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aa3

Housing And National Wealth

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We keep looking at national wealth in terms of GDP. Which is obviously a very important measure. But I've been thinking lately that we do not really measure capital for different nations.

So compare two nations, nation A has a fully developed housing stock. Nation B the people live in dormatories but they are building their suburbs, roadways, electrical transmission, water systems etc.. For arguments sake both nations have the same industrial output, for whatever reason nation B never built its residential capital.

From the perspective of GDP both nations have the same output. But clearly the people in nation A are richer, owning their own homes in a society where the residential infrastructure is already built. They are living in suburbia, while the people in nation B are still in dormatories.

There are around 20 million residential units in Britain, with the average being worth around £250k. The value of that is actually £5 trillion pounds. The UK mortgage market is probably around £1.5 trillion pounds. There is other vested capital besides the houses. For example if we assume replacement cost for the electric generation and transmission at £2,500 a kilowatt of capacity, then the British system of ~75 million kilowatts is worth £187 billion pounds.

How is this much higher capital wealth of nation A expressed in the economy relative to nation B. Because people in nation A can sell this capital they have, borrow against it, inherit it. Isn't it rational in this society that a growing emphasis on inherited capital over current labour wages would happen? Whereas in nation B where the residential housing and infrastructure has yet to be built this source of inherited capital is not there yet. Therefore in nation B a person's wealth is more based on the value of their labour.

In some ways I think the Britain we talk about from the 50's and 60's was like nation B. We were building the modern nation. Whereas Britain today is more like nation A.

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Housing is, and always will be, an expense. It is something that is consumed (albeit very slowly). That you can pay that expense in advance (by buying a house) is irrelevant. That you can do this by incurring another expense (debt servicing) is even more irrelevant. What is relevant is whether the land can be owned/inherited as that is an expense that by freeholding can be offloaded to others.

As for a comparison between the two nations, it very much depends on whether the inhabitants of nation B are currently building housing or not. If they are not, then their output must be other things - and a lot more of them, as nation A must spend time both maintaining (and sometimes rebuilding) the housing stock they have and building new houses as occasion requires. Nation B has for the time being accepted a lower standard of housing, so the overhead of the housing infrastructure is lower.

That said, all infrastructure is overhead (if we could generate and deliver electricity without power stations and pylons we wouldn't build them), the 'capital' value of which is entirely determined by the desires of the populace. If the people don't want electricity then generation infrastructure is worthless. If the people are happy to live and die in dorms, then british-style housing is worthless.

Wealth is everything that is owned that is not money (This is my own definition btw, so disagree away - also note that it's not the same thing as having a high standard of living). The wealth of nation B depends on what they have instead of housing that they work to acquire. If it is relatively permanent like housing then nation B has just as much capital as nation A. They'd probably have just as much of an inheritance culture as well. It just wouldn't be houses that they'd pass on.

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Your logic is backward.

The size of a country's economic output is a function of capital, labour, and technology. Generally output will increase with each of these factors i.e. more factories means more output, more workers means more output, a greater skillbase or scientific/engineering knowledge means more output. However there is also an element of diminishing returns. If you have 1 million workers, there is no point in building 2 million factories as you clearly don't have the staff to man them. Equally if you only have 1 factory but 1 million workers, there is going to be a lot of unemployment.

A developing nation like India has very little capital but plenty of workers, so the main bottleneck to economic output is the lack of capital (tractors, factories, etc). As you said in your OP, a developed country like the UK has a great deal of capital (houses, motorways, power stations etc) so logically the main bottleneck to economic output should be scarcity of labour. This is why wages are low in India (no shortage of labour) and much higher in the UK (no shortage of capital), but I would argue that labour in the UK is still underpaid considering how much capital we have within our borders.

As my signature implies, it makes no sense that in a country with 22m already constructed good quality brick houses and only 20 million full time workers, there are millions of young full time workers who cannot afford to buy one of those houses in their wildest dreams.

Yes, inheritance of capital (especially land and buildings) does exist, but there is no point in inheriting something if you are not able to profit from it. Most people decide they want the cash now and sell granny's house straight away, but some people might choose to hang onto it and rent it out. However, the more people who take the second strategy, the more rentals will be available and the lower rents should go, pushing some inheritors to sell until an equilibrium is established.

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Housing is, and always will be, an expense. It is something that is consumed (albeit very slowly). That you can pay that expense in advance (by buying a house) is irrelevant. That you can do this by incurring another expense (debt servicing) is even more irrelevant. What is relevant is whether the land can be owned/inherited as that is an expense that by freeholding can be offloaded to others.

As for a comparison between the two nations, it very much depends on whether the inhabitants of nation B are currently building housing or not. If they are not, then their output must be other things - and a lot more of them, as nation A must spend time both maintaining (and sometimes rebuilding) the housing stock they have and building new houses as occasion requires. Nation B has for the time being accepted a lower standard of housing, so the overhead of the housing infrastructure is lower.

That said, all infrastructure is overhead (if we could generate and deliver electricity without power stations and pylons we wouldn't build them), the 'capital' value of which is entirely determined by the desires of the populace. If the people don't want electricity then generation infrastructure is worthless. If the people are happy to live and die in dorms, then british-style housing is worthless.

Wealth is everything that is owned that is not money (This is my own definition btw, so disagree away - also note that it's not the same thing as having a high standard of living). The wealth of nation B depends on what they have instead of housing that they work to acquire. If it is relatively permanent like housing then nation B has just as much capital as nation A. They'd probably have just as much of an inheritance culture as well. It just wouldn't be houses that they'd pass on.

Thats an interesting thing about economies.. while the British style housing is very valuable to Brits it might not be to a theoretical nation. If they did not want the costs of maintaining those homes, or even simply much preferred dormatories then the British homes would have no value to them.

Even within Britain, some people want to live in detached suburbs, the American style city.. others want to live in densley populated areas with condos and apartments.. still others want rural properties.

The people in nation B would pass on everything except the residential capital. For the sake of argument I said they have the same industrial output they just haven't built their residential cities yet. But it seems like for most people in Britain the main bulk of their inheritance is the housing capital. Although the savings, bonds and stocks can add up to quite a lot for some. And small businesses for others.

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Housing as an expense.. I'm not so sure. Obviously the house you live in has expenses to maintain and insure. But if you were given a well built house in an area with proper infrastructure that has a lot of value. If you didn't want to pay the expenses you could simply sell the house.

Btw this is also why I believe in mandating the longest lasting materials be used, because even though it costs more up front it builds up the capital of the nation. Better than say a roof that only lasts 15 years. A concrete roof that lasts 100 years.

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This brings up all the problmes of defining wealth that I started a thread on recently.

You're bringing in a red herring by mentioning the MARKET value of nation A's housing stock. This might for instance, change radically from day to day depending on credit availability, whereas the utility (I think that's the word) or 'social value' of the housing stock will differ little from day to day.

The housing stock will certainly have a social value; how one rationally assigns a monetary equivalent to that value is deeply problematic. And therefore the difference in 'wealth' between your two nations will depend entirely on if and how your measures convert such 'social value' to numbers.

Edited by Selling up

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It is an interesting problem.

Perhaps the answer lies in splitting up the effects into stocks and flows.

From a stock perspective, valuable houses support an economy as the assets can be passed on and could form a collateral base for borrowing which could be reinvested productive assets.

From a flow perpective, valuable houses degrade an economy as it diverts income to houses (both from a debt service and speculative perspective) that could be better invested in productive assets.

In an extreme situation, we could could end up with a nation with its entire static wealth allocated to houses at the expense of a complete destruction of its wealth creating industries due to income flows.

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How is this much higher capital wealth of nation A expressed in the economy relative to nation B. Because people in nation A can sell this capital they have, borrow against it, inherit it. Isn't it rational in this society that a growing emphasis on inherited capital over current labour wages would happen? Whereas in nation B where the residential housing and infrastructure has yet to be built this source of inherited capital is not there yet. Therefore in nation B a person's wealth is more based on the value of their labour.

Without monopoly of some kind inherited capital goods are quickly outcompeted by what is produced

And therein lies the problem with what you are saying. Most of the value of this residential real estate is not the value it represents as a capital enhancement, but the value it represents as a monopoly or block to someone else. In many ways this is a negative value (a subtraction from wealth) in that the number is derived from the fact that people are now going to find it more difficult (more expensive) to make furher improvements.

Edited by Stars

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Hi aa3,

A few points here:

(i) Young people can't buy houses because houses are too expensive, not that their pay is too low because

(ii) If you claim that wages are too low given the level of British capital goods, then why is UK importing so many food (despite the agricultural subsidy), clothes etc.

I would conclude that UK is importing because the wages are too high (relative to the capital x labour in India, china etc).

The capital bottleneck perhaps is only a real problem at fairly low level. Once there is enough capital to move up the value chain,

it would be the human capital (quality of labour forces) that counts. This is perhaps what is happening in China, they started with

failrly low level of capital goods, but with their ingenuity, ruthlessness and hard work, they make profit from the limited capital / capital goods

they have. The capital is then reinvested to gain more capital goods which lead to an exponential improvment in their industrial base.

So, limited capital, lots of human capital can lead to a virtuous cycle spirialling up.

In the other hand, high level of capital goods without high quality human capital leads to diminishing return. (plus expenses

to maintain the capital goods).

Edited by easybetman

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  • 145 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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