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According to the McKinsey study mentioned in the article[a]: * Two-thirds of global paper wealth is tied up in real estate valuations (residential and commerci

• b9a2cab5 5y ago
  Asset prices are merely a function of discounted future cash flows. As interest rates are lower, the discount on future cash flows decreases. The world is also much more stable than it was in the 1950s-1980s - look at the state of Asia now and then. That means there is a lower risk discount on future cash flows. If paper wealth takes a shit the people that will be impacted will be retirees and the wealthy, not your average joes.
  • cs702 5y ago
    Two-thirds of paper wealth is in real estate. For most families that have any wealth, the biggest component of that wealth is the current valuation of the home in which they live. If the valuation of real estate in relation to income globally reverts to long-term historical norms, a lot of regular people would be affected, not just the wealthy.
    • PeterisP 5y ago
      For someone for whom the biggest component of that wealth is the current valuation of the home in which they live, the fluctuations of that price affects only the theoretical number, but does not affect their life in any meaningful way; they own and use the exact same asset as before, they are not trading it. These price fluctuations matter for people who either want to invest into real estate or withdraw previous investment, not for people who want to live in their current house.
      • djyaz1200 5y ago
        That's true except for cash out refinancing. Lots of middle class folks take out home equity loans to pay down credit card debt. This was a big component of the 2008 financial crisis. That and banks leveraging 40-1 and betting big that housing would never decrease in value.
        • rootusrootus 5y ago
          > take out home equity loans to pay down credit card debt I'm sure I'm preaching to the choir, but this is a terrible strategy. In a perfect world it cuts the interest payment a lot, but the risks are significant.
          • sokoloff 5y ago
            The risk is magnified if you’re the type of person with a track record of running up credit card debt.
    • another_story 5y ago
      It really depends. If you're not moving or borrowing against the value, does the value of your house matter that much?
    • wallacoloo 5y ago
      > If the valuation of real estate in relation to income globally reverts to long-term historical norms […] a lot of everyday people will tell you that just won’t happen. that governments perceive the risk of falling home values to be so large that they will do everything in their power to prevent that from happening.
  • ttul 5y ago
    I’m not sure I agree with you here. Average Joe has been investing in houses just as eagerly as Rich Ralph. The difference is that Average Joe will be brought to his knees if house prices should fall. Rich Ralph will still be rich, just a little less so. I think that in the fullness of time, it will be seen that today’s high asset prices were directly and unambiguously a consequence of extremely low interest rates and the creation of money by central banks and nothing more than that. When returns on lending are low, investors have to switch to riskier asset classes in order to generate the returns that they need to service their future cash flow requirements. For example, pension funds have to generate a certain amount of cash flow to cover their future pension liabilities, which are fixed and unchangeable. When central banks make money cheaper by lowering interest rates, pension funds have to shift to classes of assets that generate higher cash flow, even if that means taking on more risk. They don’t really have a choice in the matter. There is a positive feedback loop here. Low interest rates cause large investors like pension funds to shift to riskier assets. This stimulates the risk appetite of retail investors, who pile in when they see the trend of increasing prices in these riskier assets, such as stocks and houses. The increase in asset prices reduces the effective returns on those assets, forcing pension funds another large investors to shift to even riskier things, like venture capital. Rinse and repeat. I suppose nobody can say for sure that there hasn’t been some kind of long-term shift in global economic growth because of changes in technology, but it sure seems to me like cheap money is a more reasonable explanation for all of the craziness we have been seeing in the past year or two.
    • anigbrowl 5y ago
      Average Joe will be brought to his knees if house prices should fall I'm not so sure - it depends on how heavily leveraged buyers are and what % of them have used price increases to secure more capital. If your home has significantly appreciated in value but you haven't taken equity out of it, it could be said that you were leaving money on the table but only if you knew of a better investing opportunity. If you just let the property appreciate and didn't securitize that gain, a decline from peak values doesn't hurt because you have no loan to service.
      • dillondoyle 5y ago
  • andrewmutz 5y ago
    > As interest rates are lower, the discount on future cash flows decreases That is one of the causes of high asset prices. Another is that cheaper debt allows more people to borrow money to buy assets. > If paper wealth takes a shit the people that will be impacted will be retirees and the wealthy, not your average joes. If paper wealth drops average joes will also be affected. Employment depends on consumer spending, and a big drop in asset prices can have a significant impact on spending through wealth effects (https://en.wikipedia.org/wiki/Wealth_effect https://en.wikipedia.org/wiki/Wealth_effect)
  • rcpt 5y ago
    > state of Asia now and then Climate change and sealife collapse is getting pretty serious for SE Asia and I don't know what to believe about India water supply.
  • deleted 5y ago
    [deleted]
  • mbesto 5y ago
    > If paper wealth takes a shit the people that will be impacted will be retirees and the wealthy, not your average joes. Also the elephant in the room is that property taxes are a derivative of your net worth, not your income. So if paper wealth (due largely to RE) continues to outpace income then we're in for a big hurting soonTM. This is the hilarious part about critics against a wealth tax - we already have a wealth tax. I live Texas and people are about to have a brutal wake up call when they can't afford $10k/year in taxes because their $200k ranch they bought 5 years ago (and cost them $40k down) is now worth $500k. Note - I have mixed feelings about the proposed wealth tax. The proposed implementation was misguided.
    • JamesBarney 5y ago
      I think property taxes in Texas are one the biggest reason our house prices have remained somewhat sane.
      • mbesto 5y ago
        You clearly haven't been to Austin... there's nothing sane about property values here.
        • JamesBarney 5y ago
          It's also the fasting growing city in the nation, and I think it'd be worse if we didn't have a ~3% property tax. But probably better if they didn't have zoning.
        • naasking 5y ago
          Austin is utopia of sanity compared to Toronto where I live.
      • dnautics 5y ago
        Am I crazy? My friend owns a house in Sacramento. We (I'm in Texas) compared notes, and our property tax rates are comparable.
  • cwp 5y ago
    The world was more stable 1990-2020 than it was 1950-1980, yes. I don't think it's a good bet to assume that stability will continue. The pandemic will peter out, sure. But the US is shifting toward isolationism, China is heading for a population crash, Japan is rearming, and Europe is rethinking its strategic position in light of all that. That doesn't necessarily add up to increased conflict, but it does point to a lot of uncertainty.
    • rswail 5y ago
      That leaves out the decarbonization impact on the Middle East and other fossil fuel providers like Russia and Australia.
• stareblinkstare 5y ago
  >[...] they believe the global economy is about to shift to much faster economic growth, driven by new technologies like AI, quantum computing, cheap sustainable energy, and space exploration. >Some of the smartest people I know are either in one camp or the other, [...] And you believe them?
• elihu 5y ago
  > In the other camp are those who are quite concerned about the financial, economic, and political consequences if paper wealth reverts to historical norms in relation to global income. What about the camp that is worried that paper wealth doesn't revert to norms? I mean, if a person doesn't already own a house, then inflated prices work against them.
  • xwdv 5y ago
    That’s more of a personal problem. Paper wealth reverting to norms would be more of a societal problem, and thus is more important to prevent.
    • TrainedMonkey 5y ago
      A class of people unable to afford a home sounds like a societal problem.
      • sokoloff 5y ago
        A class of people unable to afford housing is a societal problem. Unable to purchase a home in a specific city is not nearly so obviously a problem. (Much of Europe seems happy to rent for life.)
        • deleted 5y ago
          [deleted]
        • diffeomorphism 5y ago
          Same difference. Rent prices and house prices are tied. If houses are unaffordable, so is rent.
        • clippablematt 5y ago
          Much of Europe has to rent for life, but isn’t happy about it. (at least in my experience of like everyone I know).
• DebtDeflation 5y ago
  > they come broadly from two camps One camp is the "this time is different" camp and the other camp is the camp that has been proven correct (eventually) in every historical instance of an asset price bubble. It should be noted that the first camp ALWAYS has a very good argument (usually involving technological change) about why this time is in fact different, but it always turns out to not be different.
  • tsol 5y ago
    Past results don't guarantee future outcomes
• AussieWog93 5y ago
  >faster economic growth, driven by new technologies like AI, quantum computing, cheap sustainable energy, and space exploration. It always blows my mind a bit when people talk about the productivity gains of the future coming from cutting-edge "sci-fi" technology. I've seen with my own eyes the insane productivity gains some knowledge workers can get simply through the use of hacky-but-effective domain-specific Python scripts. We're talking one person producing more benefit than an entire team by an order of magnitude. I'm sure there are other tried-and-true technologies that simply aren't rolled out widely enough and constitute a massive amount of economic low-hanging fruit (especially in the developing world). I'd push for them before I look to the stars for the next miracle technology.
  • cptaj 5y ago
    Can you give examples of these "hacky domain specific scripts"? I love hearing about niche custom computing.
    • montenegrohugo 5y ago
      As an intern at my first job a few years ago I basically did something like that. We had a data hunting that would go out into supermarkets and collect data, but oftentimes with errors. Supervisors would sift through all of them and spend 4-5 hours a day removing/fixing/joining faulty entries. I saw that, wrote two Python scripts to automate it (~2 weeks from start to deployment). All that workload automated immediately, and to my knowledge it's still in use today.
    • bityard 5y ago
      Not the one you're replying to, but I'm my experience this means writing your own tools and automation for the job you do when none exist. (Or are too expensive.) I've seen many shops where the amount of code for dev and QA tools significantly exceeds whatever product they ship.
    • AussieWog93 5y ago
      Yeah, specifically in my business (e-commerce, selling used video games) we have a set of scripts that can create a full eBay listing simply by scanning a game's barcode, another one that generates sales reports and breaks them down with exactly the information that I want, one that interfaces with some hardware to automatically test the save function in Game Boy games, and some more to come in future (we're new!). I saw some similar things in the accounting department at my previous employer, and on the flip side I've met many people who seem to spend an inordinate amount of time doing steps that a computer could do, but worse. I think the important bit is to have tight integration between the person writing the code and the person with the domain-specific knowledge that the code is performing - ideally they should be the same person. As we move away from seeing computer programming as a specialised skill for a class of elite engineers and towards something just generally useful like reading and writing, I can see this yielding huge dividends economically.
• skybrian 5y ago
  "Paper wealth" is an odd term that's not used in the study. It seems particulary odd to call real estate investments "paper wealth." After all, land and buildings are pretty darn real, hence the name. These investments may be overvalued and if prices change, owners will find they're not as wealthy as they thought, but they'll own the same thing. Also, what does it mean to say that wealth is "tied up" in real estate? Prices going up doesn't change anything real. The effect might be more resources going into construction and renovation, though. Debt and financial derivatives backed by inflated asset prices might be the problem, as in 2008. Those income streams might be less solid than they look.
  • analyte123 5y ago
    If you have to spend 5x your net worth on a house, that’s capital that is not spent on building businesses, whether through direct investment (buying tools or paying workers at your own business) or indirect (through stocks or other securities).
    • skybrian 5y ago
      Your debt is someone else's income. They could spend it on any of these things, assuming you keep paying. (All you get is a house, though.)
    • 01100011 5y ago
      Devil's advocate: Doesn't that mean the person who sold you the house now has the money to invest? It seems to me that wealth isn't being lost. It's being transferred to those wealthy, smart, or lucky enough to have invested in real estate.
      • jackcosgrove 5y ago
        I think in most cases it's being transferred to someone older than you. Real estate is a seniority system.
        • skybrian 5y ago
• missedthecue 5y ago
  Money doesn't disappear when you buy real estate. It goes to the person that sold you the real estate, and they can choose where to put that resulting capital.
  • gowld 5y ago
    Money isn't capital. Money represents capital. When they try to spend that windall money, in aggregate, it will cause inflation, and the money will be proven to represent less capital than previously assumed. The seller will thrive, but non-sellers will suffer higher prices.
    • missedthecue 5y ago
      My point is that one industry isn't starved because an allocator buys assets in a given asset class such as real estate. The money doesn't disappear, it keeps moving.
  • micromacrofoot 5y ago
    you mean to tell me this is some kind of economy?
    • missedthecue 5y ago
      Income = expenditure is one of the most intuitive but least grasped concepts of introductory economics. It's interesting to me that this is the case.
• anm89 5y ago
  One thing to keep in mind is that when values of an asset are inflated, the nominal price of the asset can change to match the underlying value of the asset (ie price falls)or the value of currency can change to justify the current price of the asset (ie price stays the same and the currency weakens). I think people are biased towards assuming the first one whereas the are structural reasons relating to Ray Dalio's long term debt cycle argument why the latter is more likely at this specific moment even though historically the former happens more than the latter.
  • carom 5y ago
    Inflating the currency is much more likely. It is how the government will escape a crisis when they cannot lower interest rates any more. That said, I think land is finite and will keep pace with inflation.