House Prices: The Short-Covering View

It's pretty obvious that when a country's population rises, demand for housing goes up. If you're a financial-market type like Paul McCulley of Pimco, you can see the rise in demand as a short-covering rally: "you are born short a roof over your head," he writes, "and must cover, either by renting or buying".

I hasten to add that McCulley is by no means a housing-market bull, and that he reckons that the recent rally in house prices is speculative, rather than short-covering. But it makes me wonder why we've seen enormous house-price spikes in places like Spain, where population growth is negative, and that in general there seems to be almost no correlation between population growth and house-price growth.

Part of this is because countries with fast-growing populations, like Mexico and Brazil, also have supercharged construction sectors. The total value of housing is going up, but that's because the number of houses is going up, rather than the price of houses.

The US is no outlier. It has moderately positive population growth; it has also had a housing-price spike which while big in absolute terms is small by the standards of other countries such as the UK and Ireland. The difference can be explained, in part, by the fact that the US has had a massive construction boom.

But I still like the idea of housing as short-covering, even if I'm not sure how useful it is.