It is mostly true that we are not creating any more real estate, if we consider land only in the strict sense of the term. Land creation, as in the case of Dubai’s artificial archipelagos, is not a scalable solution. But we are essentially adding new space by developing high-rise apartments, creating virtual land in the form of online conference services and electronic storage, and improving transportation so that people can live in remote areas with cheap land.
The emailer then recounted his own experiences in the US housing market:
“The first house we bought was in 1971 for $19,000, now worth over $300K, second house for $34K, now worth over $400K, third house for $130K, now worth over $450K, fourth house for $190K, now worth $435K, fifth house for $305K, sold for $800K three years later, the current house bought for $300K (downsizing in retirement) and worth $450K.”
According to his numbers, the value of the first house has increased by a factor of 15.8 (300,000/19,000). But over that 50-year period, the US consumer price index has risen by a factor of 6.7, which means that the real value of the home did little more than double. And the compounded annual real price return over those five decades is only 1.7%.
Finally, he noted, “even the tax laws favor owning real estate.” That is true. There is often a tax subsidy to homeownership; in most countries, imputed rent on owner-occupied housing is not subject to income tax. But this tax subsidy does not appear to be growing, and so does not justify continued increases in home prices.
But I take the emailer’s moral imperative seriously. Even at currently elevated US home-price levels, buying still makes sense for those who are set on homeownership and want to get on with their lives. Homeownership can activate a predilection for community, long-term friendships with neighbors, and a sense of security and permanence.
Moreover, buying a house with a mortgage serves as a self-control mechanism that helps people to save more. The discipline imposed on young homeowners by regular amortizing mortgage payments is a key driver of retirement saving. And buyers can hedge some of their risk in the home price index futures market.
Make no mistake: homeownership clearly has its benefits. But people who really want to buy now need to be sure that they can accept what could be a rather bumpy and disappointing long-term path for home values.
Robert J. Shiller, a 2013 Nobel laureate in economics, is professor of economics at Yale University and the co-creator of the Case-Shiller Index of US house prices. He is the author of Irrational Exuberance, the third edition of which was published in January 2015, and, most recently, Phishing for Phools: The Economics of Manipulation and Deception, co-authored with George Akerlof.