Is housing an uproductive asset to the wider economy?

' Housing investment is not productive

Property spruikers are currently having a field day proclaiming the productivity of housing investment. These claims are fallacious. Housing investment does NOT improve productivity.

To clearly explain why this is the case we first need to define productivity. Productivity is a measure of output from a production process, per unit of input. A productive capital investment therefore enables more future goods and services to be produced per unit of input (such as labour, materials etc).

An example of a productive investment may be a machine that enables a new design of metal fasteners to be produced from less metal, and with less labour time, but is equally as strong. In this case we have a productivity gain in terms of materials and human labour time for the same output. This investment allows use to produce more fasteners in future periods even with no more inputs.

Housing does nothing of the sort. It simply houses more people and does nothing to improve the per capita productivity.

Let's use a little thought experiment to prove the point.
no measurable productivity gains since 2004. This, not surprisingly, coincided with a significant increase in annual housing investment.

The most popular claim by property spruiker is that housing is productive because it produces this thing called ‘somewhere to live’. Clearly there is a misunderstanding of productivity here. Tomatoes produce something to eat, as do bananas, which are equally as important as shelter. But it doesn't mean that growing a tomato improves our productivity.

The second most overlooked issue is that even if you redefine the argument to say that productive investment is any investment in capital that enables future production, which is the case for housing because homes enable future production of occupied space, you can easily overlook the fact that there are varying degrees of productivity of an investment. Housing productivity is clearly extremely low, with net rental returns (the measure of the future production you are enabling), around 2-3% in most areas.

Of course, property spruikers will still tell you that capital growth proves their point about relative productivity, but in the current financial climate, I would say there is still time to learn about the fragility of asset prices and the disconnect between the current price and the true productive contribution of the asset."

from Fresh economic thinking: Housing investment is not productive

 

So housing investment is not productive and growing food is not productive. Does that mean we should not build housing or grow food?

 

Construction activity increases productivity. Spending on housing boosts productivity when occupants furnish. Productivity is measured by GDP - Gross Domestic Product is the value of production. It is measured by taking all business outputs and deducting costs of inputs. GDP for property is affected by price growth but inputs rise in costs too...Try finding a tradie who isnt busy.

Housing ownership doesnt affect productivity. Housing ownership may reduce expenditure on rents but it can also be affected by interest rates etc...Rent or interest as a % of earnings rising may lower GDP (total spending). High mortgage servicing also affects GDP....There is a argument that current high prices lowers GDP....But take care most owners havent sold their property !! This only typically affects new ownership. The whiny gen X's just bang on about affordability that affects them. The reality is old aussies who invested in property have higher income than a few years ago. That adds to GDP when they spend it. At present aussie are banking big $ into offsets and reducing mortgages. This is savings. Its not spending which boosts the economy.

Net investors dont always increase national savings. Buying a second or third IP using borrowed $ doesnt improve the economy. Its not even a asset since its offset by a debt. There are stacks of investors who tell you they have a portfolio worth $2.0m...They never seem to deduct their debt. Both are rising and thats what the Reserve Bank has a concern about. It just increases lending risk and doesnt help the economy as such

The abundance of investors seems to hold a cap on rents that arent rising in pace with prices for real estate. But rent is rising. Record low cash and interest rates have helped on tat front. The concern is that if inflation develops its a rough ride ahead.

 

You cannot grow more land but you can grow more tomatoes.

Also there is more competition for food with alternatives (e.g. all fruit, vegs, meat, bread). Where as with property there is less fixed amount of supply in each suburb.

Is property a productive asest? There are many people involved in property than meets the eye. From solicitors, rea, bankers, mb, ba, inspectors, valuers but this is for existing property, you still have builders, subbies (electricans, plumbers, painters, tv antennas, landscapers), plus consultants & engineers (e.g. stormwater consultant, hydraulic engineer, structural engineer, waste management consultants, traffic consultants), then you also have delivery drivers + suppliers and their employees (e.g. a rep to have the product specified, another to quote the job, another to organize the job and delivery).

I don't know as much about farming but once the farm is setup it is just a farmer, gatherers/harvesters and then sourcing a client to buy the produce who will buy your product to resell (selling direct would be hard with 1,000,000 tones of tomatoes) and then you have the staff to pack and store.

According to the ABS construction is the 4th largest contributor to our GDP. This is behind finance and insurance (some of which is likely attributed to property), then manufacturing (again some of which is likely attributed to property) and mining (we could argue this one but lets leave it out). With professional services behind construction.

Source:
1350.0 - Australian Economic Indicators, Oct 2010



Funny to note that Agriculture is one of lesser contributors to our GDP.

So I think housing is contributing quite a lot to our bottom line.

 

According to that definition, Education is unproductive? Does that mean we shouldn't invest in Education?

But really, if you are looking at whether housing is an uproductive asset to the wider economy, you should be looking at a macroeconomic definition of productivity.

In macroeconomics the approach is different. In macroeconomics one wants to examine an entity of many production processes and the output is obtained by summing up the value-added created in the single processes. This is done in order to avoid the double accounting of intermediate inputs. Value-added is obtained by subtracting the intermediate inputs from the outputs. The most well-known and used measure of value-added is the GDP (Gross Domestic Product). It is widely used as a measure of the economic growth of nations and industries. GDP is the income available for paying capital costs, labor compensation, taxes and profits.
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Productivity - Wikipedia

It would be hard to argue that knocking down a barely habitable house and building 3 townhouses does not add value to the economy. The same could be said for a major renovation project that significantly increases the value of a property. Both of these activities contribute to the economy.

The other side is an investor that buys a house, rents it out and makes no improvements. That activity does add significant value to the economy through value adding. Lets call this passive investing.

How important is passive investment in housing to the economy? Ongoing, there is land tax, council rates, water rates, property management fees, maintenance, interest payments, insurance etc. These all make a minor contribution to the economy and I can see this is not productive. However, if you add all the rental properties across Australia, what contribution do they make to the economy combined? I have never seen this quantified but it would be interesting to know. Property management is an industry, so if we abolished housing investment at least one industry would disappear. I can't see how that would be good for the economy.

 

If you are just looking at passive investing in housing (taking out construction and renovations), I would argue that it is not a productive asset. What does that mean? For the sake of the economy, we only invest in productive assets? Growing food, investing in housing and education are all unproductive but essential. If we only invest in productive assets, who pays for the rest of the essentials that are not productive?

 

Then there would need to be studies on how many people haven't made any changes to the property after they bought it.

Even on our most recent purchase the vendor had spent about 100k on renovations but there are still things we will be doing to the property before we rent it out.

 

I agree more data is needed. Even just the completely passive investors make some contribution to the economy although it could be argued that contribution is not "productive" as such. How much contribution they make is unknown because the data is not available.

I think all this stems back to having a look at the broader economy in Australia. Is the economy healthy and growing? Not really. So then what is to "blame" for that. Investment in housing is a soft target because passive investing in housing is seen as "unproductive". If you have a look at the overall economy in Australia, there probably has been too much investment dollars invested in housing. Lets argue that overinvestment in housing as an asset class has caused a distortion in the market that has harmed the economy. What is the alternative?

As a thought experiment, lets say that a high percentage of the dollars that were invested in housing over the last 5 years were instead directed towards some kind of "productive" investment. It has been argued that buying existing shares is a productive investment. We will pretend that is correct. So the billions of dollars that was passively invested in housing over the last 5 years is now redirected to the stock market instead. Would that lead to overinvestment in shares as an asset class and cause a distortion in the market that would harm the economy? I don't know enough about economics to answer that question but conceptually, I would have thought it would cause a bubble that would eventually crash and harm a lot of investors. Perhaps there is something I am missing?

 

Taking a billions of dollars from housing and put it into shares would increase share prices and decrease property. As there would of been more demand for the shares and less demand for housing.

It needs to be a mindset shift of the population to be hey we don't need to worry about our futures go out and spend money today.

If you knew you were going to have 100k p.a. after tax as a pension in today's dollars no one would worry about saving. However then because there was more supply of money and same supply of goods or cost of goods would go up. So it doesn't really change it... Not sure if this makes sense

 

@Big Will makes sense to me. Looking at the economy as a whole, it's easy to see that too much investment money has been put into housing, driving up prices to ridiculous levels in some part of Sydney (for example). I blame Super for that. Just looking at my financial position personally, I could go hey, look, I am overexposed to residential property, time to diversify my investment portfolio. So I look at the alternatives, perhaps I should by shares. Problem is I have a lot more money invested in Super than I do in resi property. And the largest investment asset class I hold in Super is shares. So overall, if I started investing in shares now, my portfolio would become even more unbalanced and I would be overexposed to shares as an asset class.

My investing in resi property is to balance my overall investment portfolio (Super and non-Super investments). Of course I have the option of another unproductive asset class: commercial investment property. I would like to diversify further by investing in CIP but I have a lot more to learn before I jump in. So I will just be moving my investment dollars from one unproductive asset class to another unproductive asset class.

 

I do the same as you, personal investing funds is property and super funds are in shares and both of them have cash.

Shares could end up being better than property or property might end up better than shares in the long run. However would I be happy if one gave x% and the other was x+1%, both are better than doing nothing but if you with the approach I might get x+0.5% which is okay and I'd prefer that over x. Ideally I would the x+1..

 

If you add to housing supply you decrease the cost of shelter for the workforce. This reduces the cost of labour in the country you are doing business. A lower cost of labour results in a more productive nation.

So while a simple growth in prices does not generate further output an increase in stock definitely will. Also having a city with desirable housing and social infrastructure adds to productivity as you can attract a more highly skilled workforce to your chosen city.

 

This is hilarious. You do know you're on a property/wealth creation forum.

I'll let you ponder whether property is a productive asset or not while I continue to build wealth . Nothing amazes me anymore these days.

 

What do you expect from someone who thinks that growing food is unproductive? At a macro level, productive is taking a raw material and adding value. A farmer buys tomato seeds (raw material) and grows and harvests tomatoes. The tomatoes are worth more than the seeds. This is the very definition of adding value. This is the very definition of productive. Now what did the OP say about growing tomatoes? Unproductive.

 

New housing is certainly productive. Existing housing is just like most other services, which shift money around the economy without really creating anything.