»  National Review Online

August 5th, 2005

   Faery Gold

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Who wants to be a millionaire? Well, I have no principled objections. And now I find that in fact, yes! — I am a millionaire, or at least, one half of a millionaire couple. My house — a modest three-bedroom colonial, eighty years old, on a sixth of an acre — is worth, in realtor's jargon, "north of five"; which is to say, over $500,000. I have a sheaf of mutual funds, most left over from 401K plans back in the days when I used to do honest work in big corporations, and the bottom line on their market values is, er, north of six. Since this is all in my name, or my wife's, and we don't carry any debt, we are millionaires! And then some! Wooo-hooo! Break out the bubbly!

Well, no, wait a minute, hold the bubbly. That million dollars is all faery gold. We need a house to live in. If we sold this one, we'd have to buy another one, and they don't come much smaller or older than this. As for all those bulging mutual funds:  I am reliably informed that if I were to actually attempt to cash in any of that "money," Uncle Sam would come down on me like a wolf on the fold — aye, and Uncle George, too — so I had best not even think of doing so. It's all faery gold. I must continue to drive a 12-year-old car, my garage is never going to get that makeover it needs, and if my kids are to go to college, I shall have to work till I drop.

What a strange, artificial business it is, this illusion of middle-class wealth. Look, I'm not complaining. I live far better than any of my ancestors, better than 98 percent of the world's population; in the cosmic scheme of things, way better than I deserve, since I have no extraordinary talents, have never worked very hard, nor even stuck to one line of work for very long, and am clueless about investing. I'm fine with my situation. It just seems a bit … bogus.

Especially the fact that my cosy, but poky, little house is worth half a big one. Even more astonishing, that's a hundred thousand more than it was worth the last time I checked, not much more than a year ago. This is of course a universal phenomenon. Walking my dog the other day, I got talking to a fellow at the end of the street. The house next to him, on half an acre, was sold just eight months ago. Yet now I see it is for sale again. What's up with that? My neighbor said he'd heard there was a problem with the marriage. Anyway, did I know what they were asking? I didn't. "Six seventy-five!" he told me. The sale price eight months earlier had been five seventy-five.

It's like this all over, except for a couple of dead zones (Germany, Japan). There's a world-wide housing boom. The Economist publishes a quarterly table of house prices in twenty different countries. The latest one, in the June 18 issue, shows a year-on-year increase of 12.5 percent for the USA at the end of March, up from 8.4 percent in the previous twelve months. And we only rank sixth on the table:  in South Africa the rise was 23.6 percent. Even China is having a house-price boom, up 9.8 percent on the year. Remember China? — all those ant-like drilled commies in identical shabby Mao suits, riding bicycles and waving little red books? There's globalization for you.

Britain logged a 5.5 percent increase, down from 16.9 percent the previous year, so perhaps the air is going out of the bubble over there. My nephew certainly hopes so. He recently sold his house in west-central England and decamped to his holiday home in Turkey. Apparently his plan is to sit out there for a few months enjoying the climate and rock-bottom expenses, then come home and rent an apartment until the property market collapses, then buy a house equivalent to his old one for two-thirds the price. Very nice, if it works out.

As artificial as these numbers might be in terms of actually making us richer, they represent vast economic forces. The Economist: "Over two-fifths of all private-sector jobs created since 2001 have been in housing-related sectors such as construction, real estate, and mortgage banking." And: "Over the past four years, consumer spending and residential construction have together accounted for 90 percent of the total growth in GDP." So all those rosy economic figures you've been reading on NRO add up to the fact that we've all been trading in smaller houses for bigger ones. Not exactly the Industrial Revolution.

And now the really bad news:  The International Monetary Fund analyzed twenty house-price busts in various nations across the past thirty years. Of the twenty, nineteen led to recessions. The one exception? The USA. Nobody seems to know any strong reason for this. Likely it was just dumb luck, and next time we'll take the hit like everyone else.

Japan provides a nasty warning of what can happen when boom turns to bust. Japanese property prices have dropped for 14 years in a row, by 40 percent from their peak in 1991. Yet the rise in prices in Japan during the decade before 1991 was less than the increase over the past ten years in most of the countries that have experienced housing booms.

Hey ho. As I said, it's only faery gold. Faery gold, in a faery economy.