Suppose that two people (A and B) decided to combine their money and jointly invest them into something. Suppose that A contributed X dollars and B contributed Y dollars. After some time lapse the value of their X+Y dollars becomes Z. If they realize this investment at that point, what portion of Z would A take and what portion would B take ?
Of course, there is no law stipulating that. All depends on the agreement between the parties. But in most cases the parties agree to split profit proportionally to their contributions. In other words, A normally gets XZ/(X+Y) and B gets YZ/(X+Y).
Surprisingly, there are exceptions to this reasonable rule. When you buy a house which costs P1 dollars, you contribute a downpayment X and bank contributes the rest (P1-X). But when you sell the house for a price P2 you pay to the bank somewhat about R(P1-X), where R is the compound interest over the period of time that you owned the house. The rest is yours. Thus, you get roughly P2 - R(P1-X) and not (P2 x X)/P1, as would be the case with the normal investors A and B.
The difference is huge. For example, if X = 0.05 x P1, P2 = 2 x P1 and R = 5%, then you get 2 x P1 - 1.05 x (P1 - 0.05 x P1) = 1.025 x P1 rather than 0.1 x P1 !
This makes investing into real estate quite different from any other type of investment in that it violates the fundamental principle of economical sanity: the return on capital must be proportional to the amount of capital invested. (Do not confuse this with the Marx's or Malthus' observation that "the return on capital is, on average, the same for all types of investments".) In the case of real estate, the return is simply not proportional ! For example, if you put down $100 on a house that costs $100,000 and its value appreciates to $200,000, then the return on your $100 is almost $100,000. But if you put down $200 instead, the return on $200 is again almost $100,000 ! (Not to mention another paradox that you profit more than the bank which covered most of the purchase price !)
I am not sure if the returns are indeed, on average, the same for all kinds of investment, but I am positive that in a balanced economy there should be no astronomical disparity between various types of investment at any point in time. It should not be that when you invest $100 into stocks and stocks rise 100%, your $100 become $200, but if you invest $100 into real estate by putting them down on a $100,000 property, which then appreciates 100%, your $100 become almost $100,000 !
Is it not a loophole in the law (or absence of a proper law), which may destabilize economy ? The fact that no destabilization happened in the past is only because never before real estate appreciated 100% over 4 years.
According to TRIZ, contradiction is a disease of a system. To make it healthy contradictions have to be resolved ! Would not it be, therefore, prudent to enact a law that upon house sale mortgagee and owner have to have equal rates of return on capital invested ? Then people that put only $100 down on a $100,000 house would not be undeservingly rewarded with $100,000 profit upon its sale. They would get just $200, which is fair. And bank, which contributed $99,900 would get back roughly $199,800 rather than $100,000, which it gets under the current legislation.
Of course, in the case of property depreciation, the borrower still has to return the amount borrowed (with interest) and not to leverage his losses on the shoulders of the bank.
Such a law would be in accord with Marx's ideas about the equality of the rates of return. At the same time it would be very beneficial for banks ! Yet another paradox, is not it ?