Rising house prices and austerity!

Simon Wren-Lewis in his Mainly Macro blog makes some interesting comments on house prices (and rents) and the wider economy.

The reason for this that everyone focuses on, understandably, is stagnant housing supply. However, housing can also be seen as an asset. Just as low real interest rates boost the stock market because a given stream of expected future dividends looks more attractive, much the same is true of housing (where dividends become rents). Stock prices can rise because expected future profitability increases, but they can also rise because expected real interest rates fall. With housing increasingly used as an asset for the wealthy, or even as a way of saving for retirement, house prices will behave in a similar way. A shortage of housing supply relative to demand raises rents, but even if rents stayed the same falling expected real interest rates raise house prices because those rents become more valuable compared to the falling returns from alternative forms of wealth.


A interesting take. Indeed we would concur that there is a major problem with housing regarded as an investment rather than as somewhere to live.

What is to be done though? Oft mooted options such as tax changes to capture rising house prices focus on the effects rather than the causes of the problem. Restricting ownership to those who actually want to live in the property and making it difficult to raise loans based on house values would help. At the same time making investment in other activities more profitable would be a step forward.


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