[Brakenshire]

The English Upper Class does have a long and storied tradition of rent-seeking. If you can extract so much value out of something like housing, it's difficult to see why you would get involved in anything risky and technical.

[roel_v]

Why is real estate investing 'rent-seeking' and buying a tech company an 'investment'?

[skewart]

Real estate investing is not inherently rent-seeking. The fact that the word "rent" is in "rent-seeking" and we pay "rent" for an apartment seems to often cause some confusion.

Rent-seeking involves seeking out regulatory or other non-market protection for a stream of revenues. Taxi medallion companies lobbying city governments to restrict the supply of medallions is a textbook example.

That said, a real estate investor certainly could engage in rent-seeking behavior. For example, they could lobby a city to restrict new development, thereby reducing competition and protecting or increasing their revenue. In practice, companies that invest in stable real estate assets (e.g. REITs) typically don't do this. The incentive structures in the industry don't really support it. I'm sure it does happen in some cases though.

Now, to be fair to the GP comment about the "English Upper Class" it's not entirely unreasonable to accuse them of rent-seeking for their land holdings. With very broad brush strokes, there are a lot of "Upper Class" English people who own a lot of incoming-producing real estate who also push very hard for historic preservation laws that restrict new construction - e.g. Prince Charles and his friends.

[morgante]

> For example, they could lobby a city to restrict new development, thereby reducing competition and protecting or increasing their revenue.

You don't have to be the one to create a rent-seeking opportunity to be the one who benefits from it.

The fact that many desirable locales have strict zoning regulations to restrict development absolutely turns homeowners there into rent-seekers. They're exploiting a stream of income which only exists due to government intervention.

[skewart]

For sure, homeowners are very often rent-seekers. In fact, I would be willing to wager that there are a lot more rent-seeking homeowners than professional real estate investors.

I took the question in the thread to be more about real estate investment firms than individual homeowners.

[pjc50]

The tech company wins or loses based on innovation (unless it goes the monopoly route, in which case it's back to rent-seeking).

Real estate is scarce, inherently exclusive by location, and limited in supply by planning law. The amount of money returned by real estate is totally out of proportion to the work involved in its maintenance.

[DominikR]

> The amount of money returned by real estate is totally out of proportion to the work involved in its maintenance.

And what is the work involved in building a housing unit? If you build one in most of the EU capitals today you can expect to get your investment back after 30-40 years if you rent it out. (that's why most just sell the housing unit)

Would you make an investment in a company expecting to get your investment back after 30 years? I certainly wouldn't because I want to make profit while I'm still alive.

If housing units would grow like trees without human interaction then you'd be right, but each one of them had to be built in the first place.

[pjc50]

The returns aren't in the rent, they're in the capital gains. More gains than the stockmarket. This is why people are buying the units, especially from overseas. Sometimes they're even left unlet.

[skewart]

FYI, the vast majority of rental real estate is owned by investment firms who buy and sell entire buildings, not people buying units.

In general capital gains in an otherwise depreciating asset are tied to outsized increases in the revenue stream that asset produces. To put it another way, the increase in value is fundamentally driven by an increase in the number of people who want to use the building or the neighborhood - it's driven by a real utilitarian value that the asset does provide, or has the potential to provide for people.

If you think that real estate always goes up in value (above inflation) I would wager you've spent most of your life in the big cities where an increasing number of people want to live. I also have some lovely properties in Buffalo and Detroit that you might be interested in.

Of course, sometimes, in a frothy market, both professional firms and random individuals speculate on real estate, looking for capital gains disconnected from any underlying fundamental increase in utilitarian value. There are plenty of half-finished subdivisions in rural Florida that show how real this phenomenon is. However, it's an aberration, and it's fundamentally unstable so it doesn't tend to last for long.

Drawing conclusions about real estate markets in general from speculative bubble conditions is similar to drawing conclusions about technology companies from day trading on the Nasdaq in 1999.

[DominikR]

> More gains than the stockmarket

Sorry, but this can't possibly be true. Since the 2008 crash the Dow Jones for example tripled in value while the San Francisco housing market gained 40%.

It is very rare that the real estate market outperforms the stock market.

[roel_v]

So if I have, say, a machine that makes t-shirt more cost-effectively than my competitors, your claim is that I'm 'rent-seeking'? Do you think that because it's not innovative, or because I'm the only one with such a machine?

(This is a trick question. Before you answer, please make sure you actually know what 'rent-seeking' means, because it's obvious that most other commenters don't.)

[pjc50]

"Rent-seeking involves seeking to increase one's share of existing wealth without creating new wealth" - WP.

The more efficient T-shirt machine produces more with less, therefore the overall resources available go up. Not rent-seeking.

Having a patent on the machine, and/or attempting to sabotage the creation of similar machines? Rent-seeking.

[daemin]

Because owning a piece of property and charging for it is just extracting value out of something static. If investing in a company building or producing something you're helping create value.

[DominikR]

This would be the case only if the piece of property was always there and no one had to build and maintain it.

For houses this is not the case. You actually have to produce houses and you have to constantly work on them so they don't collapse after some time.

[daemin]

Yes, the property has to be maintained, but generally the cost and effort of doing that is minimal, and the usual things that break need to be fixed by the person living there, not the landlord.

[skewart]

I think you might be comparing apples and oranges when comparing investing in a company and investing in real estate. There are different ways to invest in a company and different ways to invest in real estate.

Investing in a company to help fuel its growth, like VCs do, is analogous to investing in a new development project. There are lots of firms that provide equity investment to developers for new construction. Much like VCs these firms are interested in helping to create something new to meet market demands. Also like VCs they are typically looking for an exit event, where they benefit from the sale of the recently developed property.

The tech analogue for being a landlord - holding on to a stable asset and maintaining it - is holding on to an already profitable business and just maintaining it. For example, there are lots of SaaS businesses that have a decent number of customers and the owners are happy to just do the minimum needed to maintain the code and handle customer service requests. You can buy and sell these businesses as an investor much like income-oriented real estate investors buy and sell fully-leased apartment and office buildings. These investors are not helping to create something new in a direct way.

However, those income-oriented investors do create a market for stable assets, be it a Midtown Manhattan office building or shares of GE. They aren't directly investing in growth, but they are providing the incentive for growth. After all, while an early stage growth investor might be happy to know that they can sell their stake to another growth investor, as a company gets bigger and bigger its room for growth tends to diminish, and growth investors become less interested in buying it. But the market for its shares doesn't disappear. That's because there are investors looking for stable cash flow, even if it's from a static asset - be it an apartment building from the 1970s or Oracle.

[DominikR]

This is not a matter of what you feel or believe, it isn't rent-seeking by definition, period.

Rent-seeking is everything where you extract value by not being productive in the sense of creating new wealth.

Building a house is damn expensive and creates a lot of new wealth, while maintaining a house preserves the wealth you created before.

[daemin]

It is not something that I feel or believe, it is factual. I know this because I am both a renter and a landlord. I inherited a property which I am now renting out, and except for a few major fixes, I have left the property pretty much as is while collecting quite a bit in rent from the occupiers.

In the same vein I could just purchase a property and rent it out, in doing so I have not created it - it already existed - but now I am just extracting value from it. Same as the bank will do to me with the mortgage.

[itp]

Because one is literally the definition of rent-seeking[0], and one is not.

[0] https://en.wikipedia.org/wiki/Rent-seeking

[roel_v]

Despite having linked to literally the first google hit on 'rent seeking', you obviously don't even know what it means.

[DominikR]

Did you care to read the content of the link you posted?

Because then you'd know that housing is not rent-seeking by this definition as there clearly is a contribution to productivity.

Houses have to be built, maintained, developed and advertised on the market. And there are a lot of risks in this business.

[wavefunction]

Housing ownership _can_ be rent-seeking, as long as rentier behavior is applied to the stock.

For example, home-owners in San Francisco who actively prohibit new construction are rent-seekers.