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There is more to high house prices than constrained supply

economist.com

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

#31

Post by projectramo »

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…

You have the mechanism right but I think you draw the wrong conclusion.

Your max amount changes with interest rates. So if interest rates rise your max amount goes down for the same payment and house prices go down.

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

#33

Post by jimnotgym »

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...

... and even as your second home capital gains is taxed at a lower rate than income. Plus it can be deferred until you die! If your estate is big enough to be worth it you can form a trust and defer it forever.

That unpaid tax flows straight back into the housing market.

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

#34

Post by esotericn »

davidhbolton wrote: post #18

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 effecti…

> In 2015 a typical 2 bed flat in East London was £1,400 per month, West London around £2,500.

I think you're defining East and West in weird ways in order for this to make sense. Maybe it's because Hyde Park shifts the real "centre" of London off to the left (e.g. Charing Cross is 'sort of' the middle but isn't really.)

If you compare like for like it's much closer. e.g. go 3 miles east and 3 miles west from a 'centre' and compare prices. There's not a 70% difference unless you end up in an outlier (e.g. South Ken).

Last year a 2 bed in Hammersmith was ~1500. I think that would compare fairly well with the other side which would be near Canary Wharf somewhere.

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

#35

Post by will_brown »

Housing prices are artificially high because of debt and finance.

If loans/debt/financing/mortgages were made illegal, then these artificial high housing prices based on the credit line one can obtain rather than what one can actually afford, prices would come down to fair market value. I know people will claim credit is based on what one can afford but that is mental gymnastics (foreclosures, student loan defaults, car repos, and credit card defaults could all suggest otherwise)and wouldn’t matter if credit were made illegal.

The same is true of student loans. Tuition costs couldn’t continue to exponentially (artificially) increase based on the guarantee of government loans to students to cover these costs, take away a the loans and the prices will meet the new demand.

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

#36

Post by esotericn »

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…

> The only thing the interest rate determines is who gets the money - the seller or the bank.

It seems here like you've forgotten that even though your payment may not vary, what you get will (e.g. will it be further out, smaller, apartment not house, worse neighbourhood)...

Or, ultimately, at the bottom end, your 'maximum monthly payment' isn't enough to buy at all so you rent forever (London, for anyone who isn't in a well paying field).

Consider - you'll probably be working 8 hours a week. For various reasons we settle on roughly that. But some people get paid very well and others don't. That matters regardless of whether everyone works 8 hours a week because most people don't retire early even if they could.

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

#37

Post by s4vi0r »

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…

Or just destroying the entire cancerous concept of landlordism and housing as a commodity.

No need to get all complicated, the solution is pretty simple.

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

#38

Post by lordnacho »

davidhbolton wrote: post #18

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 effecti…

I don't know, you have to look at a lot of data.

I moved into a flat in 2003 and moved out of it in 2011. The rent barely changed the whole time (~1350/month to ~1450). I've seen the exact same flat for a similar amount. Marylebone.

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

#39

Post by sjg007 »

xwkd wrote: post #26

Take a look at the lumber market. The cost of building materials has been shooting up for the past 10 years. I believe houses are getting more expensive because returns on new builds come with much higher risk. It’s cheaper to recycle the existing real estate market.

Materials, labor and everything cost more today. 2008 wiped out a good portion of home builders / construction workers. Also basically nothing got built for 5 years until house prices recovered. Also factor in a high COL area and you can't really buy for cheap either the the land or the build.

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

#40

Post by lordnacho »

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…

The thing to think about is convexity. If everyone is maxing out their budget when rates are 2%, it causes a huge problem for their personal budget when rates go up to 4%.

If the rate was originally 10% like a few decades ago, each rate increment would matter a lot less.

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