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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%
by 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 agoReal estate returns have been juiced by government policies for decades. The interest deduction, government backing of mortgages, and implicit guarantees of mortgage backed securities. Aka the cost of buying a house to the consumer is lower than it should be on a risk adjusted basis.
- cryptonector 9y agoThe cost to the consumer of buying a house is probably higher than it would be without these incentives, actually, because it ends up causing more money to spill into real estate. It's the same with college costs: every additional dollar of federally subsidized loans made available to the public adds a dollar to the cost of college, almost necessarily so.
- zimablue 9y agoYou've mixed up two things here I think. Returns vs Cost of buying a house. The point is that the government subsidies make the profits on buying real estate high, which leads to high prices. So both are true: "high cost of buying a house" "high returns on real estate" Obviously they can't be true forever, the upper limit I guess is the ability of the lower classes to rebel divided by their tolerance of being priced out of their own land.
- cryptonector 9y agoI was... responding the last sentence of the parent. All economics and human societies, really, are bubbles. Very, very long-lived bubbles. Obviously growth on Earth is ultimately limited, so yeah, these very long-lived bubbles cannot go on forever. The real trick is to predict when any one bubble will burst!
- kbutler 9y agoThe grandparent was describing the long-term vs short-term effect of broad subsidies. The short-term effect of a subsidy is a reduced cost to the consumer. If subsidies are generally and persistently available, this reduced perceived cost increases demand, causing increased prices. The ratio of price increase to amount of subsidy (and thus whether the consumer or producer benefits from the subsidy) will depend breadth of the subsidy and on elasticity curves of supply and demand. Then there's the increased demand because the subsidy increases ROI. further increasing prices of the fixed input (land/existing housing) to the good (living space).
- cryptonector 9y agoThank you. That is roughly what I meant to convey. Mind you, because these subsidies are never really temporary, I suspect the immediate effect on prices is always to raise them. And perhaps even temporary subsidies cause price rises just by increasing demand, though the price rises might only be temporary.
- lr4444lr 9y agoAll true, but since I can't get the PDF to load maybe you can tell me, how were the costs of real estate included? Calculating yield for real estate is not as obvious to me.
- mcguire 9y agoOne of the other comments had an archive.org link; there's a fair section on that.
- mcguire 9y agoIf you look at Figure 1 at http://voxeu.org/article/rate-return-everything http://voxeu.org/article/rate-return-everything, the advantages of housing returns predate those policies by decades, although it looks likely that the policies have stabilized the returns since they have existed. Edit: The actual paper breaks down the data between all data and post-1950. The advantages of housing appear actually greater pre-1950, before those policies.
- justherefortart 9y agoYeah "juiced". Versus a company that can not only write off all interest and fixes (unlike a person). But corporations can also depreciate the asset. But it's the individual homeowner that's juiced. Lmfao.
- valuearb 9y agoCorporations are just an extra layer of taxes in the individuals who own it.
- justherefortart 9y agoAnd thousands more write offs. I can't write off my lunch at 50% either for simply talking about "work". Having owned 7 small businesses in part or in whole, you get away with a hell of a lot if you try. Having been an auditor, companies do so many illegal things they get away with, the ethical isn't even in the same category.
- ttul 9y agoAnd the implied tax of maintaining the corporation.
- api 9y agoI do like seeing confirmation of what is patently obvious. Real estate is The Problem, at least in economically healthy areas. In economically vibrant cities real estate hyperinflation has soaked up all the gains and locked them up in non-productive assets, serving to enrich only banks and rentiers at the expense of individuals and more productive entrepreneurial activity. I've been whining about this for over a decade.
- osrec 9y agoCould not agree with you more. London is a classic example at the moment! Even after 5 years of working in the city, most people struggle to buy a studio apartment in a bad neighborhood.
- mcguire 9y agoWhat is an "economically healthy area", and what is "more productive economic activity", if the return on capitol is much larger than the growth rate?
- api 9y agoEconomically healthy means there are jobs with healthy wages, etc. Los Angeles, San Francisco, and Boston would be healthier than say Detroit, Cleveland, or Bakersfield. Productive means the money causes things to actually happen like new product development, entrepreneurship, research, health care, etc., vs. just sitting in a bank. Productive also means it benefits people doing real things vs. just collecting rent and sitting around. Look at Silicon Valley and imagine how much more angel capital there might be if real estate were not so inflated. When someone buys a $1.5M starter home, that's $1M not available for other investments.
- randomdata 9y ago> When someone buys a $1.5M starter home, that's $1M not available for other investments. Why do you feel the money disappears? From my perspective, the $1.5M is now in the hands of the seller, who is equally free to invest in other investments.
- Spooky23 9y agoThat’s a really one dimensional analysis. Real estate has been and remains one of the major drivers of economic activity. The stuff you are upset about is just the downside of increased productivity and consolidation. The only reason you have the wacky real estate costs in certain places is that the money people have concentrated in a few places. Their convenience is more meaningful than the inflated salaries required to support housing that’s 10x the national average. People have a fundamental drive to improve their home to enhance its value but also be more pleasant and suited to their wants and desires. That drives everything from home improvements to furniture to art. This ideal of a higher density residential society with lots of landlords that is popular on HN right now is a terrible future. Landlords want one thing — maximum return on assets. That means high cost, minimum possible opex.
- pwthornton 9y agoAnything less than higher density in more areas is a catastrophic future for all of us. Sprawl is driving climate change. Sprawl hurts environmental air quality. Sprawl hurts health with long commutes and a lack of walking and exercise.
- valuearb 9y agoSprawl only has a minor effect in all of those, and has many positive effects. My kids play in s 1/3 acre yard all day. for example.
- wnissen 9y agoHow does this all square with the Case-Schiller home price index, which showed something like a 1% real rate of return (i.e., just barely above inflation) for properties over time. As I understand it their data is based on comparable house sales and isn't subject to many of the common errors that occur when the mix of homes for sale shifts drastically.
- wnissen 9y agoApologies for replying to my own comment, but apparently they are including the "imputed rent" in the calculation. That is, the amount of rent you would have paid if you didn't own the home. The thing is, you have to live somewhere, so if you didn't own the home you would have been paying rent. That's why the imputed rent isn't included in Case-Schiller, because as an investment you're not living in the home and it would be double counting to assume that you are. So I'm quite skeptical of this analysis that equities are the same rate of return as housing.
- mrep 9y agoCan you link an article/journal on why a land value tax is good? I have seen this come up a few times in hacker news and yet I still can't find a good article/journal for why land value taxes are better than other alternatives and I have read dozens of economics/accounting/finance textbooks none of which back up land value taxes.
- capisce 9y ago"In praise of the land value tax": http://theweek.com/articles/553242/praise-land-value-tax http://theweek.com/articles/553242/praise-land-value-tax The Wikipedia entry on the subject: https://en.wikipedia.org/wiki/Land_value_tax https://en.wikipedia.org/wiki/Land_value_tax