Yes, your house is wealth

From Noah Smith:

“Every so often I encounter the argument that owner-occupied housing isn’t a form of wealth. This would come as news to economists like Emmanuel Saez and Gabriel Zucman, who study wealth inequality for a living, and who definitely count owner-occupied home equity in their wealth numbers. It would also come as news to the U.S. Census Bureau, who finds that equity in owner-occupied housing represented the largest share of the wealth of households outside the top 1% as recently as 2015:

The definition of wealth here is just assets minus liabilities. An asset is anything you can sell for money. You can sell your house for money. Hence it is an asset. In fact, historically, it’s one of the assets with the best returns.

But I don’t want to make an argument from authority here. There are very good reasons we count owner-occupied housing as wealth, and they’re not too hard to understand.

To see why, first let’s make an analogy: a magic cupboard that gives you food.

The magic cupboard analogy

Suppose you had a magic cupboard that gave you three meals a day, free of charge. Furthermore, suppose there was a market for magic cupboards, and that you could sell your own for $1 million if you wanted to.

This magic cupboard represents a form of wealth. If you think it’s not, consider whether you would be poorer if your magic cupboard burned down or got stolen or stopped working. Yes, you would be poorer.

Some people might argue: “But you need food every day. If you sold your magic cupboard, you’d just have to use the money to buy food.” And indeed you would. You would have to go to the grocery store or go to restaurants, because you wouldn’t have a magic cupboard. You could use the cash from the sale of your magic cupboard to buy food at the store or at restaurants.

But now consider someone who doesn’t own a magic cupboard. They also have to eat every day. They have to go to the grocery store or go to restaurants. But unlike you if you sold your magic cupboard for cash, the person who didn’t start out with a magic cupboard has to work for the cash they need to buy food every day. Because they have to work for what you could just buy off of an asset sale, they’re poorer than you.

Thus, the magic cupboard is wealth.”

Continue reading here.

Posted by at 8:46 AM

Labels: Global Housing Watch


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