House Prices Are Not Going Up, The Currency is Going Down
Your dogbox is not worth as much as you think it is
We’ve all heard it.
From the neighbour next door, the bloke at work, your cousin, maybe even your cousin’s dog’s best friend’s owner…
‘House prices only go up’.
And at a cursory glance, it is true.
If you measure house prices in Pacific Pesos ($AUD), they’ve pretty much gone straight up, for decades.
But if you dare dig a bit deeper, there’s something much more concerning going on.
House prices are not going up, the currency is going down.
The value of your hard earned money is being eroded away, at a frightening pace.
When I say the ‘currency is going down’, I don’t mean this in the strictest sense of the word.
I don’t mean to say ‘the AUD is decreasing relative to the USD’.
What I mean is the AUD is decreasing relative to a basket of goods, services and housing costs the common citizen needs.
And no, this is not CPI.
CPI is totally distorted by ridiculous weightings and exclusions, and for practical purposes should be ignored.
When people say ‘house prices only go up’, they think the value of the house is going up.
But that couldn’t be further from the truth.
The value of the house, in the majority of cases, stays pretty much the same - just take a look at a chart of houses priced in gold, or houses priced in bitcoin.
One way to think of valuing a house is the following formula:
House price = utility value + monetary premium
The utility value of a house is straightforward: it acts as shelter - a place to sleep, cook and provide for your family. The utility value can be eroded through natural wear and tear (maintenance costs).
The monetary premium of a house is a poorly understood concept though.
When we talk about a house having a monetary premium, we typically mean things like aesthetics, proximity to schools and transport, safe suburb, etc.
But the biggest part of its monetary premium is currency debasement.
When people think the price of something will become more expensive in the future, it creates a self-fulfilling prophecy whereby they bring forward future demand into the present.
In the case of houses, everyone is now conditioned to the idea that ‘house prices only go up’.
So what do they do?
Instead of starting a business, or investing in stocks, they invest in houses.
Every spare bit of extra cash goes into saving for a deposit, or buying another investment property.
Demand for houses goes up, inflating the monetary premium.
Most people don’t think about this before purchasing an investment property, but they viscerally understand it.
They know that if they simply leave their money in the bank, its value will be eroded over time due to inflation.
They also know that both sides of government want higher house prices, so they see it as inevitable that prices will keep rising.
This is how you get an upwards spiral of house price inflation.
The monetary premium gets inflated because people are psychologically conditioned to expect higher prices.
In other words, they get FOMO - fear of missing out.
Even when you consider other demand-side policies such as allowing foreigners to buy Australian property, they too are buying because property is recognised as a store of value - one that can help offset the cost of inflation because it ‘only goes up’.
So next time someone tells you ‘house prices only go up’ in Australia, it is your duty to tell them the following:
‘House prices don’t go up, the currency just goes down’.
Spread the word.
