By Gary Gibson
Mar 13th, 2012
Sell Your Gold. Buy a House. Put Nickels in It.
Normally we would not look upon buying a single family house for personal use as an investment. But these are strange times we live in.
Why don’t we consider a single-family house for personal use an investment?
In a completely free market (and a free market means no central bank with a monopoly on currency issue and the ability to manipulate interest rates) housing prices would probably act like the price of all other goods and services. That is to say, that they would tend to move downward over time due to increasing production efficiency and competition among producers against the backdrop of precious metals money and competing currencies that would tend toward stability.
The notion that housing prices should rise at all is born of generations experiencing constant expansion of the money supply by the central bank. Rising house prices are just a byproduct of inflation. A house’s price has no more natural inclination to rise than the price of a gold coin, a good suit or a laptop sans inflationary policy and artificially low interest rates.
A house is at base merely a very durable good for consumption. It provides its user with an essential function: shelter. In terms of assets a house for personal use is more like a car or a kitchen appliance than it is like a stock in a company.
That is unless the house is used like an apartment building. When bought and rented out at a profit, then a house becomes sort of like a dividend-paying stock.
Even in a fiat currency environment with its strong inclination toward inflation, we see small pockets of the free market driving prices downward over time. Technology springs first to mind. But even items whose prices rise due to inflation tend to do so more slowly than wages so that the items themselves require shrinking percentages of median income.
This is not the case with markets in which the state tinkers most: things like medical care, education and housing.
In the case of both education and home ownership, government has tried to increase availability by encouraging increasing levels of debt thus driving up the costs. This is the opposite of the market’s mechanism of fostering lower prices through innovation and competition.
We want to make clear that housing for personal use would likely become increasingly cheaper in a free market. A home would never have been misconstrued as an “investment” in such a free market. It would have been seen for what it really is: a durable good meant for consumption and enjoyment.
The population would have rightly cheered the tendency for homes in this environment to get more and more affordable, just like they do when their electronic geegaws get more sophisticated while coming down in price. (The laptop on which your editor is typing this has a 17” screen, an absolute luxury that would have costs thousands of dollars just a few years ago which now costs us a little over $400). There wouldn’t have been this happy expectation of rising home prices (and simultaneous perverse fretting creating “affordable housing” for the poor who find home ownership increasingly impossible because of those rising prices).
As it is we don’t live in the fantasy land where free markets reign. We live in a world of government tinkering and central bank manipulation of currency supply and interest rates. We live in conditions that foster speculative asset bubbles. We have no choice but to act accordingly.
So while we lament the absence of freedom and free markets, we remain on the lookout for the financial pitfalls of a bubble-prone world. And we look out for the resulting opportunities.
And the opportunity right now? Use borrowed money to get a house for personal use. (Then fill the basement with nickels and silver, guns and non-perishable food).
Thanks to BrotherJohnF