Your example is nonsensical. This is not how the real world works, living in hypotheticals doesn’t help anybody.
Also quite literally the meaning of a good investment is “it goes up and to the right” and anything that goes up and to the right in perpetuity is bound to become unaffordable if the wages or wealth of the buyers doesn’t increase at the same rate as the asset.
The housing market is a Ponzi scheme propped up by governments. But that’s a topic for another conversation.
> Also quite literally the meaning of a good investment is “it goes up and to the right” and anything that goes up and to the right in perpetuity is bound to become unaffordable if the wages or wealth of the buyers doesn’t increase at the same rate as the asset.
I feel like you're just not understanding the math.
Suppose you want to invest in real estate, but property values are low and stable, zero capital gains. You invest $500,000 in twenty $25,000 units, rent them out and receive $250/mo each in net profit, $3000/year in gains/unit, 20 units, $60,000/year in total gains. Then you invest the $60,000 back into real estate, so now you have $560,000 in housing and next year you collect $67,200/year in gains from renting them, which you invest back into real estate, so then you have $627k in assets.
Number chart goes up and to the right, even though the price per unit hasn't moved.
It's not different for homeowners. If you buy a house -- it doesn't matter if it's $25,000 or $500,000 -- you no longer have to pay rent to somebody else. Whatever you used to be paying in rent, now you get to keep. You can invest that in more real estate or in stocks or whatever you want, but by buying a house to live in, you have a return in terms of imputed rent regardless of whether the value of the house goes up.
Your growth rate of 560k to 627k is 11.9% (r - the rate of return on capital). This outpaces wage growth - let's assume generous non-inflation corrected 5 % (g - a proxy for the growth rate of the economy)
Your assets after 50 years: 267x
Your wages after 50 years: 11.4x
Your new ratio of assets to wages: 23.4
This calc works with any number where r > g (source: capital in the 21st century by piketty). The end result of asset growth outpacing wages is complete divergence and the end game of Monopoly where 1 guy owns everything. Usually by then the system has cracked and the society has burned down.
These are hypothetical numbers. The point is that you can receive a return without any capital gain, not what the exact percentage is.
> This outpaces wage growth
So does the S&P 500. The big problem here is that real wage growth has stagnated, of which a major contributor is... high real estate costs.
> The end result of asset growth outpacing wages is complete divergence and the end game of Monopoly where 1 guy owns everything.
This is obviously untrue. Example: Jeff Bezos and Elon Musk get into a bidding war over real estate on Mars. The Martian real estate market is now worth a hundred trillion dollars, even though nobody lives there. The owners of Martian real estate now have a net worth of trillions, but it's all locked up in Martian real estate. The rest of the economy is unaffected.
Asset price inflation only affects ordinary people if the inflated assets are something they have to buy.
Which gets us back to real estate, which is such a thing. Suppose Bezos wants to buy Earth real estate in order to rent it out and turn a profit. He buys units that cost $25,000, makes not just 12% but 25% annual returns, uses all the money to buy more units.
If construction is constrained, housing costs are going up with higher demand, which is the problem in the existing market. But suppose we're not doing that; it still costs $25,000 to add a new unit of housing and anyone proposing regulations to make construction more expensive shall hang from the neck until dead in the gallows on main street.
If Bezos wants to use his profits to buy more housing and he tries to buy the existing housing, demand increases, so the price goes up to $26,000/unit, so construction companies build more units until it falls back below $25,000/unit again. Then Bezos goes to rent out his new units and finds that rents have gone down because there are now more units on the market. But a 21% return still great so he keeps at it and then goes to buy more units with the profits again, which causes more to be built, which further lowers rents/returns by increasing supply.
The ultimate result of this, then, is that r falls below g. Unless you constrain construction.
I think you present an idealized version of market economies that is not in line with my experience (I live in Sydney Australia our housing system has collapsed). Our disagreement seems predicated on our beliefs around r > g. Have you read Piketty?
I'm familiar with it. The obvious question to ask in response is, why is r > g? What can be done about it?
Piketty's answer is more or less "do socialism", but that's not obviously correct. For example, a lot of government spending programs tend to funnel money into well-connected industries, which are the things already accumulating capital. Likewise, transfer payments to individuals can be absorbed by monopolists if the monopolies are allowed to persist.
And that, really, is the true cause of it. Market consolidation. Regulatory capture. If there is more competition, the competition lowers margins, and then more of the surplus goes to the consumer instead of the investor. If the incumbents capture the government (or the government is careless about creating market barriers to entry) then competition is reduced, margins increase and more returns go to capital. The latter is clearly what's happening in the housing market.
The difference you’re not accounting for is that when someone buys a house, in practice they value it as an asset that must increase in value, not simply as a way to offset rent costs, which is effectively what you’re saying.
Thats the real problem. People believe their 500K house must go up in value and not fluctuate in value like any other marketplace of goods would see, and therefore are in opposition to anything that reduces the value of the home in which they live.
That’s why homeowners routinely bend over backwards to maintain home values. The general consensus society has is it’s one of the primary nest egg assets, and for many it’s their biggest one and they act in that self interest.
Real estate lacks the functioning market dynamics you see in every other area of economic activity, in part because we have collectively as a society decided long ago to adopt policies that would enshrine protecting home values above other concerns.
Edit: This also captures capital in an unproductive manner because real estate doesn’t have functioning market dynamics.
Imagine instead of having ever increasing real estate costs (the reality of todays world) which benefit only a finite fraction of economic investment but make up a huge total of the average persons expenses, that productivity gains could instead be captured by other investments like stocks. You’d have more people able to invest in companies, meaning there well could be more companies to invest in, increasing the health of other markets in turn. People will put their money somewhere and naturally a productive business is one such place afterall
Instead, one of life’s biggest overall expenses not only increases over time in aggregate but the value is captured by an fraction of the population of that increase, which is really a net loss to economic activity more broadly
Also quite literally the meaning of a good investment is “it goes up and to the right” and anything that goes up and to the right in perpetuity is bound to become unaffordable if the wages or wealth of the buyers doesn’t increase at the same rate as the asset.
The housing market is a Ponzi scheme propped up by governments. But that’s a topic for another conversation.