> Inflation makes it harder for the current generation
It's not obvious to me that this is the case- if your wages go up with inflation, and you store money in stocks/bonds that keep up with inflation- doesn't it also just make any debt you have gradually reduce overtime?
"if your wages go up with inflation, and you store money in stocks/bonds that keep up with inflation"
This depends on at least four premises:
a) that your wages at least track with inflation
b) that your expenses (not debt) track less than inflation
c) that you can buy into stocks/bonds before the inflation AND they track at least with inflation
If any of those are untrue, your conclusion falls apart.
If all three are untrue, your expenses are growing faster than your wages and the little you have left over is now buying already-inflated assets.. which we've seen play out once in recent times.
Why would expenses need to track less than inflation, if your wages are tracking with it? Expenses, by definition, track with inflation.
With (c) stock prices are generally tied to the underlying value of a company which is protection from losing value due to inflation except in rare cases where the inflation directly harms the business model. Assuming the inflation continues to increase over time, you just buy the stocks as soon as you get the money, there is no need to do it "before the inflation" or any sense in which stocks can be "already inflated."
There's such a thing as a personal inflation rate.
CPIH in the UK for example includes the cost of housing but the weighting of housing is effectively an average of a teenager, a mid life family and a pensioner. It comes out at like 20% weight which is well under what most people spend on housing.
If you get an annual cost of living adjustment, presumably it is ahead of cost half the year and behind the other half which averages out. Rent usually updates annually also. If all other debt payments are effectively decreasing, you’re just doing better.
It only feels psychologically worse when you notice food prices going up steadily and you have slightly less left over than you did last month. People will still be mad about that even if actually ahead.
The interest is usually still more than inflation, they just make less money- and the alternatives for them are either cash, which loses more, or investments that are higher risk and more volatile.
Wages are a lagging indicator. Basically everyone who makes their money working and not off investments gets screwed roughly to the tune of the inflation rate. Eventually the economy reached equilibrium but in the intervening years everyone's discretionary spending gets redirected into the pockets of asset owners rather than quality of life improvements.
This is why being in low interest debt is so amazing. Take two people with the exact same job tracks, same appartments, family, interests, etc...
But give one of them $2,000,000 in mortgage debt at 3.0% interest on 3 properties that are rented out, and don't have the other have anything.
In 15 years, those properties will be worth 2-3x as much, and the debt will still be 2,000,000. This is what happened to boomers even though they don't realize it. Its not that houses are some amazing investment, its that no one will give you 7figure loans at 3% interest to buy stocks with money you don't have, but they will do it for a property.
I don’t think the 2-3x as much in 15 years time is likely to be true. When interest rates start out low there is much less scope for appreciation than when they start out high. So if you buy when mortgage rates are at 3% you can’t expect the big gains you get when mortgage rates fall.
My personal rule of thumb is that rents remain fairly stable as a proportion of earnings under balanced supply and prices are then a function of rents / mortgage rates.
Over the past 15 years median household income has gone from $50k to $80k while mortgage rates more than halved from 6.5% in 2006 to 3.1% in 2021. Most of that 2-3x increase is from the fall in rates.
> My personal rule of thumb is that rents remain fairly stable as a proportion of earnings
This is the problem, because supply is artificially constrains if wages double (through efficiencies), rents increase to soak up the extra productivity.
That did happen to Boomers, but I wouldn't assume it will happen again. Over a long enough time period housing values must approximately track inflation, because there is an upper threshold of income percentage (certainly below 100%) people can afford to spend on housing. Currently, mortgage rates are about 2x what inflation has been over decades historically. Boomers mostly made money with regulatory capture- landowners were able to politically block housing construction during a time of increasing population, causing a short term anomaly where people were paying steadily increasingly high percentages of income on housing. Both that regulatory capture, and the population growth are disappearing now.
When I run the numbers where I live based on current market rates buying a home is predicted to be a big money loser over time vs renting and investing the difference. Renting lets you buy into housing with the prices and tax rates of when the owners bought them decades ago.
Buying still has a ton of tax advantages and gives people access to an incredible amount of leverage that they wouldn't be able to get otherwise.
For what it's worth, I don't disagree with you, and I think renting makes more sense than buying right now for the first time in decades, but it's just by a hair.
It depends on when and where: All real estate investment is a bet on a specific location, and properties don't maintain themselves: In general, the land appreciates, while the house on top of it loses value.
If you bought a house 15 years ago large parts of north St Louis, chances are you lost money, even without accounting for said home maintenance. They one I live in didn't go up 50% in 15 years. A lot of commercial investments? Ravaged.
So while it's true that it's possible to leverage yourself more in real estate, and that said leverage is even tax advantaged, assuming that the line will go up faster than anything else in a risk-adjusted way is a very risky position to take.
> In 15 years, those properties will be worth 2-3x as much
You're extrapolating the last 15 years onto the next 15 years. The last 15 years came on the heels of a historic decline in real estate prices that occurred just prior to that period (2008-2010).
>This is what happened to boomers even though they don't realize it. Its not that houses are some amazing investment, its that no one will give you 7figure loans at 3% interest to buy stocks with money you don't have, but they will do it for a property.
Interest rates from 1971-1998 were higher than they are today[1].
It kind of happened to boomers, but it's wrong in a number of ways.
1. Interest rates were in the teens when they bought their houses. However they may have only paid $50k for a house in the 80s.
2. Most only bought their own house and didn't have many other investments. My parents for example had an investment property in the 90s, but were an exception.
3. House values have gone up because building regulations and zoning have become so onerous that supply hasn't kept up with demand. I believe this will continue and house prices will continue to beat inflation in many jurisdictions.
It's not obvious to me that this is the case- if your wages go up with inflation, and you store money in stocks/bonds that keep up with inflation- doesn't it also just make any debt you have gradually reduce overtime?