There is more to high house prices than constrained supply • Hacker News Board

Re: There is more to high house prices than constrained supply

#11

Post by ThrowMeDown01 » Sat, Nov 24, 2018, 2:05 PM UTC

A2017U1 wrote: post #8

mooreds wrote: post #4

Earlier quoted context omitted.

All real estate is local. Certainly the innovations mentioned are part of the issue for most markets, but for some markets there are other impprtant factors: * The flood of expat money (Vancouver) * Supply constraints due to geography and/or Nimbyism coupled with net in migration (Bay area) * Builder hesitation plus in migration (Front range of Colorado) Hard to paint one picture. However, making mortgages easier to…

> All real estate is local. > The flood of expat money (foreign investment) these two statements are contradictory

No, why? The expat money went into local markets (very unequally but that's another point). Vancouver, London, etc. But even in small towns real estate investors are not necessarily local. My mother just moved into an apartment owned by a lawyer living a few hundred kilometers away.

It depends on what you understand when OP says "all real estate is local", I assume that it's the thing itself and its customers. It can be seen as inexact because yes, the investors often are not and that is that second statement, but we all know what OP meant, so no need to start nitpicking over nothing. I see no merit in arguing over words whose meaning everybody understands just for the sake of it.

Re: There is more to high house prices than constrained supply

#12

Post by robocat » Sat, Nov 24, 2018, 2:15 PM UTC

austincheney wrote: post #6

baybal2 wrote: post #2

>Low interest rates and innovations in the mortgage market may also be to blame Low interest rates and innovations in the mortgage market are to blame You are simply letting a person to buy more of any big, expensive asset. And the thing does gets out of control fast when there is a even minimal expectation of appreciation, and inflation fears. And that on top of the fact that real estate is the only "investment" pos…

Lower interest rates opened housing inventory to more people who were and ready to purchase it at already ridiculously low prices since the market crash of 2008. This is part of what got me into my house. > You are simply letting a person to buy more of any big True, but that is grossly incomplete. It suggests that single individuals (or agencies) are gobbling up a plurality of real estate. It is also true that many…

I think you are talking about a minority of buyers.

Structurally what is happening for the majority?

"In 1991, 67% of British 25- to 34-year-olds owned property; today only 37% do." is the problem. Not how some of those individuals within the 37% came to own their home.

Re: There is more to high house prices than constrained supply

#13

Post by phkahler » Sat, Nov 24, 2018, 2:23 PM UTC

Home prices vary inversely with interest rates. Here's how that works:

1) person tells bank they'd like a mortgage to buy a house.

2) banker asks for info on income, expenses, etc.

3) banker estimates persons maximum monthly payment.

4) banker figures out max loan amount based on #3

5) buyer is encouraged by everyone to spend the full amount from #4

Everyone - the seller, their agent, your agent, the bank, and maybe some others - want you to spend every penny you can. Everyone benefits from higher prices except the buyer. Even if you're immune to it, there is enough pressure that the market as a whole tends toward the highest prices people can afford.

Now lets see how interest rates play in this. At step 4 above, the amount you can borrow for a given monthly payment is mathematically increased by lower interest rates. For a given amount of debt your payment should be lower if rates are lower - that's true - but they'll make up for it by pushing a larger loan.

Ultimately your payment is determined in step 3 and has nothing to do with interest rates or home prices. You will "pay" the same for your house (total payments) regardless of interest rates. The only thing the interest rate determines is who gets the money - the seller or the bank.

In a services and consumption based economy this is the primary way interest rates drive things. Sure, businesses will do their part too, but they're a smaller part of it.

Re: There is more to high house prices than constrained supply

#14

Post by TheOtherHobbes » Sat, Nov 24, 2018, 2:25 PM UTC

ThrowMeDown01 wrote: post #11

A2017U1 wrote: post #8

Earlier quoted context omitted.

> All real estate is local. > The flood of expat money (foreign investment) these two statements are contradictory

No, why? The expat money went into local markets (very unequally but that's another point). Vancouver, London, etc. But even in small towns real estate investors are not necessarily local. My mother just moved into an apartment owned by a lawyer living a few hundred kilometers away. It depends on what you understand when OP says "all real estate is local", I assume that it's the thing itself and its customers. It can…

At the high end, the money didn't go anywhere, except possibly offshore. A lot of London real estate was being built explicitly as an investment, and the offshore investors - who are now being cleaned out - handed over their money to developer/speculator companies, who were also offshore and/or foreign owned.

So no - this real estate is not local. It happens to have a physical location, but when you understand how the money associated with it does it best to avoid spreading out into the surroundings, it might as well be built on an uninhabited atoll in the Pacific.

At the low end in London the money went to landlords who bought large portfolios with the financial assistance of buy-to-let loans and tax breaks.

The tax breaks are being removed, and interest rates are drifting upwards. This is killing casual landlords, but isn't a problem for the sharks and the rabbit hutch 10-gig-economy-workers-in-a-room slumlords.

Re: There is more to high house prices than constrained supply

#15

Post by esotericn » Sat, Nov 24, 2018, 2:25 PM UTC

yholio wrote: post #9

The price of houses is driven by market rents compounded with access to financing. If lenders are willing to finance an investment with 3% yield, then house prices will jump to 33x their annual rent value - it goes without saying that's only possible in low interest markets. The rent itself however is controlled by supply and demand - there needs to be a real person there earning a paycheck and he must have no other…

What influences the willingness of a lender?

Availability of money in the general lending environment, sure, but surely there's a risk component there.

The low interest rates can only persist as long as a lender has a reasonable expectation that they'll be paid back (e.g. that rents remain high enough to sustain the mortgage over the term).

The real world factors like 'how desirable a place is'/'are good jobs there' and so forth seem to be further back in the causation chain to me.

This is probably why we see the sort of "non-linear growth" that we do. An environment with stable, increasing rents due to increased demand _directly_ increases the price of housing linearly, and then on top of that it's a less risky market as a result so you end up with lower interest rates which drive it even further.

A mortgage at 3% is basically a risk-free rate. Lenders are saying "you can't lose by buying here so go wild".

Re: There is more to high house prices than constrained supply

#16

Post by fjsolwmv » Sat, Nov 24, 2018, 2:34 PM UTC

sgroppino wrote: post #5

mooreds wrote: post #4

Earlier quoted context omitted.

All real estate is local. Certainly the innovations mentioned are part of the issue for most markets, but for some markets there are other impprtant factors: * The flood of expat money (Vancouver) * Supply constraints due to geography and/or Nimbyism coupled with net in migration (Bay area) * Builder hesitation plus in migration (Front range of Colorado) Hard to paint one picture. However, making mortgages easier to…

But there are other factors like tax. In the UK for example you generally won't need to pay capital gains tax when selling your main home...

Ita the same in the US, except for windfall gains over $250K/person (x2 for married couples), a vanishingly small fraction of inventory.

Re: There is more to high house prices than constrained supply

#17

Post by bradleyjg » Sat, Nov 24, 2018, 2:37 PM UTC

esotericn wrote: post #15

yholio wrote: post #9

The price of houses is driven by market rents compounded with access to financing. If lenders are willing to finance an investment with 3% yield, then house prices will jump to 33x their annual rent value - it goes without saying that's only possible in low interest markets. The rent itself however is controlled by supply and demand - there needs to be a real person there earning a paycheck and he must have no other…

What influences the willingness of a lender? Availability of money in the general lending environment, sure, but surely there's a risk component there. The low interest rates can only persist as long as a lender has a reasonable expectation that they'll be paid back (e.g. that rents remain high enough to sustain the mortgage over the term). The real world factors like 'how desirable a place is'/'are good jobs there'…

The lender on a very percentage of loans made in the United States since 2008 is directly or indirectly the federal government. The federal government is not constrained by the reasonable expectation of being paid back or market discipline.

Re: There is more to high house prices than constrained supply

#18

Post by davidhbolton » Sat, Nov 24, 2018, 2:37 PM UTC

I take issue with the statement that since 2005 rents in London have only gone up by less than 4%. This is personal data but In 1998 I was paying £650 a month for fully furnished. In the same building but on the top floor unfurnished is £925.

I bought in 2000 and sold in 2015 for three times what I paid. The main people buying where I lived in East London, were from West London where rents were so high it was effectively cheaper long term to buy in East London. Number 47 on this page. https://www.rightmove.co.uk/house-prices/E10-6QB.html

My son-in-law and his wife had moved back in with us a year or two earlier because rents in East London had gone up. In 2015 a typical 2 bed flat in East London was £1,400 per month, West London around £2,500.

There's a simple reason why house prices and rentals in London have gone up. Demand due to mass migration. Back in 2015 London's population was at an all time high, numbers not since seen 1939 apparently. https://www.trustforlondon.org.uk/data/londons-population-ov... Many properties were bought-to-rent though that got hit by changes in law.

Re: There is more to high house prices than constrained supply

#19

Post by travisoneill1 » Sat, Nov 24, 2018, 2:41 PM UTC

phkahler wrote: post #13

Home prices vary inversely with interest rates. Here's how that works: 1) person tells bank they'd like a mortgage to buy a house. 2) banker asks for info on income, expenses, etc. 3) banker estimates persons maximum monthly payment. 4) banker figures out max loan amount based on #3 5) buyer is encouraged by everyone to spend the full amount from #4 Everyone - the seller, their agent, your agent, the bank, and maybe…

Even if the majority of people choose the max they can afford, it doesn't follow that individuals can't freely choose cheaper houses for themselves.

Re: There is more to high house prices than constrained supply

#20

Post by mabbo » Sat, Nov 24, 2018, 2:45 PM UTC

phkahler wrote: post #13

Home prices vary inversely with interest rates. Here's how that works: 1) person tells bank they'd like a mortgage to buy a house. 2) banker asks for info on income, expenses, etc. 3) banker estimates persons maximum monthly payment. 4) banker figures out max loan amount based on #3 5) buyer is encouraged by everyone to spend the full amount from #4 Everyone - the seller, their agent, your agent, the bank, and maybe…

> Ultimately your payment is determined in step 3 and has nothing to do with interest rates.

This presumes a single purchase. You've got to go 'macro economic' to see where this breaks down.

When prices start rising because of increased max loan amounts, you get things like bidding wars. Toronto has been terrible for those in the last 5 years. Both the bank and the seller win when people start paying (and borrowing) twice as much as they would have for the same house 5 years ago. Belief that home values are higher and will rise causes them to do so (bubbles, yay).

Example, personal: I bought my condo for under $600k 3.5 years ago. The neighbour is selling their nearly identical one today for just shy of $1m. (CAD$, but still insane). Interest rates are higher today than they were when I bought.

My new neighbours will pay higher amounts to both the bank and the seller. There's more to prices than just interest rates.