Debate Magazine

Ricardo and UK House Prices

Posted on the 18 November 2017 by Markwadsworth @Mark_Wadsworth
David Ricardo's Law of Rent states that rents are set by the difference in incomes (productivity) by those found at the margin of production and those within it ie infra-marginal. That difference currently gets capitalised into rental incomes and selling prices.
We know that agglomeration increases productivity, so as London is over twice the size of any other European capital, its no surprise it has the highest incomes.
Furthermore, the margin of production for the UK no longer ends within its boarders. It is arguable that due to free movement of people within the EU, it stops there. But to a certain extent, due to globalization, margins extend around the world.
Is it really therefore such a surprise, as some people most definitely are, that prices in the UK, especially London/SE are so high?
Yes we can build, and in the short term prices will fall. But in the long term, margins will simply readjust and we'll be back to square one. 
Ricardo and UK House Prices Above taken from 

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