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The Rate of Return on Everything, 1870–2015 (2019)

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Re: The Rate of Return on Everything, 1870–2015 (2019)

#51

Post by Etheryte »

superb_dev wrote: post #9

How can an entire economy have a growth rate? Is it not measuring how much "new money" was put into the system?

Money doesn't affect the size of your economy, in general money is not even relevant to the discussion, save for the fact that it gives us a unit of measurement. Money is a relative resource, in a simplified manner, money dictates who gets what fraction of the pie. By printing more money you're not making more pie, just dividing the existing pie into thinner slices. Economies grow because of improvements in technology, science, using or finding natural resources, producing things etc.

Re: The Rate of Return on Everything, 1870–2015 (2019)

#52

Post by pessimizer »

_yb2s wrote: post #18

I don't understand how housing can increase in cost in a stable steady manner, as a fraction of household income over long periods of time like more than 100 years. It seems to defy logic, so it makes me suspect how it is being calculated when people claim that housing costs have gone up by massive amounts. Since only a small increase would price a large number of people out of the market- it seems logical that housi…

> I don't understand how housing can increase in cost in a stable steady manner, as a fraction of household income over long periods of time like more than 100 years.

It hasn't. House prices have been stable for hundreds of years. They're currently being used as financial vehicles, and as another government asset inflation to ward off that pesky balance of accounts reckoning, but they'll be back down eventually.

Rents are different, probably because landlords collude. Or irrational exuberance or whatever. Times when everybody suddenly agrees that housing is worth a lot more, for no particular reason.

Some guy here (https://www.reddit.com/r/Economics/comments/sq1pb/graph_of_c...) plotted the 2000s housing bubble vs. inflation-predicted price.

I would say that the fact that we didn't see a dip after the bubble makes it pretty obvious that if you deal in financial instruments around houses rather than houses themselves (including rents), there had to be a lot of money made that never came back. Renters never got a refund of the inflated rent that they paid during the time of those inflated house prices; that seems like it would account for the 6.6% a year that this paper claims as the return on owning housing. Because the buying and selling of houses is ultimately going to be a wash.

That says to me that housing bubbles are required in order to make any money from housing. That money will be supplied by renters and overextended owners who can't buy when prices return to the ground, and can't hold out until the next bubble.

Re: The Rate of Return on Everything, 1870–2015 (2019)

#53

Post by thbb123 »

georgeecollins wrote: post #25
_yb2s wrote: post #18

I don't understand how housing can increase in cost in a stable steady manner, as a fraction of household income over long periods of time like more than 100 years. It seems to defy logic, so it makes me suspect how it is being calculated when people claim that housing costs have gone up by massive amounts. Since only a small increase would price a large number of people out of the market- it seems logical that housi…

To help you conceptualize how that is possible: 100 years ago the world population was 2 billion, and now it is 8 billion. While the housing stock is also increasing with that population growth, the actual amount of desirable land does not grow as fast. That's why -- for example-- the US gov't in the 1850s could just hand out 40 acre plots of land to people. They can still do that, but it has to be way out in Alaska…

To add to that, a house a hundred years ago was nothing like a house today: building codes, square footage per person, heating, plumbing, connectivity... Building and maintaining a decent housing unit is far more expensive in material and energy than it was 60 years ago.

Re: The Rate of Return on Everything, 1870–2015 (2019)

#55

Post by JumpCrisscross »

_yb2s wrote: post #49
bombcar wrote: post #23

Earlier quoted context omitted.

There have been two major real housing price jumps that I know of, and both are correlated with significant household income increases (at least nominal). Almost everything else can be factored into changes in what the "nominal house" is - from a one room cabin without plumbing to a McMansion with a three car garage. One was the great urbanization post-world wars and the other was the great increase in dual-income ho…

Fair point, in that sense it seems like some fairly fixed step-ups are possible where people culturally decide to spend more of their income on housing, but it cannot be a steady trend to profit from as an investor, because it will always have a hard cap at 100% of household income. It can't steadily beat inflation over long time scales.

> It can't steadily beat inflation over long time scales

Of course it can. That’s what productivity means. The value could keep going up even amidst the fraction of incomes being spent on it going down.

Re: The Rate of Return on Everything, 1870–2015 (2019)

#56

Post by PostOnce »

Retric wrote: post #48
_yb2s wrote: post #18

I don't understand how housing can increase in cost in a stable steady manner, as a fraction of household income over long periods of time like more than 100 years. It seems to defy logic, so it makes me suspect how it is being calculated when people claim that housing costs have gone up by massive amounts. Since only a small increase would price a large number of people out of the market- it seems logical that housi…

People get much larger houses today because they can afford much larger houses. This comes from both increased prosperity and having fewer kids. 1950s: The average new home sold for $82,098. It had 983 square feet of floor space and a household size of 3.37 people, or 292 square feet per person. 2010s: The average new home ($292,700) offers 924 square feet per person (2.59 people per household, 2,392 total square fee…

Around here, they're building bigger houses, but also on much smaller plots without gardens or dogs or tree-houses or places for kids to play outdoors.

I suspect it's the same in a lot of places.

Maybe these square-foot-per-person calculations should also include square feet of land.

Re: The Rate of Return on Everything, 1870–2015 (2019)

#57

Post by sk11001 »

ggm wrote: post #50

I shall continue to quote 7% as the acceptable long term rate of return in aggregate and look at apple, telsa, Nvidia, Google askance, wondering when they will return to baseline.

They don't need to return to baseline. The overall market return can be around 7% - within that you'll have losers, flat lines and huge winners like Apple and Nvidia. That's how you get to the 7% average - by having some companies gain much more than that.

Re: The Rate of Return on Everything, 1870–2015 (2019)

#58

Post by ggm »

sk11001 wrote: post #57
ggm wrote: post #50

I shall continue to quote 7% as the acceptable long term rate of return in aggregate and look at apple, telsa, Nvidia, Google askance, wondering when they will return to baseline.

They don't need to return to baseline. The overall market return can be around 7% - within that you'll have losers, flat lines and huge winners like Apple and Nvidia. That's how you get to the 7% average - by having some companies gain much more than that.

It's very hard for that to sustain over decades without causing market distortions. I'd be interested in what is the longest run of above-market returns by any company since the 1870s.

In effect, if they accrue enough value, then they alter the average rate of return. And, since that sucks capital out of the rest of the economy, we're kind of fucked overall because companies making tinned peaches and medicine actually need capital, and a good rate of return depends on that capital.

Re: The Rate of Return on Everything, 1870–2015 (2019)

#59

Post by bluGill »

_yb2s wrote: post #47
bluGill wrote: post #36

Earlier quoted context omitted.

right out of adam smith, when people get more money they typically spend it on better housing.

I'm talking about in proportion to income... for example, if people spend 30% of household income on housing, you cannot have an order of magnitude increase in housing prices over any time scale as it will always have a hard cap at 100%.

Inflation is a factor as well.

Re: The Rate of Return on Everything, 1870–2015 (2019)

#60

Post by pessimizer »

pineaux wrote: post #2

So basically, housing is the best investment vehicle based on all the numbers.

Yes, but only because you can overcharge rents to people who can't afford housing. If everyone could afford housing, it wouldn't have any return.

The return on housing rents is equal to the minimum (psychological) expectation that landlords expect. It's an arbitrary vig/rake, and like all arbitrary vigs/rakes, it's around 5%. It's an expected gift for owning the house. It's a gratuity for being wealthy enough that you're never forced to buy or sell.

An aside is that this rate was set in one context by currency and convention: an English pound was 20 shillings, and a guinea was 21. So when you won an auction, you would pay the auction house in guineas, and the auction house would pay the owner of the item in pounds, giving a 4.75% share to the house. Racehorses are still sold this way, although aren't any guineas or shillings any more, it's now 1£ and 1.05£.

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