Part 2 of WHY HOUSE PRICES ARE ‘REASONABLE’
The long decline in real rates of interest was used to justify half of the inflation-busting rise and rise of house prices in the UK. That was in the first Part of my commentary on the Bank of England paper “UK house prices and three decades of decline in the risk‑free real interest rate” by David Miles and Victoria Monro.
( Explainer for those a bit rusty on economic theory: When Income elasticities of demand are greater than one, consumers will buy proportionately more of a particular good compared to a percentage change in their income. Consumer discretionary products such as premium cars, boats, and jewellery represent luxury products that tend to be very sensitive to changes in consumer income).
There is no bubble here: How did Miles & Munro reach that conclusion?
Conclusion (by Miles & Munro)
“The conclusions are stark — since 1985, the observed decline in index-linked gilt yields and other changes in the cost of home ownership are associated with an increase in house prices of around 90%; income rises account for about a further rise of 80% - between them these factors account for all of the observed rise.”
SO I’M WASTING MY TIME? Houses are not over-priced. The price of houses does not need to be stabilised or reduced by Squeezing the Banks, Land Value Tax, or even Land Nationalisation. Pushing for change is pointless?
Reference for this blog: Miles, David ,& Victoria Monro (Dec 2019)UK house prices and three decades of decline in the risk‑free real interest rate Staff Working Paper No. 837 Bank of England