Thursday 30 August 2018

City AM - gloriously missing the point.

From page 2 of today's paper edition:

Land and housing boom The UK's net worth rose £492bn last year due to surge in property prices and the value of land... Almost all of the rise was fuelled by a £450bn land value rise, while housing added £40bn

The UK's net worth clearly does not change one single penny because land values change. At best, land values are an indication that the productive economy is doing well and the country is being well run.

Firstly, the value of land fluctuates inversely to interest rates (or proportional to credit availability) so it is not real, hard capital. Do we as a nation become wealthier just because interest rates fall? I doubt it.

Secondly, land values are merely the net present value of wealth that will flow from elsewhere to today's landowners, whether that flow is direct (rent or selling prices) or indirect (all the public services funded out of taxes on output and employment).

If you take into account the net present value of the equal and opposite flows of wealth from tenants, buyers and taxpayers, the net value of land is at best £nil, and probably a negative.
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UPDATE, Dinero, in the comments:

I don't deny that defining wealth is a subtle point, but I don't see that it is obtuse to define expected future income as wealth.

Money is an IOU from the bank financed from its creditors future income and that is considered wealth.

Even physical commodities like oil and gold are valuable because of the expectation that someone will them it in the future.


If you are going to include future income from other people as wealth, then you must also include the future expenses to be incurred by those other people as negative wealth, in which case the net value of land is still nothing.

Money, like land, is wealth from the point of view of the depositor or landowner. But money is even less net wealth than land is. If one person has 'money' then somebody else somewhere owes the same amount, if you take all positive money balances and all negative balances (debts, mortgages) it nets off to precisely zero. Money is merely a measurement of indebtedness from one person to another and not net wealth.

Oil and gold are actual, useful things. They are real net wealth. Just because one person has oil or gold doesn't mean that somebody else has negative oil or gold, i.e. it would be theoretically possible for everybody in the world to own a small amount of gold and a small amount of oil. It is impossible for everybody to have a positive money balance.

8 comments:

Bayard said...

"Almost all of the rise was fuelled by a £450bn land value rise, while housing added £40bn"

Presumably, by "land" they mean "agricultural land" and "housing" they mean "land with houses on it". I very much doubt that the value of the bricks and mortar has gone up by £40bn.

Mark Wadsworth said...

B, nope.

The ONS works out total value of land and buildings, about £7 trillion and splits that into buildings (bricks and mortar) £2 trillion and land £5 trillion.

So according to ONS, value of bricks and mortar has gone up by £40 billion. Whether that new buildings, improvements or general price inflation I don't know, but seems perfectly plausible.

Dinero said...

The Guardian also used the same definition of land and wealth yesterday.

I Don't deny that defining wealth is a subtle point, but I don't see that it is obtuse to define expected future income as wealth.

Money is an IOU from the bank financed from its debtors future income and that is considered wealth.

Even physical commodities like oil and gold are valuable because of the expectation that someone will buy them it in the future.

Mark Wadsworth said...

Din, see update to the post.

Dinero said...

Land is useful and is valued at the market rate, what some one will pay if it is sold as are gold and oil , and so they are comparable.

If people can afford to bid up the price of land , from higher future expected incomes then that is an indicator of the value that they expect to generate in the future. The value to be created in the future by mortgagors. That using net present value can be called the UK net worth,

The effect of interest rate on capital values could be equated by factoring the capital sum plus the future interest payments that go to the bank and calling that combined sum, the present value.

Mark Wadsworth said...

Din, land only has value because of what other people in the vicinity do. So we all play a small part in creating UK land values.

We have not all played a small part in mining for gold or pumping out and refining oil.

Dinero said...

the price paid for land or gold is defined by the buyers perceived value and their funding.aAnd so , it is reasonable to enumerate a countries wealth by prices. Its not perfect but it not fundamentally wrong.

Mark Wadsworth said...

Din, like I said in the post "At best, land values are an indication that the productive economy is doing well and the country is being well run."

They are not in themselves value. The true value (rental value) could be taken to fund public services, hey presto, selling price of land = £nil. The country would be no worse off in aggregate.