Homey-in-Chief on top form

The HIC continues to tie himself in knots in City AM:

IMAGINE, dear reader, that grocery prices had increased at the same rate as house prices since 1971, a frightening thought for a Friday morning. A  pint of milk would cost £2.61 (compared with 49p today); a chicken would cost £51.18; a bunch of six bananas would cost £8.47; a box of six eggs would cost £5.01; a loaf of sliced white bread would cost £4.36; and a leg of lamb would cost £53.18. These figures, compiled by Shelter, are shocking; Britain would face catastrophe were these today's prices...

Agreed so far.

But there is a difference between consumer goods and food and homes. The latter are assets, and these naturally tend to rise over time, not fall.

Nope, that all depends on what you class as an asset.

Nearly all physical "assets" - cars, buildings, roads, power stations - depreciate over time and need to be constantly repaired or replaced, and newer, better, cheaper alternatives are always coming onto the market. The occasional antique or collector's item are the exception to this, but again, it is not the value of the wood or the canvas which increases, it is the scarcity value.

Only "assets" whose value (i.e. market price) is dictated by the net present value of a future income stream tend to increase in value over time. The current value is the expected income you can derive from them in future, if that income is expected to increase, then the value of the "asset" increases.

So this basically means a) shares in companies with a reasonable amount of monopoly power or b) land, and you can argue over whether the income from land is monopoly income or whether it increases because of its scarcity value or a mixture of both. And clearly, if the value of something depends purely on future monopoly income and that income has not been earned yet, it is truly "unearned" and "speculative" in any sense of those words.

Rising food prices are entirely bad, yet rising asset prices boost owners' wealth.

Aargh! All things being equal, rising food prices are good for farmers and food retailers, and thus for good for people who own farmland (or manufacture things which enable more food to be grown) and people who own land suitable for retail premises (thus defeating his own argument).

Having established that it is not the value of the physical building which increases, purely the value of the land i.e. the estimated amount of unearned income from that land, all this means is that rising house prices (or rents) simply mean that in future, one group of people (today's non-landowners) will be paying larger sums of money to another group (current landowners).

The money which those tenants and purchasers have to pay is out of earned income (from where else?) and so to sum up, rising land prices mean that in future, there will be bigger transfers from the productive sector to the unproductive sector. In general, how can that make us wealthier? That reduces the size of the economy - it is a negative sum game.

And in specific, the only people who benefit from this are the bankers (who cream off their bit of the land rents as mortgage interest), large landowners (who can fund a very comfortable lifestyle by selling off tiny bits of land at inflated prices) and existing landlords. Which in turn must mean that everybody else is a bit worse off.

The apparent rising wealth of owner-occupiers is an illusion, as it assumes they all want to cash in. The real reason they are wealthier is because they are probably earning more. So the land price is merely a measurement of the earnings capacity/potential of people living in that area and meaningless in itself (if you already count the increased earnings as extra wealth - which they are - it would be double-counting to include the land price increases as extra wealth as well).
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He then compounds his inherent contradictions by concluding that the solution is to allow more homes to be built, which would depress prices slightly in the very short term and be good for the economy anyway, however the gains are shared, but...
The second - and more interesting - part of his editorial debunks the Malthusian/Home-Owner-Ist myth that there is a shortage of land and that poverty arises because of over-population (both Ricardo and Henry George railed again this, the argument neither stacks up logically nor is it based on observation of what actually happens in the real world):

PEOPLE, not commodities, land or even capital, are the ultimate resource of an economy, as the US academic Julian Simon famously put it. Without talented, motivated, skilled and educated individuals, nothing is possible; capital itself is a product of labour...

Correct, obviously.

This is always a lesson that nations suffering from shrinking populations relearn at great cost: all the productivity growth in the world is rarely enough to compensate for the psychological and actual effect of a declining population, perhaps because there are hidden economies of scale in denser populations.

The economies of scale are not in any way "hidden", they are blindingly obvious and easily measurable, there is a famous meta-study that says all things being equal, average wages/output per person are five per cent higher if the town they live in has twice the population.

And the other way of looking at it is to look at land prices/rents. The bigger a town, the higher the rental values in the middle and the higher the average rental value per person, because the bulk of all those extra five per cents goes into higher rents.

So that debunks his solution - more construction in places with higher land prices will increase the population size/density and hence increase output and hence increase land prices/rents even further (however slightly).

Even worse, (for him), having incorrectly described rising land values as representing increased "wealth" he then merrily goes on to explain what the one and only true source of that "wealth" is - people in general and population size/density in particular.

So why not let people in general keep this extra value?