Tuesday, March 25, 2003

Of books, houses and improving our busts

The second-hand book market is stone cold dead, in Melbourne at least (plus my own observations as a *cough, cough* book owner facing reduced circumstances). Ergo, the housing price bust can’t be far behind. Pourquoi?

For starters, how is it that the second-hand book market has fallen so flat, while the new book market is doing okay? That is, they surely ride, more or less, together? In any case, aren’t second-hand books – like booze and gambling – things whose fortunes generally look up in times of recession? And what has any of this got to do with house prices?

New books serve as an analogue of house (“home”) ownership in several ways. Both are rarely bought purely for investment (capital gain) purposes. While there is no ready way of long-term renting a book, assuming that there was, and that it was priced at about 80% of the cost of owning the book outright, there would, I theorize, still be a clear majority (say 75%) of book owners in Australia. The attractions of book ownership, then, are non-fiscally rational, but nor are they solely practical (such as being able to annotate an owned book, but not a rental one). Owned books have a clear, if rather inchoate, quality of being “capital” on the proprietor’s shelves – irrespective of their prospects of capital gain (minimal in most cases, of course), or of rental income – being commercially to let out. Putting this another way: all books are ultimately owned as part of a library and no amount of rented books on a tenant’s shelves can ever form a library, because every volume already has a prior, permanent such “home”.

In practice, a liquid second-hand book market dispenses with, and rebuts all of the above paragraph. Long-term rental of a new book, for those unable (or very rarely, unwilling) to pay the upfront, or debt-financed, ownership premium is a nonsense, with all but the very-newest titles generally available for second-hand purchase at between about 20% and 50% of the new price. While such a market is rather imperfect from a consumer choice POV, the public library conveniently picks up much of the slack here (such as by stocking very new titles).

On the other side of the supply/demand curve, the hefty discount offered off the RRP at second-hand bookshops is a stark reminder of the non-existent capital gains prospects of most books, from an owner’s POV (and remember that the shop buys wholesale from them). Much more so than for new cars, a new book loses at least 50% of its value the instant it is proverbially driven from the showroom. Crucially, this doesn’t substantially detract from the “capital” value an owner ascribes to their books – if only because a minority of all owned books, and from a minority of all owner libraries, ever get exposed to the pitiless wholesale price scales of second-hand bookshops.

So, what is the significance of the second-hand book market losing its liquidity, as at present? At its simplest, the decreased demand for second-hand books (without a corresponding, premium-brand-switching, demand increase for new books) is an economic absolute. There is no tweaking (that I can think of, anyway) with price, stock, or anything else that is likely to ramp up buyer demand at the second-hand bookshop. In a kind of economic “perfect storm”, then, even a 90% discount for an as-new book contains no meaningful discount, as far as attracting buyers is concerned.

The weirdest thing about this (for me) is that the undiscounted, new book market is continuing on as before. In other words, the capital value of new books is being propped up at two discrete points. New book buyers are almost totally price insensitive, a state of mind that must partially be due to their decreasing familiarity with the insides of second-hand bookshops (both as buyers and sellers), which in turn (ironically?) insulates them from “out-of-the-showroom” capital loss jolt – which has clearly increased as a percentage in recent months, for the above reasons.

All this shows that capital value can clearly float in the ether. I am vaguely aware of an economic/tax term called the unrealised capital loss, but I don’t think that higher rates of such unrealisation (though they are clearly out there) lead to any elucidation of what’s going on. Rather, the key seems to be that the twin factors of price insensitivity and artificially high perceived capital value can, and do, perversely thrive when the floor has fallen totally out of the secondary (non-owner for houses, second et al owner for books) market. The “out-of-the-showroom” capital loss for a new book is now a median 100%, but does anyone even know or care? Having a roof over one’s head, of course, does usually qualify as a more essential need that having possession of any particular book, so making a 100% capital loss on housing an impossibility, but remember here – whatever actual percentage loss awaits will and can be determined only after a floor value has been re-built. Currently, as with books, there is actually no rational stopping point whatsoever.

So, what is the upcoming house price landing going to be like? Here, I really have no idea, for it is at this point that the analogue of book– and house-ownership falls away. Second-hand bookshop proprietors are evolved creatures of adversity, with their businesses (as the TV series “Black Books” showed) being forever on the verge of becoming hobbies-at-will, whose chief purpose is the generation of maximum social abrasion to all customers. Such bookshops’ landing, then, can and has been deferred indefinitely. For the housing market’s landing, however, there will be no such dishevelled man-mattresses to cushion the fall.

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