Saturday, 18 November 2017

Ricardo and UK House Prices

David Ricardo's Law of Rent states (as a stylised fact)  that rents are set by the difference in incomes (productivity) by those found at the margin of production and those found within it ie infra-marginal. That difference currently gets capitalised into rental incomes and selling prices.

We know that agglomeration increases productivity, so as London is over twice the size of any other European capital, its no surprise it has the highest incomes.

Furthermore, the margin of production for the UK no longer ends within its borders. It is arguable that due to free movement of people within the EU, it stops there. But to a certain extent, due to globalization, margins extend around the world.

Is it really therefore such a surprise, as some people most definitely are, that prices in the UK, especially London/SE are so high?

Yes we can build, and in the short term prices will fall. But in the long term, margins will simply readjust and we'll be back to square one. 

Above taken from Inequality Matters


Lola said...

Well, 'boarders' are renters...Or do you mean 'borders'. Ses Mr Pedant. :-)

Ben Jamin' said...

@ Lola

Only one? My dyslexia must be improving :)

Bayard said...

BJ, whilst we are being pedantic, the second clause of the first sentence of the fourth para should be " as it is most definitely to some people".

It's hard to tell whether these surprised people are deluded (they genuinely have no idea why London is expensive) or malicious (they know damn well, but want to promote an idea like the Housing Crisis myth or "it's all the fault of the 1%").

Mark Wadsworth said...

BJ, lots of people compare London rents with Berlin rents (on the basis they are both capital cities) ignoring the fact that adjusted for size of hinterland, Berlin is more comparable with Birmingham/Coventry.