Real estate has been a great investment all your life, so you think it will continue. But your life experience has been an outlier. Housing prices might stagnate or shrink in the coming decades.
Good article for a generic warning but there is a lot missing in your analysis.
First, real estate is really local. Since buildings cannot be moved (generally), they cannot be considered as a commodities. Living in Manhattan is not like living in new Jersey for a multiple reasons although the two locations are only few miles away. Making general statements on the entire world cannot be precise.
Second, real estate is not just residential. Hospitality and logistics are booming, office market is shrinking and retail is softly recovering after 5 years of collapsing. Any sector have different cycles which follows different pace and direction.
Third, you ignored innovation, renovation and conversions. Old buildings cannot be converted often into modern space so they will lose their values unless in extraordinary locations while more modern products will preserve their intrinsec value. On the other hand, in some specific locations old resi building can be demolished and converted in something else. So again, it depends on the (micro) location.
Fourth, the analysis pre WWII is difficult to compare to our next future. Before the 1940 in most of the world there was no need for a permit to build a house. You could be bulding everywhere, you did not need any connections with sewer, eletricity network, etc. Developing today is getting harder for several reasons amongst which environmental impact valuations, longer planning procedures, political willingness, physical constraints, etc especially in the most demanded (again) locations.
As someone said in the past, do not forget the 3 most important elements in real estate: location, location and location.
1. Housing has some differentiation, but not infinite. You said it yourself: Manhattan is a bundle of houses that people would consider, not each Manhattan home is unique and unchangeable. And although New Jersey is not Manhattan, the fact that you mention it in the same sentence shows that it is exchangeable with Manhattan in some circumstances. What remote work does is making these much more exchangeable than they used to.
You're also taking as an example New York, which is probably the single piece of real estate with most demand in the world, which will as a result continue gathering that demand. It will be completely different for, say, Tucson vs Phoenix, or a rural area in Vermont vs Maine.
2. This is addressed in the premium article very specifically. Hospitality will indeed be untied, retail, office, logistics unlikely
3. I am talking mostly about the cost of land here. I address the cost of construction in the premium article. The short is land is much more scarce than construction skills and materials. Prices can skyrocket with an excess demand of land vs supply, but the market can correct when that happens in construction costs.
Glad I checked the comments! You've added some things I wouldn't have thought to ask since I'm not an analyst. I always thought more data means the prediction is more likely to be accurate. But I can see that the conditions pre WWII would be difficult to factor into a predictive analysis.
The US really pushed housing affordability by creating Fanny and Freddie Mae. That expanded the available supply of cheap loans guaranteed by the government. Also the bond creation in the 1980s where mortgages were bundled and sold as bonds freed banks to make even more home loans.
Just like the student debt skyrocketed after the government got into it, so did the home prices.
Recently was pointed to another great post about this. Works in progress, "the housing theory of everything". Expensive housing has some really bad, often unexpected, downstream effects on the economy. This provides another huge incentive for governments to tackle the crisis.
Should be obvious that housing is a bubble, growth on the order of 100 of % are not an indicator of a sustainable model. In terms of rent, people are already paying like 40-50% of their net income for rent, can't go much higher than that without inciting a revolution...
Yes that piece is good. I have something along those lines in the works. I think they’re spot on. I also assume it’s one of the biggest causes of the fertility drop. So 2 birds with one stone
Heartening, to think that many of our problems can be solved (or greatly alleviated at least) simply by tackling the housing issue. Looking forward to that piece, if it ever makes it to getting published
Haha, well, that's the writer's life, right? I've had dozens of drafts "in the works" for months, but publishing is a slow trickle.
I meant to say, I'm looking forward to the day when that amazing piece will 100% come out and still be extremely relevant to the cultural discourse at the time ;)
The implication of dropping R.E. prices on city budgets that rely extensively on property taxes will force a multitude of changes. And because houses can't move, they are loved by governments who often subsidize home purchases by allowing [some] interest expenses and [some] real estate taxes to be taken off of the income tax. For the owner, the long-term bet was that the rise in your house price would offset the forced underlying rent (the real estate tax) over time. Many owners are sitting on unrealized windfall profits. Should that significantly disappear, the rent/buy equation will likely be reversed.
First, over last many decades the average family has gone from having on income to two incomes, which has made more money available to be spent on housing. That will not continue… we will not go to three incomes per household.
Secondly, interest rates has gone from 20% to 2%. They will not go lower.
Excellent article. I do not know where housing prices are moving over the long run, but I enjoyed your analysis.
One major disagreement that I have is there is no evidence that "Cities grew as much as they could horizontally and the edge of our car suburbs hit the Marchetti constant."
This assumes that people work in the downtown region, which is not true, particularly in North America. The vast majority of North Americans who live in metro areas work in suburbs that are far from the downtown but within driving distance of their house in the suburbs. This removes the transportation limit from Marchetti constant.
The true limiting factor is Urban Containment Zones which are determined by public policy, not geography or transportation. They are a major factor in housing inflation. Removing Urban Containment Zones would enable affordable housing to be constructed when land prices are affordable.
One additional point in favor of Marchetti's theory is that average car commuting in the USA hovers around 30 minutes each way. The difference is that car commuters can travel much further with cars and have widely varying starting and stopping points.
In the article you talk about housing prices but you only show a couple of renting graphs. If housing prices drop but cities are still saturated, wouldn't the rent prices remain stable and therefore yielding greater returns?
On the other hand, I've alway been very interested in how you approach any given topic in order to learn about it and draw your conclusions. Do you have an article about this? I think it'd be super interesting for curious minds that want to learn about topics that feel too big at the beginning.
A lot of expensive urban centres have constrained political or natural boundaries which limit geographical expansion, hence land and houses become more expensive. NY: the island; Vancouver: mountains and the sea; Hong Kong; Singapore; Paris? Toronto: the greenbelt. Another factor: availability of public housing: Vienna
Real estate is all about "location, location, location" so macro trends in population/demographics has to be reflected in on-the-ground realities in any particular geography. The supply-side of the equation is also vitally important and local restrictions in development growth artificially constrains supply thereby driving value to existing landowners. It's wrong to have a catch-all reason to not invest in a particular asset class especially given the asset class returns are almost entirely contingent on what is happening within that particular locality (this is before we get onto topics such as credit availability and market liquidity).
You are right, and I explore this in the premium article this week.
That said, it is absolutely important to know if a trend that lifted most boats in the past is about to reverse, so that most boats start going down, only for a few of them to keep being lifted
after the crash of 2008, an awful lot of money (one way or another) was transferred to much of the wealthiest in society, or in say developed economies, via the bailouts. now, even if you don't, *they* invest in real estate, which is to say many of the wealthiest bought, and continue to buy, the homes of the middle class, your mum and dad's homes, instead of their being able to buy them - i.e., the very wealthy often buy n+ homes/buy-to-lets more or less ad infinitum. this too limits supply
those properties become assets from which rents are perpetually increased and extracted from all but the wealthiest. this is a strong part of the dynamic that you may have missed, no? a key factor in why there's a housing crisis in many developed economies (certainly at least in the UK). and it's another reason why supply is limited, demand is high, and many people are increasingly angry
i think the fact that certain economies have essentially now become generalised, asset-sweating economies means that what you own, rather than what you produce, now defines your economic status, your class.
anyway. happy to have push back on this claim, am eager to better understand. great piece, cheers
I tackle this in the premium article this week. The short take on this is that I think it might matter a bit in the short term, but not much when talking about decades.
I think your comment matters an awful lot about inequality though, another topic that I’ll touch on in the future.
thanks for the reply, look forward to reading the article. indeed inequality, especially wealth inequality, is the lens through which i first understood the idea
that appears to me to be an incredibly serious problem, which is to say i don't know how we can make assets available again to the rest of society without some serious, one might say radical, policy intervention. ideas i've heard floated include a Citizens Wealth Fund (not a sovereign one, mind; i.e. a fund which transfers assets to citizens in some form over some longer timescale). also, regular payments to citizens for their data being used by FAANG companies. certainly it seems that marginal increases in someone's income will not solve the problem
anyway thanks again. tho i will say, i think i'd invest in real estate in the short term because, to coin a phrase, in the long term we're all dead
the continued rent from it might pay for any number of other assets long before you have to sell it, likely at a higher price than at which you bought it. in any case, i'm willing to bet that many other investment choices are likely to be whole or part ownership of assets of some kind
It’s frankly astonishing to me how little is known of Henry George when his “Progress and Poverty” was once so popular as to be rivaled only by the Bible for sheer publication numbers.
I believe this is correct and true, at least in California where desirably located homes in college towns are not owner-occupied but rented out practically 100%. There are also those who own 2nd or 3rd homes in the mountains or on the coast as recreational rentals which are also very popular seasonally.
yeah, exactly so. and i don't really know how you counter that, short of some dramatic state intervention. wealth taxes and redistribution doesn't seem likely to happen in either the U.S. or the U.K., at least for now
One way to counter it in the us would be to get rid of the tax break that allows you to avoid capital gains tax on real estate sale if you invest again in real estate within a time limit. I know of an example where someone sold a commercial property and rushed out and paid cash for four houses that are now rentals or short term vacation rentals.
Any incentive to demand is just going to translate into higher prices because real estate demand is inelastic. The only way to curb costs is increasing supply, and that means urban deregulation.
I agree, any residential real estate model that ignores investment demand is woefully incomplete. There are some societies - China for example - where residential real estate is the only savings vehicle available to the masses. And there are other societies - New Zealand for example - where the financial leverage available through multiple home ownership is the celebrated road to riches. And much of the world's most expensive real estate - penthouses on Billionaires Row, Arab and Russian-owned City estates, indeed, houses and apartments across all the world's most expensive cities - are safe deposit boxes in secure jurisdictions for the global elite.
another way of saying this is that the dynamics of capitalist economies has become more focussed on this 'asset model', of which real estate ownership is a prime example. not to be all Marxist, but ownership of assets, real estate included, by a powerful minority, as a phenomenon seems set to continue
Probably migration will continue to get easier not more difficult making price appreciation ever more a matter of how attractive the location is to live. Will Toronto housing continue to be a global commodity?
Could also add changes to deductibility of state and local income taxes, and caps on loan deductions structurally changing the attractiveness of home ownership in the US
Let's suppose you convinced me. And let's suppose I'm greedy. What are the best financial instruments to take a long-term short position in real estate?
When and how quickly prices will fall is the question. In Canada we have seen prices driven up in part higher than historical immigration rates. Now with those set to stabilize or decline we could be an early example of how prices will drop.
The supply section was very weak in my opinion. At least provide numbers regarding how many people work remote. I don't think it's as much as you think. Not to mention how AI will target these jobs first.
And the two sentence justification for why people will all of a sudden by YIMBY rather than NIMBY was disappointing as well.
🎯 remote work in the countryside is a lonely affair. People like to be around other people. And remote work isn’t most people’s reality, or even preference
Good article for a generic warning but there is a lot missing in your analysis.
First, real estate is really local. Since buildings cannot be moved (generally), they cannot be considered as a commodities. Living in Manhattan is not like living in new Jersey for a multiple reasons although the two locations are only few miles away. Making general statements on the entire world cannot be precise.
Second, real estate is not just residential. Hospitality and logistics are booming, office market is shrinking and retail is softly recovering after 5 years of collapsing. Any sector have different cycles which follows different pace and direction.
Third, you ignored innovation, renovation and conversions. Old buildings cannot be converted often into modern space so they will lose their values unless in extraordinary locations while more modern products will preserve their intrinsec value. On the other hand, in some specific locations old resi building can be demolished and converted in something else. So again, it depends on the (micro) location.
Fourth, the analysis pre WWII is difficult to compare to our next future. Before the 1940 in most of the world there was no need for a permit to build a house. You could be bulding everywhere, you did not need any connections with sewer, eletricity network, etc. Developing today is getting harder for several reasons amongst which environmental impact valuations, longer planning procedures, political willingness, physical constraints, etc especially in the most demanded (again) locations.
As someone said in the past, do not forget the 3 most important elements in real estate: location, location and location.
Indeed. That, and many more, addressed in the premium article.
https://unchartedterritories.tomaspueyo.com/p/is-any-real-estate-investment-safe
Quickly:
1. Housing has some differentiation, but not infinite. You said it yourself: Manhattan is a bundle of houses that people would consider, not each Manhattan home is unique and unchangeable. And although New Jersey is not Manhattan, the fact that you mention it in the same sentence shows that it is exchangeable with Manhattan in some circumstances. What remote work does is making these much more exchangeable than they used to.
You're also taking as an example New York, which is probably the single piece of real estate with most demand in the world, which will as a result continue gathering that demand. It will be completely different for, say, Tucson vs Phoenix, or a rural area in Vermont vs Maine.
2. This is addressed in the premium article very specifically. Hospitality will indeed be untied, retail, office, logistics unlikely
3. I am talking mostly about the cost of land here. I address the cost of construction in the premium article. The short is land is much more scarce than construction skills and materials. Prices can skyrocket with an excess demand of land vs supply, but the market can correct when that happens in construction costs.
4. I address permitting in this article
That is stuff he said he is covering in his next article.
Glad I checked the comments! You've added some things I wouldn't have thought to ask since I'm not an analyst. I always thought more data means the prediction is more likely to be accurate. But I can see that the conditions pre WWII would be difficult to factor into a predictive analysis.
The US really pushed housing affordability by creating Fanny and Freddie Mae. That expanded the available supply of cheap loans guaranteed by the government. Also the bond creation in the 1980s where mortgages were bundled and sold as bonds freed banks to make even more home loans.
Just like the student debt skyrocketed after the government got into it, so did the home prices.
Recently was pointed to another great post about this. Works in progress, "the housing theory of everything". Expensive housing has some really bad, often unexpected, downstream effects on the economy. This provides another huge incentive for governments to tackle the crisis.
Should be obvious that housing is a bubble, growth on the order of 100 of % are not an indicator of a sustainable model. In terms of rent, people are already paying like 40-50% of their net income for rent, can't go much higher than that without inciting a revolution...
Yes that piece is good. I have something along those lines in the works. I think they’re spot on. I also assume it’s one of the biggest causes of the fertility drop. So 2 birds with one stone
Heartening, to think that many of our problems can be solved (or greatly alleviated at least) simply by tackling the housing issue. Looking forward to that piece, if it ever makes it to getting published
“If”
You sound like you know me well
Haha, well, that's the writer's life, right? I've had dozens of drafts "in the works" for months, but publishing is a slow trickle.
I meant to say, I'm looking forward to the day when that amazing piece will 100% come out and still be extremely relevant to the cultural discourse at the time ;)
The implication of dropping R.E. prices on city budgets that rely extensively on property taxes will force a multitude of changes. And because houses can't move, they are loved by governments who often subsidize home purchases by allowing [some] interest expenses and [some] real estate taxes to be taken off of the income tax. For the owner, the long-term bet was that the rise in your house price would offset the forced underlying rent (the real estate tax) over time. Many owners are sitting on unrealized windfall profits. Should that significantly disappear, the rent/buy equation will likely be reversed.
I believe there are two more things,
First, over last many decades the average family has gone from having on income to two incomes, which has made more money available to be spent on housing. That will not continue… we will not go to three incomes per household.
Secondly, interest rates has gone from 20% to 2%. They will not go lower.
True on the 1st one!
Interest rates at 2%? Where?? They're 5.5% in the US and ~4.5% in the EU AFAIK
Interest rates went down to 2%, and then up again.
they’re not at 2% and they can go lower than 2%
Excellent article. I do not know where housing prices are moving over the long run, but I enjoyed your analysis.
One major disagreement that I have is there is no evidence that "Cities grew as much as they could horizontally and the edge of our car suburbs hit the Marchetti constant."
This assumes that people work in the downtown region, which is not true, particularly in North America. The vast majority of North Americans who live in metro areas work in suburbs that are far from the downtown but within driving distance of their house in the suburbs. This removes the transportation limit from Marchetti constant.
The true limiting factor is Urban Containment Zones which are determined by public policy, not geography or transportation. They are a major factor in housing inflation. Removing Urban Containment Zones would enable affordable housing to be constructed when land prices are affordable.
https://frompovertytoprogress.substack.com/p/how-housing-became-unaffordable
Very interesting point!
One additional point in favor of Marchetti's theory is that average car commuting in the USA hovers around 30 minutes each way. The difference is that car commuters can travel much further with cars and have widely varying starting and stopping points.
> Building restrictions can’t get any tighter, and will likely be relaxed.
As long as something is being built, restrictions can get tighter.
In general, the class of home owners is powerful, and have a lot to lose. Expect them to pull all kinds of tricks to avoid losing money
I haven't lived in many areas, but in those where I have, building was basically impossible
Agree
Hola Tomás! Great article, as always.
In the article you talk about housing prices but you only show a couple of renting graphs. If housing prices drop but cities are still saturated, wouldn't the rent prices remain stable and therefore yielding greater returns?
On the other hand, I've alway been very interested in how you approach any given topic in order to learn about it and draw your conclusions. Do you have an article about this? I think it'd be super interesting for curious minds that want to learn about topics that feel too big at the beginning.
I cover this in my business communication course, happening right now. I might do another cohort in the future!
Renting and buying are strongly correlated as people can go from one to the other when they go unbalanced.
A lot of expensive urban centres have constrained political or natural boundaries which limit geographical expansion, hence land and houses become more expensive. NY: the island; Vancouver: mountains and the sea; Hong Kong; Singapore; Paris? Toronto: the greenbelt. Another factor: availability of public housing: Vienna
That’s right.
And the cities that can grown and aren’t limited are cheaper (eg Berlin).
Those that can grow in space but limit themselves are expensive (eg Madrid can’t build up anymore)
Real estate is all about "location, location, location" so macro trends in population/demographics has to be reflected in on-the-ground realities in any particular geography. The supply-side of the equation is also vitally important and local restrictions in development growth artificially constrains supply thereby driving value to existing landowners. It's wrong to have a catch-all reason to not invest in a particular asset class especially given the asset class returns are almost entirely contingent on what is happening within that particular locality (this is before we get onto topics such as credit availability and market liquidity).
You are right, and I explore this in the premium article this week.
That said, it is absolutely important to know if a trend that lifted most boats in the past is about to reverse, so that most boats start going down, only for a few of them to keep being lifted
Total meltdown in US commercial real estate (offices) due to remote working….
after the crash of 2008, an awful lot of money (one way or another) was transferred to much of the wealthiest in society, or in say developed economies, via the bailouts. now, even if you don't, *they* invest in real estate, which is to say many of the wealthiest bought, and continue to buy, the homes of the middle class, your mum and dad's homes, instead of their being able to buy them - i.e., the very wealthy often buy n+ homes/buy-to-lets more or less ad infinitum. this too limits supply
those properties become assets from which rents are perpetually increased and extracted from all but the wealthiest. this is a strong part of the dynamic that you may have missed, no? a key factor in why there's a housing crisis in many developed economies (certainly at least in the UK). and it's another reason why supply is limited, demand is high, and many people are increasingly angry
i think the fact that certain economies have essentially now become generalised, asset-sweating economies means that what you own, rather than what you produce, now defines your economic status, your class.
anyway. happy to have push back on this claim, am eager to better understand. great piece, cheers
I tackle this in the premium article this week. The short take on this is that I think it might matter a bit in the short term, but not much when talking about decades.
I think your comment matters an awful lot about inequality though, another topic that I’ll touch on in the future.
thanks for the reply, look forward to reading the article. indeed inequality, especially wealth inequality, is the lens through which i first understood the idea
that appears to me to be an incredibly serious problem, which is to say i don't know how we can make assets available again to the rest of society without some serious, one might say radical, policy intervention. ideas i've heard floated include a Citizens Wealth Fund (not a sovereign one, mind; i.e. a fund which transfers assets to citizens in some form over some longer timescale). also, regular payments to citizens for their data being used by FAANG companies. certainly it seems that marginal increases in someone's income will not solve the problem
anyway thanks again. tho i will say, i think i'd invest in real estate in the short term because, to coin a phrase, in the long term we're all dead
Real estate is nearly always a decades-long investment unless you’re flipping.
This is likely to start being relevant within a decade or so
the continued rent from it might pay for any number of other assets long before you have to sell it, likely at a higher price than at which you bought it. in any case, i'm willing to bet that many other investment choices are likely to be whole or part ownership of assets of some kind
Georgism solves this
It’s frankly astonishing to me how little is known of Henry George when his “Progress and Poverty” was once so popular as to be rivaled only by the Bible for sheer publication numbers.
will study further, thanks
I believe this is correct and true, at least in California where desirably located homes in college towns are not owner-occupied but rented out practically 100%. There are also those who own 2nd or 3rd homes in the mountains or on the coast as recreational rentals which are also very popular seasonally.
yeah, exactly so. and i don't really know how you counter that, short of some dramatic state intervention. wealth taxes and redistribution doesn't seem likely to happen in either the U.S. or the U.K., at least for now
One way to counter it in the us would be to get rid of the tax break that allows you to avoid capital gains tax on real estate sale if you invest again in real estate within a time limit. I know of an example where someone sold a commercial property and rushed out and paid cash for four houses that are now rentals or short term vacation rentals.
Any incentive to demand is just going to translate into higher prices because real estate demand is inelastic. The only way to curb costs is increasing supply, and that means urban deregulation.
How did it come about that we find ourselves back in an economy whose capital allocation wouldn’t be out of place in a Jane Austen novel?
I agree, any residential real estate model that ignores investment demand is woefully incomplete. There are some societies - China for example - where residential real estate is the only savings vehicle available to the masses. And there are other societies - New Zealand for example - where the financial leverage available through multiple home ownership is the celebrated road to riches. And much of the world's most expensive real estate - penthouses on Billionaires Row, Arab and Russian-owned City estates, indeed, houses and apartments across all the world's most expensive cities - are safe deposit boxes in secure jurisdictions for the global elite.
But in China real estate investment is collapsing, together with developers
Spot on, Walter.
I discuss this in the premium article!
another way of saying this is that the dynamics of capitalist economies has become more focussed on this 'asset model', of which real estate ownership is a prime example. not to be all Marxist, but ownership of assets, real estate included, by a powerful minority, as a phenomenon seems set to continue
Probably migration will continue to get easier not more difficult making price appreciation ever more a matter of how attractive the location is to live. Will Toronto housing continue to be a global commodity?
Could also add changes to deductibility of state and local income taxes, and caps on loan deductions structurally changing the attractiveness of home ownership in the US
Let's suppose you convinced me. And let's suppose I'm greedy. What are the best financial instruments to take a long-term short position in real estate?
Shorting is dangerous. Shorting in the long term is very dangerous. Shorting in an illiquid market is even worse.
That said, I don't have a play in mind but I'm interested about hearing some
When and how quickly prices will fall is the question. In Canada we have seen prices driven up in part higher than historical immigration rates. Now with those set to stabilize or decline we could be an early example of how prices will drop.
Maybe. Although remember m: this is a multi decade approach!
The supply section was very weak in my opinion. At least provide numbers regarding how many people work remote. I don't think it's as much as you think. Not to mention how AI will target these jobs first.
And the two sentence justification for why people will all of a sudden by YIMBY rather than NIMBY was disappointing as well.
https://unchartedterritories.tomaspueyo.com/p/the-fight-for-the-remote-worker
can you unlock for me lol
Im glad you think my hard work is compelling!
🎯 remote work in the countryside is a lonely affair. People like to be around other people. And remote work isn’t most people’s reality, or even preference