[eru]

> How does a house gain value?

To be more mathematical, your property is the house plus the land under it.

People will not pay more for the house than replacement value. If you keep it in good order, you can keep that value up.

The land can't be `replaced'. So for pricing we look at the whole future income stream discounted to today's dollars at some appropriate interest rates.

That income stream is, yes, basically what other people are willing to pay to use that piece of land.

What people can afford to pay for rent is basically what's left over after they paid other things. You can see it as an auction. That's why land values in silicon valley are so high. (Exacerbated by the fact that local regulation there makes it almost impossible to substitute capital for land, ie you can't build up.)

[mikekchar]

But it's also very important to understand that there is a ceiling. There will be a point at which Silicon Valley startups will stop increasing salaries. People will no longer be able to buy a house. Demand will drop and so will prices. If this occurs at the same time interest rates rise, people will not be able to afford to renew their mortgage and the house of cards will tumble. If the prices are really high and nobody has paid off any of the capital on their properties (as in London in 1991/92 and Tokyo where people had multi-generational mortgages), people will not be able to afford to sell because they owe more than they can sell the house for. But they will be forced to sell because they can't afford the new mortgage. There will be a rash of personal bankruptcies and unless someone steps in, very, very nasty things will happen. In London, the Japanese bought up the land (ironically just before their bubble burst). In Tokyo the government stepped in.

I don't know when, but everything is lined up "nicely". Ridiculously low interest rates, sky high prices, insane salaries. Even if SV companies move to a cheaper location to save on salaries it could trigger the collapse. Seriously not looking forward to a time when the fed raises interest rates to protect a falling dollar... Etc.

[eru]

Oh, definitely.

That's why I am in favour of taxing land values (as a proxy for unearned land rent), and the central bank targeting nominal GDP levels.

The former policy dampens land price bubbles and raises taxes in the most economically efficient way possible; the latter avoids real shocks in one part of the economy taking the whole house of cards down.

Ideally, no single company would then be too big to fail.

http://www.economist.com/blogs/freeexchange/2015/04/land-val...

http://www.economist.com/blogs/freeexchange/2011/10/monetary...