Want To Know The Secret To Your Children’s Upward Mobility?

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.