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Well it has an imputed cash flow if you choose to live there yourself, and a real cash flow if you rent it out. Which makes it different from other non-investment investments, e.g. gold bullion.
By analogy, imagine investors in Walmart had a choice between (1) receiving cash dividends; or (2) receiving an equivalent amount of free product from the shelf at the local Walmart store. Whichever you choose, it's still an investment that generates returns.
I agree -- if you separate the value of the house structure from the value of the underlying land. On human timescales, the land isn't going to depreciate due to entropy. And if the land is convenient to a significant economic or cultural center, it may very well appreciate.
Well, at least for now you don't need to feel bad for me. I made the calculation that (1) it was roughly the same cost to make mortgage, tax and maintenance payments for 20 or 30 years, followed by maintenance and tax only, than to pay rent for the same time period; (2) buying would hedge against the risk of serious inflation in housing prices, which is a real risk; and (3) buying would spare me the headache of dealing with a landlord cuts corners on maintenance and repairs. The fact that I now own a house which would go for a lot more than what I paid is a nice bonus, but it's not something I was counting on.
What about natural scarcity? There is a natural limit to the number of houses with private yards which can be built such that they are convenient to one of the big 3 cities in the US.
Well that's one of the big questions posed by modern technological advancement. In the West, there is now what amounts to an unlimited food supply. So wealthy people eat steak at Michelin-starred restaurants while poor people eat hamburgers at MacDonald's. Poor people may become obese, but I doubt they feel wealthy.
In the US, the poorest people can easily afford a wristwatch which is more accurate and reliable than a Rolex or a Patek-Phillipe. And yet rich people spend tens of thousands of dollars on fancy watches while poor people (I assume) don't feel particularly wealthy wearing $15 drug store watches.
So it seems that perhaps wealth and scarcity are inextricably intertwined. That even in a state of abundance, people find ways to distinguish the wealthy from the non-wealthy. So I wouldn't be so quick to dismiss real estate as an investment, either in the cash flow sense or in the speculative sense.
This was the original dividend in 1610. The Dutch East India Company gave a a quantity of spice to every shareholderwho personally showed up at a building to get a scoop. They were spice-rich so as a treat shareholders get a sample.
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