went south on me.  The tech recommended I forgo a quote and check out used ones on Craigslist.  He said putting it in was pretty easy.  He said he doesn't mind seeing the upper class folks forkin over ridiculous dollars for a new unit from his company, but there's just no sense in it for low end scum like me.

I got on Craigslist that night.  Found a Carrier, great unit, used, from a commercial building, just what I needed.  $395, plus about $100 of miscellaneous, and I've got a very nice unit that should last another 12 or so years.

Thu, 03/27/2014 - 21:07 | 4601071 fonzannoon
fonzannoon's picture

I paid $8,800 for central A.C a few years ago. I refuse to turn it on but from what I read it should work well if I ever decide to turn it on, which I won't.

Thu, 03/27/2014 - 22:35 | 4601335 The Deacon
The Deacon's picture

Peanuts paid and a commercial unit to boot.   Sweetness! 

Nice to know there are still some kind people out there.

Thu, 03/27/2014 - 19:18 | 4600677 Freddie
Freddie's picture

The problem is there are endless numbers of factors in the equation.  Any possible profit or happinees of home ownership has caught the eye of the county who owns your land.  You don't really own it.  The bank owns it and if you pay it off - the county owns it.  And those hard(ly) working city and country employees need golden pension plans.

The shit is never ending.  Well with inflation, you keep ahead cause the value goes up due to inflation.  This means that door, window or piece of wood will cost more in the future and it will.  The problem is shit breaks all the time and maint on many houses is not that cheap. 

Skateboarder is in Calif - so the whole thing becomes an even bigger mess.  Insane property costs, taxes, water, energy, out of control state govt, invasion of illegals. Calif was paradise but the libs really destroyed it.  many of them were from NY, PA, NJ and Baltimore like mafia princess Pelosi.

Thu, 03/27/2014 - 19:22 | 4600696 fonzannoon
fonzannoon's picture

Good to see you Freddie, I'm drinking back in black IPA tonight.

Thu, 03/27/2014 - 21:01 | 4601057 greatbeard
greatbeard's picture

>> home ownership has caught the eye of the county who owns your land.

You pay the county their pound of flesh wether you own or rent.  In general, the same piece of property, renters pay more to the county than owner occupants.

Score one for ownership.

Fri, 03/28/2014 - 01:18 | 4601622 NaN
NaN's picture

Skateboarder, I know what you mean.

Fri, 03/28/2014 - 01:40 | 4601638 chiswickcat
chiswickcat's picture

Rent vs buy. In most places you can rent a much nicer residence for the same amount of mortgage equal mortgage payment. If I buy, and I want to keep my monthly cost the same I would have to live in a property half the value. Therefore, by renting only what you need gives you the chance of having surplus cash at the end of each months to invest in other ways...

Fri, 03/28/2014 - 04:42 | 4601754 Tom_333
Tom_333's picture

Why should you buy a house?

To live in. Wat otherreason is there...?

Thu, 03/27/2014 - 17:33 | 4600349 Bluntly Put
Bluntly Put's picture

I thought it was a bit simplistic as well. The article fails to address the idea of secured loans, that is collateral for the loan in case of default is title to the property. Almost all theories of fractional reserve lending avoid the distinction.

I'm no banker or ecnomist but it seems to me that avoiding the discussion of "secured lending" is in a way downplaying the entire racket. When banks make secured loans it is in their interest to slant the price of the collateral in their favor. It also becomes immediately apparent why banks got bailouts from the fed in terms of both ultra low interest rates, and monetization of their creative securities as other banks probably are using them as collateral themselves.

I'm convinced banks don't print money out of thin air, they print money out of confidence we give them in their accounting system. It's no mystery to me why both government accounting figures and major bank accounting figures are dubious at best. They have to maintain the illusion everything is growing and expanding to keep the whole game of interleveraged promise balls in the air.

 

Thu, 03/27/2014 - 18:03 | 4600442 AccreditedEYE
AccreditedEYE's picture

This article is from Blackstone.. They'll do anything to scare sheep out of buying and not renting from them.

Thu, 03/27/2014 - 17:37 | 4600363 SilverIsKing
SilverIsKing's picture

Agreed on both points.  How does a bank raise rates on a fixed rate loan?  Nonsense.

Thu, 03/27/2014 - 18:57 | 4600620 Robot Traders Mom
Robot Traders Mom's picture

Yes, it is too simplistic and reads like a marketing piece.

Even right now, real inflation is much higher than the 5% on a 30-yr fixed. Inflation will most likely be around 20% when the government finally lets CPI officially pass 5%. 

Home ownership is bullshit. Literally the one argument that is hard to defend is being a debtor on long-term agreements. Nobody wants to be a creditor on this stuff (read: Ocwen). 

Why they chose to make the inflation argument out of so many others is beyond me...

Thu, 03/27/2014 - 19:14 | 4600668 Stuck on Zero
Stuck on Zero's picture

Yep, simplistic.  Why would you ever rent when you could get a better place at 0% down with zero personal risk?  The upside is all yours and the downside is the banks (taxpayers).

 

Thu, 03/27/2014 - 19:41 | 4600760 Event Horizon
Event Horizon's picture

Bullhockey,,   my house has gained 1.2 million (no cap gains here) in 12 years... 300% and no mortggae

my neighbor rented for 3 years and lost 72 grand in rent... waiting for a crash and the market moved up 30% so he lost more in opportunity

Location, location, location....timing, timing, timing

Thu, 03/27/2014 - 20:10 | 4600879 juslen
juslen's picture

luck luck luck

Thu, 03/27/2014 - 20:16 | 4600909 Event Horizon
Event Horizon's picture

it would be luck if it was only my house, it isn't

Thu, 03/27/2014 - 19:47 | 4600798 cornflakesdisease
cornflakesdisease's picture

Working class people's little homes don't give them tax brreaks on the interest except for the first few years.  Then the regular exemptions are better.  We all ain't rich.

Thu, 03/27/2014 - 21:57 | 4601213 Hammer Down
Hammer Down's picture

Too simplistic indeed. I have no argument against his take on fractional reserve banking. Most people on here are well aware of how the banking system works however and attacking the idea of home ownership to make that point isn't necessary. Banks price based on par to earn a spread when they sell the loan to MBS packagers. The days of holding the loan in house are long gone, so right off the bat his inflation argument is nonsense. Owning a home is most definitely the smarter move exactly because of the inflation hedging and principle reduction; unless rents are substantially lower and the return possibilities on the difference are greater than the leveraged returns from home appreciation. That's a tall order. Speculating in a bubble market? That's a different story altogether

Thu, 03/27/2014 - 17:11 | 4600266 fonestar
fonestar's picture

fonestar will stay in his attic thanks.

Do NOT follow this link or you will be banned from the site!