Bloomberg: Land Is Underrated as a Source of Wealth

In the long term, housing does about as well as stocks. It’s also a major driver of inequality.

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.

At least in the U.S., the bursting of the housing bubble has given some the idea that land appreciates more slowly than other assets. If one looks only at capital gains, stocks have outperformed housing by a wide margin in recent decades.

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.

And that total return is higher than people realize. According to new research, the return on residential real estate has been as high as or higher than the return on equity. As modern economies have grown and developed, owners of the ground on which we live have been steadily enriched.

Read full Article https://www.bloomberg.com/view/articles/2018-01-02/land-is-underrated-as-a-source-of-wealth