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Why is the real rate of return on real estate anything above 0? If so, it means we're getting significantly worse at producing housing/shelter. Sure, some of

Why is the real rate of return on real estate anything above 0? If so, it means we're getting significantly worse at producing housing/shelter. Sure, some of it can be chalked up to land value increase. But, much of america is not land locked in any way. If real estate really is returning greater than 0 real returns (not including rent/dividend) then that is quite concerning for society. It means we haven't achieved any progress in housing for 150+ years (sure electricity/sewage/pipes, but that goes in a different category, more like utilities). If this trend continues, greater and greater percentage of people's incomes will go towards housing and more and more families will need to live in a given living space: the complete opposite of progress. EDIT: I'm talking about ONLY the capital gain portion, not the rent port. The rent portion of course should be greater than 0.

781 7y ago
Because the population is growing, and people want to live in SF/NY/London/... not in the middle of nowhere. Real estate prices in landmark places will continue going up, probably at an accelerating pace as more people get richer and bid it up.
- barry-cotter 7y ago
  https://twitter.com/geographyjim/status/1121809404049776641?s=20 https://twitter.com/geographyjim/status/1121809404049776641?... GIF of housing supply in London, New York, Paris and Tokyo, 1970-2013, showing growth of maybe 1/3 in the first three and doubling in Tokyo. Amazingly real estate prices in Tokyo are basically flat throughout this period, those of the other three, not. Real estate prices will go up in desirable locations if supply is not allowed to grow with demand.
diego 7y ago
It's not so simple. The value of living in cities has increased because of economies of scale, population has grown and space in cities is limited. It's not like people want to build houses in the middle of nowhere. It does not follow that a positive return on real estate means that we're worse at producing shelter.
- pascalxus 7y ago
  when the price of something goes up, it means we're getting worse at producing it. It doesn't matter if you're using new technologies. what matters is results. If a gallon of milk goes from 2$ to 2.50$ inflation adjusted, then we've gotten worse at producing it (increase costs), etc. And, by gotten worse, I mean in aggregate: (this includes price of land, zoning laws, regulations, NIMBYs suing developers, insurance, frequency of huricanes, etc): all these things can make us get worse at developing shelter. What you'll notice about all these causes is they're directly or indirectly all Self inflicted.
purple-again 7y ago
It turns out people have this strange obsession with living within x miles of their family. While the number of people living in New York City has greatly increased the amount of land has not. The more people demanding the same thing, the more it costs. Hence real estate in desirable areas continues to return a significant rate. Well unless you invested in Detroit of course.
- barry-cotter 7y ago
  > While the number of people living in New York City has greatly increased the amount of land has not. The more people demanding the same thing, the more it costs. If there was the political will to do so they could build more densely in NYC. The amount of land is not going to grow massively but there’s no technical reason Brooklyn could not be built up as densely as Manhattan, or Queens as densely as Brooklyn. The technology for eight story walk ups or for similar buildings with elevators is about as old as the telegraph. If Tokyo can double its inhabitants from 1970-2013[1] with no rise in real estate prices or rents there’s no non-political reason NYC can’t do the same. [1]https://twitter.com/geographyjim/status/1121809404049776641?s=20 https://twitter.com/geographyjim/status/1121809404049776641?...
zemo 7y ago
... it's literally the first sentence of the second paragraph of the introduction. The rate of return on real estate is the appreciation in its value plus the amount of rent you can charge for using it versus its cost to purchase. If you can buy a property for $100k and it yields $5k of yearly income, that's a 5% rate of return. You can't "not include rent", that's literally the function of a lot of real estate purchase.
- pascalxus 7y ago
  I'm talking about ONLY the capital gain part.
  - zemo 7y ago
    that's not what rate of return means. You might as well say "why do real estate assets appreciate in value on average?" Why should a real estate asset that does not appreciate in value continue to exist? Assets that don't appreciate in value can be demolished and replaced with assets that do appreciate in value. Assets that appreciate in value have an intrinsic reason to continue to exist; assets that depreciate in value don't have to continue existing. (And yes of course an asset that is depreciating in value should continue to exist if it is being lived in) Existing housing appreciating in value also does not prevent new housing from being built. If every house is going up in value a little bit each year, an investment-minded person might see this and say "hey, I should build a house, as it will appreciate in value". Once housing -stops- appreciating in value in an area, people stop building additional housing in that area. So appreciation tends to spur construction until the appreciation stops. People don't build additional housing in areas where housing is depreciating in value, so on the average, construction should not be expected to halt appreciation, since appreciation encourages construction specifically in areas where appreciation is likely, and not in areas where appreciation is unlikely. There are many similar effects that lead to appreciation in value on the average. It's not clear why housing appreciating in value should suggest that "we're getting significantly worse at producing housing/shelter".
    - bloomer 7y ago
usaar333 7y ago
Per paper, it's 0.9% real capital gain return since 1950 in the US. That's smaller than the 1.9% real gdp per capita of the US since 1950, meaning people are actually spending a lower percentage of income toward housing. (mind you 1950 typical housing, which is far worse than 2019 typical housing) You can probably chalk a lot of this up to land value increases - as population increases, but targets only a small segment of land, land values will go up. (especially as that population earns more in real terms)
iamaelephant 7y ago
> If this trend continues, greater and greater percentage of people's incomes will go towards housing and more and more families will need to live in a given living space Yes this is literally a housing crisis and yes it's a real thing. Take a look at the busy markets in Sydney, Toronto, Auckland, etc. Why do you think millennials are so angry about housing?
ls612 7y ago
In a “spherical cow in a vacuum“ simplified world if there was massive population growth but a fixed supply of land then real returns to land would be positive during that period. This ignores several nuances of the real world but given that the world population went up by nearly an order of magnitude in the past 150 years its still a huge effect nonetheless.
rb808 7y ago
A lot of reasons but two fundamental parts as I see it First population growth, California's population is 10x what it was 100 years ago, so a family had an acre, now you have ten families on the same piece of land. That makes the land much more valuable. Secondly people spend a stable fraction of their earnings on housing, so income growth is important, and why a house in California costs much more than a house in say Peru. And why a house in NYC costs much more than it did 100 year ago - with stable population. If you look at places with stable/falling populations and stable/falling incomes, house prices are stable/falling too, see Rural America, Midwest, Argentina, Russia etc
- aidenn0 7y ago
  And at least where I live in California, housing is much more expensive to build in real terms than it used to be. I lived in a house that would be illegal to build today (the house was too large for the lot; note that it's total square footage, not the housing footprint that is the problem, which might explain why ranches seem to be so popular around here). That's ignoring things like tighter building regulation for safety and environmental reasons. It also means that the house itself will appreciate because if you tore down the house, you would have to build a much smaller house on the lot. I looked into buying a lot and building, and estimates were showing that the permitting process could cost more than the lot itself.
  - dsfyu404ed 7y ago
    The fact that land having structures that are "grandfathered in" is a major selling point for any piece of property with said structures tells you all you need to know about how much of a success curtailing people's freedom to build what they want on their own property has been. >I looked into buying a lot and building, and estimates were showing that the permitting process could cost more than the lot itself. That's the point. The city is creating an artificial wealth minimum for people developing properties. If you don't have at least $X to burn on their whims then you are not allowed to build in their city.

781 7y ago

Because the population is growing, and people want to live in SF/NY/London/... not in the middle of nowhere. Real estate prices in landmark places will continue going up, probably at an accelerating pace as more people get richer and bid it up.

barry-cotter 7y ago
https://twitter.com/geographyjim/status/1121809404049776641?s=20 https://twitter.com/geographyjim/status/1121809404049776641?... GIF of housing supply in London, New York, Paris and Tokyo, 1970-2013, showing growth of maybe 1/3 in the first three and doubling in Tokyo. Amazingly real estate prices in Tokyo are basically flat throughout this period, those of the other three, not. Real estate prices will go up in desirable locations if supply is not allowed to grow with demand.

diego 7y ago

It's not so simple. The value of living in cities has increased because of economies of scale, population has grown and space in cities is limited. It's not like people want to build houses in the middle of nowhere. It does not follow that a positive return on real estate means that we're worse at producing shelter.

pascalxus 7y ago
when the price of something goes up, it means we're getting worse at producing it. It doesn't matter if you're using new technologies. what matters is results. If a gallon of milk goes from 2$ to 2.50$ inflation adjusted, then we've gotten worse at producing it (increase costs), etc. And, by gotten worse, I mean in aggregate: (this includes price of land, zoning laws, regulations, NIMBYs suing developers, insurance, frequency of huricanes, etc): all these things can make us get worse at developing shelter. What you'll notice about all these causes is they're directly or indirectly all Self inflicted.

purple-again 7y ago

It turns out people have this strange obsession with living within x miles of their family. While the number of people living in New York City has greatly increased the amount of land has not. The more people demanding the same thing, the more it costs. Hence real estate in desirable areas continues to return a significant rate. Well unless you invested in Detroit of course.

barry-cotter 7y ago
> While the number of people living in New York City has greatly increased the amount of land has not. The more people demanding the same thing, the more it costs. If there was the political will to do so they could build more densely in NYC. The amount of land is not going to grow massively but there’s no technical reason Brooklyn could not be built up as densely as Manhattan, or Queens as densely as Brooklyn. The technology for eight story walk ups or for similar buildings with elevators is about as old as the telegraph. If Tokyo can double its inhabitants from 1970-2013[1] with no rise in real estate prices or rents there’s no non-political reason NYC can’t do the same. [1]https://twitter.com/geographyjim/status/1121809404049776641?s=20 https://twitter.com/geographyjim/status/1121809404049776641?...

zemo 7y ago

... it's literally the first sentence of the second paragraph of the introduction. The rate of return on real estate is the appreciation in its value plus the amount of rent you can charge for using it versus its cost to purchase. If you can buy a property for $100k and it yields $5k of yearly income, that's a 5% rate of return. You can't "not include rent", that's literally the function of a lot of real estate purchase.

pascalxus 7y ago
I'm talking about ONLY the capital gain part.
- zemo 7y ago
  that's not what rate of return means. You might as well say "why do real estate assets appreciate in value on average?" Why should a real estate asset that does not appreciate in value continue to exist? Assets that don't appreciate in value can be demolished and replaced with assets that do appreciate in value. Assets that appreciate in value have an intrinsic reason to continue to exist; assets that depreciate in value don't have to continue existing. (And yes of course an asset that is depreciating in value should continue to exist if it is being lived in) Existing housing appreciating in value also does not prevent new housing from being built. If every house is going up in value a little bit each year, an investment-minded person might see this and say "hey, I should build a house, as it will appreciate in value". Once housing -stops- appreciating in value in an area, people stop building additional housing in that area. So appreciation tends to spur construction until the appreciation stops. People don't build additional housing in areas where housing is depreciating in value, so on the average, construction should not be expected to halt appreciation, since appreciation encourages construction specifically in areas where appreciation is likely, and not in areas where appreciation is unlikely. There are many similar effects that lead to appreciation in value on the average. It's not clear why housing appreciating in value should suggest that "we're getting significantly worse at producing housing/shelter".
  - bloomer 7y ago

usaar333 7y ago

Per paper, it's 0.9% real capital gain return since 1950 in the US. That's smaller than the 1.9% real gdp per capita of the US since 1950, meaning people are actually spending a lower percentage of income toward housing. (mind you 1950 typical housing, which is far worse than 2019 typical housing) You can probably chalk a lot of this up to land value increases - as population increases, but targets only a small segment of land, land values will go up. (especially as that population earns more in real terms)

iamaelephant 7y ago

> If this trend continues, greater and greater percentage of people's incomes will go towards housing and more and more families will need to live in a given living space Yes this is literally a housing crisis and yes it's a real thing. Take a look at the busy markets in Sydney, Toronto, Auckland, etc. Why do you think millennials are so angry about housing?

ls612 7y ago

In a “spherical cow in a vacuum“ simplified world if there was massive population growth but a fixed supply of land then real returns to land would be positive during that period. This ignores several nuances of the real world but given that the world population went up by nearly an order of magnitude in the past 150 years its still a huge effect nonetheless.

rb808 7y ago

A lot of reasons but two fundamental parts as I see it First population growth, California's population is 10x what it was 100 years ago, so a family had an acre, now you have ten families on the same piece of land. That makes the land much more valuable. Secondly people spend a stable fraction of their earnings on housing, so income growth is important, and why a house in California costs much more than a house in say Peru. And why a house in NYC costs much more than it did 100 year ago - with stable population. If you look at places with stable/falling populations and stable/falling incomes, house prices are stable/falling too, see Rural America, Midwest, Argentina, Russia etc

aidenn0 7y ago
And at least where I live in California, housing is much more expensive to build in real terms than it used to be. I lived in a house that would be illegal to build today (the house was too large for the lot; note that it's total square footage, not the housing footprint that is the problem, which might explain why ranches seem to be so popular around here). That's ignoring things like tighter building regulation for safety and environmental reasons. It also means that the house itself will appreciate because if you tore down the house, you would have to build a much smaller house on the lot. I looked into buying a lot and building, and estimates were showing that the permitting process could cost more than the lot itself.
- dsfyu404ed 7y ago
  The fact that land having structures that are "grandfathered in" is a major selling point for any piece of property with said structures tells you all you need to know about how much of a success curtailing people's freedom to build what they want on their own property has been. >I looked into buying a lot and building, and estimates were showing that the permitting process could cost more than the lot itself. That's the point. The city is creating an artificial wealth minimum for people developing properties. If you don't have at least $X to burn on their whims then you are not allowed to build in their city.