Bloomberg, January 02, 2018, by Noah Smith.

“When most people think of wealth in the modern economy, they tend to think of stocks and bonds. The word “capital” is often synonymous with corporate ownership. Land wealth, meanwhile, is often relegated to a footnote. Yes, people own houses, but vast fortunes are made in the stock market, while the fates of nations rise and fall with the bond market.”

“But ignoring land is a mistake. Despite the explosive growth of corporations since the Industrial Revolution, land still represents a huge percent of all the wealth in the economy. What’s more, focusing only on capital gains neglects the extremely important fact that land earns income from rent. If you live in your own house, this income is implicit — living in your own home means you don’t have to pay rent to someone else. But if you’re a landlord, you get checks every month, just like stockholders receive quarterly dividends. And in the same way that a stockholder can use dividends to buy more shares, a landlord can use rental income to buy more property — thus, rent needs to be counted in the return to housing.”

“In their new paper, titled “The Rate of Return on Everything, 1870-2015,” economists Oscar Jorda, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick and Alan Taylor compare stocks, bonds and housing over the past century and a half. Housing is by far the hardest asset to measure — its price varies enormously from unit to unit and city to city, and records are hit or miss. Knoll and Schularick, together with Thomas Steger, have worked heroically to overcome these data deficiencies and create a long-term database of housing prices in advanced economies.”

Read the full article here.