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.

Andrew Leigh on house prices & the value of a quality public education

Andrew Leigh is an amazingly active economist and does work of real social value. The current Economic Record has a piece by Andrew and his colleague Ian Davidoff where he values public school education in the ACT by looking at the effects of better than average test scores on house prices. A preprint of the whole paper is here.

I have a question for Andrew. If you get an education benefit from locating in a suburb that provides access to better-than-average public schools that means that house prices should rise to internalise that benefit. But doesn't it also mean that house prices should subsequently grow more slowly to account for the non-residential benefit? For example suppose real estate is increasing at 7% per annum on average everywhere. If you get some education benefit from living in a living in a particular location (say it is worth 2% of the value of the house) doesn't arbitrage mean that house prices should grow at the slower rate 7%-2% = 5%.

I wonder about this because I observe house prices in suburbs like Kew and Balwyn in Melbourne. The prices of these houses are high partly because they are very near good public and private schools. My theory suggests rates of capital appreciation should be slower in these suburbs - a prediction at variance with the facts. These suburbs are galloping away in terms of rates of capital accumulation.

Am I confused? I have asked many people about this over the years and remain none the wiser. The best discussion I had on the topic was with Ted Sieper a decade ago - he was adamant that prices in suburbs offering education benefits should grow more slowly than the market as a whole.