March 03, 2004

Population Assumptions

One of the assumptions interwoven into our financial lives is the long-term appreciation of real estate. The common phrase "God isn't making any more land" to imply that buying property now will lead to appreciation and a nice retirement nest egg decades later only holds true if population increases over those decades.

The opposite is also mostly true. God isn't destroying much land either. Sure, you have a Krakatoa or an Atlantis every once in awhile but that's a fluke if it happens during your lifetime. If the population drops in absolute numbers and also ages, you end up with a secular lower demand for land. This has huge implications for the real estate market and how to create retirement nest eggs in the 2050 and beyond period where world population is supposed to stabilize and then shrink somewhat. I'll barely miss this trend but my children won't.

Long-term fortunes have always depended on stable rental income. Great merchant houses have often arisen over history but they always buy land to hedge their bets once they have accumulated their fortunes. But with land a depreciating, not appreciating asset, the whole financial calculus of buying a house building equity and using that equity for a retirement nest egg goes out the window.

And, tick tock, tick tock, nobody even worries about it.

Posted by TMLutas at March 3, 2004 08:37 PM