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From Commodity to Asset: The Truth Behind Rising House Prices

When it comes to rising house prices, nearly everyone has a theory about the cause. There’s ‘too much foreign money’. There are ‘too many immigrants’. There’s ‘too little construction’. And so on. What unites these explanations is that they appeal, in some way, to the idea that rising prices are caused by a mismatch between supply and demand. And surely that’s true, right? Yes, it is true … in the same way that death is caused by dying. But of course, that’s circular logic. And so it goes with ‘supply and demand’. Since prices are always caused by the interplay between what we want and what we can get, evoking ‘supply and demand’ leads us pretty much nowhere. Worse, it often puts the focus on short-term patterns, when the real scientific payoff lies in studying price trends over the long term. Speaking of the long term, many people assume that rising house prices are a recent problem. But in the United States, the pattern dates to the early 1970s. For almost a century before that, US house prices had been dropping against income. And so Americans treated their house like a ‘commodity’ — a thing they bought to live in. But from 1972 onward, house prices began to slowly appreciate ag

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