House Prices in a Modern World

Last week I set up the basic history of the rise in house prices in a modern world. We can summarise the way house prices behave as a country starts to grow a solvent working class.

There are several stages in the development of a housing market.

The Feudal Stage: This is when the land is owned by the king, the local noble, or the state. The average person owns nothing. There is effectively no housing market.

The Rise of the Merchant Class: This is when land becomes detached from feudal lords or the government, and can be bought. But it can only be bought by the rich. There is now a market, but it is a very small market.

The Rise of the Proletariat: This is when the working class starts to become an economic force in the market, and has some disposable income which can be used to buy poor quality housing.

The Introduction of Mortgage Finance: When the proletariat begins to earn more money it is in the merchants', and the bankers' interest to stimulate trade, and we get the concept of buying by instalment, leading to the modern form of mortgage.

With these stages in the market come various side effects. Until the market for homes reaches a critical mass there is no market worthy of discussion, and prices can be quite arbitrary. However, when a sizeable middle class begins to buy into the property market prices begin to stabilise, but prices don’t tend to move much. Real movement only comes when the market becomes open to the much larger group of potential working class buyers.

There still needs to be one extra element in the mix. Working class wannabes still can’t buy until they can pay for their homes out of wages rather than capital.

There is only a serious movement in house prices once the final stage has been reached. Up until the market becomes a mass market price changes are likely to be small. They only accelerate when large numbers of people start chasing the available properties for sale. They accelerate more when people try to upgrade to better housing. They accelerate even more as wages rise. This leads on to what I would call a mature market.

In a mature market prices are governed by the following metrics:

the size of the wage packet

whether that packet is rising faster than inflation

whether mortgages are freely available

whether interest rates (the cost of the borrowed money) are low

Given a confluence of all four, house prices will rise. Without that assistance the odds are that they wont.

It is perhaps time for another rule:

House prices rise to their level of affordability, but not much further

This means that over the early stages in the development of the housing market there will be little movement. An upward movement in prices will only come as more and more people become rich enough to enter the market. Upward movement in prices will accelerate as mortgage finance becomes available, and interest rates are low.

I end this particular chapter in my book The Ultimate Real Estate Guide on this topic with this sentence: If you want to experience those conditions you need to find another country that is going through that period of expansion. Hello emerging markets!

Most of the countries I travelled through in my youth were mired in the past. Some were positively medieval, and some seemed to be stuck in the stone ages. Even when I was living in Spain there was no electricity outside the main cities. In fact, electricity only came to the countryside in the eighties.

When I travelled through the Middle East only the Lebanon was in any sense modern. I lived and worked for some time in Cairo, and loved my time there, but when I was writing home to my mother I said the best way to describe Cairo would be to equate it with the London of the time of Dickens. It was a very personal city. The people seemed to live and work in the streets. Almost all work could be seen as one walked around the town. People were making shoes on the sidewalk. Others were dying clothes, or making tables and chairs. The whole round of human life was on show, and all you had to do to experience that life was to wander along the various streets.

Okay, let’s lurch forward fifty or more years. Spain is a modern state. So is Egypt. So are most of the countries I now visit. In some respects I wonder why I bother to visit some places because they all tend to look the same these days.

That means the vast majority of the countries in this world are no longer third world countries. In many respects they are rapidly ceasing to be emerging countries. These days they have already emerged.

Let’s revisit some of those categories I mentioned above.

The Rise of the Proletariat: This is when the working class starts to become an economic force in the market, and has some disposable income which can be used to buy poor quality housing.

The Introduction of Mortgage Finance: When the proletariat begins to earn more money it is in the merchants', and the bankers' interest to stimulate trade, and we get the concept of buying by instalment, leading to the modern form of mortgage.

As I say, this leads to a mature market, which eventually leads to a rising housing market. And this is now happening in the newly emergent economies. This is where the new money is being made and will increasingly be made.

There is one more problem that we need to investigate which makes the relationship between the new economies and the old economies change quite drastically. I’ll look at that next week. And then we’ll consider what you could do about it if you want to experience the wealth gaining opportunity that should by now be staring you in the face.