Your parents' property wealth can determine your lot in life
For some time now, we’ve seen rising inequality in North
America. And as a result, social mobility has been declining, particularly
respective to many of our peer nations.
Pew
Research Center, a nonpartisan organization that informs the public
about the issues, attitudes and trends shaping the world, has new data on the
differences in how rich and poor families raise their children and it indicates that
we’re becoming a two-tier society — one in which who you become depends heavily
on who your parents are.
Pew’s survey found that rich parents tend to coddle
their kids, creating busy after-school schedules full of soccer games and
violin lessons. Working-class kids, however, are left much more to their own
devices, given fewer resources and less stroking. According to Pew, that makes
them more independent and closer to their parents. Yet it doesn’t help working-class
youths climb the socioeconomic ladder. Once they hit their working years, they
struggle just as their parents did.
Inequality and a lack of social mobility isn’t a
new phenomenon. It’s always been the norm. In the wonderful 2014 book The Son Also Rises, University of California academic Gregory Clark
shows that birth (or more precisely, the family one is born into) has accounted for about 50% of people’s success in life across
nearly every country and time period. On top of that, Clark found that it takes
10 generations or more for inherited upward mobility to wear off. Even in the New
World, we’re more like the inhabitants of Downton Abbey than
we would like to admit.
Why is this? Much of it has to do with education,
including better schooling for rich children but also those after-school
resources cited by Pew. But there’s a larger factor driving this, too: real estate. Rich kids are more likely
to inherit property wealth from their parents, increasingly the fastest way up
the economic ladder. Academics like Thomas Piketty have written at length about
real estate’s importance in building socioeconomic oligopolies. More recently,
former British financial regulator Adair Turner has made a strong case for real
estate as the single biggest driving factor in our two-tier economy.
“There is something about a modern economy that is
extremely real estate intensive,” Turner, author of Between Debt and the Devil, asserted in a recent interview. “Living in a
‘nice’ location is a high-income want, as is good education and health care.”
These desires are what economists call “elastic”
wants. They are constantly in demand, and in lieu of proper price control,
their cost can and will spiral almost infinitely (unlike, say, the price of a
pair of pants, shoes, or even a car, which is somewhat bounded).
Just as rising education costs make it harder for
the poor to climb the socioeconomic ladder, so too do higher real estate
prices. Banks aren’t willing to extend credit to those who can’t put down 30%
cash on a new home, but rising rents are making it tougher for people to save.
That’s making it harder, if not impossible, for working-class (and even some
middle-class) families to buy a home. As an increasing share of global wealth
is held in housing, those who lack real estate, fall and are left behind. This last detail is particularly evident in
British Columbia’s Lower Mainland Region.
What’s the solution? Some believe that the price
inflation of elastic economic goods like health care, housing and education
need to be constrained by smarter policies involving both the public and the
private sector. In the case of real estate, some are calling for changes to
immigration policy and what constitutes residency. But that would do nothing to
fix the problem. Instead, it would create a more divisive property market,
since private companies would have no impetus to create any kind of affordable
housing, focusing primarily on the most profitable segment(s).
Others believe that the quickest
fix would be tax reform that focuses on rewarding people for residency and penalizing foreign investors and luxury home buyers. They argue that when only the rich can afford property, and property
makes up an increasing amount of global wealth, and a larger percentage of that
wealth is kept in the family, then you really do have the makings of a new
Gilded Era. On the surface, this seems
to have some appeal. Closer inspection,
however, shows that this can lead to retaliatory action from other countries,
does little to address supply issues, and is counter to market related
policies. To date, no one has been able to properly explain to me how higher taxes will leave me with more money for housing. In fact, I believe that more taxes will decrease affordability and create asset-price inflation that fuels the cycle of inequality I have outlined above.
I have a
simple solution. If social mobility is
related to financial wealth, and financial wealth is commensurate with property
wealth, why not simply invest in real estate?
Start small if you have to, but start now. You may not begin with your dream home, but you will get a home, a great investment, and a legacy for your children.
Let's get started. Together.
Let's get started. Together.