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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

#81

Post by jedberg »

clofresh wrote: post #78
pjc50 wrote: post #21

Earlier quoted context omitted.

Not everyone is mortgaged - quite a lot of the price rises are driven by foreign capital flight. A few places have figured this out and decided to tax it: https://www.bloomberg.com/news/articles/2018-02-20/british-c...

I've noticed this annecdotally when trying to buy a home on separate occasions in the New York and LA metro areas. I'm not sure it's foreign capital, but the majority of winning bids were all cash offers above the asking price. I'd love to see a retrospective analysis on Vancouver's protective measures to see if they did actually help, or if buyers found loopholes, or it wasn't Chinese buyers to begin with.

I wish I could find the link now, but someone did a study on Vancouver and found that the tax had no effect on housing prices. The foreign buyers simply added it as another cost of parking their money outside of their country (usually China) and the math still worked in their favor.

It brought in some extra money to Vancouver though.

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

#82

Post by will_brown »

ip26 wrote: post #48
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,…

Hmm, forgetting land entirely, actual replacement cost is a lot higher than most people can afford directly (literally, the cost of materials and labor, a very competitive market) so I think instead of arriving at the true price of the house the market would instead be dominated by those who hold capital (as with industry), and we'd basically all be renters.

The credit based system is already dominated by people with capital. And I admit that same general bias would likely appear in homeownership statistics in a non credit based system.

But the systemic problems of indebtedness and lack of access to credit (either bad credit or no credit) would disappear. Your greater point may be right, that leveling of the playing field will be all for not because the still existing wealth divide.

To your point to the costs. I think the home costs are already generally the cheaper part in most real estate purchases (ie the land is worth more than the home). And those costs (like everything in society) are artificially inflated because the pricing is set in a credit based system where price is based on future ability to pay/not what one can pay out of pocket today.

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

#83

Post by astura »

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 said they shouldn't, we are discussing how interest rates effect the housing market as a whole.

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

#84

Post by johnpmayer »

__blockcipher__ wrote: post #67
johnpmayer wrote: post #53

Earlier quoted context omitted.

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.

A home produces rents. If you live in the home that you own, you can think of it equivalently as a productive asset that provides you one unit of free rent (modulo some quality of life factor based on how nice the property is to live in) every month.

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

#85

Post by Digory »

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.

I think the US version of this discussion is usually about the extraordinary rise in SV, NYC and DC, even as the rest of the country shares low interest rates.

True, prices will also fall when interest rates rise, but it’s been a generation since that’s been practical knowledge.

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

#86

Post by johnpmayer »

hedvig wrote: post #75
johnpmayer wrote: post #53

Earlier quoted context omitted.

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…

Those that aren't born into wealth - controlled by rents or controlled by debts. Those with capital - can control others by rents or control others by credit. What great options.

Well yeah, that apparent injustice is the ethical rationale behind a progressive wealth tax, once you've decided to enforce property rights.

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

#87

Post by tonyedgecombe »

mmirate wrote: post #44
s4vi0r wrote: post #37

Earlier quoted context omitted.

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.

What exactly would remain after this "destruction" of yours?

Presumably what the government in the UK is already doing, gradually adjusting taxes to make the rentier economy less viable over time.

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

#88

Post by tonyedgecombe »

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…

I can't help feeling half the problem with the UK student loans system is the fact it is framed as a loan rather than tax. If it was a graduate tax people would look at it completely differently despite a similar financial outcome.

You are right though, without that extra finance there is no way universities could have expanded the way they have. Traditionally they were always underfunded (in the UK) compared to other parts of the education system.

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

#89

Post by closeparen »

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 problem of “high house prices” is just imprecise language for “high cost of housing” - whether the cost is interest or principal is not terribly consequential.

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

#90

Post by tonyedgecombe »

johnpmayer wrote: post #84
__blockcipher__ wrote: post #67

Earlier quoted context omitted.

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.

A home produces rents. If you live in the home that you own, you can think of it equivalently as a productive asset that provides you one unit of free rent (modulo some quality of life factor based on how nice the property is to live in) every month.

If that was all it was it would be fine. The trouble is, at least in the UK, property has been an appreciating asset. People have been using it as a source of current or future income rather than just a home.
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