Piketty, Housing, and Capital Share

Gianni La Cava has a very interesting article (based on a longer paper) on what accounts for the rising share of capital in the income accounts:

A key observation in Thomas Piketty’s Capital in the Twenty-First Century (Piketty 2014) is that the share of aggregate income accruing to capital in the US has been rising steadily in recent decades. The growing disparity between the income going to wage earners and capital owners has led to calls for government intervention. But for such interventions to be effective, it is important to ask who the capital owners are.

Recent research has shown that the long-run rise in the net capital income share is mainly due to the housing sector (e.g. Rognlie 2015, Torrini 2016 – see Figure 1). This phenomenon is not specific to the US but has been evident in almost every advanced economy. This suggests that it is not entrepreneurs and venture capitalists that are taking an increasing share of the economy, but land owners.

…The decomposition of the national accounts by type of housing indicates that the secular rise is mainly due to a rising share of imputed rent going to owner-occupiers. The owner-occupier share of aggregate income has risen from just under 2% in 1950 to close to 5% in 2014 (top panel of Figure 2). The share of income going to landlords (i.e. market rent) has also doubled in the post-war era. But, in aggregate, the effect of imputed rent is larger simply because there are nearly twice as many home owners as renters in the US economy. A similar phenomenon is observed in the personal consumption expenditure data (bottom panel of Figure 2). In other words, today’s landed gentry are predominantly home owners, not private landlords.

…The geographic decomposition reveals that the long-run rise in the housing capital income share is fully concentrated in states that face housing supply constraints. To see this, I divide the states into ‘elastic’ and ‘inelastic’ groups based on whether the state is above or below the median housing supply elasticity index (as measured by Saiz 2010). This index captures both geographical and regulatory constraints on home building across different US regions. For 50 years, the share of total housing capital income going to the supply-elastic states has been unchanged at about 3% of GDP (Figure 3). In contrast, the share going to the supply-inelastic states has risen from around 5% in the 1960s to 7% of GDP more recently. Notably, these divergent trends in housing capital income are not due to a few ‘outlier’ states where housing supply is particularly constrained, such as New York or California – instead, there is a clear negative correlation between the long-run growth in housing capital income and the extent to which housing supply is constrained across all states (Figure 4).


There is also a demographic impact to housing demand. The boomer generation had propelled housing prices from the late 70s through mid-2000s. Fewer people starting families means less demand and downward pressure on housing prices, especially in places without supply constraints.

@John Hall - So your thesis runs counter to Piketty's claim that during peacetime inequality increases? And if this paper is right, then to get rid of this inequality we simply allow higher density housing. I would like this to be true in Northern Virginia, where my family, in the 1%, owns real estate near Metro stops and we want to rezone it to high-density commercial.

Land: they don't make it anymore (except in Hong Kong with the new airport, and parts of Holland). And recall even in Japan the Emperor's palace was worth more, at the peak, than all of California. This too ended badly.

If we rezone your real estate to high-density commercial, then I'm sure you will get richer and inequality probably would increase in the short-term. This is especially true if it is only the area your family that gets rezoned, and not a comprehensive zoning reform solution.

With comprehensive zoning reform, I would guess that we could curtail the growth in home prices in these cities. I'm not sure if we could bring down the absolute levels, but perhaps.

except in Hong Kong with the new airport, and parts of Holland

And building roads and building up.

Also one can live with very little impact on the land where one lives if one wants to.

What is "high density commercial"?

That phrase ("high density commercial") made me think of the zoning for tall shiny buildings in one of my favorite video games - Sim City.

In Asia a lot of malls don't sprawl that much but go up a fair few stories.

And then the corporate/management sections of the related companies will occupy the 15 or 20 stories above that.

Less housing.

"This suggests that it is not entrepreneurs and venture capitalists that are taking an increasing share of the economy, but land owners."

The very old investment advice of, "Buy land, they're not making anymore of it", comes to mind.

I think the new investment advice is "Buy houses, use the political process to keep them from building any more"

And advocate for Affordable Housing elsewhere.

"instead, there is a clear negative correlation between the long-run growth in housing capital income and the extent to which housing supply is constrained across all states "

Don't you mean a positive correlation? More constrained supply, more housing capital income growth.

Less supply, more housing capital income growth. You just equated "less supply" to "more constrained supply."

Score one for Henry George.

Ding! Ding! Ding!

And this comports well with the fact that inequality has risen faster in blue states than in red ones. Highest inequality is in places like New York and San Francisco and Boston, where it is very obvious that housing and home ownership is a major barrier to economic mobility.

I have been saying for years that high housing prices decrease social mobility and increase inequality, because the difficulty of purchasing a first home traps renters into renting and thus prevents capital accumulation by the renter. And lower interest rates and looser loan terms, policies promoted by both parties over the last 30 years, don't really help. It doesn't help to make it easier to take out a loan if it just takes twice as long to pay it off. The point of home ownership is to build equity and hence capital. If they are spending 3x as much as the house and taking 30 years to pay it down, they aren't building any capital. It's the equity accumulation that produces social mobility. The longer you make people take to build home equity, the less social mobility there is, because they don't have that capital to draw on for things like college tuition or financing a small business.

In general I would posit that any economic scheme based on high levels of consumer debt is going to lead to greater inequality because the debt load renders everyone except the people at the banks less able to build capital.

Excellent post!

I'm not really greatly fond of social engineering, but I'd tentatively support removing Income Tax deductions on mortgages longer than 15 years or that are greater than 25% of net income.

That would be stupid. That would simply favor richer people who can afford 15 year mortgages without doing jack about housing prices. Just get rid of the home mortgage interest deduction entirely.

Any income tax deduction is social engineering, if you don't favor it you should end the deduction, and ideally, end the tax.

However, taxing land in blue states would solve everyone's problems. They could take over all services from the federal government while reducing inequality and make everyone who lives there happy. Then, the programs could be ended in the red states and taxation there ended, making everyone there happy.

The point of home ownership is to have a place to sleep at night. Lack of capital accumulation by renters means that the capital is accumulated instead by the landlord. Not only is the landlord accumulating the capital, he's also responsible for the maintenance, improvement and repair of the property and paying the taxes and assessments. Those are passed along to the tenant, of course, who would have to pay them in any case.

Yes. That's my point. Not that it decreases capital accumulation, but that is increases inequality. If the landlord is accumulating the capital rather than the tenant, inequality increases, since presumably the landlord is already richer.

Comment of the Day by Hazel @ 2:13 pm.

This is exactly the situation in the Australian Capital Cities, especially Sydney & Melbourne.

The cheapest way to accumulate wealth is through low annual fee passive investments in a broad equity market. Admittedly anecdotal to be sure.

Taking my personal case buying a house in late 1984 in an area where prices have appreciated consistently has a rough CAGR of 4.8%.

Equity investing passively in a broad market index from late 1984 has a rough CAGR of 9.4%.

Equity investing did not require making either a sizable down payment or obtaining a loan. The initial investment was lower and additional units were both easily affordable and did not require a broker to purchase.

I'm not saying one shouldn't buy a place to live. Just that other investments can perform better without as much personal risk.


Couple of problems there. Equity accumulation doesn't account for the value of the home, since the home doubles as a place to live. Unless you want to live under a blanket of stock certificates in a back alley somewhere, equities can't provide that function. The benefit is that you can get a place to live AND purchase a valuable asset at the same time. Whether or not the value of the home increases is almost beside the point. Even if housing prices were static, it would still be better to spend your rent money purchasing an asset than throwing it away. The renter gets nothing. Also, once you pay the home off you don't have to pay rent anymore (except property tax), which is also another reason to favor cheap housing prices. The sooner people pay off the house the sooner they can live rent free and have that much more money to put into equities (or whatever).


Frankly that's pretty stupid. The renter takes his down payment and any discount in cost and invests it in equities. It's not "throwing money away". In many expensive locales, you would be financially MUCH better off renting and investing the money you save. Owning a home is a luxury for people who like to dabble in home improvement and feel high class (in such cities).

This is one of the few smart things Cliff has said.

In many localities housing prices are so high that it's not worth it to purchase a home under current conditions. But IF housing prices were much lower, people could purchase a home and pay off the loan sooner and end up with a hard asset, which is capital.

Owning a home is a luxury for people who like to dabble in home improvement and feel high class (in such cities).

Yeah, cities with high inequality.

Do you think purchasing a house is a bad investment in places where a 10-15 year mortgage is affordable to most people?

Tuvea, I agree. It's not like an illiquid investment like a home is automatically a great place to tie up so much capital. The problem many (most?) people have is that they'll spend the money unless they're locked into building equity via mortgage. Not that saving in other vehicles might be better, but that it's not behaviorally easy.

Well, it's not just that. I guess we've all gotten so used to houses being absurdly expensive that we can't imagine a world where normal people can purchase a home in under 15 years and then stop paying rent. It's not the market value of the home which is the investment. It's the value of (a) having a place to live that you don't have to pay rent to occupy, and (b) owning a (relatively) safe asset which you can borrow against. Both of those things also give people a cushion of financial security which allows them to be less risk averse. Paid off houses give people added financial security, while huge mortgages decrease financial security.

People are more mobile when they rent. But rents can also increase to the point that New York and San Fran are not realistic options for most people either.

Notably, these divergent trends in housing capital income are not due to a few ‘outlier’ states where housing supply is particularly constrained, such as New York or California – instead, there is a clear negative correlation between the long-run growth in housing capital income and the extent to which housing supply is constrained across all states.

I'm not surprised. The 'outlier' states have a lot of housing markets that aren't supply constrained (pretty much all of upstate New York) and most other states have at least a few hot outlier markets with supply constraints.

Population density from Wikipedia, the first number after rank is population per square mile

New Jersey 1 1,210.1 467.2 11 8,958,013 46 7,354 19,046.8
Rhode Island 2 1,021.6 394.4 43 1,056,298 50 1,034 2,678.0
The top two have perhaps the highest uniform density.
Massachusetts 3 871.1 336.3 15 6,794,422 45 7,800 20,201.9
Massachusetts density is very low in western third compared to to eastern two thirds, so density is effectively much higher
Connecticut 4 741.6 286.3 29 3,590,886 48 4,842 12,540.7
Maryland 5 618.7 238.9 19 6,006,401 42 9,707 25,141.0
Delaware 6 485.3 187.4 45 945,934 49 1,949 5,047.9
New York 7 420.1 162.2 4 19,795,791 30 47,126 122,055.8
New York upstate is low density with the effective density in the eastern south probably 4 times higher
Florida 8 378.0 145.9 3 20,271,272 26 53,625 138,888.1
Pennsylvania 9 286.1 110.5 6 12,802,503 32 44,743 115,883.8
Ohio 10 284.2 109.7 7 11,613,423 35 40,861 105,829.5
California 11 251.3 97.0 1 39,144,818 3 155,779 403,465.8
California has a lot of desert and arid land so the population is concentrated in only a third of the land, and in a good portion of that land, water must be brought from hundreds of miles away to support its population, and that water has grown scarce.
Illinois 12 231.6 89.4 5 12,859,995 24 55,519 143,793.5
Most of the population is concentrated in the top third of the state.

Now according to economists, these States should be booming because land costs are low yet the people do not desire housing in these States for some strange reason.
Kansas 41 35.6 13.7 34 2,911,641 13 81,759 211,754.8
Nevada 42 26.3 10.2 35 2,890,845 7 109,781 284,331.5
Nebraska 43 24.7 9.5 37 1,896,190 15 76,824 198,973.2
Idaho 44 20.0 7.7 39 1,654,930 11 82,643 214,044.4
New Mexico 45 17.2 6.6 36 2,085,109 5 121,298 314,160.4
South Dakota 46 11.3 4.4 46 858,469 16 75,811 196,349.6
North Dakota 47 11.0 4.2 47 756,927 17 69,001 178,711.8
Montana 48 7.1 2.7 44 1,032,949 4 145,546 376,962.4
Wyoming 49 6.0 2.3 50 586,107 9 97,093 251,469.7
Alaska 50 1.3 0.5 48 738,432 1 570,641 1,477,953.4

Why don't most economists like in the last low density States where housing and other living costs are cheap?

Instead, economists, especially those who blame government for the scarcity of cheap land, live in high density States and in the high density portions of those States. To get a share of the land millions of people are bidding for, the price is going to be higher.

Yet economists refuse to blame the high demand for the high price of land, AND ignore that population voting with their feet moving into the high density areas and making them higher density when arguing these same States have government policies driving people out.

After all, justify Texas being more desirable than California when the population density of Texas is 40% of California, and both States are arid and desert in similar proportions. Note that Texas has better water access than California.

Still thinking this through...but in a well functioning capitalistic system won't value always flow to where barriers to entry/competition are highest? May be a fundamental flaw.

We can do all sorts of things to reduce barriers to entry. Starting with deregulation.

Fully agree. Then rents will flow to the next "most protected" source of profits. Basically government's role in capitalism should be constantly bolstering competition wherever large returns on capital are appearing. Pretty much the exact opposite of what we do.

Well, your own statement shows what the problem is. Government should not "bolster competition". It should stop trying to interfere with markets. In the case of housing, government tried to do all kinds of social experiments (make housing "accessible" to the poor, "protect" neighborhoods from outsiders, etc, etc) and those are the reasons why competition is hindered... Government tries to fix things and breaks them, and then tries to fix them again just to break them somewhere else. It's all about the "do something" instinct. That is what needs to be controlled.

If you consider where the market would end up with unfettered capitalism, with all the cartels, mafias (basically) etc. that would come with it, I think in balance ACTUAL competition is even well served by government at present.

However, from the position of the status quo, certainly governments often act contrary to entrenched competition protection mechanisms in ways which contribute to the increasing industrial concentration (moving to monopolies) and greater reliance on regulatory rents rather than innovation to earn massive profits.

Yeah, I don't see why government needs to do anything to bolster competition wherever huge profit margins are appearing, since human nature (greed) will do that on it's own. Government just needs to get out of the way.

How is government preventing the rational act of buying land in Kansas and building a home there instead of fighting ten to a hundred more competing bidders to buy land in Massachusetts, southeast New York, coastal California? Better yet, buy land in one of the Dakotas, or Utah?

Just because everyone else wants to live someplace, you do not need to want to live there and pay more to win the stiff competition to own and control land.

They aren't. That's where there is less inequality in places like Georgia, where the economy is also booming.
There's no inevitable connection between having a good economy and preventing people from building houses. There are, believe it or not, places in the country where there are good job opportunites AND low housing prices. And those places correlate to less inequality.

When zoning, density, and height restriction laws prevent competitive housing capital, the value flowing in will just raise the price of existing capital.

Move to Kansas, Utah, Wyoming, why don't you? Less competition to own and control the land.

Land-use restrictions are devolving into neo-feudalism.

On any given day you can read rants against the minimum wage in right-wing media, blogs, etc.

But property zoning? Rare. And no one ever rants against laws preventing push-cart or truck-vending.

We believe in free markets, but especially when applied to workers, and not so much to property owners.

Just consider that capital can cross almost every border on the planet in the blink of an eye, but most of the planet would never be allowed across a great many borders.

The basic situation is "free markets IF IF IF it suits the wealthiest of shareholders and executives".

Libertarians complain about both of those things a lot. And are generally regarded as crazy wierdos for doing so.

I'm not so sure "we" even believe in markets when it comes to labor. When it's pointed out that increasing salaries might attract a larger talent pool to jobs where employers claim they can find employees, we are given all manner of smoke and mirrors as to why that doesn't work. Also, there's a meme that goes around claiming that people are paid according to their productivity-- as if supply and demand have nothing to do with it. (Yes, a highly productive worker should be in more demand than a less productive worker-- the problem is that a new employer has very little trustworthy information on the matter when faced with a job applicant)

Justifying high wages and bonuses to CEOs is highly justified by conservatives because only by paying really high compensation can you get management that can defraud bank customers without getting caught. Clearly, the compensation to management at Wells Fargo was too low.

So why is the price of land so high? Nothing relating to money in the hands of wealthy people?

Chicken, meet egg.

I can see how housing increases the income of landlords, but how does it increase the income of those who simply own a house to live in it? When they sell-- yes, but that's a one-time spike in income. Otherwise getting paid, say, 60K a year is the same in the stats whether you rent, mortgage or own outright. (Yes in the last instance you will have more disposable income, but that does not show up in income statistics)

In the last instance you can invest the extra disposable income in a way that increases future income. You can also borrow against the house to finance other income-increasing activities.

On average, over time, the capital gain must be declared. It will show up in the income stats.

Also, in the shorter run, higher asset value enables access to yet more capital, which may be profitably invested.

Except when asset prices fall to the actual labor cost of the assets. Eg, EXXON assets soared to high prices due to the scarcity that EXXON and it's fellow cartel members engineered, aided by cartel coordinator Dick Cheney. Then Obama came along and disrupted the cartel allowing outsiders to enter the supply chain who invested billions in labor costs building capital assets, assets that cartel members refused to build because only by scarcity could they reap 50% profits on average across the cartel.

Then in 2014, supply of capital assets exceeded market demand driving asset prices down, in some cases, asset prices were driven below the labor costs of building them.

In the massive layoffs from cheaper oil, real estate asset prices have been falling below the labor cost of building new assets, and homeowners are losing everything, including their home and land.

Anyone who borrows more than the depreciated labor cost of an asset plus the price of land in the past recession is taking a very high risk which they must be prepared to have their investment zeroed out in a two year downturn.

You don't lose your home if the mortgage is paid off. You're making my argument for me. Low housing prices allow people to purchase an intrinsically valuable asset - a place to live - which insulates them from financial shocks and provides them with a means to access capital in the future. The lower the housing price is the LESS risk people are exposed to because they are likely to have paid off the mortgage much sooner.

In the income statistics homeowners receive an "imputed share of rents" for occupying their own home. It's an accounting entry as opposed to an actual payment. As the value of your house increases the imputed rent also increases (regardless of what happened to your money income.)

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