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.
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...
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.
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).
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
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?
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.
Interesting thoughts and data. Doesn't get into other economic variables (which is disclaimered at the end).
I am inclined to agree with the basic premise that, at a macro level, real estate will not be the investing powerhouse it has been in our lifetime, but that does not mean there aren't deals to be had or that real estate isn't still an important part of a balanced investing strategy.
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.
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...
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.
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
> 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
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.
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).
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
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?
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.
Interesting thoughts and data. Doesn't get into other economic variables (which is disclaimered at the end).
I am inclined to agree with the basic premise that, at a macro level, real estate will not be the investing powerhouse it has been in our lifetime, but that does not mean there aren't deals to be had or that real estate isn't still an important part of a balanced investing strategy.