23 ms·

The Rate of Return on Everything, 1870–2015 [pdf]

215 points by Sandman 9y ago

stephengillie 9y ago
The PDF appears to be 2.9 MB and is taking a long time to download, possibly due to the source being "hugged" to death? This appears to be an abstract, based on title: https://www.nber.org/papers/w24112 https://www.nber.org/papers/w24112 This paper answers fundamental questions that have preoccupied modern economic thought since the 18th century. What is the aggregate real rate of return in the economy? Is it higher than the growth rate of the economy and, if so, by how much? Is there a tendency for returns to fall in the long-run? Which particular assets have the highest long-run returns? We answer these questions on the basis of a new and comprehensive dataset for all major asset classes, including—for the first time—total returns to the largest, but oft ignored, component of household wealth, housing. The annual data on total returns for equity, housing, bonds, and bills cover 16 advanced economies from 1870 to 2015, and our new evidence reveals many new insights and puzzles.
- allenz 9y ago
  Try http://web.archive.org/web/20180105120132/https://www.frbsf.org/economic-research/files/wp2017-25.pdf http://web.archive.org/web/20180105120132/https://www.frbsf....
- jsnell 9y ago
  There's a recent column by the same authors that's basically the executive summary: http://voxeu.org/article/rate-return-everything http://voxeu.org/article/rate-return-everything
  - FabHK 9y ago
    Nice. The right side of graph 4, with the massive drop of r-g during WW1 and WW2, bolsters the argument made I believe by Branko Milanovic eg in Global Inequality, namely that war, by destroying fortunes, works to reduce inequality.
kruhft 9y ago
After taking a basic Mathematical Finance course, you'll find that nothing does better than the Prime Rate in the long term, unless you get lucky, or unlucky.
- kruhft 9y ago
  I guess nobody here has taken that course?
  - dcow 9y ago
    This is an empirical paper not a theoretical discussion on mathematically maximizing the formula for returns...
  - cantrip 9y ago
    I think you need to elaborate more on what exactly you're talking about. Nothing does better than the prime rate? You mean in terms of interest rate? Isn't the definition of the prime rate the best you can get? In the long term? What does that even mean here? Can I get lucky and do better than the prime rate, whose definition is the best interest rate you can get? Saying this knowledge is basic Mathematical Finance is also very condescending. I haven't taken "that course" but I feel from your tone that you took a 101 college course which now guides your entire mode of economic thinking. Elaborate on your statements.
    - kruhft 9y ago
      4th year Introduction to Mathematical Finance, but basically 101 in a sense. Using a binomial model (essentially a random walk) and using 'the formulas' for portfolio calculation, you will find that in the 'long term' (in math, infinite, but 'a long time' in the real world') you will find that no investment portfolio will beat the Prime Rate, as this is what all returns are based off of. It was just the results I saw from the course. I know one can get 'lucky' and beat the Rate, but overall, as a zero sum game, someone else has to lose and overall the group rate of return is calculated as...the Prime Rate. Sorry for being condescending sounding; I thought this was common knowledege given it's taught in introductory finance.
crazygringo 9y ago
Highlights: > 1. In terms of total returns, residential real estate and equities have shown very similar and high real total gains, on average about 7% per year. ... The observation that housing returns are similar to equity returns, yet considerably less volatile, is puzzling. > 2. We find that the real safe asset return has been very volatile over the long-run, more so than one might expect, and oftentimes even more volatile than real risky returns. > 3. ...our data uncover substantial swings in the risk premium at lower frequencies that sometimes endured for decades, and which far exceed the amplitudes of business-cycle swings. > 4. Comparing returns to growth, or “r minus g” in Piketty’s notation, we uncover a striking finding. Even calculated from more granular asset price returns data, the same fact reported in Piketty (2014) holds true for more countries and more years, and more dramatically: namely “r >> g.” ...globally, and across most countries, the weighted rate of return on capital was twice as high as the growth rate in the past 150 years.
- capisce 9y ago
  Some more highlights: > In terms of total returns, residential real estate and equities have shown very similar and high real total gains, on average about 7% per year. > The data summary in Table 3 and Figure 2 show that residential real estate, not equity, has been the best long-run investment over the course of modern history. > Although returns on housing and equities are similar, the volatility of housing returns is substantially lower, as Table 3 shows. Returns on the two asset classes are in the same ballpark— around 7%—but the standard deviation of housing returns is substantially smaller than that of equities (10% for housing versus 22% for equities). > Predictably, with thinner tails, the compounded return (using the geometric average) is vastly better for housing than for equities—6.6% for housing versus 4.6% for equities. This finding appears to contradict one of the basic assumptions of modern valuation models: higher risks should come with higher rewards. Seems the way the real estate market works has caused a big drain both on economic growth (as investments have gone into real estate rather than more productive products), and on economic equality. So a Georgist land value tax does seem like a pretty good idea.
  - ttul 9y ago
    Real estate returns have been juiced by government policies for decades. The interest deduction, government backing of mortgages, and implicit guarantees of mortgage backed securities. Aka the cost of buying a house to the consumer is lower than it should be on a risk adjusted basis.
placeybordeaux 9y ago
IPFS mirror: https://gateway.ipfs.io/ipfs/QmZ1y9U9KRuGBVUisc1YbXrjp8tDXGe8Ca2URfXBKvZqrD https://gateway.ipfs.io/ipfs/QmZ1y9U9KRuGBVUisc1YbXrjp8tDXGe...
pjc50 9y ago
I wonder if the extreme r - g divergence is helped by another factor: tax havens and hidden assets. GDP only includes things that can be counted and taxed; there have long been attempts to allow for the grey or black economy in GDP, but fundamentally it's dark matter that the owners are trying to hide. But on the other end the assets are visible; we can count that there are X trillion dollars in bonds and Y trillion dollars in housing. We just can't work out who owns them because the trail goes dead in blind trusts in tax havens somewhere. (There's a good paper on this that I can't find right now)
- carry_bit 9y ago
  > GDP only includes things that can be counted and taxed Unlike gross output, GDP only includes final outputs. All B2B activity is excluded by GDP, but capital is still involved. I wonder how things look if you look at gross output instead.
mcguire 9y ago
I suspect that the issues with safe vs risky assets are a result of how screwed up the definition of economic risk is: * Risk is defined by relatively short term visible price fluctuations, with "unusual" events removed from the model as "uncertainty". * The risk model seems to use a Gaussian distribution, which doesn't fit the data particularly well.
polskibus 9y ago
I wonder if there is a study of real estate investment returns in relation to demographics trends. For example, does poor demographical outlook (low births for instance) correlate with lower real estate ROIs later ?
mattnewport 9y ago
I wasn't able to download the PDF but I read the summary article http://voxeu.org/article/rate-return-everything http://voxeu.org/article/rate-return-everything In the paper, do they attempt to take into account the costs of real estate investment over holding stocks when calculating total returns? Things like property taxes, maintenance, stamp duties, realtor fees, legal costs dealing with problem tenants, etc.? If not I wonder if those explain some of the mystery around real estate returns relative to stocks?
- pwthornton 9y ago
  Not to mention that real estate needs constant investment to keep it in working order and up to code. This is not the case with equities.
  - eurg 9y ago
    They use net returns (after operating costs etc., p.31), and provide an argument why leverage doesn't make a large difference (p. 40).
- asah 9y ago
  ...and don't forget deal sourcing, tax prep - real estate investing is very labor intensive, vs stock market equities which is point/click and super easy. For institutional investors, this is easily amortized but individual retail investors should invest in REITs to avoid over-concentration in a single property.
sandover 9y ago
Take a quick look at a graph of population growth from 1870-2015. It has an incredibly steep curve. Now think about how that graph will look from 2015-2100. Likely, it will be drastically flatter. Wouldn't this have a huge effect on real estate -- indeed, isn't that population graph the primary driver of what happens in the real estate market? I'm not sure the last century provides a meaningful guide here.
- antisthenes 9y ago
  Yes, it will have a huge effect on real estate, but probably not the way you think it will. Real estate prices in desirable urban areas will continue to grow at the same, or higher pace. If you look at urban zip codes in desirable economic areas, they were barely affected by the 2008 downturn, and by 2010 the prices were recovered. Today, those prices are much higher than they were in 2007. Land supply is an almost straight line with a slight growth, probably something on the order of y = 1.2x, mostly due to innovations in transport speed, cars & metro. So unless we get maglev metro that travels at 200mph, RE prices will continue to reach new highs.
  - beebmam 9y ago
    Unless it becomes more appropriate for more people to work remotely, which is the case. I imagine is one of the main reasons people move to urban cities is because of employment.
    - rubidium 9y ago
      Employment, entertainment, education and culture.
      - bdamm 9y ago
        And, quality services such as healthcare. Plenty of countryside with no good doctors or hospitals within an hour drive.
        9y ago
68c12c16 9y ago
original link is dead (which could be the result of its sudden popularity on HN -- their entire server is quite slow for other content as well)... archive.org has a mirror copy of this document, https://web.archive.org/web/20180105120132/https://www.frbsf.org/economic-research/files/wp2017-25.pdf https://web.archive.org/web/20180105120132/https://www.frbsf...
debt 9y ago
I was just thinking about this because Sears is in the process of closing something like 100 more stores. They were a behemoth of their time and now are barely staying a lot. So many years of managerial incompetence and greed and market forces have completely eroded their dominance. I say eroded because they're not completely gone yet, and it's taken so long for them to glide down to this point. It's just fascinating that company so large because reduced to so little over such a long span of time.
deleted 9y ago
[deleted]

215 points by Sandman 9y ago

The PDF appears to be 2.9 MB and is taking a long time to download, possibly due to the source being "hugged" to death? This appears to be an abstract, based on title: https://www.nber.org/papers/w24112 https://www.nber.org/papers/w24112 This paper answers fundamental questions that have preoccupied modern economic thought since the 18th century. What is the aggregate real rate of return in the economy? Is it higher than the growth rate of the economy and, if so, by how much? Is there a tendency for returns to fall in the long-run? Which particular assets have the highest long-run returns? We answer these questions on the basis of a new and comprehensive dataset for all major asset classes, including—for the first time—total returns to the largest, but oft ignored, component of household wealth, housing. The annual data on total returns for equity, housing, bonds, and bills cover 16 advanced economies from 1870 to 2015, and our new evidence reveals many new insights and puzzles.

allenz 9y ago
Try http://web.archive.org/web/20180105120132/https://www.frbsf.org/economic-research/files/wp2017-25.pdf http://web.archive.org/web/20180105120132/https://www.frbsf....
jsnell 9y ago
There's a recent column by the same authors that's basically the executive summary: http://voxeu.org/article/rate-return-everything http://voxeu.org/article/rate-return-everything
- FabHK 9y ago
  Nice. The right side of graph 4, with the massive drop of r-g during WW1 and WW2, bolsters the argument made I believe by Branko Milanovic eg in Global Inequality, namely that war, by destroying fortunes, works to reduce inequality.

kruhft 9y ago

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

kruhft 9y ago
I guess nobody here has taken that course?
- dcow 9y ago
  This is an empirical paper not a theoretical discussion on mathematically maximizing the formula for returns...
- cantrip 9y ago
  I think you need to elaborate more on what exactly you're talking about. Nothing does better than the prime rate? You mean in terms of interest rate? Isn't the definition of the prime rate the best you can get? In the long term? What does that even mean here? Can I get lucky and do better than the prime rate, whose definition is the best interest rate you can get? Saying this knowledge is basic Mathematical Finance is also very condescending. I haven't taken "that course" but I feel from your tone that you took a 101 college course which now guides your entire mode of economic thinking. Elaborate on your statements.
  - kruhft 9y ago
    4th year Introduction to Mathematical Finance, but basically 101 in a sense. Using a binomial model (essentially a random walk) and using 'the formulas' for portfolio calculation, you will find that in the 'long term' (in math, infinite, but 'a long time' in the real world') you will find that no investment portfolio will beat the Prime Rate, as this is what all returns are based off of. It was just the results I saw from the course. I know one can get 'lucky' and beat the Rate, but overall, as a zero sum game, someone else has to lose and overall the group rate of return is calculated as...the Prime Rate. Sorry for being condescending sounding; I thought this was common knowledege given it's taught in introductory finance.

crazygringo 9y ago

Highlights: > 1. In terms of total returns, residential real estate and equities have shown very similar and high real total gains, on average about 7% per year. ... The observation that housing returns are similar to equity returns, yet considerably less volatile, is puzzling. > 2. We find that the real safe asset return has been very volatile over the long-run, more so than one might expect, and oftentimes even more volatile than real risky returns. > 3. ...our data uncover substantial swings in the risk premium at lower frequencies that sometimes endured for decades, and which far exceed the amplitudes of business-cycle swings. > 4. Comparing returns to growth, or “r minus g” in Piketty’s notation, we uncover a striking finding. Even calculated from more granular asset price returns data, the same fact reported in Piketty (2014) holds true for more countries and more years, and more dramatically: namely “r >> g.” ...globally, and across most countries, the weighted rate of return on capital was twice as high as the growth rate in the past 150 years.

capisce 9y ago
Some more highlights: > In terms of total returns, residential real estate and equities have shown very similar and high real total gains, on average about 7% per year. > The data summary in Table 3 and Figure 2 show that residential real estate, not equity, has been the best long-run investment over the course of modern history. > Although returns on housing and equities are similar, the volatility of housing returns is substantially lower, as Table 3 shows. Returns on the two asset classes are in the same ballpark— around 7%—but the standard deviation of housing returns is substantially smaller than that of equities (10% for housing versus 22% for equities). > Predictably, with thinner tails, the compounded return (using the geometric average) is vastly better for housing than for equities—6.6% for housing versus 4.6% for equities. This finding appears to contradict one of the basic assumptions of modern valuation models: higher risks should come with higher rewards. Seems the way the real estate market works has caused a big drain both on economic growth (as investments have gone into real estate rather than more productive products), and on economic equality. So a Georgist land value tax does seem like a pretty good idea.
- ttul 9y ago
  Real estate returns have been juiced by government policies for decades. The interest deduction, government backing of mortgages, and implicit guarantees of mortgage backed securities. Aka the cost of buying a house to the consumer is lower than it should be on a risk adjusted basis.

placeybordeaux 9y ago

IPFS mirror: https://gateway.ipfs.io/ipfs/QmZ1y9U9KRuGBVUisc1YbXrjp8tDXGe8Ca2URfXBKvZqrD https://gateway.ipfs.io/ipfs/QmZ1y9U9KRuGBVUisc1YbXrjp8tDXGe...

pjc50 9y ago

I wonder if the extreme r - g divergence is helped by another factor: tax havens and hidden assets. GDP only includes things that can be counted and taxed; there have long been attempts to allow for the grey or black economy in GDP, but fundamentally it's dark matter that the owners are trying to hide. But on the other end the assets are visible; we can count that there are X trillion dollars in bonds and Y trillion dollars in housing. We just can't work out who owns them because the trail goes dead in blind trusts in tax havens somewhere. (There's a good paper on this that I can't find right now)

carry_bit 9y ago
> GDP only includes things that can be counted and taxed Unlike gross output, GDP only includes final outputs. All B2B activity is excluded by GDP, but capital is still involved. I wonder how things look if you look at gross output instead.

mcguire 9y ago

I suspect that the issues with safe vs risky assets are a result of how screwed up the definition of economic risk is: * Risk is defined by relatively short term visible price fluctuations, with "unusual" events removed from the model as "uncertainty". * The risk model seems to use a Gaussian distribution, which doesn't fit the data particularly well.

polskibus 9y ago

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

mattnewport 9y ago

I wasn't able to download the PDF but I read the summary article http://voxeu.org/article/rate-return-everything http://voxeu.org/article/rate-return-everything In the paper, do they attempt to take into account the costs of real estate investment over holding stocks when calculating total returns? Things like property taxes, maintenance, stamp duties, realtor fees, legal costs dealing with problem tenants, etc.? If not I wonder if those explain some of the mystery around real estate returns relative to stocks?

pwthornton 9y ago
Not to mention that real estate needs constant investment to keep it in working order and up to code. This is not the case with equities.
- eurg 9y ago
  They use net returns (after operating costs etc., p.31), and provide an argument why leverage doesn't make a large difference (p. 40).
asah 9y ago
...and don't forget deal sourcing, tax prep - real estate investing is very labor intensive, vs stock market equities which is point/click and super easy. For institutional investors, this is easily amortized but individual retail investors should invest in REITs to avoid over-concentration in a single property.

sandover 9y ago

Take a quick look at a graph of population growth from 1870-2015. It has an incredibly steep curve. Now think about how that graph will look from 2015-2100. Likely, it will be drastically flatter. Wouldn't this have a huge effect on real estate -- indeed, isn't that population graph the primary driver of what happens in the real estate market? I'm not sure the last century provides a meaningful guide here.

antisthenes 9y ago
Yes, it will have a huge effect on real estate, but probably not the way you think it will. Real estate prices in desirable urban areas will continue to grow at the same, or higher pace. If you look at urban zip codes in desirable economic areas, they were barely affected by the 2008 downturn, and by 2010 the prices were recovered. Today, those prices are much higher than they were in 2007. Land supply is an almost straight line with a slight growth, probably something on the order of y = 1.2x, mostly due to innovations in transport speed, cars & metro. So unless we get maglev metro that travels at 200mph, RE prices will continue to reach new highs.
- beebmam 9y ago
  Unless it becomes more appropriate for more people to work remotely, which is the case. I imagine is one of the main reasons people move to urban cities is because of employment.
  - rubidium 9y ago
    Employment, entertainment, education and culture.
    - bdamm 9y ago
      And, quality services such as healthcare. Plenty of countryside with no good doctors or hospitals within an hour drive.
      - 9y ago

68c12c16 9y ago

original link is dead (which could be the result of its sudden popularity on HN -- their entire server is quite slow for other content as well)... archive.org has a mirror copy of this document, https://web.archive.org/web/20180105120132/https://www.frbsf.org/economic-research/files/wp2017-25.pdf https://web.archive.org/web/20180105120132/https://www.frbsf...

debt 9y ago

I was just thinking about this because Sears is in the process of closing something like 100 more stores. They were a behemoth of their time and now are barely staying a lot. So many years of managerial incompetence and greed and market forces have completely eroded their dominance. I say eroded because they're not completely gone yet, and it's taken so long for them to glide down to this point. It's just fascinating that company so large because reduced to so little over such a long span of time.

deleted 9y ago

[deleted]