Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Monday, August 29, 2005

When the Price of a Complement falls...
When the Price of a Substitute Rises...

Here is a plausible sequence of events:

  • a glut of savings in Asia leads to low interest rates everywhere in the world.
  • low interest rates lead to an increased demand for housing. See here and also see here [h/t to BenS].
  • at the same time, reduced expectations about stock market returns lead to a further increased demand for housing.
  • low total costs of housing lead to reduced demand for rental units.
  • rising housing prices and continued low interest rates lead to expectations of higher future housing prices. But as Bill Maher says [reg. req'd - thanks MA],
    This bubble isn't all across the country. Score one here for the red states, because it's apparently only in the savvy, liberal do-gooder coastal blue areas that greed and stupidity have taken over.
  • expectations of rising housing prices, coupled with continuing low rents, lead people to convert apartments to condominium units.
  • concerns about comparatively high house prices, coupled with expectations of rising interest rates reverse the process and lead to increased demand for rental units.
  • increased demand and reduced supply lead to rising rental rates

That seems to be the sequence underlying this article in the NYTimes (reg. req.) about rising rents.

But rents have clearly changed direction, even if the increases have been relatively small. With the economy growing and mortgage rates inching up, more people are looking to rent apartments and homes rather than buy them. At the same time, many buildings are being turned into condominiums, reducing the supply of rental property.

But what caused the glut of savings in Asia in the first place? High growth rates surely contributed.

Note that Arnold Kling does not buy the NYTimes story. He thinks that if rents are rising, either the bubble is already ended or never existed. My own take is that IF some major cities have been experiencing a bubble, one reason for the bubble to fizzle would be that people switch from buying to renting. The NYTimes story is consistent with this time path; surely the two could be concurrent.

But be sure to read the piece just below this one, arguing that the bubble has already burst, consistent with Arnold Kling's piece.

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