Welcome Guest [Log In] [Register]


Reply
Robert Shiller: The Illusion of Housing as a Great Investment; Robert Shiller Says Housing Is Not An Investment
Topic Started: 15 Apr 2012, 10:54 AM (910 Views)
Mahamed
Member Avatar
Morbidly Obese

http://www.fool.com/investing/general/2012/04/12/the-illusion-of-housing-as-a-great-investment.aspx

The Illusion of Housing as a "Great Investment"

By Brian Richards | More Articles
April 12, 2012 | Comments (3)

Yale professor Robert Shiller, author of the new book Finance and the Good Society, says that historically home prices have not been a good financial investment -- they essentially tracked the rate of inflation from 1890 to 1990.

Yet during the housing boom of the 2000s, the mind-set of most Americans was that housing was a great capital-gains-generating investment. I recently asked Shiller, one of the leading thinkers on U.S. housing, how we collectively fell into that illusion. Hear his explanation in the video below, excerpted from my interview with him in front of a live audience at Motley Fool Headquarters. (Running time is 3:51; a transcript is provided below.)

Robert Shiller: There's no guarantee that home prices are going to go up. I think we've gotten into an illusion about that. We got into an illusion and it created this spectacular bubble. We have to reflect now that we had a kind of crazy mind-set in the last couple of decades, and we have to get back to thinking like people used to think. Housing is a depreciating asset, goes out of style; it's going to end up in the wrong place. People will want to live somewhere else, so it's not any automatic capital gain.

Brian Richards: You've written extensively about investor behavioral psychology. How did we fall into that illusion and how do we work ourselves out of it?

Shiller: That's a very interesting question. How did we get this idea that home prices only go up? There are a number of elements of it. I don't know where to start. One of them is that we had a lot of inflation. I'm talking psychology now. You're asking how we got into a wrong view. In the 70s and 80s, we had a lot of inflation and then Paul Volcker came in and stopped it. So inflation has been declining now for 30 years, and we've lived our lives in that environment.

But we still encounter examples when someone says, "My grandmother just sold her house." Especially five years ago, say this happened five years ago. Grandma sold their house for $300,000, and do you know what she paid for it in 1952? It was only $30,000 or something like that. So it went up ten-fold. Now those stories are in all of our repertory, but when you really look at it, what was just consumer price inflation over that period? It was something like that. She really didn't make any money off of it. And she was putting money into it year after year and maintaining it. So we forget that. It's that kind of bias.

Also I think that we're influenced not by population growth so much, but by the sense of the growing wealth of the world and the finiteness of land, and we mistake land for…well that's another thing that happened. We started to think of urban real estate as land. And that's a change in our thinking.

If you go back hundreds of years, there was land speculation in this country, but there was no housing, not much urban housing speculation. So it was common sense. Talk to George Washington, if you could, all right? George Washington was a land speculator, and he owned Mount Vernon as among his speculations. But for George Washington, speculating in real estate meant buying thousands of acres for a shilling an acre or something like that. Not buying a house in the city, so we've changed. It's become much more proliferated as something that everyone does. You buy this house and it's going to make you a lot of money.

It's also just the bubble itself -- the Fed had very loose policy and that encouraged the bubble and prices were going up fast, so that proliferated stories about real estate as an investment. Anyway, that's a complicated analysis of our psychology. But it is a unique phenomenon, really, that it was so national. And it also reflects our better communications now. It wasn't as easily so national in the past.
Edited by Mahamed, 15 Apr 2012, 10:54 AM.
Profile "REPLY WITH QUOTE" Go to top
 
newjez
Member Avatar


Keep positing Mahamed. You won't always get debate, but you are a good read.
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
Profile "REPLY WITH QUOTE" Go to top
 
HSRboy
Member Avatar


Good on Shiller, and god bless his Shiller index which showed us the extent of the housing bubble in USA. :tu:
Barnaby Joyce - Indians owning Coal mines in AUS is good, Chinese owning a cotton farm in AUS is bad

Aussie Home Sales at 11-year low: http://online.wsj.com/article_email/SB10001424052702304459804577282401287187084-lMyQjAxMTAyMDEwNjExNDYyWj.html
Profile "REPLY WITH QUOTE" Go to top
 
raveswei
Default APF Avatar


Quote:
 
16 April 2012 by Cullen Roche

Interesting comments here by Robert Shiller on the myth of the last few decades that housing is now an investment asset (via Motley Fool):

Robert Shiller: There’s no guarantee that home prices are going to go up. I think we’ve gotten into an illusion about that. We got into an illusion and it created this spectacular bubble. We have to reflect now that we had a kind of crazy mind-set in the last couple of decades, and we have to get back to thinking like people used to think. Housing is a depreciating asset, goes out of style; it’s going to end up in the wrong place. People will want to live somewhere else, so it’s not any automatic capital gain.

Brian Richards: You’ve written extensively about investor behavioral psychology. How did we fall into that illusion and how do we work ourselves out of it?

Shiller: That’s a very interesting question. How did we get this idea that home prices only go up? There are a number of elements of it. I don’t know where to start. One of them is that we had a lot of inflation. I’m talking psychology now. You’re asking how we got into a wrong view. In the 70s and 80s, we had a lot of inflation and then Paul Volcker came in and stopped it. So inflation has been declining now for 30 years, and we’ve lived our lives in that environment.

But we still encounter examples when someone says, “My grandmother just sold her house.” Especially five years ago, say this happened five years ago. Grandma sold their house for $300,000, and do you know what she paid for it in 1952? It was only $30,000 or something like that. So it went up ten-fold. Now those stories are in all of our repertory, but when you really look at it, what was just consumer price inflation over that period? It was something like that. She really didn’t make any money off of it. And she was putting money into it year after year and maintaining it. So we forget that. It’s that kind of bias.

Also I think that we’re influenced not by population growth so much, but by the sense of the growing wealth of the world and the finiteness of land, and we mistake land for…well that’s another thing that happened. We started to think of urban real estate as land. And that’s a change in our thinking.

If you go back hundreds of years, there was land speculation in this country, but there was no housing, not much urban housing speculation. So it was common sense. Talk to George Washington, if you could, all right? George Washington was a land speculator, and he owned Mount Vernon as among his speculations. But for George Washington, speculating in real estate meant buying thousands of acres for a shilling an acre or something like that. Not buying a house in the city, so we’ve changed. It’s become much more proliferated as something that everyone does. You buy this house and it’s going to make you a lot of money.

It’s also just the bubble itself — the Fed had very loose policy and that encouraged the bubble and prices were going up fast, so that proliferated stories about real estate as an investment. Anyway, that’s a complicated analysis of our psychology. But it is a unique phenomenon, really, that it was so national. And it also reflects our better communications now. It wasn’t as easily so national in the past.”


http://pragcap.com/robert-shiller-housing-is-not-an-investment
http://popping-bubble.blogspot.com/

Thinking of an Australian property speculator (PI):
Inaction = missing opportunities.
Missing opportunities = losing.
Too much thinking = inaction.
Thinking = missing opportunities.
Therefore thinking = losing.

disgraceful little man Frank Castle owes a house to Salvation Army

Profile "REPLY WITH QUOTE" Go to top
 
Admin
Member Avatar
Administrator

Quote:
 
Robert Shiller is Wrong

The American academic Robert Shiller has taken another contrarian tack with his latest book Finance and the Good Society. His claim is that Western finance has lost the sense of virtue that it once had. It is interesting to trace where Shiller is wrong, or at least looking in the wrong direction. Because it tells us much about where finance has become post-capitalist and ever more dangerous.

Much of what Shiller says is right. For instance his observation that “financial institutions and financial variables are as much a source of direction and an ordering principle in our lives as the rising and setting sun, the seasons and the tides.” This is undoubtedly true. Indeed, finance IS rules, so it sets the rules of money, and therefore the rules of commerce.

He then goes on to argue that most bankers and financiers aren’t especially bad people, that greed is something of an aberration. He cites the virtuous stalwarts of the past from Goldman Sachs and ratings agencies to show that recklessness has not always characterised the sector. A return to that sense of virtuous service of commerce, he argues, will re-invigorate the strength of capitalism, surely the best economic and political system. Shiller cites Montesquieu’s argument that healthy commerce tends to produce societies less inclined to war and vicious politics (the Frenchman was obviously not writing at a time when some society’s commerce heavily depended on the production of instruments of war, as is the case now).

It is all fine stuff, and there is certainly considerable historical precedent to support what he is saying. Trouble is, it has very little to do with the problems that have emerged over the last decade or two. Here are some objections:

1. It is true that many bankers and financiers are not unusually bad people. They are probably like any other group of people; some good, some bad. And that is the point. It is a systemic problem. The financial behaviour that emerged is just what most would do, given the chance. Blaming individuals is not the way to solve it, deeply satisfying though that often is. Changes have to be made to the system.

2. Shiller makes an error that I think is almost ubiquitous. He assumes that regulation is somehow external to finance, acting on it as an outside constraint. That is not true, as we can see implied in his own quote. Money IS rules and governments set those rules. What has changed in the last two decades is that governments gave up that role, until they could no longer avoid it after the GFC, and traders instead established their own rules, derivatives mostly. We now have a system in which the financial players make up their own rules. Little wonder that the systemic problems are massive (see point 1).

3. Allowing traders to make up their own rules means that the subordinate role of finance, its function of serving commerce, has been altered, very much for the worse. Shiller argues that finance should support business, it should be humble. That is what will not happen in the current system, or at least not happen often enough. It has become a world unto itself, an exercise in gaming a system of rules in a potentially endless regress of making money out of the money made out of money.

4. We are now in that world of “meta-money”. Its most extreme iteration is high frequency trading, which, especially in stock markets, is a travesty of capitalism. The purpose of stock markets is to raise capital to fund public companies. The trading in nano seconds has nothing to do with that; the algorithms make no distinction between companies. It is just an exercise in gaming the rules of share trading. Same with currencies, which is also dominated by high frequency trading.

We would all love to go back to the world Shiller describes.Such virtuous men and women could grace the hallowed corridors of Yale, no doubt, making the odd financial donation. The problem is that it is not going to return. The computer driven monster of meta money has been unleashed. That is the world as it is, not as it once was.

Read more: http://www.nakedcapitalism.com/2012/05/robert-shiller-is-wrong.html
Follow OzPropertyForum on Twitter | Like APF on Facebook | Circle APF on Google+
Profile "REPLY WITH QUOTE" Go to top
 
miw
Member Avatar


Mahamed
15 Apr 2012, 10:54 AM
http://www.fool.com/investing/general/2012/04/12/the-illusion-of-housing-as-a-great-investment.aspx

The Illusion of Housing as a "Great Investment"

By Brian Richards | More Articles
April 12, 2012 | Comments (3)

Yale professor Robert Shiller, author of the new book Finance and the Good Society, says that historically home prices have not been a good financial investment -- they essentially tracked the rate of inflation from 1890 to 1990.
If home prices have tracked CPI, I would say that makes them a good investment.

1. Given about 2.5% nett rental returns, that means you have an investment with low volatility that almost guarantees real returns of 2.5% over the long term. You get a couple of points over this from shares if you reinvest all dividends, but the volatility is much higher. Also, your average punter has a good chance of approximately performing the index in housing, and almost no chance of matching the index in shares.

2. In a place like Australia, where the population is growing, almost any location you buy will improve in desirability because new development is in less desirable locations. The median location of 1970 is a premium location now. This is worth at least another percent or two. Of course it is going the other way in places where there is nett outward migration so check your demographics before you buy.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
AREPS™
Profile "REPLY WITH QUOTE" Go to top
 
BubbleBoy
Member Avatar


miw
13 May 2012, 07:55 PM
If home prices have tracked CPI, I would say that makes them a good investment.

1. Given about 2.5% nett rental returns, that means you have an investment with low volatility that almost guarantees real returns of 2.5% over the long term. You get a couple of points over this from shares if you reinvest all dividends, but the volatility is much higher. Also, your average punter has a good chance of approximately performing the index in housing, and almost no chance of matching the index in shares.
They could buy ASX code STW (index fund of top 200 listed companies) or SFY (Index fund of top 50 listed companies). The existence of low fees should mean that while it underperforms the index, it shouldn't be by much.

My name is based on a Seinfeld character, not on a belief of a housing bubble.
Profile "REPLY WITH QUOTE" Go to top
 
miw
Member Avatar


BubbleBoy
13 May 2012, 08:11 PM
They could buy ASX code STW (index fund of top 200 listed companies) or SFY (Index fund of top 50 listed companies). The existence of low fees should mean that while it underperforms the index, it shouldn't be by much.
Yeah. In theory it's very easy. I guess I should have mentioned that most people underperform for psychological/emotional reasons. The index is so volatile that people buy near the top and sell out just as it is about to turn around at the bottom. You can do that with housing, of course, but the temptation to over-trade isn't there and the drawdowns are less severe.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
AREPS™
Profile "REPLY WITH QUOTE" Go to top
 
1 user reading this topic (1 Guest and 0 Anonymous)
« Previous Topic · Australian Property Forum · Next Topic »
Reply



Australian Property Forum is an economics and finance forum dedicated to discussion of Australian and global real estate markets and macroeconomics, including house prices, housing affordability, and the likelihood of a property crash. Is there an Australian housing bubble? Will house prices crash, boom or stagnate? Is the Australian property market a pyramid scheme or Ponzi scheme? Can house prices really rise forever? These are the questions we address on Australian Property Forum, the premier real estate site for property bears, bulls, investors, and speculators. Members may also discuss matters related to finance, modern monetary theory (MMT), debt deflation, cryptocurrencies like Bitcoin Ethereum and Ripple, property investing, landlords, tenants, debt consolidation, reverse home equity loans, the housing shortage, negative gearing, capital gains tax, land tax and macro prudential regulation.

Forum Rules: The main forum may be used to discuss property, politics, economics and finance, precious metals, crypto currency, debt management, generational divides, climate change, sustainability, alternative energy, environmental topics, human rights or social justice issues, and other topics on a case by case basis. Topics unsuitable for the main forum may be discussed in the lounge. You agree you won't use this forum to post material that is illegal, private, defamatory, pornographic, excessively abusive or profane, threatening, or invasive of another forum member's privacy. Don't post NSFW content. Racist or ethnic slurs and homophobic comments aren't tolerated. Accusing forum members of serious crimes is not permitted. Accusations, attacks, abuse or threats, litigious or otherwise, directed against the forum or forum administrators aren't tolerated and will result in immediate suspension of your account for a number of days depending on the severity of the attack. No spamming or advertising in the main forum. Spamming includes repeating the same message over and over again within a short period of time. Don't post ALL CAPS thread titles. The Advertising and Promotion Subforum may be used to promote your Australian property related business or service. Active members of the forum who contribute regularly to main forum discussions may also include a link to their product or service in their signature block. Members are limited to one actively posting account each. A secondary account may be used solely for the purpose of maintaining a blog as long as that account no longer posts in threads. Any member who believes another member has violated these rules may report the offending post using the report button.

Australian Property Forum complies with ASIC Regulatory Guide 162 regarding Internet Discussion Sites. Australian Property Forum is not a provider of financial advice. Australian Property Forum does not in any way endorse the views and opinions of its members, nor does it vouch for for the accuracy or authenticity of their posts. It is not permitted for any Australian Property Forum member to post in the role of a licensed financial advisor or to post as the representative of a financial advisor. It is not permitted for Australian Property Forum members to ask for or offer specific buy, sell or hold recommendations on particular stocks, as a response to a request of this nature may be considered the provision of financial advice.

Views expressed on this forum are not representative of the forum owners. The forum owners are not liable or responsible for comments posted. Information posted does not constitute financial or legal advice. The forum owners accept no liability for information posted, nor for consequences of actions taken on the basis of that information. By visiting or using this forum, members and guests agree to be bound by the Zetaboards Terms of Use.

This site may contain copyright material (i.e. attributed snippets from online news reports), the use of which has not always been specifically authorized by the copyright owner. Such content is posted to advance understanding of environmental, political, human rights, economic, democratic, scientific, and social justice issues. This constitutes 'fair use' of such copyright material as provided for in section 107 of US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed for research and educational purposes only. If you wish to use this material for purposes that go beyond 'fair use', you must obtain permission from the copyright owner. Such material is credited to the true owner or licensee. We will remove from the forum any such material upon the request of the owners of the copyright of said material, as we claim no credit for such material.

For more information go to Limitations on Exclusive Rights: Fair Use

Privacy Policy: Australian Property Forum uses third party advertising companies to serve ads when you visit our site. These third party advertising companies may collect and use information about your visits to Australian Property Forum as well as other web sites in order to provide advertisements about goods and services of interest to you. If you would like more information about this practice and to know your choices about not having this information used by these companies, click here: Google Advertising Privacy FAQ

Australian Property Forum is hosted by Zetaboards. Please refer also to the Zetaboards Privacy Policy