Is Housing A Better Investment Than Stocks?

Data shows that housing plays a much bigger role in perpetuating inequality than most people realize.

At 26-years-old, I’m nearly as old as my mother and father when they bought their first home in Green Lake. For those of you not from Seattle, this neighborhood is about a twenty minute bus ride away from Pike Place Market and just a few blocks away from a gorgeous glacial lake. There’s a lovely trail that hugs the lake’s willow-lined shores, with a variety of bars and coffee shops nearby. In short, it’s a very desirable place to live.

And consequently the median price for a home in that neighborhood now costs around $827,000. As a renter with tens of thousands of dollars in student debt, the idea of owning property in this beautiful city (let alone in Green Lake) is remaining merely that —a fanciful idea, especially when housing prices jump nearly 18 percent in a year.

But let’s say I had the money to buy a home. Even in that favorable situation, is putting money into real estate the best way to invest? An online survey asked 1,000 Americans this question:

As it turns out, Americans’ financial instincts are actually pretty sound. Recent studies show that investing in housing has almost been as profitable as investing in equities over the past century.

It appears that land is an underrated source of wealth and, therefore, wealth inequality. The concept was hinted at in Thomas Piketty’s book Capital, where the Frenchman noticed this trend when looking at capital-income ratios in both Britain and America.

In Britain the recent rise in the capital-income ratio is about two-thirds attributable to housing and one-third attributable to other domestic capital. In America growth in other domestic capital is actually more important than growth in housing.

Piketty certainly wasn’t the first researcher to examine the housing sector’s impact upon wealth accumulation—and many economists and thinkers believe he underestimates how much land ownership contributes to the uneven ownership of wealth.

While reading about the subject, I came across an in-depth article by Gianni La Cava, a Senior Researcher of the Reserve Bank of Australia, which looks at a variety of recent research on inequality’s roots. La Cava comes to the conclusion “that it is not entrepreneurs and venture capitalists that are taking an increasing share of the economy, but land owners.”

A 26-year-old MIT graduate student, Matthew Rognlie, offers a similar theory which began as a direct rebuttal to Piketty’s thesis.

Rognilie argued that Piketty understated the magnitude of housing’s impacts upon the economy and claimed that “recent trends in both capital wealth and income are driven almost entirely by housing.” He convincingly writes:

Housing has a pivotal role in the modern story of income distribution. Since housing has relatively broad ownership, it does not conform to the traditional story of labor versus capital, nor can its growth be easily explained with many of the stories commonly proposed for the income split elsewhere in the economy — the bargaining power of labor, the growing role of technology, and so on.

So if housing is as big of a factor as some argue, it opens up another question: in the pursuit of lessening inequality, are progressives fixating too much on taxing businesses and wealthy investors?

The recent tax cut debate in the United States excited many Democrats, independents, and progressives to rail against the cutting of corporate tax rates, but there seemed to be little to no attention given to disproportionate ownership of land and how that perpetuates deep structural inequality.

That is not necessarily anyone’s fault. Taxes on capital gains and income are far easier to imagine and thus far more likely to galvanize popular support. Taxing land and its value, on the other hand, is far less neat and harder to conceptualize. Yet the opaque nature of land ownership should not mean we ignore its real influence on inequality. As Noah Smith points out:

…in order to address wealth inequality, it’s important to focus on land. Even after the rise of the modern corporate economy, unequal ownership of the most basic and ancient asset of them all is still creating big divisions in our society.

Smith’s absolutely right, but how does a society go about achieving this?

The Economist argues that “if housing wealth is the biggest source of rising wealth” then we need to do more than simply promote tax increases on the one percent and their equity. Instead “policy-makers should deal with the planning regulations and NIMBYism that inhibit housebuilding which allow homeowners to capture super-normal returns on their investments.”

I do not pretend to know much about planning regulations when it comes to land ownership. Over the next couple of weeks, I’ll dig into the details surrounding these policy choices, as affordable housing is a problem that is affecting almost every major city in America. Certainly this is the case in Seattle, as I noted earlier—so much so that the team at Civic Skunk Works did a podcast episode on the subject:

The divide between the haves and have-nots is gigantic right now. It is important that progressives keep an open mind when it comes to solving inequality and do not become irrationally tied to any one policy choice just because it’s politically expedient and instead seek the best outcomes instead of the easiest political scores.