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Real Estate Won’t Go Up Forever: Why the Future is not Like the Past

Opinion

Many people proclaim real estate as an investment class and think the past will adequately predict the future. In my corner of the world, average home prices have gone from 2x an average income in the 1970s to 16x an average income now. For the next 50 years to be like the previous 50 homes would have to reach a rather absurd 128x average income.

Is this even remotely plausible? Current home prices are high but affordable for two-income families with above average incomes willing to pay off a home over 25 years. If a home costs 128x an average income and a family is supposed to spend 30% of pretax income on real estate, you quickly arrive at the conclusion that a household needs to be earning over 8x an average income to have any hope of paying off a twenty-five year mortgage on such a house. While inequality is rising, it’s not rising to the point where we can expect enough people earning 4x the average income (with partners doing the same) to represent the entire housing market.

Even if we consider generous parental support for larger than typical down payments, you might get to a household needing 6x average income instead of 8x. While there will be more such people, the number is again so staggering that it’s impossible for these people to represent the entirety of the detached housing market.

The alternative is that something happens to make incomes rise faster than historical trend, or something happens to make housing prices slow down. I’d argue that the former is extremely unlikely, and that I currently see no forces acting on the market that could conceivably cause a rise in income growth. If anything, consolidation and concentration of power in a handful of monopolies and oligopolies is giving organizations Monoposto power in labor markets and creating a downward trend in salary growth.

So, it’s worth acknowledging the future won’t be like the past.

Real estate cannot indefinitely remain a growth asset. Someone will hold the bag for treating it as a profitable investment over the next 50 years and I think we are likely to see the holders be both current and future buyers over the next 20 years.

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