Land contributes most to inequality
Those who own it tend to acquire more of the same and widen the gap further
like stocks, where price changes are easy to document.
Housing also involves maintenance costs, physical depreciation, vacancy costs, the cost of searching for tenants and capital losses to things like fire, flood and war. Knoll and Schularick make good-faith attempts to account for most of these factors, but they’re working with inherently limited data — for example, houses that burn down simply disappear from the records. Also, it’s important to remember that returns change over time. Stock markets have gotten more developed in rich countries in the past few decades, making it easier for small investors to put their money into equities.
Broad lesson
But even with somewhat different numbers, the broad lesson would be clear: Over the long term, housing has been a great investment. That doesn’t mean that investors should ditch their stocks and run out to buy houses — liquidity is a real issue, property taxes are substantial and it’s harder to diversify a real estate portfolio than a stock portfolio.
But it does mean that a wise investor should diversify into land by buying things like real estate investment trusts.
The more important implication, however, is for inequality. To some degree, housing acts as an equaliser between the rich and the middle-class, since the latter puts more of its wealth into real estate by virtue of buying homes.
But many big landlords are very rich. And home ownership is a way that the middle-class and upper-middle class pull away from the working class and poor, a larger portion of which can’t afford to buy and must rent. The ownership disparity is also responsible for a big share of the racial wealth gap.
As economist Matt Rognlie has found, the return to land is responsible for the lion’s share of the increase in wealth inequality documented by French economist Thomas Piketty.
So to address wealth inequality, it’s important to focus on land. Even after the rise of the modern corporate economy, unequal ownership of the most basic and ancient asset of them all is still creating big divisions in our society.