Thinking more about the decline in the commercial real estate market issue left me with a new line of thought. The past several years in which a lot of people were either making money through real estate speculation or else tapping their (notionally) rising home equity to compensate for a lack of rising wages has created a habit of thought in which rising real estate prices is a good thing. And of course the fact that the housing bubble crash led to a huge snarl throughout the financial system further encourages that. But the snarl isn’t caused by falling prices per se, and as a general matter things like rising commercial real estate prices are a bad thing. You might have a store that’s selling people products they want to buy at a price they can afford. And the store could be making money. But then up goes its rent and suddenly it’s not making money. So it tries to raise prices, but that just reduces the number of people who want to buy the products and it’s still losing money. Next thing you know, the store is out of business and it gets replaced by a new bank branch or something and the whole neighborhood’s worse off, to say nothing of the people who used to work at the store.
Rising real estate prices in one town or neighborhood relative to the rest of metro area is a sign of increased desirability. Similarly, when real estate prices go up in one metro area relative to the country as a whole, that’s also a sign of increased desirability. And increased desirability is a good thing. But you shouldn’t mistake the price increase for the increased desirability — it’s a negative consequence of other good things. It’s a form of resource depletion that, like rising commodity prices, that, though correlated with growth, is actually a constraint on growth rather than a cause of it.