
The Rate of Return on Everything, 1870–2015 [pdf] - dredmorbius
https://economics.harvard.edu/files/economics/files/ms28533.pdf
======
anonu
I jumped to the conclusion (page 57) - but the bottom line is the rich get
richer.

In summary:

\- If you take more risk you get more reward - this is true based on their 150
year dataset and true across countries.

\- Equity markets and housing provide similar returns (NB: I wonder if that
will continue to hold going forward? But there's no reason for that change...)

\- Housing is less volatile. (NB: Thats strange to me considering you can get
a massive loan to buy a house but not so to lever up your 401k... the thinking
is leverage causes more volatility).

\- The return on wealth is greater than that of the economy - almost 2x growth
rate over 150 years. (NB: note to self: save more...)

~~~
mattnewport
> _\- If you take more risk you get more reward_

They kind of say this but I don't think they establish it. Bonds return less
than stocks and housing but they admit they can't explain equal returns
between housing and stocks but lower volatility for housing. They don't look
at volatility within stocks where contrary to the theory that risk is
correlated with return the data tends to show that less volatile stocks
actually have higher returns.

~~~
JumpCrisscross
> _the data tends to show that less volatile stocks actually have higher
> returns_

Which data show this? Less volatile stocks can, in certain periods of time, be
levered to return more than more volatile ones. But that is dependent on
borrowing rates being favourable and very specific, and to my understanding
rare, equity market dynamics.

~~~
mattnewport
The book _The Missing Risk Premium_ covers a lot of the evidence. The author
give a synopsis here: [https://falkenblog.blogspot.com/2013/07/missing-risk-
premium...](https://falkenblog.blogspot.com/2013/07/missing-risk-premium-
synopsis.html)

Low volatility investing is based around the observation that low volatility
stocks have higher average returns than high volatility stocks. This article
is a good summary:
[https://www.researchaffiliates.com/en_us/publications/articl...](https://www.researchaffiliates.com/en_us/publications/articles/s_2013_jan_making-
sense-of-low-volatility-investing.html)

------
pascalxus
Why is the real rate of return on real estate anything above 0? If so, it
means we're getting significantly worse at producing housing/shelter. Sure,
some of it can be chalked up to land value increase. But, much of america is
not land locked in any way. If real estate really is returning greater than 0
real returns (not including rent/dividend) then that is quite concerning for
society. It means we haven't achieved any progress in housing for 150+ years
(sure electricity/sewage/pipes, but that goes in a different category, more
like utilities). If this trend continues, greater and greater percentage of
people's incomes will go towards housing and more and more families will need
to live in a given living space: the complete opposite of progress.

EDIT: I'm talking about ONLY the capital gain portion, not the rent port. The
rent portion of course should be greater than 0.

~~~
zemo
... it's literally the first sentence of the second paragraph of the
introduction. The rate of return on real estate is the appreciation in its
value plus the amount of rent you can charge for using it versus its cost to
purchase. If you can buy a property for $100k and it yields $5k of yearly
income, that's a 5% rate of return. You can't "not include rent", that's
literally the function of a lot of real estate purchase.

~~~
turk73
Were it only that simple!

There are property taxes and maintenance. It's maintenance that kills you on
most rental deals. I think unless you own and manage a fairly decent portfolio
of properties, being a landlord is more of a break-even to loss type of
situation.

Where are all these $100K properties, btw?

~~~
christophilus
Avoid the US north-east and west coast, and you can find pretty decent values.
I know a guy in his 30s who is "retired". He actually works about 2hrs per
week. He has 10 rental properties. He pays 0 taxes due to depreciation
exceeding his rent + costs. He makes around $90K / yr take home pay which is
enough for his standard of living.

So the answer is, yes. Being a land lord can work, if you get the parameters
right as he seems to have done.

------
alexmingoia
Be careful drawing personal advice from economic aggregates. Aggregate yield
on investment or labor has little to do with individual yield on investment or
labor. In other words, it doesn’t really matter what aggregate yields are only
what _your_ yields are. Often I’m not sure what the point of talking about
aggregates is at all when it comes to labor. The gap between a software
engineer salary and fast food worker salary is so huge I’m not sure I
understand the meaning of analyzing the average aggregate yield of the two
together.

~~~
christophilus
I'd say that's true of salaries, but it seems that the investment portion of
the analysis is still interesting, as the average investor will be pretty
likely to land somewhere around the average return in the study.

------
317070
Also confirming that r>>g, returns are considerably larger than economic
growth, validating Piketty. I.e. it is increasingly getting more beneficial to
own than to work. And from this data it seems that the difference is even
accelerating.

Page 53: >Despite some variation, the positive gap between r and g is a
persistent feature of the data: r is bigger than g in every country and every
time period that we consider. The last few decades prior to the Global
Financial Crisis saw a general widening of this gap

~~~
noego
I never understood comparing r and g. r represents the _fixed_ investment
income for the rentier. g represents the _growth_ in income for the laborer.
Comparing these two numbers, is like comparing velocity vs acceleration.

Example: Let's take r=0.1, g=0.03. Consider a Rentier with a real investment
income of $100,000/year (ie, off a $1M endowment), and a Worker with wages of
$100,000/year. For simplification, let's assume both individuals spend their
entire $100,000 income every year.

If you follow the r>>g hypothesis, you might assume that after a period of
time, the Rentier will be far better off than the Worker. But that's not the
case. After 20 years, the Rentier's real income will still be $100,000/year,
off the same $1M endowment. Whereas the Worker's wages will now be $100,000 *
1.03^20 ~= $180,000

Clearly a higher r will be to the Rentier's advantage, especially if he
supplements his investment income with wages as well, and keeps growing his
endowment further. But this is going to be true even for r<g. There's nothing
special that occurs when r overtakes g, since they are comparing totally
different things.

~~~
zxcmx
So g represents growth of the _entire economy_ , not worker income or some
such thing. Note that if Piketty’s hypothesis is true then the conclusion
(return on capital will capture more and more of the economy) is more or less
tautological.

~~~
Symmetry
Worker incomes kept pace with investment income through the 19th century where
r was consistently higher than g and also in the early 20th where it didn't.
If your investments are in machines that need people to work them then better
machines mean that people's labor is more valuable.

It's only recently that we've seen we've seen wages as a share of total income
slip from roughly 50% to roughly 40% of total income. But the delta can be
almost entirely explained by large amounts of capital returns in owner
occupied housing which is a far higher share of the US capital stock than it
had been historically. And this form of capital doesn't require (much) labor
to maintain its value.

------
kk58
This entire analysis is predicated on a super trend of human population
increase.

There is an increase in demand for housing, consumption goods etc as the
population increases.

I doubt if this paradigm will succeed in an ageing world and a world in which
climate change might introduce massive stress to the population growth
continuum.

It would be interesting to see how this played out during medieval era during
black death era.

~~~
Aloha
The only real hard constraints on long term population growth are, food
insecurity, war, and pandemic.

A secondary cause that is relevant for the aging population example you cited
is gentrification, there seems to be an inverse population curve in respect to
wealth - meaning the more money you have (or your society has) the fewer
children you'll have - this is something that can be overcome thru public
policy if deemed a priority by a society.

Because of this, I see no reason why population will not continue to grow
world wide - climate change is most likely to change where and what kind of
food can be grown, not how much of it we can grow.

~~~
antt
Every country that has had a GDP ppp of over $8k equivalent 2010 dollars does
not have replenishment birth rates.

------
benj111
So to get philosophical for a minute.

Is it better for society to get a better return from housing compared to other
investments?

My gut feeling is that equity _should_ have the best return as it involves the
most risk.

Property should yield less as it's, well, safe as houses.

I suppose you could divide property into 2 elements, capital appreciation (the
safe, and as it turns out lowest yielding element) and rent (which seems to be
the real money maker), but then stocks are made up of the same 2 elements...

So all this appears to mean renters are paying 'too much'? As in landlords
should be flooding the market with cheaper rentals, except they can't because
of building regs and zoning, which then, for me begs the question, why should
the land lords be capturing that excess return? Why not capture it for
society's benefit?

~~~
HillaryBriss
> Is it better for society to get a better return from housing compared to
> other investments?

IDK, but when Japan was "taking over the world" in the 70's and 80's they
didn't have tax laws that subsidized housing mortgages the way the US has.
Japan's incentives were centered around manufacturing companies and exports.
Did it work out well for Japan? One can make the case. OTOH, Japan's debt to
GDP is like 200% now. And manufacturing in China has overshadowed that in
Japan.

In the US we've added fifty million people and built a bunch of housing.
Landlords did ok. But our trade deficit continues to rise.

What's better?

~~~
benj111
But OTO _O_ H

Japan doesn't really have a 2nd hand property market, they just start again
with a new house, so you could argue that Japans economy is centred around
manufacturing, new houses.

[https://www.theguardian.com/cities/2017/nov/16/japan-
reusabl...](https://www.theguardian.com/cities/2017/nov/16/japan-reusable-
housing-revolution)

------
narrator
You want to know what's a terrible investment? Cash. It has lost more than 90%
of it's value in the last 100 years.

~~~
muzani
100 years isn't so bad.

Try living in a developing country. It loses 50% of its value in 15 years. By
the time you save up for college, you need twice as much.

~~~
imjustsaying
I'm guessing his greater point was that fiat cash in general loses its value.

~~~
dredmorbius
As does specie.

"On the Continuous Devaluation of the Roman Currency"

[http://www.rmki.kfki.hu/~lukacs/ROMLAS.htm](http://www.rmki.kfki.hu/~lukacs/ROMLAS.htm)

[http://www.rmki.kfki.hu/~lukacs/ROMLAS_files/image008.gif](http://www.rmki.kfki.hu/~lukacs/ROMLAS_files/image008.gif)

"For in every country of the world, I believe, the avarice and injustice of
princes and sovereign states, abusing the confidence of their subjects, have
by degrees diminished the real quantity of metal, which had been originally
contained in their coins."

[https://en.wikisource.org/wiki/The_Wealth_of_Nations/Book_I/...](https://en.wikisource.org/wiki/The_Wealth_of_Nations/Book_I/Chapter_4)

~~~
ric2b
I guess Bitcoin would be the first real "gold" standard, then.

~~~
notahacker
Bitcoin lost more value in six months than most currencies managed in half a
century, and yet 'miners' were still incentivised to make more of it...

------
rossdavidh
The statement that r>>g, except during periods of wartime, suggests a Peter
Turchin-esque conclusion. The ruling class sets the rules such that r>>g,
whatever rules are required to make that happen, unless they are engaged in a
large military struggle such that they need the masses on their side.

~~~
fjsolwmv
It seems a bit strange to say that the ruling classes would pay workers more
to support a war. Another possibility is that war decimates the return of
capital because speculative investments fail due to instability, but basic and
well established needs (the "real" economy") still get funded because people
still want to eat.

~~~
rossdavidh
I think that, in many cases, the ruling classes worry more about morale (and
it's extreme failure, revolution) when there is a war on.

But, you raise a good point about other impacts. You care more about factories
and farms if you need war material and soldiers' rations.

~~~
antt
You ignore the destruction of capital war causes. Germany in 1945 had maybe
three bricks still stacked on top of each other, but had lost less than 20% of
its prewar population.

------
usaar333
Great paper, but lots of limitations. That they can't factor in taxes all that
well ("Since quantifying the time- and country-varying effect of taxes on
returns with precision is beyond the scope of this study, throughout this
paper we focus on pre-tax returns from an investor perspective.") really
distorts knowing how well the true asset returns are for different classes.

------
woobar
Real annual returns (%):

Bills Bonds Equity Housing

1.03 2.53 6.88 7.06

Nominal annual returns (%):

Bills Bonds Equity Housing

4.58 6.06 10.65 11.00

~~~
tomrod
Looks legit. On a quick skim, happy to see specific measures taken like

\- Population used as weights

\- Includes both nominal and real returns

\- Potential for Simpson's paradox addressed

Critiques

\- The Sharpe ratio is calculated for each group, but the weighted standard
deviation is not reported. Given the higher volatility of the equities market
versus the housing markets it would be nice to see the IQR.

\- Population _growth_ may be a large factor in housing pricing growth -- you
can't capture that with birth rates alone (need inflow from immigration) but
level-population controls for some of that. But (and I've only skimmed)
population may make for a poor time-series control due to serial correlation.

\- While housing comes out on top, the p-value criterion shows only the
slightest bit of statistical difference (t-stat 1.63) for geometric mean of
housing v. equities -- it's on the border of statistical significance. [US
Dollar returns, table A-14, geometric mean comparison]

Edit: Simpsons paradox, not ratio

~~~
lordnacho
Simpson's paradox perhaps? Googling "Simpson's ratio" gives you some stuff
about the aspect ratio of Simpson's episodes.

~~~
ianai
“Simpson’s paradox – the effect that occurs when the marginal association
between two categorical variables is qualitatively different from the partial
association between the same two variables after controlling for one or more
other variables…”. [https://365datascience.com/simpsons-
paradox/](https://365datascience.com/simpsons-paradox/)

Addressed by per capita or inflation adjustments?

------
ddebernardy
So in other words, excluding outliers, housing has been a better investment
than company stocks?

Or am I reading this wrong?

~~~
hn_throwaway_99
But there is this important tidbit:

> The observation that housing returns are similar to equity returns, but much
> less volatile, is puzzling. Like Shiller (2000), we find that long-run
> capital gains on housing are relatively low, around 1% p.a. in real terms,
> and considerably lower than capital gains in the stock market. However, the
> rental yield component is typically considerably higher and more stable than
> the dividend yield of equities so that total returns are of comparable
> magnitude.

In other words, it's the rental yield, not the capital gains, that make up for
the difference.

I'd also add the "past performance is no guarantee of future results" caveat.
The time period studied was one of immense population growth, so in advanced
economies with plummeting birthrates a different primary driving factor could
take hold.

~~~
ianai
Wonder whether REIT stocks act more like RE or equity stocks in that regard.

~~~
atdt
Do REITs provide exposure to rental gains?

~~~
ianai
Absolutely. In order to qualify they must pass through 90% of their profit as
dividends. Just be sure to chose REITs that invest in real estate the way you
want.

------
xiphias2
Gold / commodities are missing from the article, and a quite significant part
of the economy

~~~
mrfredward
Producers of gold/commodities are included, as these are businesses financed
with debt/equity.The return on buying gold bars and sticking them in your
basement (or buying a note tied to the value of gold in someone vault) isn't
covered because it doesn't produce income in the way that stocks, bonds, and
rental properties do.

~~~
rpz
In what way does the income on an investment on precious metals or commodities
differ from the income on a paper asset?

An interesting difference that I do know with respect to gold is that selling
_physical_ gold is not subject to any taxation

~~~
mrfredward
Companies return capital to shareholders, bonds pay interest, and when you
rent out real estate, tenants send you a check every month.

No one sends you a check in the mail for having a gold bar in your basement.
There is no income, but you can benefit from a change in price when you sell
it.

~~~
xiphias2
I thought the article is about capital returns (income+change of price),
that's the only interesting way to compare assets.

------
rpz
I must say I skimmed the article, however I find it interesting that the rate
of return on gold and silver themselves were not really discussed or
tabulated.

~~~
mrep
Gold and silver are commodities that don't produce value outside the price you
pay for and then sell for. Also, you don't really need to cover it when you
can easily find graphs for their prices going back hundreds years.

------
rb808
The paper mentions survivorship bias but doesn't talk about markets that went
to zero in this period. If you were investing in the last 19th century you'd
have had big allocations to China, Russia etc that would have been completely
lost as Communist governments nationalized everything. Also its easy to forget
that Argentina, Brazil, Southern Africa, Egypt etc were wealthy and growing
economies 100 years ago that pretty much went to zero too. Its disappointing
this wasn't even hinted at.

------
elamje
Are you upset r >> g? What if you had to retire on savings that were sitting
in a bank account earning .1% APY?

If you make on average, $100k a year over a short 30 year career, saving only
10% at .1% APY, what are your savings? $314.5k. What if you invest instead and
earn on average 8%? $1.2MM

How about over 40 years? $418k vs $2.8MM.

Compound interest has and will continue to be a major driver for wealth
throughout the world. Reducing its benefit to a moral argument of the rich
getting richer is sad.

Many of the richest Americans are taking part in the giving pledge, allowing
their wealth to build and take advantage of compound interest over their
lifetime and giving a large portion of it back. The alternative is giving 40+%
to the government each year, who will not be earning compound interest with
it.
[https://givingpledge.org/PledgerList.aspx](https://givingpledge.org/PledgerList.aspx)

Compound interest coupled with the fact that people can’t take their wealth to
the grave makes for a natural ability for money to both amass quickly and then
be transferred back to the public or to heirs or wherever else.

~~~
AgentOrange1234
Your compound interest is generated by the hard work of other people, and when
you transfer it to your heirs you’re just creating aristocrats. I don’t see
the public good here.

~~~
elamje
I’m not saying heirs are good or bad, some end up going on to make even bigger
economic impact and some completely bust. Regardless, the giving pledge and
other philanthropic things are changing the game for the argument against
billionaires. Hard to hate someone that’s going to give 95+% of their net
worth to cancer research, homelessness, etc.

For some of us on HN that work in Tech, we are making great salaries on the
backs of the the people that built the building we work in, or the computers
we use for our job. You could say that the factory worker in China that built
our PC deserves some of the wealth that we amassed via our
computers/servers/etc. Follow it down the rabbit hole and you will see that
everyone on this forum has benefitted from the hard work of others, and those
people benefitted from the hard work of those that built their factories,
homes, etc.

~~~
127
The whole idea of people being paid different amount of money for their work
is how much they produce. It's nonsensical to say low skilled workers should
be paid as much as high skilled workers.

Yes everyone benefits from everyone elses hard work. We transfer value through
money. People participate in a voluntary system where the prices are
controlled by supply and demand.

------
viburnum
I used be really interested in historica returns (especially Dimson, Marsh,
and Staunton) until I learned that profits have as much to do with squeezing
labor as anything else. If you want to predict future returns you need to know
how badly working people will be treated in the future.

~~~
axpence
Can you elaborate with specific examples?

~~~
dredmorbius
It is not the actual greatness of national wealth, but its continual increase,
which occasions a rise in the wages of labour. It is not, accordingly, in the
richest countries, but in ... those which are growing rich the fastest, that
the wages of labour are highest....

But though North America is not yet so rich as England, it is much more
thriving, and advancing with much greater rapidity to the further acquisition
of riches....

Though the wealth of a country should be very great, yet if it has been long
stationary, we must not expect to find the wages of labour very high in it.
... There could seldom be any scarcity of hands, nor could the masters be
obliged to bid against one another in order to get them. The hands, on the
contrary, would, in this case, naturally multiply beyond their employment.
There would be a constant scarcity of employment, and the labourers would be
obliged to bid against one another in order to get it....

But it would be otherwise in a country where the funds destined for the
maintenance of labour were sensibly decaying. Every year the demand for
servants and labourers would, in all the different classes of employments, be
less than it had been the year before. Many who had been bred in the superior
classes, not being able to find employment in their own business, would be
glad to seek it in the lowest. The lowest class being not only overstocked
with its own workmen, but with the overflowings of all the other classes, the
competition for employment would be so great in it, as to reduce the wages of
labour to the most miserable and scanty subsistence of the labourer. Many
would not be able to find employment even upon these hard terms, but would
either starve, or be driven to seek a subsistence either by begging, or by the
perpetration perhaps of the greatest enormities. Want, famine, and mortality
would immediately prevail in that class, and from thence extend themselves to
all the superior classes, till the number of inhabitants in the country was
reduced to what could easily be maintained by the revenue and stock which
remained in it, and which had escaped either the tyranny or calamity which had
destroyed the rest....

The liberal reward of labour, therefore, as it is the necessary effect, so it
is the natural symptom of increasing national wealth. The scanty maintenance
of the labouring poor, on the other hand, is the natural symptom that things
are at a stand, and their starving condition that they are going fast
backwards.

\-- Adam Smith, _Wealth of Nations_

[https://en.wikisource.org/wiki/The_Wealth_of_Nations/Book_I/...](https://en.wikisource.org/wiki/The_Wealth_of_Nations/Book_I/Chapter_8)

------
drited
Does anyone else think equal weighting of the 16 countries used despite
different size and periods of data availability for the different countries
could result in misleading results? The housing returns seemed surprisingly
high to me.

~~~
pradn
I think the "geometric mean" row weights by country-gdp.

~~~
drited
I see, I was going by the note under table 2 that said 'annual global returns
in 16 countries, equal weighted'.

I did find another reason that reported housing returns are too high though.
This is their key input 'net rental yields [which] use rental income net of
maintenance costs, ground rent, and other irrecoverable expenditure'

That neglects to factor in that after say 50 years most houses need to be
replaced or massively renovated. Factor in that expenditure and the real
returns should be somewhere between 1 and 2 percent lower.

------
rvn1045
Does the housing data include the cost of maintainence and additions to homes?
I vageuly remember reading somewhere that if you include the total cost of
himeownsrhip the returns aren’t very noteworthy.

------
p0nce
> 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.

------
sailfast
Does anyone know if they're publishing the database indicated in Section II?
Would be interesting to try and visualize the data.

------
RickJWagner
Warren Buffet (a man who knows a thing or two about good returns) urges people
to invest in themselves first.

Seems like good advice.

~~~
ddebernardy
Yeah but he also says that you're better off investing in productive assets,
whereas this seems to suggest that, leaving outliers aside, investing in a
house is a better investment than a company.

~~~
taffer
> Yeah but he also says that you're better off investing in productive assets,

I would regard anything that generates cash flow as a productive asset (and
that's probably what Buffet's thinking, too). Unlike gold, for example, which
just lies around.

> this seems to suggest that, leaving outliers aside, investing in a house is
> a better investment than a company. A good investment is about risk as well
> as return, and it is not easy for the average Joe to build a well
> diversified real estate portfolio.

~~~
ralph84
On the other hand, the average Joe has much more control investing in real
estate than investing in public companies. As a minority shareholder of a
public company you are completely at the mercy of management. You just have to
hope there's something left over for the minority shareholders after
management is done enriching themselves. As a landlord you don't get to decide
market rents, but you do get to decide who you rent to, how you maintain and
improve the property, etc.

~~~
chii
As a minority shareholder, you still have voting rights. And it's much easier
to build a diverse share portfolio to hedge against mismanagement from any
particular company.

And shares tend to not require maintenance unlike real estate. But unlike real
estate, shares can disappear if many companies tank. But land you own won't
ever disappear unless war or catastrophic natural disasters happen.

~~~
ralph84
> you still have voting rights

Your share of General Electric is 1 in 8.7 billion. For reference the odds of
winning the Powerball jackpot is 1 in 292 million.

And that's not even considering the companies where management issues
themselves a different class of stock with 10x the voting rights.

~~~
chii
if you indeed own such a small amount, then yes, you vote is as proportionally
impactful as your share. I don't see what's wrong.

As for management giving themselves 10x voting rights - that doesn't just
happen out of the blue. If a large portion of the shareholders decide that
it's the right thing to do (by voting), then yes, it can happen. But i highly
doubt that a majority shareholder would vote themselves out of control. It's
quite likely that the founder is doing this to retain control despite offering
to create more shares. The new buyers of said share knows this, and tacitly
agree as indicated by their purchase of said share.

------
rmrfrmrf
Weird how Marx came to this conclusion 125 years ago in _Capital, Vol. 3_ and
isn't mentioned once.

~~~
viburnum
Which conclusion?

~~~
rmrfrmrf
Falling rate of profit

------
wrong_variable
Not surprising - the developing world is still thirsty for 3-4 trillion USD in
infrastructure spending.

Not to mention the developed world could also use a bit of infrastructure
spending.

------
bubblewrap
I've been wondering if they have considered survivor bias. It sounds like the
most basic thing, but easily forgotten.

Now this, on housing prices, makes me rather doubt it: "We combine the long-
run house price series"

If you just look at house prices, aren't you overlooking the risk of losing
your house (damage, accidents, repairs you can't afford), and overlooking how
much people have to keep investing in their houses to keep the prices up?

