Thursday, November 12, 2015

Tap Housing

When I was at university I remember feeling very uncomfortable about Collateralized Debt Obligations. We learnt how you could package loans into various bits that had different risk characteristics. The safer stuff could then be sold separately from the riskier stuff. The theory being that lots of people like low risk investments. The high risk bits spoil everything. If you could take away the smelly stuff and tie a pretty bow on it, there would be more access to finance for more people.

I felt uncomfortable but I didn't actually do anything about it. I also didn't spend a lot of time learning more about it, partly because I spent more time on the things I found interesting. When the Global Financial Crisis came along, it turned out these complicated debt instruments were a huge part of the cause. But I get zero brownie points for having steered clear of the stink and said nothing. Nassim Taleb rightly points out that you should get no credit for hindsight predictions where you have no skin in the game. 'I told you so's also don't mean very much if you are always predicting something, and it happens sometimes and not other times, but your predictions aren't reliable enough to know when.

After the GFC, the popularity of many areas of finance sunk to the levels of politicians, lawyers, and other areas we don't understand, and distrust. I talked about this in 'Bankers and Poets'. Just like toys and cars are more difficult to take apart and repair ourselves nowadays, some financial abstractions are so complicated, it becomes insanely difficult to understand them. We always trust there is someone else who does. Hope perhaps more than trust. We also start to personify organisations and professions rather than seeing them as a group of individuals. Too big.

One of the issues with feeling uncomfortable about something, is whether it is worth diving into to gain more comfort. Particularly when it is big and complicated. There is also a strong incentive to shut up about it until you feel like you can confidently say something worth while. We tend to 'stay private till we plonk'.

I am going to tentatively start diving into one area I feel uncomfortable about, because I think it is a really big issue. I am not an expert on property investment, but for a lot of people it is a really big deal. It is also an emotional thing. We live under roofs if we are lucky. Whether we own that roof or rent it is a big deal. It becomes a symbol of 'having made it'. The UK, where I live, has the same feeling toward property ownership as Kiwis have to Rugby. Land, power and identity have long been linked. It isn't a purely quantitative number crunching exercise.

I don't like the general investment case for property. I think the prices of property in certain places (e.g. London) are completely bonkers. It is like hiring an Uber Taxi to go out at 9pm on New Years Eve, and returning at 2am. When supply doesn't keep up with demand, prices go nuts. In my view, housing is a basic necessity. Like water. We should be as used to tap housing as we are to tap water. 

I think of investing in the same way as getting a job.  The Money is finding something productive to do. If you are buying houses, fixing them up, selling them and moving on, I can understand the job a little better. But it is you doing the work, not the house. If you are buying a house to live in, particularly if the house is bigger than you need, what exactly is the job? Beyond being a store of value, there is no inherent reason a house should go up in value just because it always has. One reason for the 'property ladder' going up is massive urbanisation has not been met by adequate building. The price going up has been a signal of 'not enough' rather than of a 'good job'. If anything, progress would be that the price of housing regularly went down... like basic food stuffs, like computers, like anything where the problem gets conquered.

As soon as you limit supply, prices spike. It doesn't mean that is what the thing is worth. I love Modigliani. I wouldn't pay $170.4m for one of his paintings.


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