The title for this column has been pinched from Willem Buiter, who in turn attributes it to the current governor of the Bank of England, Mervyn King. As Buiter has pointed out, a more correct formulation would be to state that an increase in house prices does not make us, as a nation, better off. The implications of this for economic policymaking are quite far-reaching. It is crucial that we do not fall into the trap of becoming too heavily dependent on asset prices and debt for our growth. The policy decisions made now, in this Budget, will have long-term repercussions for the structure and balance of our rapidly maturing economy and even more rapidly maturing financial system.

The rationale for the Buiter-King assertion is quite straightforward. In much the same way that an increase in coconut prices only makes us better off if we are a net exporter of coconuts, an increase in house prices cannot make us all better off since, overall, we are simultaneously consuming all the housing services we own. Quite simply, India as a whole has its “stock” of housing equal to its “consumption”. Therefore, any increase in house prices ends up being merely a transfer from a younger generation to an older one and a transfer of wealth and resources from those who currently don’t own housing to those who do. Neither is optimal from a policymaker’s perspective, especially if the policymaker is concerned about income inequality.

It is possible, indeed expected, that the budget will need to include measures to stimulate the housing sector. However, the analysis I have laid out means that those measures should be focused specifically on first-time buyers and on housing development. An across-the-board measure, like reducing interest rates or taxes on all housing, might well turn out to be seriously counter-productive, as it would incentivise existing home owners to take on more debt, and thus push house prices up further with little net gain to the economy.

... contd.