Re: residential land rent vs GDP: Shiller's buddy vs Shiller


<royls@xxxxxxxxx> wrote in message news:493801f7.6779480@xxxxxxxxxxxxxxxxx
On Thu, 04 Dec 2008 12:49:11 GMT, "sinister" <sinister@xxxxxxxxxxxxxx>
wrote:

http://finance.yahoo.com/real-estate/article/106238/The-Future-for-Home-Prices

Key paragraph:

"Karl Case, an economics professor at Wellesley College whose name adorns
the S&P Case-Shiller home-price indexes, has studied U.S. house prices going
back to the 1890s. Over the long run, he says, home prices tend to increase
on average at an inflation-adjusted rate of 2.5% to 3% a year, about the
same as per capita income. He thinks that long-run pattern is likely to
continue, despite the recent choppiness."

Since real per capital income growth can be taken as a proxy for real GDP
growth (indeed, it's actually greater than GDP growth!), this is evidence in
favor of the claim that the rent of land in the residential sector increases
with GDP.

It's in distinct contrast to what I recall Shiller himself saying, namely
that home prices don't grow much faster than inflation. (IIRC he claimed
0.5% faster, distinctly slower than long-term US real GDP growth.)

I've already explained why the Case-Shiller HPI is unscientific
nonsense: because it only tracks resales of existing houses, it
captures almost all the depreciation of structures, but deletes the
increase in land value whenever an existing house is demolished and
replaced (typically with higher-density structures on much more
valuable rezoned land, of course). How else can house prices be
claimed to pace per capita income, while increasing from two or three
years' after-tax income 100 years ago to five or ten years' after-tax
income today?

Don't get me wrong; I'm not saying the new claims are correct. I agree with your point that the numbers are probably biased because of the issue of demolishing the structure.

All I'm saying is that the claims made by Case here are roughly consistent with the claim that land rent does not decrease as a fraction of GDP, whereas Shiller's 0.0 to 0.5% real increase claim _is_ inconsistent.

So it's evidence, at least, that they don't have their story straight.

In general, of course, your point about home prices as a multiple of income is, for me, the clincher. Like that study that claimed that homes in Holland had not increased much over inflation over a very long (200 year?) period of time: if that kind of thing were true, in the long run one would expect that home prices would asymptotically tend towards 0% GDP, which is quite evidently not happening.

It's funny that my "heros" on the time-local issue of the bubble (Shiller and Dean Baker) got that one so correct, but at the same time appear not to understand land economics. (Baker, because he once said in his blog, which I've followed for almost a decade now, that he didn't see why prices for housing shouldn't follow the same kind of downward trend as things like prices for athletic shoes or other apparel. So he doesn't understand the fixed supply aspect of land...)

-- Roy L

.

Relevant Pages

  • Re: PMs message...on National Day
    ... and the GDP per capita income. ... This income and price gap is getting worse ... ie about 2/3 of Per Capita income... ... prices had gone up year by year...but his income ...
    (soc.culture.singapore)
  • Re: To all those yank bashers...
    ... has no house but money in the bank earning say 5% after tax. ... Rightmove's figure's are for "offering prices". ... My prediction is that by the end of the year, house prices will be down by ... assume that other posters do not know as much if not more than you. ...
    (uk.local.kent)
  • Re: Ive just lost about 50 bloody grand thanks to diversity.
    ... towns much less viable....so it's all the other factors i don't know. ... the london type example i gave is in a town that isn't changing ... in that house prices have increased ...
    (uk.politics.misc)
  • Re: OT: The politics of "change"
    ... Low house prices, by themselves, should boost the market. ... affordable price goes down until the payment is the same. ...
    (sci.electronics.design)
  • Re: OT: The politics of "change"
    ... Low house prices, by themselves, should boost the market. ... affordable price goes down until the payment is the same. ...
    (sci.electronics.design)