Monday, March 10, 2008

Property slump or stall?

Karl Denninger says house prices over the last 100 years have averaged three times income. What's the implication for us?

This BBC survey says the average semi (a standard unit of housing, one would think) is "worth" slightly over £200,000; official statistics put household income at £33,492. So houses cost around six times earnings.

That suggests a 50% drop is due. But as Keynes observed with wages, house prices tend to be "sticky downward": no-one is in a hurry to realize a big loss on their home equity. Death, divorce and redundancy may force some sales; others may choose to wait, or go for house swaps.

Or wages could double. Up till recently, it was a standard assumption that "inflation" would run at 2.5% p.a. and wage increases 2% above that. Using the "Rule of 72", it would take 16 years of 4.5% wage increases to double nominal incomes.

Whether wages will always rise in real terms, is another matter. One of the effects of globalization is to hold down wages in the developed countries; and food and energy costs look as though they will continue to rise as the rest of the world gets richer and more populous.

3 comments:

Bretwalda Edwin-Higham said...

This is true about houses and incomes. I did some research on this for local use.

hatfield girl said...

The share of wages in the advanced countries in the last 20 years has fallen from 65% of GDP to 55%, due to the globalisation of labour - the involvement of larger labour masses in foreign trade.

In the emerging countries wages don't rise as a result of globalisation because of large-scale unemployment.

All in all the world's working classes are facing a bad. However, emerging countries gain in terms of employment. Better to work for next to nothing than have nothing - it pays to be exploited.

SACKERSON said...

Thanks, HG. So it's as I've felt for a long time: the aristos are returning.