Lower house prices can make you happy

[yieldmatters]

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/26/ccom126.xml&CMP=ILC-mostviewedbox

All - I thought this was a fantastic article (from the UK). Sums up my view on the social / macroeconomic side exactly.

If, for the moment, you look through the veil of monetary values and concentrate on the real world of production and consumption, you will see that nothing real is changed by higher or lower house prices. Societies no more enrich themselves by buying and selling each other's houses at higher and higher prices than by everyone agreeing to take in each other's washing.

But what about all the fortunate millions of people who have been personally enriched by higher house prices? Reading this, you may already be feeling distinctly upset by what you have just read. In that case, stand ready to be outraged by what you are about to read.

Never mind, I'll risk it. That wealth amassed in the housing market is part illusion and part redistribution from other members of society.

 

[Ausprop]

I buy that argument, tho it needs to be firmly tied to: rents need to reflect the economic reality of the consumer durable being consumed. this will cause pain amongst the generally poorest slice of the community. If house prices came off say 30-40% and rents doubled we would be returning to a reasonably efficient market place

 

[Ausprop]

actually one point worth noting that in the Oz context the mortgaged funds were primarily foreign, vendors have then spent a portion of that. so asset deflation has turned what should have been short term debt into a long term debt with no easy way to repay it

 

[plusnq]

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/26/ccom126.xml&CMP=ILC-mostviewedbox

All - I thought this was a fantastic article (from the UK). Sums up my view on the social / macroeconomic side exactly.

Should be changed to ALL wealth amassed is part illusion and part redistribution from other members of society.

 

[yieldmatters]

Should be changed to ALL wealth amassed is part illusion and part redistribution from other members of society.

So the drastic improvement in living standards (wealth) over the last 200 years is part illusion and part redistribution? It looks and feels pretty real to me so not sure it is illusion. And if it is redistribution then there must be some mighty poor people around!

All wealth over the last 10 years? ... maybe. Since the I.T. revolution I have not seen much in terms of real productivity gains. Just a big house price bubble.

 

[alexlee]

Should be changed to ALL wealth amassed is part illusion and part redistribution from other members of society.

Yeah, but if everyone believes in the illusion (the Matrix theory) and I'm the recipient of said redistribution..... why should I be complaining?
Alex

 

[plusnq]

So the drastic improvement in living standards (wealth) over the last 200 years is part illusion and part redistribution? It looks and feels pretty real to me so not sure it is illusion. And if it is redistribution then there must be some mighty poor people around!

All wealth over the last 10 years? ... maybe. Since the I.T. revolution I have not seen much in terms of real productivity gains. Just a big house price bubble.

Have a think about it? Where does the increased wealth come from?????

 

[boomtown]

If, for the moment, you look through the veil of monetary values and concentrate on the real world of production and consumption, you will see that nothing real is changed by higher or lower house prices. Societies no more enrich themselves by buying and selling each other's houses at higher and higher prices than by everyone agreeing to take in each other's washing.

Meh bollucks.

There are massive industries created around buying and selling each others homes at higher and higher prices.

Real estate agents for starters depend on a virtuous spiral ever increasing wealth. The entire renovation industry which brings housing in unliveable condition back into the marketplace depends on the same virtuous spiral. I am sure there are plenty of other examples people could come up with.

The author of the article sounds like someone who has been up the ivory tower too long.

 

[steveadl]

There have been millions of people whose lives have been distorted by property considerations - people forced to move, or prevented from moving, forced to commute long distances and/or live apart from their families, people who have refrained from having more children, or indeed any at all, because they could not afford decent accommodation. As house prices fall, these people's life choices will be different.

I'm not a theoretical mastermind like this bloke, but what he fails to look at is the simple demand and supply equation.

Let's take London for example. Say that there is a massive crash tomorrow and all properties throughout London experience a 30% fall back to "realistic" levels where yield become very attractive and people are no longer put into harship to afford the house (hell make it a 50/60/70% drop for sake of argument).

What happens next?

Everyone clamours to buy those houses in Notting Hill (from memory that's a ritzy suburb isn't it?) and all the other desirable areas near the city that have suddenly become affordable for the "every man".

The simple fact remains that these houses are so highly priced, because pretty much everyone wants to live there. And if the price was cut by 30% - then everyone and their dog would want to buy there, and that just can't happen.

Prices will rise again until the amount of buyers is sufficiently thinned out to only accomodate the buyers who can afford the area.

 

[yieldmatters]

Have a think about it? Where does the increased wealth come from?????

What increased wealth? Over the last 200 years or more recently or for houses especially?

Over the last 200 years it is caused by massive productivity improvements in the economy.

For houses - there is no increased wealth. One man's gain is another man's loss. Generally (but not exclusively) it is the first home buyers that have lost.

 

[oc1]

What increased wealth? Over the last 200 years or more recently or for houses especially?

Over the last 200 years it is caused by massive productivity improvements in the economy.

For houses - there is no increased wealth. One man's gain is another man's loss. Generally (but not exclusively) it is the first home buyers that have lost.

So it's a zero sum game is it now????

 

[Ausprop]

What increased wealth? Over the last 200 years or more recently or for houses especially?

Over the last 200 years it is caused by massive productivity improvements in the economy.

For houses - there is no increased wealth. One man's gain is another man's loss. Generally (but not exclusively) it is the first home buyers that have lost.

don't forget it is a market tho and the housing supply is not static. increased prices sees increased supply

 

[plusnq]

Over the last 200 years it is caused by massive productivity improvements in the economy.

For houses - there is no increased wealth. One man's gain is another man's loss. Generally (but not exclusively) it is the first home buyers that have lost.

And how was the productivity increased? Was there a transfer of wealth involved?

 

[yieldmatters]

And how was the productivity increased? Was there a transfer of wealth involved?

No - new wealth. Hence the word "productivity" - producing more with less.

 

[Peter Parker]

No - new wealth. Hence the word "productivity" - producing more with less.

I have thought it odd that if the cost of producing X (let's say manufactured goods) is lowered, then that's counted as an increase in productivity. More is done with less, people's buying power increases and standards of living rise.

If it's an exportable item we can earn more foreign exchange as we grab market share from less efficient producers, and if the price is lowered sufficiently, actually create extra demand (think of computers and big screen TVs). Hence it's counted as an economic 'good' by all and sundry.

It seems to be a different story in real estate. Almost no one lauds falling real estate prices, even though it might reduce business costs if you want to buy your premises. Instead low prices are considered as reflecting poor demand, tight credit and a recession.

It would be interesting to try to apply concepts like productivity and efficiency to real estate values.

Property reminds me of a regulated industry like taxis. To become a taxi operator you need a taxi licence. The number of these is fixed and as a result they are very expensive. My free-market instincts would be to increase the number of licenses, which would reduce their value. Existing holders would suffer big losses in equity (like what would happen to real estate if banks stopped lending or only lent 50% LVR), but those joining the industry would gain, as would passengers. Taxi drivers are paid abysmally, but new operators entering the market would keep more of their income than repaying the bank (if they borrowed to buy a taxi licence).

Property is more secure, but like taxi licences, its price is still socially determined. Policies that would 'improve property productivity' would cause loss of equity amongst existing property holders (unlike taxi licencees, this is a majority of households). As a result the consequences (negative equity, loss of confidence, tighter credit) would be too radical for any legislator to contemplate, since more people have vested interests in maintaining existing property values than possible higher future productivity.

Vested interests are too strong, and promoters of economic growth will pursue some types of productivity gains more vigorously than others; in the above examples, low manufacturing costs is considered 'good' (as a mark of efficiency), while high property prices are viewed as an expression of strong demand rather than an expression of inefficiency (which it also is).

Our finance and tax structures also has peculiar biases. Examples are seen in the treatment of labour versus capital; capital plant and buildings has depreciation allowances, while labour is saddled with payroll, workcover and income taxes.

The overall effect is to reward capital and capital accumulation more than labour, though both are required for an economy and society to function.

 

[jingo]

An excellent post spiderman.

Regards Jason.

 

[plusnq]

No - new wealth. Hence the word "productivity" - producing more with less.

Really? As opposed to comparitive advantage? If the market is say 1M bushels of wheat and my local producers become very efficient and meet all local need...then the lesser producers will not be able to compete and therefore sell less. A transfer of wealth is created not new wealth. We make furniture in milling factories with laser cutters where once craftsmen plied their trade. A transfer of wealth....not to mention social capital. After all we can only fit so many tables and chairs in our houses. Most of the productivity gains are in fact a function of cheap energy and technology transfers, each of which transfers wealth from the old paradigm to the new. Horse and cart to truck and air freight, wood burning to coal to electricity. How many typewriters are sold these days?

 

[yieldmatters]

An excellent post spiderman.

Regards Jason.

I agree - nice.

 

[yieldmatters]

Really? As opposed to comparitive advantage? If the market is say 1M bushels of wheat and my local producers become very efficient and meet all local need...then the lesser producers will not be able to compete and therefore sell less. A transfer of wealth is created not new wealth. We make furniture in milling factories with laser cutters where once craftsmen plied their trade. A transfer of wealth....not to mention social capital. After all we can only fit so many tables and chairs in our houses. Most of the productivity gains are in fact a function of cheap energy and technology transfers, each of which transfers wealth from the old paradigm to the new. Horse and cart to truck and air freight, wood burning to coal to electricity. How many typewriters are sold these days?

That's a distribution of wealth issue. It's still new wealth though once you net off the winners and the losers. If it wasn't then we would not have progressed at all in 200 years ... that's not what you are arguing is it? We have progressed haven't we?

If every house in Australia doubles in price then everybody feels twice as rich but the same houses are sitting there - therefore no new wealth. That is the point the writer is making in the article. I agree with him.

 

[ianvestor]

No - new wealth. Hence the word "productivity" - producing more with less.

Here's a little example I came up with of how wealth is created:

Imagine a society where the follow items are valued as such:

Slice of bread: 20 cents
Slice of cheese: 20 cents
Sandwich (consists of 2 slices of bread, and 1 slice of cheese):

In this society people would rather have a completed cheese sandwich than the individual ingredients, so these are valued at 80 cents, despite the ingredients being only worth 60 cents seperately.


Now consider 3 people in this society with the following belongings:

Person 1:
4 slices of bread, total value $0.80

Person 2:
3 slices of cheese, total value $0.60

Person 3:
2 sandwiches, total value $1.60


So, the grand total 'wealth' amongst this society is $3.00

Now let's say Person 1 decides to make a deal with Person 2. He decides to give 2 slices of bread in exchange for 2 slices of cheese. Now things look like this:

Person 1:
2 slices of bread, 2 slices of cheese, total value $0.80

Person 2:
2 slices of bread, 1 slices of cheese, total value $0.60

Person 3:
2 sandwiches, total value $1.60

Now, the total 'wealth' amongst this society is still the same $3.00 because although Person 1 and 2 have the ingredients required to make sandwiches, they haven't yet actually MADE the sandwiches. Let's see what happens when they put them together!

Person 1:
1 sandwich, 1 slice of cheese, total value $1.00

Person 2:
1 sandwich, total value $0.80

Person 3:
2 sandwiches, total value $1.60

Now the total wealth in this society has grown to $3.40, 40 cents of which is completely new wealth, generated by Person 1 and 2 doing a deal and exerting some effort (labour). Note, this 40 cents was not taken away from anyone, not even from Person 3.

-Ian