I don't understand how housing can increase in cost in a stable steady manner, as a fraction of household income over long periods of time like more than 100 years. It seems to defy logic, so it makes me suspect how it is being calculated when people claim that housing costs have gone up by massive amounts.
Since only a small increase would price a large number of people out of the market- it seems logical that housing can't really increase in cost/value over long time spans, but must track the overall economy almost exactly.
To help you conceptualize how that is possible: 100 years ago the world population was 2 billion, and now it is 8 billion. While the housing stock is also increasing with that population growth, the actual amount of desirable land does not grow as fast. That's why -- for example-- the US gov't in the 1850s could just hand out 40 acre plots of land to people. They can still do that, but it has to be way out in Alaska or something.
A hundred years ago it took much more labor to produce enough food to feed a person. Before the industrial revolution let's say 90% of all people were farmers. In 1850 in the US that was maybe 50% of all people were farmers. So the % of GDP going to food was much higher. Now 1-2 people can feed 100 in the west. That means less of your income proportionately goes to food.
Similar declines in the amount of labor required to produce a thing are happening in manufactured goods. So it may have once taken hundreds of hours of human labor to build a car, but now it takes much fewer.
So the wealth of everyone is going up faster than the supply of desirable land. That does mean people are getting priced out. But also people find ways to live on less land. Before the industrial revolution most families needed a farm to survive. Now many, many families can live in an apartment building in a city that takes way less land.
> So the wealth of everyone is going up faster than the supply of desirable land
We are also slowing down the rate we are making land desirable. During the 50s-70s we had massive success by creating suburbs that were connected to city centers. Due to how geography works, new suburbs are further from city centers and inherently less desirable. We have developed most of the geographically appealing regions of the US. The regions that can support more sprawl are seeing growth at a high enough rate that local infrastructure such as schools, roads, water, and construction labor is being stressed.
In the not too distant future we will have climate change that will displace people and a declining population that will reduce housing demand. Combine that with new building techniques/materials and in 100 years the housing situation will be totally different than today.
> Due to how geography works, new suburbs are further from city centers and inherently less desirable. We have developed most of the geographically appealing regions of the US.
"We have turned all of the areas within 15 miles of the existing urban development into suburbs, while banning nearly all new urban development, and banning nearly all urbanization of existing suburbs. We've run out of cities to build suburbs around and this seems like a natural limit where a Mad Max style fight for a limited suburban housing stock is our inevitable outcome. This is Basic Geography 101."
That Mad Max style fight has already been won by geriatric white men (PostWar Boys) who paid off their houses 20 years ago, who are now nominal multimillionaires, and whose preferences appear to largely control national, state, and local political outcomes.
Compared to Europe the US has an unimaginable amount of land.
Europeans don't know this really - no one has told them, because they never went to the US, the ones who did went for some coastal city. On the other side Americans don't realize the reasons why Europeans live in cities. Europe is much much smaller and with less desirable land to begin with and then there is the entire "walkable cities" which is utopia reasoning...
God damn you US ppl dont know how good you got it.
The continental US is 8.08 million km^2 [0], while Europe is 10.18 million km^2 [1], almost 26% larger. Even adding the non-contiguous regions does not make the US bigger (still just 9.83 million km^2) [2].
Subtract out Russia from this calculation and “Europe” is 75% the size of the US. When people talk about “Europe” and Europeans not understanding how big the US is they are not talking about Eastern Europe/Russia, they’re talking about Portugal to Poland, maybe to Ukraine. Sometimes they’re not even thinking of the Nordic countries which also have a lot of land.
This of course invites the counter argument that the US coastal areas are just as dense and small feeling as Central Europe.
For another comparison, the state of Australia I live in has 3x the land area of Texas, a current population of 2.9 million that largely live in the one concentrated urban area, farms and cattle stations large than those in the US, and had people walk out of the desert than had never met or heard of non indigenous people until that point in time in the mid 1980s.
I grew up in one of the more remote corners when the state population was less than 800 thousand and the local population within a few hours drive was barely a thousand or more..
Western Australia, a unique place that is part Texas, part Alaska, part Silicon Valley and part something of Europe.
It should be a country of its own, and might as well could be with the most isolated capital city in the world, but the Austealian Federal govt keep fucking it up, despite it being the real cash cow of the country.
To add to that, a house a hundred years ago was nothing like a house today: building codes, square footage per person, heating, plumbing, connectivity... Building and maintaining a decent housing unit is far more expensive in material and energy than it was 60 years ago.
This is the one I'm curious to see play out. How low can it go? Did it reach bottom? Maybe once it stabilizes at a new norm, housing supply will catch up and prices will settle down.
I must not be looking at the right place then. All the new homes I've seen recently are 2000+ sq. ft. The only ones that are smaller are usually townhomes and are even less affordable than the bigger homes I just mentioned they are located near downtowns or other heavily populated areas.
> The only ones that are smaller are usually townhomes and are even less affordable than the bigger homes I just mentioned they are located near downtowns or other heavily populated areas.
That will not change because the market of people looking to buy a 1k sq ft home on a quarter acre lot in a less populated area either cannot afford the construction costs or the set of buyers interested in that is too small to bet on for a developer.
People get much larger houses today because they can afford much larger houses. This comes from both increased prosperity and having fewer kids.
1950s: The average new home sold for $82,098. It had 983 square feet of floor space and a household size of 3.37 people, or 292 square feet per person.
2010s: The average new home ($292,700) offers 924 square feet per person (2.59 people per household, 2,392 total square feet) — three times the space afforded in the 1950s.
Around here, they're building bigger houses, but also on much smaller plots without gardens or dogs or tree-houses or places for kids to play outdoors.
I suspect it's the same in a lot of places.
Maybe these square-foot-per-person calculations should also include square feet of land.
If you are going to do that, other play grounds should also be counted: the forests and fields which used to be nearby, the per-child space in nearby parks, etc.
All these are places children used to go unsupervised, but now mostly don't.
It’s like an outdoor pool, there’s definitely a market but adding a pool can lower your property’s value. Land doesn’t decrease the value of a property, but it can dramatically lower the number of buyers.
If this is true, it is so insanely contrary to the opinion of literally every single person I have ever met. Everyone wants a yard. Most people want a sizeable yard for their dogs or kids, or to drink beer and have campfires.
I grew up in rural midwest USA. maybe opinions are different elsewhere, but your comment is a bit baffling. Ive never in my life heard someone say "that house would be perfect if it just came with less land"
I know several people who decided to get smaller yards or were happy to move into apartment complexes without them.
We both are dealing with biased samples. A childhood friend who is very into the outdoors moved to a rural area and got 14 acres, everyone else moved to an apartment or a house with under an acre. This stuff shows up on migration patterns, and well there’s a reason the Rural Midwest USA is a small percentage of the US population.
So, I agree many people do want a large yard, but revealed preferences suggest it’s a minority opinion.
Revealed preferences are only as revealing as the market is competitive. In monopolies, is it not revealed that the populace prefers to be price-gouged? In a market as regulated as housing and with deep ties to policy (and industrial structures that I have heard about which I do not understand), it's difficult to not be sceptical of revealed preferences as a sole convincing explanation.
I wish I new how that article got to 80k for a house in 1955.. I couldn't find a link to trust "interactive visualisation" they're citing and Google didn't help me either.
I wasn't born then, so no personal experience and everything I could find pointed more towards 5-10k, i.e. this advertisement
That can't be right, it must already be an inflation-adjusted number. My parents bought their most recent house in ~1970 for $30K, and that was a bit above the median for the area.
A few ways that housing can continue to increase as a percentage of income:
1.) Go from a single income supporting to a house to multiple incomes supporting a house. This is actually happening, with the shift from single-earner households in the 1950s to dual-income households to groups of unmarried professionals living together as roommates. The preponderance of post-1950s data can also overweight this effect: historically, the norm was far large extended families to live together in one household, and the single-earner U.S. nuclear family was an aberration created by suburbanization.
2.) Have reset points. How can real estate continue to return 7% real returns for 120 years? Well, return 7% for 40 years, at which point your investment is up 15x. Then bomb the house and kill the owner. Then give the land to the guys who helped you kill the owner at a low, low price, help them build a house on it cheap, and start the 7% appreciation calculator over again from a new low baseline. This is also very close to what actually happened over those 120 years, between WW1, WW2, the Russian/Ottoman/Austrian revolutions, the fall of the Warsaw Pact, the Chinese Civil War / Cultural Revolution / Great Famine, and so on.
3.) Have a smaller percentage of people owning houses. The average housing price can absolutely escape the confines of the median income, if the median person does not own a house. The study's use of rent and imputed rent partially controls for this, but the broad answer for "Housing prices can't outstrip incomes forever, can they?" is "Sure they can, if nobody can afford houses."
4.) Have more people. If you're talking the returns to an asset class, and you own all that asset class, and then suddenly there are more people that need that asset, you're going to make money. This, to a large degree, actually happened during those 120 years.
I sort of think there are other things still at work here.
People still live near infrastructure (although requirements change)
Maybe 1000 years ago, they probably lived near a port, water source and source of food.
Nowadays we have efficient transport with semis and container ships, but I would imagine that there are still things like say power infrastructure, sources of commerce and schools and even internet that make living practical and affordable.
I'll bet as we can do distributed living practically (PV+batteries, wells/septic , starlink and amazon) that maybe more things are possible.
I wonder if Texas, especially around Dallas, is settling into a pattern that'll work well. If you have enough land, that is. Instead of single big city with dense downtown surrounded by progressively less dense housing, there are multiple cores. Smaller cities, close enough that their suburbs mix. On the surface that does seem more workable than building mega-cities.
That's exactly the right model. Sparse cities with distributed industry.
Houston (Greater Houston Area) is another such example. It's geographically huge, but most commutes are fairly short. This allows Houston to have faster commutes than NYC, despite having a comparable population, and VASTLY better living conditions.
That's called a conurbation. I think it's how most of the mega-cities in the world outside of North America formed in practice. For a case with no primary core, have a look at the Ruhr area.
>> The raw construction cost of a housing unit in a dense building is cheap
Not true. The cost per foot of construction of a single family home is lower than that of a small apartment building. A small apartment building has a lower cost per square foot than a mid-rise apartment. And a mid-rise apartment building has a lower cost per square foot than a high-rise apartment building.
Taking only construction costs into account, when land is cheap, single family homes make the most financial sense, and dense housing doesn't make sense.
Well, except for manufactured homes. They have a lower construction cost per square foot than single family homes, but when most people talk about density they aren't talking about trailer parks.
That's why I specifically said that a per-unit cost is lower in cities. But units tend to become smaller and smaller over time.
> Taking only construction costs into account, when land is cheap, single family homes make the most financial sense, and dense housing doesn't make sense.
I don’t understand the logic here, the land itself will be valuable regardless of whether or not there is a house there or an apartment building. The principal component of the cost of buying a house or a condo is the associated land cost. Building more density gives more people access to that land.
If your contention is that more housing is bad because it draws more economic activity which raises land values then that’s fair but this is the same as arguing for less freedom of movement. Essentially any nation that adopts your policy prescription is taking a step towards turning into the Soviet Union.
That may sound like hyperbole but that is the end result of NIMBYism and illiberal land use policy.
It's the "spiral" part (i.e. self-reinforcing vicious process).
Dense cities allow employers to get access to a larger pool of workers, giving them a competitive advantage. This in turn makes cities more attractive for workers. Since land area is conserved and people won't commute for much more than 30 minutes, it means cities have to increase the density.
This in turn makes cities more attractive for employers, driving the demand for housing even higher.
Rinse, wash, repeat.
> That may sound like hyperbole but that is the end result of NIMBYism and illiberal land use policy.
There is literally no city in Japan, US or in major EU countries that managed to build its way out of high housing prices. Not a single one.
> I don't understand how housing can increase in cost in a stable steady manner, as a fraction of household income over long periods of time like more than 100 years.
It hasn't. House prices have been stable for hundreds of years. They're currently being used as financial vehicles, and as another government asset inflation to ward off that pesky balance of accounts reckoning, but they'll be back down eventually.
Rents are different, probably because landlords collude. Or irrational exuberance or whatever. Times when everybody suddenly agrees that housing is worth a lot more, for no particular reason.
I would say that the fact that we didn't see a dip after the bubble makes it pretty obvious that if you deal in financial instruments around houses rather than houses themselves (including rents), there had to be a lot of money made that never came back. Renters never got a refund of the inflated rent that they paid during the time of those inflated house prices; that seems like it would account for the 6.6% a year that this paper claims as the return on owning housing. Because the buying and selling of houses is ultimately going to be a wash.
That says to me that housing bubbles are required in order to make any money from housing. That money will be supplied by renters and overextended owners who can't buy when prices return to the ground, and can't hold out until the next bubble.
There have been two major real housing price jumps that I know of, and both are correlated with significant household income increases (at least nominal). Almost everything else can be factored into changes in what the "nominal house" is - from a one room cabin without plumbing to a McMansion with a three car garage.
One was the great urbanization post-world wars and the other was the great increase in dual-income households.
But if you factor things out and try to correct for as many variables as you can, housing is pretty "steady state" though the percentage of income directed toward it that's acceptable has crept up somewhat.
Shelter is, like food, one of the few real necessities and so it will be bid up to the point of pain or worse if there is a scarcity.
Fair point, in that sense it seems like some fairly fixed step-ups are possible where people culturally decide to spend more of their income on housing, but it cannot be a steady trend to profit from as an investor, because it will always have a hard cap at 100% of household income. It can't steadily beat inflation over long time scales.
With extreme consequences to the population. When people are not given space to create their own families, the result is the massive population decrease we're living through now in industrialised nations.
Is the housing price adjusted to sqms / sqft and equipment / amenities?
Because my grandparents with their two kids and great-grandma literally lived in a one-room studio in the 1950s, even though they weren't poor. (Grandpa was an engineer for state railways, a good job in 1950s Czechoslovakia.) The toilet was common for 3 households. That was just the standard of living back then. You wanted to be warm, you had to drag coal upstairs from the basement and feed the home furnace. Daily.
In 1964, all five moved to a 3-room apartment, which increased their living space a lot, but it would still feel incredibly cramped by today's standards. It had a separate toilet just for them, though, and centralized heating. No more hauling coal upstairs. Progress!
Of course that those smaller, more primitive apartments were much cheaper than the house built in 2022 that I am now living in, and that is stuffed full with various sophisticated devices.
Its variance is though. It is all owned, and controlled. If there was a new land rush then new housing would be almost free until the land was all claimed.
I'm talking about in proportion to income... for example, if people spend 30% of household income on housing, you cannot have an order of magnitude increase in housing prices over any time scale as it will always have a hard cap at 100%.
> In fact, the long decline observed in the past few decades is reminiscent of the secular decline that took place from 1870 to World War I.
> The fact that returns to wealth have remained fairly high and stable while aggregate wealth increased rapidly since the 1970s suggests that capital accumulation may have contributed to the decline in the labor share of income over the recent decades (Karabarbounis and Neiman 2014).
Predicted here:
Piketty, T. (2014). Capital in the twenty-first century. Harvard University Press.
> In terms of total returns, residential real estate and equities have shown very similar and high real total gains, on average about 7% a year.
> Housing, equity, bonds, and bills make up over half of all investable assets in the advanced economies today, and nearly two-thirds if deposits are included.
Interesting, Housing is marked as "risky", and yet heavily invested. Investors are over leveraged in risky investments. They probably do it because controlling housing nets them power above and beyond normal returns. I wonder if this part of the reason for the "boom and bust" of market economies in the West when proper government regulation is removed. The riskiness of much of the investment of most investors may lead to sudden losses and shifts in risk, which may result in them withdrawing capital to "safer" investments, thus triggering a "bust".
And `r ≫ g` shows why the wealthy can wield so much power. Holding capital hostage to regulate economic growth and control it is very powerful, and why they can exercise the kind of control they can.
Politicians in democracies favor property owners because they are a majority, reliable voters and are likely to stay in the district. Therefore, the tax and political policies encourage owning a house. Many families take inordinate risks to own a house when, with fairer rules, they would rent.
It's actually one of the big problems with Capital in the 21st century: if you strip out housing, r < g! Turns out it's all zoning and rent control all the way down! Fix zoning and you end up incidentally fixing inequality too because it's such a large part of economic rents.
if it's all because of zoning, then how come we built more housing in the period leading up to the great recession (with the strict zoning laws that already existed)?
I shall continue to quote 7% as the acceptable long term rate of return in aggregate and look at apple, telsa, Nvidia, Google askance, wondering when they will return to baseline.
They don't need to return to baseline. The overall market return can be around 7% - within that you'll have losers, flat lines and huge winners like Apple and Nvidia. That's how you get to the 7% average - by having some companies gain much more than that.
It's very hard for that to sustain over decades without causing market distortions. I'd be interested in what is the longest run of above-market returns by any company since the 1870s.
In effect, if they accrue enough value, then they alter the average rate of return. And, since that sucks capital out of the rest of the economy, we're kind of fucked overall because companies making tinned peaches and medicine actually need capital, and a good rate of return depends on that capital.
> since that sucks capital out of the rest of the economy, we're kind of fucked overall because companies making tinned peaches and medicine actually need capita
What's constraining the latter is rates. There is zero evidence tech companies are causing the inflation that is pushing up rates. (If anything, it's broadly deflating.)
(And to my knowledge, getting financing for tinning peaches or medicines is plentiful. It's called middle market finance, and while it doesn't make the headlines, it's huge.)
As a non-economist, I ask: do you think their above-grade returns can persist into the future for decades, without becoming a concern, or altering this 7% rate?
My example of why it is bad is a hypothetical. If it's a stupid hypothetical I accept that, but my underlying belief that you cannot really have identified, "the same" companies continue to return 2-3x market average over 50 years without some concern remains.
Am I wrong? Sure, some companies do better than others. Warren Buffet swears by re-insurance. When the west coast disappears in a tsunami, it won't be as bountiful, right?
There is a problem of perception. Apple, telsa, Nvidia, Google are in the news a lot - currently.
Apple has been amazing for the past 20 years. Even during that period, its PE has varied a lot - the amount of money people were willing to pay compared to profits: at times it's very popular, at times not.
Coca Cola is not in your list. But its result during the 1980s, 1990s was less but comparable to Apple these past years.
Google is only 25 years old.
Nvidia stock market price has been amazing only the past 10 years.
Tesla is only 21 years old as a whole. Its stock price is too chaotic to be even described by a single return rate!
Walmart did amazing 1975-1993. Nearly 20 years, then not so good.
IBM, GE, several others had times of glorious stock market return.
But, to return to the way you phrased it, more or less there have always been some companies that seemed to return a lot. Perhaps too much. That's more or less a normal of the stock market. None of them has lasted indefinitely or somehow taken over all of finance. Keeping a large company growing at this pace is, erm, hard. Note that this is not Apple's strategy currently: Apple produces a lot of profit and it is returned to the shareholders rather than desperately trying to grow the company with that money.
It feels like I am always peddling Lyn Alden on macro questions. One of Lyn's recent public articles analyses long term returns and argues that most investments suck, and a few superachievers pull up the averages.
So Apples and Nvidias eventually rotate out of the return engines club and are replaced by next few champions; but not a broad group.
> do you think their above-grade returns can persist into the future for decades
In aggregate, yes, given equities have done just fine persisting over the last century and a half. (Also, the 7% figure appears to be nominal.)
> you cannot really have identified, "the same" companies continue to return 2-3x market average over 50 years without some concern remains
No, I don't believe we have precedent for this.
> When the west coast disappears in a tsunami, it won't be as bountiful, right?
Flooding isn't typically privately insured. As far as reinsurance is concerned, a tsunami taking out a bunch of California would be financially uneventful; on one hand, you're losing a premium stream, on the other hand, you've freed up reserves.
(Not an economist nor an actuary, but have training in both and some licensing in the latter.)
Are these two example well chosen? Seems to me there has been plenty of entrepreneurship in food. So many new companies started in the past perhaps 20 years, and many now surprisingly large.
And medecine overall (drugs, machines, care, insurance, tests, prevention) has been considered a field with good future prospects for a long time - worthy of investing.
It's nothing to do with money. We're literally producing more and better goods than the previous year. This can be due to better technology, more tools, or increasing population (and probably some other factors I forgot).
Money doesn't affect the size of your economy, in general money is not even relevant to the discussion, save for the fact that it gives us a unit of measurement. Money is a relative resource, in a simplified manner, money dictates who gets what fraction of the pie. By printing more money you're not making more pie, just dividing the existing pie into thinner slices. Economies grow because of improvements in technology, science, using or finding natural resources, producing things etc.
"By printing more money you're not making more pie, just dividing the existing pie into thinner slices."
So if you need a haircut but can't afford one, and I give you a new £10 note to get a haircut, and the barber works the extra 10 minutes to do that haircut and earn that £10 there's no new pie there.
Looks like 10 minutes more output to me.
"Printing more money" does make more pie. That's exactly what happens every time a loan is taken out, or government hires somebody who would otherwise be unemployed.
"Printing more money" leads to "shredding more money" via loan repayments and increased tax take, all via increases in the utilisation of existing resources.
That because "printing more money" is about buying something. That something has to at least potentially exist or more money will not be printed and circulated in the first place.
This mixes up where the value creation takes place. Shitcoins are a good example of this fallacy, I can mint ten billion neilwilson-coins right now and hand them out, it doesn't mean any new value has been created. Perhaps an easier way to understand this conceptually is to think of money as a loan, because that's what it essentially is, a pair of credit and debit. Taking out a loan in and of itself it doesn't create any new value, the value is created if you do something useful with it. Money isn't even a requirement, you can also barter or trade. Money is only a means for mediating trade and do relative distribution, it isn't wealth.
The example was a barber. There is no difference between transferring an existing credit to the barber and generating a new credit for the barber. The result is the same - an additional haircut is performed.
In the case of a new credit that is an additional haircut that wouldn't otherwise have been performed because the person wanting it has desire, not demand (desire backed by the ability to pay).
So I disagree. We have a monetary economy. Since the whole point of the game is to 'make money' people will create more output if you offer them money in exchange for doing that.
The 'loan' as you call it drives the new production, as any loan does since all loans are, necessarily, new money.
This is a mixup of money and wealth. Money is not wealth, and in the same vein, the point of the game if you'd like to call it that, is not to make money, but to become wealthy. These are two very different things.
Wealth is possession of real assets, natural resources, real estate, valuable companies, in classical econ terms, any scarce resource. Money is not a scarce resource, for nearly marginal cost we could create a near infinite amount of it (and in the digital age of banking we often do create large amounts of it with no direct cost). You can't create more oil, land, houses etc without incurring considerable costs, whether it be in the form of effort, time or etc and that's what makes those resources scarce. Money is scarce if you look at it on a personal level, you can't just create more money for yourself, but that doesn't make it scarce on a global level.
What might create some confusion is that wealth is often measured in money, but that doesn't make it the same thing. Wealth is real resources and money is the means we use to decide who gets how much of those real resources.
Yet the wealthy have very large bank accounts and own an awful lot of financial assets.
Almost like you are completely wrong.
Not everybody is enamoured with shiny yellow metal.
The wealthy are not interested in hoarding stuff. The wealthy are interested in the flow of money that lets them do stuff - primarily by freeing up their time.
It's control of the annual pie that's the key, not a sitting on a pile of gold like Smaug.
You live alone in the forest and chop wood during the winter. The next winter you're much better at the task and chop more wood. There's no difference in money supply, population or any such. But your economic output has increased.
Demand increases due to population growth. Population goes down, growth goes down (broadly speaking, some caveats and nuance as always depending on some goods or services).
Or demand increases due to some major new factor (which has happened a few times in recent history) that basically enables new energy extraction, or new resource extraction.
But over very long periods of time, it does seem to mostly be connected to population.
Regardless of inflation or changes in the money supply, new techniques, new technologies, trade, and population growth can cause the value of everything bought and sold to increase over time. You can measure that value in dollars, or you can look at changes in the quantity and quality of goods and services.
Money just represents tokens to use on our collective pile of goods and services. Growth refers to the rate at which the pile grows, and is largely divorced from money. Money is fake, and the systems behind it's distribution/allocation is regularly gamed for personal gain, in ways that go against the spirit of what money is supposed to represent. Money is an intermediate tool to help keep a track of who put how much on the pile so that everyone can focus on doing what they are good at, and in return, take from the pile what they need, as made by others who are good at other things.
Increasingly we see a problem of people who add nothing to the pile getting large wads of money and taking more than their fair share from the pile. This is a problem.
There has to be a level of personal/private intent for this to be true.
I would argue that under a centrally planned economy, you could have the same number of people working, using the same tech/equipments and energy, but not be a good economy because the output isn't what those individual participants in the economy wants to consume.
and you've also casually mentioned 'useful', without saying to whom.
Basically, i am arguing that for productivity to be 'useful', it must be privately useful. Therefore, an economy must be producing something that an individual decided they want, rather than something that is commanded by an authority (such as a top-down command economy).
After all, the gov't authority might consider it useful to have holes dug by shovel, in order to occupy people and prevent them from doing other things.
That calculation does not factor into the rent you will not pay when you buy a house and live in it. Imputed rent is a thing and you need to consider it. If you don't live in the house you wouldn't let the house sit vacant: you would rent it. In your formula the rent can be thought of as if it's a dividend of the investment.
Alternatively just read the linked article; the linked article makes the correct fair comparison. You will arrive at that conclusion by reading just the second paragraph, which says
> data on total housing returns (price appreciation plus rents) has been lacking (Shiller 2000 provides some historical data on house prices but not on rents). In this article we build on more comprehensive work on house prices (Knoll, Schularick, and Steger 2017) and newly constructed data on rents (Knoll 2017) to enable us to track the total returns of the largest component of the national capital stock.
Shiller is explicitly mentioned. And the article authors disregarded it because it failed to include rent.
Housing prices may collapse over the next 50 years as the population pyramid inverts and buyers demand decreases due to fewer individuals. What is the definition of long-term though?
As the housing maintenance labor force shrinks and it gets more expensive for elderly to maintain their non dense homes though, the value should decrease and become more affordable for the young who can do those labor things. Maybe?
If the elderly has any children (presumably they have), those children will inherit the house, rather than sell it at a loss. It would only decrease in price, if the children has a high need for cash, and a low/zero need for housing. This situation is still typically rare (for example, moving away permanently is one such situation). And even in those cases, you will rent out the house, rather than sell for a loss.
Therefore, the most average, and typical scenario is going to have the housing price be stable, rather than drop.
If anyone wants to download the data, it's available at:
> The Jordà-Schularick-Taylor Macrohistory Database is the result of an extensive data collection effort over several years. In one place it brings together macroeconomic data that previously had been dispersed across a variety of sources. On this website, we provide convenient no-cost open access under a license to the most extensive long-run macro-financial dataset to date. Under the Terms of Use and Licence Terms below, the data is made freely available, expressly forbidding commercial data providers from integrating, in addition to any existing data they may already provide, all or parts of the dataset into their services, or to sell the data.
There's also the The Credit Suisse Global Investment Returns Yearbook:
> The Credit Suisse Global Investment Returns Yearbook is the authoritative guide to historical long-run returns. Published by the Credit Suisse Research Institute in collaboration with London Business School, it covers all the main asset categories in 35 countries. Most of these markets, as well as the world index have 123 years of data since 1900.
> The Global Investment Returns Yearbook, an authoritative guide to historical long-run returns, launched by UBS Investment Bank Research and UBS Global Wealth Management’s Chief Investment Office. This edition demonstrates the combined strength of UBS and Credit Suisse as the integration of the two banks progresses, and also marks the continuity of a longstanding relationship with the authors, Professor Paul Marsh and Dr Mike Staunton of London Business School and Professor Elroy Dimson of Cambridge University.
> In peacetime, r has always been much greater than g
This is an ultra simplistic formula, made by someone who's been born, raised and fed in a highly socialist country where the only word politicians know is "tax".
No shit. What gave it away, the two terms or the inequality? :)
Joking aside, it's simplistic because it's elementary. If real returns exceed real growth, ceteris paribus, you have a net flow of principal (so to speak) from labour to capital. That doesn't mean one can conclude the argument with those two variables alone. But it's a valid starting point, and concludes with many solutions other than increasing taxes to reduce r.
I wonder if this is still true once population growth reaches zero or negative. It seems like the baked in assumption of housing is that someone else is going to need it more tomorrow than you do today. I think this is an experiment the U.S. will begin running in earnest in the near future.
That if won't happen anytime soon neither for the Earth in general nor USA in particular. Media often loves to move goals from population growth to agin g population to fertility rate, etc. All those while connected do not negate the fact that population is growing, and growing fast. That 'once population growth reaches zero or negative' is very theoretical and UN is constantly underestimating population growth. So no, we will not see that in our lifetimes.
I think you are missing 'in our lifetime', even though you are quoting 'will double in ~150 years'. Also 'declining every year' doesn't mean it won't start growing again.
Most developed countries will probably run the experiment before us, as long as we can keep the country appealing enough to keep attracting immigrants.
Buy housing in hyper desirable areas that rarely become more dense. Everyone always loves the beach, whether there are 1% fewer humans next year or not.
Yes, but only because you can overcharge rents to people who can't afford housing. If everyone could afford housing, it wouldn't have any return.
The return on housing rents is equal to the minimum (psychological) expectation that landlords expect. It's an arbitrary vig/rake, and like all arbitrary vigs/rakes, it's around 5%. It's an expected gift for owning the house. It's a gratuity for being wealthy enough that you're never forced to buy or sell.
An aside is that this rate was set in one context by currency and convention: an English pound was 20 shillings, and a guinea was 21. So when you won an auction, you would pay the auction house in guineas, and the auction house would pay the owner of the item in pounds, giving a 4.75% share to the house. Racehorses are still sold this way, although aren't any guineas or shillings any more, it's now 1£ and 1.05£.
Owning capital has a cost - the cost of capital (aka, the cost of money). At minimum, the cost is the risk free interest rate.
The owner paid a pretty penny (or borrowed, at a higher than risk-free rate) to buy the property. The previous seller did the same, or invested capital in building the property itself. So therefore, "owning a house" is the last chain in a sequence of investments, all of which costs money.
Yeah, it would be interesting to have more transparent costs, especially with inflation. New siding every 20 years is $40k, a new roof might be $30k every 25 years, a new driveway, etc.
I just shudder to think about all my trips to Home Depot over the last 20 years of owning a home.
I never did those when I was renting. Yes, I didn't get to renovate or pick my paint colours. And yes my money paid down someone else's mortgage. But I suspect if you add it all up...
which is a bit of a non-sequitur - who cares what your rent is paying towards? The landlord could be smoking weed with your rent money and you'd not be affected (financially).
You should add it all up. Some of the things you purchased at Home Depot can be counted in the cost basis of the home and reduce your capital gains tax if you later sell it.
Really? Really? So if you bought a shack in Vancouver twenty years ago for a song and now it's worth the entire symphony orchestra you can sell it with no taxes?
No wonder prices up there have gone bonkers even by US standards.
Yeah 0. None other than land transfer tax which is very little. And if anybody suggested putting in a sane G7 standard tax policy around this, the baby boomers would come rip their head off and parade it around on a pitchfork.
It's ... actually a reasonable policy, in some way. It can be quite annoying in the USA when you (if single) have more capital gains than you get "for free" ($250k which sounds like a lot, but if you bought in CA 20 years ago and are now moving, that can get eaten up quickly - a $300k house in 2004 would be almost $500k today from inflation alone) you pay tax.
Then if the house you bought with the proceeds drops in value and you have to sell, you can't claim a deduction for the capital loss.
Of course all capital gains taxes whatsoever have the hidden inflation problem, where you get taxed on the inflation caused by ...
In my opinion all these policies which encourage housing inflation are just the result of western neo-liberal economies trying to cover over their abdication of reasonable retirement/pension policies.
Trudeau was on record a couple weeks ago basically saying "we can't let housing prices fall. if housing prices fall, people won't be able to retire" which is a fucked up admission that there's no way to "retire" without passing debt onto the next generation.
It's not going to end well. It either falls apart in crisis / housing bubble pop, or we end up with some kind of neo-feudalist future slowly developing over the next 100-200 years.
Biggest of them all: interest. On a $1M mortgage, you’ll almost pay $2M as interest over 30 years even at 7%.
Historically interest was never as low as during the pandemic. And most people bought houses using mortgages. The average “cost” of owning a house is much more than the selling price, even before you account for the upkeep.
The mortgage interest is one of the few costs that people (sometimes) account for. Usually with a hand-waving "my mortgage payment is lower or about the same as my rent payment" - which ignores that a rent payment covers everything whereas the mortgage payment only covers principal, interest (and sometimes insurance and property tax, if escrowed).
In many places, this can be substracted from taxes, effectively slashing 35-40% of the cost where I live. So does almost all renovation costs (not upgrades though, just repairs).
Also, where I live 7% wasn't the case in past 20 years, and even now its rather 1.5% + whatever bank puts on.
> all the tax affordances related to owning real estate vs. equities
The only ones I can think of are depreciation (analogous to capital loss harvesting), 1031 exchanges (loosely analogous to step-up basis; this is the biggest difference) and opportunity zones (analogous to QSBS).
If you borrow against your equities, you can deduct the interest paid on that. That mortgage-interest deductions are bigger is a function of the lending being federally guaranteed more than tax law.
Since only a small increase would price a large number of people out of the market- it seems logical that housing can't really increase in cost/value over long time spans, but must track the overall economy almost exactly.