You could, in fact, argue that the price crash of housing during the downturn was a feature not a bug. I'd say the bug in the system is that housing is not a directly productive form of investment, so having the availability of capital tied up in the housing market is demonstrably hazardous.
This analysis is common, but it turns out to be a
little simplified. If I give you $1 million for a house, the "$1 million" isn't "tied up" in the house, you now have that $1 million and
you are going to want to invest it in something else. Sure, you could buy a house with that $1 million too, but then the person who sold you
that house now has $1 million to invest elsewhere. (note: the only material resource-consuming thing that all this house-price boosting does spur is more construction work, which is itself productive work).
"the
availability of capital
tied up in the housing market" is thus not a very realistic phrase, because it assumes the money is literally stuck in the house, rather than turned into liquid assets owned by someone else. If houses rise in value, sure there's more capital value, but that doesn't actually mean there's any less money anywhere else. In fact, you can borrow against the nominal value of your house, so if you paid $500,000 and the house is now nominally* worth $1,000,000, you didn't "tie up" an extra $500,000 in your house, it's just nominally worth that much extra. You can borrow against that as collateral, which means that high housing prices actually allow more loans to be made and
more liquid capital to be generated in the system, not less. The risk is actually the opposite to what was implied: rising housing prices risk over-heating other investment areas due to excessive mortgage-backed borrowing and investment, rather than the idea that housing investment "starves" other areas of available investment funds.
EDIT: * Note that "nominal" value is most of the value in the housing market. It didn't actually come from anywhere. The housing price is determined by supply vs demand of the number of people currently selling houses vs the number of people buying houses, and only a
small percentage of houses are available on the market at any time. But this small fraction of the available housing stock determines the "value" of all houses, including the vast majority which aren't for sale. If slightly more people start trying to sell their houses at the same time then the "capital" value of all houses falls. That value came from nowhere, went nowhere, represents pretty much nothing of any real substance.
Author
Topic: AmeriPol thread (Read 3640458 times)