The Boom and Bust Cycle
Jun. 5th, 2021 02:17 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
ndrosenThe other day, I said to expect a major recession around 2026; now I’ll briefly review the reasons to anticipate such a turn. Prosperity may mean higher wages, and good returns to capital invested in productive businesses, but it also leads to higher ground rents on land; landowners get rich in their sleep, leaving less of GNP for the people who work. This results in the selling prices of land rising not only in proportion to the increased land rents, but more, to reflect expected future increases in land rents. This is called a housing boom, and people speak of families building wealth through homeownership.
Keep in mind, though, that while it’s well and good to have a place to live, owning a house doesn’t build wealth for you; you’ll need to spend money, or put in your own labor, to keep it in repair. It’s the land underneath that rises in price, and gives you an opportunity to sell at a profit. Land prices tend to rise and rise.
When there’s a speculative bubble in rare tulips or dot com stocks, a prudent man can stay out of it, but even people who do not wish to become speculators need to participate in a land price bubble. If you want a home in a nice neighborhood of a city where there are well-paid jobs, you will probably have to buy land at an inflated price. Perhaps you can rent, but with land prices rising by double digits year after year, it certainly seems that you had better buy a lot now, instead of waiting, so you become a land speculator whether you much want to or not, and help drive up prices for the next family in need of a home.
People cannot usually pay cash down for major land purchases so they get mortgages, or, if they’re developers, get bank loans to buy land and build more houses, apartment buildings, shopping malls, and so forth. Housing prices, land prices in particular, cannot keep exceeding the growth of people’s incomes by double digits every year, so sooner or later, they don’t. Once land prices stop rising, they don’t stabilize, since they rested on the expectation of yet further price increases; therefore, they fall.
Once land prices fall, people cannot or will not make payments on their mortgages and other debts depending on ever higher prices, triggering a chain of financial defaults, and setting off a panic. (What was originally called a panic became known as a depression, and then a recession; someone may soon need to devise a new euphemism.) This is what happened, as Georgists had predicted, in the Great Recession of 2008, and more or less what happened in 1990, with the Savings and Loan crisis, as as what had happened numerous times before.
The explanation of the real estate cycle, as the so-called business cycle can more accurately be described, is due to Professor Mason Gaffney, who refined the explanation offered by Henry George.
There seems to be an eighteen year cycle from one major crash to another, as in 1973, 1990, 2008, and, I expect, 2026. This pattern also occurred during the nineteenth century, but the Great Depression of 1893 (as it was called before the 1929 Great Depression) was not followed by a major depression in 1911, perhaps because in that period, land was taxed heavily enough to dampen speculation. After 1929, World War Two seems to have been drastic enough to reset the cycle for a while (these are explanations which I heard at at least one Georgist conference). As to length of the eighteen year pattern, it may have something to do with people who did not experience the previous major recession as adults growing old enough to be major participants in business, finance, and government policy.
Keep in mind, though, that while it’s well and good to have a place to live, owning a house doesn’t build wealth for you; you’ll need to spend money, or put in your own labor, to keep it in repair. It’s the land underneath that rises in price, and gives you an opportunity to sell at a profit. Land prices tend to rise and rise.
When there’s a speculative bubble in rare tulips or dot com stocks, a prudent man can stay out of it, but even people who do not wish to become speculators need to participate in a land price bubble. If you want a home in a nice neighborhood of a city where there are well-paid jobs, you will probably have to buy land at an inflated price. Perhaps you can rent, but with land prices rising by double digits year after year, it certainly seems that you had better buy a lot now, instead of waiting, so you become a land speculator whether you much want to or not, and help drive up prices for the next family in need of a home.
People cannot usually pay cash down for major land purchases so they get mortgages, or, if they’re developers, get bank loans to buy land and build more houses, apartment buildings, shopping malls, and so forth. Housing prices, land prices in particular, cannot keep exceeding the growth of people’s incomes by double digits every year, so sooner or later, they don’t. Once land prices stop rising, they don’t stabilize, since they rested on the expectation of yet further price increases; therefore, they fall.
Once land prices fall, people cannot or will not make payments on their mortgages and other debts depending on ever higher prices, triggering a chain of financial defaults, and setting off a panic. (What was originally called a panic became known as a depression, and then a recession; someone may soon need to devise a new euphemism.) This is what happened, as Georgists had predicted, in the Great Recession of 2008, and more or less what happened in 1990, with the Savings and Loan crisis, as as what had happened numerous times before.
The explanation of the real estate cycle, as the so-called business cycle can more accurately be described, is due to Professor Mason Gaffney, who refined the explanation offered by Henry George.
There seems to be an eighteen year cycle from one major crash to another, as in 1973, 1990, 2008, and, I expect, 2026. This pattern also occurred during the nineteenth century, but the Great Depression of 1893 (as it was called before the 1929 Great Depression) was not followed by a major depression in 1911, perhaps because in that period, land was taxed heavily enough to dampen speculation. After 1929, World War Two seems to have been drastic enough to reset the cycle for a while (these are explanations which I heard at at least one Georgist conference). As to length of the eighteen year pattern, it may have something to do with people who did not experience the previous major recession as adults growing old enough to be major participants in business, finance, and government policy.
