Why are high/rising property values considered a good thing?

Question

Increasing prices for housing are pretty much universally treated as positive in the news and in political discourse: newspapers run headlines like "Good news: Home values are up" and talk about "housing recoveries" when home prices go up and housing's "remaining depressed" (as opposed to "remaining moderate" or "remaining affordable") when they don't. (See here for several more examples.) But as with any other good, rising home prices are good for sellers and bad for buyers. I can't see any reason why everyone seems to treat the sellers' status as more important.

In fact, when people move between (owned) homes, they usually sell one house and buy another in quick succession. Any overall change in housing prices is a wash for them. Many people buy a home and then die before selling it - high housing prices don't seem to help them much. By the time people sell a home to move to a rental retirement home, they are usually receiving Social Security, Medicare, and a pension, and don't have a long life expectancy, so it seems to me that they would prioritize the money they receive from a sale less than a young first-time homebuyer would prioritize the amount that they lose. And of course, most people don't sell their homes very often, so higher prices don't seem to do them much good over the vast majority of their lifetimes. The most concrete impact I can think of that changes in the average homeowner's house price have on their day-to-day life is through their property taxes, in which case rising house prices are a bad thing for the homeowner.

(It's true that it's good for you if your neighbors' house prices rise, because then they pay higher property taxes which go to local services that you can take advantage of. But people seem to focus more on their own house's price then on their neighbors'.)

It seems to me that for anyone other than the tiny percentage of the population who are professional real estate agents, roughly speaking, rising housing prices are a bad thing until you buy your first house, and then after that are fairly neutral, at least until you're very old and about to move into a retirement home. Housing is a notoriously illiquid good, so an increase in the fraction of total wealth tied up in housing would seem to decrease overall economic flexibility. Am I missing an obvious reason why rising prices are a good thing for the economy as a whole?

Answer 1

Considered a good thing by whom?

• Financial institutions and speculators: yes, since houses for them are just another asset. Higher asset prices is a key mechanism of profit making for financial institutions (capital gains). In the recent financial crisis house prices collapsed and people defaulted on their mortgage payments. Thus, the fall in the value of houses repossessed by banks meant the return on financial assets associated to housing translated into massive losses for financial institutions and government agencies associated with the housing market like Fannie Mae and Freddie Mac in the US.

• Home owners: partly yes. A price increase is good, particularly if you have a mortgage to pay (so if you sell the house you can pay the loan back). Rising house prices are also good for pensioners, which main source of wealth is their house. Rising prices also give people the feeling they are richer (and hence spend more). Some argue that the positive appreciation of the media of rising house prices is partly due to the fact that newspapers are written and read mainly by older people, not by youngsters i.e. renters.

• Renters: no, because rents are associated with house prices. If incomes are not growing at the pace of house prices, renters will be squeezed, to the benefit of landlords and homeowners. This is true in the UK (and in many other advanced economies, see here):

• Central banks, and perhaps the overall economy and population: not necessarily, because rising house prices fueled by speculation and indebtedness (e.g. speculators and investors entering into the buy-to-let market) mean possibilities of a bubble bursting and a subsequent financial crisis. For example, in the UK, Mark Carney has expressed such concerns in the past.

• Estate Agents: yes, as their business as intermediaries depends partly on fees from sales. People is more willing to sell when the market is on the up, fostering the property chain. If prices are falling, people prefer to wait instead of selling their house, breaking the property chain.

Answer 2

House prices usually don't rise in isolation. You make some very good points that are all valid. Nonetheless, house prices typically rise, when the economy is doing well, when unemployment is falling, when wages are rising, etc. So when newspapers welcome rising house prices, they treat it as an indicator of the overall health of the economy and this is why it's considered positive.

If my salary is increasing rapidly, I might not mind house prices rising even if I don't own a house. A good example is the housing boom in the US until 2007. The economy was booming, people were better off each year and rising house prices were not seen as something negative.

In recent years, however, extraordinary central bank policy (low interest rates basically) pushed up house prices, but the economy was not booming to the extent that house prices rose in many countries. In this scenario it is less clear that rising house prices are a good thing, as you also elaborate.

Note: Housing is illiquid, but in the US housing boom until 2007, many people could take out home equity loans to turn their illiquid wealth into cash and spending power.

Answer 3

Whether rising housing prices are a good or a bad thing depends on the stage of business cycle.

If the economy is coming out of recession or economic growth is slow (below average), as it is now in 2017, then rising housing prices are generally a good thing. Housing reflects the broader state of the economy. People have more money to pay for houses, homeowners and companies benefit from real estate appreciation, lenders/borrowers are more optimistic, construction and related industries are hiring to build more houses, etc.

If the economy is going strong and prices are rising rapidly, that is the sign of overheating. Lenders are lending recklessly and buyers become speculative (buying only because the prices are going up). It is not good because it causes a real estate bubble. Eventually it bursts and a lot of people lose a lot of money, like back in 2008. Or even like in 1990's in Japan:

It is not always easy to make a correct judgement in real time. The state of the economy and whether there is a bubble or not is only obvious in retrospect. So media often makes bad calls, as do economists, bankers, and governments. They do the best they can, much like weather forecasters.

Answer 4

If I care about the well-being of my children then, once my children own a house, I expect our family unit (consisting of me plus my children) to become net sellers of housing in the future (because I will one day die and my children will sell my home).

People are typically in their mid 40s or older when their parents die. If we look at the proportion of UK adults in their mid 40s who own their own home we find that the figure is around 70%, so the majority of parents who die will be leaving a house to children who already own a home (although if the current trend for home ownership rates to decrease continues, this will cease to be true in 20 or 30 years' time).

Responding to comments:

The number of children is virtually irrelevant once they already own a house. At that point, the price at which they bought is locked-in. If they want to buy a new house then any increase in its price is mostly offset by an increase in the price at which they can sell their current house. For this reason, from the point of view of keeping a roof over your own head, the price at which you buy your first house matters far more than the price at which you buy each subsequent house.

We can look at a quick example. Suppose that the parents live in a family home, worth $x$, and the $n$ children each have a stake in a 'starter home' which is currently worth $x-\epsilon$. Now let prices increase by a factor $\Delta$. At some point, each child will (a) upgrade to a family home, and (b) inherit $2/n$ stakes in a family home from their two parents. The overall future housing expenditure of your child will be $$E=\Delta(x-x+\epsilon)-\frac{2}{n}\Delta x=\Delta\left(\epsilon-\frac{2}{n} x\right).$$ We can look at the effect of an increase in house prices on expenditure: $$\frac{\partial E}{\partial \Delta}=\epsilon-\frac{2}{n} x.$$ This is negative (i.e. children experience a net gain) if $n<2x/\epsilon$. To do a back of the envelope calculation, in the part of the world where I live a family home costs about £375,000 (e.g. three bedroom stand alone house) and a starter home (e.g., two bedroom apartment) costs around £300,000. We would thus find a net gain if a typical family has fewer than $2\times 375/75=10$ children, which is easily satisfied.

Two final remarks:

• This assumes your children already own a home. But if they don't already own a home then they expect to have a future expenditure of $\Delta x$ and a future inheritance of $\Delta 2x/n$. In that case, any family with $n\leq 2$ is still weakly better-off after a house price increase. In the UK, about 85% of all households with at least one child have 2 or fewer children.

• Your children will also have children of their own. But even if I care about all future generations of my family to some extent, I still like high house prices provided I put enough weight on my children's' wealth relative to that of other future generations. I do not think it is unreasonable assume that people care disproportionately about their children's' well-being.

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