
The Rate of Return on Everything, 1870–2015 [pdf] - Sandman
https://www.frbsf.org/economic-research/files/wp2017-25.pdf
======
sandover
Take a quick look at a graph of population growth from 1870-2015. It has an
incredibly steep curve. Now think about how that graph will look from
2015-2100. Likely, it will be drastically flatter.

Wouldn't this have a huge effect on real estate -- indeed, isn't that
population graph the primary driver of what happens in the real estate market?

I'm not sure the last century provides a meaningful guide here.

~~~
antisthenes
Yes, it will have a huge effect on real estate, but probably not the way you
think it will. Real estate prices in desirable urban areas will continue to
grow at the same, or higher pace. If you look at urban zip codes in desirable
economic areas, they were barely affected by the 2008 downturn, and by 2010
the prices were recovered.

Today, those prices are much higher than they were in 2007.

Land supply is an almost straight line with a slight growth, probably
something on the order of y = 1.2x, mostly due to innovations in transport
speed, cars & metro. So unless we get maglev metro that travels at 200mph, RE
prices will continue to reach new highs.

~~~
rubidium
My bet is driverless cars, whenever they arrive, will actually increase the
value of rural/small town land that's ~1 hour from a city center.

Hypothesis is many people live close to the cities because they hate
commuting. But if commuting means work on a laptop or watch a movie, then the
commute time is less significant. It's the near ring suburbs that will take
the biggest hit. Small towns outside the suburbs will increase.

~~~
linkregister
I suspect that commuting traffic will increase to eliminate this advantage.
Already in major metros, long commutes suffer low speeds due to congestion
during rush hour periods. Without a commensurately vast increase in
infrastructure investment, I do not foresee a significant change in commute
experiences from self-driving cars.

I predict that most people would not elect to live 2 hours away from offices
despite being able to have access to entertainment and work while commuting.

The evidence is already here: various tech companies run shuttles to far-flung
areas (Google has shuttle service from Stockton to Mountain View), yet
employees aren’t moving to these lower-cost areas in large numbers.

Workers with families will have upper bounds to how long a commute they’ll
endure. Their families are more important to them than being able to have
entertainment, and meeting times limit the amount of time that can be used for
work done while commuting. At that point, it’s approaching remote work, which
is a promising idea, but isn’t a solution for long commutes by itself.

I see self-driving cars changing last-mile and replacing hub-and-spoke
commutes as a replacement to taxi services and short-distance shuttles.

~~~
aplummer
> I suspect that commuting traffic will increase to eliminate this advantage.

I think maybe in the short term, but in the long term I can imagine self
driving traffic moving much faster than regular traffic. Cars all accelerating
at the same time at lights, Uber pool in vans becoming super cheap. Roads
could dynamically add and remove lanes in a direction without needing
infrastructure, since all the cars will just "know" which lanes are available.
Personal cars (hopefully rarer) can drive themselves home rather than take up
parking space in cities.

~~~
rwmj
The main advantage is the self-driving car could be an extension to your
office. For instance if I have an 8 hour day with 4 hours of face-to-face
meetings, then it doesn't particularly matter if the other 4 hours are spent
commuting because I can work the whole time.

------
crazygringo
Highlights:

> 1\. _In terms of total returns, residential real estate and equities have
> shown very similar and high real total gains, on average about 7% per year._
> ... _The observation that housing returns are similar to equity returns, yet
> considerably less volatile, is puzzling._

> 2\. _We find that the real safe asset return has been very volatile over the
> long-run, more so than one might expect, and oftentimes even more volatile
> than real risky returns._

> 3\. _...our data uncover substantial swings in the risk premium at lower
> frequencies that sometimes endured for decades, and which far exceed the
> amplitudes of business-cycle swings._

> 4\. _Comparing returns to growth, or “r minus g” in Piketty’s notation, we
> uncover a striking finding. Even calculated from more granular asset price
> returns data, the same fact reported in Piketty (2014) holds true for more
> countries and more years, and more dramatically: namely “r >> g.”
> ...globally, and across most countries, the weighted rate of return on
> capital was twice as high as the growth rate in the past 150 years._

~~~
capisce
Some more highlights:

> In terms of total returns, residential real estate and equities have shown
> very similar and high real total gains, on average about 7% per year.

> The data summary in Table 3 and Figure 2 show that residential real estate,
> not equity, has been the best long-run investment over the course of modern
> history.

> Although returns on housing and equities are similar, the volatility of
> housing returns is substantially lower, as Table 3 shows. Returns on the two
> asset classes are in the same ballpark— around 7%—but the standard deviation
> of housing returns is substantially smaller than that of equities (10% for
> housing versus 22% for equities).

> Predictably, with thinner tails, the compounded return (using the geometric
> average) is vastly better for housing than for equities—6.6% for housing
> versus 4.6% for equities. This finding appears to contradict one of the
> basic assumptions of modern valuation models: higher risks should come with
> higher rewards.

Seems the way the real estate market works has caused a big drain both on
economic growth (as investments have gone into real estate rather than more
productive products), and on economic equality.

So a Georgist land value tax does seem like a pretty good idea.

~~~
ttul
Real estate returns have been juiced by government policies for decades. The
interest deduction, government backing of mortgages, and implicit guarantees
of mortgage backed securities. Aka the cost of buying a house to the consumer
is lower than it should be on a risk adjusted basis.

~~~
cryptonector
The cost to the consumer of buying a house is probably higher than it would be
without these incentives, actually, because it ends up causing more money to
spill into real estate.

It's the same with college costs: every additional dollar of federally
subsidized loans made available to the public adds a dollar to the cost of
college, almost necessarily so.

~~~
zimablue
You've mixed up two things here I think.

Returns vs Cost of buying a house.

The point is that the government subsidies make the profits on buying real
estate high, which leads to high prices.

So both are true: "high cost of buying a house" "high returns on real estate"

Obviously they can't be true forever, the upper limit I guess is the ability
of the lower classes to rebel divided by their tolerance of being priced out
of their own land.

~~~
kbutler
The grandparent was describing the long-term vs short-term effect of broad
subsidies.

The short-term effect of a subsidy is a reduced cost to the consumer.

If subsidies are generally and persistently available, this reduced perceived
cost increases demand, causing increased prices. The ratio of price increase
to amount of subsidy (and thus whether the consumer or producer benefits from
the subsidy) will depend breadth of the subsidy and on elasticity curves of
supply and demand.

Then there's the increased demand because the subsidy increases ROI. further
increasing prices of the fixed input (land/existing housing) to the good
(living space).

~~~
cryptonector
Thank you. That is roughly what I meant to convey.

Mind you, because these subsidies are never really temporary, I suspect the
immediate effect on prices is always to raise them. And perhaps even temporary
subsidies cause price rises just by increasing demand, though the price rises
might only be temporary.

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placeybordeaux
IPFS mirror:

[https://gateway.ipfs.io/ipfs/QmZ1y9U9KRuGBVUisc1YbXrjp8tDXGe...](https://gateway.ipfs.io/ipfs/QmZ1y9U9KRuGBVUisc1YbXrjp8tDXGe8Ca2URfXBKvZqrD)

------
mcguire
I suspect that the issues with safe vs risky assets are a result of how
screwed up the definition of economic risk is:

* Risk is defined by relatively short term visible price fluctuations, with "unusual" events removed from the model as "uncertainty".

* The risk model seems to use a Gaussian distribution, which doesn't fit the data particularly well.

------
mattnewport
I wasn't able to download the PDF but I read the summary article
[http://voxeu.org/article/rate-return-
everything](http://voxeu.org/article/rate-return-everything)

In the paper, do they attempt to take into account the costs of real estate
investment over holding stocks when calculating total returns? Things like
property taxes, maintenance, stamp duties, realtor fees, legal costs dealing
with problem tenants, etc.? If not I wonder if those explain some of the
mystery around real estate returns relative to stocks?

~~~
pwthornton
Not to mention that real estate needs constant investment to keep it in
working order and up to code. This is not the case with equities.

~~~
eurg
They use net returns (after operating costs etc., p.31), and provide an
argument why leverage doesn't make a large difference (p. 40).

------
stephengillie
The PDF appears to be 2.9 MB and is taking a long time to download, possibly
due to the source being "hugged" to death?

This appears to be an abstract, based on title:
[https://www.nber.org/papers/w24112](https://www.nber.org/papers/w24112)

 _This paper answers fundamental questions that have preoccupied modern
economic thought since the 18th century. What is the aggregate real rate of
return in the economy? Is it higher than the growth rate of the economy and,
if so, by how much? Is there a tendency for returns to fall in the long-run?
Which particular assets have the highest long-run returns? We answer these
questions on the basis of a new and comprehensive dataset for all major asset
classes, including—for the first time—total returns to the largest, but oft
ignored, component of household wealth, housing. The annual data on total
returns for equity, housing, bonds, and bills cover 16 advanced economies from
1870 to 2015, and our new evidence reveals many new insights and puzzles._

~~~
jsnell
There's a recent column by the same authors that's basically the executive
summary: [http://voxeu.org/article/rate-return-
everything](http://voxeu.org/article/rate-return-everything)

~~~
FabHK
Nice. The right side of graph 4, with the massive drop of r-g during WW1 and
WW2, bolsters the argument made I believe by Branko Milanovic eg in _Global
Inequality_ , namely that war, by destroying fortunes, works to reduce
inequality.

------
polskibus
I wonder if there is a study of real estate investment returns in relation to
demographics trends. For example, does poor demographical outlook (low births
for instance) correlate with lower real estate ROIs later ?

------
pjc50
I wonder if the extreme r - g divergence is helped by another factor: tax
havens and hidden assets. GDP only includes things that can be counted and
taxed; there have long been attempts to allow for the grey or black economy in
GDP, but fundamentally it's dark matter that the owners are trying to hide.

But on the other end the assets are visible; we can count that there are X
trillion dollars in bonds and Y trillion dollars in housing. We just can't
work out who owns them because the trail goes dead in blind trusts in tax
havens somewhere.

(There's a good paper on this that I can't find right now)

~~~
carry_bit
> GDP only includes things that can be counted and taxed

Unlike gross output, GDP only includes final outputs. All B2B activity is
excluded by GDP, but capital is still involved. I wonder how things look if
you look at gross output instead.

------
debt
I was just thinking about this because Sears is in the process of closing
something like 100 more stores. They were a behemoth of their time and now are
barely staying a lot.

So many years of managerial incompetence and greed and market forces have
completely eroded their dominance. I say eroded because they're not completely
gone yet, and it's taken so long for them to glide down to this point.

It's just fascinating that company so large because reduced to so little over
such a long span of time.

------
68c12c16
original link is dead (which could be the result of its sudden popularity on
HN -- their entire server is quite slow for other content as well)...

archive.org has a mirror copy of this document,

[https://web.archive.org/web/20180105120132/https://www.frbsf...](https://web.archive.org/web/20180105120132/https://www.frbsf.org/economic-
research/files/wp2017-25.pdf)

------
kruhft
After taking a basic Mathematical Finance course, you'll find that nothing
does better than the Prime Rate in the long term, unless you get lucky, or
unlucky.

~~~
kruhft
I guess nobody here has taken that course?

~~~
cantrip
I think you need to elaborate more on what exactly you're talking about.

Nothing does better than the prime rate? You mean in terms of interest rate?
Isn't the definition of the prime rate the best you can get?

In the long term? What does that even mean here? Can I get lucky and do better
than the prime rate, whose definition is the best interest rate you can get?

Saying this knowledge is basic Mathematical Finance is also very
condescending. I haven't taken "that course" but I feel from your tone that
you took a 101 college course which now guides your entire mode of economic
thinking.

Elaborate on your statements.

~~~
kruhft
4th year Introduction to Mathematical Finance, but basically 101 in a sense.

Using a binomial model (essentially a random walk) and using 'the formulas'
for portfolio calculation, you will find that in the 'long term' (in math,
infinite, but 'a long time' in the real world') you will find that no
investment portfolio will beat the Prime Rate, as this is what all returns are
based off of.

It was just the results I saw from the course. I know one can get 'lucky' and
beat the Rate, but overall, as a zero sum game, someone else has to lose and
overall the group rate of return is calculated as...the Prime Rate.

Sorry for being condescending sounding; I thought this was common knowledege
given it's taught in introductory finance.

~~~
gburt
The linked paper is empirical counterevidence to that theoretical model
though.

Admittedly, we can always just say "we're not in the long run," I'm not sure
how useful that is.

I'm not certain what model exactly you're talking about, but I think it also
probably misses technological change as a real source of growth independent of
any monetary musings.

~~~
kruhft
Theory is an 'efficient' market model. Practice is not. Reminds me of the old
joke:

An Efficient Market Theorist sees a $100 lying on the ground, and passes it by
saying "If that existed, someone else would have picked it up by now!".

~~~
FabHK
> An Efficient Market Theorist

Milton Friedman, in the apocryphal story. And back in my days it was $20 :-)

