The Great Transfer
Every year, in every Western country, one generation makes a great transfer to pay a debt to the past.
Dear readers,
With their permission and my gratitude, I’m sharing the article I wrote last week for eldiario.es. I don’t usually do cross-posting, except when I feel it’s essential — and in this case, it is. Like the medieval levy, like the foreign debt of the late twentieth century, and like migrant remittances in the early twenty-first, “the great transfer” is the economic phenomenon that defines this historical moment.
I hope you enjoy it!
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:: Hijos del optimismo (Children of Optimism) ::
“There comes a point where it feels less like you’re paying someone for a home and more like you’re paying them a salary.” A few days ago, Ainhoa Díaz and Raúl Sánchez published an analysis in eldiario.es on the income transfers that tenants make to landlords in Spain every year.
It is extraordinary, essential work — for the testimonies it includes, for the data it provides (among them the figure that tenants collectively pay €28 billion a year), but above all because it puts a name to the central economic reality of twenty-first-century society: the great transfer.
Every year, in every Western country, the same operation repeats itself: one part of the population hands another a growing percentage of its income in exchange for having somewhere to live. As Díaz and Sánchez explain, most of the payers are young and poorer, while most of the recipients are older people with twice the income. For hundreds of millions of people, that transfer is the central act of their economic life — the primary concern, the one that orders all other decisions: where they’ll live, whether they’ll study, whether they’ll eat meat this week, where they’ll go on holiday, whether their children will have tutoring.
What the work of Díaz and Sánchez doesn’t quite reach is that the great transfer doesn’t end with rent — it isn’t limited to tenancy. Whoever buys a flat today for six, ten, or twenty times what the previous owner paid is doing exactly the same thing as tenants: making a great transfer to the seller, only with the bank’s help and spread over thirty or forty years of mortgage payments.
And one might think this has always been the case — that every generation had to invest part of its income to pay for housing; that it’s normal for people to pay for their flat. Or that those who worked hard to buy their home have the right to receive a return on their investment. There is a moral story we have been told many times about how our parents made sacrifices and saved to buy a flat (and therefore, we are supposed to read between the lines, they have the right to be paid much more for that flat than it cost them).
But what should that return actually consist of? The fair thing would be for each generation to pay for housing what it cost at the time, adjusted for CPI — as is done with pensions — or, being more generous, adjusted for whatever wage growth or per-capita GDP growth has occurred.
What has happened is something else entirely: house prices have grown far faster than any of those benchmarks. And that difference has nothing to do with anything the owners have done: it was produced by a political pact that wanted a generation to be able to get rich by buying a home.
This is what the great transfer consists of: today’s adults materializing the promise of progress that the state made to their parents forty or fifty years ago — even in an economy that has spent decades failing to grow enough to deliver it.
To make that promise real, current generations of workers end up paying up to eight times more for their homes than those who bought in the twentieth century. And this is why households today work more hours than they did fifty years ago, despite all the productivity gains that have occurred in the meantime.
Far beyond an obvious moral problem, the great transfer presents two enormous challenges for society. The first is plain to see: it is unsustainable — it is a gigantic Ponzi scheme. Although it has become received wisdom that house prices will never stop rising, the reality is that there is a physical limit to the number of hours a family can dedicate to paying for its home. Sooner or later — I would say sooner — prices will stop rising at this rate, the equation will flip, and a generation will not be able to sell for more than it bought. Some data on the global property market suggest we may be very close to that moment.
The second problem, less obvious, concerns the world we are making. Forty or fifty years ago, when the current housing stock was built, buying a home was an act oriented toward the future. Money went to the builder, to the wages of the workers putting up the building, to the architect who designed it, to the materials being used, to the furniture that would fill the rooms. Almost nothing was paid for the land — which was often publicly owned and had been granted — and no idle capital was waiting to take a cut of the profit, since financing often came from savings banks and other non-profit initiatives. The investment our parents made set companies in motion and drove a country forward: it was a transfer a society made to itself in order to keep advancing.
Today, property transactions set nothing in motion. Every time a young person signs a mortgage, the money they put on the table goes to reward something that happened many years ago: the return on the original buyer’s capital, or the current lender’s, or the landowner’s.
The stagnation of the European economy — all the more glaring given that science, communication, culture, and many other areas of life continue to advance — cannot be explained without accounting for this phenomenon. The great transfer has become a way of paying a — fictional — debt to the past. One that is leaving us without resources to invest in what is yet to come.
If you’re interested in the content of this newsletter, you’ll love my first book, “Hijos del optimismo” (Children of Optimism). It tells the story of the changes that have taken place over the last 25 years and which we have not yet managed to fully understand
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