Have we learned nothing?

3 October 2008

Listening to the radio this evening about the banking crisis and the big government bailouts. The presenter asks the expert guest if this means that house prices will start to “recover”. After all that’s happened, the universal assumption that hyperinflation in the housing market is good for the economy remains unchallenged.

I’m no economist, but it seems to be that all economists do, in the media at least, is mislead people about the nature of money.  The fact is, economic growth that isn’t fuelled by increased production is a mirage and will always be wiped out by inflation.  That’s what a recession is – the economy borrowed from the future, and now it’s left with the debt.  And if you raise the price of a commodity so high that nobody can afford to buy it, nobody will buy it until you drop the price.  Basic supply and demand.  House prices need to fall, or everybody but a handful of very rich people will be priced out of the market.

A house’s increase in value is nothing more than the increased willingness of buyers to spend money on it – a house that’s gone up in value by 50% is not a 50% better house – it’s exactly the same house it was before.  It’s imaginary value.  A mirage.  House price hyperinflation will always lead to economic recession.  The only people to benefit from house price hyperinflation are people who own multiple houses, and the rest of us suffer the consequences.  It needs to stop.