Monday, 3 January 2011

Do House Prices Absorb Excess Wealth?

Astonishingly, coalition minister for Housing Grant Shapps is speaking sensibly about the UK Housing Market on BBC R4 Today this morning (3rd Jan 2011 - see http://news.bbc.co.uk/today/hi/today/newsid_9334000/9334045.stm). I agree with him that a stable market is a good thing, that property bubbles are very bad, and that the current market is considerably overpriced. He's also right that a fast correction will be a devastating thing. Look at Ireland for example. However, I do not believe he is correct on 2 important points:
1. His prediction that the market will slow down and stabilise gradually. Putting policies in place to make this happen (build more homes etc) is GOOD, but his colleague's austerity cuts, VAT rise and general crusade to get rid of a huge number of government related jobs will almost certainly mean this thing goes down like a Tiger-shaped hot-air balloon that's run out of gas.
2. That house-prices should end up cheap - like white-goods and TVs. This is hokum, and not because houses can't be shipped from China (although they can), but because house price inflation partly happens to absorb excess wealth. As we get richer (due to most things becoming more affordable) our societies reach consumerism saturation point - that point you might have reached when asked what you want for Christmas and it's a job to know. We've bought the dishwasher, PS3, huge TV, MacBook, Sky+Broadband, Fender guitar. What else IS there to get? There's only so many holidays you can take - and your car can only be incrementally better than a Focus. But I believe as humans we NEED to make progress, to accumulate "achievements" (which is what all of those materialist goods supposedly mean to us) - we have to aspire. It sounds strange to think that we subconsciously want to have things that are out-of-reach, but here we are paying what is in reality a 1/4 or 1/3 of a million pounds for a few rooms with shit carpets. Land is the one thing that cannot be manufactured (easily) and is therefore the one thing that will become in short supply (and thus more valuable) when everyone has everything else.

(Just as 'real' animals are more valuable in Blade Runner ;)

I am no economist. Nor do have any proof other than the correlation between house-prices and previous times of wealth. But I bet you this - as the economy turns dark that trend will be reversed, and assuming we come out the other-end into a new time of prosperity (2020?) we will see that which has a limited scarcity soaking up excess cash once more.

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