Housing can’t both be a good investment and be affordable?

This article from cityobservatory.org is going viral: Housing can’t both be a good investment and be affordable

Well, in order for your home to offer you a real profit, its price would need to increase faster than the rate of inflation. Let’s pick something decent, but not too crazy—say, annual increases of 2.5 percent, taking inflation into account. So if you bought a home for $200,000 and sold it ten years later, you’d be looking at a healthy profit of just over $56,000.

Maybe you’ve guessed by now: The wonderland of ever-increasing housing prices is San Francisco. When researcher Eric Fischer went back to construct a database of rental prices there, he found that rents had been growing by about 2.5 percent, net of inflation, for about 60 years. And this Zillow data suggests that San Francisco owner-occupied home prices have been growing by just over 2.5 percent since 1980 as well.


Like I said, over ten years, that gives you a profit of just over 25 percent. But compound interest is an amazing thing, and the longer this consistent wealth-building goes on, the more out of hand housing prices get. In 1980, Zillow’s home price index for San Francisco home prices was about $310,000 (in 2015 dollars). By 2015, after 35 years of averaging 2.5 percent growth, home prices were over $750,000.

However, the author, Joe Cortright, cherry picks one of the most expensive cities both on a nominal and inflation-adjusted basis, San Francisco, as being representative of the nation as the whole.

Second, the author ignores opportunity costs. Rents, especially since 2009, have vastly exceeded inflation. This means even if home prices do not make any real gains, the opportunity cost of renting, over the long-run, far exceeds what it costs to buy.

The third possibility is more housing is built and or people move from expensive urban centers to less expensive regions. Rather than wealth being concentrated on a real basis, it gets spread out. This is what happens in less developed countries and in less intelligent regions and states. Because people in these less intelligent, less developed regions are always moving outward, wealth is unable to be concentrated, unlike New York and San Francisco, which have huge concentrations of wealth. This is discussed in further detail here: HBD & Investing, Part 3 (IQ and the concentration of wealth)