Economics Nobel Winner Angus Deaton's 10 Lessons On Residential Real Estate

On October 12, the Royal Swedish Academy of Sciences announced that Princeton University professor of economics and international affairs Angus Deaton has won the Nobel Prize in Economics 2015 for his “analysis of consumption, poverty, and welfare”. “To design economic policy that promotes welfare and reduces poverty, we must first understand individual consumption choices. More than anyone else, Angus Deaton has enhanced this understanding,” the academy said while announcing the prize.

Deaton, an economist of British origin, has informed opinions on various issues, including estimating poverty lines in India. When the Indian government in 2011 argued before the Supreme Court that outside cities, Rs 26 per individual was enough to avoid poverty in India, the economist called this unwise. Deaton has extremely insightful views on housing, too.

Here are 10 principles on housing India can learn from Deaton:

In improving human health, homes play an important role

Many believe that improvement in health and life expectancy can be primarily attributed to advancements in medicine and health care. While Deaton accepts that public health measures played an important role in raising life expectancy and lowering infant mortality, he attributes this mostly to better water supply and sanitation in modern day homes. In the major cities in the US and Britain, such improvements had much to do with vast public investment in late 19th and early 20th centuries. This coincided with the spread of modern plumbing and electricity. Water supply and sanitation issues are key reasons behind India's poorly functioning health care system.

Home prices are a major reason of world inequality

If goods and people traded freely across borders, income levels across the world would have been similar. Owing to two major constraints, restrictions on free immigration and high prices of residential property, income levels across the world differ substantially. Unlike steel, gasoline, automobiles and computers, residential property is not an internationally traded commodity and, thus, the price of residential property cannot be arbitraged between the rich and poor countries. In another words, even if residential property is cheaper in countries such as India, international trade is unlikely to change this situation because dwelling units cannot be transported across borders.

Purchasing power parity comparisons are imperfect

Comparing income levels according to purchasing power parity may not be correct. One reason behind this is that there are no rental markets for certain kinds of homes. Deaton cites homes in villages or shanties in slums as examples in this case. The Indian government cannot, for instance, periodically collect the price of shanties in Mumbai's slum area Dharavi or homes in villages because they are not regularly traded in the market. International comparisons of expenditure surveys spending on food, fuel, tobacco and alcohol, and this forms nearly two-third of household spending in countries such India. However, this still excludes spending on homes, transportation and clothing.

Poverty line estimates in India ignore home prices

Deaton observes that calculations of poverty line in India ignores three kinds of expenditure: health care, education and residential property. This, Deaton thinks, is a serious omission. The three form the bulk of expenditure in the US. So, excluding these factors makes the poverty line estimate faulty.

Standards of dwelling units tell little about immigrants' living standards

While migrating to big cities or more prosperous countries, people might have to live in homes of poor quality to access. This helps them access labour markets. Though such homes may not meet minimum standards set by government authorities, they speak little about the living standards of immigrants. For example, migrants from small towns in India may live in congested rooms in, say, Mumbai, but this need not mean that their living standards have declined. High prices of residential property in cities like Mumbai often reflect the high price of residential property in prosperous urban areas. This is a key reason studies on living standards may be imperfect.

Shortage of land leads people in Asia to save more, raising prices

In Asian countries such as Hong Kong, Taiwan and Korea where home prices are high, people often cite the decision to buy a home as a reason to save. While land shortage is one reason why home prices are high, Deaton argues that propensity to save might also be a strong reason for this. Moreover, poor or non-existing mortgage markets compel people in Asian countries to save more. Access to credit is low or non-existent in many Asian countries. In India, for instance, low-income households have little access to credit. This leads to a cycle of saving and residential price growth in many countries.

Increase in consumption has much to do with people borrowing against their equity in homes

Deaton thinks that though an increase in consumption in the US and UK can be attributed largely to an increase in consumption among the young, this has partly do with allowing older home owners to borrow against their equity in their homes in the UK.

National accounts on consumption ignore owner-occupied homes

National accounts on consumption often ignores the imputed value of owner-occupied residences. As owner-occupied homes are not goods that are traded on the market, this is often omitted from surveys.

As a result, national accounts of consumption in the Organisation for Economic Co-operation and Development (OECD) countries often survey only over three fourth of the total consumption of households. In India, there is very little data available on the imputed prices of owner-occupied homes.

Moreover, as over 11 million homes in India are vacant, their transaction prices in the rental market are unknown. There are no functioning local rental markets in many parts of India from where such data can be collected.

Inflation in India is understated

Residential property and transportation are two goods in which inflation cannot be easily measured. Apart from that, it is difficult to compare inflation levels of home prices and transportation in different parts of India. For example, it is difficult to compare the prices of two 1,000 sq ft homes, one in Mumbai and another in a village in Uttar Pradesh. As inflation levels in these two segments are higher, Deaton thinks that this severely understates inflation in India.

Environment influences home prices

Deaton points out that pollution levels have much to do with the residential property prices. As Deaton puts it, in areas with great variance in environmental quality, while the wealthy live in hilltop plots with fine views, low-income households live in plots downwind of the smokestacks.