Family Harford has just put in an offer for the house next door, to hoots of scorn from my colleagues, who know me as a bear among bears. It is true that the London housing market seems (who knows?) to be in the final stages of its biggest-ever bubble. But there are special circumstances involved here, one of which is that no rational economic actor disobeys an order from his wife.

My discomfort at having to make an offer put me to thinking that we often bungle our housing decisions. I am ever the champion of economic rationality, but even I would admit that there are exceptions. Buying a house is a rare event and the stakes are mind-bendingly high. Calamity is, therefore, always possible.

Most people do not seem to see the cost of a house in the same way that they see other prices. House prices are simply viewed through the lens of monthly repayments that either can or cannot be afforded. We spend time and money insuring ourselves against some losses, such as a malfunctioning washing-machine; yet the value of the house we own (or the cost of the house we might someday want to buy) fluctuates by far more, perhaps on a daily basis. Nobody cares, nobody hedges the value of their homes – although it is not hard to do so – and nobody seems to compare the price to any meaningful alternative, such as retiring 15 years early.

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February 9th, 2008 in Undercover Economist | Permalink