Monday, December 8, 2008

Why Housing Prices Will Keep Rising Compared to Food Prices

On an internet forum I participate on associated with my under grad (Grinnell College), people were talking about how much people spent on various things (rent, food, entertainment ect.) To get a better idea of how my fellow alumni spend their money I created a simple expenditure survey (you can take it and add to my data by clinking the link). The survey proved popular enough that 130 people took it. I shared more results within the community, but I thought one result demonstrates an important economic concept. Income elasticity:

On the graph above, post tax take home pay is on the X axis and two type of goods on the Y axis (Groceries and Rent/Mortgage Utilities). To me there appears to be little relationship between income and grocery spending (note food out is another category). I'm typical of this result. My income has gone over the last couple of years, my rent has gone up by about the same percentage (in part due to a move to DC) while my grocery bill hasn’t increased that much (I eat lunch out a little more, but buy slightly better food at the grocery store). For most Americans we might be at a point where the income elasticity of our grocery bill is zero, that is even if we get pay raises we won’t really increase are spending on food. But it’s not the same for housing. As we get richer we tend to live in better (i.e. more expensive) neighborhoods.

This has an interesting long term impact. As the country gets richer over time, we all will continue to demand better housing, causing an increase in the price of housing. This can be partly offset by new building. But as our income grows we are not going to eat that much more (really can Americans eat any more).

There might be better surveys to demonstrate this, but since many Grinnellians read my blog I thought you might find this interesting.

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1 comment:

Morgan Page said...

So how do the correlation coefficients compare between food and income vs. rent and income?

By the way this is known as the problem of the "fixed stomach" (as in, it's a problem for the food companies). In order to make more money, food companies have to add more "value" to food (e.g. through processing) because there is a limit to how much more we can eat.