Saturday, August 09, 2008

Housing stock not part of wealth?

Willem Buiter has offered the provocative view that the stock of housing should (generally) not be included as part of net wealth. As The Economist remarks:
A shift in the value of housing does not affect household wealth in the aggregate, he says, because on average everyone is a tenant in his own home. A price fall hurts those who are “long” housing assets, ie, those who own more property than they will need over their lifetime (call them landlords). It benefits those who are “short” housing, ie, those who plan to buy a property or to trade up to a bigger one in the future (call them tenants). The average experience is of an owner-occupier who plans to live in his home until he dies. Unless he worries about how much he will leave to his heirs, he is indifferent to the value of his home.
The qualifier 'generally' is needed since Buiter excludes property price changes that stem from speculative bubbles since in the Buiter model:
'should prices fall because of a bubble bursting, then there is a wealth effect. Landlords are worse off because they lose the bubble value—the part that did not reflect fundamentals. But tenants are no better off, because the present cost of future housing services is unchanged'.
Otherwise falls in house prices are transfers of wealth between landlords and potential buyers and will not have deflationary effects. They will simply be redistributions. Thus the standard sorts of wealth multipliers which are between 0.01-0.07 for rich countries (so if wealth rises by $1, spending rises by between one and seven cents) are an exaggeration. There should be no deflationary impact from the current fall in house prices to the extent these reflect a collapse in fundamental valuations.

Of course the empirical relevance of the Buiter argument depends on the extent to which current house prices are falling in response to a deflated bubble. My guess as a non-specialist macroeconomist is that this is in fact a fair part of the current story.

The complete NBER Working Paper can be sought here.


Francis Xavier Holden said...

Some people are both tenants and landlords to themselves. If you have a young family then you need say a 3 or 4 bedroom house and, increasingly for some these days, a home office. When you cease to have children at home you may wish to get a smaller dwelling - trading down in size but up in newness/quality.

Many people are relying on the house value to fund old age health and nursing home needs.

I'd say that means that the day to day week to week or even year to year fluctuations in house value doesn't matter much, but that the long term value, in particular the value in relation to residential aged care buy in and / or other care fees does matter.

hc said...

FXH, That's right - with our tax laws on capital gains that is a sensible way to go. still people wanted to do the same thing get a cheaper investmemt option.

rabee said...


Just a few examples.

1) I recently remortgaged my overpriced family home and got my self a Hummer. If my house was half its price the bank wouldn't have lent me the money.

2) My dad downsized to a nice apartment in a suburb that has seen very low house price increases. He spent a few nice weekends at the casino. Not all houses are the same; it's a heterogeneous market.

So let's say that houses were homogenous there was no rental market, and the assets market was so incomplete that you couldn't transfer wealth from your house value to other consumption. Then sure you wouldn't include house prices in wealth and there would be no market for houses and house prices wouldn't be going up or down (in a stable population).

jc said...

Nice choice of vehicle, Rabee. I'm sure harry will be impressed. NOT!

Harry, are you impressed with Rabee's choice of car?

Houses are part of a nations stock of wealth. It's silly to ignore it.

hc said...

Rabee & JC, Buiter - as should be obvious - is not claiming that the value of housing iws not paert of an individual's wealth. He is claiming that socially it nets out in terms of its impact on spending decisions.

Spiros said...

What about government bonds? The government owes them and we own them. But we are the government (or at least we finance the government). So we owe them to ourselves. Shouldn't they also net out?

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