Posted by M at HPC, an article at Pieria.co.uk which summarises some research based on some very detailed Danish data over a ten-year period.
Their conclusion:
Our finding that it is unlikely that households perceive apparent wealth gains from rising house prices as actual wealth gains has important implications. Central banks and policy makers should not worry about inflationary pressures from the housing market.
Our results also imply that it is probably not a very good idea to design policies targeting the housing market when trying to stimulate household demand in order to lift the economy out of the crisis. Of course, households knew this all along.
Funnily enough, we also observe that there is a negative correlation between rising house prices and the savings ratio (see charts in Section 3 of this post). If people think that their house is doing their saving for them so they don't bother actually saving, and during a recession, people tighten their belts a bit and prepare for a rainy day.
Now, seeing as for a given income, people can only either spend (consume) or save their income, there appears to be a missing figure - during a time of rising house prices, if people are saving less but not spending more, where does the missing money go? Perhaps it goes on paying deposits for their children to "help them onto the property ladder"?
But hey. If rising house prices lead to lower savings without increasing economic activity (consumption), this makes them doubly bad for the economy.
Forbidden Bible Verses — Genesis 10:21-32
3 hours ago
8 comments:
The problem is that falling house prices makes it more likely that you lose an election by a landside as John Major knows.
Therefore what is bad for the country (house prices rising by more than inflation) is good for politicians.
You could say that we get what we deserve.
LF, yes of course, as far as general elections are concerned, that's all that seems to matter any more.
Presumably there is still the effect of rising property values on ability to get credit. This was quite pronounced here up to the crash wasn't it?
PC, that is the missing figure to which I refer.
It is beyond dispute that there was massive mortgage equity withdrawal going on from 2002 to 2007 or thereabouts, equivalent to 5% of disposable incomes or something - but maybe those people just worked less than they otherwise would have done in order to pay for the same consumption? For example, let's assume that all the new credit was spent on imports.
In that case, rising house prices actually depress overall output, don't they?
Consumption <> economic activity. What about investment?
AC, truth of the matter is that consumption = production.
When people say "Ah, but what about investment?" they are incapable of saying which side it's on.
Is it on "production" side, because new investment has to be "produced", or is it on "consumption" side, because resources have to be consumed to create new capital, and that new investment will in turn be "consumed"?
Truth is, "investment" is on both and neither sides and can be ignored for these purposes.
It's a bit like Homeys who are incapable of seeing that land rents are being consumed as they arise.
Spending = consumption + investment
Doesn't affect your post really, but there's a tendency for people to think that the way out of recession is to increase consumption, when actually what is needed is increased investment.
AC, sorry still no, as you are not comparing like with like.
Let's agree that "investment" is somebody building a new car, and "spending" is when somebody buys the car for say £20,000.
But that car has a useful life of say 20 years, so once you buy the car, you are "consuming" £1,000 of car every year without the corresponding spending.
Of course there is a constant flow of cars being scrapped and new cars being built and it all averages out.
So I could just as well argue...
spending + investment = consumption
Therefore, in the long run, "investment" cancels out on both sides, and hey presto...
consumption = production.
"Spending" is a meaningless term in this context, and the only point of "investment" is to increase our capacity for future production and hence future consumption.
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