The property market

This post is related to my previous post regarding money and finance. The media often posts huge numbers of property transactions. It often broadcast the huge numbers that are thrown around in property transactions and the amount of money being made within one single transaction by the seller of the property. But really property transactions especially those that have not been developed or enhanced does nothing for the economy simply because the money is moved simply from the left hand to the right hand. In effect, nothing tangible is created by the transaction.

No essential value has been created as nothing of value is being created and nothing is being enhanced by the seller. It is merely inflationary expectations at work that is driving prices up.

This is contrast by value creation in offering a product or service. When we offer a product for sale, we have enhanced a product so that it is of greater value hence can be sold for a higher price. In offering a service, we are facilitating a transaction and hence we have created some form of value by allowing a transaction to go through. The value creation is therefore tangible and provide some use value to the buyer.

Therefore, in my opinion, the property market should not be used as yardstick for economic activity. The problem with the property market is that much of the value comes from the price of the land and even though, developers can enhanced the attractiveness of their products, the value is actually the location of the property- this is after all, the construction cost is fairly generic.

The price of land is really the result of inflationary pressures build up over the years and that is why it is impossible to commoditized land. The location itself already provides differentiation. The only time it will be ever commoditized is when the nuclear Armageddon has happened and flatten the land to it's core.

Essentially, the property market is actually a bet on the economy that it will continue to rise and built up and hence the value of the land will increase. And this is coupled by the explosion of money with more sophisticated financial techniques which means that more money is going after ever finite supply of land.

Of course, with explosion of money comes more volatility and therefore lots of speculation activity. At the same time, the lure of quick and large sums of money due to the leverage nature of mortgages means that whatever that goes up fast will come down really fast as well.

Therefore in my opinion, property prices should rise in tandem with inflation rather than outpaced it. This is because in modern day, where most of us buy houses on mortgage, income growth should follow economic growth as well, any outpacing will result in houses being out of reach of the common person.

Therefore if we view an extremely speculative property market as a boon for the economy market, we must bear in mind that a 10% rise in a property market is in effect a 50% rise in the wealth of the economy especially if the mortgage is about 5 times leverage. Consider that your wages rise 5%, and that is not indefinite, it is also at best USD$200 per month increase. Would it be sustainable for you and by the time, it reached your children's turn to buy houses, how much would they need to fork out to even own a home.