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Population, Environment, and Economics

The housing pyramid


David Sirkin

21 September 2008

 According to an NPR commentator I heard on 19 September, a contributing factor to the sub-prime mortgage debacle and the resulting current financial crisis was the feeling among so many that housing prices only go up. They were shocked to learn that they can also go down.

What we are witnessing now is a correction of the prices of homes that became over-valued. Over the long run, home prices in the US of course do increase with time. As a result, we see the purchase of a home as an investment, a true financial investment that can be expected to bring a financial reward in the future.

We should step back and ask, “Why? Why do home prices, and especially land prices, generally increase with time?” There is one main reason: population growth. It is easiest to understand this in the case of a house built on the edge of a growing metropolis. The wilderness or farm land beyond the metropolitan area is inexpensive compared to land in residential areas near the center of the city. So houses built there are cheap. But as time goes on and the population of the city grows, the metro area spreads out even further. A house that was once on the edge is now deeper inside. The land it was sitting on is now much more valuable. Of course, there are exceptions. Some cities shrink. Some urban areas become desolate. But in general, if the population of the country is growing, cities and towns are growing. A large percentage of the housing in the country is subject to the kind of process just described, or a similar one.

The housing market has a pyramid property to it. Those who get in first are ahead of the game. Newcomers have to pay a high price or start out in an undesirable area. But more newcomers continue to arrive (from births and immigration), buoying up those who came before. Like any pyramid scheme, it is unsustainable. We live in a vast, but still finite country. Continued expansion is already taking a toll on our natural environment and wildlife. Eventually, our supply of farmland and other resources will be stressed.

The housing market is a cornerstone of our economy. Our entire economy also has a pyramid quality, with population growth fueling economic growth as newcomers take their places at the bottom of the pyramid. This process allows fortunes to be made, but it is not only straining the environment and our resources; it is also actually making the nation poorer (see A surprising fact and Recession does not make us poorer; population growth does). So the same process, population growth, that makes our homes increase in value also makes us, on average, poorer.

The way to long-term prosperity includes ending population growth and ending the pyramid economy. The economy in a non-growing country is less of a contest in which a few winners get to the top while the masses remain impoverished, but is one in which per-capita wealth can grow fairly steadily and a high standard of living can be achieved for all, as we can see happening already in some European countries that have stopped growing. It requires adjustments and a change in mindset from the way we currently view the economy. That change will include for most of us viewing the purchase of a house or apartment as a home in which to live, but not as a financial investment.

Population, Environment, and Economics

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