Stumbling and Mumbling

Author: chris dillow   |   Latest post: Mon, 9 May 2022, 1:55 PM


House prices: who wins, who loses

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I grow my own kale and never buy any from the shops. If the price of kale rises, do I therefore win or lose?

The answer is: neither. On the one hand, I could profit if I were to sell the kale I grow. But on the other, the cost of eating my own kale - the money I would make if I were to sell it - has also risen. Net, I'm neither better or worse off.

Some of you might not care very much about the kale-growers of Rutland. What's true of kale, though, is true of something many of you do care about - house prices.

Just as I am self-sufficient in kale, so I'm self-sufficient in housing. As an owner-occupier, I'm a supplier and buyer of housing services in equal amounts. What's true of kale prices, therefore, also applies to house prices. A rise in my house price would make me richer if I were to sell. But to the same extent it increases the cost of me occupying the house - the money I'd make if I were to sell. Net, it's a wash. For me, house prices are not wealth. And what's true for me is true for many other owner-occupiers. As Mervyn King said (pdf) back in 1998:

A rise in house prices leads not only to an increase in wealth but also to an increase in the cost of housing services. Or, to put it another way, if the price of your home goes up, you will not be able to spend more on other things if you wish to carry on living in your home.

(See also this pdf by Willem Buiter)

Who, then, does gain from higher house prices?

Plenty of people. Those who are sellers, or who expect to be. These include owner-occupiers planning on trading down, say because their house is part of their pension, or landlords looking to cash out. It also includes people expecting bequests of their parents' or grandparents' houses.

But of course, if prospective sellers benefit from higher prices prospective buyers lose.

High house prices, then, are a transfer not so much from young to old - many of us oldsters don't give a damn about house prices and many more shouldn't - but from many young people to a subset of owners and inheritors.

But is it a zero-sum transfer, or a positive- or negative-sum one?

In some cases, it's positive-sum. Rising house prices also benefit those planning on using their house as collateral to borrow for consumption, home improvements, to start a business or to use home equity release schemes to top up their pension. These are winners without corresponding losers. In fact, to the extent that higher house prices encourage business start-ups (and there's evidence (pdf) at least from the US that they do), everyone gains from increased aggregate supply and competition.

On the other hand, though, it can be negative-sum. Insofar as they increase household debt, higher house prices increase economies' vulnerability (pdf) to financial crises. And there are several channels through which they depress productivity. In increasing commuting times and distances workers are more likely to become stressed and absent. Insofar as they encourage construction booms they divert economic activity into less productive sectors of the economy. If people are spending huge sums on housing costs - either mortgages or rent - they've less to spend in dynamic sectors or upon the goods and services supplied by new companies, all of which deters entrepreneurship. And high and rising prices divert potential entrepreneurs towards rentier activities such as landlordism whilst also channelling savings away from business and towards property.

Net, rising house prices are a bad thing.

Boris Johnson, however, has other priorities. He said recently that if the government does more to help people with the cost of living "that will mean that people's interest rates on their mortgages go up, the cost of borrowing goes up, and we face an even worse problem".

There's a germ of truth here. Anything that supports aggregate demand would tend to raise inflation (relative to what it would otherwise be) and hence raise interest rates.

But why would this be "an even worse problem" than hunger and fuel poverty? Hpir

My chart shows why. It shows that the rise in house prices relative to incomes since the 1990s has been closely associated with the long-term downtrend in interest rates. This is because houses are an asset, and the price of an asset is the discounted value of future incomes - be they rent or the rent you save by being an owner-occupier. Lower interest rates mean a lower discount rate and hence a higher asset price. There is therefore widespread agreement that house prices depend heavily (pdf) upon interest rates. And indeed, on the rare occasions when interest rates have risen (such as in the late 80s or mid-00s) house prices subsequently fell soon after.

Which is why the Tories are so scared of rising interest rates. It's because they would lower house prices. Which is nasty for that minority who do depend upon high and rising prices, such as those hoping for a bequest or landlords. It is these - whom Phil rightly describes as the most backward, uncompetitive and socially regressive sections of capital - who are Johnson's client base.

And their interests collide with those of three other groups. One is those who most need help with cost of living. In refusing to support these for fear of higher interest rates, the government is sacrificing them to protect landlords and those hoping for a big inheritance. The second group are renters and wannabe buyers. And the third group comprises many entrepreneurs and potential entrepreneurs - those whose businesses are being stymied their potential customers are handing cash over to utility companies and landlords instead of spending it with them. If we had an intelligent opposition, it would be trying to form a coalition of these interest groups.

Of course, house prices are a deeply political issue. But let's be clear what the division of interests is. It is not young versus old, but rentiers versus the rest of us.

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