Paper Wealth

By Ramesh Akkineni

Buffett on Real Estate Bubble

On housing, let's pretend that Omaha passed a law saying that nobody could move in or out, that the birthrate exactly equaled the death rate, and the only new housing construction allowed was to replace damaged or destroyed buildings. In other words, a completely stable real estate supply and demand. Now let's say that, in order to increase wealth, someone came up with the idea that at the end of every year, everyone would simply sell the deed of his or her house to a neighbor, and every year the town would increase the price of every house by 20%. Residents could borrow money from outside of town to finance the transactions, and the increased paper wealth allowed them import more luxury goods from outside of Nebraska. As you can tell, no real value has been created in the Omaha economy.

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