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Didn't you use the example of stockpiling soup a while back? That was a good one!

The right way to think about things like this is the present-value of the future income stream net of depreciation. In this way we can project the future to the present and label things 'investment' or 'consumption' in a more natural fashion.

In this way: buying a new car with a five year-life is consumption, buying a bottle of scotch to drink in 6 months is *worse* than buying one to drink today because of discounting the future benefit.

Nick,

After having a quick look at Nolan's post and some of the comments it seems to me that the problem is confusion over what constitutes investment as measured in GDP vs the common notion of investing.

Building a new house constitutes real investment, buying an existing house is not an investment.

The distinction is basically the same as with equity investing. Buying a stock in the secondary market is not a real investment and does not directly add to GDP. However, most people would say they are "investing" when they buy shares.

Nick,

just read more of the comments on Nolan's blog and saw that you already made this point. Also, I thought your last comment there was on the money. How the investment is financed is irrelevant, it's marginal products that matter.

"If I buy a $20 bottle of Scotch, planning to drink it next week, I have made an investment,"...

Not a good one. I've nearly been beaten for settling a Scotch debt with the cheap stuff.

Jon: In equilibrium though, all goods we buy should have, at the margin, a PV of income equal to their cost. There's an intuitive sense that some goods are more "capital like" than others, in that the stream of future income goes further into the future. But, if I remember my reading from the Cambridge vs Cambridge capital controversy, any measure of how long that income stream lasts depends on the rate of interest used in the calculation. One good can be more "capital like" than another at one rate of interest, but the order reverses at another rate of interest.

Adam. Thanks.

It might be useful to have a different perspective on the new/old houses question though. Suppose Canada imports a lot of old houses (OK, mobile homes). I would want to call that "investment" since it adds to Canada's capital stock. Thinking about individuals in the same way, if you sell me an old house, we could say that I have made an investment, but you have made a disinvestment, so that my positive and your negative investment cancel out for the country as a whole.

You get the same answers either way. Just a different way of getting to the same answer.

Phillip: maybe it was a small bottle of the expensive stuff!

I should have added: if we include imports of used mobile homes as both investment and imports, it cancels out, so C+I+G+X-iM stays the same, as it should. But K goes up.

I'm not sure how StatsCan treats imports of capital goods, new and used. But I guess they probably do it like this.

Nick: That only holds for "capital". Consumption goods have costs in excess of the PV of their income streams. Which is precisely my point.

Your bottle of cheap Scotch shows this. The 'value' of consuming it is the same in the future as in the present. Yet the time-value of money is not. Ergo, buying it today to consume tomorrow is not an investment.

"Buying a house is an investment, because the cost comes now and the benefits come in the future."

You have an interesting definition of benefits, probably not the one most people typically use when talking about investment return. When you're not measuring the benefits in dollars it's difficult to make a blanket statement like that, because everyone's utility will be different. That statement would only hold true for some people, if I understood your point correctly.

Since having a warm building, sealed from the weather provides much of the benefit of housing, we could see that a basic home is an investment. The granite countertops and marble bathroom are consumption.

Andrew: I would put it a bit differently. If you buy any house, granite countertops and all, that is an investment. If you move from living in a house that doesn't have granite countertops to one that does, those granite countertops are also an increase in consumption.

pointbite: some investments yield benefits in cash; others yield benefits in kind. But it all comes down to the same thing, because cash is no good until you convert it into kind. And kind is no good either, unless you can convert it into utility. Therefore, all investments ultimately yields returns in utility (unless they are bad investments, of course). But yes, it's easier to measure cash.

Jon: OK, I think I maybe get your point now. But I would put it this way. Some investments, and this is true regardless of whether they are producer or consumer durables, give you a choice of when to enjoy the returns. When to cut growing trees is one example. When to drink a bottle of Scotch or wine is another. If the Scotch doesn't improve with age (do they age Scotch partly in bottles, or only in sherry casks??), then it's more like storage. But even storage is a form of investment. Even if the Scotch tastes the same, you are storing it until it's most subjectively valuable (when you must want a glass). So, subjectively, the utility you get from drinking it does vary over time, and should be higher when you drink it that when you buy it. Yes, otherwise you should have drunk it immediately.

Nick, that's true, but typically (at least colloquially) when people use the word "investment" it means you're trying to increase the utility over time. Buying something with a static utility (like a potato) isn't really "investing" so much as "saving". I think there's a difference.

For example I don't consider buying gold an investment, it's more savings and speculation. It's storing purchasing power, sometimes at a cost. Granted you may get more utility from living in a house than enjoying the shine of a pretty metal, but that's relative, I will enjoy my first coin more than my 10th house.

I'm nit picking, I don't think you're statement is wrong, I just think it's a bit too vague.

I just read Jon's comment... sorry for the repetition. Your answer is interesting, thinking about utility fluctuating like a stock portfolio is different. But it's a collection of stocks without dividends, which I still consider speculation. If that scotch was generating income then I'd agree with you!

Nick : Whiskey doesn't continue to mature in the bottle. As for barrels, I think single malt Scotch is most commonly aged in used American oak barrels previously used for bourbon or American whiskey and less commonly in Sherry casks.

Even if the Scotch tastes the same, you are storing it until it's most subjectively valuable (when you must want a glass). So, subjectively, the utility you get from drinking it does vary over time, and should be higher when you drink it that when you buy it. Yes, otherwise you should have drunk it immediately.

So it derives its value from being consumed. :)

What we getting to here is a concept of 'final' or consumer goods. Goods whose value is directly derived from their utility at time of consumption.

Conversely, a 'wrench' is an investment because I don't want to consume the wrench as such--I get annoyed when it breaks! Its value derives from the other goods whose value derives from other goods whose value derives from consumption itself.

For 3rd world microfinance shacks are an acceptable use of loan funds because it was found they permit warehousing behaviour of goods. Maybe a freezer is a better example. If you save money shopping bulk the savings certainly an investment. If you just eat more meat it is consumption unless a pro athlete. The part of having a house that physically and psychologically increases your earnings is certainly investment.
Have to be careful with the assumption a house is a future dividend of goods. B.Clinton assumed this believing *all* home ownership (including flipping) increases community involvement and now there are boarded up home everywhere. Perhaps a home that fits your finances is an investment?

Tricky demarcation. You'd maybe consider subsidizing investment behaviour but not consumption behaviour. Maybe help to quantify just what those steady stream of dividends are. If you work for your wife and she wants a house it is an investment. But I'd bet she'd also prefer a house in a ritzy area of town. Buying a house doesn't automatically get you those dividends. You forecast these and then buy.

I can throw twoonies off a bridge and be happy that they glitter on the way down. I can say the happiness of blowing $100 is worth $5 to me. Consumption $100. Investment -$95. I wouldn't call it investment at all unless I really really like tossing twoonies. Whereas if I take 5 cents and flatten them on the tracks I'm getting a couple bucks in fun. Consumption 5c, "investment" $5. There is an aspect of personal finances I can't quite put my finger on here that is being missed.

Philip:
"I can throw twoonies off a bridge and be happy that they glitter on the way down. I can say the happiness of blowing $100 is worth $5 to me. Consumption $100. Investment -$95. I wouldn't call it investment at all unless I really really like tossing twoonies."

Investment expenditure: $100
Gross return on investment: $5 (a really bad investment. -95% rate of return)
Consumption: $5

"Whereas if I take 5 cents and flatten them on the tracks I'm getting a couple bucks in fun. Consumption 5c, "investment" $5. There is an aspect of personal finances I can't quite put my finger on here that is being missed."

Investment expenditure: $0.05
Gross return on investment: $5 (a really good investment, with 100,000%? rate of return)
Consumption $5

For what it's worth I think the intuitive notion most people use to think about housing as an 'investment' in this: At some point in the future, if I sell the house, pay whatever is left over on the mortgage subtract interest payments, and adjust for inflation, I'll have money left over as 'profit'.

Seems odd to expect that to be true of houses in general. Residential housing in non-productive, requires extensive maintenance, and wears out over time. So why would we expect a house built today to be worth more in the future? By way of comparison we don't generally expect cars to get more valuable as they get older. I suppose part of it is due to neighborhoods maturing and becoming more desirable places to live, but should that really make a house appreciate forever?

Patrick, for what it's worth, Shiller claims in "Irrational Exuberance" that the very, very long run real price appreciation of housing is close to zero. If that's true than consuming the services is the only real return over all. Mpreover, to the extent that there was real long run price appreciation it would probably be in the land not the house.

Seems to me that perhaps the distinction is more that, apart from actualy doing damage, the act of consuming the flow of housing services has little effect on the depreciation rate.

Thus, if you buy a car which is a consumer durable that provides a flow of transportation services, you have something that will provide only a certain amount of the service, say 400,000km if it's a good car.

Housing on the other hand lasts pretty much indefinitely, the insides are refurbished from time to time but Europe is full of house whose structure is hundreds of years old, I'm sitting in one now actually.

Thus, I think you can argue that with a car you are really buying a storage device for a given quantity transportation services while a house continously produces more of the housing service, in a sense.

Patrick:

"For what it's worth I think the intuitive notion most people use to think about housing as an 'investment' in this: At some point in the future, if I sell the house, pay whatever is left over on the mortgage subtract interest payments, and adjust for inflation, I'll have money left over as 'profit'."

And for some people, that was in fact true, during the inflationary years, and during the bubble years. The nominal rate of appreciation sometimes exceeded the nominal interest rate on the mortgage, so if you had a big enough mortgage you were actually being paid to own a house. It would have been profitable even if you left the house empty, collecting no rent (from yourself, or anyone else). Their mistake was in thinking that state of affairs was normal, rather than a temporary disequilibrium, or change from one LR equilibrium to another.

I think Shiller is roughly right about LR real house prices being roughly constant. Though I get the sense that there is less technical change in house construction that in goods on average, so that we might expect to see equilibrium real house prices (excluding land) rising slowly, say at 0.5%. Land prices are trickier. With growing population, and people wanting bigger lots, they might rise.

Adam: "Thus, I think you can argue that with a car you are really buying a storage device for a given quantity transportation services while a house continously produces more of the housing service, in a sense."

That strikes me as an important insight. I really like it. A car is like a bottle of Scotch. A house is like a fountain of scotch, that keeps flowing indefinitely, but the scotch goes down the drain if you don't drink it as it flows. Damn yes I like it. But I can't think through the economic implications of that insight. It HAS to matter. But how?

If we drew the analogy to a monetary 'investment', a car or bottle of Scotch is like a wad of dollar bills. You can spend them when you like, but once you spend them, it's gone. A house is more like a very long bond, which pays a stream of interest coupons.

Where do we take that next, Adam?

it's important that housing including land value is an investment where depreciation is less than 100 per cent

depending on the house itself (clapboard versus castle), there will come a point where land appreciation starts to offset house depreciation; perhaps Shiller's results mean they net out in the long run, on average, in real terms, with land value dominating in the long run

most cars depreciate to scrap metal value, with some spectacular exceptions after taking into account restoration costs

but scrap metal does not carry forward original value the way land does after a tear-down

Nick, I think you're carrying the analogy too far. A house is exactly like a car. Every part of a car can be refurbished just like a house, but people choose not to do so for other reasons. I like the wrench analogy better, a wrench is an investment because it's used to create new value, a house/car don't add value to anything. My appreciation of them may fluctuate over time, but a I said before that's not investing, that's savings and speculation.

A house is a very efficient investment. My goal is to become financially independent and have access to all the necessities of life without working. It isn't feasible to buy a lifetime supply of most necessities, like food or healthcare, so I must find some sort of investment that will provide me with the income to buy those things as I need them. But when it comes to shelter, I can buy a house and it will produce shelter directly for the rest of my life.

I'm glossing over issues like maintenance or having to move or whether current market prices are reasonable. There are likely cases where owning a house isn't better than investing and renting; but given that shelter is such a large portion of living expenses, it's nice there is a way to buy a risk-free lifetime supply of it.

jimsum; you are correct. As a renter of a house, you face the risk that rents will rise. As the owner of a house, you face the risk that rents will fall. As an owner-occupier (someone who rents a house from himself) those two risks exactly cancel. That makes owning the house you live in efficient. Other efficiencies are moral hazard (you internalise all the costs and benefits of abusing or looking after the house you live in), plus, in a sense, the tax advantages (you don't get taxed on the rental income you receive from yourself). One inefficiency is the high transactions cost of selling and buying a house whenever you want to move.

If you can pay 100% cash (no mortgage) you get another efficiency by avoiding imperfect capital markets. If you need a large mortgage, you get another inefficiency by needing to use imperfect capital markets.

If you can make a big downpayment, and don't plan to move too often, it's efficient to own your house (assuming house prices are right). Otherwise rent.

pointbite: the big difference between a house and a car (Adam's point) is that a car depreciates in proportion to how much you use it (just like a bottle of Scotch). A house doesn't. That's an exaggeration, because even garaged cars may depreciate, and roughly-used houses may need more maintenance. Sure, you can always replace everything in a car that wears out, but it's much more expensive than buying a new one.

Nick, I just don't agree with that statement. A car depreciates in proportion to many things, probably most importantly the perception of quality (the model) and how well it's maintained. Fixing an old car may cost more than buying the same model year, but almost never more than buying a new car (assuming we're talking about regular wear and tear). If that was Adam's point, he's wrong.

I just can't accept the logic that fluctuating utility of potatoes make them an investment... because they produce nothing while they rot. And besides we're now arguing degrees of the same principal -- they all depreciate over time, but are there OTHER benefits that balance those losses? In that case, what matters is not the "good" but how you use it. Buying a car to transport stuff for your business could be an investment, buying a car to dump in your garage should not. Similarly if you rent your house or use it as an office then you have a case, buying it to sit on the couch watching hockey, not so much. Hence the reason I prefer the wrench.

But I'm getting the impression we'll have to agree to disagree.

I think Nick is saying everything can be measured as an investment. Whereas when people ask about housing as an investment they mean the definition of the word that means at least breakeven ROE or at least a cost savings over renting.

Phillip: Yep. If it has costs today and benefits in the future, it's investment. But if the benefits don't exceed the costs, if the rate of return is less than the rate of interest, if the costs of actual and foregone interest plus maintenance etc, are more than the rent, it's a bad investment.

So housing produces a flow housing service that, like any service, can't be stored; so use it or loose it. In evaluating whether or not housing is a good investment I have to do some accounting by projecting unknown future interest rates, inflation, maintenance costs, etc to the present. No easy task.

In chess, really good players can project many moves ahead, an average player can project a few moves ahead, and a novice only looks at the next move. Now suppose people make projections about investments in a similar way (i.e. they make an intuitive model). Some people look far into the future, most look at some medium term (what ever that may be) and some practically live only in the moment.

As Nick pointed out, during the bubble: "The nominal rate of appreciation sometimes exceeded the nominal interest rate on the mortgage"

Arguably, this was a short term condition that would not last, but if an investor makes decisions by projecting only a short time into the future, in some sense it would be rational to jump on the bandwagon. They'd think: "tomorrow is likely to be like today and I'm gonna be rich!". And the longer the bubble exists, the more people it would 'recruit', when in reality the longer the bubble exists the less likely it is to continue.

Does this make any sense?

It makes a lot of sense Patrick.

The trouble is, we all assume that the future will be like the past, in some way. We have to. We extrapolate from past averages, or past trends. The question is, *which* trend or average do we extrapolate? And over how long a period?

So what have we discovered here?

I think the distinction between investment and consumption is entirely arbitrary at the margin. Think washing machines or pens.

I love to play with a theory called the "leisure theory of value" in which utility comes nicht from consumption of goods and services, but also requires the leisure to enjoy them. In this case ALL goods are intermediate goods or investment goods.

And the flow of income (i.e. rent or inputed rent) is a financial concept not an economic concept. The financial economy and real economy are parallel entities which sometimes drift apart due to the uncertainty of the future (and important feature of the real world economy often forgotten).

But Adam P. is also right what is often confused here is that "investment" in housing usually actually means speculating in land prices.

"...comes nicht from...". Been living in Germany too long? ;) ..kommt nicht von..

Yep. I remember reading other micro guys playing with that theory. Many consumer durables (skis, canoes) are complements with leisure. I think it helps explain labour supply curves being inelastic, or backward-bending.

I wonder how useful it is to divide AD into C+I+G. In practice, the division between C and I is between "stuff that households" and "stuff that firms buy".

Nick,
I think that leisure theory is more robust than just talking about recreation goods. In the past one member specialised in providing that leisure, it was that important. I think we overestimate greatly the value of "income" in two income households. There has been a lot of substitution going on, and uncertainty and the price of land are the driving of factors.

OK. I would perhaps call that "home production" rather than "leisure". You grow your own veggies, and cook your own meals, rather than eating out. Clean your own home rather than have cleaners in. Consumption of home-produced goods like that would probably be a substitute for consumption goods bought in the market.

Home production is excluded from GDP figures. (Except for an allowance for the services of the home you own). It ought to be in there (except it's hard to measure) if you want GDP to include all goods produced. But for short-run macro theory, it ought to be excluded, if you see the recession (as I do) as a problem with the monetary exchange economy.

Nick,
that is not exactly what I meant. Anything you consume, takes time. A family as a unit can specialise internally in that required time, the breadwinner treating the consumption utility of other family members as part of his own utility function. Trying to do without less that time, means you have to buy even more goods and services from the market, and it suffers from diminishing returns. And yes, as a bonus, the model is robust with regards to household labour being in or out of the market.

Oops
Trying to do with less of that time, ...

And Nick, is winning utility from say skiing or canoing different in principle that winning utility by growing and consuming your own vegetables? You still commit time, skill and effort to produce a result.

General Principle - the closer you look at apparently clear distinctions the more abitrary they look.

reason: I can think of market substitutes for growing my own vegetables, but not for canoeing. (I can pay someone to grow vegetables for me, but not go canoeing for me). But even here, if you push it, they might not be the same good. Part of the utility I get from eating my own veggies is due to the pride I take in having grown them myself.

Agreed. I can only think of two non-arbitrary distinctions:

1. Market vs non-market production.
2. Consumption vs investment (do the benefits come right now, or later?). But even in C vs I, consumption seems to be just a limiting case of investment, as the benefits come closer and closer to the present.

Yes,
that is why I like the "leisure" theory of value, the idea that what is bought and sold in the market is not really the end product, but an intermediate product that still requies input from the consumer to be something of value. The only exception to this might be pure positional goods (e.g. a Rolex), but even in this case you could argue the input from the consumer is psychic. Then some of my favourite confusions - e.g. between (real) productivity and (deflated) marginal revenue and between price and value and easier to avoid.

... are easier to avoid.

P.S.
(2) Above YES!!! Exactly the point.

P.S. Have you ever thought about the fact that as a society we are massively over capitalised (we have many, many machines that are used at a fraction of their capacitiy). That we are amazingly inefficient with our use of time (many services having to provide capacity for peak hour rushes that is mostly not needed) for a society that nominally seems obsessed with efficiency. Why?

"Have you ever thought about the fact that as a society we are massively over capitalised (we have many, many machines that are used at a fraction of their capacitiy)."

Yes. Once, many years ago, I wrote a draft of a paper on just that topic. There is a massively high unemployment rate of capital. Right now, my car, bike, canoe, bed, etc. are unemployed. Most of my capital goods spend most of their time unemployed. The same is no doubt true of capital goods in the everyday sense, i.e. firms' machinery.

In fact, when you look at it this way, labour has a very low unemployment rate compared to other resources.

Is this inefficient? No, not necessarily. Fire engines have a very high unemployment rate. Most of the time they are just sitting there, doing nothing. If fire engines were perfectly and instantly mobile, or if fires were perfectly predictable, and the law of large numbers applied, we could manage with probably only 1% of the existing number of fire engines.

Some neighbours share lawnmowers, to reduce the unemployment rate of lawnmowers. But then moral hazard and transactions costs limit sharing.

You could call it a "reserve army of the unemployed", as long as you recognise it's not just human capital, and recognise that this is not a Marxian explanation.

The "economy" consists of a large number of actual and possible investment projects. Each project causes disutility at some point(s) in time, and utility at some (other) point(s) in time. Some of those projects you can do yourself; others involve other people (markets). In some of those projects the time dimension is so short we can reasonably ignore it. We call those "consumption" projects.

Very Austrian. I expect I could squeeze in "roundaboutness" if I tried, and mention projects of various "orders". But to me the key dimensions are time, and whether other people are involved.

Nick, if the time distinction between consumption and investment is arbitrary, wouldn't "intent" be a more reasonable differentiator?

"Intent" to do what, pointbite? Live in it yourself, vs rent it out?

Nick, intent to consume the good vs. intent to use the good to consume even more later (produce something else of greater value, earn dividends, interest whatever). In which case saving becomes a sub-category of consumption (deferred to the future) and speculation becomes a sub-category of investment.

I'm still struggling with the idea that buying something is an investment just because it continues to exist the next day. Something about that just strikes me as a little odd, and too easy, certainly "investing" must require a reasonable expectation of gain, doesn't it? I don't think fluctuations in utility are good enough because there is no case I can think of where somebody would buy something with the expectation his utility will drop, so it's kind of a moot point.

I understand the whole continuous housing argument, but that means almost everything that is used continuously or repeatedly is an investment regardless of context. How is buying a house instead of renting an apartment different from buying a stereo instead of attending a concert? I'm sure your wife will be pleased to know that stereo is an investment because it works every day ;) But don't get too excited, because that could mean expensive furniture and clothes are an investment and cheap furniture and clothes are consumption because the former last longer. For the sake of men everywhere, burn this thread when you're done reading it!

Please tell me I'm missing something, because it all seems like consumption to me. You can have intelligent consumption vs. unintelligent consumption, but it's all consumption. It's definitely not going to yield any production... and isn't that the point of investment? How can something be an investment if the only possible outcomes are a reduction of wealth by X or 2*X, over different timeframes?

pointbite:

I buy a cow. It produces milk. I could sell the milk or consume it myself.

I buy a house. It produces shelter. I could sell (rent) the shelter or consume it myself.

Etc, for stereo and furniture.

Those are all investments.

The main point I made in my post was that when we invest and plan to consume the returns to that investment, (as we commonly do when buying a consumer durable) it is both an investment and a decision to increase consumption.

Producing milk is exactly my point, that's an investment. Buying a house is like eating the cow.

This is a subject I've been getting headaches over for years now. I think the biggest problem is in the word 'investment', and how that word is employed. In the United States when we say 'housing investment', we mean to say that purchasing a house is like purchasing a stock, and we therefore expect real profit returns as a result (this is how we've run into so much trouble). To call housing an 'investment' based on the understanding that it is a personal one without commercial benefits is the better spirit of the description. Most (at least in the U.S.) try to view home ownership from both 'investment' standards, and that is why our market crashes and our homeless are currently comprised of formerly middle class skilled Americans.

As a world population, we have to exercise extreme caution when defining terms like 'investment'. Just look at the mess the United States has made of itself, largely over the simple matter of real estate.

A house really is a used car, but is rarely valued by that standard. There is an inherent allure programed into the system which hints at wealth, regardless of condition. It is never the consumers who get rich though. Its the agents and the brokers and the banks because when a person sells their over-valued home for a profit, they buy another overvalued home at a loss. Its a vicious cycle with lots of promise and little carry through.

Price fixing is the standard, and it is unethical. In the U.S. it seems we dream up arbitrary numbers to attach to our houses in hopes that we'll make a million, but all we accomplish with this 'investment' process is the destabilization of a necessity. Making housing less attainable by attempting to capture windfall profits is not good for consumers or countries. All the practice does is concentrate low income populations into impoverished areas, leading to rising criminality, and contribute to homelessness, and restrict the economy proper only to the growth which is permitted with income left over after rental or mortgage payments. A 'western' view of 'investment' is corrosive and detrimental to society and to economy.

The very wealthy use housing costs to keep the middle and lower classes at arms distance. The middle class use price fixing to the same end, as they see it, but fail as the rich actually have the incomes required to support their expenses while the middle class must depend on what can be borrowed. This creates enormous debts which, as America is demonstrating, are easily accumulated but never paid. The middle class also use housing to attempt to keep the lower class in check, fearing low real estate values will bring crime into their neighborhoods. That practice perpetuates crime rather than reducing it. In essence, U.S. consumers use property value to establish elitism and discriminate, all at the cost of the entire nations economy, and for pursuit of only a few spare dollars.

pointbite: "Producing milk is exactly my point, that's an investment. Buying a house is like eating the cow."

No it isn't. Buying a house is like buying a cow. Living in a house is like drinking the milk. And the nearest analogy to eating the cow would be setting fire to the hose to keep yourself warm.

When you live in a house today, you still have a house that you can live in, rent, sell, or burn tomorrow.

When you drink the milk today, you still have a cow that you can drink the milk from , sell the milk from, sell the cow, or eat the cow, tomorrow.

A.W.: Owning your own home is like owning a stock, except: the dividend is a roof over your head not cash; all earnings are paid out as dividends; so unlike a stock (where some earnings are not paid out as dividends and those retained earnings lead to the stock appreciating) a house will normally only appreciate at the rate of inflation, unless you are skilled or lucky and get a bargain; it costs money to maintain a house.

Yes, a used car is a closer analogy than a stock, except that cars wear out in proportion to miles driven while houses wear out over time.

Or taking the cow as a pet.

Nick, are you seriously equating eating a cow to burning down your house? That's a bit absurd. When I eat a cow I take a resource that could have produced income and I consume it. When I live in a house I take a resource that could have produced income and I consume it. Sure the house lasts a bit longer than the cow, so maybe it's more like taking the cow as a pet. "Living in a house is like drinking the milk." No it's not, in one scenario after X days I have a cow and some milk, in the other I have a house that's worth a bit less (requires maintenance). In the first case my net worth increased, in the second it decreased. I can make more cows with my cow, I can't make more houses with my house. I don't agree with your analogy at all. Cow = wrench, house = car.

Assume milk goes bad after one day. Then the analogy is exact.

If I drink one day's milk production I can't sell that same milk, but I can sell future milk.

If I live in a house for one day I can't rent out that day's shelter, but I can rent out future shelter.

Cows require maintenance too.

Sure, cows breed calves, and houses don't breed houses. But calves drink some of the milk. Maybe I could rent out half my house to builders, in exchange for a share in the new houses they build.

Yes, if you live in the house and rent the basement, then the analogy works.

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