The oldest asset class still dominates modern wealth

Are real estate prices today equivalent to the price of bread?this is a problem Recently asked Initiated by the leader of the German trade union Seize the company’s own rental units And put them under public ownership.many Dutch city It is hoped that investors will be prohibited from buying cheap houses for rent.

South Korea’s ruling party Frustrated in the mayoral election Failed to prevent the average price of apartments in Seoul from rising by 90%. Chinese President Xi Jinping has made affordable housing an important part of the theme of common prosperity. Say The house is “used for living, not for speculation.”

We know that housing prices in many places are rising. But a new study by the McKinsey Global Institute counts the balance sheets of 10 countries (Australia, Canada, China, France, Germany, Japan, Mexico, Sweden, the United Kingdom, and the United States) that account for 60% of global income. The figures are jaw-dropping about how much money is in real estate and why.

The research titled “The Rise and Rise of Global Balance Sheets” looks at the physical assets, financial assets, and liabilities held by households, governments, banks, and non-financial companies. The survey found that two-thirds of net assets are stored in residential, corporate and government real estate, and land. For all discussions of digitization, entities seem to be new entities.

How did this happen? What is the impact?

McKinsey’s research found that there is a strong negative correlation between net assets relative to GDP and the five-year rolling average of nominal long-term interest rates. The author believes that the decline in interest rates has played a decisive role in raising the prices of various assets, especially real estate prices. Limited land supply, zoning issues, and an over-regulated housing market also help push up value. As a result, house prices in 10 countries/regions have tripled on average.

The consequences are disturbing. First, relative to income, asset values ??are now nearly 50% higher than the long-term average. Traditionally, net assets and GDP are synchronized with each other on a global scale, but there are some country-specific deviations. Now, wealth and growth are completely out of touch. Of course, this is the reason behind most of the populist anger in today’s politics. In particular, affordable housing has become the slogan of the millennial generation, who cannot buy a house and start a family as early as the previous generation.

This in turn will hinder consumption growth, because they will not buy everything you put in the house. But it has also contributed to the increase in rents, because many people cannot afford it. This supports the idea that we might enter the stagflation era of the 1970s.

The disconnect between wealth and growth is largely due to excessive real estate investment. But the other side of the problem is that there is not enough capital to flow into more economically productive places. Although asset price increases accounted for about three-quarters of net asset growth, from US$150 trillion in 2000 to US$500 trillion in 2020, savings and investment accounted for only 28% of the balance sheet growth.

Given that investments in infrastructure, industrial equipment, machinery, and intangible assets are what really drives productivity and innovation, this is very bad news. With the exception of China and Japan, the share of non-real estate assets in total physical assets in these 10 countries has declined compared with 20 years ago. More importantly, despite the exponential growth of digital trade and information flow during that time, intangible assets only accounted for 4% of net assets.

This may be because, as the author has observed, “for the main business owners, the value of intangible assets is assumed to decline rapidly due to obsolescence and competition, even though their value to society may have a longer shelf life” . This is a bit like a numbers game. The study states that by removing any amortization and depreciation from the measure of intangible assets over the past 20 years, you will quadruple its value (which may actually justify the stock price of some seemingly bubble-rich technology stocks).

Nevertheless, for all discussions of blockchain, cryptocurrency and big data, it is surprising that most of the wealth of the 21st century still exists in the oldest asset class: physical assets. What lessons should we learn from this?First of all, low interest rates seem to be more and more obvious Did not make much business investmentSecond, and even more encouraging, the large government spending plans in the post-Covid era provide a new opportunity to try to push funds to more productive sectors, which may eventually bring wealth and growth back together.

Third, affordable housing is currently the most pressing economic problem. In the post-pandemic era, technology-driven mobility and increased work flexibility may relieve some of the pressure. More likely, we need to reconsider urban zoning and encourage higher density, As California has doneWe must also find a way to tax property based on a certain combination of capital appreciation and income, so as not to penalize pensioners. Only by repairing housing can we rebalance our global ledger.

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