AN OUTSIDE VIEW

The housing bubble is essentially a land price bubble, since the value of buildings is relatively constant and depends on construction costs. The purchase of a piece of land is the purchase of the future rental income stream, which is the value of the advantages of the particular location. From this point of view, it is in principle much like the purchase of an annuity. if that were all there was to it, land prices would settle at a level such that the ratio between rental value and the the land price was much the same as the general interest rate, which is usually around 5%. There would be no cyclic bubbles. But rental values have a tendency to rise, and so the expectation of future rentals is factored in to land prices. Thus yields from land tend to be lower than yields from other investments. At the bottom of an economic cycle expectations are low. But as the economy pulls out of recession, expectations of rental income growth start to rise and land prices with them, as could be see...