Are high house prices a good thing?

princeofpounds

Wow, big thread... no way I'm going to read all this and address all the points of view, but thought I'd submit mine pretty briefly.

A price isn't in itself a good or a bad thing. What a price in economic theory should be is a rationing mechanism that matches supply and demand. In doing so, it provides information content about scarcity, and hopefully provides incentivisation to effectively allocate economic capital to the production of the good concerned.

Unfortunately the housing market is a pretty screwed up market and there is all sorts of peverse incentivisation going on that produce market distortions. For example, planning laws, credit rationing (which we all know has gone wrong in recent times), government subsidy of letting markets etc. etc. The list goes on.

That's not to say that a perfectly free market would necessarily be a desirable thing - free markets can't deal with externalities (so the view in the countryside for example is allocated no worth!) by themselves.

So somehow we've got to strike a balance. All I know is that balance is not a case of higher=better.

We don't cheer when the price of food, water or heating rises, even though the contents of our fridge or water bottle or petrol tank appreciate. But we seem to love the fact that our houses appreciate despite the fact that all is really happening is that the bigger, better house that you don't yet own is getting more and more out of reach.

People are not designed to think of opportunity costs... it's a bit like an art lover getting more and more excited that the painting he owns is becoming pricier, and yet if it were not he could buy several more paintings by the same artist and derive many times more enjoyment from the actual use of the objects.

IveSeenTheLight

princeofpounds wrote: »

We don't cheer when the price of food, water or heating rises, even though the contents of our fridge or water bottle or petrol tank appreciate.

Very good post, however a couple of things.

It's unfair to compare food, water, heating and petrol prices to house prices. Reason being is that these are all used on a daily basis and need to be replenished on a continual basis. This is not the same for a property

princeofpounds wrote: »

But we seem to love the fact that our houses appreciate despite the fact that all is really happening is that the bigger, better house that you don't yet own is getting more and more out of reach.

Not everyone is looking to get a bigger or better house. I certainly am very happy with what I have and I did have to endure house prices rising when I moved from my flat to my house. This is a fact of life that it will cost more.

There are also people downsizing to which they certainly benefit with house price rises.

It would seem therefore that you are looking at house prices solely from those wishing to upsize

princeofpounds wrote: »

People are not designed to think of opportunity costs... it's a bit like an art lover getting more and more excited that the painting he owns is becoming pricier, and yet if it were not he could buy several more paintings by the same artist and derive many times more enjoyment from the actual use of the objects.

It's a valid point but you have to consider the investment.
The person may only have been able to afford the one unique painting and bought knowing that there is no other replica's.
Sure it's therefore pleasureable to know that the investment is worth more

Now if your advocating that if the picture was worth less i.e. a quarter of the original value, then he could have bought an additional 3 paintings, but then it would not be such a good investment.

Think also of the artist themselves, why should they have to produce 4 times the amount of work for the same return?

I raised a question before which does not appear to have been answered.

Why should one of lifes necessities (a roof over your head) be valued cheaply?

princeofpounds

It's unfair to compare food, water, heating and petrol prices to house prices. Reason being is that these are all used on a daily basis and need to be replenished on a continual basis. This is not the same for a property

True. The actual main important difference is that housing is a financial asset because it can produce an income stream, whereas the others are all consumable goods. I mention it not to demonstrate that housind and food etc. are exactly equivalent, but just to point out a peculiar feature of our thinking in seeing the cost of one of the essentials for survival, shelter, as a case of higher being better.

Not everyone is looking to get a bigger or better house. I certainly am very happy with what I have and I did have to endure house prices rising when I moved from my flat to my house. This is a fact of life that it will cost more.

There are also people downsizing to which they certainly benefit with house price rises.

It would seem therefore that you are looking at house prices solely from those wishing to upsize

No not at all. I think you have still to grasp the important theoretical concept here. You would always take a house with more utility for a lower cost, unless you were totally irrational (which you may be, and it's an important feature of economics, but the decision in this circumstance would be quite obvious).

I have indeed talked about bigger being better (And maybe that is my own perception problem!) but it need not be a bigger house - just better. It might be a cheaper to run one, or a more attractive one, or the same one but much less expensive - and so as a result you can spend the money saved on cars, wine or whatever you wanted.

It's a valid point but you have to consider the investment.

Yes, perhaps art is not the best example as people do buy it as a financial investment rather than for its utility. My point here is more general though, that people are prepared to be denied buying extra utility from a good for apparent financial returns, not considering that there is the opportunity cost of losing that extra utility that could be bought if it were cheaper. (Hm, didn't phrase that well but hopefully you get the point).

Why should one of lifes necessities (a roof over your head) be valued cheaply?

Well, I actually agree, in that it shouldn't necessarily be valued cheaply, but it would be nice for all of us if it were (from the perspective of utility, not an individual's financial circumstances).

*Not* because of the low price in itself, but because that would be an economic indicator that there is an abundance of supply of good-quality living space. That would mean we were all richer not in the sense of finacial tallies, but in terms of economic utility and wealth.

So I suppose another way to phrase it is that the question is putting the cart before the horse - prices are not the cause of a good or bad situation, they are the result of a good or bad situation.

Cannon_Fodder

IveSeenTheLight wrote: »

A roof over your head is arguable one of the most important things required in life along with food and water.
Why shouldn't these be financially valued as such?

You were the one comparing houses to the other important things in life, now you want to introduce quibbles to qualify your absurd statement.

I agreed with 'important in life' sentiment, but wondered why a high price was a good thing.

Cannon_Fodder wrote: »

I would suggest the examples you used, food and water, are precisely the wrong ones to back up your argument. They are necessities. Not assets.

You say houses fall into the same set of "essentials". I agree. Why would high prices of food and water be a good thing??

To which you had no answer.


Now PoP has joined in and you've gotten more confused.

princeofpounds wrote: »

We don't cheer when the price of food, water or heating rises, even though the contents of our fridge or water bottle or petrol tank appreciate. But we seem to love the fact that our houses appreciate despite the fact that all is really happening is that the bigger, better house that you don't yet own is getting more and more out of reach.

IveSeenTheLight wrote: »

It's unfair to compare food, water, heating and petrol prices to house prices. Reason being is that these are all used on a daily basis and need to be replenished on a continual basis. This is not the same for a property

Why should one of lifes necessities (a roof over your head) be valued cheaply?

imo, Replenishment has nothing to do with it.

A house is available in a "replenishment form" = renting. Or a long-term basis = buying. Both are expensive in £ terms compared to years ago. They might fluctuate, often in opposite directions to each other due to the nature of the markets, but its a substantial proportion of income compared to other "essentials.".


Q. "Should all necessities carry a high price, to reflect their value"?
Q. "Would high prices of food and water be a good thing"?

chucky

Cannon_Fodder wrote: »

Q. "Should all necessities carry a high price, to reflect their value"?

the market driven through demand and supply determines the 'value'

Cannon_Fodder wrote: »

Q. "Would high prices of food and water be a good thing"?

there are different options to those affected by affordability related to high house prices - renting or social housing.

the options for those who cannot afford food is grow your own or starvation.

not the best comparison.

chucky

nearlynew wrote: »

The only people who want house peices to rise are debt junkies.

according to the poll this year more people want house prices to rise or stay the same than they want house prices to drop - you're in the minority unfortunately

Of those asked, 30% want them to decrease and 34% want them to stay the same. Only 32% of those interviewed say they want prices to go up.

http://www.bbc.co.uk/pressoffice/pressreleases/stories/2009/05_may/11/propertywatch.shtml

IveSeenTheLight

Cannon_Fodder wrote: »

You were the one comparing houses to the other important things in life, now you want to introduce quibbles to qualify your absurd statement.

I in no way compared it.
I merely mentioned things in my life I could not afford.
It was others that made the comparison

Emy1501

chucky wrote: »

according to the poll this year more people want house prices to rise or stay the same than they want house prices to drop - you're in the minority unfortunately
http://www.bbc.co.uk/pressoffice/pressreleases/stories/2009/05_may/11/propertywatch.shtml

No he is not he used the word rise and therefore 64% did not want prices to rise so the majority do not want prices to rise.

IveSeenTheLight

Cannon_Fodder wrote: »

YouA house is available in a "replenishment form" = renting. Or a long-term basis = buying. Both are expensive in £ terms compared to years ago. They might fluctuate, often in opposite directions to each other due to the nature of the markets, but its a substantial proportion of income compared to other "essentials.".

Housing is a substantial proportion of income, yet it's currently below the long term average
http://www.lloydsbankinggroup.com/media1/research/halifax_hpi.asp (See Regional Affordability Link)
Mortgage payments as a proportion of income is 30.1% for the UK.
The average is 37.2%

Cannon_Fodder wrote: »

Q. "Should all necessities carry a high price, to reflect their value"?

Market demand sets this. If it is a necessity, then there is likely to be a large demand. Prices will only remain low in this circumstance if there is sufficient supply

Cannon_Fodder wrote: »

Q. "Would high prices of food and water be a good thing"?

As food and water is a necessity, it is the same question as above :rolleyes:.
You have to ask why are food and water prices increasing.
Is there sufficient supply?
Where is the food obtained from?
What are the costs involved to make them readily available?

Here's some interesting reading for you
http://www.guardian.co.uk/science/2009/dec/13/britain-faces-food-shortage

kabayiri

DaddyBear wrote: »

What we need are changes to tax laws.
My philosophy would be to have 1st houses exempt from stamp duty to £250k and then 2% above that.
Any other home should have stamp duty applicable at a higher level, say 4%, irrespective of value. They should also have an annual tax placed upon them, say 1% of the value, and should not be eligible for reduction in council tax.
The aim is to make a first home almost free of tax, yet make subsequent purchases highly taxed. You only need one home so anyone with more than one deserves to be taxed highly.

As an extension of this.

Suppose such additional funds raised from secondary homes were ringfenced by the government, and ploughed directly back into significant social housing programs, particularly in areas of high housing demand.