Born short

No in the title to this post I am not complaining about my lack of height.  I am simply discussing the housing market 😉

The Worthwhile Canadian Initiative gives an interesting point on housing:  We are all born with a short position on housing.

This has an interesting implication.  Since short positions involve risk and since long positions involve risk (as rental costs/incomes are volatile), the low risk position is to own one house.

As a result, we would expect the rate of return on housing to be LOWER than other asset classes.  An interesting point to keep in mind!

11 replies
  1. moz
    moz says:

    Most people don’t need a whole house for shelter. But they’re hard to buy in smaller units, so it becomes “do I buy more than I need and hoard or rent the excess, or do I rent excess from someone else? Share housing is cheap. Buying a house with a group of friends is legally interesting but it can work quite well. To date, friends who have done that have come out behind my position of investing the excess. But the government subsidises their choice much more than mine, so I suspect the low-risk option is also low-return once you exclude my involuntary contribution.

  2. fibby
    fibby says:

    A short position comes with the obligation to buy at some (possibly fixed) time in the future. The housing position is less an obligation to buy, than a situation of it becoming rational to buy at a certain time. This means it only looks like a short position on the household cashflow statement, not the household balance sheet.

  3. agnitio
    agnitio says:

    We need somewhere to live, unless we own a house (i.e. are renting, living with our parents etc..) we are effectively borrowing housing aren’t we?

    If we didn’t need somewhere to live we wouldn’t have an initial negative position in housing.

    Interesting that this agrument implies that when you buy a house you aren’t neccesarily net long in housing, as you are offseting the negative postion you already have.

  4. rauparaha
    rauparaha says:

    I’m confused. Is housing an asset or a service, or both? If rental housing is a service then it’s a flow not a stock, like fibby said. So are you borrowing an asset or are you consuming a service?

  5. Matt Nolan
    Matt Nolan says:




    I think the logic is that a house is only worth its rental equivalent over time – so the position is in rental services.

    If you decide not to buy a house you have to purchase rental services, and the value of rental services varies – so if real rents fall you make some money. If you buy one house you neither have to buy or sell rental services so the rental value has not impact on you. If you buy two houses you are now selling a rental service – so if real rents fall you lose some money.

    A short position merely means that if the value falls you win. If you own zero houses (which many people do at birth) then lower rents also implies lower house prices which is a win for you – as it is now cheaper to get the rental service you REQUIRE in the future.

    If you have one house lower rents and lower house prices should not matter as you both own a rental service and want to consume one rental service.

    If you own two houses you are “long housing” as you own two rental services but only consume one – as you need to sell one a fall in prices hurts you.

  6. Matt Nolan
    Matt Nolan says:

    @Matt Nolan

    The key point to remember is that you are COMMITTED to consuming one rental unit per period in the future – committed. So if you own NONE you win from a fall in price, if you own one you are neutral, if you own two you lose.

    As Moz says, its not super simple as you can choose the size etc of your property and this is a consumption decision you can decide on.

    But when we look at it as a commitment it does become obvious why people choose housing as a low risk asset class – where the “asset” is infact the value of future rental equivalents. If we have a bubble this is a bit messier – but again that is just a transfer between agents in the economy.

  7. rauparaha
    rauparaha says:

    So I have a long position on bicycles and a short position on cars? Is a person who wants a holiday bach short on housing if they only own a main house at present?

    I suppose what I wonder is whether you can apply a method that was formulated for analysing securities to an analysis of consumables?

  8. Matt Nolan
    Matt Nolan says:


    I completely buy your point.

    But, if we believe somewhere to live is a NEED – something that we could not live without – I think it can be appropriate (or at least enlightening) to treat it this way.

    If we believe we REQUIRE a future position X then not buying an asset that provides X in the future is like a short position – as the change in the value of X (which we have committed to buying) can change.

    As a result, no you do not have a short position on cars.

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