One of the first lessons I learnt in Econ101 was that barter trade is inefficient compared with a money economy. Yet, in an interesting article in the FT’s House & Home section (“Fair Trade”, May 16 2009) I read about the rising popularity of websites through which people can swap houses, instead of buying and selling them. Is this another example of how useful my economics degree is?
Up to a point. Your degree probably did not contain much behavioural economics, and that would have been helpful to understand half of the story. People tend to form strong views about what a fair price is for a house, and behavioural economists call this “anchoring”.
Anchoring can take extreme forms. Experimental subjects have been known to be influenced by contemplating the last two digits of their national insurance number or other obviously random numbers. More commonly, people fixate on what some estate agent told them was their home’s value at the peak of the market. When the market weakens, prices do not so much fall as evaporate, as sellers cling on to the hope of a price that buyers are not willing to pay.
Under the circumstances it should not be surprising that barter has become more common. Neither seller needs to acknowledge that his precious house has become less valuable; they simply recognise the fact that their homes are of similar value and get on with the trade.
Still, the practice is not entirely the product of a psychological quirk. In a market as thin as this one, selling a house and buying another one is a big financial risk. Prices can move a long way before the two trades are finalised, and so swapping hedges both parties against that risk. Your degree has a little life left in it yet.
Also published at ft.com.