Thread by @tomaspueyo

You think housing prices will keep going up because you've seen it all your life. But this is a historic anomaly that is likely to reverse soon: Prices might start shrinking in many places.

This thread is the case against investing in housing:

Our perception of real estate prices is extremely biased.
Most ppl alive today have only experienced them since WW2, but that's a completely anomalous period!

Prices before did not grow as much. Here are real prices for 14 countries
What happened?

Supply and demand

The last 80 years have seen a growth of housing demand never seen before. At the same time, supply has been shrinking consistently. These trends are all reverting now. Let's look at them in detail:

A. DEMAND
1. The number of humans has grown faster than at any other time in history (this graph is logarithmic!)

Many developed economies (this thread is mostly about them) have doubled or nearly tripled their population

But as you know this huge growth is reverting. Many developed economies are now shrinking, and that will accelerate

Fewer ppl, less demand

Who's going to inhabit all the houses that Baby Boomers will leave behind?

2. Urbanization
It's not just that there were more ppl. They all wanted to live in cities!

Urbanization nearly 10xed, from ~10% to 80-90%. But we can't go higher than that. The urbaniztion trend that pushed demand up in cities has now ended

3. Household size
For decades, we've shrunk our household sizes. We didn't want to live with other generations. Now each nuclear family has their home. In fact, the number of ppl per household might be even growing. No more demand coming from there

4. Bigger houses
We've been buying bigger and bigger houses, driving up demand for land

At some point, that will stop
In the meantime, the annual growth rate is slowing down

So the 4 biggest sources of housing demand used to be huge, and are now slowing down or reverting:
1. Population shrinks
2. Urbanization stops
3. Household sizes stabilize
4. The growth in house sizes slows down

And supply is going in the opposite direction!

B. SUPPLY
You can only grow your cities horizontally (more land) or vertically (more floors)

1. Horizontally
The size of cities is determined by transportation, because ppl don't want to commute much more than 30m each way. That's called the Marchetti Constant

When ppl could only walk to work (eg, Rome, Paris before 1800), cities were small

The train allowed ppl to live farther out, and cities grew (eg London 1870)
Then streetcars and bikes (eg, Chicago 1915)
The car exploded this growth (eg, Atlanta 2010)

And the surface available to build grows with the square of the distance! So if a car was 10x faster➡️cities could grow 10x farther➡️Their surface could grow by 100x! What a huge amount of new supply!

That's why suburbs exploded. But now they don't anymore. Why?

This growth came with car ownership. But now we have broadly as many cars as we want. People who need a car to work mostly have it

As people are forced to live ever farther, their commute becomes too long, limiting cities' horizontal growth potential

This growth in supply of land lasted in most developed countries until the 1990-2000s. As it ran out, supply dwindled, and prices started soaring

But now a new commuting technology has arrived: We can get to work instantly!

Since the Internet's speed is that of light, our commute time is reduced to zero, and cities become infinite. The only limit today are timezones

A huge amount of horizontal supply that was unreachable has been unlocked, flooding the market

2. Vertical growth
Something similar has happened with vertical growth
In the late 1800s, new tech like elevators and steel framing made taller buildings possible. They went from 4-6 floors to 12+ Now we can make them one km tall!

But the average size of our buildings stopped being limited by technology, and started being limited by regulation. In many places, the height of new buildings has *shrunk*!

The NIMBY movement has limited the vertical supply of housing in the last few decades, pushing prices up

That limitation can't really get any worse than it is, so supply can't be further restricted. But if the YIMBY movement (Yes In My BackYard) continues growing, these restrictions will be weakened, and more supply will reach the market

SUMMARIZING:
A. Demand used to grow a lot:
📈ppl
📈urbanization
📈houses/person
📈house size

B. Supply was limited
📉Additional horizontal supply (after cars)
📉Vertical growth (NIMBYs)

ALL THESE TRENDS ARE SLOWING DOWN, STOPPING, OR REVERTING!

Nearly all of us have lived through 75y of real estate prices going up. We have accepted it as a fact of life. It isn't. It was due to extraordinary circumstances that are now disappearing.

I go into details about this in this new article:
unchartedterritories.tomaspueyo.com/p/why-i-dont-i…

Of course, there's much more to consider: interest rates, wealth vs population, big vs small cities, housing vs real estate, timing, immigration... I'll talk about it in my premium article tomorrow
bit.ly/4aV7Lj2

If you learned something & want more, retweet and follow me!

Sources in articles
Of course, none of this is investment advice! Don't invest because someone on the Internet told you to. I'm sharing how I think. Take it as info and entertainment, and talk with investment advisors

the prices above are in *real terms*. They account for inflation.

The most common reply is: "This is due to money printing"
Yes and no

You can see prices shooting up after 1971, the end of Bretton Woods. But:
• Housing prices also grew before that, since 1945
• Housing prices grew in real terms after Bretton Woods
• Housing prices grew faster than incomes after Bretton Woods

So it's not just Bretton Woods
Why did housing prices outpace inflation, even income?
Because demand was higher than supply and coveted land demand is inelastic
I explore this in this week's premium article
unchartedterritories.tomaspueyo.com/subscribe