that's not what rate of return means. You might as well say "why do real estate assets appreciate in value on average?"
Why should a real estate asset that does not appreciate in value continue to exist? Assets that don't appreciate in value can be demolished and replaced with assets that do appreciate in value. Assets that appreciate in value have an intrinsic reason to continue to exist; assets that depreciate in value don't have to continue existing. (And yes of course an asset that is depreciating in value should continue to exist if it is being lived in)
Existing housing appreciating in value also does not prevent new housing from being built. If every house is going up in value a little bit each year, an investment-minded person might see this and say "hey, I should build a house, as it will appreciate in value". Once housing -stops- appreciating in value in an area, people stop building additional housing in that area. So appreciation tends to spur construction until the appreciation stops. People don't build additional housing in areas where housing is depreciating in value, so on the average, construction should not be expected to halt appreciation, since appreciation encourages construction specifically in areas where appreciation is likely, and not in areas where appreciation is unlikely.
There are many similar effects that lead to appreciation in value on the average. It's not clear why housing appreciating in value should suggest that "we're getting significantly worse at producing housing/shelter".
I think he is talking about the actual building on the property. It doesn't make sense that an 20 year old house should be worth more than an "equivalent" newly constructed house. It should depreciate through wear and year like any other capital asset. That it appreciates (in real dollars, inflation adjusted) instead is confusing.
you're ignoring everything other than the intrinsic worth of the house itself as an object.
E.g., if you had a house in North Dakota in 2005 and then they discovered the Bakken formation in 2006 and the shale oil boom started, the value of your home would appreciate because of the rapid influx of oil industry labor. The price of something isn't determined by its intrinsic value alone; it's what people will pay for it. If people will pay more for it tomorrow than they will today, it's an appreciating asset.
If the population is growing faster than the housing stock for that area, the demand for housing goes up.
it's the change in price at time of sale. The price of the asset is only known at the time of sale. At all other times, the assumed price is speculative. The capital gain is just the difference between the price you sell it at and the price you bought it at. That's all it is.
I would imagine that money spent modifying the asset comes into the calculation somehow. Is that not the case? No adjustments to capital gains tax for renovation costs, etc.?
Edit: I did a quick Google. It looks like qualifying home improvements can be added to the cost basis. However, maintenance expenses cannot.
you're making this way too complicated in your head. Capital gains aren't paid on an ongoing basis. Gains are only realized at the time of sale. It's literally just the difference between price at which you sell an asset and the price at which you purchased the asset.
Property taxes are paid on an ongoing basis. Property tax rates are a function of the value of the property. Tax for a property is periodically recalculated by recalculating the fair market value for the property. The fair market value is speculative; it's an essentially a statement of expectation about the market. There's no obligation that a sale be for that price. But again, that's property tax, not capital gains.
If you buy a house at fair market value in a market with absolutely no change in housing values, and the house has a crummy kitchen and then you reno the kitchen, you have a reasonable expectation that you'll sell the house at a gain. So yes, improvements "come into the calculation somehow" inasmuch as they help you sell the property at a higher price. But that's not regulated or guaranteed in any way; the gains are just what you can get someone to pay you for the property. You could do lots of work on your house and then a sinkhole opens up in the street in front of your house and you no longer have a road in front of your house and the value will go down. You could make a house -worse- and still realize a gain if there are other factors that would make people willing to pay more for it.
You can't just view the intrinsic value of the house as an object to understand its price. The price is not its intrinsic value, it's what people are willing to pay for it. The gains are how much the sale price changed over time; they're not a function of the change in the intrinsic value of the object itself.
Thanks for the response. However, it doesn't answer the question of whether one's capital gains tax bill will be affected by any investments in renovating or improving the property. If you take another look at my comment, you will see that I already answered this question.
The cost basis used in the capital gains calculation may be adjusted by qualifying home improvement expenses, but not by things like maintenance costs.
P.S. A bit of friendly advice. There is almost always a better way to phrase things than "you're making this way too complicated in your head". It can be poorly received even if you are well-situated to provide useful information or understanding to the other person. It comes off especially poorly when you didn't understand what the other person was asking.
A bit of friendly advice: starting out with "a bit of friendly advice" is passive-aggressive. It can be poorly received even if you are well-situated to provide useful information or understanding to the other person.
> Assets that don't appreciate in value can be demolished and replaced with assets that do appreciate in value
It's more complicated than that.
An asset isn't necessarily an investment. E.g. cars, merchandise, foodstuff etc. People need somewhere to live, so they'll keep building houses and people will keep buying them and living in them, even if the "smart money" is chasing higher returns.
Now in the purest sense, someone with a family home could sell it and buy shares. Let's ignore leverage and say they fully own the home. That might be a smart thing to do. But there are other factors at play including tax, and including emotion and the practicalities of renting vs. owning. If you rent maybe you can get evicted more easily.
I said "can be", not "spontaneously cease to exist due to their non-appreciation". Homes don't explode the moment they stop appreciating in value.
> An asset isn't necessarily an investment. E.g. cars, merchandise, foodstuff etc.
um sure but the topic at hand is the rate of return on real estate assets, not "how to invest your money". Cars are a depreciating asset, and so what? That is not the topic being discussed.
> People need somewhere to live ...
Sure but again I don't know what about this statement is revelatory. Yes everyone needs shelter, we take that as axiomatic.
> so they'll keep building houses
ok but here's the thing: you actually can't take that for granted. Most people don't build their house, they buy one that already exists. The vast majority of people engage in real estate trade, not real estate construction. Real estate development is performed by a comparatively small number of actors, and they do it expressly for the purposes of profit. Yes, a majority of housing is owned for the purposes of residence, but that does not imply that a majority of real estate development is pursued for the purposes of occupancy by the person funding its development. People will only build houses for themselves if it's cheaper than buying on that already exists (or if they have some sort of requirements that can't be fulfilled by housing on the market, but again, the number of people hiring architects to design houses for them to live in is comparatively small).
>>An asset isn't necessarily an investment. E.g. cars, merchandise, foodstuff etc. People need somewhere to live, so they'll keep building houses and people will keep buying them and living in them, even if the "smart money" is chasing higher returns.
Yes, people will still build houses, but you eliminate a vast number of more optimal arrangements by taking profit-motivated housing development out of the picture, and that results in less abundance of housing.
Efficiency returns from specialization/division-of-labor, that is enabled by trade, is as close to an economic law as there is. And separating consumption of and investment into housing is a form specialization/division-of-labor.
Many cities that have penalized or restricted profit motivated housing development have seen very serious negative repercussions for housing affordability.
The assumption that long-held economic principles do not apply in a particular industry or sector is a very common one and almost always wrong.
> An asset isn't necessarily an investment. E.g. cars, merchandise, foodstuff etc.
Aren't those examples consumables, not assets? I always assumed assets are by definition things you invest in, not things you consume, but maybe I'm lost in translation here...
An asset is just anything that has value that can be bought and sold. Those are all depreciating assets, but they're assets nonetheless. Are you thinking of securities?
> "Once housing -stops- appreciating in value in an area, people stop building additional housing in that area."
Philadelphia had experienced this for a time, homes not appreciating in value and roughly 10% of the city became vacant land. Once a house got in enough distress that it needed to be demolished, it was cursed, and that curse would domino to neighboring properties.
housing appreciation is a good thing. if it appreciates, people will build more housing, people will take care of their properties, etc etc
if housing is appreciating, it means it's more expensive. For example if the price of milk were to appreciate and it goes from 2$ to 2.50 a gallon (inflation adjusted), then we're getting worse at producing milk. And if that pattern continues forever, fewer and fewer people will be able to drink milk. it doesn't matter that we're using new technologies (sure those can help reduce price) but it's the aggregate result that matters. For example, technologies might reduce the price of milk from 2$ to 1.50 but then we institute laws that say every cow needs at least 10 acres of space which then increases the price to 2.50. the net result, is still we're getting worse at producing milk.
> For example if the price of milk were to appreciate and it goes from 2$ to 2.50 a gallon (inflation adjusted), then we're getting worse at producing milk.
by your logic, organic milk is "worse" because it costs more. Maybe the price of something was low because people simply don't want it for some reason. Maybe people don't want it because the quality is low. Maybe we get better, not worse, at producing this good and the quality goes up: now the price of that good goes up because more people want it, because it's more desirable. Price going up can signal that we're getting -better- at producing a good, not -worse-, under certain conditions.
Prices changes can also have absolutely nothing to do with how good we are at producing something. Maybe the CDC puts out a notice that milk causes spontaneous combustion, and so the price of milk plummets because nobody wants it any more because they're afraid of bodily immolation. Now a bunch of producers go out of business. A new report comes out! That last report was baloney. Suddenly everyone wants milk again. Milk is great! But there aren't enough producers now. The prices skyrocket! A roller-coaster of changes in pricing can occur with literally no change whatsoever in our ability to produce a good.
Rising prices does not imply that we got worse at producing something, it literally only means that people are willing to pay more for the good. It has absolutely no explanatory power to help you reason about -why- they're paying more.
How did the supply change? How did the demand change? How did the product change? None of these things are addressed by stating, in a vacuum, that the price went up.
> For example if the price of milk were to appreciate and it goes from 2$ to 2.50 a gallon (inflation adjusted), then we're getting worse at producing milk.
Or getting better at producing milk, but more slowly than we are getting better at producing everything else in the basket of goods and services used to track general inflation.
Now, if the price of milk is going up compared to the average (mean, not median) pay per hour of labor, that's a good standard for getting worse at producing milk. (If it's worse by the median but not the mean, we’re just getting worse at distributing income.)
In Japan existing housing stock depreciates. The net result is better than appreciation in my experience. L
Right now the net result is buildings can be rebuilt when needed. All my friends can afford to buy a home. RE prices are reasonable and thus have reasonable rates of return.
The total cost of buying a new house is similar to America as the lower interest rate compensates for the depreciation. The difference is thus smaller down payments and lower monthly payments. If you want a similar net return to America then you can invest the difference in RE or equities.
Thus young people can buy homes easily while the total wealth building is not reduced. The generated wealth will be more diversified and thus less dependent on housing valuations.
yeah I'm not sure anyone is arguing that the appreciation of housing values is a good thing, just that it's an emergent thing and it's not that surprising. Much of this paper is corroborating Piketty, whose central thesis is more or less that the rate of return on capital is too high, and that the consequence of the high rate of return on capital is increasing wealth inequality. We're in essence creating a system that says that if you want to make more money, owning stuff is better than doing stuff. That's a pretty lamewad system imho, as it encourages the growth of the rentier class as the expense of the working class.
Why should a real estate asset that does not appreciate in value continue to exist? Assets that don't appreciate in value can be demolished and replaced with assets that do appreciate in value. Assets that appreciate in value have an intrinsic reason to continue to exist; assets that depreciate in value don't have to continue existing. (And yes of course an asset that is depreciating in value should continue to exist if it is being lived in)
Existing housing appreciating in value also does not prevent new housing from being built. If every house is going up in value a little bit each year, an investment-minded person might see this and say "hey, I should build a house, as it will appreciate in value". Once housing -stops- appreciating in value in an area, people stop building additional housing in that area. So appreciation tends to spur construction until the appreciation stops. People don't build additional housing in areas where housing is depreciating in value, so on the average, construction should not be expected to halt appreciation, since appreciation encourages construction specifically in areas where appreciation is likely, and not in areas where appreciation is unlikely.
There are many similar effects that lead to appreciation in value on the average. It's not clear why housing appreciating in value should suggest that "we're getting significantly worse at producing housing/shelter".