I was wrong about housing vs stocks

But I am still bearish on both asset classes.

Late last year, I came across a house in the Blue Mountains which was both for sale and for rent at the same time. I wrote a blog post pointing out that while the rent would be $2400 a month of “dead money”, in the parlance of online finance bros, the mortgage for the house would entail an interest payment of $5,254 per month, also “dead money”.

As longer term readers of my blog will know I am generally sceptical of such growth, and believe there is a lot of “greater fool” thinking in all asset markets at the moment, caused by decades of steadily easing monetary conditions following the rise of neoliberalism, austerity and wage restraint. So people should be sceptical, I think, about future house price appreciation outpacing the interest costs. Trees don’t grow to the moon, etc.

However, I then found myself thinking, but what about the $4024 of money left over? What if you invested that, every month, as well as the returns on that investment. Surely that would compound in a positive way, with no interest cost, and the hypothetical renter’s net worth would race out ahead of the hypothetical home owner’s well before the term of the loan was up?

Well I was wrong.

Essentially, I was failing to properly account for the difference between the value of the house, and the amount owing, and how quickly that would grow over time. In retrospect, the mistake seems obvious. The value of the house is nearly 1.4 million, so the compounding growth of that outstrips the interest payments from day one, and the difference only grows over time. This effect, assuming average conditions over the last 30 years, puts the homeowner ahead. It’s not a total scam. It’s the power of leverage — the kind of large-scale leverage an ordinary person could never get access to in the context of stocks.

I stand by that (amateur) position that either stocks or housing are good places to invest. My household puts anything we manage to save into a high interest savings account, or the software company we run.

I also stand by the practice of, as an amateur, trying to figure out this stuff for yourself, rather than depending on the received wisdom. But it’s important to test your ideas, and put them under scrutiny as well. Having spent a couple of hours going through the mechanics of the whole thing on a spreadsheet, I now understand not just that I was wrong, but why.

Stone Transparency — the software I used to capture the research above, helps with that. It’s a tool to help force the kind of mental discipline that squeezes errors out of your thinking, rather than digging them deeper in.