Real Estate as Speculation, Symbol, and Safety Net: Why Property Means Something Different Across Cultures

Houses are treated similarly to all other investment types; the reason why an individual purchases their home is that the expected value (or potential earnings) of purchasing that property (i.e., rental income saved plus capital gains – less the cost associated with selling/buying), exceeds the potential returns available from alternative investments. If we discount the potential future earnings associated with a property and compare those discounted values to the yield on U.S. Treasury bonds, then a purchase price for that property can be calculated.

This economic model works fairly well in developed countries where houses represent just one type of financial asset available to individuals and households have a diverse portfolio of assets. However, when applied to families living in developing cities such as Addis Ababa or Dubai, this model leaves much to be explained while missing even more. Houses do not compete directly against stocks within most household budgets. A large percentage of households in these locations do not have a stock portfolio because no portfolio exists. For many families, the property being purchased is typically the only physical asset owned completely. As such, this fact alone changes the question being asked when someone purchases a piece of land.

Robert Shiller’s Observations On Why Prices Move On “Stories” More Than Fundamentals 

While Shiller’s contribution to the study of housing did not include a better pricing mechanism for housing, his major contributions were two-fold: first, the realization that the movement of housing prices is significantly influenced by stories told by market participants. In addition, Shiller concluded that asset bubble growth occurs due to contagion caused by similar stories that are spread from person-to-person; regardless of the actual state of current wage levels and rents. Once sufficient numbers of investors believe a particular story about housing (e.g. “the future belongs here”), this belief creates evidence to support the story (increasing housing prices). This self-reinforcing effect is likely to continue until investors lose confidence in the story.

However, Shiller’s conclusions regarding how housing prices move based upon narratives are not limited to speculative bubbles. For example, in some cities of the Gulf states, the narrative may be something to the effect that “this is where the future is created.” While this story may be viewed as somewhat irrational, it is certainly not solely driven by fundamental valuation calculations. Similarly, in some areas of Addis Ababa, the prevailing narrative is something akin to “they cannot print money so land is where you should put your money.” Again, while this narrative does contain elements of rationality, it is also not primarily a function of calculating expected returns.Property as Inheritance InfrastructureIn much of Ethiopia and the Gulf region, a house or a plot of land isn't bought so much as built into the family over a generation. It gets extended, divided as well as argued over and handed down. In the case of the absence of pensions, deep insurance markets, or trusted financial institutions, property is quite often the sole mechanism through which a family’s economic position actually transfers from one generation to the next. Owning a property signals that a family has arrived, and it provides a physical fallback in case of things going wrong, somewhere where children can return to, land that can be sold in an emergency, a structure a family literally adds a floor to as it grows. Why the Numbers Don’t WinEven where people can run the calculator, they often don't act on it, and behavioural economics explains why. Loss aversion means the pain of losing an ancestral property looms larger than the gain from selling it and investing the proceeds elsewhere, so families tend to hold on to underperforming land or buildings long after a spreadsheet would say to sell it. A property also functions as a status good: its value for the owner isn’t only what it generates in rent, but what it signals to everyone else, and that signalling value doesn’t discount the way cash flows do A house which never appreciates in the market can still be “worth it” for what owning it says. None of this is irrational, is it rational given a fuller account of what the asset is actually for.