Levered assets, such as real estate, tend to have prices that are correlated with interest rates. Lower rates usually translate into higher asset prices. We are living through this kind of environment right now. And so it is generally valuable to have a view on where rates might go next.

To do that, it can be helpful to look back at history. And a lot of the time, that look goes as far back as the second half of the 20th century. I wasn't buying real estate in the 1970s and 1980s, but I am often reminded -- by people older than me -- that this was a period of high inflation and high interest rates.

But what about an even longer period of time?

Paul Schmelzing (visiting researcher at the Bank of England) has a pioneering working paper that was published last year which looks at global interest rates over a 707 year time horizon. His research spans the period of 1311 to 2018 and uses archives and many other sources to try and reconstruct annual rates across the world's advanced economies.

Below are two charts from the paper that I found interesting. The first represents the data that was used to weight long-term debt yields across the various advanced economies. My how things change when you take a long enough view. It also shows the share of advanced economy real GDP that is captured by the study (it's about ~80% -- the red line below).

The second chart shows the headline global real rate from 1317 to 2018. And what Schmelzing discovers is that even when you look across many different monetary and fiscal regimes, real interest rates have never really ever been stable. In fact, when you look as far back as the 14th century, real interest rates have on average declined about 0.6 to 1.6 basis points per year.

So part of his argument is that what we are seeing today maybe isn't all that strange; it's actually expected. For a copy of the full working paper, click here.

Images: Bank of England

This morning, I am looking at the following chart of average home prices in the Greater Toronto Area:

It’s from this Globe and Mail article.

These are staggering numbers. The average price of a detached home in the suburbs (905 area code) increased 21% year-over-year. In the city (416 area code), the increase was 19.6% YOY. These numbers are almost unbelievable.

The article focuses on low supply (decrease in listings) and high demand. And that is certainly a big part of what’s going on here in this city, as well as in many others.

But of course, the backdrop to all of this is our low / zero / negative interest rate environment.

Larry Summers has a great post on his blog (which I discovered this morning via Fred Wilson) that talks about this “remarkable financial moment.” In some instances, real interest rates are actually negative! (You should read his post.)

There are always people threatening that interests rates just have to go up. But Larry, as well as others, continue to argue that natural real interest rates are likely to remain close to zero going forward.

Fred mentions Albert Wenger on his blog this morning and I have written about him before as well, here. In his book World After Capital, Albert argues that capital is no longer the scarce resource of our time. Instead, it has become attention.

If you believe all of this to be true, then perhaps the numbers at the top of this post aren’t so unbelievable after all.