Matthew C Klein, Columnist

Shiller's Lesson: Housing Was Never a Great Investment

Economist Robert Shiller, who recently won the Nobel memorial prize in economics, is right that money spent on housing is consumption rather than investment.

October 16, 2013 at 4:54 PM UTC

By Matthew C Klein

Matthew C. Klein writes for Bloomberg View about the economy and financial markets. He previously wrote for the Economist magazine and its economics blog, Free Exchange. Before that, Klein was a research associate at the Council on Foreign Relations, where he spent more than two years studying the history of the Federal Reserve and the intellectual history of monetary economics for an upcoming book by Sebastian Mallaby. He also worked at Bridgewater Associates, where he studied the economies of Central and Eastern Europe and advised institutional investors on asset-liability management. Klein has a bachelor's degree in history from Yale University. Originally from Chicago, he lives in New York.

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You have probably heard it a million times: Buying housing is better than renting because renters forgo the opportunity to accumulate equity in real estate. There was even a time when people thought that it was worth promoting homeownership because it reduced crime, although more recent research has found that areas with high rates of homeownership have less flexible labor markets and lower rates of entrepreneurship. Yet the biggest problem with the conventional wisdom is that home equity just isn't a great place to put your money -- especially if thetax code ever gets fixed. This doesn't mean that buying is inherently inferior to renting, but it does mean that many prospective buyers might be better off renting and accumulating wealth in other ways.

I'm reminded of all this because Robert Shiller just won theNobel prizein economics for his research into the psychological drivers of asset prices. During a recentinterview with Bloomberg TV, he said that spending on shelter is consumption, not investment. This is because the equity that homeowners exert such effort to build barely keeps pace with inflation over long periods of time. Shiller has shown this for U.S. home values since 1890, while other scholars have noted similar patterns in Beijing andAmsterdam over even longer time horizons. In other words, homeowners are paying interest for the privilege of owning an asset thatreturns less than Treasury bills.