Graph of the day: house prices in the European Union
According to Scott Sumner, decreases of house prices are quite exceptional, which proves that the housing market is rational in the neo-classical sense, which proves that markets are rational in the neo-classical sense. Is he right? Or might the housing market be characterized by ‘house price illusion’, the idea that when one house sells for a higher price all houses will, eventually, sell for a higher price? And might there be a fallacy of composition: when one house gets more expensive, individual wealth of the owner increases. But when all houses get more expensive – this is just house price inflation and the total stock of real wealth does not increase a dime as we have to deflate this with the index of house prices? Anyway – the idea that house price decreases are the exception is just not right.
Source: the new Eurostat house price data. Caveat: the data are not entirely comparable, Dutch house prices for instance decreased despite a decrease of the sales tax from 6% to 2% (while the same government at the same time increased house rents…).