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Saturday, May 09, 2026
Wealth generation through houses
I am a boomer in retirement, being financially comfortable. So you might assume that I did as many in my generation, and created that wealth by buying a house when I was 30. Instead, the house I live in is my first one, and I only bought it not so long ago, when I was already 57 years old. But then, I bought it without needing a mortgage. Houses are not the only possible path to wealth generation. In fact, as long as you spend less than you earn and invest your savings at a decent yield, you'll generate wealth. So why do so many people think that a house is necessary for the middle class dream?
Much of this is in fact psychology, not economics. Saving is hard. If you have unspent money, there are numerous temptations available, and countless people who are clearly out for your money. The huge advantage of a mortgage is that it forces people to save money. By borrowing money to invest in an asset, you turn optional savings into required debt repayments. People consider their mortgage repayments like the rent they paid before buying a house, as a fixed cost, not as something that ultimately generates wealth. One day the mortgage is paid back, and surprise, surprise, you are suddenly sitting on a valuable asset.
Since the end of World War II until the financial crisis of 2008, houses have been a great investment in most countries. Houses are an investment which result in two different sorts of yield simultaneously: One is the rent you are saving by living in your own house, which is a yield that you "get" (or rather "not have to spend") every month. The other yield is the increase in value of the house, which historically in the period mentioned above has been well above inflation. Combined, the two result in a historically great return on investment.
Now social media have fabricated an intergenerational conflict well above the natural conflict between generations that already the ancient Romans have been writing about. Part of that is just how the internet works, taking small conflicts and blowing the out of proportion, because conflict drives clicks, which can then be monetized. Another part might stem from an attempt to deliberately stoke intergenerational jealousy in order to turn public opinion against state-run pension systems, as turning these systems market-based would generate billions of profits for the finance industry. So there is a wide-spread story around that older generations somehow conspired against younger generations to make it impossible for the younger generations to buy houses and get wealthy too.
The more likely explanation is that there isn't a conspiracy, and the high housing prices are an accident of history, caused by a number of reasons. Some of those reasons actually can be blamed on current owners of houses, e.g. zoning laws. Other reasons are more political, where the neoliberalism that started in the 80's led to a global retreat of governments from providing social housing. Housing was thought to be best provided by the free market, and the market pretty much everywhere failed to provide affordable housing, as affordable housing simply isn't as profitable as unaffordable one.
However, there is a part of the story that is nearly never discussed: Would it actually be a good idea for younger generations to buy houses today in order to create wealth and provided for a comfortable retirement? Now the part about mortgages forcing people to save, and house ownership giving a yield of unspent rent remains valid. However, it isn't obvious that house prices will continue to rise above the rate of inflation. If you bought a house in 2008, the value of that house dropped after the financial crisis; and while in general house prices are back up to where they were in 2008 plus inflation, there has been stagnation in the housing market over the past years.
The future of house prices is uncertain for two reasons: One is the fact that the political consequences of people not having affordable housing, whether bought or rented, are high. There isn't a government in the world that is currently not working on policies to make housing more affordable. The second factor is demographics: Many countries have already reached peak population, and while the US is still growing, that growth is only driven by immigration; and immigration has an uncertain political future as well. The world's largest generation, the boomers, are soon going to leave the single-family homes they currently live in, and move into retirement homes and cemeteries. Both of these factors combined, and given that house prices are currently at historical highs, suggest that betting on houses continuing to increase value faster than inflation is not a safe bet anymore.
The dream of a single-family home in the suburbs with a white picket fence providing financial stability might also be outdated for cultural reasons. The single-family home doesn't make much sense without a family. Marriage and having children are both strongly decreasing in popularity, especially with women. It is hard to imagine somebody following a 4B ideology (no dating, no sex, no marriage, no children) still believing they need to buy a house to fulfill their dreams. The prevalent housing of the future might be the one-bedroom apartment in the city, and the advantages of ownership vs. renting aren't quite as obvious for these.
That doesn't mean in any way that wealth generation will become impossible. It might not even be harder than for the boomer generation. The younger generations will just have to learn to save more of their income and spend less. How that clashes with their ideas of work-life balance is a different story.
- posted by Tobold @ 9:23 AM Permanent Link
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Tobold: "[...] to turn public opinion against state-run pension systems [...]"
What happened to "I will complain about the fact that politicians took my money out of public pension funds for other stuff when those were producing surpluses, instead of covering the predictable future."?
Public PAYG pension funds are always a bad idea when considering an ageing population. Yes, it made sense in a 2.5 children world. Now you are trapped in that system because changing it to a non PAYG system would require you to void (or likely refinance) someone's contribution and set up a personal pension scheme (which governments are notoriously bad at running - because they lack incentive).
The issue is that you would not want to give away the pension responsibility as that is a huge political lever. So a market based pension would not happen.
You also need to consider the average voter. While the top of the bell curve might make good investments and come out with a high pension, the middle could manage to beat inflation and the bottom would gatcha their funds away on get rich later schemes. But maybe it is only the top part who would beat inflation and the rest lose to various degrees.
But as a politician it is the easiest voter grab if you promise the lower and middle part yields of the top, while you gatcha way everyone's money and then blame unfortunate circumstances.
Does not matter much for you, because you managed to add another round of political circus to your personal pension scheme.
"Housing was thought to be best provided by the free market, and the market pretty much everywhere failed to provide affordable housing, as affordable housing simply isn't as profitable as unaffordable one."
Affordable housing was always provided by the free market as someone had to build the houses.
Nowadays there is just so much red tape and governments only willing to pay bottom dollar, that nobody is willing to build.
Governments could redirect funds and pay above market rate for affordable housing and the free market would come running. That is the beauty of the free market. It signals what participants want without having to go around and try to gauge vague utility curves.
The problem is obviously that the government would never recoup any of the money and they would not gain goodwill by building affordable housing. Affordable housing usually goes to people who - surprise - cannot afford regular housing. Mostly because their market contribution is not valued enough.
So you end up in a state where you reward low valued people and draw the ire of higher valued people by taking away their opportunities of on their level affordable housing and likely also redistributing their taxes to fund the other people.
The biggest issue in my eyes is that globalisation has opened up the world and made certain locations so interesting for basically everyone.
It is no longer a local scale where rich people move to the city and poorer people do not, but rich people (or investors rather) from all over the world with more money than the local rich people move to your city and just price you out.
What happened to "I will complain about the fact that politicians took my money out of public pension funds for other stuff when those were producing surpluses, instead of covering the predictable future."?
Public PAYG pension funds are always a bad idea when considering an ageing population. Yes, it made sense in a 2.5 children world. Now you are trapped in that system because changing it to a non PAYG system would require you to void (or likely refinance) someone's contribution and set up a personal pension scheme (which governments are notoriously bad at running - because they lack incentive).
The issue is that you would not want to give away the pension responsibility as that is a huge political lever. So a market based pension would not happen.
You also need to consider the average voter. While the top of the bell curve might make good investments and come out with a high pension, the middle could manage to beat inflation and the bottom would gatcha their funds away on get rich later schemes. But maybe it is only the top part who would beat inflation and the rest lose to various degrees.
But as a politician it is the easiest voter grab if you promise the lower and middle part yields of the top, while you gatcha way everyone's money and then blame unfortunate circumstances.
Does not matter much for you, because you managed to add another round of political circus to your personal pension scheme.
"Housing was thought to be best provided by the free market, and the market pretty much everywhere failed to provide affordable housing, as affordable housing simply isn't as profitable as unaffordable one."
Affordable housing was always provided by the free market as someone had to build the houses.
Nowadays there is just so much red tape and governments only willing to pay bottom dollar, that nobody is willing to build.
Governments could redirect funds and pay above market rate for affordable housing and the free market would come running. That is the beauty of the free market. It signals what participants want without having to go around and try to gauge vague utility curves.
The problem is obviously that the government would never recoup any of the money and they would not gain goodwill by building affordable housing. Affordable housing usually goes to people who - surprise - cannot afford regular housing. Mostly because their market contribution is not valued enough.
So you end up in a state where you reward low valued people and draw the ire of higher valued people by taking away their opportunities of on their level affordable housing and likely also redistributing their taxes to fund the other people.
The biggest issue in my eyes is that globalisation has opened up the world and made certain locations so interesting for basically everyone.
It is no longer a local scale where rich people move to the city and poorer people do not, but rich people (or investors rather) from all over the world with more money than the local rich people move to your city and just price you out.
The fact that we have state-run pensions and that many of them were mismanaged doesn't mean that market-run pensions would not have had problems. Just compare the typical fund that a salesman disguised as "financial advisor" at your local bank is trying to sell you with an ETF: Financial institutions are great at skimming off profit with fees, without adding any value.
While it's true that financial institutions have an incentive to "skim" profits, so does the state run pension.
The financial institution might not give you the full profit of your invested pension money, but as long as they are bound to at least return your invested money (or including some agreed percentage on top), do you really care if they made more profits on top?
They also have an incentive to appear to give you value because participation would be voluntary.
With state run pensions, you are not guaranteed your contribution and the legislators will play a game of chicken and hope it won't be them who need to move the retirement age upwards or reshuffle the distribution formula.
The state has no interest in providing you good returns because it is a mandatory system and you are forced to contribute.
I mean, just look at your total contribution (and the matching hidden part from your employer's side) over your working life.
Even without compounding interest, your contribution will be more than what you can realistically expect over your retirement.
So that is the state skimming more than profit. If there would be a choice, I might be tempted to bet on the market and invest myself.
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The financial institution might not give you the full profit of your invested pension money, but as long as they are bound to at least return your invested money (or including some agreed percentage on top), do you really care if they made more profits on top?
They also have an incentive to appear to give you value because participation would be voluntary.
With state run pensions, you are not guaranteed your contribution and the legislators will play a game of chicken and hope it won't be them who need to move the retirement age upwards or reshuffle the distribution formula.
The state has no interest in providing you good returns because it is a mandatory system and you are forced to contribute.
I mean, just look at your total contribution (and the matching hidden part from your employer's side) over your working life.
Even without compounding interest, your contribution will be more than what you can realistically expect over your retirement.
So that is the state skimming more than profit. If there would be a choice, I might be tempted to bet on the market and invest myself.
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