Opinion Housing wealth isnt wealth
The title for this column has been pinched from Willem Buiter,who in turn attributes it to the current governor of the Bank of England,Mervyn King.
The title for this column has been pinched from Willem Buiter,who in turn attributes it to the current governor of the Bank of England,Mervyn King. As Buiter has pointed out,a more correct formulation would be to state that an increase in house prices does not make us,as a nation,better off. The implications of this for economic policymaking are quite far-reaching. It is crucial that we do not fall into the trap of becoming too heavily dependent on asset prices and debt for our growth. The policy decisions made now,in this Budget,will have long-term repercussions for the structure and balance of our rapidly maturing economy and even more rapidly maturing financial system.
The rationale for the Buiter-King assertion is quite straightforward. In much the same way that an increase in coconut prices only makes us better off if we are a net exporter of coconuts,an increase in house prices cannot make us all better off since,overall,we are simultaneously consuming all the housing services we own. Quite simply,India as a whole has its stock of housing equal to its consumption. Therefore,any increase in house prices ends up being merely a transfer from a younger generation to an older one and a transfer of wealth and resources from those who currently dont own housing to those who do. Neither is optimal from a policymakers perspective,especially if the policymaker is concerned about income inequality.
It is possible,indeed expected,that the budget will need to include measures to stimulate the housing sector. However,the analysis I have laid out means that those measures should be focused specifically on first-time buyers and on housing development. An across-the-board measure,like reducing interest rates or taxes on all housing,might well turn out to be seriously counter-productive,as it would incentivise existing home owners to take on more debt,and thus push house prices up further with little net gain to the economy.
The possibility that returns in the housing sector are,from an aggregate national point of view,merely nominal gains,has an additional implication. We know that India faces a shortage of funding for critical areas of the real economy like infrastructure. Given the funding that we have,we therefore need to develop our equity and bond markets and not divert resources and valuable banking balance-sheet space to housing which is not directly productive in this case. In the medium term,the government could look to check house price growth by disallowing the ballooning of housing-related credit on banks books. It is also worth bearing in mind that equity and bond markets give investors much greater liquidity compared to housing.
There is,it is true,at least one benefit from higher house prices: people feel richer the more their house is worth,and the resulting wealth effect makes them spend more. This is,however,only effective in the short term. In the long term,the wealth effect is outweighed by the dysfunctionality it brings to the economy and financial system. And these distortions will become that much more difficult to undo as political constituencies become more entrenched. The Indian economy and financial system would then risk evolving into the model where the banking system became heavily dependent on asset price rises and illusory profits rather than on productive lending to the real economy.
Of course,the argument need not be just an economic one. Those concerned about cultural heritage could make the argument that a spike in house prices such as in Bombay for example has led to a surge in hastily-erected (and unsafe) structures and resulted in once-charming neighbourhoods losing their character and increasingly taking on a pockmarked and dishevelled appearance. The social and judicial ramifications are also significant. Rising property prices have spawned disputes as families squabble over property which in turn has helped to clog up the judicial system; a large proportion of the 40-lakh judicial case backlog is property-related.
All of the above is not to argue against any house price rises whatsoever. Long-term home owners have little to fear an economy growing at a nominal rate of around 15 per cent will always see increases in property prices. For its part,the government should know that pushing across-the-board lower home loans is playing with fire: theres little doubt that it will cause owners to borrow more,and push prices up to unsustainable levels with all the negative ramifications thats brought to the rest of the world.
The writer is a Delhi-based strategic analyst express@expressindia.com
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