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I’ve been watching the housing markets. Home prices are still up 3% year-over-year. That’s not much of a slowdown. Home prices are still increasing at the rate of broader inflation.

Inflation is a very tricky thing because it’s always true that when we have to pay more for one thing, we have less money left to buy other things, and that puts pressure on the prices of those other things, offsetting the increase in inflation in that first thing. When home prices rise, on average people will have less money to spend on other things. They can tap their homes equity by borrowing against it, but that’s just delaying the inevitable because they’ve got to pay back the loan eventually and they will then have less money to spend on other things by the amount of their new higher loan payments. So the consumption benefits are temporary.

It’s only when you build something that other people want that wealth and value is created. Just purely bidding up prices without building anything is only inflationary. If the price of your home goes up for no other reason than because people are now willing to pay more for it than before, then the people who are paying more for it have less money to spend. But if the value increases because you improved your property and in doing so you purchased goods and services, then you added to other peoples’ wealth and that offsets the higher amount people are paying for property.

Homes alone aren’t really a source of wealth creation. That’s a myth. They do nothing to increase the overall productivity of the economy. The only reason we, on average, can own bigger and bigger homes is from a very macroeconomic perspective, we are spending less time and energy on our basic needs and we are having them met much more cheaply than in the past.

People are choosing to spend more on homes because they can. The same goes for healthcare. Economists and market bears like to worry about the rising cost of healthcare. The way they measure this is the average amount people are spending on healthcare and the total size of the industry. But they never consider that perhaps the portion of our healthcare expenses that is relatively discretionary is increasing. In other words, people are paying more for healthcare in part because they are choosing to do so, because they can afford to make that choice, because even at today’s high prices for gasoline and many other commodities, people still have relatively more money to spend on healthcare.

Source: The Myth of Housing as a Source of Wealth Creation