It is not true that the “price of almost everything” goes up with economic growth and conversely goes down in recession.

Daphne Caruana Galizia (TMID, 18 January) has confused price with value, for if the price of “everything” goes up we have inflation and if the price of “everything” goes down we have deflation. Indeed the world has supposedly kept inflation low during this period of growth because the prices of the baskets of goods that our economists track have not gone up.

However, they choose not to include assets such as house prices and stock markets in their calculations. Therefore governments have been free to print money and banks have multiplied this into easy credit, which people are throwing at property. Remember therefore that no net wealth has been created by rising property prices – wealth is only created on average for everyone when there is greater productivity in the general economy. Instead, people have collectively decided to allocate what wealth they have plus a share of their future earnings (for that is what a mortgage is) on property in the belief that they can one day sell it for more to a greater fool.

Property, like any other asset, should over the medium term return to a value that is proportional to the earnings it generates. Property should be valued by the expected rent it will yield over the next 20 years in relation to other assets. For those who say, “Rents don’t matter. There’s a shortage of land to build on”, remember the property crashes in Hong Kong and Tokyo with similar land problems that wiped out the wealth of an entire young generation. For those who say, “It’s different now because reason XYZ means that property prices will stay on a plateau”, remember the dot.com bubble where commentators said that dividends and earnings didn’t matter anymore.

It was all about click through rates and it was “different this time” because there was a wall of pension fund money that had to go somewhere and so stocks had reached a new permanently high plateau. In the end as we all know when the fools and the optimists disappeared then the earnings were all that mattered again.

So what are the earnings (rents) like on property? If you have Lm65,000 to invest you could get more from it each year sitting in a bank risk free than you could from a flat you had to maintain and find someone to rent from you. You have to pay fees and taxes on the property. If you ever needed the money you would have to sell it and only months later get hold of it.

An economist would say that the price of property has gone up but the value has not (otherwise rents would have risen just as fast). In the medium term this imbalance must be corrected and either rents must rise or property prices must fall.

Dominic Newland

London