by Morgan Sliff
Once upon a time there was no such thing as investment. In fact, for most of human history, the idea of giving somebody something for the promise of something a bit more in return, maybe — if things went well, say, in saber-toothed tiger teeth speculation — would have gotten you a puzzled look at best and a club to the head at worst.
But somewhere along the line homo sapien became an economic species. And it began, like most things, with land. Real estate was the very first type of investment, beginning about 4,000 years ago in Mesopotomia.
Types of investment have proliferated over the last half-century to include everything from stocks and bonds to mutual funds, ETFs, hedge funds and private equity. But the granddaddy of them all is still king: a groundbreaking recent study shows that as long as such things have been measured (about 150 years) real estate has quantifiably provided the best combination of low risk and high return among any other class of investment. And as the human population explodes and wealth further democracizes, this is a trend that isn’t likely to go away anytime soon.
It’s a well-worn but true adage that to understand the future we must understand the past. So today we are going to take a look at the history of real estate investment, with a nod towards its prehistory (including the invention of investment) and another towards its future (particularly developing countries).
Humans have been around at least 200,000 years (some recent findings suggest 300,000 years), so in that context the idea of a house much less an investment is almost brand new. For most of our history, we moved around, hunting and gathering, trailing herds and seasons and perfecting the fine art of the moveable feast.
We began settling down between 30,000 B.C. and 15,000 B.C. as agrarian communities formed. The very idea of private property came from this time; fertile areas were claimed by whoever could successfully defend the land from encroachment. From these settlements arose land improvement, and boom, populations exploded — farmers had more secure food supplies, hence more children, and pretty soon real estate investors stood erect and yowled, “Let’s flip this property!”
Well, not quite so fast. First, peoples began collectively defending larger swathes of land, giving rise to armies and their leaders, positions that would finally become lords and kings, who also happened to oversee who got what land. Camps became villages became cities and the leading families became property owners. Thus was born rent, and thus a more concrete notion of land value, and income derived from it. Hence land became tradeable. Real estate was born.
Investment, interestingly, predates the invention of money. Trade was almost entirely a barter system until about 2,600 years ago; the first currency is believed to have been created by King Alyattes in Lydia (modern day Turkey) in 600 B.C. The history of investment begins earlier, in 1754 B.C., with the Code of Hammurabi, a Babylonion set of laws in Mesopotamia that outlined a framework for investment — one that was built around real estate. The Hammurbi laws created a way to establish collateral, in the form of land, in exchange for investment in a project (significantly it also established punishment, ranging from temporary slavery to death, for anyone who defaulted on their obligation as a debtor or creditor).
More recognizably modern investment practices took root in 1602 with the establishment of the Amsterdam stock exchange, which connected potential investors with opportunities and businessmen with investment money to make things happen. In the following two centuries, much happened, leading inevitably to the birth of the formalized system of supply and demand we call Capitalism and onward march towards the globalizations of markets.
Throughout it all, real estate investment remained the surest way to realize profit.
A 150-year Winning Bet
The following statements are rooted in rock-solid fact, not mere conjecture: stocks can make an investor rich, but nearly as often not one iota richer and quite possibly significantly poorer; treasury bonds are reliable but won’t really change your life, other than to make sure your money doesn’t go down the drain; real estate investment is extremely likely to make you significantly more wealthy and almost certainly will not make you poorer.
These were the findings of a quietly earthshaking paper released at the end of 2017 by a group of economists from University of Bonn, the University of California-Davis, and the Deutsche Bundesbank (the central bank of Germany). The economists drilled down into one the greatest troves of historical financial data ever assembled — the annual returns of treasury bills, treasury bonds, equities, and residential housing from 1870 to 2015 for 16 highly developed countries, including Germany, Japan, and the United States — to make arguably the most comprehensive and definitive study of investment ever made.
What they found was that beyond any doubt real estate investment has been the best investment throughout the history of recorded investment.
The paper was called “The Rate of Return on Everything” and found that find that the annual return on housing investment during ever since 1870 was just over 7% (adjusted for inflation) while the return on equities was just under 7%. Yet risk associated with this real estate investment was far lower — about half as risky as equities, and even slightly less risky than bonds.
The researchers took the next step, analyzing their findings to arrive at a conclusion truly worth considering as the real estate market becomes more globalized daily. They considered what the “ideal investor” would invest in, and arrived at the conclusion that this investor would hold “an internationally diversified portfolio of real estate holdings.”
These findings turn accepted wisdom — that risky investments like stocks offer higher returns than stable ones like real estate — completely on their head. Couple this finding with the landmark study of human progress and the global spread of wealth, Steven Pinker’s 2018 book “Enlightenment Now,” which showed that the less-developed countries are gaining wealth more quickly than already-wealthy countries are increasing wealth and doing so while also experiencing far greater population growth. Hence housing demand is spiking along with wealth.
In other words, history repeats itself, over and over and over again, and in the world of investment, this means that real estate remains the once and future king.