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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

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.
  - Gigachad 5y ago
    That does seem to be what happens. In Australia, if the prices of houses even look to be standing still, the government will hand out taxpayer money to buyers to prop the prices up. Or they will let people withdraw from their retirement funds to buy.
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.

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.
- Gigachad 5y ago
  That does seem to be what happens. In Australia, if the prices of houses even look to be standing still, the government will hand out taxpayer money to buyers to prop the prices up. Or they will let people withdraw from their retirement funds to buy.

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.