Could you perhaps expand on how conflating cash flow and expected net worth at future time t relates to accurate measurement of current and past inflation in housing or shelter costs?
I own and I can tell you that I don’t pay anything close to what someone renting a similar house pays.
I think this is the point. If rent for the house you own is going up faster than your cost of ownership, then the difference is in some sense untaxed capital gains from your home equity. As a homeowner, your income (in terms of buying power) is higher than your salary.
To put it another way: If you had instead taken the equity you’ve built in your home and bought stocks (or whatever you see as the next best investment after homeownership), then devoted the returns from those stocks into paying rent, would you be better or worse off? And how would that answer change over time?
Similarly: if you were a retiree living on returns from your investments made over the course of your working life, whether you own or rent makes a significant difference to your standard of living. If you own and your home is paid off, you don’t owe rent. Let’s say you have one retiree A with a $500k home (fully paid off) and $2M in investments, and another B with $2.5M in investments. Both use the common advice that they can spend 4% of their principle a year. Person A probably owes a few hundred dollars a month on taxes and a few hundred more on upkeep, then has $80k/year to spend on other things. Person B owes rent but has $100k annual income. That gives person B $20k/year to spend on rent. That’s about a third of what it would cost to rent the home person A owns. So, we can treat person A’s buying power as being equivalent to almost $140k/yr. The difference between A and B is a result of housing inflation since A bought their home being higher than inflation in the economy overall.
(Note: in reality if these hypothetical retirees had the same working life history, we’d have to also ask whether person B was able to put away more money in investments back when housing costs were lower and whether the compound growth would give them much more net worth now. I have not attempted to account for that, and I’m not sure if or how that affects the question of estimating inflation. I think my example is still directionally correct).
Most people conflate cash flow and expected net worth at future time t. Implicit rents are useful for measuring the actual delta.
oops, I did not in fact parse the qualifier ‘for the purposes of calculating inflation.’
Yeah, I was a bit less clear in my statement than I could have been.
I think it’s on me, you lead with a clear thesis statement.
Could you perhaps expand on how conflating cash flow and expected net worth at future time t relates to accurate measurement of current and past inflation in housing or shelter costs?
I think this is the point. If rent for the house you own is going up faster than your cost of ownership, then the difference is in some sense untaxed capital gains from your home equity. As a homeowner, your income (in terms of buying power) is higher than your salary.
To put it another way: If you had instead taken the equity you’ve built in your home and bought stocks (or whatever you see as the next best investment after homeownership), then devoted the returns from those stocks into paying rent, would you be better or worse off? And how would that answer change over time?
Similarly: if you were a retiree living on returns from your investments made over the course of your working life, whether you own or rent makes a significant difference to your standard of living. If you own and your home is paid off, you don’t owe rent. Let’s say you have one retiree A with a $500k home (fully paid off) and $2M in investments, and another B with $2.5M in investments. Both use the common advice that they can spend 4% of their principle a year. Person A probably owes a few hundred dollars a month on taxes and a few hundred more on upkeep, then has $80k/year to spend on other things. Person B owes rent but has $100k annual income. That gives person B $20k/year to spend on rent. That’s about a third of what it would cost to rent the home person A owns. So, we can treat person A’s buying power as being equivalent to almost $140k/yr. The difference between A and B is a result of housing inflation since A bought their home being higher than inflation in the economy overall.
(Note: in reality if these hypothetical retirees had the same working life history, we’d have to also ask whether person B was able to put away more money in investments back when housing costs were lower and whether the compound growth would give them much more net worth now. I have not attempted to account for that, and I’m not sure if or how that affects the question of estimating inflation. I think my example is still directionally correct).