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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

#61

Post by topkai22 »

There is a point that is often glossed over in these analysis- the rental stock and the ownership stock are often fundamentally different. Last time my family moved we weren’t opposed to renting, but there was something like 1/10 the number of available SFH rental units in the area we were looking compared to available SFH rental units.

In the US at least I think there is a case to be made that this is due to the UNDER financialization of housing- if you own a home at want/need to move it is difficult for most families to do anything but sell their current home in order to qualify for a mortgage. This suppresses the rental stock even when it is financially reasonable to rent out a house versus selling. (Yes, there are companies buying SFH housing to let out, but they seem small compared to the overall market right now)

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

#62

Post by simonh »

esotericn wrote: post #36
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 i…

I don’t think the poster is forgetting anything, just pointing out that the amount of money going into the housing market and bidding up house prices is directly based on interest rates.

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

#63

Post by malvosenior »

nly wrote: post #23
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.

Individual action doesn't matter. If you're only willing to spend 30% of your take home pay on rent, whereas your sociodemographic twin is willing to pay 50%, they'll outbid you. Incidentally I currently spend 47% of my take-home on rent in London. At 32, buying a property is still out of my reach. There are statistics on this in this related BBC article https://www.bbc.co.uk/news/business-42179119

I don’t think they’ll outbid you, they’ll buy a more expensive house.

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

#64

Post by simonh »

I think the discussion so far, while interesting, is tangential to the point the article is trying to make. The point is that supply of housing isn’t the only thing affecting house prices. If you view houses as financial assets with varying value, it’s the supply of financial assets that matters, not just the supply of houses. Or am I missing the point?

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

#65

Post by __blockcipher__ »

esotericn wrote: post #55
Theodores wrote: post #45

Earlier quoted context omitted.

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 go…

Tread carefully. Implement such a policy naively and you end up with the American dream: everyone tied to mortgages they can’t afford.

Of course the core problem is treating affordability as merely a function of access to loans, without accounting for second / higher order effects.

You’re clearly not proposing that, but it is of course an easy trap for a society to fall into

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

#67

Post by __blockcipher__ »

johnpmayer wrote: post #53
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…

IMO homes should not be considered productivr capital. Farms are, as one example.

A home sits there and looks pretty (maybe), slowly losing real value. Of course, w/ an increasing population amd limited supply it accrues nominal value (and “real” value in the investment sense).

Yet compared to owning shares in an actual productive company, it’s a very poor value proposition.

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

#68

Post by Retric »

mattm wrote: post #51
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.

That’s not just a question of loans. Schools can always discount prices down to what people can pay. So, they charge families making twice as much more money each year.

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

#69

Post by tomxor »

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 will "pay" the same for your house (total payments) regardless of interest rates.

There is a missing branch in your procedure... step 4b) Banker refuses loan because combination of interest rates and house prices are too high for person to afford with current income:

> In 1991, 67% of British 25- to 34-year-olds owned property; today only 37% do.

I suspect this varying cut-off threshold of a substantial portion of the population is largely responsible in the apparent non-simplistic relationship between the other variables.

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

#70

Post by mamon »

malvosenior wrote: post #63
nly wrote: post #23

Earlier quoted context omitted.

Individual action doesn't matter. If you're only willing to spend 30% of your take home pay on rent, whereas your sociodemographic twin is willing to pay 50%, they'll outbid you. Incidentally I currently spend 47% of my take-home on rent in London. At 32, buying a property is still out of my reach. There are statistics on this in this related BBC article https://www.bbc.co.uk/news/business-42179119

I don’t think they’ll outbid you, they’ll buy a more expensive house.

And you think you'll be able to find a cheaper house? No, sorry: sellers will raise their asking price to match (or exceed) the market average. So, your choice really is between paying the same price as everybody else or not buy a house at all.
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