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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

#51

Post by mattm »

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…

It's crazy how this isn't more common knowledge that the Economist needs to write an article about it. We're also seeing the same thing recently with tuition prices. There is more money available for student loans so schools just jack up the tuition to meet the supply of money available.

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

#52

Post by travisoneill1 »

phkahler wrote: post #46
travisoneill1 wrote: post #19

Earlier quoted context omitted.

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.

>> 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. The entire market is affected by this. You might spend less on a house, but the price of that house has already been influenced by the overall market. Homes in that price range are still at the maximum for people in some income range.

Correct. You will get less house for your money than you would if houses were not in high demand. Same as the price of everything else works. And if other people want to spend more than you on houses why shouldn't they?

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

#53

Post by johnpmayer »

will_brown wrote: post #35

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,…

Credit allows people to purchase things beyond their current wealth but rather within their future means to pay (their future productivity and trustworthiness). This is particularly useful for those who aren't born into wealth: Credit is practically the only way for normal folks to access productive capital, such as a home that allows you to avoid paying rent, or an education that in theory makes you more productive in the future.

You are correct to point out that the prediction of one's future ability to pay (their future productivity and trustworthiness) is difficult. But I think eliminating credit (at least when used to purchase productive capital) is throwing the baby out with the bath water.

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

#54

Post by PunchTornado »

fovc wrote: post #24

In case anyone else is wondering, 161% since 1996 is 4.4% per year compounded. I think annual figures are more relatable and wish publishers would just state those

4.4 per year is huge. wish my salary went up like this between 2008 - 2014

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

#55

Post by esotericn »

Theodores wrote: post #45
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…

Years ago in the UK there was a considerable quantity of council owned properties, these were nice places to live with nice rents to pay. There was no shame in living in a council house, but you wouldn't be buying it, so it was not yours. You wouldn't be evicted either or forced to pay through the nose. This worked as a baseline, if you had more money or wanted to live in a posh area (or just the countryside) then yo…

Right.

In the UK, societally, we've decided that we don't value everyone having a decent place to live.

We don't seem to really have a "goal" for our society, I think. Maybe "everyone should have a job". But that's indirect; people want jobs because they (ideally) result in outcomes like feeling like you're contributing and receiving a stable life in response.

"Everyone gets a house if they want" is a really solid goal to aim for that we've just sort of given up on. It's not unviable at all, it's just politically been brushed aside.

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

#56

Post by rb808 »

sjg007 wrote: post #39
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.

> 2008 wiped out a good portion of home builders / construction workers.

In the US/Ireland/Spain maybe, in most countries house prices didn't fall - they rose with the low interest rates.

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

#57

Post by zippy5 »

mabbo wrote: post #20
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)…

However, the problem is that loans are an extrapolation of 30 years of income. So in a boom portion of the cycle, we over project an unsustainable income but in the bust portion, we under project. There is an inherit recency bias in the loan approval process.

When coupled with an interest rates that are far below the historical median, there is an implication that a buyer can take out more debt than in any other economic conditions.

This is a great resource to understand macroeconomic debt cycles: https://www.youtube.com/watch?v=PHe0bXAIuk0

However in a place like Toronto, I imagine there could be a lots of regional factor that would be more significant than interest rates: - Gentrification - Zoning Restrictions - Increase in Population - Geographic constraints (like bridges, freeways, school districts)

Personally, I suspect you'll do quite well in Toronto but every housing market faces headwinds at some point.

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

#58

Post by mancerayder »

What about construction costs? In the US costs have gone up due to:

- Tariffs which affect steel and timber

- higher wage costs due to low unemployment (perhaps the most benevolent of the list)

- a construction boom in certain areas (Brooklyn comes to mind) leading to a scarcity of construction professionals being available

I'm sure 'new construction' costs being high affects the prices of second-hand properties, which scale up. Even more so if they're renovations.

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

#59

Post by simonh »

travisoneill1 wrote: post #52
phkahler wrote: post #46

Earlier quoted context omitted.

>> 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. The entire market is affected by this. You might spend less on a house, but the price of that house has already been influenced by the overall market. Homes in that price range are still at the maximum for people in some income range.

Correct. You will get less house for your money than you would if houses were not in high demand. Same as the price of everything else works. And if other people want to spend more than you on houses why shouldn't they?

Nobody is saying they shouldn’t, I have done exactly this, buying a house by taking the maximum mortgage I could afford to get the nices house I could get. We are just discussing the mechanism and forces at play and the role of interest rates.

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

#60

Post by brownbat »

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…

I expected this was true for the same reasoning when buying a home, but when I sampled the historical numbers, there was no strong relationship.

Bankrate came to similar conclusions: https://www.bankrate.com/finance/mortgages/rising-rates-lowe...

I think your reasoning is valid, so best I can figure it's because home prices and interest rates are both directly correlated with economic activity. So if the economy is heating up, that might drive up wages and interest rates and inflation, and you see interest rates and home prices go up in parallel.

The model of two simple variables tugging on each other breaks down when you add other factors, hence the weak relationship.

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