House prices: who wins, who loses

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?

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.

Comments

[David Peniket]

A very interesting piece. I can see how an opposition might forge a coalition of those who need help with the cost of living with renters and wannabe buyers but I’m not sure that it would be very easy to convince entrepreneurs of the beneficial impact on aggregate demand of a fall in house prices. This is not least because entrepreneurs have benefited from low interest rates and their own costs of capital will increase as interest rates go up.

The real challenge is how to increase the supply of housing since - as the article explains - the value of housing is the discounted present value of the actual or imputed rents. Unfortunately recent Government policies such as Help to Buy have served only to increase demand and make a bad situation worse.

[reason]

David Peniket - yes - good to see someone pointing out that demand side policies will not actually work with housing, because house costs are controlled on the upside by ability to pay. The blog - https://www.fresheconomicthinking.com/ is very good on explaining housing issues - basically the best policy is to invest in social housing - the government should build or rather finance the building of houses for poorer people. Leaving it to the private sector sector won't work because the private wants higher house prices.

Chris Dillow - I think you should have spent a bit more effort explaining the connection between interest rates and rents. That doesn't fall out of your analysis. There is a connection - but it is indirect (because renting and buying are substitutes for one another).

[reason]

CORRECTION
.. because the private SECTOR wants higher house prices. ...

Another important point not really discussed in the post in that "house prices" is really a horribly misleading term (as many terms in economics seem to be - see savings and investment). Most of the price of "houses" in popular locations is the price of LAND. And this is a very important distinction.

[Robin]

I wouldn't underestimate the power of existing owners feeling like mugs if house prices fall. If I bought a property for £300k a couple of years ago but in 5 year's time it will be worth £250k, then I've lost £50k (plus inflation). Of course, this should be offset by a decrease in my cost of housing because inflation makes my mortgage debt easier to handle (as long as my income rises with inflation). But that is a very subtle effect that doesn't necessarily overcome the fact that I feel like a mug for paying £50k too much. Also it requires me to trust that my employer will raise my wage with inflation. For many, this is a tough ask, especially those in the public sector.

[rsm]

Does a rising homeless population mean a lot of us just don't want to live indoors, subject to landlord controls on what drugs we can do, whether we can sleep out on the lawn, what trees we must cut, etc.?

Why doesn't government reestablish the Lockean Proviso by buying back private land and returning it to commons so we have the choice to sleep outside for free, as our ancestors always enjoyed?

[ltr]

A brilliant essay:

https://fred.stlouisfed.org/graph/?g=of2H

January 15, 2018

Real Residential Property Prices for United Kingdom and United States, 1992-2018

(Indexed to 1992)

[Ben]

House prices should depend upon the cost of building them. Note the number of houses being built has actually gone down as the big builders are making so much profit that it pays them to limit supply.

[Henry Rech]

It's interesting how we all get excited when property prices rise.

What is actually gained when the price of property rises?

There is a gain when your property's price rises faster than other properties, which can happen, but it is not the norm.

Property prices tend to rise in sympathy. When they do what is the gain? If I sell my property with its newly risen price I have to buy another property with a newly risen price. There is no relative gain.

Of course, if I funded my property purchase with borrowed money and if the price rise is greater than the rise in interest costs I have gained.

There is also a gain if property prices rise faster than the price of goods and services. But how many extra Maseratis can you own, how many extra gin palace yachts can you own, how many extra private jets can you own, how many extra servants can you employ and feel better off at the margin.

The rich might feel better when their property empires expand in value but what really have they gained?

The same reasoning can be applied to other equity investments.

[nickj]

some of those in receipt of or expecting an inheritance (eg my kids) will use it to buy all or part of a house. to an extent it's a wash for these people as well - they get £ fraction of house. ofc if fraction is less than 1 low prices favour them.

a big fall in house prices screws the banks collateral and presumably knackers the equity release mongers. these are powerful forces.

[Jim]

Very fine and large, but where does it get us? We know any PM who wants to stay elected will keep house prices up. Further, the banks would get a bit twitchy to see their mortgage book heading south.

I am old and I know plenty of us oldies who would not be that bothered to see a modest wedge knocked off their house price - less to p&*s away in the care home. But the middle aged are bothered, what with lousy pension pots and job insecurity a rising house price is the only hope for a decent future. Much the same for the younger cohort who have managed to scramble aboard the housing market. That cohort may vote Labour in their hearts but Tory with their wallets.

Much talk of building public housing. Sounds very sensible but I worry a bit about the long term demographics - and I guess those who might finance housing might worry. Suppose as us oldies die off and the overall population who can raise the money for a house goes down then we might end up with spare houses. The rental market gets more competitive. An unthinkable thing today but in 30 years time maybe.

Seems to me money is moving East. A person in India or Vietnam or China is fundamentally worth exactly the same as any English person. Any difference has to do with the surrounding investment in social infrastructure - competent government, education, culture, transport etc. Our real investment is going down and theirs is going up. Some think re-shoring will rescue us, I suspect hard nosed economics will say no - until we get a lot cheaper. Maybe that is the plan.

[SBI share price]

Commenting on a blog is an art. Good comments create relations. You’re doing great work. Keep it up.

[Blissex]

«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.»

That is the same argument as "my pension fund is £1m and yours is £10k, but we are equally poor until we retire and start drawing down a pension".

Ask the people making that argument: if Jane live in a £4m townhouse in Chelsea, and Jack rents a £300/month bedsit in Dudley, is that a net wash because house prices are not wealth? Buffoonery.

They never agree when I ask them: would you want a 100% tax/credit on capital gains/losses for your property, so you could always sell for the same price you paid, because it's a net wash and house prices are not wealth? Buffoonery.

[Blissex]

«basically the best policy is to invest in social housing - the government should build or rather finance the building of houses for poorer people. Leaving it to the private sector sector won't work because the private wants higher house prices.»

Unfortunately that's the usual rather mistaken view of the issue, because it is based on the completely mistaken argument that high housing costs are caused by hoarding of buildings or a shortage of land.

While there are countries where buildings are expensive or get hoarded, there is in "the west" a giant "savings glut", and anyhow land is generally plentiful and cheap.

What is expensive is access to jobs: most people want to live in Hammersmith or Croydon not because the sunny beaches or the snowy pistes, but because of proximity to well-paid jobs.

What has made housing costs in 2/3 of the UK fall over time and boom in the south-east is simply determined government (Conservative, New Labour, LibDem) policy to spend fantastic sums (e.g. the 2008 onwards bailouts) to concentrate the "good jobs" in tory areas, and to extirpate them from "trot"/"trade union" areas.

[rsm]

May I fix the following for Blissex?

《~~spend~~ create out of thin air fantastic sums (e.g. the 2008 onwards bailouts)》

[Blissex]

«Suppose as us oldies die off and the overall population who can raise the money for a house goes down then we might end up with spare houses. The rental market gets more competitive. An unthinkable thing today but in 30 years time maybe.»

That has already happened for 30 years in "the north", where government policy has been to destroy decently paid union jobs.

There is an interesting article worrying about what will happen when those areas lose the last recipients of the last good unions pensions they still have:

https://flipchartfairytales.wordpress.com/2014/03/11/what-happens-when-the-pensions-dry-up/
“My late father-in-law used to joke about the pensioners jugging up in the pubs and clubs of South Wales. He reckoned the old folk drank more than the youngsters. It certainly seemed that way last time I was in his local Wetherspoons just before noon on a Tuesday lunchtime and found the place full of sixty- and seventy-somethings tucking into pub lunches.
A CEBR report for Saga, published last month, found that the over 50s account for a greater share of household spending than they did a decade ago. [...] I touched on this when The Economist called time on Britain’s old industrial towns last year. I have no firm data for this but I reckon pensioner spending is one of the reasons why some of these towns have avoided economic collapse.»

«A person in India or Vietnam or China is fundamentally worth exactly the same as any English person. Any difference has to do with the surrounding investment in social infrastructure - competent government, education, culture, transport etc.»

Germany and Japan and China-Taiwan and Kore-south etc. were devastated and brutally poor after WW2, but the surrounding capital was quickly rebuilt. It is mostly about cultural capital.

«Our real investment is going down and theirs is going up.»

Why invest in areas with "lazy, uppity, unaffordable" workers?

«Some think re-shoring will rescue us, I suspect hard nosed economics will say no - until we get a lot cheaper. Maybe that is the plan.»

I think the plan is both a lot fewer and a lot cheaper, to "save the planet". Butlers and nannies from southern England, maids and waiters from "the north", gardeners and cleaners from Ireland, Wales and Scotland, and for everything else, immigrants from the Commonwealth, mostly from the indian subcontinent. The model is Dubai, a very successful place where successful people can have very excellent lifestyles.

[aragon]

Everybody looses!

Housing is a necessity and a liability not an asset.

Housing costs represent a misallocation of resources and the distribution of wealth, which is already too concentrated.

Blissexs, Dubai or the Singapore on Thames, model may be the vision of the upper/political class.

So why rage against the system, just batten down and wait for the final exit.

But even Dubai worries about what happens when the oil runs out. And Singapore is smaller than London.

Maybe the lazy, expensive and uppity workers question why the should sustain the even more lazy expensive (not to mention stupid) parasites of the upper class.

It is the fear of populism, socialism or even revolution which stalks the political class, hence threats had to discredited immediately.

Some people are even questioning Capitalism! And in Russia as a consequence of sanctions Intellectual Property is been subject to Compulsory licencing.
(For rights holders - the apocalypse).

Unless they come up a way of extending the human life span, I won't see the end game, back to serfdom, or a brave new world of Oxycontin.

As the Rolling Stones suggested:
Paint it black.

https://www.azlyrics.com/lyrics/rollingstones/paintitblack.html

Loss, at the lack of imagination of the upper/political classes and as a consequence for our past, present and future.

[Blissex]

«But even Dubai worries about what happens when the oil runs out.»

Dubai has no oil, it is Abu Dhabi that has most of the oil. Dubai's economy is 100% based on property, and consequently during the 2008 property crash it had to be bailed out by Abu Dhabi.

«And Singapore is smaller than London.»

Not all of the M25 area is supposed to become Singapore-on-Thames or Dubai-on-Thames, and as to Dubai most of its residents are very poor "guest workers".

There is a development model that has been followed by some areas like Hong Kong, Dubai, Switzerland, and somewhat differently by Bahamas, Channel Islands, Monaco (with Singapore in-between), based on different mixes of:

* Cheap "guest worker" labour for low cost offshoring.

* Rent their sovereignty to foreign entities to shield them from the laws of their origin countries.

* Leverage both of the above to pump up local property prices.

Those three elements are the core elements of the long term plan for the M25 area.

«Maybe the lazy, expensive and uppity workers question why the should sustain the even more lazy expensive (not to mention stupid) parasites of the upper class.»

They can question how much they wish, but what they can do about it, not having negotiating organization nor political representation, and being exposed to the competition of billions of "People of Global Majority" happy to take wages around the £1-2/hour level?

They can at most riot, and putting down riots is just a cost of doing business for the upper-middle and upper-classes.

It will take a long time or a truly huge collapse of the neoliberal-rules based order for them to be able to rebuild negotiating organizations and political representation.