Comments (8)

• Seth Daniels

• Good article.

  When "they" typically argue against including asset prices in inflation measures, I think they are employing fuzzy reasoning since they generally include housing as an "asset class".

  While from an accounting sense a house is clearly an asset the same way a car is (although a house typically has associated liabilities to match, estimated to be 8% or so per annum including mortgage, taxes, insurance, maintenance, etc), I think viewing a house the way a classical economist would is a better way of looking at it. In other words, it is an asset but should not be considered an “asset class� the way one would classify a stock or bond or commodity.

  If you are living in the house, it is an exhaustive use of capital (i.e. it is consumed) rather than an investment. A house that one lives in is effectively a consumer durable good (yes, you may be able to argue that the land it is built on is potentially a capital good). It is simply a store of future housing services.

  Ironically, given the recent housing and mortgage boom, housing demand has shifted from renters to buyers, which has depressed rental prices, thus understating the housing price increases reflected in CPI (imputed rent)

• Published: September 27, 2005 4:24 PM

• D. Saul Weiner

• Consider further the damage that the improper measurement can have on investment decisions:

  Low interest rates reduce borrowing costs for potential home-buyers and persuade renters to buy. In turn, rental markets suffer and their prices go down. In the substitution world, this activity contributes to a reduction in the CPI. Then, the lending markets turn around and say "Inflation is nowhere to be seen, so rates can remain low". Which then favors a continuation of this cycle. So if you analyze what is going on here what you see is low interest rates causing inflation, but due to the bogus measurement scheme, it is picked up as disinflation and used as an excuse to keep interest rates low! If housing prices were measured consistently, on the other hand, the result would be a corrective one, in that all other things being equal, inflation would register, interest rates would rise, housing prices would tend to stabilize, and rental markets would in turn gain. This same dynamic applies to the auto market as well, where this incorrect feedback loop would also operate.
  

• Published: September 27, 2005 7:10 PM

• billwald

• Higher house prices are primarially a function of zoning, govt regulations, and consumer choice.

  Zoning takes buildable land off the market.

  Zoning restrictions decrease the value of the land but increases the value of existing structures.

  After WW2 a typical new house was around 1,000 sq ft. Now days people want a three car garage that is almost 1,000 sq ft.

  Zoning increases the cost of legal housing but one thing the Russian Revolution demonstrated is that most any existing structure can be "duplexed." In my neighborhood (old part of Everett, Washington) most of the larger houses have been duplexed and made into rentals. People (mostly relatives) live in travel trailers parked in back yards.

  I used a trailer in the back yard for housing for 10 years. The Wife and I were willing to replaced it with a taxed building but the hight restrictions prohibited what we wanted to build.

  If land is zoned to limit hight then the economical use of commercial land requires that every structure be built to the maximum height.

• Published: September 28, 2005 9:29 AM

• Paul Edwards

• That was some irrefutable logic Stefan. Thanks. I'd also promote the more general statement: "Higher prices are higher prices". Whether we are talking about price increases in TVs, stocks, bonds, houses, oil, or copper, the only way more money overall can be spent in the economy, is via monetary inflation (or eventually when people become unwilling to hold money).

  The reason for the existence of the CPI, IMHO, is not to give people a feel for the status of inflation in the nation, but rather the opposite. It was designed and created to obscure the fact of inflation as well as its affects. If there was no monetary inflation and say housing prices increased such that more money was actually being spent overall on houses. The consequences would simply be that less money would be spent on whatever other goods and services that are substitutes for housing purchases. This most likely would include investments in such things as stocks and bonds because many people view buying a house at least partially as an investment.

  The fact that housing, oil, copper, gold, and stocks in general, can all simultaneously go up in price such that more money overall is being spent in those markets, while no corresponding and similarly dramatic reductions in expenditures in other markets occur, clearly demonstrates that inflation is happening.

  In the end, it would be simpler, more accurate, and more to the point, to issue figures showing changes in the money supply in terms of the Austrian definition of money and post that in the papers and have people discuss those figures. Those are the ones that count after all.
  

• Published: September 28, 2005 12:12 PM

• D. Saul Weiner

• Paul,

  Good points. Can you point me to the Austrian definition of the money supply?

• Published: September 28, 2005 4:24 PM

• Paul Edwards

• Thanks Saul.

  There's more than one, so i'll link you to a few. I like Rothbard's the best because of his argument for including savings accounts as money, and his explanation of how checkable money funds are not. There are other slight variations out there which you may like better. Here’s a few links:

  
  Rothbard: http://www.mises.org/rothbard/austrianmoneysupply.pdf

  Rothbard: http://www.mises.org/rothbard/money.pdf

  Salerno (with links): http://www.mises.org/story/1550

  Frank Shostak: http://www.mises.org/journals/qjae/pdf/qjae3_4_3.pdf

• Published: September 28, 2005 5:53 PM

• ogÅ‚oszenia nieruchomoÅ›ci

• ogÅ‚oszenia nieruchomoÅ›ci

• Published: September 10, 2006 1:20 PM

• Gko

• There's more than one, so i'll link you to a few. I like Rothbard's the best because of his argument for including savings accounts as money, and his explanation of how checkable money funds are not.
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