I’m Forever Blowing Bubbles

Ladies and Gentlemen! I give you the magic money tree, the perpetual motion machine, the fountain of eternal youth, the philosopher’s stone, the goose that lays the golden egg, the gift that keeps on giving. Despite all the laws of economic gravity, house prices keep rising:

Express

But why should this be, when real incomes have fallen drastically, there’s high unemployment and GDP still hasn’t recovered from the recession? Well the government has pretty much thrown the kitchen sink at keeping prices up. But should they? Are high house prices really so important, especially compared to other pressing problems we have.

Here’s a couple of thought experiments which show why I think the obsession with house prices is silly:

  1. I know an easy way of doubling house prices. Let’s pull every other house down. Of course this is a ridiculous idea – yes, those still with houses would find them more valuable, but we’d have a lower standard of living as a country because of it. High prices are just a reflection of scarcity – more people want houses than there are available. They are a way of showing we don’t have as many homes as people want, and therefore we don’t have the standard of living – those real assets that give us somewhere to live, and raise a family and be near work – that we could have.
  2. “Food Prices Keep Rising” – imagine that was the headline. Would that be seen as a good thing? Of course not. Housing, like food, is something we all need. And surely the important thing is how much housing we get for our money, not how much money we need for our housing. The ideal should be that we can all buy mansions for £1, not a shed for £1 million.

There are of course reasons why high house prices are bad:

  1. The more we have to spend on it, the less we have to spend on other things.
  2. It prevents young people from moving out and starting new families.
  3. It prevents people from being able to move to where there are better opportunities for work and so forth.
  4. Governments have to spend a huge amount on housing benefit to subsidise people to live as housing would be unaffordable otherwise.
  5. It encourages too many people to think the way to get rich is to buy a house and wait, rather than having to find some useful good or service to provide for others. It never ceases to amaze me that the same newspapers who become incandescent at the thought that people receive £70 a week when they’re not working become ecstatic that people can gain £1,000’s in their assets for doing an equal amount of sweet F.A.
  6. The same forces that keep homes pricey keep land prices pricey more generally. Imagine someone wanting to build a new factory or shop. If the land they need to buy to start building is expensive, the investment becomes correspondingly more costly and so may not happen, snuffing out economic activity before it happens.
  7. House price bubbles (when prices keep rising because everyone thinks they will rather than being rooted in fundamentals) are behind an awful lot of economic misery. Japan still hasn’t really recovered from a real estate bubble popping back in the late 80’s/early 90’s. One of the primary causes of the recession we’re still in was a housing bubble in the U.S. Places like Ireland and Spain are suffering from similar causes. And Britain has had similar experiences.

That’s not to say there aren’t people who benefit from higher prices, they get a feel-good factor and can borrow more money. They get a bigger capital gain when they sell up, but of course the next house will be more expensive so that gain won’t go so far. Housing is not net wealth.

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2 Comments

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2 responses to “I’m Forever Blowing Bubbles

  1. Pingback: Postscript: Some More Thoughts On Help-to-Buy | Steven Clarke's Blog

  2. Pingback: Community Land Auctions | Steven Clarke's Blog

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