House Price Fallacies

Some interesting data on housing prices in the United Kingdom(1) was recently published by Savills, one of the world’s leading property agents. The important messages that can be drawn from this data apply globally, namely, that fiat currency has a clear and direct impact on prices that can lead to a variety of misconceptions about houses in particular and finance more generally.

The following table sets out the change in UK house prices over the past 70 years, marking the coronation and reign of Queen Elizabeth.

Fiat currency issued in excess by the banking system has caused a misunderstanding about the essential nature of houses and their price. Homes are now widely considered to be an ‘investment’ because of their rise in price, which is the objective of any investment, but these rising prices are not making house owners wealthier. The nature of housing is being misconstrued.

The price of everything arises from its value. If something has usefulness to some people, they will give value to it. They will then subjectively determine through a process of economic calculation the price of the product that is useful to them. A transaction is completed if the buyer and seller agree to a price, but from where does the usefulness of a house arise?

The Essential Nature of Housing

A house provides shelter. That is its highest purpose and is the usefulness from which its value arises. Assuming that there were no additions to a house built in 1952, it provides the same degree of shelter today as in the past.

There is no investment here because a house is not purchased to put one’s money at risk of loss to make a gain. The house was purchased to provide shelter, and if the house remains standing, it will continue to do so.

One’s wealth does not increase by owning a house. In fact, when properly measured it is natural for a house to decline in price because of depreciation. Even the best construction materials wear out and degrade over time.

It is of course possible that a house can increase in value even if there are no additions to it. Location is of importance, and the value can increase if the location becomes more convenient, as recently occurred with houses near a station of the newly opened rail line crossing London. But those gains are rare and largely lost when viewing countrywide data.

Calculating Prices with a British gold sovereign coin

When calculating prices with a British gold sovereign coin an entirely different picture emerges. The sovereign is still the Coin of the Realm, and its gold weight has remained unchanged since it was first minted in 1817. Because gold is natural money and the sovereign is a consistent and unchanging unit of account over time, the sovereign provides a more accurate measure of house prices than fiat currency.

Even when adjusting for inflation, fiat currency is an inferior means of calculating prices. Collecting price data and composing formulae that are meant to account for the decline in a currency’s purchasing power is a complicated process that rarely achieves an accurate measurement. In the above table, £56,087 is meant to equal the actual £1952 house price on an inflation adjusted basis. The error of this analysis is clear when using sovereigns.

By this measure, the price of the average house rose from 656 gold sovereigns in 1952 to 745 at present, up 12% compared to 13,329% rise in the fiat currency price. This small increase when using sovereign coins is probably the result of gold being undervalued, namely, its purchasing power is below normal. Under the Gold Standard, house prices like those of all buildings tended to fall over time because of depreciation.

A free and capitalist society advances living standards to humanity’s benefit. Economic calculation is central to that process but is difficult if not impossible with the distortions to prices that arise when using fiat currency.

(1) “A brief history of the UK housing market 1952 – 2022”

https://www.savills.co.uk/landing-pages/a-brief-history-of-the-uk-housing-market-1952—2022.aspx

Source: https://www.fgmr.com/house-price-fallacies/

James Turk is the Founder of Goldmoney. His latest book is “Money and Liberty: In Pursuit of Happiness and The Theory of Natural Money”