The Rate of Return on Everything, 1870–2015*

Abstract

What is the aggregate real rate of return in the economy? Is it higher than the growth rate of the economy and, if so, by how much? Is there a tendency for returns to fall in the long run? Which particular assets have the highest long-run returns? We answer these questions on the basis of a new and comprehensive data set for all major asset classes, including housing. The annual data on total returns for equity, housing, bonds, and bills cover 16 advanced economies from 1870 to 2015, and our new evidence reveals many new findings and puzzles.

Riders on the Storm

“…A longer sweep of financial history sets the post-WW2 record of the natural rate in a broader context. Despite much wringing of hands about the three-decade decline in the natural rate, Jordà, Knoll, Kuvshinov, Schularick, and Taylor (2019) show that low real rates of return in safe asset classes occupy long stretches of time historically, in a manner consistent with a low neutral real rate of interest. If anything, it is then the relatively high levels of the real interest rates experienced in the 1980s, the very noticeable peak seen here and in other recent studies, which stand out more as the exception than the rule.…”

“…The model is estimated by Maximum Likelihood using the Kalman Filter and the constraints described above for each country individually: Germany, Japan, the U.K., and the U.S. for the period 1955 to 2018. We employ post-WW2 annual data taken from the Jordà, Schularick, and Taylor macrohistory database (www.macrohistory.org/data) and developed in Jordà, Schularick, and Taylor (2017) and Jordà, Knoll, Kuvshinov, Schularick, and Taylor (2019), and where we extend the series forward from 2015 using standard sources.…”

UK House Prices and Three Decades of Decline in the Risk-Free Real Interest Rate

“…• Measures of the housing risk premium, RP , are a challenge to pin down. Jorda et al (2017) show that real returns on housing over the very long term are comparable to those of equities. If the return on houses were also perceived as being as risky as that of a diversified portfolio of equities the premium might be 4-6% per annum.…”

House price affordability, the global financial crisis and the (ir)relevance of mortgage rates

“…Since the 1990s, research has argued that affordability is driven (in the UK) by changes in, inter alia, demography, income distribution, housing supply, tenure and an important long history of financial deregulation (Bramley, 1994). More recent determinants of affordability include the pressure from investors who own multiple properties beyond the primary residence (Jordà, Knoll, Kuvshinov, Schularick, & Taylor, 2017). Austerity and poor performance in other financial assets has led to cuts in pensions in several countries, which has stimulated demand for housing because it is viewed as a relatively safe alternative asset (Austin, Gurran, & Whitehead, 2014), and the established view is that sustained low interest rates since the global financial crisis have incentivized consumers to invest in home ownership rather than in other assets (Squires & White, 2019).…”