Are Increasing Housing Prices Good for the Economy?

The Drudge report is an economic news report run by conservative right-wing Republicans. They have claimed that the economy of America is growing well because the housing prices seem to be on an upward spiral once again. This problem is not new or recent. In the past couple of decades, housing prices have become the barometer of the entire economy. They no longer depict the condition of the real estate market alone. Many economists have started extrapolating the change in housing prices to mean growth or decline in the economy as a whole. This has created a mindset that home prices must perpetually go higher!

Housing is a strange good where the masses celebrate the price rise. Imagine, if the price of other necessities like food or clothing were going up at a rapid pace. Would people still be celebrating the rise? What makes housing different?

How Increasing Housing Prices Impact People

The majority of the population is worse-off when the prices of housing increase year on year. This loss becomes even more severe when the rise in prices is more than the increase in wages. In effect, the real prices of homes go out of the reach of the common man. The property tax rates of most homes in America are a function of the real estate values. Hence, a notional rise in the real estate value leads to a very real rise in the property tax rates. For people inhabiting these properties, the value only increases on paper. However, their budgets are immediately drained by increased tax payments.

Similarly, when property prices rise, gentrification becomes the norm. This means that people who have lived for decades in a house are forced to move out due to market pressures. The next generation of workers has to commute even more to get to work. Commuting to and from work is a drain on the entire economy. It leads to wastage of time and fuel, causes stress and clogs the streets. The massive traffic problems that we see in bigger cities are linked to rising home prices.

Lastly, the indebtedness of families in America is increasing by the day. Housing debt is a significant part of the overall debt owed by Americans. However, Americans have been culturally conditioned for decades to buy houses. A large number of Americans are living under stress thanks to their huge mortgage bills. Yet for some strange reason, we as an economy tend to celebrate rising home prices!

Government Apparatus That Favors Home Owners

The government of United States has created agencies like Freddie Mac and Fannie Mae. They buy all the mortgages that are underwritten by banks. In effect, they are the ones actually lending money to people to buy homes. The government funds these agencies. Hence, in effect, the government is using tax money collected from all citizens to favor only a few citizens! To make matters worse, when the mortgage market fell apart in 2008 the government intervened and recapitalized these agencies. It seems like the government has a vested interest in keeping the housing prices high.

Undue Favoritism

The United States government is supposed to be neutral towards economic alternatives that people have. Ideally, they should not be concerned about how individuals manage their housing needs. For them, renting and ownership should be irrelevant! However, the United States federal government does not believe in this. For decades, they have been creating schemes to push home ownership on the people. They make it sound like home ownership is somehow better than renting even though they both have similar implications. The majority of people in America buy homes by taking out mortgages. This means that they have similar monthly payments as renters do. Also, just like renters, if they do not make these payments, they are likely to end up on the street. Why is it that the government favors home ownership so much? Why are so many undue tax breaks provided to homeowners when they are not provided to renters?

The Reason for this Undue Favoritism

The government does not look at housing as a social need. For them, it is a business. They need to increase the Gross Domestic Product of the nation. This means that they need to somehow convince the people of the nation to spend more. One of the best ways to do this is by encouraging homeownership. Homes are expensive. As a result, when more and more people buy them, the aggregate expenditure increases and as a result the GDP increases. This becomes good news for the government since they can claim that it is their favorable policies which have brought about this economic growth. This is the reason why the government gives tax breaks to people who buy homes. This is also the reason why the government wants to keep up the illusion of rising home prices. As long as people think they are gaining money from this entire exercise, they will continue to buy homes at inflated prices and pay hefty mortgage payments for the rest of their lives.

To sum it up, increasing housing prices negatively impact the real income of the people. However, it benefits the government. Hence they are the ones that incentivize the lenders to keep funding mortgages and create these property bubbles.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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