The Rate of Return on Everything, 1870–2015 [pdf]
economics.harvard.edu
economics.harvard.edu
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...)
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.
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.
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...
Also most companies don’t last very long, so equity in a given company is far more likely to go to zero than land with paying tenants.
This is exactly the strongest argument against universal basic income, that nobody wants to address.
So with or without nationwide housing shortage, any income increase will still be captured by local landlords.
The rent problem is a de-facto blocker for UBI
Here's an article on the German method of rent control in the Financial Times, 'German rent control works for both landlords and tenants' - https://www.ft.com/content/efe1f74c-3c1d-11e9-9988-28303f70f...
Also, social housing is not the same as rent control.
Around 20% of the housing stock in Denmark is social housing - https://urbanlifecopenhagen.weebly.com/housing.html
It's for the same reason that PE returns are less volatile. The assets are illiquid and don't get repriced often. They're sold when it's convenient for the seller, which tends to be when they can make money, so the returns appear more less volatile then they actually are.
Sounds as if they fell prey to survivor bias, neglecting to account for the people and companies who went bankrupt.
EDIT: I'm talking about ONLY the capital gain portion, not the rent port. The rent portion of course should be greater than 0.
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".
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.
Edit: I did a quick Google. It looks like qualifying home improvements can be added to the cost basis. However, maintenance expenses cannot.
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.
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.
edit: https://www.irs.gov/publications/p523#en_US_2018_publink1000... I'm not a tax attorney, that's a question for a tax attorney. Calculating capital gains taxation isn't really the topic at hand.
Edit: Addressing your edit, the capital gains calculation is literally what the comment (by usaar333) before me asked about:
> I'm not even sure how they calculate capital gain. If I do maintenance on my house, are the authors viewing that as raising the basis?
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.
> 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).
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.
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...
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
see what i mean?
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.
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.)
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.
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?
So the answer is, yes. Being a land lord can work, if you get the parameters right as he seems to have done.
The rates are adjusted for maintenance cost in the paper. The example I gave is a simpler model than what is presented in the paper:
> These net rental yields use rental income net of maintenance costs, ground rent, and other irrecoverable expenditure. These adjustments are discussed exhaustively in the next section. We use net rather than gross yields to improve comparability with other asset classes.
did you try opening the paper and searching "maintenance" before you posted?
> Where are all these $100K properties, btw?
For one thing, it's a thought experiment. We're using our imagination to define our words. Stop looking at everything so unbearably literally.
And for real, that is a ridiculous question even when taken literally. Finding houses under $100k is really not confusing so long as you look in places with low costs of living. Randomly picking Tulsa, Oklahoma, for example: https://www.redfin.com/city/35765/OK/Tulsa/filter/property-t...
If there was the political will to do so they could build more densely in NYC. The amount of land is not going to grow massively but there’s no technical reason Brooklyn could not be built up as densely as Manhattan, or Queens as densely as Brooklyn. The technology for eight story walk ups or for similar buildings with elevators is about as old as the telegraph. If Tokyo can double its inhabitants from 1970-2013[1] with no rise in real estate prices or rents there’s no non-political reason NYC can’t do the same.
[1]https://twitter.com/geographyjim/status/1121809404049776641?...
You can probably chalk a lot of this up to land value increases - as population increases, but targets only a small segment of land, land values will go up. (especially as that population earns more in real terms)
First population growth, California's population is 10x what it was 100 years ago, so a family had an acre, now you have ten families on the same piece of land. That makes the land much more valuable.
Secondly people spend a stable fraction of their earnings on housing, so income growth is important, and why a house in California costs much more than a house in say Peru. And why a house in NYC costs much more than it did 100 year ago - with stable population.
If you look at places with stable/falling populations and stable/falling incomes, house prices are stable/falling too, see Rural America, Midwest, Argentina, Russia etc
I lived in a house that would be illegal to build today (the house was too large for the lot; note that it's total square footage, not the housing footprint that is the problem, which might explain why ranches seem to be so popular around here). That's ignoring things like tighter building regulation for safety and environmental reasons.
It also means that the house itself will appreciate because if you tore down the house, you would have to build a much smaller house on the lot.
I looked into buying a lot and building, and estimates were showing that the permitting process could cost more than the lot itself.
>I looked into buying a lot and building, and estimates were showing that the permitting process could cost more than the lot itself.
That's the point. The city is creating an artificial wealth minimum for people developing properties. If you don't have at least $X to burn on their whims then you are not allowed to build in their city.
Real estate prices in landmark places will continue going up, probably at an accelerating pace as more people get richer and bid it up.
GIF of housing supply in London, New York, Paris and Tokyo, 1970-2013, showing growth of maybe 1/3 in the first three and doubling in Tokyo. Amazingly real estate prices in Tokyo are basically flat throughout this period, those of the other three, not. Real estate prices will go up in desirable locations if supply is not allowed to grow with demand.
Yes this is literally a housing crisis and yes it's a real thing. Take a look at the busy markets in Sydney, Toronto, Auckland, etc. Why do you think millennials are so angry about housing?
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
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.
This is based on a bunch of lecture notes and papers: http://www.princeton.edu/~moll/piketty_notes.pdf, http://piketty.pse.ens.fr/files/Piketty2015JEP.pdf (this one is by Piketty and also there it's about r-g rather than r>g -- see the discussion on p.75 and 76) and https://www.aeaweb.org/articles?id=10.1257/jep.29.1.29
Consider r and g in turn. It's easy to see why r matters for wealth accumulation: if you get a high return you have high capital income and so, for any given level of consumption, you will have high wealth tomorrow. In your example with a $1M endowment and assuming people consume 5% of their wealth a 10% return will mean next year's wealth is $1,050,000 and a 20% return will mean next year's wealth is $1,150,000.
Next consider g: now the idea is the economy is growing at rate g and therefore people's other income sources are growing at rate g. We therefore de-trend everything by g and end up with r-g ("Detrending" here simply means looking at things RELATIVE to the average). So it does make sense to compare r and g, simply because we're thinking about a growing economy so you want to compare EVERYTHING to g.
Also note that these "multiplicative shock" theories aren't really about rentiers vs workers. They are just about people making investments and either getting lucky or unlucky. Here is a good explanation of these theories http://nautil.us/issue/44/luck/investing-is-more-luck-than-t.... Of course, this is just one theory of wealth accumulation/inequality, and there are others with other predictions where r-g would not be so central.
Why does a GDP growth rate of g imply that people's other income sources (wages from labor?) are also growing at rate g?
Wage growth in a country depends on confounding factors like worker productivity, relative bargaining power between workers and owners, outsourcing to other countries, automation, and the mix of manufacturing and service jobs in the economy.
It's very possible for the rate of economic growth to be, say, +3% while rate of change in the share captured by workers is flat or negative.
If labor income is growing at a different rate, the "correct" version of the theory should have r-g(labor_income). This would probably give even more extreme because it seems like in many countries the growth rate of labor income is less than the growth rate of the economy, i.e. r-g(labor_income)>r-g(GDP).
If you're interested in the dynamics of the economy and distribution if different variables grow at different rates, see here see e.g. http://www.princeton.edu/~moll/UG-slides.pdf
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.
Obviously, the worth via interest can't grow forever, because there is no infinite value going around.
Also, isn't it a good thing if labor becomes less valuable, implying that less labor is REQUIRED? That is what people aim for when they invent technology to make life easier, after all.
I think you may have this backwards.
If I generate $1 of value/hr that's kind of the maximum you can justify my wages being. If you give me a machine that increases my productivity 10 fold and the machine costs $2/hr then my maximum wage tops out at $8.
Now in this situation less labour is required, but the labour isn't less valuable. Obviously now you need a new industry to come along to employ the other 9 people who aren't now needed, possibly now servicing me and my newfound wealth, or possibly building the machines that put them out of a job.
'value' is what someone is willing to pay. My employer would have been willing to pay me a maximum of $1 and $8 pre and post machine introduction, so you could say my value increased. But I'm not likely to see much of that in the short term, because all my mates are now unemployed, and would be willing to do the job for their old pay, so my leverage is very low, so worst case I keep the same pay, in which the value of the job to me hasn't changed.
Of course, as you say, it could work the other way, and working could become more valuable because one worker could generate more returns. But that requires there to be more demand for everything.
Like, say, people eat only potatoes, and all work 8 hours per day to harvest just enough potatoes for everyone. If a machine could do their work, and they couldn't think of anything else to do, there would still be the same amount of potatoes, but less work to do.
Could your pay go down in the example? Theoretically yes, in practice we see the opposite. Economic development couldn't happen if it did. Although I suppose short term dislocations could lead to lower pay in the short term, before increasing long term?
Don't forget 'progress' is people increasing productivity. In a world where everyone has to work full time digging potatoes, that's all anyone has. If it only takes 1 member of the group to dig potatoes, that frees the other members to discover science, religion, chips. We are in a situation now where a fraction of the population work in food production, but we all have jobs and more wealth than potato growing us could possibly imagine.
That added productivity doesn't disappear, in our earlier example the owner of the means of production has captured all the value that I didn't get from it. He has to do something with it. Even if he puts it in the bank, that's possible seed money for a venture that ends up employing my 9 ex workmates.
Also don't forget that the one potato digger won't want to dig potatoes all day whilst everyone else sits around. If there's no reason to dig more he'll dig enough for himself and take the rest of the day off. Now you could entice him to dig for you in exchange for beans, because you know he doesn't like picking beans, and as you don't like digging potatoes. And of course I could offer to trade apples...
The problem is that life is not easier because all that efficiency is captured by a tiny group of non-laborers.
The people whose labor was replaced are not benefiting from the end of their labor. They're now jobless and forced to compete harder for lower pay.
But sure, there are various ways of looking at it. As others have pointed out, with increased productivity, the value of labor could also increase.
But it is of course a relevant question how to measure.
I suppose you can also get a computer that is as expensive or more expensive than a computer 20 years ago. But it would also be a million times faster (or more, I am too lazy to look). You could also get a Raspberry Pie for 30$.
I used to think this.
I came to the conclusion that families and familial lines, like individual people, are living organisms.
Some of those living organisms (familial lines) are relatively young and inexperienced - and they will not gain that experience within one family members' lifetime. It will take multiple generations of growth and nurturing to "grow up" to produce individuals, like you, who can operate in a more complicated society and transact more abstracted work products for more abstracted rewards.
In the meantime, as in all of history, members of juvenile family lines need meaningful, satisfying labor that they can transact for reasonable currency to thrive as a living organism.
Asking why we need any labor to be done is like asking why all those infants can't just get with the program and eat solid foods already.
If less labor is required for tasks A, B and C, then that frees up people to do new tasks D, E and F.
It is untrue that there is a fixed amount of work to be done, so when some of it is automated, then that necessarily creates unemployment. That's the "lump of labor fallacy".
https://en.wikipedia.org/wiki/Lump_of_labour_fallacy
It's also fallacious thinking to assume that every person must be employed working for wages.
If someday the economy as a whole can produce everything people need by employing 10% of the people to build robots, then we can organize it such that the people who like to build robots can do that, and the people who like to paint, or sculpt, or hike or sail can do that.
There is no universal law of the universe that requires the 10% of robot builders to own everything on earth, and the other 90% should live in rags, filth and sickness.
I know this sounds hard to believe for some. But today, agriculture takes up about 2% of labor, and manufacturing about 10%. And we consume about 2x what we did per person compared to the late 1970's. So, cut back manufacturing to about 4% of the labor force and use another 3% of the labor force for distribution. Voila, 10% of the labor force is used to sustain a 1970's level standard of living. Everyone else can improve their themselves, create arts, study nature or contemplate the nature of existence (that's sarcasm there).
In your universe the universal law is that the robot builders have (collectively) nigh absolute leverage over the rest of society. Without the angel assumption they would slowly (or quickly) use that leverage to amass power.
People wouldn't live in rags or whatever but all secondary economies point to providing value to the robot builders.
But wages are always relative to prices. If everything is being made by robots that nobody has a monopoly on then everything should be very inexpensive. Having to work for the same nominal wages as you had in 2003 is not that much of a problem if nominal prices are now 5% of what they were then.
The problem comes when you have some kind of corruption or distortion or regulatory compliance costs keeping some prices high (see: housing, education, medicine) even as general wages are flat or decline, or just grow less than those costs.
The argument is when returns are greater than growth, societal inequality increases because the "haves" continue to hold on to their wealth, essentially creating a kind of permanent upper-class, that isn't based on merit the way it should be under capitalism, and that this (arguably) feels fundamentally unfair.
A better example would be 2 people who work and who both make $100,000 and who consume 100% of their labor income. But one of these individuals has a $1 million endowment and reinvests every penny earned from interest. You can see how that would accelerate the concentration of wealth.
Rentier with a real investment income of $100,000 may have just few million in wealth
my take away was that equities produce a lot of wealth, but squander it by not returning it to shareholders (lack of dividends). look how many tech companies refuse to pay dividends because 'we are a growth company, we are always a start up". i hate stock buy backs, I think it just rewards people exiting the stock.
in short, if you are a property owner, you can garentee cash flows. economy goes up, down, you more less have an income stream. stocks, they will always go out of business. a company that never returns money to share holders in the end is always worthless, but today, that is in vogue.
Removing housing reduces returns seems like a tautology: if you remove one of the best-returning asset classes, returns are lower.
* Residential real estate market size was $33 trillion in 2018, of which about 80 million units are privately owned and 60 million units are not.
* Commercial real estate market size (Office buildings etc.) was about $15 trillion.
But even regardless of that, it doesn't change the numbers. The majority of the increase in real estate prices goes to corporations rather than individuals. An explanation of why it happens doesn't change that it does.
Some cities and countries (e.g. Vienna, or the Netherlands) provide public housing through gouvernement and/or not for profit organisations (i.e. with 0% returns), to a large part of the population. These places also have some of the lowest inequalities, which seems to validate the parent's message.
Make it cheaper and easier to build new housing and you'll see a lot more new housing.
So zoning contributes substantially to wealth inequality.
They were saying that most of the imbalance if from housing, that a lot of people own, not just from owning stocks/bonds/etc...
The paper briefly mentions it but does not address or refute the point further.
The rate at which r is growing compared to g is accelerating. For anyone who works for a living, that should be unsettling.
I don't think it's so much a coincidence, but rather a direct effect of it. Less investment into businesses usually means fewer jobs.
We know that debt will grow the economy, but it certainly seems like households are debt-saturated at this point.
What makes you so sure the US is at the tail end of it?
Of course I would not want to see rapid inflation. Yet the numbers suggest that our strong inflation control has been a cause of labour's reduced portion of GDP. Running the QE hot by letting inflation outpace the central banks inflation goal might be a good idea for assisting labour's income mix. A dangerous idea, so I hope some other country tries it first.
But combine e.g. relaxing zoning rules with a reasonable level of inflation and then nominal housing prices don't have to decline to adjust, they can just stay where they are as nominal wages and other prices catch up to them.
If this were true, wouldn't it be prudent to take out loans and invest in the stock market (own) rather than invest in education (labor)?
Why would that be true? Say r was lower than g, what is my alternative to investing my capital?
There does seem to be some conflict between exhorting everyone individually to save more while complaining that the economy is suffering from shortfall in aggregate demand (i.e. people not spending enough money).
The way r can get suppressed long-term is through (1) wealth taxation, (2) depreciation of an important asset class (eg as birth rate falls further below replacement housing can start to depreciate), or (3) high inflation.
If it is (1) then there really isn't much to be done, although hopefully the redistribution will be administered sufficiently well to help everyone achieve a high quality of life. If it is (2) then you can avoid the depreciating assets. If it is (3) then you once again avoid depreciating assets (don't hold cash/bonds/cash-like assets).
Long term it always makes sense to invest as long as you can do better than the (generally negative) “return” of inflation.
Okay, so the rational behavior is for me to do the minimum amount of work possible for most of my life, since wages grow faster than savings. Then, the week before retirement, I just have to do 10 years of work all at once!
Doesn't really work.
If g is one percentage point bigger than r it makes my retirement savings somewhat smaller than I'd like, but it's still far better than not having any.
If I already have lots of money, and I don't want to go bankrupt, my only real options are r and leaving it in a box. And r definitely has better results than the box.
Preemptively buying products I don't want yet has an even worse return than the box, since they need to be stored and decay over time.
I thought Piketty himself conceded that wartime (and, I think, immediate post-war period) was a period where this didn't hold true ...
The r/g thing is kind of indirect.
1) Whenever you buy something with money - you're making a 'profit' (surplus). You value that thing more than the money - the delta is the profit. Your personal profit.
When companies compete and produce better goods for roughly the same price, we're winning immensely, the company may not make much more money.
This is supposed to measured in inflation, but it's not.
We basically don't measure individual profit, only corporate profit.
2) We also don't measure the value of things for which money is not changed: when my brother's mother in law comes over to babysit - there's not GDP gain. When he pays a babysitter, well that goes to the GDP, but same value created.
So when women came into the workplace en-masse over the last two generations, we saw a much bigger increase in GPD than in reality, because those numbers assumed they were doing 'nothing of economic importance' at home, which is obviously false. If raising children is 'labour' then how the hell were mothers (and stay at home dads, though more rare in the past) not part of the labour market?
This is the tip of the iceberg.
3) 120 years ago, governments were tiny. Now they are huge i.e. 30-50% of the economy. We don't even try to measure the value (let alone surpluses) generated by gov. we just count how much they spend! Think of how much of a massive distortion this is in terms of calculating overall wealth!
The government could cure cancer, put in a $10 pill and the GDP wouldn't budge. Actually, it would go down because we might have less health spending.
Almost all aspects of government have improved quite a lot, but because it's socialized, it might have no bearing on the GDP at all.
A regulation that required companies to stop polluting may add some indirect GDP via new equipment, but the vast surpluses go to us, the consumer/citizen in the form of clean air! How is that measured in our GDP? It isn't!
So all three of these issues are fairly existential to the nature of how we measure value, and each of them is enough to throw everything offside.
They are even more problematic because they point to the existential problem in economics and that is 'how do we measure value'? It's something we used to argue a lot about, but not so much any more (but not because it's settled).
There is a good podcast on the FT by Uni College London Prof Mariana Mazzucatto [1] where she talks about this.
I'm not that old, but I grew up without the internet, and I was close with my grandparents who grew up on a farm without electricity, plumbing, or cars, or radios. They were not particularly poor for their area, and were the first in the area to get plumbing and TV eventually.
The level of increase in surpluses is mind boggling and I don't think we account for it well.
Women can now do mostly as they please.
Most 'heart surgery' was a wickedly complicated and dangerous thing 30 years ago - now it's usually quick and fast, not a big deal. So many more have access to it.
Almost everyone in the west can afford to go on an airplane, but that used to be for the rich.
Almost anyone who scores spectacularly in school can get scholarships (I know it's more complicated than that) but it's true. At least technically, Uni is open to everyone. This is new.
I could go on forever. (As I often do, sorry)
[1] https://podcasts.apple.com/ca/podcast/mariana-mazzucato-on-w...
This explains why the average quality of life/wealth gap between (Socialist) East Europe and West Europe was smaller than the raw difference of GDPs.
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.
pretty sure the vast majority of people did not own any land at all at that time, and that land was not bought and sold in the way that it is today. Did the concept of housing prices even exist then?
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.
If I’m right about that, then the years after reaching a global population maximum could be rough - possibly really rough, bordering on disaster.
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?
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?
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...
Not surprising since China is many times bigger geographically and wrt population. It's like 8 Japans glued together.
'Should' is an interesting word isn't it :). However the higher the risk, the higher the chances that you may not get the return you are looking for.
My thinking for 'should' is that faced with 2 options 1 risk free the other with a 50% failure rate, you would rationally go for the risk free option if they both yielded the same income. Even if the yield on the risky option were double it still isn't rational to go for that investment, why spend the years fretting when you can go for the risk free option for the same outcome. So clearly a risk premium is required to entice people into those riskier investments.
Alternatively get more permissive with zoning, in the right places, but careful not to grant a monopoly to any developer.
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.
"On the Continuous Devaluation of the Roman Currency"
http://www.rmki.kfki.hu/~lukacs/ROMLAS.htm
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/...
But, you raise a good point about other impacts. You care more about factories and farms if you need war material and soldiers' rations.
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
- 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
Addressed by per capita or inflation adjustments?
Thanks for the correction.
The imputed rents show survival bias same as stock returns.
Or am I reading this wrong?
> 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.
1. Invest in an index fund, which I deposit into automatically every month, at X% return and Y% risk.
2. Invest in a rental property, which I then have to spend time to manage (or pay someone to manage), at the same X% return and Y% risk.
I wondering how you're supposed to account for the difference between the two. Even if I don't hire someone to manage my property, I still have to spend time managing it, which can have a significant opportunity cost.
I am not a finance person, but it seems you're talking about two possible investments. One in a rental property and one with your time. If you manage the rental yourself then there is an opportunity cost where your time may have been better spent somewhere else. If you pay to have it maintained/managed then you are free to invest your time in whatever you like. You need to figure out the value of your time to make sense of it.
The real issue is you won't know Y until afterwards.
So you spend $1,000,000 on a house. With interest on a 30 year note, typically, that house with interest will cost $3,000,000 total. As an investment most people only consider capital gains, but the majority of gains according to the PDF are from rental income.
Source, Page 3, paragraph 2:
The majority of households in advanced economies today hold a leveraged portfolio in their local real estate market. As with any leveraged portfolio, this significantly increases both the risk and the return associated with the investment. And today, unlike in the early twentieth century, houses can be levered much more than equities. The benchmark rent-price ratios from the IPD used to construct estimates of the return to housing refer to rent-price ratios of unleveraged real estate. Consequently, the estimates presented so far constitute only un-levered housing returns of a hypothetical long-only investor, which is symmetric to the way we (and the literature) have treated equities.
I furthermore suspect that in calculating rental return, no account has been made of vacancy rates, agent's fees, insurances, repairs etc.
Soooo... in summary, although this report implies that housing has been a better investment than stocks... I suspect it hasn't.
Either way, if real estate averages about 1% better yield than equities, I'd go with equities, because they don't require maintenance, other than reading an occasional financial statement (or if you're indexing, not even that).
An interesting difference that I do know with respect to gold is that selling physical gold is not subject to any taxation
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.
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
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.
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.
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.
The public good is that secure property rights are a great way of increasing economic growth which enables human flourishing. Would you rather live in a world as rich as the 1910s USA, with equal wealth per person, or now, with antibiotics, air conditioning, cheap easy and safe travel and practically free high quality entertainment available 24 hours a day?
In 1904 one of the most powerful men in the world, the US President, Calvin Coolidge, has his son die of an infected blister. I’d be hard pressed to choose between living as an average Ukrainian today or Rockefeller or Carnegie back then. Economic growth does enormous good to huge swathes of people and confiscatory taxation jeopardises that.
But all this is orthogonal to aristocracy and the insane wealth gap we see today. You argue well, with language like “confiscatory taxation”, but you really just are claiming we can’t have progress without embracing unlimited winner take all.
This is clearly nonsense. You can have one without the other.
Until then the situation is best summarized by this meme: https://pbs.twimg.com/media/Dypf0KDWkAUyNdn.jpg:large
> I must study politics and war that my sons may have liberty to study mathematics and philosophy. My sons ought to study mathematics and philosophy, geography, natural history, naval architecture, navigation, commerce, and agriculture, in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry, and porcelain.
> John Adams
> US diplomat & politician (1735 - 1826)
> The fact is, that civilisation requires slaves. The Greeks were quite right there. Unless there are slaves to do the ugly, horrible, uninteresting work, culture and contemplation become almost impossible. Human slavery is wrong, insecure, and demoralizing. On mechanical slavery, on the slavery of the machine, the future of the world depends.
> OSCAR WILDE, The Soul of Man Under Socialism
I would personally prefer a person passionate about cancer research to allocate $1B rather than short sighted, sometimes pork-barreling, legislators.
Well, you can't.
Case in point: the concept of "human employment" that you base your precition on may or may not exist in the future... Because: the singularity is near.
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/...
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.
Seems like good advice.
"Don't do as succesful people say. Instead do as successful people do."
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.
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.
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.
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.
Real estate sucks. Well, being a landlord sucks. Land can drop in value, sometimes remarkably--look at Detroit, Northern Indiana, Baltimore. Lots of places.
Not to mention the developed world could also use a bit of infrastructure spending.
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?