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 housing can't really increase in cost/value over long time spans, but must track the overall economy almost exactly.
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 or something.
A hundred years ago it took much more labor to produce enough food to feed a person. Before the industrial revolution let's say 90% of all people were farmers. In 1850 in the US that was maybe 50% of all people were farmers. So the % of GDP going to food was much higher. Now 1-2 people can feed 100 in the west. That means less of your income proportionately goes to food.
Similar declines in the amount of labor required to produce a thing are happening in manufactured goods. So it may have once taken hundreds of hours of human labor to build a car, but now it takes much fewer.
So the wealth of everyone is going up faster than the supply of desirable land. That does mean people are getting priced out. But also people find ways to live on less land. Before the industrial revolution most families needed a farm to survive. Now many, many families can live in an apartment building in a city that takes way less land.
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 feet) — three times the space afforded in the 1950s.
A few ways that housing can continue to increase as a percentage of income:
1.) Go from a single income supporting to a house to multiple incomes supporting a house. This is actually happening, with the shift from single-earner households in the 1950s to dual-income households to groups of unmarried professionals living together as roommates. The preponderance of post-1950s data can also overweight this effect: historically, the norm was far large extended families to live together in one household, and the single-earner U.S. nuclear family was an aberration created by suburbanization.
2.) Have reset points. How can real estate continue to return 7% real returns for 120 years? Well, return 7% for 40 years, at which point your investment is up 15x. Then bomb the house and kill the owner. Then give the land to the guys who helped you kill the owner at a low, low price, help them build a house on it cheap, and start the 7% appreciation calculator over again from a new low baseline. This is also very close to what actually happened over those 120 years, between WW1, WW2, the Russian/Ottoman/Austrian revolutions, the fall of the Warsaw Pact, the Chinese Civil War / Cultural Revolution / Great Famine, and so on.
3.) Have a smaller percentage of people owning houses. The average housing price can absolutely escape the confines of the median income, if the median person does not own a house. The study's use of rent and imputed rent partially controls for this, but the broad answer for "Housing prices can't outstrip incomes forever, can they?" is "Sure they can, if nobody can afford houses."
4.) Have more people. If you're talking the returns to an asset class, and you own all that asset class, and then suddenly there are more people that need that asset, you're going to make money. This, to a large degree, actually happened during those 120 years.
> 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.
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.
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 households.
But if you factor things out and try to correct for as many variables as you can, housing is pretty "steady state" though the percentage of income directed toward it that's acceptable has crept up somewhat.
Shelter is, like food, one of the few real necessities and so it will be bid up to the point of pain or worse if there is a scarcity.
Is the housing price adjusted to sqms / sqft and equipment / amenities?
Because my grandparents with their two kids and great-grandma literally lived in a one-room studio in the 1950s, even though they weren't poor. (Grandpa was an engineer for state railways, a good job in 1950s Czechoslovakia.) The toilet was common for 3 households. That was just the standard of living back then. You wanted to be warm, you had to drag coal upstairs from the basement and feed the home furnace. Daily.
In 1964, all five moved to a 3-room apartment, which increased their living space a lot, but it would still feel incredibly cramped by today's standards. It had a separate toilet just for them, though, and centralized heating. No more hauling coal upstairs. Progress!
Of course that those smaller, more primitive apartments were much cheaper than the house built in 2022 that I am now living in, and that is stuffed full with various sophisticated devices.
> In fact, the long decline observed in the past few decades is reminiscent of the secular decline that took place from 1870 to World War I.
> The fact that returns to wealth have remained fairly high and stable while aggregate wealth increased rapidly since the 1970s suggests that capital accumulation may have contributed to the decline in the labor share of income over the recent decades (Karabarbounis and Neiman 2014).
Predicted here:
Piketty, T. (2014). Capital in the twenty-first century. Harvard University Press.
> In terms of total returns, residential real estate and equities have shown very similar and high real total gains, on average about 7% a year.
> Housing, equity, bonds, and bills make up over half of all investable assets in the advanced economies today, and nearly two-thirds if deposits are included.
Interesting, Housing is marked as "risky", and yet heavily invested. Investors are over leveraged in risky investments. They probably do it because controlling housing nets them power above and beyond normal returns. I wonder if this part of the reason for the "boom and bust" of market economies in the West when proper government regulation is removed. The riskiness of much of the investment of most investors may lead to sudden losses and shifts in risk, which may result in them withdrawing capital to "safer" investments, thus triggering a "bust".
And `r ≫ g` shows why the wealthy can wield so much power. Holding capital hostage to regulate economic growth and control it is very powerful, and why they can exercise the kind of control they can.
Politicians in democracies favor property owners because they are a majority, reliable voters and are likely to stay in the district. Therefore, the tax and political policies encourage owning a house. Many families take inordinate risks to own a house when, with fairer rules, they would rent.
It's actually one of the big problems with Capital in the 21st century: if you strip out housing, r < g! Turns out it's all zoning and rent control all the way down! Fix zoning and you end up incidentally fixing inequality too because it's such a large part of economic rents.
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 nothing to do with money. We're literally producing more and better goods than the previous year. This can be due to better technology, more tools, or increasing population (and probably some other factors I forgot).
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.
You live alone in the forest and chop wood during the winter. The next winter you're much better at the task and chop more wood. There's no difference in money supply, population or any such. But your economic output has increased.
Demand increases due to population growth. Population goes down, growth goes down (broadly speaking, some caveats and nuance as always depending on some goods or services).
Regardless of inflation or changes in the money supply, new techniques, new technologies, trade, and population growth can cause the value of everything bought and sold to increase over time. You can measure that value in dollars, or you can look at changes in the quantity and quality of goods and services.
Money just represents tokens to use on our collective pile of goods and services. Growth refers to the rate at which the pile grows, and is largely divorced from money. Money is fake, and the systems behind it's distribution/allocation is regularly gamed for personal gain, in ways that go against the spirit of what money is supposed to represent. Money is an intermediate tool to help keep a track of who put how much on the pile so that everyone can focus on doing what they are good at, and in return, take from the pile what they need, as made by others who are good at other things.
Increasingly we see a problem of people who add nothing to the pile getting large wads of money and taking more than their fair share from the pile. This is a problem.
That calculation does not factor into the rent you will not pay when you buy a house and live in it. Imputed rent is a thing and you need to consider it. If you don't live in the house you wouldn't let the house sit vacant: you would rent it. In your formula the rent can be thought of as if it's a dividend of the investment.
Alternatively just read the linked article; the linked article makes the correct fair comparison. You will arrive at that conclusion by reading just the second paragraph, which says
> data on total housing returns (price appreciation plus rents) has been lacking (Shiller 2000 provides some historical data on house prices but not on rents). In this article we build on more comprehensive work on house prices (Knoll, Schularick, and Steger 2017) and newly constructed data on rents (Knoll 2017) to enable us to track the total returns of the largest component of the national capital stock.
Shiller is explicitly mentioned. And the article authors disregarded it because it failed to include rent.
Housing prices may collapse over the next 50 years as the population pyramid inverts and buyers demand decreases due to fewer individuals. What is the definition of long-term though?
If anyone wants to download the data, it's available at:
> The Jordà-Schularick-Taylor Macrohistory Database is the result of an extensive data collection effort over several years. In one place it brings together macroeconomic data that previously had been dispersed across a variety of sources. On this website, we provide convenient no-cost open access under a license to the most extensive long-run macro-financial dataset to date. Under the Terms of Use and Licence Terms below, the data is made freely available, expressly forbidding commercial data providers from integrating, in addition to any existing data they may already provide, all or parts of the dataset into their services, or to sell the data.
There's also the The Credit Suisse Global Investment Returns Yearbook:
> The Credit Suisse Global Investment Returns Yearbook is the authoritative guide to historical long-run returns. Published by the Credit Suisse Research Institute in collaboration with London Business School, it covers all the main asset categories in 35 countries. Most of these markets, as well as the world index have 123 years of data since 1900.
> The Global Investment Returns Yearbook, an authoritative guide to historical long-run returns, launched by UBS Investment Bank Research and UBS Global Wealth Management’s Chief Investment Office. This edition demonstrates the combined strength of UBS and Credit Suisse as the integration of the two banks progresses, and also marks the continuity of a longstanding relationship with the authors, Professor Paul Marsh and Dr Mike Staunton of London Business School and Professor Elroy Dimson of Cambridge University.
> In peacetime, r has always been much greater than g
This is an ultra simplistic formula, made by someone who's been born, raised and fed in a highly socialist country where the only word politicians know is "tax".
I wonder if this is still true once population growth reaches zero or negative. It seems like the baked in assumption of housing is that someone else is going to need it more tomorrow than you do today. I think this is an experiment the U.S. will begin running in earnest in the near future.
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£.
UniverseHacker|1 year ago
Since only a small increase would price a large number of people out of the market- it seems logical that housing can't really increase in cost/value over long time spans, but must track the overall economy almost exactly.
georgeecollins|1 year ago
A hundred years ago it took much more labor to produce enough food to feed a person. Before the industrial revolution let's say 90% of all people were farmers. In 1850 in the US that was maybe 50% of all people were farmers. So the % of GDP going to food was much higher. Now 1-2 people can feed 100 in the west. That means less of your income proportionately goes to food.
Similar declines in the amount of labor required to produce a thing are happening in manufactured goods. So it may have once taken hundreds of hours of human labor to build a car, but now it takes much fewer.
So the wealth of everyone is going up faster than the supply of desirable land. That does mean people are getting priced out. But also people find ways to live on less land. Before the industrial revolution most families needed a farm to survive. Now many, many families can live in an apartment building in a city that takes way less land.
Retric|1 year ago
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 feet) — three times the space afforded in the 1950s.
https://compasscaliforniablog.com/have-american-homes-change...
tim333|1 year ago
If you plot house prices against incomes they do a wave pattern which is high at the moment. But they were even higher against income in 1845.
Article here has data from 1845 for the UK https://archive.ph/FRzaA
nostrademons|1 year ago
1.) Go from a single income supporting to a house to multiple incomes supporting a house. This is actually happening, with the shift from single-earner households in the 1950s to dual-income households to groups of unmarried professionals living together as roommates. The preponderance of post-1950s data can also overweight this effect: historically, the norm was far large extended families to live together in one household, and the single-earner U.S. nuclear family was an aberration created by suburbanization.
2.) Have reset points. How can real estate continue to return 7% real returns for 120 years? Well, return 7% for 40 years, at which point your investment is up 15x. Then bomb the house and kill the owner. Then give the land to the guys who helped you kill the owner at a low, low price, help them build a house on it cheap, and start the 7% appreciation calculator over again from a new low baseline. This is also very close to what actually happened over those 120 years, between WW1, WW2, the Russian/Ottoman/Austrian revolutions, the fall of the Warsaw Pact, the Chinese Civil War / Cultural Revolution / Great Famine, and so on.
3.) Have a smaller percentage of people owning houses. The average housing price can absolutely escape the confines of the median income, if the median person does not own a house. The study's use of rent and imputed rent partially controls for this, but the broad answer for "Housing prices can't outstrip incomes forever, can they?" is "Sure they can, if nobody can afford houses."
4.) Have more people. If you're talking the returns to an asset class, and you own all that asset class, and then suddenly there are more people that need that asset, you're going to make money. This, to a large degree, actually happened during those 120 years.
cyberax|1 year ago
It's the density death spiral. Dense housing gets more expensive (yes, dense housing IS more expensive!), that in turn drives even more density.
The only way to fix it? Promote suburbs and smaller cities. There is literally _no_ other fix.
pessimizer|1 year ago
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.
bombcar|1 year ago
One was the great urbanization post-world wars and the other was the great increase in dual-income households.
But if you factor things out and try to correct for as many variables as you can, housing is pretty "steady state" though the percentage of income directed toward it that's acceptable has crept up somewhat.
Shelter is, like food, one of the few real necessities and so it will be bid up to the point of pain or worse if there is a scarcity.
sdwr|1 year ago
Based on prices, you can have roommates, children can live with parents, etc.
Real housing costs could double tomorrow, and people would survive (not happily).
inglor_cz|1 year ago
Because my grandparents with their two kids and great-grandma literally lived in a one-room studio in the 1950s, even though they weren't poor. (Grandpa was an engineer for state railways, a good job in 1950s Czechoslovakia.) The toilet was common for 3 households. That was just the standard of living back then. You wanted to be warm, you had to drag coal upstairs from the basement and feed the home furnace. Daily.
In 1964, all five moved to a 3-room apartment, which increased their living space a lot, but it would still feel incredibly cramped by today's standards. It had a separate toilet just for them, though, and centralized heating. No more hauling coal upstairs. Progress!
Of course that those smaller, more primitive apartments were much cheaper than the house built in 2022 that I am now living in, and that is stuffed full with various sophisticated devices.
unknown|1 year ago
[deleted]
Too|1 year ago
llm_trw|1 year ago
There are more people than ever and the surface area of the planet hasn't increased.
bluGill|1 year ago
smoovb|1 year ago
https://news.ycombinator.com/item?id=16078059 on Jan 5, 2018
https://news.ycombinator.com/item?id=19817584 on May 5, 2019
smarm52|1 year ago
> The fact that returns to wealth have remained fairly high and stable while aggregate wealth increased rapidly since the 1970s suggests that capital accumulation may have contributed to the decline in the labor share of income over the recent decades (Karabarbounis and Neiman 2014).
Predicted here:
Piketty, T. (2014). Capital in the twenty-first century. Harvard University Press.
> In terms of total returns, residential real estate and equities have shown very similar and high real total gains, on average about 7% a year.
> Housing, equity, bonds, and bills make up over half of all investable assets in the advanced economies today, and nearly two-thirds if deposits are included.
Interesting, Housing is marked as "risky", and yet heavily invested. Investors are over leveraged in risky investments. They probably do it because controlling housing nets them power above and beyond normal returns. I wonder if this part of the reason for the "boom and bust" of market economies in the West when proper government regulation is removed. The riskiness of much of the investment of most investors may lead to sudden losses and shifts in risk, which may result in them withdrawing capital to "safer" investments, thus triggering a "bust".
And `r ≫ g` shows why the wealthy can wield so much power. Holding capital hostage to regulate economic growth and control it is very powerful, and why they can exercise the kind of control they can.
mdnahas|1 year ago
JackYoustra|1 year ago
ggm|1 year ago
sk11001|1 year ago
superb_dev|1 year ago
OscarCunningham|1 year ago
Etheryte|1 year ago
carlosjobim|1 year ago
toomuchtodo|1 year ago
Edit: https://journals.sagepub.com/doi/full/10.1177/21582440177360...
jetrink|1 year ago
Grimblewald|1 year ago
Increasingly we see a problem of people who add nothing to the pile getting large wads of money and taking more than their fair share from the pile. This is a problem.
mensetmanusman|1 year ago
If lots of people are doing a lot of work powered by a lot of energy and productive technology equipment, the (material) economy is good.
smath|1 year ago
kccqzy|1 year ago
Alternatively just read the linked article; the linked article makes the correct fair comparison. You will arrive at that conclusion by reading just the second paragraph, which says
> data on total housing returns (price appreciation plus rents) has been lacking (Shiller 2000 provides some historical data on house prices but not on rents). In this article we build on more comprehensive work on house prices (Knoll, Schularick, and Steger 2017) and newly constructed data on rents (Knoll 2017) to enable us to track the total returns of the largest component of the national capital stock.
Shiller is explicitly mentioned. And the article authors disregarded it because it failed to include rent.
mensetmanusman|1 year ago
throw_pm23|1 year ago
throw0101d|1 year ago
> The Jordà-Schularick-Taylor Macrohistory Database is the result of an extensive data collection effort over several years. In one place it brings together macroeconomic data that previously had been dispersed across a variety of sources. On this website, we provide convenient no-cost open access under a license to the most extensive long-run macro-financial dataset to date. Under the Terms of Use and Licence Terms below, the data is made freely available, expressly forbidding commercial data providers from integrating, in addition to any existing data they may already provide, all or parts of the dataset into their services, or to sell the data.
* https://www.macrohistory.net/database/
See also perhaps "Historical Returns on [US] Stocks, Bonds and Bills: 1928-2023" (updated annually AFAICT):
* https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile...
There's also the The Credit Suisse Global Investment Returns Yearbook:
> The Credit Suisse Global Investment Returns Yearbook is the authoritative guide to historical long-run returns. Published by the Credit Suisse Research Institute in collaboration with London Business School, it covers all the main asset categories in 35 countries. Most of these markets, as well as the world index have 123 years of data since 1900.
* https://www.credit-suisse.com/about-us-news/en/articles/medi...
* https://www.credit-suisse.com/about-us/en/reports-research/s...
As well as:
> The Global Investment Returns Yearbook, an authoritative guide to historical long-run returns, launched by UBS Investment Bank Research and UBS Global Wealth Management’s Chief Investment Office. This edition demonstrates the combined strength of UBS and Credit Suisse as the integration of the two banks progresses, and also marks the continuity of a longstanding relationship with the authors, Professor Paul Marsh and Dr Mike Staunton of London Business School and Professor Elroy Dimson of Cambridge University.
* https://www.ubs.com/global/en/investment-bank/in-focus/2024/...
JumpCrisscross|1 year ago
This explains the enduring link between populism and war mongering.
TacticalCoder|1 year ago
This is an ultra simplistic formula, made by someone who's been born, raised and fed in a highly socialist country where the only word politicians know is "tax".
unknown|1 year ago
[deleted]
pineaux|1 year ago
idiotsecant|1 year ago
pessimizer|1 year ago
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£.
bombcar|1 year ago
Even bare land has to be maintained somewhat. You can't just subtract purchase price from sale price and call it done.
spiantino|1 year ago
andrepd|1 year ago
betaby|1 year ago
jstanley|1 year ago