This always seemed problematic to me.
Jere Krischel
12

This always seemed problematic to me. We want increased wealth (higher home prices), but we also want affordable housing (lower home prices). There are two irreconcilable drivers here.

Not really. The differential lies in the rate of growth and sunk costs. Consider renting a house for $500/mo versus buying one for that same cost. Assume for sake of simplicity that the increase in property price is perfectly in sync with the increase in wages. At the end of twenty years, what do you have in each case?

In the former, nothing. In the latter, you could sell and get out exactly what you paid in, minus interest, relatively speaking. In order for wealth accumulation via home ownership to happen, all that is needed is that home prices stay fixed with wage increases (and of course that mortgage interest doesn’t overshadow the growth). So with no relative difference in affordability, purchasing a home is a path to wealth accumulation.

Really, you still get comparative wealth accumulation with a minor loss in ratio. If you think of selling your house after 20 years as a “rebate” on your rent, you can see it. At the end of twenty years of mortgage payments you get at least some of that back, whereas at the end of twenty years of rent payments, you don’t. All things being equal, you get wealth accumulation.

Of course, this kind of dichotomy would exist in any wealth generating concept (say, higher share prices vs. affordable shares), and it seems almost inevitable that it would finally break down into either a huge wealth disparity between rich and poor, or a massive loss of wealth across the board.

There is reason to believe that any system will produce, as a by-product, a differential between those who do various things and those who do others. yet nothing indicates anything like what you describe has produces a “massive loss of wealth across the board”. It generally takes some form of collectivism to do that.

Just thinking out loud, this smells a bit like a rationale for a regular boom and bust cycle, so that both sides of the equation “get their chance”, avoiding a total concentration of wealth on the one hand, and a total lack of wealth on the other, over time.

I’m not sure I’d use the term “rationale” as it sounds, to me, like justifying it. It does, however, explain the reality of it. Prior to intense government regulation the boom/bust cycle was actually relatively small compared to ofter the onset of intense poking of grubby fingers into the pie. But yes, corrections will happen when allowed to naturally. I know of many companies that were able to get off the ground by purchasing assets from large companies that failed at prices they could afford. It isn’t so much strictly an economic cycle as it is natural use cycles.

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